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RD Lenders Conference

UNITED STATES OF AMERICA

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DEPARTMENT OF AGRICULTURE

RURAL DEVELOPMENT LENDER'S CONFERENCE

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THURSDAY, MARCH 8, 2007

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The meeting came to order at 8:30 a.m. in Room 107A of the Jamie Whitten Building of the Department of Agriculture. William Hagy, Deputy Administrator for Business Programs, USDA-DC.

PRESENT:

WILLIAM HAGY     Deputy Administrator for Business Programs

BEN ANDERSON     Associate Administrator

PANDOR HADJY     Assistant Deputy Administrator for Business Programs

JODY RASKIND     Director, Specialty Lenders Division, Business Programs

CAROLYN PARKER     Director, Business and Industry Loan Program



I-N-D-E-X

ITEM            

Introduction and welcome

Explanation of ground rules

Presentation by Mr. Frederickson

Presentation by Mr. Seimetz

Presentation by Mr. Coleman

Presentation by Mr. Bell

Presentation by Mr. Davis

Presentation by Ms. Waters

Open forum

P-R-O-C-E-E-D-I-N-G-S

(9:09 a.m.)


MR. HAGY: Good morning, everyone. If you could get your seats, we'll get started here in a few minutes. Can you hear me all right in the back? Is it coming through okay back there? Okay.

Well, you that are from out of town, welcome to cold, snowy and wet Washington D.C. It's going to get better, though. This is March. Winter normally doesn't last very long up here in March. So welcome.

I'm the Deputy Administrator for Business Programs. My name is Bill Hagy, and we're excited about you being here today. A lot of you traveled long distances to be here, and we really appreciate you taking the time out of your busy schedules to be with us.

Primarily, this is going to be a listening forum today. A forum in which we want to hear, from you, comments about our program-Problems you have with the program, and how the program is working. Are there recommendations you have for improvement of the program? And we're going to listen. We're not going to comment today.

We have a stenographer here that's taking notes from the meeting. We intend on sharing those notes with you, and Pandor is going to go into that in a little more detail when he starts the facilitation portion of the listening forum.

We're excited today to have with us Ben Anderson, who is our Associate Administrator for Rural Business-Cooperative Programs. But before Ben comes up, since we're such a small audience, I think it would be advantageous if we just went around the room and allow everyone to introduce themselves.

Everybody stand up, introduce yourself, and tell us who you are representing. All right? We'll start down here.

MS. RASKIND: Good morning, welcome. I'm Jody Raskind. I'm the Director of the Specialty Lenders Division, in the business programs area of rural development. Thank you.

MR. HADJY: Good morning. My name is Pandor Hadjy. I'm the Assistant Deputy Administrator for Business Programs here in Washington, D.C.

MR. ANDERSON: Hi. Ben Anderson, the Associate Administrator for Business and Cooperative Programs.

MR. DEISS: Hello, I'm Jeff Deiss. I am the USDA Rural Development and Business Program Director in Oregon.

MS. PARKER: Good morning. Carolyn Parker, I'm the Director for the Business and Industry Division in Washington, D.C.

MS. DANIELS: Good morning. My name is Nichelle Daniels. I'm a Loan Specialist with the Business and Industry Division.

MR. ASHBY: Good morning. Tony Ashby. I'm a Loan Specialist with the Business and Industry Division.

MS. SPEIGHT: Good morning. My name is Samantha Speight. I'm the Budget Officer for Business and Cooperative Programs.

MR. FLORES: My name is Dave Flores, Branch Chief for Loan Services.

MR. BELL: My name is Ed Bell from Louisiana.

MR. POGANSKI: Morning, Roger Poganski with Stearns Bank in Saint Paul, Minnesota.

MR. DOMINE: Morning everybody. I'm Steve Domine, also from Stearns Bank in Minnesota, Saint Paul.

MR. HOBERT: I'm Gary Hobert with Greater Atlantic Corp. here in Virginia and Maryland.

MR. SCHULTZ: I'm Fred Schultz. I work at the same bank as Gary. I'm a Commercial Lending Officer, and Vice President.

MR. CARR: I'm Gene Carr, USDA Secondary Market.

MR. WATERS: Good morning. Jim Waters, USDA Rural Development Program Director for Delaware.

MR. WEAVER: Bruce Weaver, USDA Loan Specialist of the Dover, Delaware State Office.

MR. HORN: Richard Horn, Arbor One Financial, South Carolina.

MS. HILL MIDGETT: Good morning. I'm Nannie Hill Midgett, Director for the Oversight Division. I'm here at the National Office.

MR. MURPHY: Vince Murphy, Program Director, Pennsylvania.

MS. NICHOLAS: Kenya Nicholas, Loan Specialist here in the National Office.

MS. SHIPPEE: Rhonda Shippee, USDA Rural Development Business Program Director for Vermont and New Hampshire.

MR. CASSIDY: Morning. I'm Chris Cassidy with the Energy Branch here at USDA in Washington.

MR. HOYL: I'm Mike Hoyl, Western Commerce Bank, Hobbs, New Mexico.

MS. WATERS: I'm Mary Waters, Vice President of Corporate Relations at Farmer Mac here in D.C.

MR. FOORE: Good morning, my name is Michael Foore. I'm with the administrator's office in Rural Business Cooperative Programs here in Washington.

MR. SHARP: Richard Sharp, B&I Servicing Branch, here in Washington.

MR. MCCULLOUCH: Warren McCullouch, Farmer Mac here in Washington. I'm a relationship manager with the firm.

MR. KERRIGAN: I'm Patrick Kerrigan from Farmer Mac.

MR. COGAN: Morning. I'm Jim Cogan, from Ohio.

MR. KIEFERLE: I'm Fred Kieferle, the B&I Processing Branch Chief in the National Office.

MS. GRIFFIN: Brenda Griffin, Business and Industry Division.

MR. SMITH: Good morning. Bill Smith, Loan Specialist in the Business and Industry Division, here at the National Office.

MR. DAVIS: Good morning. I'm Edgar Davis with Kentucky Highlands Investment Corporation, London, Kentucky.

MR. SEIMETZ: Good morning. I'm John Seimetz from Bridgeview Capital Solutions. I'm President and CEO.

MR. COLEMAN: Bob Coleman, I'm the editor of Coleman's World Audit Lender Weekly, southern California.

MR. FREDERICKSON: Lyle Frederickson, I'm a lender, Arizona Business Bank, Phoenix, Arizona.

PARTICIPANT: Introduce yourself.

MS. DUVALL: I'm Pat Duvall. I'm a professional sign language interpreter for the hearing impaired for USDA.

MR. HAGY: Thank you, and again, welcome. I'm going to ask Ben to come forward to provide opening remarks from the administrator's office. Ben?

MR. ANDERSON: Thanks, Bill. Jack Gleason, our Administrator, is sorry he couldn't be here this morning to talk with you about our B&I and 9006 Programs, and to listen in on the presentations. He's on the road right now to speak at both a renewable energy conference, and an economic development summit, and then to travel on and meet with some of our lenders, and visit some rural development programs offices out in the field.

I'll start by echoing what Bill said. Thank you all for coming to our lenders conference this morning, and for your interest in improving the delivery of our B&I and 9006 Guaranteed Loan Programs.

These are two successful programs that are important to Rural Development, and as you know, important to many farmers, businesses, cooperatives, and other organizations throughout rural America.

The insight we receive through this conference will make them better through your perspective, more consumer-based and user friendly, which of course will help in their delivery throughout rural America.

As we announced in the Federal Register about a month ago, today we are interested in gathering suggestions on how to improve, streamline, or simplify the application process, and comments on the effectiveness of our outreach activities among other things.

In short, we want to hear from our customers, you guys. What should we continue doing, and what should we change? What are we doing right, and what can we do better? I'm sure we'll find the answers to those questions in the presentations given this morning, and in the many comments that will be submitted.

We have plenty of time for you to have the floor this morning, so I'll end it there, and say that we're looking forward to a productive and informative conference this morning. Thank you again for coming, and I'll turn it back over to Bill.

MR. HAGY: Okay, thank you, Ben. Ben comes from the great state of Minnesota, and it gets cold up there, too, in the winter time.

I want to spend a few minutes talking briefly about the history of the program, and some of the challenges that we are facing in the program today. Primarily, we're going to be talking about the B&I, the Business and Industry Guarantee Program.

Hopefully you'll let me use the acronym B&I so I don't have to say Business and Industry every time. And Section 9006, the Guarantee Program, which is authorized under the Renewable Energy Systems/Energy Efficiency Improvement Program.

But before I do that, there's been a lot of people that have worked behind the scenes in putting this conference together. Something like this takes hours of work, and there's one person in particular I'd like to recognize. Is Kenya in the room? Would you get her? I understand Kenya was here until 8:00 last night. Kenya Nicholas. Thanks, Kenya.

There's been a lot of other people that have worked with Kenya, but Kenya has been the focal point in putting this together and making sure it runs smoothly. So she deserves the credit. Thank you.

Okay, I'm not going to spend much time, just a few minutes, bringing you up to date on these two programs, and some of the challenges that I see we're facing. First, the B&I Program.

The B&I Program has been around as long as I've been an employee of USDA, and that's a long time. It actually was authorized in a 1972 Rural Development Act, and we had funding for the first time in 1974.

The program started out with a funding level of about $40 to $50 million in the mid ‘70s and the early `80s. Several years in the late ‘80s and early ‘90s, congress considered not even funding the program, but it did survive.

It survived that era, and it's grown into a large program over the years, even though it's fluctuated in the amount of money available over the years. This year, this fiscal year of 2007, we have about $1.3 billion that is available, and we're in the process of getting these funds distributed or allocated to our state offices. And we hope, in our teleconference next week with the field staff, to be able to provide them with their allocation of funds.

Well, that's good news, and it's also not so good news. We've got $1.3 billion. We've had almost $1.3 billion before, and we were not able to use it.

The annual appropriation this year was a little over $900 million, and you add the $410 million carry over from last year to it, you get the $1.3 billion. If we cannot show congress that we can use these funds, eventually in a year or two, they're going to say that the program doesn’t need the current appropriated level and they'll reduce it.

And that's exactly what happened a few years ago. If you've been working in the program for a few years ago, you will recall there was a couple years where we ran out of money. We ran out of money as early as late July-early August. We had almost $633 million appropriated which was the total available for that year.

We need to work with you as our partner in trying to be able to identify how we can streamline this program to make it more user-friendly to you, make it more adaptable to meet your timing needs, establish a constant flow of demand for the program, and be able to show the results to congress.

Last time the regulations were re-written, a major re-write, was in 1996. And as a matter of fact, I think it was Christmas Eve when the regulation was published in 1996. This was a major rewrite of the program with the intent of that rewrite to provide more flexibility to our state offices in working with you as lenders in administering the program.

We feel it is now time for another rewrite of the program. And one of the things I wanted to talk about this morning was an effort that's under way here in the Department to consolidate four guaranteed loan programs into one. Those guaranteed loan programs being the two that we administer, the B&I, the Section 9006, and merge into those two programs the Community Facility Guarantee Program, and the Water and Waste Guarantee Program.

So we would have one uniform platform for administering all four programs. It's not to say there's not some uniqueness to those programs. This will be addressed through the issuance of a handbook.

But the basic administration of the Guarantee Program is the same regardless of whether it's water and waste, the community facility, or a business and industry, or an energy loan program. So that is a move that is under foot.

You will probably hear more about that in the coming months. There's been a reg drafted. There's been a team put together that has drafted a regulation that is making its way through the clearance process. It will be published as a proposed rule, and you'll get, as lenders along with the public, an opportunity to respond to this rule when it comes out.

We anticipate it hopefully will be out by the end of the calendar year as a proposed rule. And we'll try to keep you apprised, or keep our state offices apprised, in hopes they will keep you apprised of when this comes out. They encourage your comments on this proposed rule once it's published.

The Section 9006 Guaranteed Loan Program is a fairly new program. The farm bill in 2002 authorized for the first time an energy title (Title Nine). And under that energy title, the Section 9006 Program was first authorized, and actually provided mandatory funding through this fiscal year.

It's one of the few programs that was authorized under the 2006 Farm Bill, under Title Nine, that actually received mandatory funding. The program is a loan, guaranteed loan, and grant program, or combination of those three, that provides support for financing, renewable energy projects, and energy efficiency improvements for farmers, ranchers, and small rural businesses.

There are some restrictions on this program that we realize, and some of them are statutory, that probably are going to have to be tweaked in the upcoming farm bill, for it to actually be a program that is going to provide a meaningful guarantee program for a partnership with the lenders.

It has a restriction that 50 percent of the project can only come from a combination of Section 9006 loan and grant program funds. That seems to be curtailing the use of it. And there are certainly other things that we're looking at, and I'm sure congress is going to be considering in the upcoming farm bill.

But I would encourage you to take a look at this program. We have $176 million of guaranteed authority under this program this year. We had about the same amount last year, and we didn't use it. The good news is we were able to reprogram it into grant funding. There's a huge demand for the grant funding under this program.

We have in your handout a side by side comparison of the B&I and the Section 9006 Program. I'd encourage you, not now, but later on, to take a look at the comparison. It gives you an idea of the difference between the two programs.

The future of this program is going to be tremendous with all the interest in renewable energy. Everyday you read a new article about congressional interest in renewable energy. This program is going to grow. This program could become a very large guaranteed and grant program under the new farm bill.

So now is the time for us to identify what we think are the problems or issues with delivery of this program. We plan on working with congress through the next few months to make them aware of those issues.

Let's talk a little about the farm bill. The President and the Secretary announced the administration's farm bill a couple weeks ago. One of the key areas of the administration's announcement, in the rural development area, was a new energy program.

One of the programs that the secretary announced was a $2.1 billion cellulosic guarantee program over a ten-year period of time. It's estimated that this program will cost the budget authority about $210 million over that ten-year period of time.

We have been asked to start trying to think outside the box on how we could deliver a guarantee program. Cellulosic ethanol is not at a commercial scale yet. Cellulose is biomass such as wood chips, switch grass, wheat straw, corn stover, things of that sort.

All the ethanol being produced today, and there's almost five billion gallons being produced today annually, comes from corn. And then there's bio-diesel, and bio-diesel is a growing industry. There's around a quarter of a million gallons of bio-diesel that was produced in last calendar year.

The Secretary has a keen interest in us developing a guarantee program to enhance the development of cellulosic ethanol. And these are going to be riskier deals. Therefore, the structure of this new guaranteed program will need to be different from the way we administer the B&I Program, and even the Section 9006 Guaranteed Program, for it to be a program that will interest lenders.

But this is a huge investment, or potential investment, and we understand that we will be delegated the responsibility for administering this $2.1 billion program, once it's introduced and becomes legislation.

So I thought I would share that with you because there's a huge emphasis on renewable energy today, and it's going to continue, even in our B&I program. We have done a lot of energy investments under the B&I Program. We have six or seven of the 114 operating ethanol facilities financed through the B&I Guarantee Program.

And under the Section 9006 program, we’ve made a total of 19 guarantees for bio-diesel and ethanol facilities that we have financed through that program. So we have a lot of challenges ahead of us, and we want to hear from you, the lending community? How best to deliver not only our B&I and the Section 9006 program, but as we look to the future, and some of the renewable energy program authorities that we might get, how we might best be able to deliver these new programs.

The success of our programs depends on all of us sitting in this room, both agency officials, and you as our partner, the lenders. And we need to work together to assure that these sustainable benefits are going to be lasting in rural America, and that's why we're here today: to hear from you.

We want you to be candid with us. We want you to share with us the experience you've had in the program. Was it a good experience or a bad experience?

We are not going to react to your comments today. We're here to listen. But we promise you we will share the comments that you provide today with the other lenders that are not able to come, and we will provide you a response to those comments. Pandor will go into that in a little more detail here in a few minutes.

But I thank you for your time and your attendance. We will be around most of the day after the conference if any of you would like to have individual conversations with our staff. We had most of our program staff here that has responsibility for administering these programs.

So get acquainted with them during the break, and after the formal listening forum. And with that, I'm going to turn it over to Pandor to set the ground rules, and facilitate the listening forum. Pandor?

MR. HADJY: Thank you, Bill. Well, good morning to everyone again. My name is Pandor Hadjy, I'm the Assistant Deputy Administrator for Business Programs. Today, my role is to facilitate the presentation of oral comments.

The purpose of today's event, and I know you've heard this before, is to provide feedback on the delivery of our Business and Industry and our Section 9006 Guaranteed Loan Programs, in an effort to be more responsive to our customers.

We're particularly interested in hearing comments on the following topics: The effectiveness of the agency's outreach activities, equity requirements and other ways to achieve that requirement, suggestions for improving, streamlining, or simplifying the application process for our programs, and other recommendations for improving program delivery.

I'm here this morning, again, to facilitate presentations in an orderly manner. I would like to begin by providing some information and setting up some ground rules for today. Let me begin with some general information. Registered participants who indicated they will be making an oral presentation, will be making their presentations in a priority order based on the time that they registered. First registered, first speaking.

After registered participants make their presentations, other parties will be given an opportunity to make oral presentations. We encourage written comments. So far, we've received nine written comments in advance of the meetings. But remember, interested parties have up to 15 days after today, that's until March 23rd, to make some written comments. So I hope that we receive some more, because they'll be very productive for us.

An audio and written transcript of today's meeting, along with written comments submitted, will be available on the rural development website by the end of March. So everyone will be able to see which comments -- what comments we received.

For those of you that have left an email address, we'll also be emailing those out to you. So it will be both on the web and you'll get a pers

Now, the federal register stated that oral comments would be limited to ten minutes. Because the number of pre-registered speakers is smaller than we anticipated, we contacted those pre-registrants to determine the time that they needed to make their presentations.

The time for pre-registrants has been extended up to 20 minutes, if that is necessary for them to make their presentation today.

Let me shift gears now and talk about ground rules, that is general information. Please stick to the topic articulated in the federal register notice. We will consider all comments equally, whether they are orally presented, written, or sent via electronic mail. And please, again remember, you have until March 23rd to submit written comments to us.

Any individual person that wishes to make an oral comment on the subject articulated in the federal register may do so today. However, please limit your comments to the times allowed. Unused time may not be deferred to another commenter.

All oral comments will be electronically recorded. And if you had a written comment, please consider summarizing it during your oral comments today, and providing a written document for the record.

Power Point presentations made today will be made a part of the official written record. Just a couple more ground rules: Please be respectful of others, even if you do not agree with their opinions and their comments. And again, this is a listening session. As such, USDA employees are encouraged to listen, but will not be part of the oral comment process.

With that, let me call up to the podium our first presenter, Mr. Lyle Frederickson, Senior Vice President of the Arizona Business Bank. Lyle, if you would, again state your name and the company you represent for the stenographer, and then begin your presentation. Thank you for coming.

MR. FREDERICKSON: My name is Lyle Frederickson, from the Arizona Business Bank, Phoenix Arizona. Thank you for inviting me. Thank you, USDA, for providing these wonderful, wonderful programs.

We are an active user of the programs in Arizona, having done over 20 B&I or CF loans exceeding $30 million over the past 11 years. We're very pleased to say that so far we haven't had any credit issues with them. In fact, we have not yet had a 30-day delinquent on any of them.

That won't say it will never happen, but we use the program in areas where truly it would be impossible to do these loans without it, specifically a lot of loans in Indian country.

We have created a lot of jobs with these programs, and I would like the audience to be aware that these are communities where unemployment often exceeds 50 percent. And it really, really matters. Thank you for it all.

The first thing I would say along the line of streamlining things is a caution. When we press programs hard, and we press lending programs hard; I've been lending commercially for 27 years, what I've discovered is that sometimes loans get made that shouldn't be made.

Let's push it hard. Let's market hard.1 (Comment 1) But it just means we have to work very hard to be sure we're making loans to people who can pay them back.

I suggest that the agency should carefully screen its lenders for participation in the program, and lenders should be limited to sound, accredited banks, demonstrating a strong balance sheet, and sound history of prudent lending in the commercial loan arena.(Current Procedures)

These loans may also have greater than average risk, hence requiring the guarantee. The lender should therefore be experienced at monitoring risky commercial loans. The program should not admit transactional non-bank lenders, whose source of funds is from the sale of the government guaranteed loans exclusively, unless they can prove beyond a doubt that they can underwrite, monitor, and collect greater than average risk loans. (Regulation Change)

Rural loans require a relationship to be properly monitored. You have to know who the neighbors are. You have to know demographics. I don't believe you can sit in Kansas and make a loan in California, and think you know that marketplace in terms of risk.

Next thing I'd like to talk about is a disclosure of funds paid for sourcing the loan. I believe that each loan should require a full disclosure to the borrower and the agency as to brokerage or finder's fees, or packaging fees, paid by the lender to a source of the referral, or package.(Current Procedures)

If it's paid by the borrower, that's between the borrower, I think, and whoever packaged it. But these under the table things that tend to go on in finding money, I think need to be on top of the table.

Now, this is an industry loan program discussion. My testimony going forward is going to be kind of the form where I'll address the issue, then the rule, then the suggested action, and a remedy as follows.

In my written testimony, I have cited the rule from 4279 exactly. So I won't bore the audience with that number, unless you would want me to. Please speak up.

So in the case of the equity requirement, the new business, minimal tangible balance sheet equity on the borrower's balance sheet is to be 20 percent or greater of tangible assets.

In the case of existing businesses, the minimum requirement is ten percent. As in action, the requirement is a concept that I think is confusing and restrictive. It is confusing in that GAAP does not provide or define the term tangible balance sheet equity. (Regulation Change)

The rule ignores entirely the fair market value of an asset, and it is the fair market value of assets compared to the debt on the balance sheet that provides the real cushion to repay a loan. (Regulation Change)

Also, the borrower may be a passive company that simply holds an asset to be rented to an operating company, ownership of which is common to the passive company, and the repayment would come ultimately from the income statement, and/or balance sheet of the operating company, which may not be the borrower.

It may be a guarantor. It should be the guarantor. And it's an alter-ego transaction, but literally taken with the policy, it just isn't practical for these single asset holding companies to demonstrate that kind of a net worth.(Regulation Change)

In that case, it is the operating company providing the balance sheet to which the lender should rely. Remedy? The rules should be eliminated as a limitation, but instead be a guideline, and should reflect fair market value equity, a shortfall in which must be mitigated by other credit considerations, collateral, cash flow, outside network, character of the borrower, character of the guarantor, strong secondary and/or tertiary sources of repayment ensuing.(Regulation Change)

Also, balance sheets of the guarantors and affiliates of the borrower should be considered in determination of their risk mitigation in the case of the marginal balance sheet equity. (Regulation Change)

In the case of business acquisition, the balance sheet rarely has positive equity, much less ten or 20 percent in that case.

So I would like to say I had an example of an Indian country loan. We did a hotel at 14 percent equity. That was a pretty good chunk on $4 million, but we couldn't crack it.

And I would like to now, at this point, thank publicly and for the record, Mr. Hagy and Fred Kieferle, who were very instrumental in letting us still get that loan done.

Now, when did this -- it was a hotel, an industry a smart lender is going to be careful about. It was in Indian country, it's a Sovereign Nation, and it was probably the most sophisticated tribe in the United States the Navajo Nation.

The hotel in Monument Valley, the tourist community depends on a large amount of people from Europe and offshore. The hotel opened July of `01. Two months later, the world stopped, 9/11.

Well, what did we do? We were going to start principal and interest reduction. We deferred that until April, the spring, hoping that tourism would pick up again. We did. It did. It's never missed a beat on about a $33,000 a month payment. And it worked, and that was with less than 20 percent equity.

But we had back up because the guarantor and owner of the hotel also had four Burger Kings, all on Indian Nation. And the Burger Kings alone produced enough cash flow to service the hotel debt if necessary. But it worked, and it worked because you folks understood it, and thank you for your hard work.

There's a case of less than 20 percent equity. It worked because there were mitigating circumstances, but the worst thing that could happen did happen. We still made it work.

I was just going to also say that this rule is particularly difficult in Indian country where land is not owned by the borrower, and true balance sheet is a scarce commodity, and we often have to look elsewhere.(Regulation Change)

Next issue is full business plan required to accompany all loan requests. The -- I would suggest that there are loan purposes that would not require a full business plan. The credit comments submitted by the lender should be adequate in presenting the historical performance of the primary source, and subsequent sources of repayment.

It should fairly represent the balance sheet cushion in the transaction. It should represent the collateral and its value, as well as the basis for its value. It should accurately represent the credit history of the borrower, owners, and principals, and the guarantors in the credit. It should also present debt service, and inform as to how the credit is to be monitored.

An analysis of each guarantor should be in the presentation, as well as expectations of future earnings. An example of a credit that we did that probably wouldn't have required that was a company called Native Air Ambulance.

It was a U.S. Air pilot, who was Native American himself, and he started an air ambulance company. And we made a couple of B&I loans for him to rebuild his engines, which was a requirement that comes along every five years or so.

The payback was very short, and it really didn't require a full business plan, I think, to do it. So I'm suggesting we eliminate the requirement for a business plan to require each loan request.(Regulation Change)

A comprehensive plan or feasibility study should support a new request for a startup business, or major expansion. But discretion as to the requirement should be left up to the approving element of the rural development program.(Regulation Change)

Next issue: Two years projected balance sheets I believe is not necessary and provides little in the way of useful information. Hence, it is not commonly used in credit underwriting. I would conventional credit underwriting, or even government -- other government guaranteed loan programs.(Regulation Change)

The reaction, I would suggest, would be to eliminate the requirement for two years balance sheet, but a pro forma balance sheet indicating what the balance sheet would look like after the loan funds, or loans fund, and are disbursed, should be required with every single loan.(Regulation Change)

This suggestion is not meant to minimize the importance of presentation of post funding equity, but rather to simplify the presentation of credit risk by requiring the necessary pro forma balance sheet, but not requiring a subsequent point in time balance sheet projection.

More useful projections as to credit risk should be included in the debt service presentation reflecting future cash flow to service debt measured against the debt burden itself.

So in short, the remedy? Require post funding pro forma balance sheet presentation in each package, but not two years balance sheet projections.(Regulation Change)

Next issue: Loan covenants as required are too numerous, duplicative, and at times overly restrictive without providing significant mitigation of risk. Some of -- reduce required covenants to the core amount of covenants that would be applicable to all loans under the program.(Regulation Change) Minimum net worth of the primary source of repayment would be necessary on all loans.

I say primary source of repayment because I'm harkening back to that eligible passive company that may own the real estate, and leaves it to the operating company. Your repayment is coming from that operating company cash flow. That's where we need to focus. That's where we need the covenant.

Minimum debt net worth, let's see. Debt service ratio coverage would be required on all term loans. Net working capital and/or current ratio would be important in shorter term debt. I'd say less than say, at five years.(Regulation Change)

Additional debt limitation in capital expenditure limitations may be appropriate but not required for every borrower, for every loan.(Regulation Change)

The RD approval authority at the USDA would establish conditions in covenants in the loan agreement, or approve them, I should say. They would come in the package in the event the lender did not propose the sufficient agreement covenants and conditions.(Regulation Change)

So my remedy is to establish minimum required covenants for each loan, but the credit approval area of the agency should be mindful of all covenants necessary to limit risk as appropriate to support a particular loan request. (Regulation Change)

Requirement covenants should be limited to minimum net worth, annual submission of financial statements, debt coverage ratio as to term debt and networking capital as to short term debt.(Regulation Change)

I will be happy to provide additional comments or provide a working committee or something as we revamp the program for any and all of these issues. I'm happy to be an active assistant in the matter.

An example of this: There is a prohibition of any future debt without the approval of USDA. I'm making a loan to a Navajo Housing Authority. They have a block plant that is using fly ash from their coal burning power plants. And they borrow tens of millions of dollars around their housing program.

It almost broke the deal when this was imposed. It just wasn't practical. So I think that we should just be wise; not have all of these limitations out there, but some smart ones.(Regulation Change) And frankly, I would make the statement that I think I can control about any of these things through a minimum net worth requirement of an operating company.

I can control remuneration, additional debt, CapEx. I can control all that through a well thought out net worth requirement.

There is an issue, and I haven't run into it, but I can see where it could be, and that is sub part N of 4279 and 181, in B. It establishes limitations as to conflict of interest that may be too severe in a small community.

The instructions state, "None of the lenders, officers, directors, stock holders, or owners has a substantial financial interest in the borrower, and neither the borrower has a substantial interest in the lender.

My action, as in the case of the CF program: allow the agency to determine if relationships disclosed are likely to result in a conflict of interest. This change is consistent with the CF program.(Regulation Change) It does not unfairly penalize those individuals that are active participants as investors as different levels in the development of the rural community.

You may have a bank owned by a small town, or in a small town. And guess what? An entrepreneur that probably sits on the board of the bank is also a likely borrower using these programs. So it is carefully allowed in the CF program, but not B&I. That suggests we move that to be with B&I in it, may be included in the consolidation that is considered later in the year as well.(Regulation Change)

Then I'd like to say that 2the B&I 2000 Packaging Program that was out a few years ago was phenomenally good. We used it a lot. We would use it to package the loan. We would present the hard copy package to USDA. We would email the B&I package to USDA. They could have it in both forms. It was, I thought, very well done, very well presented, and truly streamlined the packaging process.

And I think it would be better for USDA because it forces consistency in the presentation. You have to fill in all the blanks. You have to address the issues that need to be.

I think there's a fellow named Ed Plourde, who wrote it and supported it. I don't think it's out there on the website anymore as an active program. I think it should be. I am not proposing you make a lot of changes to it, just upgrade it to your new forms, if you have any. But my gosh, I can't say enough about that program and how valuable it has been to us. So I would like to see that restored.(Management Change)

Lastly, renewable energy systems and energy efficiency improvement: Pretty simple comments here on that, which is the guarantee amounts, I believe, are a little less than would be under B&I as a percent of the loan.(Regulation Change)

I would say that the risk on these loans is considerable, as Bill pointed out earlier. And if the program is really designed to encourage more aggressive lending, and the renewable energy sector, then the guarantee percent should increase commensurate with the risk.(Regulation Change)

So I strongly suggest that these guarantee amounts of those loans to be increased with the caution that you've got to be really careful. (Regulation Change)

I know in Arizona, we had a lot of these little power plants turn up some years ago when we were looking at $50-$60 a barrel of oil. And it drops a little bit, and you can have trouble.

So we want to be careful, but let's get the guarantee portions up as we can. And then on loan servicing, it's required that lenders obtain GAAP financial statements on B&I loans, or borrowers annually. But in many cases, I think GAAP financial statements may not be feasible due to cost, or necessary to monitor risk.

So I'd like to see the rule changed to allow RD approval authority to determine whether -- when the loan is -- what -- either when the loan is approved, or if there's a material adverse change during the course of the loan, as to whether annual GAAP financial statements are required. (Regulation Change)

This would initially be addressed in the loan agreement for small rural borrower. An annually submitted tax return may be perfectly adequate to assess the risk on an ongoing basis.

So I'd like to allow the RD approval authority to determine the need for the requirement ongoing for GAAP financial statements.

Then, just briefly, we looked at the automated lender reporting system, and as good as I can say about the Loan Pack 2000 on the balance of that, would be the automated lending program. It has been very difficult to operate. So what I'd like to do is have the USDA allow -- until that's perfected, allow paper reporting as to its ongoing loans. (Regulation Change)

That concludes my comments, and I thank you very much for being an attentive and alert audience. Thank you.

MR. HADJY: Mr. Frederickson, we want to thank you for your comments. Next, I'd like to call to the podium John Seimetz, President and CEO of Bridgeview Capital Solutions. And please identify yourself and the company you represent for the record, Mr. Seimetz. And is your Power Point loaded?

MR. SEIMETZ: Yes, it is. Good morning. My name is John Seimetz. I'm President and CEO of Bridgeview Capital Solutions, headquartered out of Atlanta, Georgia, and a wholly owned subsidiary of Bridgeview Bank Group, headquartered out of Chicago.

We are a formidable B&I lending advocate. Our portfolio is of new loan activities just shy of $200 million. So we've done quite a number of these program loans throughout the history of our organization.

I particularly, as well as our organization, welcome the opportunity to give you some overview at least of our perspective. I'm going to speak from Bridgeview Capital Solutions' perspective, and not as an industry advocate. But perhaps in the light in which all these comments are taken, I hope my partner does not get aggravated at me.

But one of the things I did when I looked at this opportunity is I went back and reread the comments from 1996 when the regulations were first changed, to get a perspective, at that time, of the things that were on the minds of the lenders and so forth.

There are three areas that caught my view, and I'll get into them in a moment. But the -- let's see. The thing I thought I would do first of all, is take a look at a market overview versus -- the market overview today versus what it was in 1996, and probably through the `90s or 2000.

But today, there are larger banks national and regional than there were back in 1996. Deregulation took over. There are fewer rural banks today than ever before, through assimilation, acquisition and so forth.

Large non-bank institutions, those are the Merrill Lynches of the world, and different investment companies; very large private capital market is available today in the form of venture capital, non-venture capital. You see that a lot in the real estate marketplace and so forth.

Today, you see the SBA loan program more widely accepted than it was back in 1996, and with the expansion of the 504 lending program, that when involved with real estate, and if you stop and think about that, they can go five million in a rural project, and up to 12 million in a manufacturing project.

All of these little nits and nats start eating into what your program availability is in the marketplace. Lender participation in the RBS loan programs has been eroding over the last four or five years.

The RBS loan and servicing requirement candidly do not fit the majority of bank business models. And what I mean by that is that the standards that you place upon the lenders today are higher standards than perhaps what they would do in their own lending portfolio. (Regulation Change) For example, underwriting a loan four or five times a year is not generally done in the banking community, as is the case here.

A lot of banks, take Bank of America, who somewhat exited your industry, found that it just didn't fit in because they have a quonset hut strategy of servicing in centralization, which is okay. However, the problem begins with unless you specialize by government lending, like an SBA lending group, or all we do is USDA lending, okay, for our institution and other SBA programs. It's very, very difficult to manage and monitor these program loans if you do a number of them.(Regulation Change)

The RBS loan program: I have to say the agency is not promoting this program more -- 1I'd like to see then promote the program more than it is right now. What is out there is okay, but I don't see enough of your states. (Comment 1) Because we deal nationally. We're a national lender.

For example, out of 50 states, your state offices sent me -- I think I've got 20 faxes of this announcement. Okay? From the state offices. Maybe it might be a little bit less than that, but I -- I don't want to make it sound too bad.

But the point of the matter was the contact with the lender and so forth is not as good as it could be on a national basis. And then you're going to hear from -- you've heard it before. You're going to hear a little bit today that regulations are a bit on the burdensome side.(Regulation Change) Not to say that we're losing sight of the fact that we understand this is a government program, and we understand that there are rules and regulations that have to be followed. And we certainly understand the dilemma that you have in managing this, and having to deal with congress and all the rest of the stuff that goes along with it. But in the day-to-day world of the actual battles out in the field, it can provide some problems. It does provide some problems for us.

In 1996, the -- I quote, "The guaranteed loan program will be more flexible and place more reliance on lenders." I'm trying to take that same approach today in the comments that I'm making. And also, in 1996, according to your regulations incidentally, the application processing procedures will be more efficient, less burdensome for borrowers, RBS staff, and will provide more rapid decisions in making, servicing and liquidating loans.

Within the spirit of those two statements are the examples that I'm going to work from in a few moments here. The single most issue that I feel very passionate about, and I quote, "It is a responsibility of the lender to ascertain that all requirements for making security -- securing service and collecting their loan are complied with." So you ask yourself, "Why do you need a regulation?" But you do need regulations.

Having said that, perhaps if we look at it from -- perhaps if I -- this thing is trigger sensitive. Perhaps if we look at it from that point of view, the comments I want to make -- and I'm going to glance over these. I have some handouts for here, or you can make copies of this and distribute accordingly.

Foremost in this, right off the bat 34279.15, which gives administrative power to change things temporarily; I think is the catalyst for jump starting this program with recommendations without having to go through the -- change all the regulations. What I'm saying here is that perhaps you adopt a temporary program until you're able to get everything together, so you can jumpstart this a little.(Comment 3)

If I was in your shoes, that's what I would be doing. Okay? And having said that, you picked the best of the best of these changes. 3Go ahead from the administrative point of view, as opposed to making a deal-by-deal point of view.(Comment 3) And then I believe this is going to have a higher impact, immediate impact today, while we wait with the laborious process of taking changes into effect through -- through the program. I don't see any other wording in there that would preclude you from doing that.

The certified lender program: I have a few issues, comments on that. Any lender that has originated or serviced more than five loans, for example, originated, serviced and liquidated, ought to be a certified lender by design. Okay? Without the other guidelines that you put in there. (Regulation Change)

They are typically going to be a registered, or their going to be a government institution of bank, or the traditional lender type. But I do believe that that will have some merit.

I think the limitation of only having 80 percent guarantees precludes that lender from doing larger deals, or even going into higher impact areas of doing a 90 percent guarantee is a little bit on the restrictive side.(Regulation Change)

4I would eliminate the inner-governmental comments. I view it as no value added. (Comment 4) I haven't had a response negative, but I guess over the course since 1996, how many programs or how many loans were killed because that inner-government agency said no to it.

So if it's something that can be eliminated, it would be great to do that. The lender makes the credit decision. Agency focuses on compliance. I think that's the spirit in which the regulations operate, and that ought to be the spirit, again, with the certified lender program. 4And allow the lender to do the environmental analysis. Take it out of your hands. Let the lender do it, if you're a certified lender. (Comment 4)Okay? If you're not a certified lender, then the agency has to do it.

Expand a guarantee authority to comply with 60-day turnaround time.(Regulation Change) What I mean by that is that a certified lender, according to the program, can go out and call you. "Hey, I've got a deal." You reserve the funds. It's only good for 30 days. Yet the approval turnaround mandatory time is 60 days. Perhaps that could be added in there as well.

Utilize the FCA to review lender compliance a year after the -- a year after the certification for a new loan is funded. (Regulation Change) I think you've got a great organization there that can be your police person, so to speak, as opposed to those burdens placed on you. I recommend you take total advantage of that.

Loan guarantee limits: I'd like to see you include construction lending guarantees in tiers. Something less than a normal guarantee. And then when that construction period is over, then it flips into the normal guarantee. (Regulation Change)

Because why would a lender -- I've done deals where it's been blended, and it was reduce guaranteed for the entire term. But I felt that was a little draconian, in that the highest risk was during the construction period. And yet, I was imposed upon to take a lower guarantee throughout the term.

And then the other is that includes your renewable energy loans as a high priority under this B&I program, as we get along here as well. Eliminate the ten percent tangible balance sheet issue. It's causing a lot of grief out there. That's with existing companies. Keep the 20 percent. (Regulation Change)

I'm not going to get into why other than the fact the lender is making a credit decision. Let them make their credit decision, whether it has ten percent or not. Let them make that change. (Regulation Change)

The financial statements, this is too technical for this group, but I said eliminate clause B, and rely on clause A. (Regulation Change) And I'll let you figure out what that means, because it doesn't -- I don't have it up here.

Appraisals, add the USPAP, business valuation appraisals to the operating instructions. (Regulation Change)You're going to need this for your bio-energy deals. Those are cash flow deals, okay? And you're going to need evaluations to -- a straight real estate appraisal is not the right appraisal for that kind of a lending program.

Let's see. Going the wrong way again, the pre-applications: I would suggest you use the Community Facilities Programs applications. It's two pages. (Regulation Change) It is beautiful, and you have the lender write up, and you got everything you need right there. And you eliminate the laborious lender as well as borrower application.

The borrower signs on that, and the front page with the lender, and we're off and running to the races with the rest of the information that is required under that program. I think you'll see that come to light when you start working together with the other industries -- the other agencies.

Redundancy here, but 4eliminate the consultation requirement. Let us do the site assessments.(Comment 4) Issue loan commitments subject to appraisals. (Current Procedures) Process the loan if the appraisal isn't there. I don't know why it's not done, but just do it. And then it's up to the lender to do it; get the appraisal. If it's not there, the loan won't go. So it's condition precedent.

Let the lender determine the covenants and loan restrictions. (Regulation Change) That has already been echoed here. Evaluation, again, I'm going to let you go to that section. It says the lender makes a certification. Everything in the world, in the application world, is right. The financial statements are there, etcetera. Rely on that, and less on the policing action, I suppose, that goes along with it.(Regulation Change)

Release of collateral. Give some flexibility in that environment. This is a possible solution that says you at least have the same discounted loan value at the time the collateral is released, as opposed to when the loan was done.(Regulation Change)

If you do that, then you don't need B or C, because you always have to maintain that anyway. I would eliminate -- the remaining collateral must be sufficient to provide repayment of the agency's guaranteed loan. (Regulation Change)

Collateral doesn't pay loans. Collateral secures loans. And hopefully, there is enough there. But the point of the matter is that's a little problematic statement. The need for B and C in that case, the other requirements for pre-payment, would go away. (Regulation Change)

Suggestion: Revolving loans are usually three year commitments by lenders. The one year with accounts receivable is very problematic to work with on the larger deals that we do, and it's a little laborious. Consider expanding that a little bit longer. (Regulation Change)

Liquidation plans: The main thing here, try to get it in ten business days. We're trying to speed up this process and make it ten days from the state office. (Regulation Change) Make it ten days upon receipt from the national office. That's within 30 days bottom line. But I've seen some plans take a little bit longer than that. We have to move on some of these faster than what has happened.

Somehow make the statement to you that interest does not accrue on bank loans when they're 90 days past due. We write off the interest. So if you're looking for accrued interest in that, it's not there. (Regulation Change) But in a lot of cases, each state is different how they interpret things in liquidation plans.

This is a problem in bankruptcy. It's very complicated today in the bankruptcy world. A lot of reorganizations, etcetera. I mean a liquidation has been taking two years for a very, very large loan.

But the point of the matter here is that if they come out of a chapter 11, and if the court doesn't authorize our -- okay our expenses, and it's very expensive to have legal appraisal and the rest of these. If I don't get refunded, I've got to either add them to the account, or I eat them until the loan goes bad.

You got to give us some relief in this regard, because the way the operating instructions are for each day is that I don't get paid those, okay? Unless it's a liquidating chapter 11. And the definition of that is a little bit uncertain what a liquidating 11 is. It could be a cram down. It could be a lot of things. So we need a little help there. (Management Change)

Renewable Energy Program: This is my first impression is wow. Okay? Wow that it's there, and wow, I wish a lender was involved when writing that. Because it was a lot of other folks that are not in the lending world that wrote that, and it was very clear.

The certification of the regulatory and technical requirements in that loan program is going to be a determent for lenders. (Regulation Change) This lender, for example, is not going to certify everything that you required for that loan, particularly all the technical stuff is true and accurate. I mean it's just impossible to do, and yet it's referenced back into the B&I side.

The B&I: If a B&I loan can be done in conjunction with that program, the equity issue can be mitigated. (Regulation Change) And favorable lender participation is anticipated. And what I mean by that is you do an energy deal with a 50 percent equity, and then you do a B&I loan with a second loan, okay, with a 20 percent equity. You're going to get back 30 percent of the equity, and by statute, you're okay to fund one, and the B&I Loan Program is there. So that could be a methodology for you to get around that.

If you can't do that, then the regulatory burdens outweigh the benefits to the borrower and to the lender. (Regulation Change) Okay? When we get right down to it.

Separate the instructions because I need a Philadelphia attorney to go back and reference all of that. But go ahead and give a complete operating instruction for the 9006 Program. If it has to mirror -- if you're going to change the regs on the B&I side, then they'll be changed accordingly in this. But I found it very confusing as a lender, and I know the program. (Regulation Change)

I had to go back and figure out what was what. And I know what you were doing. It's okay, but the comment is making it separate anyway.

I would also say separate the grant program out of it as well, because I think that's more to the agency's purview than it is to the lender. And just keep the lender side of it strictly for the lenders. (Regulation Change) Just a suggestion.

Separate -- excuse me. Too many non-lenders involved. I had mentioned that. And again, back to that opening remark, is that anticipate a lot of the exceptions. And I think it's also the catalyst; it allows you to get around a lot of these issues and be open-minded to some of those so that we can get these loans done on your behalf.

After having said that, here's a loan I'm working on right now, and it's a nifty little thing. It's a small ethanol plant. They're going to take citrus byproduct, and make ethanol out of it. Go figure. But it's going to work.

It's a $10.2 million project. The loan, with the discounts, comes out to 4.9 -- these are my discount rates for a project like this. Sixty percent machinery and equipment, the building is 70 percent. This is kind of a high -- this is specialty equipment, etcetera, and you come up with a discounted value of 4.9, against hard costs is what I look at. Not the soft costs. And I still got a 51.83 percent equity.

Now, I'm saying to you the 50 percent equity under the energy program is not a bad equity position to have when you look at hard costs. But it's -- but you can still do this same deal in the B&I program for 20 percent. Okay?

So this is a light deal I'm working on. There are four or five others similar in cost and nature, and they all come out the same way. The loan amount is different -- or the equity amount is in the 50s.

So I welcome -- in conclusion, I thank you for allowing me to share with you some of my observations that will help us, my partner and I. And we do very much think of you as a partner in these loans.

My comment, the last comment, is simply you are transparent in the process, but don't become part of the document. Because it creates a little bit of confusion with borrowers. (Regulation Change)

And having said that, I'd like to be able to have permission to use your new guarantee form. Give it to our attorneys, same language, but it's just incorporated in our documents, as opposed to using your form. And I would encourage you to take the words out of that that relate to USDA, etcetera. (Regulation Change)

I understand the government side of it, but the more and more you do that, it creates a problem with lenders wanting a particular set off because they think the guarantee program is going to guarantee their monthly payments, etcetera. And we don't want that to occur. (Regulation Change) So with that, I thank you very much.

MR. HADJY: We're going to take a break right now. Ten minute break. So it's 10:15. Please return at -- it's actually 10:18. Please return at 10:30.

(Whereupon, the above-entitled matter went off the record at 10:19 a.m., and resumed at 10:36 a.m.)

MR. HADJY: Before we get started with our third presenter, if we could, be seated. Mr. Hagy wants to make a comment.

MR. HAGY: It's more a clarification. When I was taking about the combining of the guarantee programs, I didn't intend, if you interpreted it that way, to mean that the guarantee programs are being merged into one area.

The programs will be independent of each other, it's just that they'll be governed under one set of rules and regulations. And the uniqueness of the program might constitute there having to be a handbook or something specific for that program. But the general operating procedures would be the same -- we're not intending on merging all four programs into one guarantee program.

And secondly, I mentioned that the proposed rule, we anticipate having it out by the end of this calendar year. That's actually the final rule that we propose to have out by the end of the calendar year, which means the proposed rule will be published some time before that with comments during this calendar year, with the final rule targeted to be out by the end of the calendar year. (Regulation Change)

So I apologize for any confusion that I might've created as a result of that Okay? Pandor, I'm going to turn it back to you.

MR. HADJY: Our next presenter is Mr. Bob Coleman, Publisher with Coleman Publishing Company. Mr. Coleman, if you'll come up and identify yourself for the record, please.

MR. COLEMAN: Thank you. My name is Bob Coleman. I'm with Coleman Publishing. I'm the editor of the weekly email newsletter Coleman World Development Lending Weekly, the spam that you get every week from us.

I want to -- I've been involved in this industry since 1997, and probably I was going through to figure out how many attendees have attended my conferences, and it's been close to 1,000. I've had Dayton Watkins, Administrator John Russo, and Peter Thomas has spoken, as well as a number of you in this room, and I appreciate it.

I've got to tell a story about Carolyn Parker, because she came to Las Vegas, and she was doing a three-hour thing on servicing.

MS. PARKER: Don't embarrass me.

MR. COLEMAN: And she opens it up, and she starts reading from the manual. And we're going, "Oh, no." And she does this for about 30 seconds. She throws the book on the floor, and she goes, "Let's talk about servicing. Let's talk about what you want to know." Anyway, people loved it. You were great. But thank you.

I apologize if I missed some people. Bill Smith, David Lewis, you were great. Kenya, Richard, I appreciate you guys coming out and talking to the lenders.

What I want to talk about today is I came up with four critical changes for the industry. And I want to make it clear the lenders -- my position is to talking to lenders, bringing together information. The lenders appreciate the job, especially the staff does. This is not a beat up the staff thing, especially if there's a trap door here.

MR. HAGY: There is.

MR. COLEMAN: I don't want to fall through. So make that very appreciative of what you do.

What do I do? As I said, I have a website. I think we provide a lot of information. We get over two million hits a year on our website. And what I did last week is we put together an audio conference. It had about ten lenders.

The meeting was on short notice, and a lot of people put in their input. And so what I've done is sort of taken that information and combined it for this. Also, those lenders; I've asked them to -- they know they can do additional written comments. And what's the date? March -- we have 15 days after today. And so, I'll try to get as much as that.

But the number one thing I just want to keep everyone here. It's the reason why we're here. We have a passion for capital access for rural America. And I see that. Again, I'm picking on Carolyn. When she was speaking in Vegas, you could see that. You could see the staff; they had a passion for this program in terms of what we want to do.

And on the lenders side, the lenders have the equal type of passion. So just always keep that in mind. There are a lot of things.

Again, my position is I'm a lender advocate, so I'm going to be pushing things towards what lenders want. But the passion is on both sides. There are people here who really feel strongly about getting capital to rural America.

My four categories: Standardization, lender certification, lender responsibility, eligibility. Standardization: The number one problem is state inconsistency, inconsistency from state to state. (Management Change) Now, I don't have the Don Quixote windmill Power Point, but I do have a blue sky -- so I understand some of this stuff is out there.

But we're not advocating limiting state offices. We understand that. But we are advocating standardization, advocating centralization. (Regulation Change) A lot of our lenders are national lenders, and this is a national program.

It's not an Alabama program. It's not -- Jeff Deiss, I'm sorry, I forgot you. You were great in California. It's not an Oregon program. It's not a Wisconsin program. It's a national program, and there needs to be consistency.

John Seimetz runs a national operation, and I'm not putting words in his mouth, but it's very difficult to run a national program when you have 50 different iterations. So one of the first things is to put together the manual. Put together the rules. Tell the state offices they have so many days to do things. Try to make things as consistent as possible.

We understand people are people, and we understand the nature of bureaucracy, and we understand things happen. So we're not asking for perfection, but I think we're saying as much as you can standardize things, we'd like that.

My presentation isn't going to be as specific as Lyle's and John's, just so you know.

The other thing we'd like to see: centralization. (Regulation Change) My view of the B&I loan program is it's building a car, but it's building a car from the wheels up. It's a custom project. Every project is unique. Every project is different.

Look at the numbers. Last year, there were only 370 loans. I mean this is not an economies of scale type of operation. Whatever the agency can do to make lenders' lives easier is -- would be appreciated.

One of the things is centralize a loan process, etcetera. Put it in one location, and have it go through. (Regulation Change) There's still a role in the state. The state obviously can advise and help, and maybe help them put it together. But put a group of people together that that's their job.

Centralize loan servicing liquidation. (Regulation Change) Again, let -- lenders have an interest at heart. They have their best interests. And what they want to do is protect their portion of the asset. And a lot of feedback I have is just bottlenecks in that process. (Regulation Change)

The more that you can centralize a servicing aspect, centralize liquidation, you have -- eliminate a lot of the layers, it's actually going to be better for the program and better for the -- for the agency. (Regulation Change)

Second part is lender certification. I only bring this up because it's -- the reason why I feel justified at bringing it up is most of these lenders that you're dealing with in the program, and last year we had 237, most of them are SBA lenders. Most of them have an experience in SBA.

So I only bring that up not to compare B&I with SBA, but I bring it up in terms of compare lenders' expectations. Lenders have -- have a history of dealing with the government guarantee program. So that's the only thing.

But there is one unique factor that needs to be remembered: Once SBA went to preferred lending where it gave the lender the authority to approve the loans, the programs skyrocketed. Last year, $30 billion was done in SBA. And a majority of that was done by lender self-approval.

Now, in this program, the lenders who I talked to, no one is really advocating a true PLP program. We understand that program is unique. But there are things that can be expedited. One suggestion was, "Hey, mirror SBA of the loans under $3 million. Let the lender approve it." (Regulation Change) I'm not necessarily advocating. I think what I'm advocating is come up with some sort of lender certification, what John was saying. Or I think Lyle also. It's let the lenders do what they're in the business of doing.

Servicing: Lenders should be able to service loans in a prudent manner. That's what they do. They service loans. But let them service the loans the way they do the rest of their loans. (Regulation Change)

If a lender doesn't do a quarterly underwriting of a commercial loan, should you really expect them to do that if it's a B&I loan? And I think we're saying no. Let them -- if that's -- they're in the business if making loans. They're in the business of making money and staying profitable. And if they can do that with their other program, let them take those standards to B&I.

Liquidation: Same thing. Let them liquidate it the way they do the rest of the loans. The third portion is lender responsibility. (Regulation Change) And if you go along with lender certification, I think John used the word lender police. Was that you? I don't -- lenders understand the risk and rewards of working with a government guaranteeing lending program.

They understand, and I think this is a fair statement. They're willing to accept certain risks for expedition.

If you can expedite servicing, expedite liquidation, expedite underwriting, they're willing to take the risk that says, "Hey, if we don't do our job right, we don't have a guarantee. We understand that." (Regulation Change) And there could be some trade-off from that standpoint.

Lenders understand they are not afraid to make decisions to protect their portion. Twenty percent of a $5 million loan, that's $1 million. They have a strong incentive to protect that. And lenders understand they must act prudently, or lose the guarantee.

It's interesting, I was unfamiliar with what John pointed out earlier in terms of the regulations. You can trust lenders to do certain things, and ultimately, the agency has the ultimate hammer, which is if you don't do it right, you don't have a guarantee.

The last thing I want to address is eligibility. My only two comments on that are simplify the process. (Statutory) Right now, it's -- there's an area that's unclear. Is it eligible? Is it not? Well, we got to call the state office.

So make it as simplified as possible. I understand there's professional issues and legislative, but the advocacy is here. Adopt a simple threshold.

And so feedback? Thank you. And my information, thank you.

MR. HADJY: Thank you, Mr. Coleman. Next is Ed Bell, with Ed Bell and Associates. Ed, please come up and identify yourself for the record, and begin your presentation.

MR. BELL: Good morning ladies and gentlemen. My name is Ed Bell with Ed Bell and Associates. I'm out of Louisiana, and I'm a nationwide packager of B&I loans, and probably the oldest living packager in the business. I've been around in this since the mid-`70s.

But basically, I only have eight points I'd like to just bring out for everyone's consideration. The Business and Industry Program is the finest mechanism for supplying credit enhancement to rural businesses in America today. It's got the most streamlined and effective delivery system.

With this in fact in mind, we should continually strive to improve the program. The points that I'd like to bring out is geographic eligibility.

The present system of determining area eligibility for B&I programs leads to confusion for all involved. The determining factor should be the municipality's political boundaries, and they should not exceed 50,000 in population. (Regulation Change)

I think this would eliminate some of the problems you find as you move from state to state with different projects because there are different rules that will apply, or different interpretations.

Second point I'd like to make is equity calculations in calculating the balance sheet equity. The market value of assets should be used -- allowed to be used in this calculation. (Regulation Change)

In cases of questionable values, the numbers should -- the numbers should be substantiated by appraisal, very similar to the European GAAP accounting system that someone is -- a business is not penalized because it depreciated down assets on their balance sheets. (Regulation Change)

Allowances should also be made to use a value of intangibles, provided the presence of third-party substantiation. (Regulation Change) I've run across this a lot in -- in new technology, particularly things that I'm not familiar with. You have your touchy feely assets, then you have something that an intangible, but it's really got considerable value to it. So I don't think you should have cut and dry rule. That should be on a case by case basis. (Regulation Change)

Next point I'd like to make is a guarantee fee. I suggest the guarantee fee be prorated for the first year to fairly reflect a true number for the lender. So if the lender is not paying for something he's not using ahead of time, depending on when that loan was closed. (Regulation Change)

Another thing that I'm kind of familiar with is the go zone rules that have come out since a lot of our disasters that have happened, particularly Katrina in Louisiana. And the same thing is happening in California right now.

The IRS allows 50 percent accelerated depreciation in go zone areas. In year one, that's available to the businesses. I predict that there'll be certain problems in the equity calculations, both in terms of covenant violations, and in subsequent B&I finances.

The solution to this problem would be to allow the restating of the balance sheets, using normal depreciation terms for B&I purposes. (Regulation Change) You can see that that's quite a hit to the equity on a balance sheet if you're taking 50 percent depreciation of your assets in year one.

Another item I'd like to bring out is the redundancy of review. The double T underwriting and loan committee review at both the state and national level, I feel is -- is unnecessary. This should be eliminated, as it is too time consuming. (Management Change) Allow states the authority to make and approve loans. But at the request of the state office, or of the lender, the national office involvement could be requested. (Current Procedures)

This would also actually hold down the number of appeals, which is extremely time consuming, and I'm sure the appeals division would like to hear this. But it would be a middle step, where you could ask for intervention by the national office. Either the lender of the state office would have this right.

Another point, regulation simplification. The 9006 regulation should be incorporated in the B&I regulations. (Regulation Change) I think this would offer simplicity of the programs for all people that are involved in it, because I get a lot of -- a lot of questions, and I really don't know what the answer is. But I think that's something that should be investigated to see if it could be simplified.

Another issue that I think should be taken into consideration is you have a relatively new entity that's been starting to grow at a fantastic rate, and it's under the treasury department. It's the certified development entities. And I suggest that all certified development entities should be allowed to make and service B&I loans. (Regulation Change)

These entities are reviewed and are licensed by the US Treasury, and I don't feel that they should need any further review as new lenders by USDA. (Regulation Change)

These are the guys that go to lenders, and they form a joint venture entity where there's a pass through of tax credits in certain areas of the United States. And it's something that I think this country is going to see a lot of, and in the very near future.

My last item that I'd like to cover is disaster eligibility. In situations of declared disaster emergencies, allow for the waiver of equity and collateral requirements, and also the geographic boundary lines. This should not apply and allow -- rather, these should not apply, and also there should be a lifting on the ceiling on the percentage of guarantee in disaster situations to 90 percent. (Regulation Change)

This would be very, very similar to the old rules that were issued for a short period of time in Florida after Hurricane Andrew, in which four or five major B&I loans were made in downtown Miami.

I suggest that this should be available for up to two years after disaster declaration, because what you have in these disaster situations is you have a lull, a period of clean up, that has to be done in a period of just shorting up the infrastructure. And then you see that there's a demand for capital for businesses to rebuild. (Regulation Change)

This is basically the eight points that I wanted to bring up. And I would hope that there's some discussion, and that USDA seriously looks into these points. Thank you very much for your time.

MR. HADJY: Mr. Bell, thank you for your comments. Next to the podium, I'd like to call Edgar Davis, with the Kentucky Highlands Investment Corporation. Please state your name for the record.

MR. DAVIS: As he mentioned, my name is Edgar Davis. I am with Kentucky Highland Investment Corporation, based in London, Kentucky.

I've been associated with the B&I program for close to 15 years, both as a commercial lender, and now with Kentucky Highlands. And have worked on about $18 million worth of loans during that period of time.

Two issues, recommendations that I'd like to make today. One dealing with the equity requirements, and would tie that to appraisal requirements. (Regulation Change)

And I would just like to see some flexibility in both sides of that within the program, which has already been stated. (Regulation Change) Most of these loans are unique in a lot of ways. And I'll just cite two examples where you see this might come into play.

One was a project we worked on recently. The three principals in the business were a physician and two pharmacists. They were coming together to start a home infusion company.

It was a startup. All three were high net worth individuals, high credit score individuals, yet they didn't bring a lot of liquid assets into their new partnership. And we struggled with the equity requirement in this scenario.

The other flip side to that is last year I had a project in a small manufacturing company that was very profitable. It had over 30 percent balance sheets equity. But due to the specialized nature of the equipment that they were looking at, we had collateral issues.

So when you start looking at the discount side of that, as the regulations are looked at and changes are thought about, I would just suggest that you look at some flexibility in both sides of that, because it can go either way.

4The second recommendation that we would like to make today deals with the inner-governmental review process, and the change that would suggest areas that that review -- I know there's been some speakers previously that said this, that maybe suggested that it be taken away completely, but if it remains a requirement that it be completed prior to the loan note guarantee issue being issued, not the conditional commitment. (Comment 4)

In our area, even though we're working on it, and it getting better, we have seen that process in itself take 150-160 days just to get the clearinghouse comments back. So that was basically down time as far as loan processing. Had we been able to get the conditional commitment, we could've been moving toward a close if all that was taking place.

So that is the two areas that I would suggest that possible changes be made in. I think it's a great program. It has worked well in our area and been able to help a lot of folks with it. And again, I'd like to thank USDA for hosting the meeting today, and allowing us to give you our input.

MR. HADJY: Mr. Davis, thank you for your comments. Next, I'd like to call to the podium Patrick Kerrigan with Farmer Mac.

MR. KERRIGAN. Mary is going to make our comments for us.

MR. HADJY: Okay, Mary Waters with Farmer Mac. Mary, please identify yourself for the stenographer. Thank you.

MS. WATERS: Good morning. I'm Mary Waters. I'm Vice President of Corporate Relations at Farmer Mac, and delighted to be with all of you this morning.

For those of you who are not familiar with Farmer Mac, we were created by congress back in the mid-`80s, in 1988, to provide a secondary market for rural, agricultural and mortgage loans.

We had our charter amended in 1991, and began our relationship with USDA's B&I program, and were able to provide a secondary market for the guarantee portions of B&I loans.

Our mission from congress was really three-fold. We were to increase the liquidity and lending capacity of lenders. We were to provide an opportunity for producers and borrowers to have longer term fixed rate financing, other financing options that they hadn't been able to access before that. And we were also to provide the benefits of the capital markets to rural lenders.

And so with that in mind, as we've said, we've been partnering with USDA's B&I program for the last 15 years in trying to bring those assets to the Business and Industrial Program.

Over the history of our relationship, I think we've accumulated about $2 billion in loans through the guarantee programs of USDA. On our books as of last September, we had about $900 million in guarantee authority. And probably about a third of that is the B&I Program.

We like to think of ourselves as probably the largest volume holder of some of the B&I guaranteed portions of their loans. I guess the part of the program we'd like to comment on today, we've found a lot of the comments said so far very helpful and informative, but 1we would really like to focus on the outreach sections of the questions that you raised. (Regulation Change)

We think that there is a large untapped opportunity for use of the secondary market in these programs. We've had great success with the FSA Guarantee Programs, particularly in some of the interest rate climates of using a longer term fixed rate financing model.

So I think some of the speakers have talked about the need of promotion of the programs, and certainly outreach. And we'd like to continue the partnership with B&I and with the lenders involved in the program, in trying to bring those benefits to the rural lenders, and borrowers in rural America. So thank you for the opportunity.

MR. HADJY: Ms. Waters, thank you for your comments. I am now going to open the floor up to any individual from the public that would like to make a comment. Okay, if we don't have anyone that -- oh, very good. Sir, please identify yourself and the company you represent for the stenographer.

MR. DOMINE: Good morning everyone, I'm Steve Domine. I'm Senior Vice President with Stearns Bank. We're an independent bank in Minnesota, and we operate on a national basis, or try to.

This is new to me, by the way. I must be -- I'm qualified to speak. I need two sets of eyes here; some to look here, and some to look there.

Truthfully, I wasn't planning to speak, but I jotted down some things that seem relevant to us. We try to do a lot of volume, and we try to do it all over the country. And as far as I'm concerned, it seems to me that there are a couple keys.

We need to establish a lender approval process. (Current Procedures) Some of you have been in this game as long as I have, I'm sure, and you were there through the SBA growing up. It's been talked about. Many of you mentioned it.

When I first started in the bank, that was 30 years ago. SBA loans were done on deals that couldn't get done otherwise, if we really are honest about it. Today, our bank views it just the opposite.

When a transaction opportunity comes into our bank, we think first SBA and B&I. There must be a way to do it under those programs. Because we're trying to grow, and grow, and grow and grow. We're trying to do it nationally. You can't do it without the assistance of what the USDA folks are providing.

You need to approve the lenders and let them do their thing. And then you need to have an approval retention process, (Regulation Change) because as we learned recently, just because you have the authority to do them doesn't mean you should be able to keep it.

You have to be able to demonstrate an ongoing ability to deliver this product effectively nationwide, or in your local markets if that's what you choose to do.

Well, how do you do that? Well, the delivery institution needs to have a balance sheet that can stand behind what they're doing. I think you heard someone earlier say that.

You need to have, in my opinion, a regulated institution. There are very effective non-bank banks doing all kinds of wonderful things. Unfortunately, there are a whole bunch of others that aren't.

Regulated banks and financial institutions have enough eyes watching over them that if I'm sitting here in Washington worrying about what's being done out in the country, I have another set of eyes.

I think that you need to concern yourselves with the personnel that are in those institutions. And if it changes, you may not be able to retain your authority to make those loans. (Regulation Change) You got to have the right people in place.

So you look at things as simple as a resume. Who is signing off? What is that institution’s government loan guarantee participation history and background? Have they been effective in other programs? Because believe it or not, if you know how to run a government program, it seems to me that if you know how to do this one, you can usually do that one.

What have their recent exams revealed? Are they making money? Financial institution is no different than a hardware store. If you're not making money, you won't be around very long. If you're doing poor loans, you won't be around very long.

What is the return on asset from that institution? What is the return on equity? What is their rating by their individual governing bodies? How is their compliance exam looking?

These are governmental things that are all happening already. We don't need to duplicate that. (Regulation Change) You can walk into any bank in the country, and within ten minutes, you can look at their existing exams and CAMEL rating, and you can pretty much know how does that bank run, and how do they do it.

As far as retention, what is the bank's loan loss reserve? That speaks to their balance sheet. If they had some losses, maybe. But if they've got the ability to back it up, you ought to be able to look at that objectively. What is their delinquency? What is their risk rate? How about their liquidation activities? How have they been doing on that?

Do they have a demonstrated marketing campaign? Are they actually making an effort to deliver the product? The rest of this gets way unorganized, just as it popped into my head.

Why a pre-ap? I don't think we need a pre-ap. (Regulation Change) If that lender knows what they're doing on the program, they should know when they talk to the customer prospect if this is an actual prospect for a particular program.

The pre-ap to me has been pretty much another step that's caused time delay, and we've heard from all of us here about that. I liked -- some of this is repeat, but I liked when someone said, "Keep the grant program separate." I believe John said that. It's a different deal. There's nothing about a loan that is a grant. (Regulation Change) I think the top of the things says I promise to repay.

Certification program does not sound good to me. Lender certification, with all due respect to Bob, what Bob's comments were, we've been down that road with SBA. How many of you were a certified lender and stayed there? We all went from there to PLP, or we went off of the chart.

I think we can move right straight to the equivalent to a PLP lender with this program. (Regulation Change) We're doing billions of dollars with the SBA Program. We're doing 350 loans in this deal. We can do 350 loans out of our shop if you give us the right tools.

Regulated lenders should be able to apply what's already in place for monitoring systems. (Regulation Change) When the OCC comes from right down the street to our bank, they look at our loan policy. They look at all those things they talked about: risk rate, our liquidity. They look at all of our loans in terms of our loan loss reserve, relative to what the loans are doing.

But they monitor our loan policy. We now have to have an SBA section to our loan policy at our bank. Well, we could have the same thing with a B&I. And that B&I loan policy could be something that you could have some input on, so you know generally speaking what these banks are doing.

It avoids duplication. Trust me, at the commercial bank level, we are being monitored well. And if you are one of the things that we do, they'll monitor that just as well.

Banks will worry about the guaranteed and the unguaranteed portion. Bob used the example on a -- I think you said a $5 million loan; a $1 million on the unguaranteed piece. Well, that's enough to get every bank I know's attention. We'll watch both.

Approval processes, they do seem to evolve. I'm talking about loan approvals. Committees like -- I view sending a loan into the state, and then sending it in to the national to get an approval process, similar to what we've done in the bank 50 times in my career.

What does the loan committee look like? In a small bank, it's usually the guy that owns the place. He or she decides if we're going to make the loan. The bank gets bigger, and more people will get at the table. There's always someone at the end of the table, though. And depending on which way their head is moving is which way that committee votes; is that not true?

Committees slow things down, (Current Procedures) just like multiple step processes. (Management Change) Just cut down on those processes, and you will eventually get to the person that sits at the head of the table, and will get the job done. We're either going to make this loan or not.

Those of you that do packaging, servicing and underwriting, you probably knew within the first hour whether that loan is going to get done or not.

My point is that in my view, if we could get the banks the authority to make these loan approvals, the banks will deliver the loans within a guideline. (Regulation Change) But the key to it all is this: Lending is an art. You cannot make a rule book and set up a set of guidelines that are going to ensure good loans.

It's an art. It's not a science. So what you do is you just set up what type of products you are looking for. Give the banks the authority to approve them, and then police them well, that they ensure the rule books. (Regulation Change)

And I believe you are going to end up with what we have with SBA today. And that's what I'd like to see happen with this. That's what I have to say. Thank you.

MR. HADJY: Mr. Domine, we thank you for your comments. Anyone else from the public that would like to make a comment? Please come up and identify yourself, and the business you represent for the record.

MR. SCHULTZ: My name is Fred Schultz, Vice President with Greater Atlantic Bank. Greater Atlantic is headquartered in Weston, Virginia. We're a community bank.

Our bank got into USDA lending through -- by a loan broker who kind of walked us through the first loan, and then we found out that this was an incredibly interesting process. So we've been doing USDA loans now for three or four years in several states, and we're going to continue to expand our horizons.

Several things that I want to mention, I think there are four: We were asked at the very beginning of this meeting to see if we couldn't comment on the marketing and outreach part of the program, and I guess I'd like to start with that. It -- it seems, from our perspective, that there is very little apparent marketing going on.

I've been involved in SBA lending for 25 years, and I know even that with all the effort that the US Small Business Administration makes to market itself and to create publications and that sort of thing, that it's still difficult to reach the small business person. Because most small business persons, you talk to them about SBA, and they all have a brother-in-law who got killed by the SBA.

There are just all these crazy notions out there. So it's very difficult, under the best of circumstances, to market a government guarantee program.

But having said that, I think that it really needs to be done. I sit on the SBA Quality Circle Steering Committee for Baltimore, and we just -- for Washington DC, and we just put on an east coast conference in Ocean City. And I made a point to speak at that conference on USDA lending. We saw a lot of people there who are really interested in learning about it, and asking, firing questions fast and furiously, and that was sort of done at my instigation.

1I just see it's -- there needs to be emphasis, whether it needs to have money thrown at it, or professional people brought in to help market this thing or what, but I think it's -- when banks finally get the big picture on this thing, it is, as we all know, a really good program. (Comment 1) And I wish I could give you more specifics, but this is hardly the time to talk about that.

Second, I'd like to talk about liquid, the liquidation process. I think that we've been through it at least once. And basically found it confusing. (Regulation Change) Looking at the regulations and studying them, actually getting online, printing them out, reading them over, underlining it, circling things, talking to the state office, it was just tough sledding.

And those guidelines need to be clarified, and if it requires centralizing liquidation, then it might be the way to go. But just trying to ascertain exactly what goes on the intermediate loss report, what goes on the final loss report.

The instructions were of little help. It just needs to be clarified exactly what goes where, so that we're not constantly peppering our state office with questions, some of which they were not able to answer right away. It had to go to other sources.

Third, I would like to talk about the geographic boundary lines. I understand that states -- the monies get allocated to the states. Some states are capable of doing more lending because of the demographics and the economies of those local states. (Current Procedures)

You're not going to get a lot of USDA deals out of New Jersey, for example, because it's mostly urban. But we've found, and I won't mention any states or any names, there's no point, but some states it would appear, and I don't know this for a fact, that 1it would appear that some state directors are less interested than others in doing B&I loans, for whatever reason. (Comment 1) Who knows?

And we've had interest from borrowers to do USDA loans, in this -- in this one particular state that I'm thinking of, and we're not going to waste their time, because we just know that it's kind of like shoveling sand uphill.

There's too many other opportunities out there where it's easier, and I'd like to suggest that there be some form where you know you've got a good deal, but you say, "Look, we'd love to do a USDA, but we're just not sure whether we can get it to work here." It's that there would be some secondary means through the USDA to get that deal done. Maybe through some other state director who has enough recognition from the central office to be able to help out, and take over on a particular loan, so that the bank doesn't have to avoid doing loans throughout the United States, in certain states. (Regulation Change) It's just an idea. I'm not sure it's the solution.

And the fourth thing I'd like to talk about is this whole idea of centralization. SBA, as we all know, has gone that way over the last ten years. Central -- first started by centralizing servicing, and they've either centralized liquidation, or in the course of certified development companies, delegated that authority to the CDCs in the 504 Program. And that whole process has gotten done.

But they've also centralized loan processing, and moving it thought a couple different offices in the United States. And I think centralizing liquidation is one thing. I think centralizing basic loan processing is something that needs to be looked at very skeptically, because one of the beauties of the USDA program, that we've found, is being able to work with our state director. (Regulation Change)

The two that we've worked most with are Jim Waters in Dover, and Vince Murphy up in Harrisburg. And frankly, without their -- my access to them, to ask them basic questions to get ideas, to figure out what can be done and how to do it, there's just some deals we never would've gotten through.

And I think that's a far stronger situation than the SBA. Because with SBA loans, true, if you're a preferred lender you get to approve them on your own, but if you have questions or stuff like that, it's really tough to get answers. And you don't have, what's been my experience over the many years, a lot of the give and take that you need between the agency personnel, who have the authority to approve up to $5 million, and the lender.

I would encourage you to protect that institution as much as you can in this whole process. (Current Procedures) That would be all I would want to say on this. And I certainly appreciate the opportunity. Thank you.

MR. HADJY: Mr. Schultz, thank you for your comments. We're still -- the floor is still open for any additional public comments. Okay, if no one is interested, then we'll begin our closeout by thanking you for your participation today.

I want to reiterate a couple things that I said earlier, that all comments, whether they're oral, written or electronic, are going to be made part of the record. The record will be emailed to those of you that have provided your email addresses. And if you haven't, you still have the opportunity to do that, to Kenya Nicholas in the back of the room there. Kenya, please identify yourself.

Also, we'll be posting the record to the rural development website by the end of March. And with that, I'm going to turn it over for closing comments to Ben Anderson, our associate administrator.

MR. ANDERSON: Well, thanks again for everyone's attendance and participation today. I think this was really helpful to us as we go through these comments once we get back to our offices and everything.

It was truly a wide variety of presentations, and perspectives and viewpoints. And again, that's all helpful to us.

I think it was Mr. Frederickson who mentioned in his presentation, he's -- I don't know if I see him, but he had a line; I think it was that rural loans require a relationship. And as we all know, in rural areas, that's so true that you have to reach out to people, and that lenders and banks have to have a good, strong relationship with their customers.

And that's definitely true for us here, too, to work on the programs, and facilitate them and everything. We do have similar strong relationships with you guys, and I think we established that today.

It seems like the staff has really good relationships with you through phone calls and peaking at your conferences, and other events. But it's good to get together and see each other in person.

Pandor touched base on the reminders of March 23rd. Just the other thing that Bill had mentioned earlier is that out staff will be around today if you want to do any follow-up meetings to go into more detail on what we discussed today.

And unless there's anything else from Bill, we'll conclude this lenders conference. Thanks again for coming.

(Whereupon, the above-entitled matter went off the record at 11:24 a.m.)

The following were written comments received outside of the lenders’ conference:

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

My only comment so far would be concerning the processing time. I submitted my completed USDA application on 10/18/06 and I received my conditional guarantee on 1/8/07. 5Is this time frame of 12 weeks (3 months) typical and is it acceptable? Can you send me the contact information for the people in your office that handle the rural development business guarantee program for my loans? (Comment 5)

Donald Tyson
The Bancorp Bank

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Subject: Notice of a Public Meeting on Administration of the Business and Industry Guaranteed Loan Program and the Section 9006 Renewable Energy Systems and Energy Efficiency Improvements Loan and Grant Program

Below is written comment as requested in Federal Register: February 15, 2007 (Volume 72, Number 31) Page 7402 Notice of a Public Meeting on Administration of the Business and Industry Guaranteed Loan Program and the Section 9006 Renewable Energy Systems and Energy Efficiency Improvements Loan and Grant Program

Issue #1
§ 4279.161(c) provides for an abbreviated application for B&I guarantee requests of $600,000 and less. § 4280.128(c) provides for an abbreviated application for Renewable Energy & Energy Efficiency guarantee requests of $600,000 and less. However, the lender needs to have virtually the same documentation in their files [as compared to applications greater than $600,000]; the only difference is whether the lender needs to provide a copy to the Agency. Additionally, once a guarantee is in place, the monitoring requirements [for a loan of less than $600,000 vs. loan of greater than $600,000] of the lender are virtually identical, i.e. GAAP prepared statements.

For loans of $600,000 or less, a feasibility study should not be required unless normally required by the lender. (Regulation Change) Justification: The cost of an independent feasibility study increases the cost of the small loan request significantly and results in the B&I program being an expensive source of financing for small loan requests.

For loans of $600,000 or less, financial statements prepared in accordance with GAAP should not be required. (Regulation Change) Rather, the borrower should be required to provide financial statements as normally required by the lender for a commercial account. Justification: Financial Statements prepared in accordance to GAAP is an expensive requirement for a small business.

Issue #2
The Renewable Energy & Energy Efficiency Loan Guarantee program typically has funding available for four to six months of the year. This potentially results in good loans not using the guarantee as the timing of the need for financing [i.e. construction season] is not at the same time as funding availability. Additionally for those applicants that do want to use the program, unnecessary construction delays take place as applicants are hesitant to start construction [as per regulations, construction could start after receipt of the application] as there is risk that there guarantee request will not be funded and therefore the lender will not close a loan. The Renewable Energy & Energy Efficiency Loan Guarantee program should have funding specifically designated for loan guarantee financing and any unused funding should carry forward into the next fiscal year to provide seamless funding from year to year. (Management Change)

Issue #3
Regulation § 4287.107(e) states: “The lender will not make additional loans to the borrower without first obtaining the prior written approval of the Agency, even though such loans will not be guaranteed.”

This regulation requires lenders to obtain Agency concurrence for any subsequent loan, whether it is a $20,000 to finance a new company vehicle, $1.0 MM to finance a new production machine or $250,000 for renewal of the annual line of credit. Lenders should be given some latitude to make loans outside of the loan guarantee when such loans will be junior in lien position on assets to the guaranteed loans or when the security for the new loan will be the specific asset purchased with the loan funds. (Regulation Change) In the case of an annual line of credit renewal, the lender should be able to automatically renew an annual line of credit without requesting agency concurrence if the line of credit will be used for the same purpose, will retain the same security as the original line of credit and will have the same maximum lending limit as the previous line of credit. Additionally, the line of credit should NOT need to be zeroed out each year prior to renewal. (Regulation Change) Providing such latitude will allow the lender to manage their loan rather than the Agency managing the loan.

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Subject: Recommended changes - B&I Guaranteed Prog. & RE/EE Guaranteed Program

PROPOSED CHANGES to the B&I GUARANTEED PROGRAM-2007
Loan Processing:
1. Reward lenders that have demonstrated a very successful “track record” in the B&I program with a faster, streamlined process to encourage more activity. (Current Procedures) The track record requirements could be a minimum of 10 B&I loans over a 5 year period; all loans are in compliance with routine servicing requirements, a minimal delinquency (1% or less) has been maintained and -0- loss claims during the period. In this case, they would be required to submit only the Form 4279-1 application, their “Lender’s Analysis” and Form 1940-20, Request for Environmental Information for review. The lender would certify that they have the other application information required by RD regulations [4279.161(a) and (b)] in their files.

2. Eliminate the tangible balance sheet equity requirement; instead, allow the B&I proposal to be underwritten based on other prudent banking standards. Tangible balance sheet equity is a concept that is complex and confusing to everyone but CPA’s. (Regulation Change) Tangible balance sheet equity is not a term used in GAAP; there is no commonly held definition. It penalizes established businesses by undervaluing their assets at depreciated book value. If it is necessary for the B&I program to establish a comprehensive equity requirement, it should be based on the applicant’s cash or market-valued asset injection into the project (and there should be no requirement for such an injection when the loan purpose is debt refinancing).

3. Eliminate the requirement for a business plan to be submitted in the application package under all circumstances for existing businesses. Instead allow the lender to determine if a business plan must be submitted by their customer for their loan request. (Regulation Change) For example, in cases where the loan request involves a debt refinance for an existing business, the business generally does not have a “current” business plan because in many circumstances, they have been in business for a number of years (know their market) and don’t have a current plan. They use their historical financial statements for the relevant information. For projects such as these, the business plan “categories” can be discussed by the lender as part of their due diligence process (which they should do anyway) in the “lenders write-up/analysis.”

4. Eliminate the requirement for 2 years projected balance sheets. (Regulation Change) An application requirement that has brought quizzical looks and comments periodically from our lenders over the years. That information is usually the one item of financial information that is consistently missing from the projected financial statement package submitted as a part of the application by the lender.

5. Eliminate the vague set of required loan agreement covenants in RD Instruction 4279-B, section 4279.161(b)(11). Instead, either establish a universal set of required and basic covenants or leave the determination/establishment of all covenants up to the lenders prudent judgment. (Regulation Change)

6. Eliminate subpart (n) of section 4279.181 [4279-B] as described in the certification process for guarantee. Instead, adopt the “conflict of interest” provision outlined in the Community Programs Guaranteed Instruction [3575-A, section 3575.27(b)]. (Regulation Change) The B&I Instruction that states that “none of the lender’s officer’s, directors, stockholders or owners… has a substantial financial interest in the borrower and neither the borrower…has a substantial financial interest in the lender.” The CF Instruction allows the Agency to determine if the “relationships” disclosed are likely to result in a conflict of interest. This change promotes consistency across commercial guaranteed loan programs plus does not unfairly penalize those individuals that are active participants at different levels in the development of their small rural community.

Loan Servicing:
1. Eliminate the servicing requirement that lenders obtain annual financial statements prepared in accordance with GAAP from all B&I borrowers; instead, allow annual tax returns. (Regulation Change) All businesses must prepare tax returns (and certify them to be accurate under penalty of law!). The cost of compiled financial statements, let alone reviewed or audited statements, is prohibitive and unnecessary in most instances. Furthermore, lenders should have the discretion to waive annual financial statement reporting on their seasoned, performing B&I borrowers.

2. Eliminate the servicing requirement that lenders obtain USDA concurrence on all subsequent loans extended to a B&I borrower; instead, require USDA concurrence only if the B&I guaranteed loan’s collateral position will be impaired. (Regulation Change)The current requirement is intrusive, time-consuming, and burdensome for all parties. There is no compelling reason for USDA to be involved in the review or approval of subsequent, unguaranteed financing extended to a B&I borrower.

3. Reduce Form RD 4279-15, Business & Industry and Section 9006 Program Visit Review Report from 9 pages to 3 pages – 2 pages pertaining to lender performance and 1 page for borrower performance. (Regulation Change)

4. Revisit and improve the on-line lender reporting system; allow lenders to retain the option of providing paper reports by mail.(Management Change) Late last year USDA introduced an on-line reporting system for B&I lenders to transmit loan statuses and pay annual renewal fees electronically. The system is complex and is based on “e-authenticating” individual bank employees rather than the bank itself. Paper-based reporting is preferable until a better system is designed.

SECTION 9006 ENERGY PROGRAM:
1. Eliminate the requirement that the amount of the loan that will be made available by a lender to an eligible project will not exceed 50% of the total eligible project costs. (Regulation Change) The amount of loan made available by the lender and the guaranteed offered by RD should be the same as the B&I Guaranteed Program for purposes of consistency.

2. Create individual handbooks with the pertinent program information (eligibility, processing, servicing requirements) and the required forms for each RE and EE program (grant, guaranteed loan and grant guaranteed loan combo) in lieu of the “flipping back and forth” requirement needed to navigate for example the 4280-B, sections 4280.128(a) and (b)(1) and (2). (Management Change)The relevant regulations from the B&I Guaranteed program outlined in the 4280-B Instruction should be included in the handbooks vs. the need “to find and look up” the pertinent B&I regulation in another instruction. For example, a lender interested in the guaranteed program should be able to open a handbook and have everything needed to process a request and not need to cross reference “two” regulations for a project.

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Dear Sir or Madam:
USDA Rural Development has (or at least had) a loan program to help farmers purchase stock in value added businesses that were being started (to provide the startup capital). The loan program gives a 90% guarantee to the lenders providing these stock loans. The Granite Falls Bank used this program on 5 loans to farmers made in 1999 and 2000. The problem with this program was that it required farmers to provide annual financial statements in accordance with GAAP. I am an experienced ag lender and I can assure you that the vast majority of farmers do not produce GAAP financial statements, but rather market value statements. This requirement greatly increases the cost of the loan program to the farmers and thus greatly reduces the likelihood the program will be used by farmers. (Regulation Change) John Virnig
President
Granite Falls Bank

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Rural Development Business Programs Lenders Conference Submitted by: Glenn Rilinger Administrative Vice President Butte Community Bank

Butte Community Bank has been very active in the USDA Business and Industry Program over the past twelve years. With the Bank’s branch system being primarily located in rural communities, the Business and Industry Program has greatly assisted us in expanding our lending capabilities to meet the financing needs of existing and potential small business customers. We have appreciated the excellent service and support that the Rural Development personnel at the local and state levels have provided. The Bank values the partnership we have established with Rural Development and look forward to our continued involvement in the program.

Topics of Discussion:
Tangible Balance Sheet Equity Test
I believe the tangible balance sheet equity requirement in qualifying for B&I assistance is unnecessary and should be eliminated. (Regulation Change) This requirement can cause a viable project that would otherwise provide an acceptable level of risk to go unfunded due to it not meeting the tangible balance sheet equity test. This requirement, in my opinion, serves no purpose as to evaluating the risk of the proposed project at hand. Listed below are several points to support my position on this issue.

1. The risk of a proposed loan transaction is evaluated by identifying the primary and secondary repayment sources. The primary repayment source is an analysis of the historical and/or projected cash flows of the borrower. The secondary repayment source is the collateral securing the loan. The collateral requirements of the loan request calls for a certain amount of injection or equity into the project by the borrower. In most cases this injection or equity represents 20% or more of the proposed project. Verification of the injection or equity into a project should be considered sufficient to satisfy that the borrower has adequate solvency. Having to look at the borrowers overall balance sheet on a pro-forma basis does not add any value in evaluating the risk of the proposed loan. (Regulation Change)

2. The ownership of entities that we come in contact with are all closely held. In many cases, the profits of the business are not held in the company. There are numerous reasons for this; the most common is for income tax purposes. Being that these entities are closely held as compared to a public company, there is little incentive to build up equity or liquidity in the company. My point is that if the equity is not shown on the business balance sheet, it can usually be found on the owner(s) personal financial statement(s). (Regulation Change)

3. In cases where the business has a negative equity position, it was likely caused by either historical losses and/or excess distributions to the principal owners. Also a mature company that has depreciated out its primary assets may show a negative net worth although there may be equity based on the current market value of the depreciated assets. If losses were the cause, this would reflect in the cash flow analysis and possibly the loan would not be made anyway. If the historical cash flows show that the business is not able to service its existing debt, the lender or the USDA would likely not approve the loan. Again, I believe the existing underwriting process will address the equity position of the business and the tangible balance sheet equity test adds an unnecessary layer of qualification. (Regulation Change)

4. In our case, providing the post loan closing balance sheet to meet the tangible balance sheet equity test is the single most cause for delay in receiving the loan note guarantee. (Regulation Change) This requirement included in the Conditional Commitment to Guarantee puts the lender in a risky position if the requirement cannot be met since the loan has already been closed. Further, in cases where the guaranteed portion of the loan has been sold, this delays delivery to the secondary market as well.

Release of Collateral
This is an area of the regulations that needs to be addressed. There are several issues with this section that should be changed.

1. The requirement that when releasing collateral with a value exceeding $100,000 it must be supported by a current appraisal on the collateral released. This seems unnecessary when the analysis should be focused on the remaining collateral that secures the loan. (Regulation Change) It makes more sense to have the remaining or replacement collateral only appraised to determine what the loan-to value ratio will be after the collateral is released.

2. The requirement that there must be adequate consideration for release of collateral should be made more flexible. (Regulation Change) In cases where there are multiple pieces of collateral and the loan balance has been reduced while the remaining collateral has appreciated in value, what is the need for consideration? If the borrower requests the collateral be released and the remaining collateral value leaves our collateral position at least equal to the original loan-to-value ratio, consideration should not be required.

3. Occasionally the lender and/or the USDA may ask for additional collateral during the initial period of a proposed project due to the increased risk. Further the borrower may be willing to pledge the additional collateral with the understanding that it be released after the initial period has passed assuming certain conditions have been met. With this regulation currently, there is no way for this scenario to occur without consideration. (Regulation Change) The regulation forces the lender to take the minimum amount of collateral.

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From: Douglas E Moss [mailto:docomoss@msn.com]
Subject: Lenders Conference Comments
TO whom this may concern:
I would like to comment on the Rural Development's guaranteed Business Program loans. I have experience with the Guaranteed programs and see that the program has potential to make long-term credit available and affordable to small businesses, but also see that the red-tape associated with the program have stripped out the ability of small lenders to make it work. I hear that this program is lender driven and it is the lender's loan. Well, I do not feel that is the case. Rural Development has so many regulations and policies, that appear to aimed at finding ways not to make loan guarantees, and to lower guarantees; that as a lender it no longer makes sense to utilize the program. The program needs to be easy to use and a benefit to lenders if we are going to spend time working through the application process. (Regulation Change) I feel that RD does not trust the lending community to make good decisions. The Business guaranteed need to be more flexible to use. The feasibility study requirement is one of the issues that is costly and difficult to get completed. (Regulation Change) As a lender that will assume the risk of the unguaranteed portion (20-40% of a project), we are not looking at projects that we are risking the bank with unnecessary exposure. I think that on-line applications would greatly streamline and simplify the application process. The more forms that can be done on line, the easier it is to work with the program.(Management Change) I appreciate the opportunity to share a few comments.
Sincerely
D. Moss

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From: Doug White [mailto:DWhite@cpbank.net]
Subject: B&I Rural Development Loans

I would like to offer feedback on improving the B&I loan program. This would be a better program more accessible to borrowers and lenders if you would consider the following improvements:

1. Delete the Tangible Net Worth 10%/20% requirement. (Regulation Change) This is now a GAAP-based calculation that has no relevance in today’s market. Intangibles must be purchased, costs do not equal market value, values change over time, and book value almost never equates to a real value. The machinations required by this rule and the borrowers it eliminates from eligibility is unreasonable. This rule penalizes long-standing businesses who wish to expand and hire more employees. It allows no recognition of appreciation of assets or of increased value owners have built up in their enterprises. It is unfair and inequitable.

2. Drop the six-day waiting period! (Management Change) Today’s fast-moving culture and competitive influences coupled with instantaneous communication methods eliminate the need for this dinosaur.

3. Pool nationwide funding. Drop the state allocations and allow demand to dictate where funds should be allocated. (Regulation Change)

4. Eliminate the GAAP statement requirement. Use tax returns as the basis for reporting. (Regulation Change) If it is good enough for the IRS, why isn’t it good enough for USDA? Obviously this “full employment for Accountants” rule is inappropriate for small business.

The above are my “top 4” that will make the program more workable. Here are others to consider:

5. Delete: USDA Approval on subsequent loans. Allow lenders latitude to make new loans when the USDA collateral position is not impaired. This is consistent with SBA. (Regulation Change)

6. Clearly specify minimum loan covenants; eliminate the vague & confusing standards now in place. (Regulation Change) Lenders should determine what additional covenants are required to maintain and service these loans.

7. Make a USDA Field Visit optional. Professionals are hired to conduct environmental due diligence. Other professionals are hired to inspect and evaluate collateral. Especially in cases of refinancing, there is often no need for USDA to visit potential borrowers. (Regulation Change)

8. Intergovernmental Consultation: Drop this requirement. It is ineffective and adds no value to transactions. It is not required for SBA financing so why do we need it for USDA? (Comment 4)

9. Fix the on-line lender reporting system so banks can use it. (Management Change) Get a bank-software designer to help; make it integrate with other systems; make it intuitive; test it & fix it before rolling it out.

10. Please open the B&I program for more input from Lenders to make it continuously adjustable to market forces. (Management Change) Our industries need to remain competitive and rural areas need as much help as we all can provide. A strong B&I program for the rural market can strengthen rural markets and allow more growth and creativity. USDA needs to consider new ways to allow input from those of us “out West” where rural markets abound. (Management Change)

Thank you!

Doug White, VP, Capital Pacific Bank "The difference is . . . getting it done!"

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Capital Pacific Bank
From: Doc Twiford [mailto:doc.twiford@bankofthecarolinas.com]
Sent: Monday, February 26, 2007 4:25 PM
To: RA.dcwashing2.LendersConf
Subject: Lenders Conference

I would recommend the USDA do more advertising in the local newspapers and billboards and then USDA can give the prospect a list of banker in their area to help them. (Comment 1)

Doc Twiford , Senior Vice President Business & Personal Banking
Bank of the Carolinas

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From: Kevin Geraci [mailto:KGeraci@cpbank.net]
Subject: USDA-Needed Reform and Comments

Ladies/Gentlemen: Although our bank is new to the USDA program, I spent the last 3 months educating myself on the programs as well as the secondary market that exists for this paper. In the process of underwriting the 3 loans I currently have in process as well as prospective loans over the last 6 months, there are many items that I believe could use a "fix" as in traditional commercial lending and/or as compared to SBA, there are items that could stand to be better thought out:

Some ideas to improve the B&I guaranteed loan program:

1. Eliminate the tangible balance sheet equity requirement; instead, allow the B&I proposal to be underwritten based on prudent banking standards. (Regulation Change) Tangible balance sheet equity is a concept that is not used in commercial lending. It is complex and confusing, not used in standard account or banking or lending practices and worse yet it is in conflict with the very goals you are charged to strive for: "Increase commerce and jobs in the rural marketplace". It penalizes long, established businesses with great equity (by normal banking standards) by undervaluing their assets at depreciated book value. If it is necessary for the B&I program to establish a comprehensive equity requirement, it should be based on the applicant's cash injection into the project and no requirement for debt refinancing).

2. Eliminate state allocations; instead, use a national pool on a "first-come-first-serve basis". (Regulation Change) It is absolutely unacceptable to run a federal program where one state is "out of money" and must compete for national funds when millions of dollars of guaranteed authority are tied up in "state allocations", make it like SBA with a national pool.

3. Eliminate the servicing requirement that lenders obtain annual financial statements prepared in accordance with GAAP from all B&I borrowers; instead, allow annual tax returns. (Regulation Change) Few businesses routinely obtain financial statements prepared in accordance with GAAP, whereas all businesses must prepare tax returns (and certify them to be accurate under penalty of law!). The cost of compiled financial statements, let alone reviewed or audited statements, is prohibitive and unnecessary in most instances, particularly for Borrowers in rural areas, as they view this as a mistrust in their integrity. Further, you can be sure that the income on a Tax Return is not inflated revenue! Furthermore, lenders should have the discretion to waive annual financial statement reporting on their seasoned, well- performing B&I borrowers.

4. Eliminate the extensive yet vague set of required loan agreement covenants in RD Instruction 4279-B, §4279.161(b)(11); instead, set forth clearly and specifically in the B&I Lender Agreement (Form RD 4279-4) what covenants USDA must universally insist on, leaving all other covenants up to the lender's professional judgment. (Regulation Change) The current requirement is confusing, intrusive, and burdensome. Lenders routinely develop prudent loan agreement covenants. The detailed list of covenants contained in the B&I regulation is not universally applicable, use the one from LaserPro banking documents that nearly every bank in the nation now uses!

5. Eliminate the requirement for a USDA field visit during the application process unless there is a need for an environmental analysis by USDA; instead, make the application process truly lender-driven. (Regulation Change) Waiting for a USDA field visit inevitably delays B&I approvals and adds a step in processing. When USDA is required to do a detailed environmental analysis, the field visit requirement is understandable, but many B&I projects (notably debt refinancing projects) do not require eyes-on environmental analysis. In such cases, the field visit should at least be made optional.

6. Eliminate the requirement for intergovernmental consultation. It was surely never the intent of Executive Order 12372 to subject a guaranteed business loan program to an intergovernmental consultation process. (Comment 4) It is not required for other federal guaranteed business loan programs such as the SBA 7(a) program, and it is incompatible with the business and banking worlds which require just-in-time approvals.

7 Revisit and improve the on-line lender reporting system; allow lenders to retain the option of providing paper reports by mail. (Management Change) Late last year USDA introduced an on-line reporting system for B&I lenders to transmit loan statuses and pay annual renewal fees electronically, although we have not had the "pleasure" of using it yet, all the banks I interviewed during my due diligence say it is retarded, at best. The system is complex and is based on "e-authenticating" individual bank employees rather than the bank itself. The input screens and system navigation are awkward and confusing. (Management Change) Overall, the new system is cumbersome and unworkable compared to the SBA's lender-based system, for instance. If it is to be made mandatory, it will constitute a real barrier to using USDA's guaranteed loan programs. Paper-based reporting is preferable until a better system is designed.

8. Establish a forum to consult regularly with the commercial lending community. (Management Change) This opportunity to comment on the B&I program is a very welcome development. As USDA evaluates and considers how best to act on the lender feedback, a continuing consultation process is essential. Call us, we will talk to you.

Kevin Geraci
Capital Pacific Bank

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Subject: Lender conference registration

Attached is my registration. I have also attached suggested improvements to the B&I program.

13 ideas to transform the B&I guaranteed loan program:

1. Eliminate state allocations; instead, fund all approved B&I applications on an over-the counter, first-come-first-serve basis out of a single national pool. (Regulation Change) The current approach of dividing B&I guaranteed funds among individual “state allocations” which are managed separately is incompatible with the business and banking worlds’ need for just-in-time approvals. It is absolutely unacceptable to run a federal program where one state is “out of money” and must compete for national funds when millions of dollars of guaranteed authority are tied up in “state allocations”.

2. Eliminate the six-working day “reservation of funds” period; instead, the formal obligation of B&I guarantees should be able to occur within 24 hours of the approval decision. (Management Change) The current approach of suspending “obligation” and the issuance of the Conditional Commitment for six working days is incompatible with the business and banking worlds’ need for just-in-time approvals.

3. Eliminate the tangible balance sheet equity requirement; instead, allow the B&I proposal to be underwritten based on other prudent banking standards. (Regulation Change) Tangible balance sheet equity is a concept that is not used in commercial lending. It is complex and confusing, as acknowledged by USDA a recent Federal Register notice which noted, “Tangible balance sheet equity is not a term used in GAAP; there is no commonly held definition. It is perhaps more accurate to call it an artificial construct than a term.” Worst of all, it penalizes established businesses by undervaluing their assets at depreciated book value. If it is necessary for the B&I program to establish a comprehensive equity requirement, it should be based on the applicant’s cash or market-valued asset injection into the project (and there should be no requirement for such an injection when the loan purpose is debt refinancing).

4. Eliminate the servicing requirement that lenders obtain annual financial statements prepared in accordance with GAAP from all B&I borrowers; instead, allow annual tax returns. (Regulation Change) Few businesses routinely obtain financial statements prepared in accordance with GAAP, whereas all businesses must prepare tax returns (and certify them to be accurate under penalty of law!). The cost of compiled financial statements, let alone reviewed or audited statements, is prohibitive and unnecessary in most instances. Furthermore, lenders should have the discretion to waive annual financial statement reporting on their seasoned, performing B&I borrowers.

5

. Eliminate the servicing requirement that lenders obtain USDA concurrence on all subsequent loans extended to a B&I borrower; instead, require USDA concurrence only if the B&I guaranteed loan’s collateral position will be impaired. (Regulation Change) The current requirement is intrusive, time-consuming, and burdensome. There is no compelling reason for USDA to be involved in the review or approval of subsequent, unguaranteed financing extended to a B&I borrower by a lender.

6. Eliminate the extensive yet vague set of required loan agreement covenants in RD Instruction 4279-B, §4279.161(b)(11); instead, set forth clearly and specifically in the B&I Lender Agreement (Form RD 4279-4) what covenants USDA must universally insist on, leaving all other covenants up to the lender’s professional judgment. (Regulation Change) The current requirement is confusing, intrusive, and burdensome. Lenders routinely develop prudent loan agreement covenants. The detailed list of covenants contained in the B&I regulation is not universally applicable.

7. Eliminate the requirement for a USDA field visit during the application process unless there is a need for an environmental analysis by USDA; instead, make the application process truly lender-driven. (Regulation Change) Waiting for a USDA field visit inevitably delays B&I approvals and adds a step in processing. When USDA is required to do a detailed environmental analysis, the field visit requirement is understandable, but many B&I projects (notably debt refinancing projects) do not require eyes-on environmental analysis. In such cases, the field visit should at least be made optional.

8. Eliminate the requirement for intergovernmental consultation. (Comment 4) It was surely never the intent of Executive Order 12372 to subject a guaranteed business loan program to an intergovernmental consultation process. It is not required for other federal guaranteed business loan programs such as the SBA 7(a) program, and it is incompatible with the business and banking worlds which require just-in-time approvals.

9. Revisit and improve the on-line lender reporting system; allow lenders to retain the option of providing paper reports by mail. (Management Change) Late last year USDA introduced an on-line reporting system for B&I lenders to transmit loan statuses and pay annual renewal fees electronically. The system is complex and is based on “e-authenticating” individual bank employees rather than the bank itself. The input screens and system navigation are awkward and confusing. Overall, the new system is cumbersome and unworkable compared to the SBA’s lender-based system, for instance. If it is to be made mandatory, it will constitute a real barrier to using USDA’s guaranteed loan programs. Paper-based reporting is preferable until a better system is designed.

10. Establish a forum to consult regularly with the commercial lending community. (Management Change) This opportunity to comment on the B&I program is a very welcome development. As USDA evaluates and considers how best to act on the lender feedback, a continuing consultation process is essential. Part of this ongoing process should make allowances for the West Coast lending community that cannot easily attend meetings in Washington, DC.

11. Eliminate the B&I application requirement in RD Instruction 4279-B, §4279.161(b)(7) for projected balance sheets for the next 2 years; further, 2 years of projected income statements and cash flow statements should only be required if business operations are projected to differ significantly from historical operations. (Regulation Change) There is no obvious value in obtaining projected balance sheets and often no need for projected income statements and cash flow statements. In many cases, prudent underwriting can be done by assuming business operations will continue along the same lines as historical performance.

12. Eliminate the B&I application requirement in RD Instruction 4279-B, §4279.161(b)(12) for a business plan for existing businesses which are not proposing any significant change in operations. (Regulation Change) Aside from start-ups and major expansion projects, the need for a business plan should really be the lender’s call. Many existing businesses do not have a current business plan because they have been in business for a number of years and nobody has asked them to produce one. Such businesses have their historical financial statements which contain the most relevant information. For projects such as these, the business plan “issues” can be discussed as part of the lender’s credit memo.

13. Lessen the expected financial analysis standards on annual financial information from existing B&I borrowers. The detailed analysis prescribed in RD Administrative Notice No. 4205 (4279-B) goes far beyond RD Instruction 4287-B, §4279.107(d)’s requirement for “a written summary of the lender’s analysis and conclusions”. The financial analysis expectation should be commensurate with the nature of the business, whether the loan is performing as agreed, and how seasoned the loan is.

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Debra Nesbitt
First VP/B& I Loan Specialist
P.O. Box 49072
Charlotte, NC 28277
704-759-3685
dnesbitt@communitysouthlending.com

Community South Bank is $300 million commercial bank based in Parsons, TN with branches in the Parsons and surrounding rural areas. Our Small Business Lending Division is based in Knoxville, TN, and we have 40 production offices in 21 states. Nationally we are very active in government guaranteed lending, and made over $342 million in small business loans last year including the USDA B&I, SBA 7(a) and SBA 504 programs. As an active lender in the B&I program we are pleased to submit comments to the Rural Development Lenders Conference. Most of our comments center around improving and streamlining the B&I loan process, but there is an issue with the tangible balance sheet equity requirement we would like to address. Last year modifications to the tangible balance sheet equity requirement allowed the use of current market value of real property assets in the refinancing of certain loans. These adjustments were applied only in cases where Rural Development is refinancing debt currently owed to a Federal agency. Part of the rationale for not extending this to all refinancing loans was a concern that lenders would use the program as a “bailout” for existing loans. This would be avoided because the program does not allow lenders to use the B&I program to refinance debt on loans they already hold. We feel that the Agency should allow credit for off balance sheet appreciation in real property as well as subordinated owner debt in all B&I loans. The greatest concern we have with the B&I program is the length of time it takes for approval. If we receive a loan that is eligible for B&I, SBA 7(a) and SBA 504, we will almost always go with an SBA program over the B&I because of the time involved for approval.

In many USDA offices the application is reviewed in detail at the Area Office level and then sent to the State office for the same review, which is duplicative. Some of the staff at the Area Offices does not have expertise in the B&I program, and are responsible for housing and other programs in addition to their B&I program duties. These staff members are often not under the supervision of the B&I Program Director and must answer to the Area Office Director, who also does not report to the B&I Program Director. If Area Office staff members have B&I Program responsibilities they should be under the supervision of the B&I Program Director, have adequate training in the program, and not have numerous other program responsibilities. When State Offices have no approval authority and loans have to be sent to the National Office for approval, the length of time for approval is usually a deal killer. Often some of the B&I offices have no sense of urgency about the approval process and will slow down the process over minor issues. (Management Change) Small rural business owners are not in the position to wait longer than 60 days for loan approval and closing, and every effort should be made to expedite the loan process.

The loan has already been underwritten by the bank which has strict credit policies and is Federally regulated, so the loans have been reviewed extensively. The intergovernmental review process can also slow down the loan approval process. (Comment 4) Each state handles the process differently, and in some states the lender must send letters to as many as four other agencies for review. These other agencies vary in what is required and their review process time can be lengthy. The SBA 7(a) program does not require intergovernmental review, so it is unclear why it is required in the B&I program. The appraisal can also slow down the loan approval if the B&I office does not begin work on processing the loan until the appraisal is complete. Depending on the location, appraisals can take 30 days or longer, and if B&I offices do not begin work on the loan until the appraisal is complete, valuable time is lost. It would be time effective if the Rural Development office began processing the loan before the appraisal is complete. (Current Procedures)

There should also be time limits put on the amount of time it takes a State Office to issue a loan note guarantee after closing. (Regulation Change)

When the lender has to wait 30-60 days for the loan note guarantee we can miss secondary market sales opportunities, which is a key factor in making guaranteed loans. (Regulation Change)

The B&I Loan Pack Software is a good tool to help complete the loan application (Form RD 4279-1). However, there are glitches in the software that need to be corrected, particularly in the collateral section where the software does not add the cells correctly. It would be helpful if the Agency would provide fillable PDF files that can be saved for all RD forms. (Comment 2) This would allow us to email the forms to borrowers and to USDA offices if changes are made. Currently completed forms can only be saved after going through a lengthy process to obtain an id, including going in person to a USDA office to show identification. The closest USDA office to me is 40 miles away. It is not necessary to have this level of security to simply complete and application forms. We have had great experiences with the B&I staff in NC, PA, FL and LA, who are all very knowledgeable in the program and willing to do what it takes to get loans approved in a quick timeframe.

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Subject: Input on the B&I program for DC Hearing
Subject: RE: Request for your input on our B&I program

Hi Debbie, the biggest issue I'm constantly contending with on the B&I deals is the tangible balance sheet equity requirement of 10% (or 20% with a start up). There have been several deals that would be great B&I loans, but we can't go this direction because of not being able to meet this requirement. I can understand the reasoning behind it in terms of wanting sufficient equity in the business, however GAAP financial statements are based on cost so there is no consideration of appreciation of assets, therefore property and real estate are generally understated and not reflective of the true net worth of the company. I have had four loans that I was going B&I with but couldn't meet this test, therefore we had to pursue other options. I would suggest that USDA re-evaluate this requirement and make some concessions to it. A suggestion would be to use market values of assets (as supported by an appraisal) in calculating the tangible balance sheet test. (Regulation Change) This wouldn't be the ideal solution but at least it would be a compromise. The idea solution (in my opinion) would be to still address it in the approval process, however if the test isn't met but can be justified by considering a true reflection of the company's net worth, then still allow the loan to be processed through the B&I program.

Thanks for providing me the opportunity to give you my feedback.

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Statement of Ed Bell
Morgan City, Louisiana
To the “Rural Development Lenders Conference”
Washington, D.C.
Ed Bell & Associates

The Business and Industry Program is the finest mechanism for supplying credit enhancement to rural businesses in America today. With this fact in mind we should strive to continually improve the program.

Geographic Eligibility:
The present systems of determining area eligibility for the B& I program leads to confusion for all involved. (Management Change) The determining factor should be the municipalities political boundary, and this should not exceed 50, 0000 population. (Statutory)

Equity Calculation:
In calculating the balance sheet equity the market value of assets should be used in this calculation. (Regulation Change) In cases of a questionable value, the numbers should be substantiated by appraisal. Allowances should be made to use the value of intangibles provided the presence of third party substantiation.

Guarantee Fee:
The guarantee fee should be prorated for the first year to fairly reflect a true number for the lender. (Regulation Change)

Go Zone:
Because of the 50% accelerated depreciation in year one that is available to businesses located in the Go-Zone one can predict certain problems with the equity calculation both in terms of covenant violations and in subsequent B&I financings. A solution to this problem would be to allow the restating of the balance sheet using normal depreciation terms for B&I purposes. (Regulation Change)

Redundancy Review:
Double tier underwriting and Loan Committee Review at both State and National level is unnecessary. This should be eliminated as this redundancy is too time consuming. (Management Change) Allow States the authority to make and approve all loans. At the request of the State Office or the Lender, National Office review could be requested.

Regulation Simplification:
The 9006 regulations should be incorporated into the B&I regulations as this would offer a simplicity to the programs for all people involved in the process.

CDE Eligibility:
Allow all Certified Development Entities to make and service B&I Loans. (Regulation Change) Since these relatively new entities are reviewed and licensed by the U.S. Treasury they should need no further review by USDA.

Disaster Eligibility:
In situations of declared disaster emergencies allow for a waiver of equity and collateral requirements also the geographic boundary lines should not apply and allow the percentage of guarantee to be raised to 90%. This should be available for two years following the disaster. (Regulation Change)

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From: Catherine Lyons
Subject: Program ideas attached is Heritage Bank of Commerce's comments on the USDA Rural Development Business Loan Program. Thanks for this opportunity.

USDA Lenders Conference on Program change recommendations for the Rural Development Business Loan Program - March 8, 2007 From: Heritage Bank of Commerce Certified B&I Lender

Heritage Bank of Commerce has been an active B&I Lender since 1999. We were the Number One Lender in California and the Country in 2004-2005 fiscal year. Attached are several ideas that we feel would assist us as lenders to get the product out to the borrower in an efficient and timely manner.

1. Remove the “reservation of funds” for 6 days requirement. (Management Change) I am not sure what purpose this serves other than delaying the commitment process to the borrower. If we did this as a standard practice in our business, we would lose the borrower. It is not practical in the business environment.

2. All loans should be approved on a “first in first out” basis. (Regulation Change) There needs to be some idea as to when you can commit to a borrower and if all they money were in the same place and allocated according to “place in line”, it would alleviate any concern that the money “might not be there when needed”. If the state allocations need to remain, look at which states are using the program and allocate accordingly.

3. Eliminate the tangible balance sheet equity requirement. This is a foreign term to banks and borrowers. (Regulation Change) It is very difficult to explain to a borrower. Instead, use what is commonly used on SBA and conventional loans which is the book value of the assets on the balance sheet.

4. Require borrowers to provide copies of annual Federal Tax returns instead of a GAAP prepared financial statement. (Regulation Change) This is as added expense to the borrower and very difficult to obtain. It puts our borrowers in “noncompliance” of loan covenants when we cannot obtain them.

5. Banks approve loans and apply terms and conditions to that approval. The “covenants” required by B&I are onerous and many times unobtainable which again place our borrowers in “noncompliance” if the covenants B&I has put in the Conditional Approval are not kept in force. Let the lender, with the knowledge of the borrower and the transaction, determine appropriate and obtainable covenants. (Regulation Change)

6. Requiring applicants to provide 2 years of “Projected balance sheets” on an existing business with historic cash flow and adequate equity is “busy work” and serves no real purpose in the loan analysis. (Regulation Change)

7. Find a more efficient and “fair” system of implementing the collection of the “Lender Fee”. (Management Change) We must accrue this fee on a monthly basis but not pay it until April. We end the year with a large “payable” on the bank balance sheet which is difficult to explain to auditors and shareholders. There is also a “penalty” when the bank funds a loan in “June” and has to pay the fee on the balance as if the loan were on the books for the entire year. An additional “penalty” comes into play when the loan is sold on the secondary market, the bank retains 20% but it required to pay the fee as if 100% of the loan were held by the bank The bank appreciates the opportunity to present these ideas to the USDA. We have utilized this program extensively and are most fortunate to work with such a wonderful staff at California USDA Rural Development. Please feel free to call us at any time with any questions regarding the above. We look forward to another successful B&I year.

Sincerely,
M. Catherine Lyons
Vice President
Business Lending

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From: Ron Benek - Vice President/ Senior Commercial Loan Officer

Subject: Changes to B&I
Ideas to transform the B&I guaranteed loan program:

1. Eliminate state allocations; instead, fund all approved B&I applications on an over-the-counter, first-come-first-serve basis out of a single national pool. (Regulation Change) The current approach of dividing B&I guaranteed funds among individual “state allocations” which are managed separately is incompatible with the business and banking worlds’ need for just-in-time approvals. It is absolutely unacceptable to run a federal program where one state is “out of money” and must compete for national funds when millions of dollars of guaranteed authority are tied up in “state allocations”.

2. Eliminate the six-working day “reservation of funds” period; instead, the formal obligation of B&I guarantees should be able to occur within 24 hours of the approval decision. (Management Change) The current approach of suspending “obligation” and the issuance of the Conditional Commitment for six-working days is incompatible with the business and banking worlds’ need for just-in-time approvals.

3. Eliminate the tangible balance sheet equity requirement; instead, allow the B&I proposal to be underwritten based on other prudent banking standards. (Regulation Change) Tangible balance sheet equity is a concept that is not used in commercial lending. It is complex and confusing, as acknowledged by USDA a recent Federal Register notice which noted, “Tangible balance sheet equity is not a term used in GAAP; there is no commonly held definition. It is perhaps more accurate to call it an artificial construct than a term.” Worst of all, it penalizes established businesses by undervaluing their assets at depreciated book value. If it is necessary for the B&I program to establish a comprehensive equity requirement, it should be based on the applicant’s cash or market-valued asset injection into the project (and there should be no requirement for such an injection when the loan purpose is debt refinancing).

4. Eliminate the servicing requirement that lenders obtain annual financial statements prepared in accordance with GAAP from all B&I borrowers; instead, allow annual tax returns. (Regulation Change) Few businesses routinely obtain financial statements prepared in accordance with GAAP, whereas all businesses must prepare tax returns (and certify them to be accurate under penalty of law!). The cost of compiled financial statements, let alone reviewed or audited statements, is prohibitive and unnecessary in most instances. Furthermore, lenders should have the discretion to waive annual financial statement reporting on their seasoned, performing B&I borrowers.

5. Eliminate the servicing requirement that lenders obtain USDA concurrence on all subsequent loans extended to a B&I borrower; instead, require USDA concurrence only if the B&I guaranteed loan’s collateral position will be impaired. (Regulation Change) The current requirement is intrusive, time-consuming, and burdensome. There is no compelling reason for USDA to be involved in the review or approval of subsequent, unguaranteed financing extended to a B&I borrower by a lender.

6. Eliminate the extensive yet vague set of required loan agreement covenants in RD Instruction 4279-B, §4279.161(b)(11); instead, set forth clearly and specifically in the B&I Lender Agreement (Form RD 4279-4) what covenants USDA must universally insist on, leaving all other covenants up to the lender’s professional judgment. (Regulation Change) The current requirement is confusing, intrusive, and burdensome. Lenders routinely develop prudent loan agreement covenants. The detailed list of covenants contained in the B&I regulation is not universally applicable.

7. Eliminate the requirement for a USDA field visit during the application process unless there is a need for an environmental analysis by USDA; instead, make the application process truly lender-driven. (Regulation Change) Waiting for a USDA field visit inevitably delays B&I approvals and adds a step in processing. When USDA is required to do a detailed environmental analysis, the field visit requirement is understandable, but many B&I projects (notably debt refinancing projects) do not require eyes-on environmental analysis. In such cases, the field visit should at least be made optional.

8. Eliminate the requirement for intergovernmental consultation. (Comment 4) It was surely never the intent of Executive Order 12372 to subject a guaranteed business loan program to an intergovernmental consultation process. It is not required for other federal guaranteed business loan programs such as the SBA 7(a) program, and it is incompatible with the business and banking worlds which require just-in-time approvals.

9. Revisit and improve the on-line lender reporting system; allow lenders to retain the option of providing paper reports by mail. (Comment 4) Late last year USDA introduced an on-line reporting system for B&I lenders to transmit loan statuses and pay annual renewal fees electronically. The system is complex and is based on “e-authenticating” individual bank employees rather than the bank itself. The input screens and system navigation are awkward and confusing. Overall, the new system is cumbersome and unworkable compared to the SBA’s lender-based system, for instance. If it is to be made mandatory, it will constitute a real barrier to using USDA’s guaranteed loan programs. Paper-based reporting is preferable until a better system is designed.

10. Establish a forum to consult regularly with the commercial lending community. (Management Change) This opportunity to comment on the B&I program is a very welcome development. As USDA evaluates and considers how best to act on the lender feedback, a continuing consultation process is essential. Part of this ongoing process should make allowances for the West Coast lending community that cannot easily attend meetings in Washington, DC.

11. Eliminate the B&I application requirement in RD Instruction 4279-B, §4279.161(b)(7) for projected balance sheets for the next 2 years; (Regulation Change) further, 2 years of projected income statements and cash flow statements should only be required if business operations are projected to differ significantly from historical operations. There is no obvious value in obtaining projected balance sheets and often no need for projected income statements and cash flow statements. In many cases, prudent underwriting can be done by assuming business operations will continue along the same lines as historical performance.

12. Eliminate the B&I application requirement in RD Instruction 4279-B, §4279.161(b)(12) for a business plan for existing businesses which are not proposing any significant change in operations. (Regulation Change) Aside from start-ups and major expansion projects, the need for a business plan should really be the lender’s call. Many existing businesses do not have a current business plan because they have been in business for a number of years and nobody has asked them to produce one. Such businesses have their historical financial statements which contain the most relevant information. For projects such as these, the business plan “issues” can be discussed as part of the lender’s credit memo.

13. Lessen the expected financial analysis standards on annual financial information from existing B&I borrowers. (Regulation Change) The detailed analysis prescribed in RD Administrative Notice No. 4205 (4279-B) goes far beyond RD Instruction 4287-B, §4279.107(d)’s requirement for “a written summary of the lender’s analysis and conclusions”. The financial analysis expectation should be commensurate with the nature of the business, whether the loan is performing as agreed, and how seasoned the loan is.