7 CFR § 1951.885 - Loan classifications.

All loans to intermediaries in the Rural Development portfolio will be classified by Rural Development at loan closing and again whenever there is a change in the loan which would impact on the original classification. No one classification should be viewed as more important than others. The uncollectibility aspect of Doubtful and Loss classifications is of obvious importance. However, the function of the Substandard classification is to indicate those loans that are unduly risky which may result in future losses. Substandard, Doubtful and Loss are adverse classifications. The special mention classification is for loans which are not adversely classified but which require the attention and followup of Rural Development. The loans will be classified as follows:

(a) Seasoned loan classification. To be classified as a seasoned loan, a loan must:

(1) Have a remaining principal loan balance of two-thirds or less of the original aggregate of all existing loans made to that intermediary.

(2) Be in compliance with all loan conditions and Rural Development regulations.

(3) Have been current on the loan(s) payments for 24 consecutive months.

(4) Be secured by collateral which is determined to be adequate to ensure there will be no loss on the loan.

(b) Current non-problem classification. This classification includes those loans which have been current for less than 24 consecutive months and are in compliance with the loan conditions and Rural Development regulations, and are not considered to pose a credit risk to Rural Development. These loans would be classified as seasoned but for the “24 months” and “two-thirds” requirements for seasoned loans.

(c) Special mention classification. This classification includes loans which do not presently expose Rural Development to a sufficient degree of risk to warrant a Substandard classification but do possess credit deficiencies deserving Rural Development's close attention because the failure to correct these deficiencies could result in greater risk in the future. This classification would include loans that may be high quality, but which Rural Development is unable to supervise properly because of an inadequate loan agreement, the condition or lack of control over the collateral, failure to obtain proper documentation or any other deviations from prudent lending practices. Adverse trends in the intermediary's operation or an imbalanced position in the balance sheet which has not reached a point that jeopardizes the repayment of the loan should be assigned to this classification. Loans in which actual, not potential, weaknesses are evident and significant should be considered for a Substandard classification.

(d) Substandard classification. This classification includes loans which are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans in this classification must have a well defined weakness or weaknesses that jeopardize the payment in full of the debt. If the deficiencies are not corrected, there is a distinct possibility that Rural Development will sustain some loss.

(e) Doubtful classification. This classification includes those loans which have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, highly questionable and improbable.

(f) Loss classification. This classification includes those loans which are considered uncollectible and of such little value that their continuance as loans is not warranted. Even though partial recovery may be effected in the future, it is not practical or desirable to defer writing off these basically worthless loans.