B-203240.OM, MAY 27, 1982

B-203240.OM: May 27, 1982

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FEDERAL AGENCIES ARE NOT PROHIBITED FROM ADOPTING REGULATIONS THAT DISTINGUISH BETWEEN DIFFERENT GROUPS FOR PURPOSES OF DETERMINING THEIR ELIGIBILITY FOR ASSISTANCE. IN CONFORMANCE WITH "OPINION MOLDER RULE" WHICH SOME OTHER AGENCIES HAVE ADOPTED. SECS. 1932 AND 1991 AS ONE THAT IS "ORIGINATED. SERVICED BY AN APPROVED LENDER "WAS NOT INTENDED TO PROHIBIT THE SALE OF THE GUARANTEED PORTION OF A LOAN SINCE SUCH SALES ARE IMPLICITLY AUTHORIZED BY 7 U.S.C. THERE IS NO BASIS IN THE STATUTE OR ITS LEGISLATIVE HISTORY FOR RESTRICTING SALES OF THE UNGUARANTEED PORTION OF A LOAN WHILE ALLOWING SALES OF THE GUARANTEED PORTION. 3. SINCE 31 U.S.C. 742AA) PROVIDES THAT INTEREST ON FEDERAL BORROWINGS SHALL NOT BE EXEMPT FROM FEDERAL INCOME TAX IT DOES NOT APPLY TO NON-FEDERAL OBLIGATIONS GUARANTEED BY A FEDERAL AGENCY WHICH IS A SUBSTITUTE FOR DIRECT FEDERAL LENDING.

B-203240.OM, MAY 27, 1982

SUBJECT: BUSINESS DEVELOPMENT PROGRAMS OF SBA, EDA AND FMHA - B-203240-O.M. DIGEST: 1. FEDERAL AGENCIES ARE NOT PROHIBITED FROM ADOPTING REGULATIONS THAT DISTINGUISH BETWEEN DIFFERENT GROUPS FOR PURPOSES OF DETERMINING THEIR ELIGIBILITY FOR ASSISTANCE, SUBJECT TO ANY APPLICABLE STATUTORY REQUIREMENTS OR RESTRICTIONS, PROVIDED THAT THEY APPLY AND INTERPRET THE REGULATIONS THEY PROMULGATE IN A CONSISTENT MANNER. FURTHERMORE, DIFFERENT AGENCIES ADMINISTERING DIFFERENT, ALTHOUGH SIMILAR, PROGRAMS CAN ESTABLISH THEIR OWN ELIGIBILITY STANDARDS THAT MAY RESULT IN CERTAIN POPULATIONS OR GROUPS BEING ELIGIBLE TO PARTICIPATE IN THE PROGRAM OF ONE AGENCY BUT NOT ANOTHER. MOREOVER, FMHA REFUSAL TO EXCLUDE MEDIA-TYPE ORGANIZATIONS FROM PARTICIPATION IN ITS GUARANTEED LOAN PROGRAM, IN CONFORMANCE WITH "OPINION MOLDER RULE" WHICH SOME OTHER AGENCIES HAVE ADOPTED, DOES NOT IN GAO'S VIEW, CONSTITUTE ASSUMPTION OF A LEGAL RISK OF VIOLATING FIRST AMENDMENT RIGHTS. 2. FARMER'S HOME ADMINISTRATION (FMHA) MAY ADOPT REGULATIONS ALLOWING LENDERS PARTICIPATING IN THE FMHA GUARANTEED LOAN PROGRAM TO SELL PART OF THE UNGUARANTEED PORTION OF A LOAN. THE DEFINITION OF A GUARANTEED LOAN IN 7 U.S.C. SECS. 1932 AND 1991 AS ONE THAT IS "ORIGINATED, HELD, AND SERVICED BY AN APPROVED LENDER "WAS NOT INTENDED TO PROHIBIT THE SALE OF THE GUARANTEED PORTION OF A LOAN SINCE SUCH SALES ARE IMPLICITLY AUTHORIZED BY 7 U.S.C. SEC. 1929(B). THERE IS NO BASIS IN THE STATUTE OR ITS LEGISLATIVE HISTORY FOR RESTRICTING SALES OF THE UNGUARANTEED PORTION OF A LOAN WHILE ALLOWING SALES OF THE GUARANTEED PORTION. 3. NEITHER THE PUBLIC DEBT ACT OF 1941, 31 U.S.C. SEC. 742AA), NOR OMB CIRCULAR A-70 LEGALLY PROHIBITS A FEDERAL AGENCY FROM DIRECTLY OR INDIRECTLY GUARANTEEING TAX-EXEMPT OBLIGATIONS. SINCE 31 U.S.C. 742AA) PROVIDES THAT INTEREST ON FEDERAL BORROWINGS SHALL NOT BE EXEMPT FROM FEDERAL INCOME TAX IT DOES NOT APPLY TO NON-FEDERAL OBLIGATIONS GUARANTEED BY A FEDERAL AGENCY WHICH IS A SUBSTITUTE FOR DIRECT FEDERAL LENDING. WHILE OMB CIRCULAR A-70 SETS FORTH THE POLICY OF THE EXECUTIVE BRANCH AGAINST GUARANTEEING TAX-EXEMPT OBLIGATIONS, IT DOES NOT ESTABLISH A LEGALLY BINDING PROHIBITION ON THAT PRACTICE. 4. NEITHER SMALL BUSINESS ADMINISTRATION (SBA) NOR FARMER'S HOME ADMINISTRATION (FMHA) ARE LEGALLY PROHIBITED BY ANYTHING IN THEIR RESPECTIVE STATUTES, OR IN ANY OTHER STATUTES OF GENERAL APPLICATION, FROM GUARANTEEING, DIRECTLY OR INDIRECTLY, TAX-EXEMPT OBLIGATIONS. HOWEVER, 42 U.S.C. SEC. 3142(A)(1) ONLY AUTHORIZES THE ECONOMIC DEVELOPMENT ADMINISTRATION (EDA) TO GUARANTEE LOANS MADE "TO PRIVATE BORROWERS BY PRIVATE LENDING INSTITUTIONS." SINCE TAX-EXEMPT OBLIGATIONS ARE ORDINARILY ONLY ISSUED BY PUBLIC BORROWERS, EDA CANNOT DIRECTLY GUARANTEE SUCH TAX-EXEMPT OBLIGATIONS. FURTHERMORE, UNDER B-194153, SEPTEMBER 6, 1974, EDA MAY NOT USE ITS LOAN GUARANTEE AUTHORITY INDIRECTLY TO SUPPORT A TAX-EXEMPT OBLIGATION ISSUED BY A NON-PRIVATE BORROWER SINCE IT CANNOT DO SO DIRECTLY.

DIRECTOR, CED:

MEMBERS OF YOUR STAFF HAVE REQUESTED OUR LEGAL OPINION REGARDING THREE QUESTIONS THAT HAVE ARISEN DURING A REVIEW YOUR DIVISION IS CONDUCTING OF THE BUSINESS DEVELOPMENT PROGRAMS OF THREE DIFFERENT AGENCIES - THE SMALL BUSINESS ADMINISTRATION (SBA), THE ECONOMIC DEVELOPMENT ADMINISTRATION (EDA), AND THE FARMER'S HOME ADMINISTRATION (FMHA).

QUESTION 1: "REGARDING THE INCONSISTENT ELIGIBILITY OF CERTAIN GROUPS, IS IT LEGALLY PERMISSIBLE FOR DIFFERENT PRINCIPLES TO BE APPLIED TO THEIR RIGHT OF ACCESS TO PROGRAMS WITH THE SAME STATUTORY OBJECTIVE AND OFFERING THE SAME FEDERAL ASSISTANCE?"

ANSWER: CLEARLY, AN AGENCY IS NOT PROHIBITED FROM ADOPTING REGULATIONS THAT DISTINGUISH BETWEEN DIFFERENT GROUPS FOR PURPOSES OF DETERMINING THEIR ELIGIBILITY FOR ASSISTANCE, SUBJECT, OF COURSE, TO ANY STATUTORY RESTRICTIONS OR REQUIREMENTS THAT MIGHT APPLY. HOWEVER, ONCE AN AGENCY HAS PROMULGATED REGULATIONS GOVERNING PROGRAM ELIGIBILITY, THE AGENCY MUST APPLY AND INTERPRET THEM CONSISTENTLY.

SIMILARLY, AN AGENCY THAT IS RESPONSIBLE FOR ADMINISTERING A PARTICULAR PROGRAM CAN ESTABLISH ITS OWN ELIGIBILITY STANDARDS THAT MAY DIFFER SIGNIFICANTLY FROM THE STANDARDS ADOPTED BY OTHER AGENCIES WITH RESPECT TO DIFFERENT, ALBEIT SIMILAR, PROGRAMS, EVEN IF THE DIFFERENT STANDARDS RESULT IN CERTAIN POPULATIONS, GROUPS, OR INDUSTRIES BEING ELIGIBLE TO PARTICIPATE IN THE PROGRAM OF ONE AGENCY BUT NOT IN THAT OF ANOTHER.

QUESTION 2: "REGARDING SECONDARY MARKET PROVISIONS, IS FMHA'S ALLOWANCE OF SALES OF PART OF THE UNGUARANTEED PORTION OF GUARANTEED LOANS A VIOLATION OF CONGRESSIONAL INTENT WITH THE RESPECT TO THE PRINCIPLE OF LENDER CO-INSURANCE, AND THUS ILLEGAL?"

ANSWER: WHILE WE AGREE THAT THE SHARED-RISK CONCEPT SHOULD REMAIN AN INTEGRAL PART OF ANY GUARANTEED LOAN PROGRAM, THE QUESTION OF FMHA'S AUTHORITY TO ALLOW LENDERS TO SELL PART OF THE UNGUARANTEED PORTION OF A LOAN RESTS ON THE SPECIFIC STATUTORY LANGUAGE THAT AUTHORIZES THE GUARANTEED LOAN PROGRAM. UNDER 7 U.S.C. SECS. 1932 AND 1991, A GUARANTEED LOAN IS DEFINED AS ONE THAT IS "ORIGINATED, HELD, AND SERVICED" BY AN APPROVED LENDER. IT IS CLEAR THAT THIS PROVISION WAS NOT INTENDED TO PROHIBIT THE SALE OF THE GUARANTEED PORTION OF A LOAN SINCE SUCH SALES ARE IMPLICITLY AUTHORIZED BY 7 U.S.C. SEC. 1929B. FURTHERMORE, THERE IS NO BASIS FOR ASSUMING THAT CONGRESS INTENDED TO ALLOW THE GUARANTEED PORTION OF A LOAN TO BE SOLD WHILE PROHIBITING THE SALE OF THE UNGUARANTEED PORTION. ACCORDINGLY, WE BELIEVE THAT FMHA'S DECISION TO ALLOW THE ORIGINAL LENDER TO SELL PART OF THE UNGUARANTEED PORTION OF THE LOAN IS WITHIN ITS BROAD DISCRETIONARY AUTHORITY UNDER THE STATUTE.

QUESTION 3: "REGARDING THE GUARANTEE OF TAX-EXEMPT ISSUES, IN VIEW OF THE PROHIBITION AGAINST THE SITUATION IN OMB CIRCULAR A-70, AND THE PROHIBITION AGAINST THE FEDERAL GOVERNMENT ISSUING DIRECT OBLIGATIONS EXEMPT FROM FEDERAL INCOME TAXATION CONTAINED IN THE PUBLIC DEBT ACT OF 1941, IS IT ILLEGAL FOR AGENCIES TO DIRECTLY OR INDIRECTLY GUARANTEE TAX- EXEMPT ISSUES?"

ANSWER: IN GENERAL, WITHOUT CONSIDERING THE SPECIFIC STATUTORY AUTHORITY OF EACH OF THE THREE AGENCIES, WE DO NOT BELIEVE THAT ANYTHING CONTAINED IN THE PUBLIC DEBT ACT OF 1941 OR OMB CIRCULAR A-70 LEGALLY PROHIBITS A FEDERAL AGENCY FROM DIRECTLY OR INDIRECTLY GUARANTEEING TAX-EXEMPT OBLIGATIONS.

THE PUBLIC DEBT ACT OF 1941, 31 U.S.C. SEC. 742AA), PROVIDES THAT INTEREST ON OBLIGATIONS ISSUED BY THE UNITED STATES OR ONE OF ITS AGENCIES (FEDERAL BORROWINGS), SHALL NOT BE EXEMPT FROM FEDERAL INCOME TAX. ACCORDINGLY, THE STATUTE DOES NOT APPLY TO NON-FEDERAL OBLIGATIONS GUARANTEED BY A FEDERAL AGENCY - WHICH IS A SUBSTITUTE FOR DIRECT FEDERAL LENDING.

OMB CIRCULAR A-70 AND THE UNDERLYING "REPORT OF THE COMMITTEE ON FEDERAL CREDIT PROGRAMS" THAT IT RELIES UPON, SET FORTH THE POLICY OF THE EXECUTIVE BRANCH AGAINST GUARANTEEING TAX-EXEMPT OBLIGATIONS. HOWEVER, THE CIRCULAR DOES NOT ESTABLISH A LEGALLY BINDING PROHIBITION ON THE AUTHORITY OF A FEDERAL AGENCY TO GUARANTEE SUCH TAX-EXEMPT OBLIGATIONS.

FURTHERMORE, WITH RESPECT TO THE SPECIFIC STATUTORY AUTHORITY OF EACH AGENCY, IT IS OUR VIEW THAT NEITHER SBA NOR FMHA ARE LEGALLY PROHIBITED BY ANYTHING IN THEIR RESPECTIVE STATUTES FROM GUARANTEEING TAX-EXEMPT OBLIGATIONS DIRECTLY OR INDIRECTLY. HOWEVER, UNLIKE SBA AND FMHA, EDA IS ONLY AUTHORIZED TO GUARANTEE LOANS "MADE TO PRIVATE BORROWERS BY PRIVATE LENDING INSTITUTIONS." ACCORDINGLY, SINCE TAX EXEMPT OBLIGATIONS ARE ORDINARILY ONLY ISSUED BY STATE OR LOCAL GOVERNMENTAL ENTITIES, WHICH COULD NOT QUALIFY AS "PRIVATE BORROWERS," EDA IS PROHIBITED BY ITS OWN LEGISLATION, IN OUR VIEW, FROM DIRECTLY GUARANTEEING TAX-EXEMPT OBLIGATIONS. FURTHERMORE, UNDER B-194153, SEPTEMBER 6, 1979, WE BELIEVE THAT EDA IS PROHIBITED FROM INDIRECTLY USING ITS LOAN GUARANTEE AUTHORITY TO SUPPORT A TAX-EXEMPT OBLIGATION ISSUED BY A "NON-PRIVATE" BORROWER.

AN ATTACHMENT CONTAINING A MORE DETAILED ANSWER TO EACH OF THESE QUESTIONS FOLLOWS.

ATTACHMENT

YOUR STAFF HAS REQUESTED OUR LEGAL OPINION REGARDING THREE QUESTIONS THAT HAVE ARISEN DURING A REVIEW OF THE BUSINESS DEVELOPMENT PROGRAMS OF THREE DIFFERENT AGENCIES - SBA, EDA, AND THE FMHA.

QUESTION 1: INCONSISTENT ELIGIBILITY

YOUR FIRST QUESTION CONCERNS WHAT YOU CONSIDER THE "INCONSISTENT ELIGIBILITY OF CERTAIN POPULATIONS, GROUPS AND INDUSTRIES" FOR PARTICIPATION IN THE BUSINESS DEVELOPMENT PROGRAMS OF THE THREE DIFFERENT AGENCIES. SPECIFICALLY YOU ASK WHETHER IT IS "LEGALLY PERMISSIBLE FOR DIFFERING PRINCIPLES TO BE APPLIED" TO THE RIGHT OF ACCESS OF CERTAIN POPULATION GROUPS AND INDUSTRIES "TO PROGRAMS WITH THE SAME STATUTORY OBJECTIVE AND OFFERING THE SAME FEDERAL ASSISTANCE." THIS QUESTION, AS SET FORTH IN YOUR SUBMISSION, SEEMS TO INVOLVE TWO FUNDAMENTALLY DIFFERENT ISSUES. THE FIRST ISSUE CONCERNS THE EXTENT TO WHICH A PARTICULAR AGENCY MAY ESTABLISH DIFFERENT RULES OR STANDARDS BY WHICH THE ELIGIBILITY OF DIFFERENT GROUPS FOR ACCESS TO ITS SPECIFIC LOAN PROGRAM IS TO BE DETERMINED.

ALTHOUGH AN AGENCY IS CLEARLY NOT PROHIBITED FROM ADOPTING REGULATIONS THAT DISTINGUISH BETWEEN DIFFERENT GROUPS FOR PURPOSES OF DETERMINING ELIGIBILITY FOR ASSISTANCE (SUBJECT OF COURSE TO ANY APPLICABLE STATUTORY RESTRICTIONS OR REQUIREMENTS), THE REGULATIONS THAT ARE ADOPTED MUST BE GENERAL IN THEIR APPLICATION AND MUST BE FAIRLY AND EVENLY ADMINISTERED. FOR EXAMPLE, ASSUMING THE STATUTE INVOLVED IS SUFFICIENTLY BROAD, AN AGENCY COULD PROMULGATE A REGULATION WHICH PROVIDED THAT GUARANTEED LOANS UNDER THE STATUTE WOULD ONLY BE MADE FOR A CERTAIN SPECIFIED PURPOSE, OR WITHIN A PARTICULAR AREA, OR TO BORROWERS FALLING WITHIN A LIMITED INCOME RANGE. HOWEVER, HAVING PROMULGATED SUCH A REGULATION, THE AGENCY COULD NOT THEN APPLY OR INTERPRET IT INCONSISTENTLY IN DETERMINING THE ELIGIBILITY OF DIFFERENT BORROWERS OR DECIDE NOT TO APPLY THE REGULATION AT ALL. IN THIS RESPECT WE SAID THE FOLLOWING AT 37 COMP.GEN. 820, 821 (1958):

"*** IT IS WELL ESTABLISHED IN ADMINISTRATIVE LAW THAT VALID STATUTORY REGULATIONS HAVE THE FORCE AND EFFECT OF LAW, ARE GENERAL IN THEIR APPLICATION, AND MAY NO MORE BE WAIVED THAN PROVISIONS OF THE STATUTES THEMSELVES. REGULATIONS MUST CONTAIN A GUIDE OR STANDARD ALIKE TO ALL INDIVIDUALS SIMILARLY SITUATED, SO THAT ANYONE INTERESTED MAY DETERMINE HIS OWN RIGHTS OR EXEMPTIONS THEREUNDER. THE ADMINISTRATIVE AGENCY MAY NOT EXERCISE DISCRETION TO ENFORCE THEM AGAINST SOME AND TO REFUSE TO ENFORCE THEM AGAINST OTHERS. ***"

ALSO SEE 53 COMP.GEN. 364 (1973).

THE SECOND ISSUE SUGGESTED BY YOUR FIRST QUESTION IS WHETHER A PARTICULAR AGENCY - SPECIFICALLY EDA, SBA, OR FMHA - MAY ESTABLISH ELIGIBILITY STANDARDS THAT ARE DIFFERENT FROM THE STANDARDS ADOPTED BY THE OTHER AGENCIES. THE DIFFERENCE IN STANDARDS MAY RESULT IN A PARTICULAR POPULATION GROUP OR INDUSTRY BEING ELIGIBLE FOR THE PROGRAM OF ONE AGENCY BUT NOT FOR THAT OF ANOTHER. THE OBVIOUS ANSWER TO THIS QUESTION IS AN AFFIRMATIVE ONE FOR SEVERAL REASONS.

FIRST, EVEN THOUGH THE GENERAL PURPOSE OF EACH OF THESE THREE LOAN PROGRAMS CAN LEGITIMATELY BE DESCRIBED AS "BUSINESS DEVELOPMENT" - THE TERM USED IN YOUR SUBMISSION - EACH PROGRAM WAS ESTABLISHED PURSUANT TO SEPARATE AND INDEPENDENT STATUTORY AUTHORITY AND WAS INTENDED TO REMEDY A PARTICULAR AND UNIQUE CONCERN OF CONGRESS. FOR EXAMPLE, SBA'S BUSINESS DEVELOPMENT PROGRAM, WHICH IS AUTHORIZED BY SECTION 502 OF THE SMALL BUSINESS INVESTMENT ACT OF 1958, AS AMENDED, 15 U.S.C. SEC. 696, EXTENDS FINANCIAL ASSISTANCE IN THE FORM OF DIRECT OR GUARANTEED LOANS TO STATE AND LOCAL DEVELOPMENT COMPANIES. THESE LOANS MUST BE USED BY THE DEVELOPMENT COMPANIES FOR THE PURPOSE OF ASSISTING "AN IDENTIFIABLE SMALL- BUSINESS CONCERN" FOR A SOUND BUSINESS PURPOSE INCLUDING "PLANT ACQUISITION, CONSTRUCTION, CONVERSION, OR EXPANSION". AS DESCRIBED IN THE REPORT OF THE HOUSE BANKING AND CURRENCY COMMITTEE ON THE LEGISLATION, THE PURPOSE OF THE SECTION 502 PROGRAM IS TO PROVIDE "FOR SBA LOANS TO THESE DEVELOPMENT COMPANIES IN ORDER TO STIMULATE THEIR ACTIVITIES ON BEHALF OF SMALL BUSINESS CONCERNS." SEE H.REP. NO. 2060, 85TH CONG., 2ND SESS. (1958).

ON THE OTHER HAND, EDA'S BUSINESS DEVELOPMENT PROGRAM, WHICH IS AUTHORIZED BY SECTION 202 OF THE PUBLIC WORK ECONOMIC DEVELOPMENT ACT OF 1965, AS AMENDED, 42 U.S.C. SEC. 3142, ALLOWS EDA TO MAKE AND GUARANTEE LOANS FOR THE PURPOSE OF FINANCING, WITHIN SPECIFIED REDEVELOPMENT AREAS, "THE PURCHASE OR DEVELOPMENT OF LAND AND FACILITIES *** FOR INDUSTRIAL OR COMMERCIAL USAGE ***." THE PURPOSE OF THIS LEGISLATION AS DESCRIBED IN H.REP. NO. 539, 89TH CONG., 1ST SESS. (1965) IS TO "HELP PROVIDE MORE JOBS AND HIGHER INCOMES FOR PEOPLE WHO LIVE IN AREAS WHERE JOBS ARE SCARCE OR INCOMES ARE LOW."

SIMILARLY, THE FMHA LOAN PROGRAM, AUTHORIZED BY SECTION 118 OF THE RURAL DEVELOPMENT ACT OF 1972, 7 U.S.C. SEC. 1932, HAS ITS OWN UNIQUE STATUTORY CRITERIA AND UNDERLYING LEGISLATIVE PURPOSE.

THUS, SINCE EACH OF THESE THREE PROGRAMS, ALTHOUGH LOOSELY CLASSIFIED AS BUSINESS DEVELOPMENT PROGRAMS, REPRESENT ATTEMPTS BY CONGRESS TO ADDRESS UNIQUE AND DIFFERENT PROBLEMS, IT IS NOT AT ALL SURPRISING THAT EACH PROGRAM HAS ITS OWN ELIGIBILITY CRITERIA THAT MARKEDLY DIFFERS FROM THE ELIGIBILITY CRITERIA ESTABLISHED FOR THE OTHER PROGRAMS. FOR EXAMPLE, WHILE THE STATUTE WHICH AUTHORIZES EDA'S BUSINESS DEVELOPMENT PROGRAM IS SILENT WITH RESPECT TO THE ELIGIBILITY OF SPECIFIED POPULATION GROUPS AND INDUSTRIES, THE STATUTORY AUTHORITY FOR FMHA'S PROGRAM AUTHORIZES LOANS TO A WIDE VARIETY OF POSSIBLE BORROWERS LOCATED IN RURAL AREAS, AND THE LEGISLATION ESTABLISHING SBA'S 502 PROGRAM REQUIRES THAT LOANS ONLY BE USED TO ASSIST IDENTIFIED SMALL BUSINESS CONCERNS.

FURTHERMORE, ASIDE FROM THE DIFFERENT STATUTORY CRITERIA AND UNDERLYING LEGISLATIVE OBJECTIVES OF EACH PROGRAM, WHICH NATURALLY TEND TO RESULT IN DIFFERENT ELIGIBILITY CRITERIA, A FEDERAL AGENCY CHARGED WITH THE STATUTORY RESPONSIBILITY OF ADMINISTERING A GOVERNMENT PROGRAM IS GENERALLY ACCORDED A WIDE DEGREE OF LATITUDE AND DISCRETION IN PROMULGATING AND LATER INTERPRETING REGULATIONS THAT ARE NEEDED TO IMPLEMENT THE PROGRAM. SEE, E.G., B-202568, SEPTEMBER 11, 1981, 58 COMP.GEN. 635, 638 (1979).

AFTER HAVING EXAMINED THE STATUTORY LANGUAGE AND UNDERLYING LEGISLATIVE PURPOSE FOR EACH OF THE THREE PROGRAMS, IT IS OUR VIEW THAT NONE OF THE ELIGIBILITY CRITERIA YOU QUESTIONED ARE SO ARBITRARY OR INCONSISTENT WITH THE STATUTORY LANGUAGE OR LEGISLATIVE PURPOSE AS TO EXCEED EACH AGENCY'S BROAD STATUTORY AUTHORITY.

IN ACCORDANCE WITH THE GENERAL POLICY OF OUR OFFICE WHEN LEGAL QUESTIONS ARISE CONCERNING PROGRAMS ADMINISTERED BY A FEDERAL AGENCY, WE REQUESTED SBA, EDA, AND FMHA TO PROVIDE US WITH THEIR VIEWS AND COMMENTS CONCERNING EACH OF THE QUESTIONS YOU RAISED. SINCE REPRESENTATIVES OF YOUR DIVISION HAVE ALREADY BEEN FURNISHED WITH COPIES OF THOSE RESPONSES (AN ADDITIONAL COPY OF EACH RESPONSE IS ATTACHED TO THIS MEMORANDUM, AS WELL), WE DO NOT BELIEVE THAT IT IS NECESSARY TO RESTATE WHAT EACH AGENCY SAID ABOUT THE FIRST QUESTION AT GREAT LENGTH. HOWEVER, WE DO HAVE SOME COMMENTS WITH RESPECT TO CERTAIN PORTIONS OF THEIR ANSWERS.

IN RESPONDING TO THE FIRST QUESTION, EACH AGENCY COMMENTED ON THE INFORMATION CONTAINED IN THE TWO TABLES YOU PREPARED CONCERNING THE DIFFERENT STANDARDS THE AGENCIES HAVE ADOPTED WITH RESPECT TO THE ELIGIBILITY OF CERTAIN SPECIFIED POPULATION GROUPS AND INDUSTRIES. SOME OF THE AGENCY COMMENTS CONCERNED THE BASIS FOR THE ELIGIBILITY STANDARDS THAT HAD BEEN ADOPTED. FOR EXAMPLE, FMHA EXPLAINED THE BASIS AND BACKGROUND OF ITS CURRENT RULE THAT RESTRICTS ELIGIBILITY TO CORPORATIONS OR OTHER ORGANIZATIONS, A MAJORITY INTEREST OF WHICH MUST BE OWNED BY CITIZENS OF THE UNITED STATES OR INDIVIDUALS WHO ARE PERMANENTLY RESIDING IN THE COUNTRY. ON THE OTHER HAND, THE RESPONSES FROM SBA AND EDA, IN ADDITION TO EXPLAINING THE BASIS FOR THE STANDARDS EACH AGENCY HAD ADOPTED, INDICATED THAT SOME OF THE INFORMATION IN OUR TABLES MAY HAVE BEEN INACCURATE OR INCOMPLETE. FOR EXAMPLE, SBA STATED THAT THE "POPULATION GROUP" TABLE SHOULD HAVE DISTINGUISHED BETWEEN PRODUCER COOPERATIVES WHICH ARE ELIGIBLE FOR SBA ASSISTANCE AND CONSUMER COOPERATIVES WHICH ARE NOT. SBA'S RESPONSE ALSO INDICATED THAT THE SALE OF ALCOHOLIC BEVERAGES WOULD NO LONGER DISQUALIFY A SMALL BUSINESS FROM BEING ELIGIBLE FOR ASSISTANCE.

IN ITS RESPONSE, EDA EXPLAINED THAT OUR CHARTS CONFUSED CRITERIA PERTAINING TO ITS DIRECT LOAN PROGRAM WITH THE CRITERIA FOR ITS GUARANTEED LOAN PROGRAM. SINCE THE STATUTE PROVIDES THAT EDA CAN ONLY GUARANTEE LOANS FROM PRIVATE LENDERS TO PRIVATE BORROWERS, NON-PRIVATE LENDERS OR BORROWERS CANNOT PARTICIPATE IN ITS GUARANTEED LOAN PROGRAM. HOWEVER, THERE IS NO SIMILAR RESTRICTION WITH RESPECT TO ITS DIRECT LOAN PROGRAM. EDA'S RESPONSE ALSO INDICATED THAT SOME OF THE INFORMATION IN THE TABLES CONCERNING THE ELIGIBILITY OF DIFFERENT POPULATION GROUPS, INCLUDING GOVERNMENT AND MILITARY EMPLOYEES, COOPERATIVES, AND NON-PROFIT ENTITIES, AND DIFFERENT INDUSTRIES, INCLUDING THE GARMENT AND ALCOHOLIC BEVERAGE INDUSTRIES, WAS INCORRECT. UNLESS OTHERWISE STATED HEREIN, WE HAVE NO BASIS FOR QUESTIONING THE ACCURACY OF ANY OF THIS TYPE OF INFORMATION IN THE RESPONSES OF THE THREE AGENCIES.

OPINION-MOLDER RULE

WITH RESPECT TO FMHA, YOUR SUBMISSION INDICATED SPECIFIC CONCERN ABOUT FMHA'S FAILURE TO ADOPT THE SO-CALLED "OPINION-MOLDER RULE" WHICH HAS BEEN ADOPTED BY SBA AND EDA. UNDER THIS RULE, CERTAIN MEMBERS OF THE MEDIA INDUSTRY THAT ARE VIEWED AS MOLDERS OF OPINION ARE NOT CONSIDERED ELIGIBLE BY SBA AND EDA FOR BUSINESS DEVELOPMENT ASSISTANCE. AS WE UNDERSTAND IT, THE BASIS FOR THE ADOPTION OF THE RULE OF SBA AND EDA IS THE POSSIBILITY THAT WITHOUT IT CONSTITUTIONAL QUESTIONS INVOLVING THE SUPPRESSION OF FREE SPEECH AND PRESS COULD BE RAISED IN THE SELECTION OR REJECTION OF LOAN APPLICATIONS FROM DIFFERENT MEMBERS OF THE MEDIA INDUSTRY OR IN CONNECTION WITH ACTION BY THE GOVERNMENT TO FORECLOSE OR TAKE OTHER COLLATERAL PROTECTION MEASURES ON ANY SUCH LOANS THAT ARE MADE AND LATER GO INTO DEFAULT.

FMHA STATES ITS POSITION IN THIS RESPECT AS FOLLOWS:

"WHILE FMHA IS FAMILIAR WITH THE 'OPINION-MOLDER RULE,' WE HAVE RESEARCHED THE LEGISLATIVE HISTORY OF THE ACT AND CAN FIND NO SPECIFIC INDICATION THAT CONGRESS INTENDED TO EXCLUDE OR INCLUDE ANY PARTICULAR TYPES OF BUSINESSES FROM THE BENEFITS OF THE B&I (BUSINESS AND INDUSTRIAL) PROGRAM. RATHER THE INTENT OF CONGRESS SEEMS TO HAVE BEEN TO FOSTER BUSINESSES WHICH WOULD PROVIDE EMPLOYMENT AND GENERATE ECONOMIC BENEFIT. ***"

"WHILE OUR REGULATIONS DO PRECLUDE CERTAIN TYPES OF BUSINESSES ***, THEY DO NOT PRECLUDE LOANS TO MEDIA TYPE ORGANIZATIONS. WE HAVE HAD NO PROBLEMS WITH THESE TYPES OF BUSINESSES AND HAVE FELT THERE IS NO NEED TO RESTRICT ASSISTANCE TO THEM."

AFTER HAVING EXAMINED THE LANGUAGE OF 7 U.S.C. SEC. 1932, AS WELL AS ITS LEGISLATIVE HISTORY, WE ARE INCLINED TO AGREE WITH FMHA'S POSITION THAT THERE IS NO INDICATION THAT CONGRESS INTENDED TO PROHIBIT FMHA FROM MAKING LOANS TO MEDIA-TYPE ORGANIZATIONS. FURTHERMORE, WE ARE NOT AWARE OF ANY INSTANCES IN WHICH A COURT HAS HELD THAT ANY ACTIONS TAKEN BY A FEDERAL AGENCY IN THE ORDINARY COURSE OF BUSINESS TO FORECLOSE OR OTHERWISE PROTECT THE INTERESTS OF THE UNITED STATES WHEN IT HAD TO HONOR A GUARANTEED LOAN TO A MEDIA BORROWER, WERE PROHIBITED BY THE CONSTITUTION SOLELY BECAUSE OF THE NATURE OF THE BORROWER'S BUSINESS. IN OTHER WORDS, WE DO NOT AGREE WITH YOUR OBSERVATION THAT "FMHA IS ASSUMING FUNDAMENTAL LEGAL RISKS." ACCORDINGLY, WE BELIEVE THAT THE QUESTION OF THE ELIGIBILITY OF THE MEDIA INDUSTRY, LIKE OTHER ELIGIBILITY DETERMINATIONS, IS BEST LEFT TO THE JUDGMENT AND DISCRETION OF THE AGENCY THAT IS RESPONSIBLE FOR ADMINISTERING THE PROGRAM.

QUESTION 2: SALE OF UNGUARANTEED PORTION OF LOAN

THE SECOND QUESTION PRESENTED IN YOUR SUBMISSION INVOLVES THE EXTENT TO WHICH THE GUARANTEEING AGENCY MAY ALLOW THE LENDING INSTITUTION THAT ORIGINATED THE LOAN TO SELL ALL OR PART OF THE UNGUARANTEED PORTION OF THE LOAN. YOUR SUBMISSION STATES THAT IT IS AN ESTABLISHED FEDERAL PRINCIPLE TO REQUIRE THE LENDER ON A FEDERALLY GUARANTEED LOAN TO ASSUME PART OF THE RISK OF LOSS. ORDINARILY THIS IS ACCOMPLISHED BY LIMITING THE PERCENTAGE OF A LOAN THAT CAN BE GUARANTEED TO A MAXIMUM OF 90 PERCENT WITH THE REMAINING 10 PERCENT REMAINING UNGUARANTEED. THUS, THE LENDER "CO- INSURES" THE LOAN.

YOUR SUBMISSION STATES THAT EDA AND SBA DO NOT ALLOW THE LENDER TO SELL THE UNGUARANTEED PORTION OF THE LOAN, REQUIRING THAT HE REMAIN FULLY "AT RISK." HOWEVER, FMHA CURRENTLY ALLOWS THE LENDER TO SELL ALL BUT 5 PERCENT OF THE LOAN. THE AMOUNT THE LENDER IS REQUIRED TO RETAIN MUST BE OF THE UNGUARANTEED PORTION OF THE LOAN. SEE 45 FED.REG. 69875, 69876 (1980). BEFORE THIS REGULATION WAS ADOPTED FMHA ALLOWED THE LENDER TO SELL 100 PERCENT OF A LOAN. YOUR SPECIFIC QUESTION IS WHETHER FMHA'S DETERMINATION TO ALLOW THE LENDER TO SELL PART OF THE UNGUARANTEED PORTION OF A GUARANTEED LOAN IS A VIOLATION OF CONGRESSIONAL INTENT WITH RESPECT TO THE PRINCIPLE OF LENDER COINSURANCE AND THEREFORE ILLEGAL.

ESSENTIALLY, WE AGREE WITH YOUR POSITION CONCERNING THE IMPORTANCE OF THE SHARED-RISK CONCEPT THAT FORMS THE BASIS OF MOST FEDERAL LOAN GUARANTEE PROGRAMS, INCLUDING FMHA'S RURAL DEVELOPMENT PROGRAM AUTHORIZED BY 7 U.S.C. SEC. 1932. THAT IS NOT TO SAY, HOWEVER, THAT FMHA'S CURRENT PRACTICE OF ALLOWING THE INITIAL LENDER TO SELL PART OF THE UNGUARANTEED PORTION OF THE LOAN NECESSARILY VIOLATES THE CONCEPT OF SHARED RISK AND IS THEREFORE ILLEGAL. IN THIS REGARD, THE FACT THAT OTHER AGENCIES, OPERATING UNDER THEIR OWN STATUTORY AUTHORITY AND LEGISLATIVE MANDATE, DO NOT ALLOW THE INITIAL LENDER TO SELL ANY PORTION OF THE UNGUARANTEED PART OF A LOAN HAS NO RELEVANCE TO THE QUESTION OF FMHA'S LEGAL AUTHORITY TO ADOPT A CONTRARY POLICY. FN1

UNDER 7 U.S.C. SEC. 1932, FMHA IS AUTHORIZED TO "MAKE AND INSURE LOANS" TO A BROAD VARIETY OF SPECIFIED POPULATION GROUPS FOR THE GENERAL PURPOSE OF RURAL DEVELOPMENT. THE STATUTE FURTHER STATES THAT:

"*** SUCH LOANS, WHEN ORIGINATED, HELD, AND SERVICED BY OTHER LENDERS, MAY BE GUARANTEED BY THE SECRETARY UNDER THIS SECTION ***."

A SIMILAR DEFINITION IS CONTAINED IN 7 U.S.C. SEC. 1991 AS FOLLOWS:

"*** 'INSURE' AS USED IN THIS CHAPTER INCLUDES GUARANTEE, WHICH MEANS TO GUARANTEE THE PAYMENT OF A LOAN ORIGINATED, HELD, AND SERVICED BY A PRIVATE FINANCIAL AGENCY OR OTHER LENDER APPROVED BY THE SECRETARY ***."

THUS, THE LEGAL QUESTION IS WHETHER THE STATUTORY DEFINITION OF A GUARANTEED LOAN IN 7 U.S.C. SECS. 1932 AND 1991 AS ONE THAT IS "ORIGINATED, HELD, AND SERVICED" BY AN APPROVED LENDER, NECESSARILY PROHIBITS THE ORIGINATING LENDER FROM SELLING ANY OF THE UNGUARANTEED PORTION OF THE LOAN. WE DO NOT BELIEVE THAT THE STATUTE WAS INTENDED OR SHOULD BE INTERPRETED AS PROHIBITING SUCH SALES FOR SEVERAL REASONS.

FIRST, THE STATUTORY LANGUAGE DOES NOT DISTINGUISH IN ANY WAY BETWEEN THE AUTHORITY OF THE ORIGINATING LENDER TO SELL THE GUARANTEED OR UNGUARANTEED PORTION OF A LOAN. IN OTHER WORDS, IF THE STATUTORY LANGUAGE IS INTERPRETED AS PROHIBITING THE SALE OF THE UNGUARANTEED PORTION OF A LOAN BECAUSE THE ENTIRE LOAN WOULD THEREFORE NOT BE "ORIGINATED, HELD, AND SERVICED" BY THE LENDING INSTITUTION THAT MADE IT, THEN THE SALE OF ANY PART OF THE GUARANTEED PORTION OF A LOAN SHOULD BE PROHIBITED AS WELL. HOWEVER, WE KNOW THAT CONGRESS DID NOT, IN FACT, INTEND TO PROHIBIT THE SALE OF THE GUARANTEED PORTION OF THESE LOANS. IN THIS RESPECT, 7 U.S.C. SEC. 1929B (SUPP. III 1979), READS AS FOLLOWS:

"THE SECRETARY MAY PURCHASE, *** THE GUARANTEED PORTION OF ANY LOAN GUARANTEED UNDER THIS CHAPTER ***. THIS AUTHORITY MAY BE EXERCISED ONLY IF THE SECRETARY DETERMINES THAT AN ADEQUATE SECONDARY MARKET IS NOT AVAILABLE IN THE PRIVATE SECTOR."

BY AUTHORIZING THE SECRETARY OF AGRICULTURE, ACTING THROUGH FMHA, TO PURCHASE THE GUARANTEED PORTION OF A LOAN ONLY IF THE PRIVATE SECTOR CANNOT GENERATE AN ADEQUATE SECONDARY MARKET TO MAKE SUCH PURCHASES, THIS SECTION DEMONSTRATES THAT THE CONGRESS EXPECTED THERE WOULD BE A SECONDARY MARKET AND THEREFORE DID NOT INTEND TO PROHIBIT THE SALE OF THE GUARANTEED PORTION OF A LOAN. THUS, AS EXPLAINED ABOVE, THE STATUTORY DESCRIPTIONS OF A GUARANTEED LOAN IN 7 U.S.C. SECS. 1932 AND 1991 CANNOT HAVE BEEN INTENDED TO PROHIBIT THE SALE OF THE UNGUARANTEED PORTION EITHER.

FURTHERMORE, WE DO NOT BELIEVE THAT ANY OTHER PROVISIONS OF THE STATUTE OR ITS LEGISLATIVE HISTORY INDICATE THAT CONGRESS INTENDED TO ALLOW THE GUARANTEED PORTION OF A LOAN TO BE SOLD BUT PROHIBIT THE SALE OF THE NONGUARANTEED PORTION. THE BASIC CONCERN OF CONGRESS WITH RESPECT TO THE SHARED-RISK CONCEPT, AS INDICATED BY THE STATUTE AND ITS LEGISLATIVE HISTORY, IS THAT THE MAXIMUM LIABILITY OF THE FEDERAL GOVERNMENT ON A PARTICULAR LOAN BE LIMITED TO 90 PERCENT OF THE TOTAL AMOUNT LOANED. LONG AS THIS PRINCIPLE IS PRESERVED, WE DO NOT BELIEVE THAT THE STATUTE IS BEING VIOLATED. WE TOOK THIS POSITION WITH RESPECT TO AN EDA GUARANTEED LOAN IN B-194153, SEPTEMBER 6, 1979, AS MODIFIED BY 60 COMP.GEN. 464 (1981). IN THAT DECISION, WE CONSIDERED THE QUESTION OF WHETHER AN EDA GUARANTEED LOAN COULD BE REPRESENTED BY TWO NOTES - ONE, REPRESENTING 90 PERCENT OF A LOAN, TO BE FULLY GUARANTEED AND THE OTHER REPRESENTING THE REMAINING 10 PERCENT OF THE LOAN, TO BE WHOLLY NONGUARANTEED. CONCLUDED THAT THE PROPOSED ARRANGEMENT WAS WITHIN EDA'S LEGAL AUTHORITY SINCE IT CONFORMED TO THE STATUTORY REQUIREMENT THAT NO MORE THAN 90 PERCENT OF THE OUTSTANDING BALANCE OF A LOAN BE GUARANTEED.

IF A SIMILAR RATIONALE IS APPLIED HERE, FMHA WOULD HAVE AUTHORITY TO ALLOW THE ORIGINAL LENDER TO SELL ALL OR PART OF THE UNGUARANTEED PORTION OF THE LOAN, PROVIDED THE MAXIMUM LIABILITY OF THE GOVERNMENT IS LIMITED TO 90 PERCENT OF THE TOTAL AMOUNT OF THE LOAN. (ALSO, C.F. B-189712 SEPTEMBER 23, 1981.)

FINALLY, WE BELIEVE THAT FMHA'S EXPLANATION OF THE BASIS FOR ITS DECISION TO ADOPT THE CURRENT RULE ALLOWING LENDERS TO SELL PART OF THE UNGUARANTEED PORTION OF A LOAN, PROVIDED THAT IT RETAINS AT LEAST 5 PERCENT OF THE TOTAL LOAN AMOUNT, IS NOT UNREASONABLE. ESSENTIALLY FMHA MAINTAINS THAT IF LENDERS WERE REQUIRED TO HOLD THE ENTIRE UNGUARANTEED PORTION MANY RURAL LENDERS WOULD NOT BE ABLE TO PARTICIPATE DUE TO THEIR LIMITED CAPITALIZATION AND RESTRICTED LENDING LIMITS.

THIS IS NOT TO SAY THAT WE NECESSARILY AGREE THAT THIS PRACTICE IS DESIRABLE FROM A POLICY STANDPOINT. AS STATED ABOVE, WE BELIEVE THAT THE SHARED-RISK CONCEPT SHOULD REMAIN AN INTEGRAL PART OF ANY GUARANTEED LOAN PROGRAM. FOR EXAMPLE, SEE 60 COMP.GEN. 464, SUPRA.

IF FMHA'S CURRENT RULE, REQUIRING LENDERS TO RETAIN PART OF THE UNGUARANTEED PORTION OF A LOAN EQUAL TO AT LEAST 5 PERCENT OF THE TOTAL LOAN AMOUNT PROVES TO BE INADEQUATE IN THAT THE ORIGINAL LENDER DOES NOT HAVE A SUFFICIENT INTEREST TO PROPERLY AND FULLY PERFORM THE NECESSARY SERVICING OF EACH LOAN, WE ASSUME THAT FMHA WOULD CONSIDER AMENDING THE REGULATIONS ONCE AGAIN. MEANWHILE, THE EXISTING REGULATION AS WELL AS ANY OTHER REGULATION THAT IS SUBSEQUENTLY ADOPTED IS SUBJECT TO LEGITIMATE CRITICISM ON POLICY GROUNDS IF IT APPEARS NOT TO BE WORKING SATISFACTORILY. HOWEVER, IT IS OUR VIEW THAT FROM A LEGAL STANDPOINT FMHA'S DECISION TO ALLOW THE ORIGINAL LENDER TO SELL PART OF THE UNGUARANTEED PORTION OF A GUARANTEED LOAN IS WITHIN ITS BROAD DISCRETIONARY AUTHORITY UNDER THE STATUTE.

QUESTION 3: GUARANTEE OF TAX-EXEMPT OBLIGATIONS

YOUR THIRD QUESTION INVOLVES THE AUTHORITY OF THE THREE AGENCIES TO GUARANTEE TAX-EXEMPT ISSUES. SPECIFICALLY, YOU ASK:

"REGARDING THE GUARANTEE OF TAX EXEMPT ISSUES, IN VIEW OF THE PROHIBITION AGAINST THIS SITUATION IN OMB CIRCULAR A-70, AND THE PROHIBITION AGAINST THE FEDERAL GOVERNMENT ISSUING DIRECT OBLIGATIONS EXEMPT FROM FEDERAL INCOME TAXATION CONTAINED IN THE PUBLIC DEBT ACT OF 1941, IS IT ILLEGAL FOR AGENCIES TO DIRECTLY OR INDIRECTLY GUARANTEE TAX EXEMPT ISSUES?"

OUR ANSWER TO THIS QUESTION IS IN TWO PARTS - THE FIRST DEALING WITH THE GENERAL QUESTION OF THE AUTHORITY OF A FEDERAL AGENCY TO GUARANTEE NON- FEDERAL OBLIGATIONS THAT ARE TAX-EXEMPT, AND THE SECOND CONCERNING THE SPECIFIC AUTHORITY OF EACH OF THE THREE AGENCIES TO DO SO IN THEIR PARTICULAR BUSINESS DEVELOPMENT PROGRAMS.

AS YOU POINT OUT, THE PUBLIC DEBT ACT OF 1941, 31 U.S.C. SEC. 742AA) PROVIDES THAT ALL OBLIGATIONS ISSUED BY THE UNITED STATES AND ITS AGENCIES SHALL BE SUBJECT TO FEDERAL INCOME TAX. SPECIFICALLY, IT READS AS FOLLOWS:

"INTEREST UPON OBLIGATIONS AND DIVIDENDS, EARNINGS, OR OTHER INCOME FROM SHARES, CERTIFICATES, STOCK, OR OTHER EVIDENCES OF OWNERSHIP *** ISSUED ON AND AFTER MARCH 28, 1942, BY THE UNITED STATES OR ANY AGENCY OR INSTRUMENTALITY THEREOF SHALL NOT HAVE ANY EXEMPTION, AS SUCH, *** EXCEPT AS PROVIDED UNDER THE INTERNAL REVENUE CODE OF 1954 ***."

IF THIS PROVISION IS INTERPRETED LITERALLY, IT IS CLEAR THAT IT DOES NOT APPLY TO NON-FEDERAL OBLIGATIONS THAT ARE GUARANTEED BY A FEDERAL AGENCY SINCE THE STATUTE ONLY REFERS TO OBLIGATIONS ISSUED BY THE UNITED STATES OR ONE OF ITS AGENCIES OR INSTRUMENTALITIES. BY REFERRING TO OBLIGATIONS ISSUED BY THE UNITED STATES, THE STATUTORY LANGUAGE IN 31 U.S.C. SEC. 742AA) APPLIES, IN EFFECT, TO MONIES THAT THE FEDERAL GOVERNMENT OR ONE OF ITS AGENCIES BORROWS. THE STATUTE REQUIRES THAT THE INTEREST THE GOVERNMENT PAYS ON THESE BORROWINGS NOT BE TAX-EXEMPT. HOWEVER, A FEDERAL GUARANTEE OF A LOAN MADE BY A NON FEDERAL LENDER IS REALLY A SUBSTITUTE FOR DIRECT FEDERAL LENDING - AN ENTIRELY DIFFERENT PROPOSITION. THEREFORE, IT DOES NOT FOLLOW THAT THE STATUTORY LIMITATION ON FEDERAL BORROWING, I.E., THAT IT ONLY BE ACCOMPLISHED THROUGH THE ISSUANCE OF TAXABLE OBLIGATIONS, SHOULD BE MADE APPLICABLE TO FEDERALLY-ASSISTED LENDING AS WELL. ACCORDINGLY, WE DO NOT BELIEVE THAT 31 U.S.C. SEC. 742AA) RESTRICTS THE AUTHORITY OF A FEDERAL AGENCY TO GUARANTEE A TAX- EXEMPT OBLIGATION REPRESENTING A LOAN MADE BY A NON-FEDERAL LENDER.

SIMILARLY, WE DO NOT BELIEVE THAT ANYTHING CONTAINED IN OMB CIRCULAR A- 70, DATED FEBRUARY 1, 1965, CONSTITUTES A LEGAL PROHIBITION AGAINST GUARANTEEING TAX-EXEMPT OBLIGATIONS. OMB CIRCULAR A-70, ENTITLED "LEGISLATION ON FEDERAL CREDIT PROGRAMS", ADDRESSES THE GOVERNMENT'S GUARANTEE OF TAX-EXEMPT OBLIGATIONS ONLY INDIRECTLY. IT DOES SO BY REFERRING TO THE RECOMMENDATIONS OF THE "REPORT OF THE COMMITTEE ON FEDERAL CREDIT PROGRAMS" (REPORT) TO THE PRESIDENT. WITH RESPECT TO THE FEDERAL GUARANTEE OF TAX-EXEMPT OBLIGATIONS THE REPORT MAKES THE FOLLOWING RECOMMENDATION (P. 19):

"(3) GUARANTEES OF TAX-EXEMPT OBLIGATIONS TEND TO EXPAND THE VOLUME OF SUCH SECURITIES ISSUED. THE COMMITTEE, THEREFORE, RECOMMENDS THAT NO PROGRAM IN THE FUTURE BE AUTHORIZED WHICH INVOLVES GUARANTEE OF TAX-EXEMPT OBLIGATIONS BECAUSE (A) THE COST IN TAX REVENUES TO THE FEDERAL GOVERNMENT WOULD GENERALLY EXCEED THE BENEFITS OF TAX EXEMPTION RECEIVED BY BORROWERS, (B) SUCH FEDERALLY GUARANTEED TAX-EXEMPT SECURITIES WOULD BE SUPERIOR TO DIRECT FEDERAL OBLIGATIONS THEMSELVES, AND THEIR INCREASING VOLUME WOULD ADVERSELY AFFECT TREASURY FINANCING, AND (C) THE AVAILABILITY OF INCREASING AMOUNTS OF HIGH-GRADE TAX-EXEMPT ISSUES WOULD TEND TO ATTRACT FUNDS FROM INVESTORS THAT SHOULD APPROPRIATELY SEEK RISK-BEARING OPPORTUNITIES."

HOWEVER, IN OUR VIEW, OMB CIRCULAR A-70, AS WELL AS THE UNDERLYING REPORT, DO NO MORE THAN STATE THE POLICY OF THE EXECUTIVE BRANCH RATHER THAN ESTABLISHING A BINDING PROHIBITION ON THE FEDERAL GUARANTEE OF TAX EXEMPT OBLIGATIONS ISSUED BY OTHER LENDERS. OUR OFFICE HAS CONSISTENTLY HELD THAT EXECUTIVE ORDERS, DIRECTIVES, OR REGULATIONS THAT ARE NOT SPECIFICALLY AUTHORIZED BY STATUTE AND WHICH ARE ESSENTIALLY DIRECTED AT INSURING THE EFFICIENT OPERATION OF THE EXECUTIVE BRANCH ARE MATTERS OF EXECUTIVE POLICY AND DO NOT HAVE THE FORCE AND EFFECT OF LAW. COMP.GEN. 451, 463 (1979). ALSO SEE 55 COMP.GEN. 60, 68 (1975); 53 COMP.GEN. 86, 88 (1973); AND 43 COMP.GEN. 217, 221 (1963). THE CIRCULAR ITSELF STATES THAT ITS PURPOSE IS TO ESTABLISH "THE POLICIES AND PROCEDURES TO BE FOLLOWED IN PROPOSING LEGISLATION TO EXTEND, REVISE OR CREATE FEDERAL CREDIT PROGRAMS ***."

FURTHERMORE, OMB DOES NOT TAKE THE POSITION THAT CIRCULAR A-70 PROVIDES ANYTHING OTHER THAN POLICY GUIDANCE. WHEN WE REQUESTED OMB TO PROVIDE US WITH ITS VIEWS ON THE AUTHORITY OF AN AGENCY TO GUARANTEE TAX-EXEMPT OBLIGATIONS, IT DIRECTED OUR ATTENTION TO A LETTER DATED DECEMBER 5, 1980, FROM THE ASSISTANT DIRECTOR FOR BUDGET REVIEW, OMB, TO THE FMHA ADMINISTRATOR WHICH READS AS FOLLOWS:

"SINCE 1965, WHEN OMB CIRCULAR NO. A-70, 'LEGISLATION ON FEDERAL CREDIT PROGRAMS,' WAS ISSUED, IT HAS BEEN THE GENERAL POLICY OF THE EXECUTIVE BRANCH NOT TO GUARANTEE, DIRECTLY OR INDIRECTLY, TAX-EXEMPT OBLIGATIONS. THIS POLICY HAD ITS ORIGIN IN THE REPORT OF THE COMMITTEE ON FEDERAL CREDIT PROGRAMS TO THE PRESIDENT OF THE UNITED STATES, WHICH WAS TRANSMITTED BY PRESIDENT KENNEDY TO FEDERAL CREDIT PROGRAM AGENCIES IN FEBRUARY OF 1963. ALL OF THE RECOMMENDATIONS OF THE REPORT, INCLUDING THE ONE PROHIBITING THE GUARANTEE OF TAX-EXEMPT OBLIGATIONS WERE ADOPTED BY PRESIDENT KENNEDY AND INCORPORATED BY REFERENCE IN CIRCULAR NO. A-70. CIRCULAR NO. A-70 HAS NOT BEEN REVISED SINCE IT WAS ISSUED AND CONTINUES TO STATE THE POLICY OF THE EXECUTIVE BRANCH.

"EXAMPLES OF ACTIONS THAT ARE CONTRARY TO THE POLICY ESTABLISHED BY CIRCULAR NO. A-70 ARE:

" - DIRECT GUARANTEES OF TAX-EXEMPT SECURITIES,

" - GUARANTEES OF LOANS FOR PRIVATE PROJECTS THAT ARE FINANCED INITIALLY BY STATE OR LOCAL GOVERNMENT AGENCIES OR AUTHORITIES WHO OBTAIN FUNDS FOR THE LOANS BY ISSUING TAX-EXEMPT BONDS,

" - GUARANTEES OF LOANS TO PRIVATE PERSONS OR ORGANIZATIONS THAT ARE ORIGINATED BY OR IT IS KNOWN WILL BE ACQUIRED BY STATE OR LOCAL AGENCIES AND AUTHORITIES AND THAT ARE USED OR WILL BE USED AS COLLATERAL FOR TAX-EXEMPT BONDS, AND

" - EITHER DIRECT FEDERAL LOANS OR GUARANTEES OF LOANS FOR PROJECTS THAT ARE FINANCED IN PART BY TAX-EXEMPT BONDS IF THE FEDERAL LOANS OR GUARANTEED LOANS ARE SUBORDINATED TO THE TAX-EXEMPT SECURITIES."

ACCORDINGLY, WHILE WE BELIEVE THAT THE EXECUTIVE BRANCH POLICY ESTABLISHED BY OMB CIRCULAR NO. A-70 AND THE REPORT ON WHICH IT WAS BASED WOULD BE VIOLATED IF AN AGENCY GUARANTEES, DIRECTLY OR INDIRECTLY, A TAX- EXEMPT OBLIGATION ISSUED BY A NON-FEDERAL BORROWER WE DO NOT BELIEVE THAT THE VIOLATION OF THAT POLICY WOULD CONSTITUTE A VIOLATION OF A LEGALLY BINDING REQUIREMENT UNLESS THE SPECIFIC LEGISLATION AUTHORIZING THE AGENCY TO GUARANTEE LOANS PROHIBITED THAT PRACTICE.

HAVING ADDRESSED THE GENERAL QUESTION, WE TURN OUR ATTENTION TO THE SPECIFIC STATUTORY AUTHORITY UNDER WHICH EACH OF THE THREE AGENCIES OPERATES TO DETERMINE IF THEY IN ANY WAY PROHIBIT THOSE AGENCIES FROM GUARANTEEING TAX-EXEMPT OBLIGATIONS.

SBA'S AUTHORITY

FIRST, WITH RESPECT TO SBA YOU STATE THAT "WHILE SBA'S 502 PROGRAM GENERALLY PROHIBITS THIS SITUATION, A NEW COMPANION PROGRAM UNDER SECTION 503 APPARENTLY ALLOWS THE GUARANTEE OF TAX-EXEMPT ISSUES." UNDER SECTION 503 OF THE SMALL BUSINESS INVESTMENT ACT OF 1958, AS AMENDED, 15 U.S.C. SEC. 697, SBA IS AUTHORIZED TO PROVIDE A 100 PERCENT GUARANTEE OF THE TIMELY PAYMENT OF PRINCIPAL AND INTEREST ON THE DEBENTURES ISSUED BY QUALIFIED STATE AND LOCAL DEVELOPMENT COMPANIES. THE PROCEEDS FROM THE SALE OF EACH DEBENTURE MUST BE USED TO MAKE ONE OR MORE LOANS TO A SMALL BUSINESS CONCERN FOR ONE OF THE PURPOSES SET FORTH IN 15 U.S.C. SEC. 696, WHICH INCLUDES PLANT ACQUISITION, CONSTRUCTION, CONVERSION, OR EXPANSION. THE STATUTE SPECIFICALLY PROVIDES THAT LOAN PROCEEDS FROM THE SALE OF A GUARANTEED DEBENTURE CANNOT EXCEED 50 PERCENT OF THE COST OF THE PROJECT BEING FUNDED BY THE LOAN.

THE FINAL REGULATIONS ADOPTED BY SBA TO IMPLEMENT SECTION 503 ALLOW IT TO GUARANTEE DEBENTURES THAT WILL BE USED TO FUND PROJECTS "WHOSE OTHER SOURCES OF FINANCING INCLUDE, OR ARE COLLATERALIZED BY, TAX EXEMPT OBLIGATIONS." 13 C.F.R. SEC. 108.503-4(C). THE REGULATIONS ALSO PROVIDE THAT "LOANS MADE WITH THE PROCEEDS OF 503 DEBENTURES MAY BE SUBORDINATED TO SUCH OBLIGATIONS." ID. IN THE PREAMBLE TO THOSE REGULATIONS, SET FORTH AT 45 FED.REG. 64551 (1981), AS WELL AS IN ITS RESPONSE ON THIS QUESTION TO OUR OFFICE, SBA STATES THAT ITS REGULATIONS ALLOWING PARTIAL TAX-EXEMPT FINANCING OF SECTION 503 PROJECTS WAS BASED ON SBA'S INTERPRETATION OF THE INTENT OF CONGRESS AS EXPRESSED IN THE CONFERENCE REPORT ON PUB.L. NO. 96-302, WHICH ESTABLISHED THE 503 PROGRAM. IN THIS RESPECT, THE CONFERENCE REPORT READS AS FOLLOWS:

"SBA SHOULD NOT DISAPPROVE THE GUARANTEE OF ANY DEBENTURE, OR ANY LOAN MADE WITH THE PROCEEDS OF A DEBENTURE ISSUE, SOLELY BECAUSE THE PROCEEDS WOULD BE USED IN A PROJECT WHOSE OTHER SOURCES OF FINANCING INCLUDE, OR ARE COLLATERALIZED BY, TAX-EXEMPT INDUSTRIAL REVENUE OR DEVELOPMENT BONDS." SEE H.CONF.REP. NO. 96-1087, 96TH CONG., 2ND SESS. 32 (1980).

IN LIGHT OF THIS CLEAR EXPRESSION OF CONGRESSIONAL INTENT THAT SBA NOT PROHIBIT THE GUARANTEE OF DEBENTURES USED TO SUPPORT PROJECTS THAT WOULD RECEIVE SOME FUNDING FROM NON-FEDERAL TAX-EXEMPT OBLIGATIONS, WE BELIEVE THAT THE REGULATIONS ADOPTED BY SBA IN THIS REGARD ARE WITHIN ITS STATUTORY AUTHORITY.

FMHA'S AUTHORITY

WITH RESPECT TO FMHA, YOUR SUBMISSION STATES THAT ALTHOUGH FMHA CURRENTLY PROHIBITS THE DIRECT GUARANTEE OF TAX-EXEMPT OBLIGATIONS, IT DOES ALLOW INDIRECT GUARANTEES OF TAX-EXEMPT OBLIGATIONS. PRESUMABLY, THE REGULATIONS YOU REFER TO ARE THE FOLLOWING:

"(A) LOANS TO PUBLIC BODIES MAY BE GUARANTEED ONLY IN CONNECTION WITH THE ISSUANCE OF ANY CLASS OR SERIES OF INDUSTRIAL DEVELOPMENT BONDS ***, THE INTEREST ON WHICH IS INCLUDABLE IN GROSS INCOME UNDER IRC (INTERNAL REVENUE CODE). NO PART OF THE LOAN GUARANTEED BY FMHA MAY EXTEND TO ANY CLASS OR SERIES OF INDUSTRIAL DEVELOPMENT BONDS THE INTEREST ON WHICH IS EXCLUDABLE FROM GROSS INCOME UNDER SECTION 103 (A)(1) OF SUCH CODE. ***" 7 C.F.R. SEC. 1980.488 (1980).

IN RESPONDING TO THIS QUESTION, FMHA STATES THAT ITS DECISION TO ADOPT THESE REGULATIONS PROHIBITING THE DIRECT GUARANTEE OF TAX-EXEMPT ISSUES WAS BASED ON AN ADMINISTRATIVE DECISION, NOT LEGAL NECESSITY. HAVING REVIEWED THE STATUTORY AUTHORITY UNDER WHICH FMHA'S LOAN GUARANTEE PROGRAM OPERATES, AS WELL AS ITS'S LEGISLATIVE HISTORY, WE AGREE THAT FMHA IS NOT LEGALLY PROHIBITED FROM GUARANTEEING TAX-EXEMPT OBLIGATIONS DIRECTLY OR INDIRECTLY. THEREFORE, FMHA WOULD BE OPERATING WITHIN ITS ADMINISTRATIVE DISCRETION IN CHOOSING TO ADOPT A REGULATION THAT PROHIBITED DIRECT GUARANTEES OF TAX-EXEMPT ISSUES BUT DID NOT PROHIBIT INDIRECT GUARANTEES.

HOWEVER, IN ITS RESPONSE TO US, FMHA DIRECTED OUR ATTENTION TO A PROPOSED NEW REGULATION THAT WOULD PROHIBIT BOTH DIRECT AND INDIRECT GUARANTEES OF TAX-EXEMPT OBLIGATIONS BECAUSE OF THE DOUBLE BENEFIT THEREBY OBTAINED BY PRIVATE BUSINESSES. THE PROPOSED NEW REGULATION PROVIDES THAT THE FOLLOWING TRANSACTIONS WOULD NOT BE ELIGIBLE FOR AN FMHA GUARANTEE:

"(C) THE GUARANTEE OF ANY LOANS WHEN ANY PLANNED SOURCE OF THE FUNDING FOR THE PROJECT WILL BE RAISED THRU THE ISSUANCE OF TAX FREE BONDS, THE INTEREST ON WHICH IS EXCLUDABLE FROM GROSS INCOME UNDER SECTION 103(A)(1) OF THE INTERNAL REVENUE CODE OF 1954, AS AMENDED. THIS INCLUDES BONDS ISSUED FOR THE PURPOSE OF PURCHASING ANY PORTION OF A LOAN OR WHICH WILL BE SECURED BY ANY PORTION OF THE LOAN." 44 FED.REG. 70742, DECEMBER 10, 1979.

FMHA ADVISED US THAT BASED ON COMMENTS IT RECEIVED FROM OMB ON THE PROPOSED NEW REGULATION WHICH BASICALLY SUPPORTED FMHA'S POSITION, IT IS CURRENTLY DRAFTING A REVISED REGULATION THAT WOULD ENCOMPASS OMB'S RECOMMENDATION PROHIBITING SUCH GUARANTEES AND WOULD APPLY TO ALL FMHA GUARANTEED LOAN PROGRAMS. SEE ATTACHED COPY OF LETTER DATED DECEMBER 5, 1980, FROM OMB TO FMHA. ACCORDINGLY, IT APPEARS THAT IF FMHA ADOPTS THE NEW REGULATIONS, AS INDICATED, IT WILL DISCONTINUE ITS PAST PRACTICE OF ALLOWING THE INDIRECT GUARANTEEING OF TAX-EXEMPT OBLIGATIONS.

EDA'S AUTHORITY

WITH RESPECT TO EDA'S LEGAL AUTHORITY TO DIRECTLY OR INDIRECTLY GUARANTEE TAX-EXEMPT OBLIGATIONS THE SITUATION IS SIGNIFICANTLY DIFFERENT. UNLIKE THE LEGISLATIVE AUTHORITY UNDER WHICH SBA AND FMHA OPERATE, THE STATUTORY AUTHORITY FOR EDA'S GUARANTEED LOAN PROGRAM ONLY ALLOWS EDA TO GUARANTEE LOANS "MADE TO PRIVATE BORROWERS BY PRIVATE LENDING INSTITUTIONS." U.S.C. SEC. 3142(A)(1). THEREFORE, SINCE TAX-EXEMPT OBLIGATIONS ARE ORDINARILY ONLY ISSUED BY A STATE OR LOCAL GOVERNMENTAL ENTITY, WHICH COULD NOT POSSIBLY QUALIFY AS A PRIVATE BORROWER, EDA IS PROHIBITED BY ITS OWN LEGISLATION FROM DIRECTLY GUARANTEEING SUCH TAX-EXEMPT OBLIGATIONS. FURTHERMORE, WE BELIEVE THAT EDA WOULD BE PROHIBITED FROM INDIRECTLY USING ITS LOAN GUARANTEE AUTHORITY TO SUPPORT A TAX-EXEMPT OBLIGATION ISSUED BY A "NON-PRIVATE" BORROWER.

IN B-194153, SEPTEMBER 6, 1979, SUPRA, WE CONSIDERED THE LEGALITY OF A PROPOSAL WHEREBY EDA WOULD GUARANTEE LOANS MADE TO A PRIVATE BORROWER BY A PRIVATE LENDING INSTITUTION WITH THE GUARANTEED PORTION OF EACH LOAN TO BE SOLD TO THE CITY OF CHICAGO WHICH WOULD FINANCE ITS PURCHASE WITH FUNDS RAISED THROUGH THE "PUBLIC CREDIT MARKETS." WE HELD THAT SINCE THE CITY OF CHICAGO "IS NOT PRIVATE, IS NOT A LENDING INSTITUTION AND COULD NOT HAVE QUALIFIED FOR A GUARANTEE INITIALLY" THE PROPOSED PROGRAM, WHICH WOULD REQUIRE EDA TO GUARANTEE NOTES HELD BY THE CITY, WOULD ALLOW EDA TO DO INDIRECTLY THAT WHICH IT COULD NOT DO DIRECTLY, AND WOULD THEREFORE EXCEED ITS STATUTORY AUTHORITY. ALSO, SEE 60 COMP.GEN. 464 SUPRA, WHICH MODIFIED ANOTHER PORTION OF THE 1979 DECISION. ALTHOUGH OUR HOLDING IN THE 1979 DECISION DID NOT EXPRESSLY ADDRESS THE ISSUE OF EDA'S AUTHORITY TO GUARANTEE TAX-EXEMPT OBLIGATIONS DIRECTLY OR INDIRECTLY, THE IMPLICIT EFFECT OF OUR HOLDING IS TO PROHIBIT EITHER TYPE OF ARRANGEMENT SINCE THE ISSUER OF THE TAX EXEMPT OBLIGATIONS WOULD PRESUMABLY NOT BE PRIVATE AND WOULD NOT HAVE BEEN ELIGIBLE FOR A GUARANTEE INITIALLY.

IN ITS RESPONSE TO US ON THIS QUESTION, EDA TAKES THE POSITION THAT THE PUBLIC WORKS AND ECONOMIC DEVELOPMENT ACT OF 1965, AS AMENDED, 42 U.S.C. SEC. 3121 ET SEQ., DOES NOT PROHIBIT EDA FROM DIRECTLY OR INDIRECTLY GUARANTEEING TAX-EXEMPT ISSUES. EDA GOES ON TO STATE, HOWEVER, THAT IT HAS ADMINISTRATIVELY ADOPTED A POLICY AGAINST PROVIDING ASSISTANCE TO "PROJECTS THAT INVOLVE AN EDA GUARANTEE OF TAX EXEMPT OBLIGATIONS AND PROJECTS THAT INVOLVE AN EDA LIEN POSITION INFERIOR TO A TAX-EXEMPT OBLIGATION ON AN ASSET FINANCED BY EDA."

HOWEVER, THIS HAS NOT ALWAYS BEEN EDA'S POSITION. IN A LETTER, DATED DECEMBER 1, 1980 FROM ITS GENERAL COUNSEL, EDA REQUESTED OUR OPINION ON THE PROPRIETY OF ITS EXTENDING ASSISTANCE UNDER CERTAIN PROVISIONS OF THE PUBLIC WORKS AND ECONOMIC DEVELOPMENT ACT THAT DID NOT HAVE A "PRIVATE LENDER" REQUIREMENT, ALTHOUGH THE EFFECT OF ITS ASSISTANCE COULD BE CONSTRUED AS THE DIRECT OR INDIRECT GUARANTEEING OF TAX-EXEMPT OBLIGATIONS. IN THAT LETTER, EDA SAID THE FOLLOWING:

"IN THE PAST, EDA HAS RECEIVED NUMEROUS REQUESTS TO USE ITS LOAN GUARANTEE AUTHORITIES UNDER SECTION 202(A) OF PWEDA TO SUPPORT TAX-EXEMPT OBLIGATIONS. IT HAS CONSISTENTLY DECLINED TO DO SO ON THE BASIS OF RESTRICTIONS IN PWEDA. SECTIONS 202(A)(1)(C) AND (A)(3)(B) REQUIRE LOANS ELIGIBLE FOR GUARANTEE TO BE 'MADE TO PRIVATE BORROWERS BY PRIVATE LENDING INSTITUTIONS.' SINCE THE 'BORROWER' IN THE ISSUE OF TAX-EXEMPT OBLIGATIONS IS A GOVERNMENTAL BODY, SUCH AS A POLITICAL SUBDIVISION OF A STATE, A SPECIAL PURPOSE UNIT OF LOCAL GOVERNMENT OR A SPECIALLY LEGISLATED PUBLIC CORPORATION, SUCH GOVERNMENTAL OR QUASI-GOVERNMENTAL BORROWING ENTITY COULD NOT BE CONSIDERED A PRIVATE BORROWER WITHIN THE MEANING OF SECTION 202. THIS STATUTORY REQUIREMENT PROHIBITS THE DIRECT USE OF EDA'S LOAN GUARANTEE AUTHORITY TO SUPPORT TAX-EXEMPT OBLIGATIONS.

"THE INDIRECT USE OF EDA'S LOAN GUARANTEE AUTHORITY TO SUPPORT TAX-EXEMPT OBLIGATIONS IS CONSIDERED AND PROHIBITED BY AN UNPUBLISHED DECISION OF THE COMPTROLLER GENERAL B-194153, SEPTEMBER 6, 1979. THE COMPTROLLER GENERAL NOTED THAT THE PROPOSAL UNDER CONSIDERATION WOULD HAVE ENABLED EDA TO 'ACCOMPLISH INDIRECTLY THAT WHICH CLEARLY COULD NOT HAVE BEEN ACCOMPLISHED DIRECTLY' AND CONSEQUENTLY WAS NOT WITHIN EDA'S STATUTORY AUTHORITY. UNDER THIS DECISION, THEN, EDA WAS PROHIBITED FROM USING ITS LOAN GUARANTEE AUTHORITY TO SUPPORT INDIRECTLY TAX-EXEMPT OBLIGATIONS."

SUBSEQUENTLY, EDA ADVISED US THAT IT HAD DETERMINED THAT THE TYPE OF FINANCIAL ASSISTANCE UNDER CONSIDERATION THEN, NONE OF WHICH INVOLVED ITS LOAN GUARANTEE AUTHORITY, WAS NOT PROHIBITED BY STATUTE AND WAS WITHIN ITS ADMINISTRATIVE DISCRETION. ACCORDINGLY, IT WITHDREW ITS REQUEST FOR A LEGAL OPINION. HOWEVER, ITS WITHDRAWAL LETTER DID NOT SUGGEST THAT IT HAD CHANGED ITS POSITION THAT PURSUANT TO ITS LOAN GUARANTEE AUTHORITY IT COULD NOT DIRECTLY OR INDIRECTLY SUPPORT TAX EXEMPT OBLIGATIONS.

SIMILARLY, IN A LETTER DATED MARCH 6, 1981, EDA'S THEN-ACTING GENERAL COUNSEL STATED EDA'S VIEW THAT "THE INTENDED PURPOSE OF THE 'PRIVATE BORROWER-PRIVATE LENDER' REQUIREMENT WAS TO EXCLUDE EDA PARTICIPATION IN TAX-EXEMPT OBLIGATIONS ***."

ESSENTIALLY, WE AGREE WITH EDA'S POSITION AS EXPRESSED IN THESE EARLIER LETTERS, ESPECIALLY THE LETTER OF DECEMBER 1, 1980. IN OUR VIEW, SINCE 42 U.S.C. SEC. 3142 PROVIDES THAT EDA CAN ONLY GUARANTEE LOANS MADE TO A PRIVATE BORROWER BY A PRIVATE LENDING INSTITUTION, EDA DOES NOT HAVE ANY LEGAL AUTHORITY TO GUARANTEE A LOAN THAT WOULD DIRECTLY OR INDIRECTLY SUPPORT A TAX-EXEMPT OBLIGATION ISSUED BY A NONPRIVATE BORROWER.

WE NOTE THAT THE SITUATION EDA DESCRIBES IN ITS RESPONSE TO US, AS ONE WHICH COULD BE CONSTRUED AS AN INDIRECT GUARANTEE OF A TAX-EXEMPT OBLIGATIONS, APPARENTLY DID NOT INVOLVE EDA'S LOAN GUARANTEE AUTHORITY. IN THAT EXAMPLE - THE CAPITAL HOTEL PROJECT IN LITTLE ROCK, ARKANSAS - EDA MADE A DIRECT LOAN OF $1,750,000. EDA'S LIEN POSITION ON THE LOAN IS SUBORDINATE TO THE LIEN POSITION OF THE FIRST MORTGAGE BONDS ISSUED BY THE METROCENTRE IMPROVEMENT DISTRICT NO. 1 OF LITTLE ROCK IN THE AMOUNT OF $4,250,000. EDA EXPLAINS HOW THIS COULD RESULT IN ITS INDIRECT GUARANTEE OF A TAX-EXEMPT OBLIGATIONS AS FOLLOWS:

"IN THE EVENT OF THE BORROWER'S DEFAULT AND FORECLOSURE ON THE LOAN, EDA PRESUMABLY WOULD BE FORCED TO BUY-OUT THE FIRST MORTGAGEE TO PROTECT THE GOVERNMENT'S INTEREST. UNDER SUCH CIRCUMSTANCES, THE SECOND LIEN POSITION ON THE EDA LOAN WOULD EFFECTIVELY RESULT IN AN INDIRECT GUARANTEE OF A TAX-EXEMPT OBLIGATION."

IN OUR VIEW, THIS ARRANGEMENT DOES NOT EXCEED EDA'S STATUTORY AUTHORITY SINCE THE PROJECT IS NOT FUNDED UNDER EDA'S LOAN GUARANTEE AUTHORITY. HOWEVER, WE BELIEVE THAT IT WOULD BE CONTRARY TO THE POLICIES ESTABLISHED BY CIRCULAR NO. A-70 WITH RESPECT TO THE GUARANTEEING OF TAX-EXEMPT OBLIGATIONS. IN FACT, ONE OF THE EXAMPLES CONTAINED IN OMB'S LETTER OF DECEMBER 5, 1980, TO FMHA, OF ACTIONS THAT WOULD BE CONTRARY TO THE POLICY ESTABLISHED BY CIRCULAR NO. A-70 WAS THE IDENTICAL SITUATION IN WHICH "GUARANTEES OF LOANS FOR PROJECTS THAT ARE FINANCED IN PART BY TAX-EXEMPT BONDS *** ARE SUBORDINATED TO THE TAX-EXEMPT SECURITIES."

MOREOVER, IT APPEARS THAT EDA'S ASSISTANCE TO THE CAPITAL HOTEL PROJECT WOULD VIOLATE ITS OWN INTERNAL GUIDELINES WHICH SPECIFICALLY PROVIDE THAT PROJECTS THAT INVOLVE EDA LIEN POSITIONS INFERIOR TO A TAX EXEMPT OBLIGATION ON AN ASSET FINANCED BY EDA ARE NOT ELIGIBLE FOR EDA ASSISTANCE. SEE FINANCIAL ASSISTANCE GUIDELINES FOR THE DEVELOPMENT FINANCE PROGRAM UNDER THE PUBLIC WORKS AND ECONOMIC DEVELOPMENT ACT OF 1965, AS AMENDED, (PUB.L. NO.89-136), PART 3, SECTION 1, PARA. 3. ALTHOUGH THIS TYPE OF INTERNAL AGENCY GUIDELINE, LIKE OMB CIRCULAR NO. A- 70, IS NOT LEGALLY BINDING, AN AGENCY CAN AND SHOULD BE EXPECTED TO ADHERE TO THE POLICIES AND PROCEDURES IT ADOPTS.

FN1 WE NOTE THAT SBA IN ITS RESPONSE TO THIS QUESTION INDICATES THAT ALTHOUGH THE ISSUE HAS ONLY BEEN INFREQUENTLY RAISED, ITS REGULATIONS DO NOT PROHIBIT A LENDER FROM SELLING "PARTICIPATIONS" IN THE UNGUARANTEED PORTION OF A LOAN, PROVIDED SBA ONLY HAS TO DEAL WITH ONE LENDER.