Alternative Finance Program Loan Agreements by skm10786

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									               Alternative Finance Program Loan Agreements
                                    By Stan Provus

This paper reviews Loan Guarantee Agreements (Agreements) that Alternative Finance
Program (AFP) organizations execute with lenders. Its purpose is to help guide existing
and new AFP program administrators in negotiating or renegotiating favorable
Agreement provisions and terms with participating lenders. An examination of a number
of Agreements indicates that some AFPs are negotiating better terms than are others.

This analysis of Agreements is presented by the major sections that comprise many
existing Agreements. The appendix provides examples of language used in those
sections. Appendix 1 includes both suggested language and section language from
existing AFP Agreements. Appendix 2 provides a summary of AFP rates and terms.

Basic Loan Guarantee Program Documents with Lenders
The Loan Guarantee Agreement is the basic agreement between a lender and an AFP
community-based organization. This document is referred to as the ―Loan Agreement"
or ―Agreement‖ in this paper. Some AFPs call this document the ―Program Agreement.‖
The Agreement should set forth all of the basic terms and conditions of the AFP
guarantee, the responsibilities of the lender and of the AFP organization, the
guaranteed loan interest rates, and so forth. Any participating lender should sign this
agreement once. As loan guarantees are approved, the AFP should send the lender a
Loan Guarantee Authorization. This is a brief statement providing basic information
about the loan guarantee that is being authorized (e.g., the borrower, lender terms,
guarantee percentage—if not uniform and stated in the Loan Agreement—and so
forth.). All Loan Guarantee Authorizations should be subject to the Loan Guarantee
Agreement.

Loan Guarantee Agreement Sections
Section 1. Basic Process: Included Loans

This section makes it clear that the AFP will guarantee only those loans for which it has
issued a written authorization, such as a Loan Guarantee Authorization, and that such
guaranteed loans would be subject to the Agreement.

Section 2. Responsibility of the Lender

The lender should be responsible for underwriting loans that are consistent with any
agreed-upon underwriting standards, such as debt-to-income ratios, and in a manner
that would be the normal practice of a lender making an unguaranteed loan (e.g.,
investigate character, credit history, and so forth). For secured loans, the lender should
investigate the value and existence of title to proposed collateral. Lenders should be
responsible for marketing the program, and the language in the Agreement should be
as specific as possible (e.g., advertise the AFP on the lender’s Web site, place program


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brochures in prominent locations at branch offices, provide one staff person as a point
of contact, and so forth.

All loan documents should permit assignment of loan documents from the lender to the
AFP organization. Any guarantee other than the AFP loan guarantee, such as when a
friend or parent may guarantee an AFP loan, should include a statement that those
guarantors waive any right or claim for contribution or reimbursement from the AFP. In
other words, it should be clear that the AFP is not providing a guarantee to a co-
guarantor of an AFP loan, such as a parent or friend. The AFP is providing only a loan
guarantee to a lender.

There may also be a provision that the lender will provide copies of all documents
executed in connection with a loan to the AFP upon request.

Section 3. Responsibilities of the AFP

Key AFP organization responsibilities may include reviewing and approving loan
guarantee applications, which may involve determining borrower eligibility and the use
of loan proceeds. The AFP organization may also be responsible for marketing the
program, training bank staff members, and serving as an intermediary to borrowers with
late or delinquent payments.

Section 4. Loan Guarantees and How Guarantees Are Secured

A. Providing Loan Guarantees

There are three basic approaches to providing loan guarantees:

1. Guarantees with No Formal Lender Loss Reserve. The AFP simply agrees to
guarantee a lender loan. For example, the AFP may provide a 50–100% guarantee. The
actual guarantee is not secured by any funding of a reserve to the lender as loan
guarantees are made. In effect, the AFP is pledging its general obligation to honor its
guarantees. This approach is similar to the Small Business Administration (SBA) loan
guarantee program for business loans, in which the SBA makes guarantee
commitments but does not secure them with reserve funds that lenders are entitled to
draw upon.

The AFP does not set up a formal loss reserve fund that the lender may draw upon to
honor its guarantees. Rather, the AFP sets up an internal provision for loss reserves on
its balance sheet that is intended to set aside funds to honor guarantees. The provision
for losses is an expense that is set aside as an allowance for bad loans that the AFP
guarantees. Lenders, however, have no claim on this provision for losses. This is the
model used by the Iowa AFP.




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A guarantee with no formal lender loss reserve operates in the following manner:
In the Iowa Agreement (see Appendix 1), the AFP may provide up to a formal 100%
guarantee. This Agreement (an attachment is part of the Agreement) also sets forth
underwriting standards. However, as we suggest, there is no requirement for the Iowa
AFP to deposit a specific number of dollars with the lender every time it guarantees a
loan. Instead, it will honor its actual guarantee commitments from an internal provision
for losses or other assets.

The Iowa AFP maintains a provision for losses on its balance sheet. The provision for
losses is currently funded at 12% of outstanding guarantees. The 12% provision is the
product of a loan grading system that determines how much should be accrued for each
loan in the provision for losses. For example, 10% of the loan amount would be accrued
in the provision for losses for each guaranteed loan meeting the following standard:

     For reasonably sound borrowers; collateral of less than 100% loan to value (LTV);
     minimal concerns regarding ability to cash flow loan repayment; good relationship
     with the guarantor and lender.

Appendix 1 includes the entire Iowa grading system.

This approach will generally provide for the highest leverage of federal dollars and state
matching funds to guarantee AFP loans. However, it may not be acceptable to some
lenders, (i.e., they may want more security than the AFP’s general obligation to honor
its guarantees).

2. Guarantees with Pooled Loss Reserves. With a ―pooled loss reserve,‖ the AFP
provides a guarantee to a lender and secures its guarantees with a pooled loss reserve.
With most pooled loss reserves, a lender can draw on the reserve to cover 100%
losses, provided there are sufficient funds in the pooled loss reserve. Unlike the Iowa
program, a formal pooled loss reserve account is established with lenders. For example,
the Georgia AFP may provide an actual 100% guarantee but does not fund the pooled
loss reserve in an amount equal to the outstanding balance of guaranteed loans.
Rather, the Georgia loan loss reserve pool is funded at an amount equal to 15% of the
total amount of secured loan balances and 40% of the unsecured loan balances at any
given month’s end.

A pooled loss reserve works in the following manner: Using the Georgia program as an
example, suppose the lender makes three unsecured loans at $3,000 each and three
secured loans at $2,000 each. This arrangement would require the AFP to deposit
$4,500 into the Loss Reserve Pool―($9,000 x .40 = $3,600) + ($6,000 x .15 = $900).
Suppose the lender sustains a total loss on one of the unsecured loans ($2,000) and
there is zero collateral recovery. Because $4,500 is available in the loss reserve pool,
the lender can recover 100% of the loss. With pooled loss reserves, lenders are often
permitted to recover 100% of losses, provided there are sufficient funds on hand in the
pooled loss reserve.




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This type of pooled loan loss reserve would also provide for good leverage of AFP
funds, but not as good as guarantees that are not secured by formal lender loss reserve
accounts (as in the Iowa Agreement).

3. Guarantees with Loss Reserves (No Pool). This approach is the least preferable
one in terms of leveraging AFP funds. Under this approach, an AFP may agree to
provide a 100% guarantee and may secure it by making a deposit into a lender loss
reserve account equal to 100% of the principal amount of the loan.

For example, each time the AFP provides an actual 100% guarantee it must deposit an
amount equal to 100% of the loan principal in a lender loss reserve account.

B. Examining Loan Guarantee Issues

1. How Much to Guarantee. Programs that guarantee a high percentage of lender
loans, such as 80–100%, may still generate good leverage of AFP funds if they are
used with loan rating systems such as Iowa’s or with pooled loss reserves such as
Georgia’s. However, providing formal 100% guarantees is not a good idea and need not
be used with any of the approaches reviewed in this section.

Patti Lind of the Iowa Abilities Fund has observed: ―Loan guarantees of 100% are
extraordinary in the banking industry. For example, the Small Business Administration
will guarantee only up to 80% of a small business loan when a borrower doesn’t have
adequate collateral for the bank to consider the loan independent of the SBA and in
consideration of the risk generally associated with business start up.

―Establishing a lender relationship to include 100% loan guarantees results in continued
expectation of this level of guarantee and does not encourage the bank to take into
account the possibility of collateralization.‖ (This is particularly true for secured loans
that should be reasonably collateralized with property that is the subject of a loan.)

She continued: ―The ramifications of 100% guarantees are significant in that they
assume that all potential borrowers aren’t bankable and need incentives to enter the
banking system. They also minimize an individual’s investment if the individual does
have the capacity to provide collateral for the loan. It also makes the program take
100% of the risk―there is not distribution of the risk.‖ (Lenders should always assume
some risk to maintain prudent underwriting standards.)
She summarized: ―Loan guarantees should be flexible and based upon the
collateralization capacity of the borrower.‖ Iowa’s Loan Grading System takes those
factors into consideration.

The level of loan guarantee should not be fixed in a Lender Agreement. Instead it
should be based on actual year-to-year loss experience. The guarantee percentage
should be adjusted accordingly, and the language contained in the Agreement should
provide for such reviews and adjustments of the guarantee percentage.




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2. What the Guarantee Covers. The Agreement should be very specific as to what its
guarantee covers. For example, the guarantee may cover 50–100% of the outstanding
principal amount of a loan plus accrued interest (limited to no more than 90 days) and
expenses. The AFP should have the ability to review expenses. Expenses may include
the cost of liquidating collateral, the payment of insurance on property securing loans,
and any related expenses. Of course, an AFP could limit its formal guarantee strictly to
losses on outstanding loan principal, meaning that the AFP would not cover accrued
interest and expenses.

3. What It Means to Oversecure a Guarantee. Regardless of how an AFP secures its
guarantee commitments, it is important for an AFP to evaluate reserve balances on a
monthly basis to avoid oversecuring guarantees. That is, Agreements or practices may
not provide for reducing the funds in a loss reserve (or applying balances to new loans)
as the principal amounts of outstanding loans are paid off.

For example, in a program where the AFP funds a formal lender loss reserve account
equal to 100% of the principal amount of loans guaranteed, it is important to review
annually the ―outstanding‖ principal amount of loans, which will be less than the amount
originally deposited to the reserve fund as borrowers pay off a portion of principal with
each payment they make. Reductions in the amount of principal that is outstanding on
loans should result in a reduction of the loss reserve, in the excess being applied to
additional deposits that must be made for new loans, or both. If an AFP does not reduce
a loss reserve in a 100% contribution program, over time the loss reserve will far
exceed the amount of principal outstanding on guaranteed loans (i.e., oversecuring
guarantees).

4. What the Suggested Limited Liability Language Is for Loss Reserve Accounts.
If an AFP uses a loss reserve account, there should be language in the Loan
Agreement such as the following: The aggregate liability of the AFP shall not exceed the
balance of the reserve account.

For example, in a pooled reserve program (see 2. Guarantees with Pooled Loss
Reserves on page 3), if there are not sufficient funds in the pooled loss reserve to cover
a lender’s losses on a defaulted loan that has been guaranteed, the lender does not
have recourse or any additional claims against the AFP.

Section 5. Guaranteed Loan Underwriting Standards, Interest Rates, and Terms

Loan Guarantee Agreements should include language that sets forth any agreed-upon
loan underwriting standards, interest rates, and terms. For example, a number of AFP
Agreements provide for maximum debt-to-income ratios such as 45%. Appendix 1
provides examples of underwriting provisions and Appendix 2 provides a summary of
AFP loan rates and terms.

Appendix 2 shows that there is considerable variance in rates and terms negotiated by
AFPs. Generally, a base AFP rate of prime (before any interest rate write-downs) would



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be considered good, because a number of programs are paying rates in excess of
prime. Similarly, there is considerable variance in the terms (maturity or loan
amortization period) offered by AFPs. AFPs should strive to obtain longer terms for
alternative technology (AT) guaranteed loans than a lender would offer without a
guarantee. For secured loans in particular, the guarantee mitigates so-called maturity
risk—the risk that declining collateral values over time will exceed the reduction of
outstanding principal on a loan.

For example, the value of AT over the term of a loan may decline rapidly if new
technology makes it obsolete. This reduction in the value of collateral may exceed the
outstanding principal amount of a loan over the term of the loan. Guarantees
substantially reduce this risk by effectively providing additional collateral support to a
lender.

Section 6. Mechanics of Defaulted Loans

There should be a section in the Agreement that sets forth what happens when loans
default. For example, the AFP may not want to pay its guarantee until after a lender
liquidates collateral, or just the opposite may be true because the AFP may be able to
liquidate collateral for a greater amount than a lender as a result of its stronger
knowledge of the market. Appendix 1 provides examples of appropriate language for
such a situation.

Section 7. Loan Servicing

This section makes it clear that the lender is responsible for servicing loans in
accordance with the normal practice of prudent lending institutions. Appendix 1 has
examples of language that is included in an agreement.

Section 8. Reporting

The Agreement should identify the information that the lender needs to provide to the
AFP on a monthly basis. Appendix 1 includes language that could be part of an
Agreement. There could also be language that requires the lender to provide other such
information as may be reasonably required from time to time by the AFP.

Section 9. Lender Fees

The Agreement should have a section that identifies all the fees a lender will charge an
AFP borrower. Appendix 1 has an example of language in lender agreements regarding
fees.




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                                 Appendix 1
                       Loan Agreement Section Language
Section 1. Basic Process: Included Loans

The AFP shall insure those loans and only those loans (a) that are made by the Lender
to a Borrower for an amount and purpose and on terms that have been approved
specifically by the AFP in a written loan insurance authorization (the ―Authorization‖)
issued with respect to each loan, and (b) with respect to which the Lender has complied
with the further terms and conditions of this Agreement (i.e., the Loan Guarantee
Agreement). The guarantee shall be effective on the date of the Authorization.

Section 2. Responsibilities of the Lender

Suggested Language

A. Prior to forwarding a request for insurance to the AFP, the Lender shall

   i.   Make such investigation of the character and credit history of the applicant and
        the stability and earnings prospects as would be the normal practice of a prudent
        lender making an uninsured or unguaranteed loan in the amount proposed,
        including a review of personal financial statements.

   ii. Where applicable, make such investigation of the value and existence of title to
       proposed collateral as would be normal for a prudent lender contemplating a
       similar uninsured loan in the amount proposed.

B. Upon and after closing the loan and disbursing the loan proceeds, the Lender shall

   i.   Cause to be executed, delivered, and, where necessary, filed or recorded with
        the proper authorities, a note; mortgage or trust deed; security agreement;
        financing statement; continuation statement; and such other instruments,
        documents, and agreements as may be applicable. The Lender shall take such
        other actions as are required consistent with prudent lending practices (a) to
        obtain a valid and enforceable mortgage or security interest in the collateral that
        is prior to the interests or claims of all other persons, except as may be
        specifically excepted by the AFP in the Authorization, and (b) to include in its
        documentation with the borrower the requirement that collateral is adequately
        maintained and insured, and that any taxes on property will be paid when due,
        consistent with prudent lending practices. All loan documents shall permit
        assignment of loan documents by the Lender to the AFP.

   ii. Cause to be executed and delivered in the Lender's standard form a guarantee, a
       mortgage or deed of trust, or a security agreement by any guarantors required in
       the Authorization. The Lender shall take such further actions consistent with
       standard lending practices to obtain a valid enforceable mortgage or security


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       interest in any security for the guarantee. Each guarantee shall include a
       statement that all guarantors waive any right or claim for contribution or
       reimbursement from the AFP and shall acknowledge that the AFP is not a co-
       guarantor or co-surety.

   iii. Exercise supervision over the collateral and its disposition, if authorized, as
        would normally be considered necessary by a prudent Lender that is not relying
        on a guarantee or insurance to perfect and preserve the Lender’s security
        interest in the collateral and in any proceeds of the collateral.

   iv. Exercise such supervision of the use of loan proceeds as may be reasonable to
       monitor so that proceeds are used for authorized purposes.

   v. Upon request, provide the AFP with copies of all documents executed in
      connection with the loan and loan disbursement and copies of the loan records
      maintained by the Lender. The Lender shall maintain such records with respect
      to insured loans that are customarily maintained by prudent lending institutions
      with respect to uninsured loans.

AFP Example: Iowa List of Lender Responsibilities

Bankers Trust will support the efforts of the partnership by

   o Assisting with program marketing through
        The Lender’s Web site
        The annual reports, newsletters, advertising, and other published materials,
          as appropriate
        The placement of program brochures at each bank location

   o Dedicating one staff person to serve as the point of contact for Iowa Able
     programs

   o Extending flexible terms to applicants, as appropriate

   o Providing loans to eligible applicants at an agreed-upon interest rate, using a
     guarantee through Iowa Able funds, when necessary and appropriate

   o Allowing a buy-down of the interest rate on certain loans, as agreed upon by
     Iowa Able and the lender

   o Educating all bank staff members on the availability of the program, on who is
     eligible for the program, and on other basic program parameters

   o Providing Iowa Able with updates on existing loans and notifying the program
     coordinator of late or delinquent payments




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     o Being encouraged to provide matching funds to leverage the federal funding
       opportunity

Section 3. Responsibilities of the AFP

Recommended Language

You may want to keep this section short to minimize your legal responsibilities, even if
you perform a number of services. For example,

With respect to any loan guaranteed by the AFP, the (agency) makes the following
representations and warranties:

     o The (agency) has the necessary authority and has duly taken all action on its part
       required to authorize, execute, and deliver this Loan Guarantee Agreement. This
       Agreement when executed will be valid, binding, and enforceable against
       (agency) in accordance with its terms.

     o The execution and performance of this Agreement by (agency) will not violate or
       conflict with any instrument by which (agency) is bound.

Section 4: Loan Guarantees and How Guarantees Are Secured

AFP Example: Iowa Loan Grading System

All AFPs should use an internal loan grading system. Patti Lind of the Iowa Abilities
Fund advances the following grading system for loans:

Risk Rating of Loans and Reserving for Loan Loss
   Loan guarantees are not being risk rated. Rather, loans are being secured at 100%
   of face value. Consequently, as a customer pays down a loan and the principal
   balance decreases, AFP loan capital is tied up securing more than 100% of the
   principal balance.

     The face amount of the loan guarantee does not need to be (a) tied up in deposit
     accounts or (b) accrued at the original value of the loan. Instead, the risk of the loan
     guarantee should be rated and interpreted as a dollar amount commensurate with
     the risk. Interpreting the risk rate of the loan is equated to a percentage of the
     principal balance of the loan to be accrued. That accrual is known as Loan Loss
     Reserve.

A sample risk rating structure includes the following:

    Rating    Allocation                        Description
1             5%         Minimum for all loans; for exceptionally sound
                         borrowers; collateralized; easily convertible collateral of



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    Rating   Allocation                          Description
                          100% or more loan to value (LTV); excellent relationship
                          with the guarantor and lender
2            10%          Starting point for most loans; for reasonably sound
                          borrowers; collateral of less than 100% LTV; minimal
                          concerns regarding ability to cash flow loan repayment;
                          good relationship with the guarantor and lender

3            15%          For approved loans where the borrower exhibits specific
                          weaknesses or potential problems; collateral uncertain
                          in value although likely 80% loan to value; little, no, or
                          weak credit history; for Telework, lack of strong
                          experience with similar enterprises or a business startup

4            30%          Postclosing adjustment rate; for borrowers whose
                          weaknesses result in clear problems, even if resolvable;
                          collateral weak in value or convertibility (This rating is
                          reserved for postclosing monitoring.)

5            50%          Monitoring rating; loans where difficulties are not being
                          resolved in a timely fashion or payments are delayed or
                          irregular (This rating is reserved for postclosing
                          monitoring.)


Loan loss reserves should be reviewed and re-allocated on a monthly or quarterly basis
according to the total loan principal that is outstanding among loans in each risk rating
class. For example, when a borrower exhibits irresolvable difficulties or makes
payments more than 30 days late, the risk of potential loss should be reconsidered and
reserves adjusted accordingly.

AFP Example: Georgia Loss Reserve Pool Language

―Georgia Able (GA) will ensure that the balance on deposit is, at a minimum, equal to
the amount of the Loan Loss Reserve Pool established and approved by the GA’s
Board of Directors and TechAble (TA). The loan Loss Reserve Pool will equal 15% of
the total amount of secured loan balances and 40% of unsecured loan balances at any
given month-end. This amount will be formally reviewed annually by the GA Board and
TA, and modified as needed. The use of pledged funds by GA would be restricted by
the use of holds on the deposits. The hold will be placed on an amount equal to the
required Loan Loss Reserve Pool. GA, at its sole discretion, may maintain balances of
any amount in excess of the Loan Loss Reserve Pool, but in no case will the balances
be below the previously defined minimum.‖ (Georgia provides a 100% guarantee, but
the loss reserve account securing its guarantee is equal to 15% and 40% of secured
and unsecured loans, respectively.)



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AFP Example: Wisconsin Loss Reserve Pool Language

The Wisconsin AFP also uses a pooled approach, but the amount on deposit would be
less than in the Georgia program, and the language provides for periodic reviews to
make adjustments to the amount on deposit.

―IndependenceFirst shall maintain a deposit account at Marshall and Ilsley (M&I) Bank
with collected balances in an amount mutually satisfactory to both parties. M&I is
authorized to debit this account for up to 20% of the amount financed of each loan to a
Customer and to credit that amount to a Reserve Account. After the first year, M&I will
conduct a portfolio analysis to determine appropriate adjustments to the Reserve
Account balances in accordance with the Proposal. IndependenceFirst grants to M&I a
security interest in the Reserve Account until this program is terminated and all loans
have been paid in full. Although M&I may debit the Reserve Account for loans that are
in default, M&I agrees to debit the Reserve Account in accordance with procedures
mutually agreed upon, provided the procedures are reasonable and do not result in M&I
having to charge off a loan using its customary policies.‖

Suggested Limited Liability Language for Loss Reserve Accounts

If an AFP uses a loss reserve account, there should be language in the Loan
Agreement such as the following: The aggregate liability of the AFP shall not exceed the
balance of the Reserve Account.

Section 5. Guaranteed Loan Underwriting Standards, Interest Rates, and Terms

AFP Example: Iowa Lender Underwriting Terms

Iowa’s language is good because it is fairly comprehensive in terms of covering agreed-
upon underwriting criteria, amortization terms of loans (which are longer than many
lenders would use with conventional loans), interest rate charged to borrowers before
any write-downs, fees that borrowers can expect to pay and knowledge of what
happens when a loan goes into default.

Iowa Able will have the option of making direct loans of $5,000 or less.




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Description of Lender Marketing Area

Bankers Trust will accept Iowa Able applications from the metro–Des Moines area,
which includes Boone, Dallas, Jasper, Madison, Marion, Polk, Story, and Warren
counties (counties contiguous to Polk County), as well as from the metro–Cedar Rapids
area, which includes Benton, Buchanan, Cedar, Delaware, Iowa, Johnson, Jones, and
Linn counties (counties contiguous to Linn County).

Description of Agreed-to Loan Underwriting Guidelines

The guidelines include the following:

   o The applicant must be of legal age or must apply with a guardian.

   o A minimum of two years of current and favorable credit history is recommended.
     Favorable credit history means no more than two times 30 days late in the past
     12 months, and no more than three times 30 days late in the past 24 months.
     Applicants with unfavorable credit history may be granted credit if the reason for
     poor credit history is sufficiently explained and documented (i.e., medical,
     divorce, loss of employment, etc.).

   o Credit experiences such as bankruptcy, foreclosure, repossessions, judgments,
     and collection accounts will be weighed against the applicant. However, with the
     exception of bankruptcy, the applicant may be granted credit if the items have
     been satisfied for two years. With bankruptcy, the discharge must have occurred
     three years prior and credit must be re-established.

   o If traditional credit history is not available, consideration will be given for
     nontraditional credit items such as rent, utilities, telephone, or some other type of
     recurring payment that can be verified and documented.

   o Loans will be treated as unsecured unless vehicles or real estate are involved or
     unless other collateral is deemed adequate.

   o Iowa Able will guarantee up to 100% of the loan. In those instances where
     liquidation of collateral is required, Bankers Trust will assist Iowa Able in this
     process. The percentage of guarantee will be reviewed by both Iowa Able and
     Bankers Trust in January 2005.

   o An applicant’s debt-to-income ratio is not to exceed 45%. Exceptions to the rule
     will be considered.

   o Income will be verified on all applicants.




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   o Gross monthly income (re-occurring income prior to any deductions such as
     federal or state taxes, insurance premiums, retirement plans, etc.) will be used to
     determine debt-to-income ratio.

   o If nontaxable income (i.e., Social Security payments, child support, or other
     sources of income that are nontaxable) is used, an adjustment will be made to
     determine the gross income (in general, a 28% tax bracket will be used).

   o An indication will appear on the application to show if the amount being financed
     will enable the applicant to return to the work force.

Loan Terms from the Lender

The Lender offers the following loan terms:

   o Amortization
      - Unsecured loans – Amortization up to 60 months
      - Secured by vehicles – Amortization up to 84 months
      - Secured by real estate – Amortization up to 15 years with 5-year balloon

Attachment A (Attachment to the Agreement) – Lender Underwriting Terms

The lender underwrites using the following terms:

Rates. Fixed rate will equal prime rate (Wall Street Journal–published prime rate) plus
1%.

Loan-to-Value. See the following:

   o Vehicle loans – 100% of purchase price or 100% of retail value

   o Real estate loans – 100% of assessed or appraised value

Fees. Only actual closing costs will be assessed to the borrower, but these costs may
be financed into the loan.

Average amount of closing costs:
Vehicle purchase – Lien notation at                       $ 5.00
Real estate purchase –
             Lien search at                             $150.00
             Flood certification at                       18.00
             Recording fees at                            47.00
             Total                                      $215.00

Defaulted Accounts. Please note the following:




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   o Borrowers will provide a waiver that allows Bankers Trust Company to discuss
     the account with Iowa Able (form provided).

   o Iowa Able will be notified when an account is 20 days past due.

   o In the event that a loan is in default for 90 days, Iowa Able may buy back the loan
     within five days of notification.

AFP Example: Kentucky Underwriting Standards, Interest Rates, and Terms

This is a good example of detailed language for a central underwriting measure—the
debt-to-income ratio. It is important for the lender and AFP to agree on how the ratio will
be calculated.

The debt-to-income ratio evaluates the applicant’s total amount of monthly payments
(including the proposed new payment) in relation to the applicant’s gross monthly
income. It is important that the applicant provide all recurring sources of income (e.g.,
employment, disability, Social Security, interest/ dividend, trust, rental income), as well
as all credit obligations that may not be reflected in a credit bureau report (e.g., child
support, alimony or spousal maintenance, rent).

Calculation of Debt-to-Income Ratio

Debt-to-Income = Total Monthly Obligations/Total Recurring Gross Income

Total Monthly Obligations includes (but is not limited to) the following:
   o New loan payment

   o Monthly lease payments on installment loans

   o Lease payments (often do not appear on CBR)

   o Revolving debt (e.g., credit cards, home equity lines of credit [include only
     amount of payment based on outstanding balance; use 4% if balance and if no
     payment amount is shown on CBR])

   o Mortgage or rent payment

   o Child support paid

   o Alimony or spousal maintenance paid

Total Recurring Gross Income may include one or more of the following:

   o Hourly or salaried income, including overtime




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   o Bonus income

   o Social Security income

   o Disability income

   o Interest or dividend income

   o Income from rental or investment property

   o Trust income

   o Pension, 401(k), IRA, annuity, or other vested retirement funds

Recurrence of overtime or bonus income must be substantiated.

Unemployment income is assumed to be nonrecurring and is normally not included.
However, in the case of certain seasonal or cyclical occupations, if the applicant is able
to provide proof of recurrence (such as several years’ tax returns), unemployment
income may be included.

Taxable income is counted at 100% of (pretax) gross. Nontaxable income, such as
disability, Social Security, and certain forms of retirement income, is ―grossed up‖ by
dividing the amount by .072, as shown in the following example:

Monthly Social Security of $735.00/.072 = $1,020.83

Debt-to-Income Guidelines

                                                           Maximum Debt to
 Gross Monthly Income           Annual Income                  Income
$3,333 and under            $40,000 and under            40%
$3,334 to $4,167            $40,001 to $50,000           44%
$4,168 and over             $50,001 and over             48%

Joint Applicants

   o The income and credit obligations of joint applicants residing at the same
     address will be considered joint income and obligations when calculating a debt-
     to-income ratio.

   o Joint applicants residing at different addresses will have debt-to-income ratios
     calculated separately and must each qualify under the debt-to-income guidelines.

   o No spouse’s income or credit information will be requested or accepted unless
     the spouse has voluntarily signed as a co-applicant.


                                                                                          15
Section 6. Mechanics of Defaulted Loans

There should be a section in the Agreement that explains what will happen when a loan
goes into default, particularly the action options available to the AFP.

Suggested Language for Secured Loans

This language is adapted from loan guarantee agreements for business loans. Both the
language and the lending programs were used successfully in Oregon and Maine.
There are no existing AFP Agreements that have this specific language.

Default and Notice of Default.

The Lender agrees to notify the AFP (organization) in writing within five business days
of any default in a payment of principal or interest of an insured loan that remains
uncured for a period of 30 calendar days. The Lender agrees to notify AFP in writing
within 15 business days of a discovery of any other event of default or any other
condition or event that in its judgment indicates the loan has or will become difficult to
collect in full. Within 30 days after receipt of notice of default, the AFP and the Lender
will agree as to which of the following options (A or B) the AFP will elect. At any time,
the AFP and the Lender may take such other action upon default as they may agree to
in writing.

A. Cure the default. The AFP may choose to cure any default if a cure is reasonably
   possible. If the AFP elects to cure any default, it may thereafter cease to cure the
   default and may, with Lender approval, elect the payment option under
   Subparagraph B of this section.

B. Payment. The AFP may pay the insured portion of the loan and may direct the
   Lender to assign all loan documents and rights to the AFP.

If the AFP either does not elect option under subparagraphs A or B of this section or
ceases to cure a default under Subparagraph A of this section and does not elect the
payment option in Subparagraph B, the Lender shall elect the following:

C. Liquidation. The Lender shall accelerate the maturity of the loan and may proceed to
   enforce all loan documents and to liquidate the security for the loan, including
   proceeding against any guarantors—all in a commercially reasonable manner and in
   accordance with standards and practices of prudent lenders.

D. Deferment. The Lender may defer principal and interest payments for up to 60 days
   in any five-year period, while using on its judgment that such deferral is reasonable
   and prudent. A loan may be deferred for no more than a total of 60 days over any
   consecutive five-year period during the term of the loan. At any time, but not later
   than five days after the 60-day deferral period, the Lender shall require the borrower



                                                                                          16
   to resume scheduled payments, including the amortization of any deferred
   payments, if such action is prudent, or the Lender shall elect the liquidation option in
   subparagraph C of this section.

At any time, where applicable and with Lender approval, the AFP may elect the
payment option provided in subparagraph B. At any time, the Lender is authorized to
secure and protect collateral.

AFP Example: Georgia AFP Agreement Default Language

A. If there is a loan default, the Credit Union will notify the Loan Guarantee Program
   Director of the default and will request payment in full on the remaining balance of
   the defaulted loan. A defaulted loan is defined as one that is 90 days in arrears. The
   Financial Institution (FI) may allow the borrower to ―skip‖ a past-due monthly
   payment at its discretion and according to its policies.

   The Program will have the option to completely purchase the loan or to forfeit the
   amount of the guarantee before the loan becomes 120 days delinquent. If the
   Program chooses to purchase the loan, the price of the loan shall be equal to the
   principal, interest, and late charges due, as well as the actual cost expended by the
   FI to purchase insurance to protect the FI’s interest in the collateral or to pay taxes
   due any governmental agency to preserve or protect the collateral in default of the
   obligations of the Guaranteed Borrower under the promissory notes, the security
   agreements, or both as held by the FI. Upon purchase, the lender will assign the
   loan, without recourse, to the Program. To facilitate purchase of the Guaranteed
   Loan, the FI is authorized to deduct the amount of the defaulted loan from the single,
   permanent account as set forth in Section 2.06 of this agreement. Upon purchase of
   the loan, the FI will assign the loan, without recourse, to GA.

Section 7. Loan Servicing

AFP Example: Georgia Language on Loan Servicing

B. All loan administration, once the loan is made, will be handled by the FI. The FI will
   receive all loan payments and will service the loan until it is paid in full or purchased
   by GA. Fees associated with the servicing of loans are waived by the FI, and any
   closing costs assessed will become a part of the loan.

C. The FI shall follow its normal collection procedures with respect to any delinquent
   Program loan. The FI will provide monthly reporting for all loans approved under this
   Program to the Loan Guarantee Program Director, including delinquency
   information.

D. When a loan payment becomes 30 days past due, the FI will send a report to the
   Loan Guarantee Program Director.




                                                                                          17
E. If there is a loan default, the Credit Union will notify the Loan Guarantee Program
   Director of the default and will request payment in full on the remaining balance of
   the defaulted loan. A defaulted loan is defined as one that is 90 days in arrears. The
   FI may allow borrower to ―skip‖ a past-due monthly payment at its discretion and
   according to its policies.

Section 8. Reporting

AFP Example: Georgia Language on Required Reports

The FI will also provide monthly reports of outstanding loans, with separate sections for
any loan amount, consisting of data fields as follows:

        o   Name                              o Term
        o   Account number                    o Next due date
        o   Original loan amount              o Payment amount
        o   Current balance                   o Number of delinquent
        o   Secured (yes/no)                    payments
        o   Note date/processed date          o 30/60/90 days delinquent
Section 9. Lender Fees

AFP Example: Iowa Language on Lender Fees

Only actual closing costs will be assessed to the borrower, but those costs may be
financed into the loan.

Average amount of closing costs:

Vehicle purchase –         Lien notation at                $ 5.00

Real estate purchase –     Lien search at                $150.00
                           Flood certification at          18.00
                           Recording fees at               47.00
                           Total                         $215.00




                                                                                       18
                             Appendix 2
                    Summary of AFP Rates and Terms

                                         Interest
                               Range of Charged                          Loan
                                 Loan       to         Repayment       Guarantee
 State     Loan Models         Amounts Borrower          Terms       Requirements
Ariz.    Guaranteed Loan       $500–    9.0–           Up to 3       100%
                               10,000   10.75%         years

Ark.     Revolving Loan        $500–     4%            Up to 20      N/A
                               50,000                  years

Del.     Guaranteed Loan;      $500–     3.5–5.5%      Up to 10      TBD
         Interest Rate Buy-    30,000                  years
         Down Loan;
         Nonguaranteed,
         Low-Interest Loan

Fla.     Guaranteed Loan;      $3,000–   5.8–8.5%      5–6 years     50–100%
         Nonguaranteed,        20,000
         Low-Interest Loan

Ga.      Guaranteed Loan       Case by   Depends       1/2–6 years   15% secured,
                               case      on Lender                   40%
                                                                     unsecured

Guam     Guaranteed Loan       $100–     Prevailing    1–5 years     75%
                               5,000     bank
                                         reference
                                         rate, up to
                                         10%

Ill.     Guaranteed Loan;      $500–     Up to         Up to 20      100%
         Interest Rate Buy-    40,000    3.5%          years
         Down Loan;
         Principal Buy- Down
         Loan

Iowa     Revolving Loan;       $500–     Prime plus 1–5 years        Up to 100%
         Guaranteed Loan;      25,000    1%
         Interest Rate Buy-
         Down Loan




                                                                                  19
                                         Interest
                               Range of Charged                         Loan
                                 Loan       to        Repayment       Guarantee
 State     Loan Models         Amounts Borrower          Terms      Requirements
Kan.     Guaranteed Loan       $500–    5%            1/2–10        100%
                               50,000                 years

Ky.      Guaranteed Loan;      $500–     4–6%         2–8 years     50–100%
         Interest Rate Buy-    25,000
         Down Loan

La.      Guaranteed Loan;      $500–     Prime plus 1–15 years      50%
         Low-Interest,         50,000    1% to
         Nonguaranteed                   prime plus
         Loan                            2%

Md.      Guaranteed/           $500–     3% to        1–7 years,    50%
         Interest Rate Buy-    30,000    1% under     up to 20
         Down Loan;                      prime        years for
         Preferred Rate                               home equity
         Nonguaranteed                                loan
         Loan

Mass.    Guaranteed Loan;      $500–no   4%           Up to 10      100%
         Interest Rate Buy-    maximum                years
         Down Loan



Mich.    Guaranteed Loan;      Up to     3.5–         1–7 years     100%
         Interest Rate Buy-    $30,000   6.75%
         Down Loan

Minn.    Guaranteed Loan;      $1,000–   Prime to     Varies        50–100%
         Interest Rate Buy-    50,000    prime plus   based on
         Down Loan;                      2%           amount of
         Low-Interest,                                loan
         Nonguaranteed
         Loan

Mo.      Revolving Loan        $500–     2–4%         Up to 5       N/A
                               10,000                 years

Neb.     Guaranteed/Interest   $1,500–   2.75–        2–10 years    100%
         Rate Buy-Down         50,000    4.5%
         Loan



                                                                              20
                                         Interest
                               Range of Charged                        Loan
                                 Loan       to        Repayment      Guarantee
 State     Loan Models         Amounts Borrower         Terms      Requirements
Nev.     Guaranteed Loan       $700–    4.25–         2–10 years   200%
                               34,000   6.25%
N.M.     Guaranteed Loan;      Up to    Up to         1/2–15       100%
         Interest Rate Buy-    $20,000  prime plus    years
         Down Loan;                     2%
         Nonguaranteed,
         Low-Interest Rate
         Loan

N.D.     Guaranteed/Interest   $500–     2% under     1–7 years    100%
         Rate Buy-Down         50,000    prime to
         Loan                            prime

C.N.M.I. Revolving Loan;       $500–     4–8%         1–5 years    100%
         Guaranteed Loan       20,000

Okla.    Guaranteed Loan;      No        5% to        3–5 years    100%
         Interest Rate Buy-    minimum   prime plus
         Down Loan;            – no      3%
         Guaranteed/           maximum
         Interest Rate Buy-
         Down Loan;
         Nonguaranteed,
         Low-Interest Loan
Pa.      Interest Rate Buy-    $100–no   0–4%         Up to 10     50%
         Down Loan;            maximum                years
         Guaranteed/
         Interest Rate Buy-
         Down Loan;
         Nonguaranteed,
         Low-Interest Loan

S.C.     Guaranteed Loan;      $1,000–   3% to        1–7 years    100%
         Low-Interest,         30,000    prime plus
         Nonguaranteed                   2%
         Loan

Utah     Interest Rate Buy-    $750–     2.75–        2–5 years    0–100%
         Down Loan;            50,000    4.35%
         Guaranteed/
         Interest Rate Buy-
         Down Loan;



                                                                             21
                                               Interest
                                  Range of    Charged                         Loan
                                   Loan           to           Repayment    Guarantee
 State       Loan Models          Amounts     Borrower           Terms     Requirements
          Nonguaranteed,
          Low-Interest Loan

Va.       Revolving Loan;         No          0–10%        3–10 years      50%
          Guaranteed Loan;        minimum
          Interest Rate Buy-      – no
          Down Loan;              maximum
          Guaranteed/
          Interest Rate Buy-
          Down
          Low-Interest Loan

V.I.      Interest Rate Buy-      $300–       4%           1–5 years       100%
          Down Loan;              15,000
          Guaranteed/
          Interest Rate Buy-
          Down Loan


Vt.       Revolving Loan          $500–       6–8%         1–10 years      N/A
                                  50,000




Wash.     Revolving Loan          $250–       Prime to     1/2–5 years     N/A
                                  10,000      prime plus
                                              2%

Wis.      Guaranteed Loan         $1,000–     Prime to     1–10 years      20%
                                  50,000      prime plus
                                              2%

Wyo.      Interest Rate Buy-      $500–       0%           Up to 5         N/A
          Down Loan               5,000                    years

Source: RESNA/AFTAP Annual Program Data FY 2004 and FY 2005.




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