(3) The operating records of the vessel shall reflect normal and satisfactory operation of the vessel's main propulsion and other machinery and equipment commensurate with accepted commercial experience and practice.

(4) The vessel shall be in a good and efficient operating condition and state of repair, commensurate with accepted commercial practice, in Class -1 with the Classification Society and in compliance with the requirements of all applicable regulatory bodies.

(5) The mortgage period shall not exceed twenty years or the balance of the 20-year economic life of the vessel, extended not to exceed five years (if the Secretary finds the reconstruction or reconditioning will so extend the economic life of the reconstructed or reconditioned vessel).

[G.O. 29, Rev., 23 F.R. 384, Jan. 22, 1958, as amended by Amdt. 2, 24 F.R. 10257, Dec. 18, 1959; Amdt. 3, 26 F.R. 4428, May 23, 1961; Amdt. 5, 31 F.R. 4410, Mar. 15, 1966] § 298.5 Additional information; examination of records; inspection of property.

(a) Additional information. The mortgagor, mortgagee, borrower or lender, as the case may be, shall from time to time (both prior to and after the insurance becomes effective) furnish to the Secretary, promptly upon his request, such reasonable, material and pertinent reports, evidence, proof or information, in addition to that furnished in the application or otherwise available to the Secretary, bearing on the eligibility of the mortgage or loan, the economic soundness of the property or project, and other matters pertaining to the mortgage or loan and the insurance thereof by the Secretary, as the Secretary may reasonably deem necessary or appropriate in connection with the performance of his duties and functions under Title XI of the act.

(b) Examination of mortgagor's or borrower's records. The mortgagor or borrower, as the case may be (and each related company in specific cases as required by the Secretary), shall from time to time (both prior to and after the insurance becomes effective) permit the Secretary, upon his request, to make such reasonable, material and pertinent examination and audit of its books,

records and accounts, and to take such information therefrom and make such transcripts or copies thereof, as the Secretary may reasonably deem necessary or appropriate in connection with the performance of his duties and functions under Title XI of the act.

(c) Examination of mortgagee's or lender's records. The mortgagee or lender, as the case may be, shall from time to time (both prior to and after the insurance becomes effective) permit the Secretary, upon his request, to make such reasonable, material and pertinent examination and audit of its records and books of account pertaining to the mortgage or loan and the obligations secured by the mortgage or evidencing the loan and the commitment to insure and/or insurance contract, and to take such information therefrom and make such transcripts or copies thereof as the Secretary may reasonably deem necessary or appropriate in connection with the performance of his duties and functions under Title XI of the act.

(d) Inspection of property. The Secretary shall have access at all reasonable times to all vessels and other property with respect to which the mortgage or loan is or is intended to be executed or made for the purpose of making such inspection as he may deem necessary or appropriate in connection with the performance of his duties and functions under Title XI of the act.

(e) Provisions to be included in documents. Provisions to implement the matters referred to in paragraphs (a), (b), (c) and (d) of this section shall be included in the commitment or commitments to insure, the insurance contract or contracts, the loan agreement, the mortgage and/or the shipyard contract as may be appropriate.

§ 298.6 Prior loans; refinancing.

(a) Insurance of mortgages under section 1106 of act. No mortgage securing a loan or advance made prior to the enactment of Title XI of the act will be insured, and no mortgage will be insured for refinancing in whole or in part any existing mortgage indebtedness except as provided in section 1106 of the act. The insurance of a mortgage for refinancing in whole or in part an insured loan secured by a chattel mortgage shall not be considered as prohibited by sec

tion 1106 of the act or by the preceding sentence. In the case of mortgages insured under said section 1106, the principal amounts of such mortgages, the eligibility requirements of such mortgages, the amounts of insurance, the limits on insurance payable by the Secretary, and other terms, to the extent not specified in the act or the regulations in this part, shall be as determined or approved by the Secretary.

(b) Inclusion of existing mortgage under section 1106 (1) of act. In the case of any mortgage insured for refinancing an existing purchase money mortgage indebtedness under section 1106 (1) of the act, the amount of the mortgage may, subject to the approval of the Secretary, include the unpaid principal balance of the existing mortgage (not to exceed 75 per centum of the purchase price of the vessel or 75 per centum of the Secretary's determination of the fair and reasonable value of the vessel, whichever is the lesser) if the vessel covered thereby is a comparatively new vessel, as determined by the Secretary, purchased by the mortgagor. § 298.7 Actual cost; maximum insurance payable.

(a) When determined. Actual cost for the purpose of loan insurance shall be determined by the Secretary in accordance with sections 1101 (f) and 1104(b) (4) of the act and § 298.2(k) prior to the making of an advance under the loan and the execution of the contract of insurance. Such determination may be revised by the Secretary at any time during the period of construction, reconstruction or reconditioning. Actual cost for the purpose of mortgage insurance shall be determined by the Secretary in accordance with sections 1101 (f) and 1104 (a) (2) of the act and § 298.2 (m) prior to the execution, delivery and recordation of the mortgage and the execution of the contract of insurance. If the insurance contract is prepared and entered into on the basis of an advance determination of the maximum insurance payable, such maximum insurance payable shall be determined by the Secretary in lieu of actual cost in accordance with the proviso to the definition of the term "actual cost" in section 1101 (f) of the

act and § 298.2 (1) or (n), as the case may be (and, if applicable, paragraph (b) of this section), at or prior to the time the contract of insurance is entered into.

(b) Limitation on insurance payable. The Secretary shall not in any event pay as insurance under Title XI of the act in respect of the unpaid principal amount of a loan or mortgage an amount in excess of that permitted under the proviso to the definition of the term "actual cost" in section 1101 (f) of the act, determined in accordance with said section 1101 (f) and with § 298.2 (1) or (n), as the case may be. The maximum insurance payable as aforesaid may include the unpaid principal balance of an existing mortgage covering a comparatively new vessel purchased by the mortgagor and included, in accordance with § 298.6 (b), in a mortgage insured for refinancing under section 1106 (1) of the act.

(c) Mortgage generally insured on basis of maximum insurance payable. Generally, a mortgage shall be insured on the basis of an advance determination of maximum insurance payable, determined as provided in paragraph (b) of this section. However, a mortgage will be insured by the Secretary on the basis of a determination of actual cost under paragraph (a) of this section based on amounts obligated to be paid as well as amounts paid, provided (1) the mortgagor shall have otherwise met all requirements of the act and the regulations in this part and any additional requirements imposed by the Secretary, (2) funds of the mortgagor equal to the mortgagor's share of any amounts included in the Secretary's determination of actual cost but not paid shall have been deposited into an escrow account together with proceeds of the mortgage loan equal to the borrowed portion of said amounts, (3) the documents shall provide for use of the escrow account for payment of deferred amounts within an agreed period and at the expiration of said period for payment to the mortgagor for reimbursement of itself and to the mortgagee for payment on account of the principal of the obligation or obligations secured by the mortgage, respectively, of the ratable amounts remaining in the escrow account representing funds of the mort

gagor and proceeds of the mortgage loan, and (4) the mortgagor shall have prepaid to the mortgagee interest at the mortgage rate on the borrowed portion of the escrow account for the period allowed for payment of the deferred amounts.

§ 298.8 Loans; mortgages.

(a) Nature of loan; loan agreement. The loan may be any loan or advance of credit other than a mortgage (excluding chattel mortgage) loan. It shall be upon such terms and conditions as may be agreed upon between the lender and the borrower and approved by the Secretary and not inconsistent with Title XI of the act or the regulations in this part. The loan shall be guaranteed or secured in such manner as may be agreed upon between the lender and borrower and/or other parties and as may be approved by the Secretary and not inconsistent with the act. The terms and conditions of the loan shall be embodied in an appropriate loan agreement as prescribed or approved by the Secretary.

(b) Nature of mortgage. The mortgage shall be a preferred mortgage as defined in the Ship Mortgage Act, 1920, as amended, or a mortgage which will become a preferred mortgage when recorded and endorsed as required by the Ship Mortgage Act, 1920, as amended. It shall cover the vessel or vessels whose construction, reconstruction or reconditioning is financed under Title XI of the act and, except as otherwise approved by the Secretary, shall be a first and prior lien on said vessel or vessels. The mortgage shall be as prescribed or approved by the Secretary, and the obligations secured thereby shall be otherwise guaranteed or secured in such manner as may be agreed upon between the mortgagor and mortgagee and/or other parties and as may be approved by the Secretary and not inconsistent with Title XI of the act or the regulations in this part, and the status of the mortgage as a preferred mortgage or as a mortgage which will become a preferred mortgage when recorded and endorsed as required by the Ship Mortgage Act, 1920, as amended, shall be established to the Secretary's satisfaction.

(c) Required provisions; shipyard and related contracts. In the case of the insurance of a loan for the construction, reconstruction or reconditioning of a vessel or vessels, or in the case of a

commitment to insure a mortgage on a vessel or vessels to be constructed, reconstructed or reconditioned, the terms and conditions for the performance of the work shall be embodied in an appropriate contract or contracts (or specifications thereof) as prescribed or approved by the Secretary. In the case of vessels for which the Government makes payments of national defense features or construction-differential subsidy, such terms and conditions will be those required in connection with such payments. In the case of other vessels, such terms and conditions will include

(1) Provisions for the furnishing of satisfactory insurance and a satisfactory performance bond by the contractor,

(2) Provisions for the performance of the work substantially in accordance with contract plans and specifications approved by the Secretary; requiring the approval of the Secretary (to be coordinated through the owner but not extending to the adjudication of cost as between the owner and the contractor) of all changes under the contract, such approval to be obtained prior to the commencement of work in the case of any substantial change in the contract plans and specifications or any change in the contract plans and specifications which increases the contract price (except as to the latter where made within any allowance for changes provided in the contract); requiring that the Secretary be furnished the technical data necessary for the approval of changes; and giving the Secretary the right of comment to the owner on working plans during construction in order to properly protect the interests of the Government,

(3) Provision permitting representatives of the Secretary (or an independent naval architect, if approved or required by the Secretary) to have access to the vessel or vessels or other property and to all work being performed by the contractor or contractors at all reasonable times during performance, including but not limited to observing all trials and tests, for the purpose of inspecting and ascertaining that the vessel is being built or has been completed substantially in accordance with contract plans and specifications approved by the Secretary,

(4) Provisions for furnishing to the Secretary (or to an independent naval

architect, to the extent directed by the Secretary) two copies of all working plans, schedules and sketches promptly after approval by the owner and the regulatory bodies concerned, two copies of all correspondence between the contractor, owner and/or regulatory bodies pertaining to plan approval and contract changes promptly after the same is issued, one copy of the vessel's certificates and documents, one copy of the approved inclining experiment if conducted, one copy of all trial and test reports, and one cloth process tracing or microfilm of each of the shipyard working plans, and

(5) Provision for payment for the work in accordance with an agreed schedule but not in conflict with the requirements of paragraph (e) of this section; for the certification by a Construction Representative of the Administration or, if the Secretary so approves or requires, by an independent naval architect of the performance of work for which payments are being made and of the performance of such work substantially in accordance with contract plans and specifications approved by the Secretary before each payment is made (except payments representing advance payments from sources other than the loan); and for the vesting of title to the work in the borrower according to payments made subject only to the lien or other rights of the contractor for additional amounts due and unpaid.

(d) Required provisions; loan agreement and commitment. The loan agreement or the commitment to insure mortgage, as the case may be, shall contain provisions as determined by the Secretary to be appropriate in respect of the matters referred to in paragraph (c) of this section and also requiring—

(1) That the borrower's right, title and interest in, to and under the contract or contracts for the construction, reconstruction or reconditioning (including designing, inspecting, outfitting and equipping) of the vessel or vessels shall be assigned to the lender and its assigns, and that such contracts shall not be modified without the prior written consent of the Secretary,

(2) That the borrower or proposed mortgagor, as the case may be, shall cause records to be kept of all amounts paid by or for its account for the construction, reconstruction or reconditioning (including designing, inspecting, out

fitting and equipping) of the vessel or vessels, and shall furnish in duplicate to the Secretary, as such payments are made, evidence in the form of signed receipts from the contracting party and executed certificates of payment by the borrower or proposed mortgagor, as the case may be, or other evidence satisfactory to the Secretary, of all such payments, together with executed copies of certificates in respect of performance of work referred to in paragraph (c) (5) of this section and, in the case of an insured loan, executed copies of the covering requisition for payment referred to in subparagraph (3) of this paragraph,

(3) In the case of an insured loan, that payments shall not be advanced by the lender except on receipt of appropriate requisitions for payment from the borrower certified by the borrower and accompanied by certified billings from the contracting party or parties and by executed copies of the certificates in respect of performance of work referred to in paragraph (c) (5) of this section (with the approval of the Secretary endorsed thereon if such certificates are by an independent naval architect), and

(4) That the borrower or proposed mortgagor shall furnish to the Secretary at or immediately prior to the time the mortgage is placed on the vessel a certification by the borrower or proposed mortgagor and a statement by an independent certified accountant or firm of accountants of the total amounts paid or obligated to be paid by or for the account of the borrower or proposed mortgagor for the construction, reconstruction or reconditioning (including designing, inspecting, outfitting and equipping) of the vessel or vessels, together with a breakdown of such totals according to items for which paid or obligated to be paid and accompanied by a certificate by a Construction Representative of the Administration or, if the Secretary so approves or requires, by an independent naval architect that all work has been completed substantially in accordance with the contract plans and specifications approved by the Secretary.

(e) Provisions for payment of “actual cost". The loan agreement shall include provisions

(1) For the payment first, from sources other than the loan, by or for the account of the owner, of not less than 122 percent of "actual cost" as determined for the purpose of the loan

and, thereafter, when the aggregate of the payment so made from sources other than the loan and the payments made from the loan equals 50 percent of said "actual cost" (and before any additional payments are made from the loan), a further payment from sources other than the loan in such additional amount as will make the total of such payments equal not less than 25 percent of said "actual cost", and for payment on the same basis in connection with any increase in the previously determined "actual cost",

(2) For payments by the lender direct to the shipyard or other contractors except where the payment is for reimbursement of the borrower for amounts expended by or for the account of the borrower on account of "actual cost" (but excluding reimbursement for payments required under subparagraph (1) of this paragraph): Provided, however, That no payment shall be made by the lender until work representing 121⁄2 percent of "actual cost" shall have been performed and that payments by the lender shall at no time exceed 75 percent of "actual cost" as represented by work performed to the date of the payment,

(3) For payment, from sources other than the loan, by or for the account of the owner, of all the elements of capitalizable cost not included in "actual cost" as such elements become due and payable and in any case prior to the placing of the insured mortgage on the vessel.

(f) Defaults. Provisions governing defaults, the rights and obligations of the parties in respect thereto, and other provisions, as appropriate, shall be included in the mortgage or loan agreement, the contract of insurance and/or the commitment to insure. In the case of any default specified in section 1105 (a) (1) or section 1105 (a) (2) of the act, no demand shall be made prior to the expiration of thirty days after the default and then only if there shall have been a failure on the part of the mortgagor or borrower to remove and remedy the default within said thirty days: Provided, however, That this requirement shall be inapplicable if the Secretary shall have given notice of his intention to terminate the contract of insurance in accordance with said section 1105 (a) (1) or section 1105 (a) (2), as the case may be. Neither the mortgage nor the loan agreement shall impair the right of the

mortgagor or borrower to remedy and remove any default within thirty days after the default, and in no event shall an obligation be imposed on the mortgagor or borrower to pay accelerated principal or increased interest without the prior written consent of the Secretary.

(g) Covenants to Secretary; optional termination of insurance. The loan agreement and the mortgage shall provide that any default arising under the loan agreement or the mortgage solely by reason of the failure of the borrower or mortgagor to perform an obligation to the Secretary thereunder (where such obligation runs only to the Secretary or, if a joint obligation to the Secretary and the lender or mortgagee, where such obligation has been satisfied as to the lender or mortgagee) shall not constitute a default except with the prior written approval of the Secretary. The contract of insurance shall also provide for the termination of insurance at the option of the Secretary for the failure of the lender or mortgagee, as the case may be, to pay premiums received from the borrower or mortgagor and due under the contract of insurance, after written demand therefor by the Secretary, or to perform and comply with specified conditions and covenants of the contract of insurance, after notice of breach is given by the Secretary.

(h) Maintenance, insurance and operation of vessels; other covenants. The mortgage shall include provisions, as appropriate, for the maintenance of the vessel or vessels in class, the maintenance of insurance on the vessel or vessels and the operation of the vessel or vessels in approved trade or trades. The mortgage and/or loan agreement shall also include such other covenants by the mortgagor or borrower as the mortgagee or lender and/or the Secretary shall require.

(1) Financial covenants; general. The imposition of financial covenants upon the borrower or mortgagor under the circumstances of the particular financing is regarded by the Secretary as the initial responsibility of the lender or mortgagee. If the Secretary finds that the proposed loan agreement and/or mortgage contains provisions (including in the case of a mortgage, provisions in respect of the payment, including accelerated payment, of the mortgage indebtedness and the maintenance of