USDA Makes Revisions to its Guaranteed Loan Program

USDA Makes Revisions to its Guaranteed Loan Program By Trent Hightower, Assistant General Counsel, Texas Rural Water Association

The United States Department of Agriculture – Rural Development (USDA-RD) recently amended its Guaranteed Loan Program, which went into effect on October 1, 2020. These USDA-RD guaranteed loans currently provide TRWA members with protection from decertification of their service area by cities and developers under the federal 7 U.S.C. Sec. 1926(b) statute.

Under this program, a loan is administered through private banks and guaranteed by USDARD. As you may recall, Sec. 1926(b) states that the service area of a USDA-RD borrower utility cannot be decertified or encroached upon because doing so jeopardizes the government’s investment by diminishing the collateral upon which the loan was based. This protection applies regardless of whether the loan is directly issued by USDA-RD or through its Guaranteed Loan Program.

For guaranteed loans issued under the new rules, if lenders choose to obtain the loan note guarantee at the time of loan closing as opposed to at project completion, the lender has to pay an additional fee to cover the government’s added risk. It has been commonly understood that the 1926(b) protection has applied upon the closing of the loan, but recently the timing of when the federal debt protection takes effect became the subject of litigation.

TRWA member Rockett Special Utility District (Rockett SUD) sought to protect its service area from decertification by the Public Utility Commission of Texas. They asserted in federal district court that their service area is protected under 1926(b) based on their obtaining a loan from CoBank that was guaranteed by USDA-RD. One of the defendants, the City of Red Oak Industrial Development Corporation, moved to dismiss Rockett SUD’s complaint arguing that 1926(b) protection does not take effect until construction of the project being financed is completed and the USDA has issued its final loan note guarantee.

Rockett SUD responded that 1926(b) protection is triggered upon the closing of the loan, USDA’s issuance of its conditional commitment and USDA’s approval of the guarantee. TRWA filed an amicus brief with the district court agreeing with and supporting Rockett SUD’s position. TRWA argued that USDA-RD is contractually bound to issue its loan note guarantee as soon as the agreed-to conditions are met. Also, CoBank had already funded its loan relying on the guarantee, so the term of the loan had commenced. Finally, TRWA asserted that if the court changed when the protection takes effect, it would undermine this important program that rural utilities have relied upon.

Unfortunately, the district court agreed with the defendant and Rocket SUD is appealing the decision to the federal Fifth Circuit Court of Appeals. The outcome of this case will determine whether Rockett SUD and other utilities that currently have a USDA-RD conditional commitment and approval of a loan guarantee are protected by 1926(b); but the new rules should protect utilities, private banks and USDA-RD moving forward.

J. F. FONTAINE & ASSOCIATES, INC. CONSULTING ENGINEERS

RURAL WATER SYSTEM ENGINEERING SINCE 1962

700 N. Sycamore St. P.O. Box 4187 Palestine, Texas 75802 (903) 729-6005 jffontaine@jffontaine.com