working capital and net worth) adequate to safeguard the interests of the United States, no further conditions will be imposed by the Secretary. However, if the Secretary finds that the loan agreement and/or mortgage does not contain such provisions, then the Secretary will require the inclusion of provisions deemed by him to be adequate for this purpose. These will include provisions as specified in paragraphs (j), (k) and (1) of this section or such further or alternate provisions as the Secretary may deem appropriate in the particular case, such as provisions relating to payment of the mortgage indebtedness, payment of crews' wages when due and additional provisions in respect of maintenance of working capital and net worth.

(j) Reserve fund. In the case of a mortgage given by a mortgagor who does not hold an operating-differential subsidy agreement and if the Secretary finds that the mortgage does not contain provisions adequate to safeguard the interests of the United States, the mortgage shall include a requirement that the net income of the mortgaged vessel or vessels for each fiscal year of the mortgagor (after all applicable costs and expenses, including reasonable allocation of overhead and provision for Federal income taxes, but before provision for depreciation) determined in accordance with the system of accounts prescribed in General Order 22 (Revised), amended (Part 282 of this chapter) to the extent applicable, and to the extent not applicable, in accordance with sound accounting principles, be treated or aplied, within 120 days after the end of each fiscal year, as follows (in the order named and to the extent available):

as

(1) First there shall be deducted an amount equal to the principal amount of the obligation or obligations secured by the mortgage or mortgages, as the case may be, on the vessel or vessels required to be paid by the mortgagor during such fiscal year (other than from the fund referred to in subparagraph (2) of this paragraph), plus an amount (to be specified in the mortgage) representing a reasonable return on the greater of (1) the mortgagor's investment in the vessel or vessels (and related necessary fixed assets as approved by the Secretary) at the time of execution of the mortgage exclusive of all borrowed capital or (ii) the sum of subparagraphs (1) and (2) of § 298.4 (n);

(2) If any balance remains, an amount equal to one year's pro rata share of the original principal amount of the obligation or obligations secured by the mortgage or mortgages, as the case may be, on the vessel or vessels shall be deposited by the mortgagor into a fund satisfactory to the Secretary, the withdrawal from which shall require the countersignature of the Secretary but whose countersignature shall not be withheld if the disbursement is being made for any purpose authorized by the terms of the mortgage or otherwise approved by the Secretary; and

(3) If any balance remains, an amount equal to 50 per centum thereof shall be deposited into the fund referred to in subparagraph (2) of this paragraph, subject to withdrawal as therein provided.

Any balance in the fund referred to in subparagraphs (2) and (3) of this paragraph, whether cash, securities or obligations, shall constitute and be held as collateral for the obligation or obligations secured by the mortgage.

(k) Covenants regarding working capital and net worth. In the case of a mortgage given by a mortgagor who does not hold an operating-differential subsidy agreement and if the Secretary finds that the mortgage does not contain provisions adequate to safeguard the interests of the United States, the mortgage shall include a requirement that so long as the obligation or obligations secured by the mortgage shall remain unpaid,

(1) No capital shall be withdrawn; (2) No share capital shall be redeemed or converted into debt;

(3) No dividend shall be paid;

(4) No loan or advance (except advances to cover current expenses of the mortgagor) shall be made, either directly or indirectly, to any stockholder, director, officer, or employee of the mortgagor or to any related company;

(5) No investment shall be made in the securities of any related company;

(6) No indebtedness to any stockholder, director, officer, or employee of the mortgagor or to any related company existing on the date of execution and delivery of the mortgage and having a stated maturity of more than one year from such date, shall be repaid in whole or in part;

(7) No salary (including the value or amount of any bonus, commission or

other form of direct compensation) at a rate in excess of $25,000.00 per annum shall be paid; and

(8) No fixed assets shall be required other than those required for the normal maintenance and operation of any vessel or vessels owned by the mortgagor;

if, after such transaction or transactions and after excluding any amount or amounts otherwise required to be maintained or set aside by the mortgagor for other purposes pursuant to any law or regulation or any covenant or agreement by which the mortgagor is bound, the amount of the mortgagor's working capital (determined in accordance with generally accepted accounting principles) would be less than the sum of subparagraphs (1), (2), (3), and (4) of § 298.4 (k) of this part, or the amount of the mortgagor's net worth (defined in § 298.4(n)) would be less than the minimum stated in § 298.4(n) or (if said net worth shall be in excess of the then outstanding principal balance of the mortgage by more than 10 per centum) an amount equal to 110 per centum of the principal balance of the mortgage from time to time outstanding, provided that the mortgagor shall have requested and the Secretary shall have given his prior written consent to a reduction to the latter amount.

(1) Covenant regarding termination of subsidy agreement. In the case of a mortgage given by a mortgagor who holds an operating-differential subsidy agreement and if the Secretary finds that the mortgage does not contain provisions adequate to safeguard the interests of the United States, the mortgage shall include a requirement that the termination or expiration of the operating-differential subsidy agreement when not immediately replaced (without interval) by another operating-differential subsidy agreement shall be an event of default under the mortgage.

(m) Provisions in case of multiple vessels. When the property with respect to which the mortgage or loan is executed or made consists of two or more vessels or other units, the mortgage or loan agreement, the commitment to insure and/or the contract of insurance shall contain provisions as appropriate, setting forth the extent to which the same shall be effective and other related matters in the event less than all of said vessels or units shall have, during the continuance of the commitment to insure or

of the insurance, become the subject of actual or constructive total loss, been requisitioned for title, or been sold or otherwise disposed of.

(n) Other required provisions. Provisions with respect to

(1) The amendment or supplementation of the mortgage and the obligations secured thereby or the insured loan and the obligations evidencing such loan, including all documents in connection therewith, and the waiver of or consent to defaults of the mortgagor or borrower thereunder,

(2) The release or compromise of claims under the mortgage or loan agreement against the mortgagor or borrower,

(3) The sale, assignment or transfer of the mortgage or loan agreement and the obligations secured by the mortgage or evidencing the loan or the vessel or vessels or other property with respect to which the mortgage or loan is executed or made, or the mortgage or charter of said vessel or vessels or other property,

(4) The enforcement or exercise by the mortgagee or lender of any right, power or remedy pursuant to the mortgage or the loan agreement,

(5) The consent by the Secretary to any of the foregoing,

(6) The furnishing by the lender or mortgagee to the Secretary, at the time of each advance under the loan or mortgage, of a statement, in duplicate, of the amount of the advance, the date of such advance, and the total amount advanced to date,

(7) The furnishing by the lender or mortgagee to the Secretary, at the time of each payment under the loan or mortgage, of a statement, in duplicate, of the payment made, including the amount applied to the payment of interest, the amount applied to the payment of principal, and the date of application, and

(8) The maintenance of the United States citizenship of the mortgagee, shall be included in the mortgage or loan agreement, the commitment to insure, the contract of insurance and/or other documents in connection therewith, as may be appropriate. Each successor or assign of the mortgagor, mortgagee, borrower or lender, as the case may be, shall be subject to the eligibility requirements of the act and the regulations in this part and to the approval of the Secretary (except as to the latter, to the extent that advance approval may be pro

vided in any of the aforementioned documents).

(0) Assignment to Secretary. In the event an assignment of the mortgage and of the obligations secured by the mortgage or of the loan agreement and the obligations evidencing the loan shall be tendered to the Secretary, the assignment shall be as prescribed or approved by the Secretary and annexed to the contract of insurance, the mortgage of the loan agreement, or the obligations secured by the mortgage or evidencing the loan, as the case may be, and shall be dutly executed by or on behalf of the mortgagee or lender and proper evidence of such execution shall accompany the assignment. Such assignment shall include the assignment to the Secretary of all collateral or security for the mortgage or the obligations secured by the mortgage or the loan agreement or the obligations evidencing the loan, as the case may be, and all policies of insurance held by the mortgagee or lender pursuant to the mortgage or loan agreement, as the case may be.

(p) Restriction on separate collateral. Unless otherwise approved by the Secretary, the mortgagee or lender shall not at any time require or accept any collateral, security, note(s), obligation(s) or debt(s) in respect of an insured mortgage or loan except such as is subject to assignment to the Secretary upon demand for payment of insurance pursuant to the contract of insurance.

(q) Interest in excess of 5 percent. If the mortgage is to secure bonds, notes or other obligations bearing interest (exclusive of premium charges for insurance) at a rate in excess of 5 per centum per annum on the amount of the unpaid principal, the mortgagor and mortgagee shall furnish the Secretary with evidence showing that in the particular area or under the special circumstances prevailing the mortgage or lending market demands it. The same requirement shall apply to loans with corresponding interest rates.

[G.O. 29, Rev., 23 F.R. 384, Jan. 22, 1958, as amended by Amdt. 3, 26 F.R. 4428, May 23, 1961]

§ 298.9 After assignment.

(a) Rights of Secretary, mortgagee and mortgagor. In the event the Secretary shall accept an assignment of a mortgage and the obligation or obligations secured by the mortgage, and any collateral or security therefor and poli

cies of insurance held by the mortgagee pursuant to the mortgage upon the default of the mortgagor pursuant to section 1105(a)(1) of the act and the contract of insurance

(1) The Secretary shall have (in addition to such other rights or remedies, if any, as he may have) the right, in his discretion, to take any and all action authorized by sections 1105 (c) (1) and 1105 (d) of the act and, to the extent not in express conflict with the action authorized by said sections 1105 (c) (1) and 1105 (d), or with this section, any and all action provided for in or authorized or permitted by or in respect of the mortgage and the obligation or obligations secured by the mortgage, and any collateral or security therefor and policies of insurance maintained by the mortgagor pursuant to the mortgage (including all action provided for in or authorized or permitted by or in respect of any or all said documents by the mortgagee, by the Secretary, or by the Secretary as assignee of the mortgagee); and the interest of the Secretary as the insurer of the mortgage and as assignee of the mortgagee, including his interest for the purpose of asserting, pursuing or enforcing said rights and remedies, shall be as provided in paragraph (c) of this section;

(2) In the event of an actual or constructive total loss or an agreed or compromised total loss or a requisition of title to or use of the vessel or vessels (or any of them) or other property covered by the mortgage, all insurance or other payments therefor shall be paid to the Secretary and shall be applied by the Secretary in accordance with the interest of the Secretary as provided in paragraph (c) of this section and, if any balance remains, in accordance with the interest of the mortgagor (or other party in interest) as provided in paragraph (d) of this section;

(3) The Secretary shall have the right to pursue to final collection all claims arising under or in respect of the mortgage or the obligation or obligations secured thereby, or any collateral or security therefor or policies of insurance maintained by the mortgagor pursuant to the mortgage, against the mortgagor or other parties liable thereunder;

(4) The mortgagee shall have no further rights or remedies under or in respect of, or interest in, the mortgage or the obligation or obligations secured

thereby, or any collateral or security therefor or policies of insurance maintained by the mortgagor pursuant to the mortgage, or the contract of insurance, or the vessel or vessels or other property covered by the mortgage, or any cash, securities or other property which may at any time be collected, received, realized or held by or for the Secretary (or others) in respect thereof, but the mortgagee shall remain obligated to comply with the provisions of section 1105 (c) (1) of the act applicable to mortgagees; and

(5) The mortgagor (or other party in interest) shall have (in addition to such other rights or remedies, if any, as it may have) such rights as are provided for the mortgagor (or other party in interest) in sections 1105 (c) (1) and 1105 (d) of the act and, to the extent not in express conflict with said sections 1105 (c) (1) and 1105 (d), or with this section, in the mortgage and the obligation or obligations secured thereby, and any collateral or security therefor and policies of insurance maintained by the mortgagor pursuant to the mortgage; and the interest of the mortgagor (or other party in interest), including its interest for the purpose of asserting, pursuing or enforcing said rights and remedies, shall be as provided in paragraph (d) of this section: Provided, however, That the rights and interest of the mortgagor (or other party in interest) shall at all times be subordinate to, and not in derogation of, the rights and interest of the Secretary, and that all property purchased by the Secretary at foreclosure proceedings or other public sale shall be free of any rights or interest of the mortgagor (or other party in interest).

(b) Rights of Secretary, lender and borrower. In the event the Secretary shall accept an assignment of a loan agreement and the obligation or obligations evidencing a loan, and any collateral or security therefor and policies of insurance held by the lender pursuant to the loan agreement upon the default of the borrower pursuant to section 1105 (a) (2) of the act and the contract of insurance

(1) The Secretary shall have (in addition to such other rights or remedies, if any, as he may have) the right, in his discretion, to take any and all action authorized by sections 1105 (c) (2) and 1105 (d) of the act and, to the extent

not in express conflict with the action authorized by said sections 1105 (c) (2) and 1105 (d), or with this section, any and all action provided for in or authorized or permitted by or in respect of the loan agreement and the obligation or obligations evidencing the loan, and any collateral or security therefor and policies of insurance maintained by the borrower pursuant to the loan agreement (including all action provided for in or authorized or permitted by or in respect of any or all said documents by the lender, by the Secretary or by the Secretary as assignee of the lender); and the interest of the Secretary as the insurer of the loan and as assignee of the lender, including his interest for the purpose of asserting, pursuing or enforcing said rights and remedies, shall be as provided in paragraph (c) of this section;

(2) In the event of an actual or constructive total loss or an agreed or compromised total loss or a requisition of title to or use of the vessel or vessels (or any of them) or other property in respect of which the loan is made, all insurance or other payments therefor shall be paid to the Secretary and shall be applied by the Secretary in accordance with the interest of the Secretary as provided in paragraph (c) of this section and, if any balance remains, in accordance with the interest of the borrower (or other party in interest) as provided in paragraph (d) of this section;

(3) The Secretary shall have the right to pursue to final collection all claims arising under or in respect of the loan agreement or the obligation or obligations evidencing the loan, or any collateral or security therefor or policies of insurance maintained by the borrower pursuant to the loan agreement, against the borrower or other parties liable thereunder;

(4) The lender shall have no further rights or remedies under or in respect of, or interest in, the loan agreement or the obligation or obligations evidencing the loan, or any collateral or security therefor or policies of insurance maintained by the borrower pursuant to the loan agreement, or the contract of insurance, or the vessel or vessels or other property in respect of which the loan is made, or any cash, securities or other property which may at any time be collected, received, realized or held by or for the Secretary (or others) in respect thereof, but the lender shall remain obligated to comply with the provisions of

section 1105 (c) (2) of the act applicable to lenders; and

(5) The borrower (or other party in interest) shall have (in addition to such other rights or remedies, if any, as it may have) such rights as are provided for the borrower (or other party in interest) in sections 1105 (c) (2) and 1105 (d) of the act and, to the extent not in express conflict with said sections 1105 (c) (2) and 1105 (d), or with this section, in the loan agreement and the obligation or obligations evidencing the loan, and any collateral or security therefor and policies of insurance maintained by the borrower pursuant to the loan agreement; and the interest of the borrower (or other party in interest), including its interest for the purpose of asserting. pursuing or enforcing said rights and remedies, shall be as provided in paragraph (d) of this section: Provided, however, That the rights and interest of the borrower (or other party in interest) shall at all times be subordinate to, and not in derogation of, the rights and interest of the Secretary, and that all property purchased by the Secretary at foreclosure proceedings or other public sale shall be free of any rights or interest of the borrower (or other party in interest).

(c) Interest of Secretary. The interest of the Secretary as insurer of the mortgage or loan and as assignee of the mortgagee or lender, as the case may be (including his interest for the purpose of asserting, pursuing or enforcing any or all of the rights and remedies stated in paragraphs (a) (1), (2) and (3) and (b) (1), (2) and (3) of this section), in the mortgage or loan agreement and the obligation or obligations secured by the mortgage or evidencing the loan, as the case may be, the collateral or security for the mortgage or loan agreement or the obligation or obligations secured by the mortgage or evidencing the loan, as the case may be, the policies of insurance maintained by the mortgagor or borrower pursuant to the mortgage or loan agreement, as the case may be, the vessel or vessels or other property covered by the mortgage or in respect of which the loan is made, as the case may be, and any cash, securities or other property (other than property purchased by the Secretary at foreclosure proceedings or other public sale and any payments or receipts for the requisition, sale, charter, operation or other use or disposition of any

such property, all of which property, payments and receipts shall belong to and vest exclusively in the Secretary) which may at any time be collected, received, realized or held by or for the Secretary (or others) in respect thereof (including payments referred to in paragraphs (a) (2) and (b) (2) of this section), shall be an amount equal to the total of

(1) The accrued and unpaid interest on and the unpaid balance of the principal of the mortgage and the obligation or obligations secured by the mortgage or the loan and the obligation or obligations evidencing the loan as of the date of the Secretary's acceptance of the assignment referred to in paragraph (a) or (b) of this section, as the case may be, together with all interest and other amounts which shall have become due and payable by the mortgagor or borrower on or under the mortgage or loan agreement (or loan), as the case may be, and/or the obligation or obligations secured by the mortgage or evidencing the loan, as the case may be, subsequent to said date,

(2) Premium charges, if any, due to the Secretary under the mortgage or loan agreement, as the case may be, including premium charges due to the Secretary as assignee of the mortgagee or lender, as the case may be, and

(3) The expenses (including administrative expenses) incurred and advances and disbursements made by the Secretary (or the United States) in the assertion, pursuit and/or enforcement of the rights and remedies, or any of them, stated in paragraph (a) or (b) of this section, as the case may be, and all other expenses (including administrative expenses) incurred and advances and disbursements made by the Secretary (or the United States) in connection with the vessel or vessels (or any of them) or other property (other than those incurred or made in respect of any vessel or vessels or other property purchased by the Secretary at foreclosure proceedings or other public sale, after the time of acquisition of title at such foreclosure proceedings or other public sale), or otherwise allocable thereto in amounts determined by the Secretary to be fair and reasonable,

after deducting therefrom all cash payments theretofore made to the Secretary on account of said items; and such interest shall be discharged and satisfied in full before discharging and satisfying