[Federal Register: July 27, 2004 (Volume 69, Number 143)]
[Rules and Regulations]
[Page 44576-44580]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27jy04-2]
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DEPARTMENT OF AGRICULTURE
Farm Service Agency
7 CFR Part 762
RIN 0560-AG53
Guaranteed Loans--Rescheduling Terms and Loan Subordinations
AGENCY: Farm Service Agency, USDA.
ACTION: Final rule.
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SUMMARY: The Farm Service Agency (FSA) is amending its regulations
governing servicing of loans made under the guaranteed farm loan
program. FSA is making these changes as a result of input from program
participants and problems in the administration of current provisions.
This rule will allow loans to be rescheduled with balloon payments
under certain circumstances and allow the approval of certain low-risk
subordinations at the field office level instead of the National
Office. It will also allow lenders to make debt installment payments in
accordance with lien priorities, payment due dates, and clarify that
packager and consultant
[[Page 44577]]
fees for servicing of guaranteed loans are not covered by the
guarantee.
DATES: This rule is effective August 26, 2004.
FOR FURTHER INFORMATION CONTACT: Joseph Pruss, Senior Loan Officer,
Farm Service Agency; telephone: (202) 690-2854; Facsimile: (202) 690-
1196; e-mail: Joseph.Pruss@wdc.usda.gov.
SUPPLEMENTARY INFORMATION:
Background
FSA published a proposed rule on August 19, 2003, (68 FR 49723-
49726) to amend its regulations governing the servicing of loans made
under the guaranteed farm loan program. The comment period ended
October 20, 2003.
Summary of Public Comments
Comments addressed all of the issues related to the proposed rule.
FSA considered the comments and incorporates several of the
recommendations and suggestions in this rule. The following is a review
of the comments and the changes made in the final rule in response to
the comments.
Payment of Loan Installments
FSA proposed to allow loan installments to be paid in accordance
with lien priority, due date and cash flow projection in the normal
course of business, but when it became evident that the borrower would
be unable to make all installments, the lender had to apply payments to
the guaranteed loan first. One respondent suggested that the proposal
was too subjective and the Agency should adopt a policy that would
require loans to be paid according to lien priority, and any exceptions
would require Agency approval. The respondent also pointed out that the
risk of guaranteed loans not being paid in an orderly manner is not
only at liquidation and that the determination of when guaranteed loan
payments would be required to be made first was extremely subjective.
Two respondents generally agreed with the proposal, but one pointed
out, however, that the risk to the government is not only at
liquidation and questioned whether the proposal would work in practice.
One respondent believed the rule should specify that a lender must
apply payments to the loan as the borrower specified. Another
respondent stated that the normal course of business rule should be
expanded to include all situations.
The Agency agrees that the proposal was too subjective and that
loan installments should be paid in lien priority in certain cases
while understanding that exceptions are required so that lenders can
conduct routine business practices. As a result, the agency will
require a lender to pay loan installments in the order of lien priority
only when the lender receives a payment from the sale of encumbered
property. This policy is consistent with current practice under state
laws. In other situations, where payment is received from the sale of
unencumbered property or other sources of income, loan installments
will be paid in order of their due date. This is consistent with
typical routine business practices. This objective and simple policy
should be consistently carried out by lenders. Any deviations will
require Agency approval.
Regarding the comment that would allow the borrower to tell the
lender which loan a payment should be applied to, the Agency has always
maintained that the lender/borrower relationship is not something the
Agency should interfere in, as the Agency has no authority or
inclination to specify that a lender has to apply payments to whichever
loan their borrower chooses. Based on the comments received, which were
generally supportive, the Agency will implement the proposed change as
modified.
Approval of Subordinations
FSA proposed to place authority for subordination approval at the
local level when the lender is refinancing existing debt secured by a
lien superior to the guaranteed loan and no additional debt is being
incurred. Two respondents supported the proposal, but suggested that
the Agency allow additional subordinations to be approved at the local
and State level. The proposal was fully supported by four respondents.
The Agency will not adopt additional changes to allow all
subordinations of guaranteed loans to be approved at local and State
levels. Subordinating guaranteed loan security is rarely in the
Government's best interest and, therefore, it is necessary for top
level management to be informed of all requests where additional debt
is being incurred by guaranteed borrowers. Based on the unanimous
support of the other respondents, the Agency adopts its proposed policy
on subordinations as final.
Payment of Interest on Repurchased Loans
FSA proposed to correct wording concerning interest payments to
specify that the holder, not the lender, would request Agency
repurchase of the loan after unsuccessfully requesting the lender to do
so. Two comments were received regarding this change. One supported the
change, while the other acknowledged that it is simply a correction in
wording. The present language has the words ``lender'' and ``holder''
reversed, and the change will correct the error. The proposed
correction is adopted in the final rule as a result of the comments
received.
Balloon Payments
The proposal to allow balloon payments in restructuring guaranteed
loans generated several comments, mostly positive. One respondent was
opposed to all balloon payments, and viewed them as a way to guarantee
nonpayment of the loan. Another respondent generally supported the
proposal but did not believe it was necessary to have an appraisal
showing the loan would be secured when the balloon payment was due.
This respondent also suggested that the Agency set a minimum number of
years before the balloon payment comes due and that a lien on all
assets be taken when restructuring with balloon payments. One
respondent supported the proposal but was concerned that lenders use of
appraisals would vary widely. One respondent wondered if lenders, at
the time of the restructuring, would have to develop a positive cash
flow projection for the time when the balloon payment came due and
noted that foundation livestock herds were not specifically discussed.
Three respondents fully supported the proposal. Another respondent
also supported the proposal, but recommended that the appraisal
requirement should only apply to loans with an unequal or graduating
amortization, which would be more risky to the Agency.
The Agency believes the balloon payment option is a necessary tool
that lenders can use to salvage operations that would otherwise be
liquidated. With the proper controls in place, this servicing option
can be very beneficial to users of the guaranteed loan program. In
response to concerns regarding lenders conducting a wide range of
appraisals, FSA has added more direction in Sec. 762.145(b)(4). The
paragraph explains that the projected value for real estate will be
derived from a current appraisal adjusted for depreciation of
depreciable property such as buildings and other improvements that
occurs until the balloon payment is due. A current appraisal is
required for equipment security. The lender will project the value of
the equipment at the time the
[[Page 44578]]
balloon payment is due based on the remaining life of the equipment or
the depreciation schedule on the borrower's Federal income tax return.
The Agency does not agree that appraisals are not necessary, or should
be required only when there is unequal or graduating amortization. An
appraisal will always be necessary when restructuring with a balloon
payment in order to provide some assurance that there is adequate
security for the debt. Lenders, however, will not have to develop long-
term cash flow projections as the volatility of the agricultural sector
and changing nature of individual farming operations often render long-
term projections meaningless.
Foundation livestock was not mentioned in the proposed rule because
balloon payments for guaranteed loans secured by livestock or crops
alone will not be authorized. Unlike real estate and equipment,
livestock and crops are perishable, and balloon payments on such
operations are extremely risky.
The Agency does agree with the suggestion that it should set a
minimum number of years before the balloon payment comes due, the time
depending on the type of loan being restructured. Therefore, Sec.
762.145 provides that balloon payments for loans secured by real estate
will have a minimum of 5 years before the balloon comes due. For other
loans, there will be minimum of 3 years. If statutory term limits
prevent such terms, balloon payments will not be used. As suggested, to
further protect the Government's interest when a balloon payment is set
up, a lien on all assets will be required.
Revised Security Requirements for Loans Rescheduled With Balloon
Payments
FSA proposed to require loans restructured with balloon payments to
be fully secured when the balloon payment became due. Three comments
were received addressing the issue of security requirements. One
respondent agreed with the requirements, but believes they should be
more specific as to how a lender is to arrive at the value of the
security used to protect the balloon installment. Two respondents fully
supported the proposal, while one questioned if Preferred Lender
Program lenders would be allowed to use their in-house appraisals to
support the fully secured claim.
Additional guidance has been provided on appraisal values as
discussed above. Current Agency policy on lenders not being allowed to
use in-house real estate appraisals will not change. The potential for
conflict of interest is too great to entertain such a proposal.
Payment of Packager and Outside Consultant Fees
Five comments, all positive, were received regarding the proposed
clarification that packager fees and outside consultant fees for
servicing are not covered by the guarantee. One respondent believed the
Agency should allow for the payment of in-house fees. The respondent
stated that inside legal counsel may have knowledge of cases, which
could actually make the process more efficient, thereby saving on legal
expenses. Two respondents support the proposal, but believe it should
be clarified to state that the costs also cannot be passed on to the
borrower.
No changes will be made in the final rule as a result of these
comments. The Agency agrees in theory that inside legal counsel's
knowledge of individual cases may lead to greater efficiency, and the
intent of the regulation is that, if available, this counsel may be
used by the lender. However, the guarantee was never intended to cover
costs incurred by employees of the lender, including staff legal
counsel. The Agency disagrees that it should regulate what fees lenders
can pass on to their customers. It is not the mandate of the Agency to
dictate terms between lenders and their customers. However, neither is
the guarantee intended to cover lender labor costs for services the
lender agreed to perform when obtaining the guarantee. Therefore, the
Agency will not cover these costs when passed on to the lender's
borrower as part of any loss claim.
Lender Bids at Foreclosure Sales
The proposal to specify the amount a lender will bid at foreclosure
sales generated numerous comments. FSA proposed that the lender's bid
would be the lesser of the net recovery value plus the prior lien
amount, and the unpaid balance of the loan plus the prior lien amount.
One respondent fully supported the proposal and believes it is good
business practice and is consistent with what is done for the Agency's
direct loans.
Two respondents were in favor of the proposal, but believe it
should be strengthened by stating that the limits are actual limits and
lenders will not be able to claim losses due to excess bids. They
stated that, as written, there are too many maybes, and the wording
should state that loss claims will be reduced, not that they may be
reduced due to improper bidding. One comment suggested that the
proposed change would not always lead to the result that was
anticipated. It was pointed out that a bid is sometimes made subject to
a prior lien, in which case the lender would not want to bid the net
recovery value. It was also pointed out that the proposal does not
contain a definition of net recovery value, which could lead to
confusion. The definition of net recovery value is included among the
definitions in 7 CFR 762.102.
One respondent requested that the Agency reconsider the proposal.
The respondent believes the lender knows best the individual
circumstances of each loan and could best determine the amount they
should bid and that the proposal could actually have the opposite
result of what is intended. Also, since several states have their own
unique laws regarding foreclosures, redemption, and time periods which
a lender must consider, the proposal would possibly hamper the lender's
liquidation of the account.
Another respondent also believes the proposal is too restrictive
and limits the flexibility provided by the current regulations. The
respondent provided several examples of situations where bidding as
proposed may not be in the best interest of the lender, the Government,
or the borrower, and may lead to a borrower losing their right of first
refusal. The respondent recommended that the final rule give the
creditor the option to bid net recovery value, appraised value, or
investment, whichever is the most advantageous in the particular
circumstance, as approved by the Agency's State Office. If a prior lien
has a very low interest rate, it would not make sense to require the
lender to pay that debt off when acquiring the property, especially if
there is a redemption period involved. Also, in some states, it is very
difficult to obtain a deficiency judgment, and bidding the net recovery
value or appraised value has not been a common practice.
After considering the comments received, the Agency has determined
that it will remove the proposal regarding bidding at foreclosure
sales. No changes will be made to the current language in 7 CFR 762.149
regarding this item. In the vast majority of cases, lenders make
reasonable bids at foreclosure sales, and it is a rare occurrence when
a lender makes an inaccurate bid, leading to a large increase in loss
to the lender upon final disposition of the collateral. In those cases,
the Agency will continue to use the option to reduce or completely deny
loss claims as necessary and appropriate. Differences in state laws
regarding foreclosure proceedings, redemption laws, and obtaining
[[Page 44579]]
deficiency judgments make it difficult to cover all possible scenarios
in one rule. It would also reduce a lender's options and flexibility in
servicing loans.
Executive Order 12866
This rule has been determined to be not significant and was not
reviewed by the Office of Management and Budget under Executive Order
12866.
Regulatory Flexibility Act
The Agency certifies that this rule will not have a significant
economic effect on a substantial number of small entities because it
does not require any specific actions on the part of the borrower or
the lenders. The Agency, therefore, is not required to perform a
Regulatory Flexibility Analysis as required by the Regulatory
Flexibility Act, Public Law 96-534, as amended (5 U.S.C. 601). This
rule does not impact small entities to a greater extent than large
entities.
Environmental Evaluation
The environmental impacts of this final rule have been considered
in accordance with the provisions of the National Environmental Policy
Act of 1969 (NEPA), 42 U.S.C. 4321 et seq., the regulations of the
Council on Environmental Quality (40 CFR parts 1500-1508), and the FSA
regulations for compliance with NEPA, 7 CFR part 1940, subpart G. FSA
concluded that the rule does not require preparation of an
environmental assessment or Environmental Impact Statement.
Executive Order 12988
This rule has been reviewed in accordance with E.O. 12988, Civil
Justice Reform. In accordance with that Executive Order: (1) All State
and local laws and regulations that are in conflict with this rule will
be preempted; (2) no retroactive effect will be given to this rule
except that lender servicing under this rule will apply to loans
guaranteed prior to the effective date of the rule; and (3)
administrative proceedings in accordance with 7 CFR part 11 must be
exhausted before requesting judicial review.
Executive Order 12372
For reasons contained in the Notice related to 7 CFR part 3015,
subpart V (48 FR 29115, June 24, 1983) the programs and activities
within this rule are excluded from the scope of Executive Order 12372,
which requires intergovernmental consultation with state and local
officials.
Unfunded Mandates
This rule contains no Federal mandates, as defined by title II of
Unfunded Mandates Reform Act of 1995 (UMRA), Public Law 104-4, for
State, local, and tribal governments or the private sector. Therefore,
this rule is not subject to the requirements of sections 202 and 205 of
UMRA.
Executive Order 13132
The policies contained in this rule do not have any substantial
direct effect on states, on the relationship between the national
government and the states, or on the distribution of power and
responsibilities among the various levels of government. Nor does this
rule impose substantial direct compliance costs on state and local
governments. Therefore, consultation with the states is not required.
Paperwork Reduction Act
The amendments to 7 CFR part 762 contained in this rule require no
revisions to the information collection requirements that were
previously approved by OMB under control number 0560-0155.
Federal Assistance Programs
These changes affect the following FSA programs as listed in the
Catalog of Federal Domestic Assistance: 10.406 Farm Operating Loans;
10.407 Farm Ownership Loans.
List of Subjects in 7 CFR part 762
General--Agriculture, Loan programs--Agriculture.
0
Accordingly, 7 CFR is amended as follows:
PART 762--GUARANTEED FARM LOANS
0
1. The authority citation for part 762 continues to read as follows:
Authority: 5 U.S.C. 301; 7 U.S.C. 1989.
0
2. Amend Sec. 762.140 by revising paragraph (d) to read as follows:
Sec. 762.140 General servicing responsibilities.
* * * * *
(d) Loan installments. When a lender receives a payment from the
sale of encumbered property, loan installments will be paid in the
order of lien priority. When a payment is received from the sale of
unencumbered property or other sources of income, loan installments
will be paid in order of their due date. Agency approval is required
for any other proposed payment plans.
* * * * *
0
3. Amend Sec. 762.142 by redesignating paragraph (c)(3)(ii) as
(c)(3)(iii) and adding new paragraph (c)(3)(ii) to read as follows:
Sec. 762.142 Servicing related to collateral.
* * * * *
(c) * * *
(3) * * *
(ii) The lender may, with written Agency approval, subordinate its
interest in basic security in cases where the subordination is required
to allow another lender to refinance an existing prior lien, no
additional debt is being incurred, and the lender's security position
will not be adversely affected by the subordination.?>
* * * * *
0
4. Amend Sec. 762.144 by revising paragraph (c)(3)(iii) to read as
follows:
Sec. 762.144 Repurchase of guaranteed portion from a secondary market
holder.
* * * * *
(c) * * *
(3) * * *
(iii) In the case of a request for Agency purchase, the Agency will
only pay interest that accrues for up to 90 days from the date of the
demand letter to the lender requesting the repurchase. However, if the
holder requested repurchase from the Agency within 60 days of the
request to the lender and for any reason not attributable to the holder
and the lender, the Agency cannot make payment within 30 days of the
holder's demand to the Agency, the holder will be entitled to interest
to the date of payment.
* * * * *
0
5. Amend Sec. 762.145 by revising paragraphs (b)(4) and (b)(7) to read
as follows:
Sec. 762.145 Restructuring guaranteed loans.
* * * * *
(b) * * *
(4) Loans secured by real estate and/or equipment can be
restructured using a balloon payment, equal installments, or unequal
installments. Under no circumstances may livestock or crops alone be
used as security for a loan to be rescheduled using a balloon payment.
If a balloon payment is used, the projected value of the real estate
and/or equipment security must indicate that the loan will be fully
secured when the balloon payment becomes due. The projected value will
be derived from a current appraisal adjusted for depreciation of
depreciable property, such as buildings and other improvements, that
occurs until the balloon payment is due. For equipment security, a
current appraisal is required. The lender is required to project the
security value of the equipment at the time the balloon payment is due
based
[[Page 44580]]
on the remaining life of the equipment, or the depreciation schedule on
the borrower's Federal income tax return. Loans restructured with a
balloon payment that are secured by real estate will have a minimum
term of 5 years, and other loans will have a minimum term of 3 years
before the scheduled balloon payment. If statutory limits on terms of
loans prevent the minimum terms, balloon payments may not be used. If
the loan is rescheduled with unequal installments, a feasible plan, as
defined in Sec. 762.102(b), must be projected for when installments
are scheduled to increase.
* * * * *
(7) The lender's security position will not be adversely affected
because of the restructuring. New security instruments may be taken if
needed, but a loan does not have to be fully secured in order to be
restructured, unless it is restructured with a balloon payment. When a
loan is restructured using a balloon payment the lender must take a
lien on all assets and project the loan to be fully secured at the time
the balloon payment becomes due, in accordance with paragraph (b)(4) of
this section.
* * * * *
0
6. Amend Sec. 762.149 by adding paragraph (d)(3), and amending
paragraph (i)(2) by adding a new last sentence to read as follows:
Sec. 762.149 Liquidation.
* * * * *
(d) * * *
(3) Packager fees and outside consultant fees for servicing of
guaranteed loans are not covered by the guarantee, and will not be paid
in an estimated loss claim.
* * * * *
(i) * * *
(2) * * * Packager fees and outside consultant fees for servicing
of guaranteed loans are not covered by the guarantee, and will not be
paid in a final loss claim.
* * * * *
Signed at Washington, DC, on July 2, 2004.
James R. Little,
Administrator, Farm Service Agency.
[FR Doc. 04-17046 Filed 7-26-04; 8:45 am]
BILLING CODE 3410-05-P