[Federal Register: March 9, 2004 (Volume 69, Number 46)]
[Rules and Regulations]
[Page 10901-10913]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09mr04-1]
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Rules and Regulations
Federal Register
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[[Page 10901]]
FARM CREDIT ADMINISTRATION
12 CFR Parts 609, 611, 612, 614, 615, and 617
RIN 3052-AB69
Electronic Commerce; Organization; Standards of Conduct and
Referral of Known or Suspected Criminal Violations; Loan Policies and
Operations; Funding and Fiscal Affairs, Loan Policies and Operations,
and Funding Operations; Borrower Rights
AGENCY: Farm Credit Administration.
ACTION: Final rule.
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SUMMARY: The Farm Credit Administration (FCA) issues this final rule to
clarify the rights provided in the Farm Credit Act of 1971, as amended
(Act), for loan applicants and borrowers of the Farm Credit System (FCS
or System). The final rule further explains the responsibilities of the
System in providing these rights, responds to comments, and places all
borrower rights provisions in one part of our regulations.
EFFECTIVE DATE: This regulation will be effective 30 days after
publication in the Federal Register during which time either or both
Houses of Congress are in session. We will publish a notice of the
effective date in the Federal Register.
FOR FURTHER INFORMATION CONTACT:
Mark L. Johansen, Policy Analyst, Office of Policy and Analysis, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4479, TTY (703)
883-4434;
or
Joy Strickland, Senior Counsel, Office of General Counsel, Farm Credit
Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-
2020.
SUPPLEMENTARY INFORMATION:
I. Objectives
The objectives of the final rule are to:
Provide the protections required by the Act to
applicants and borrowers with distressed loans;
Avoid placing unnecessary burdens on System
institutions; and
Use plain language in a question-and-answer
format.
II. Background
In the Farm Credit Amendments Act of 1985 \1\ and the Agricultural
Credit Act of 1987,\2\ Congress gave particular rights to borrowers
with distressed loans who borrow from System institutions operating
under titles I and II of the Act. These rights include notice when a
loan becomes distressed; the opportunity to request a restructuring of
a distressed loan; review of certain loan decisions; and the right of
first refusal on purchasing or leasing agricultural real estate
acquired by a System institution through foreclosure or voluntary
conveyance. Collectively, these rights are referred to as borrower
rights. We published a proposed rule (69 FR 5595) on February 4, 2003,
to clarify our expectations for compliance with borrower rights. This
final rule addresses the comments received on the proposed rule.
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\1\ Pub. L. 99-205, 99 Stat. 1678.
\2\ Pub. L. 100-233, 101 Stat. 1568.
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III. Redesignate Portions of Part 614 to Part 617
We are redesignating Sec. 614.4336 and all of subparts L and N of
part 614 to a new part 617 to make the borrower rights rules more
readily identifiable. We are also redesignating Sec. 612.2130 through
Sec. 612.2270 to a new subpart A in part 612 and Sec. 617.1 through
Sec. 617.4 to Sec. 612.2300 through Sec. 612.2303. In addition, we
are making conforming changes to Sec. Sec. 609.910(c), 611.1223(d)(6),
611.1290, 614.4560(d), 615.5280(h), and 615.5290(a) and (b) to reflect
the redesignation. As a result of finalizing this rule before we
finalize the proposed Effective Interest Rate Disclosure rule (68 FR
5587), we are also including amendatory and conforming changes to
Sec. Sec. 611.1223(d)(6), 611.1290, and 614.4560(d) here.
IV. Comments and Our Response
We received 12 comments on our proposed rule from 10 System
associations, one System bank, and the Farm Credit Council (FCC) on
behalf of the Farm Credit institutions they represent. The commenters
generally supported the proposed rule; however, they asked us to change
or clarify certain aspects of our proposal. We discuss those aspects,
the individual comments associated with them, and our responses below.
Those areas of the proposed rule that did not receive comments are
finalized as proposed.
V. General Issues
A. Waiver of Borrower Rights
Four System associations commented that FCA should interpret the
Act to allow the waiver of borrower rights by certain borrowers, such
as large and sophisticated borrowers. They argued that these borrowers
are represented by experienced counsel and are at equal-bargaining
strength with qualified lenders. They also commented that borrower
rights prevent qualified lenders from acting as lead or agent lenders
in commercial transactions.
We continue to believe that waivers of borrower rights should be
authorized only on a limited basis. Wholesale waiver provisions, such
as ones for all large and sophisticated borrowers, would not be
consistent with the intent of Congress.
A System association also commented that prohibiting waivers of
borrower rights deprives borrowers of a potential ``tool'' for use in
negotiating concessions or some other economic value in a workout
situation. The association stated that without this ``tool'' the
institution has no incentive to listen to such loan-servicing
proposals. The institution's position is not in keeping with the
legislative intent of borrower rights. Borrower rights are not
bargaining tools. They are statutory rights designed to protect
borrowers with distressed loans who generally are in unequal-bargaining
positions with qualified lenders. The Act and our regulations do not
consider these rights to be ``tools'' for obtaining concessions in
restructuring discussions, and neither should the System.
B. Borrower Rights and Bankruptcy
Six System associations and the FCC commented that the Bankruptcy
Code supersedes all borrower rights and, therefore, no borrower rights
should be offered once bankruptcy has been filed. The commenters
offered several reasons
[[Page 10902]]
to support this supposition, including (1) A qualified lender may not
always be able to satisfy both the Bankruptcy Code and our regulations
in a way that is meaningful to the borrower; (2) a borrower who
voluntarily files bankruptcy has made an ``election of remedies'' that
effectively waives his rights under the Act; (3) the process of debt
restructuring under borrower rights should not be concurrent with the
process of bankruptcy because it creates a conflict in jurisdiction and
right of review; and (4) the Bankruptcy Code and the Act provide
separate and distinct remedies to the borrowers.
We do not agree that borrower rights and bankruptcy are mutually
exclusive, but that the requirements of the Act and the Bankruptcy Code
can co-exist. Further, the courts have ruled that our borrower rights
provisions apply to debtors in bankruptcy.\3\ Borrower rights under the
Act are generally compatible with filing for reorganization in
bankruptcy, as both laws are designed to resolve a borrower's financial
difficulties. Additionally, bankruptcy reorganization offers various
remedies to borrowers, many that are similar to those provided under
the Act. We believe that borrowers filing for bankruptcy do not waive
their rights under the Act, nor make an election of remedies resulting
in a loss of those rights.
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\3\ In re Kvamme, 91 B.R. 77 (Bankr. D. N.D. 1988) (holding the
Act merely provides for a restructuring opportunity and within
bankruptcy that opportunity is no more nor less than what would be
available to a borrower outside of bankruptcy (emphasis in
original)).
Courts have also held that they are ``not at liberty to pick and
choose among congressional enactments and when statutes are capable
of coexistence, it is the duty of the courts, absent a clearly
expressed congressional intention to the contrary, to regard each as
effective.'' See Morton v. Mancari, 417 U.S. 535, 551 (1974).
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One of the associations commented that borrower rights impede the
bankruptcy plan negotiation process. We do not believe that notifying a
borrower of restructuring opportunities impedes a bankruptcy workout
negotiation. Further, we do not believe that informing a borrower in
bankruptcy, and his counsel, of his restructuring opportunities
conflicts with any bankruptcy provisions. We recognize that combining
borrower rights with bankruptcy reorganization may require additional
effort by qualified lenders, but believe no real conflict exists
between the Act and the Bankruptcy Code.
C. Borrower Rights and Arbitration
The FCC commented that it disagreed with our position that borrower
rights may not be set aside as a result of the arbitration process. The
FCC stated that our position defeats the purpose of arbitration and
creates a disincentive for qualified lenders to use arbitration. We do
not agree with the comment. Arbitrators must work within the framework
of borrower rights and other prevailing laws when reaching decisions.
VI. Section-by-Section Analysis
A. Definitions
1. Adverse Credit Decision [Sec. 614.4440(a) to New Sec. 617.7000]
A System association and the FCC commented that the definition of
an adverse credit decision excludes those situations where a loan
request is approved for less than the amount requested by the
applicant. The System association commented that applicants have been
confused by receiving notices of the adverse credit decision after
agreeing to a loan in a lesser amount. The System association further
pointed out that the Federal Reserve Board's (FRB) Regulation B
provides that a loan in a reduced amount, if accepted by an applicant
and closed, is not an adverse credit action. The System association
further commented that if an applicant does not accept a counter offer
within a set period of time the nonacceptance would be an adverse
credit decision.
The commenter correctly referenced Regulation B and adverse credit
decisions; however, the plain language of section 4.14 of the Act does
not support the commenter's approach. The plain language of the Act
clearly states that making a loan in an amount less than requested is
an adverse credit decision. While it may appear confusing for
applicants to receive a notice of the adverse credit decision after
agreeing to a loan in a lesser amount, we believe this confusion is
minimized by qualified lenders appropriately counseling applicants or
by providing an explanation of the requirements in the notice of the
adverse credit decision.
The FCC commented that our treatment of reduced loan offers is
inconsistent with our discussion in the proposed rule on applications
for restructuring. We stated that Congress expected borrowers and
lenders to negotiate applications for restructuring. If negotiations
result in a denial of the application for restructuring, the borrower
may appear before the credit review committee (CRC). The FCC argues
that we proposed an inconsistent definition of adverse credit decision
because we did not specifically identify approved restructuring plans
that are less than what the borrower applied for as subject to CRC
review. The FCC compared reduced loan requests with reduced
restructuring requests when making this argument. The Act and our
proposed rule treat these two types of actions differently. Sections
4.13B(a)(2) and 4.14(b)(1) of the Act specifically state that
applicants may request CRC reviews of decisions to deny or reduce the
amount of the loan applied for. Conversely, section 4.14(b)(2) provides
CRC review rights for denied loan restructurings, not reductions in
restructuring requests.
2. Application for Restructuring [Sec. Sec. 614.4440(c) and
614.4512(a) to New Sec. 617.7000]
A System association and the FCC commented that they disagreed with
including a borrower's bankruptcy plan of reorganization in our
proposed definition of an application for restructuring. They expressed
concern that including a bankruptcy plan in the definition may make it
difficult or impossible for the qualified lender to comply with all
borrower rights provisions. We agree that the proposed definition
inadvertently created confusion and are removing bankruptcy plans of
reorganization from the definition of ``application for
restructuring.'' However, as a paperwork reduction measure, a proposed
bankruptcy plan may be considered as the application for restructuring
if the bankruptcy filing contains all of the information necessary for
a restructuring application, as required by section 4.14A(a)(1) of the
Act.
A System association commented that it appeared that we had deleted
the requirement contained in existing Sec. 614.4440(c) that an
application for restructuring include a preliminary plan of
restructuring from the borrower. In our plain language rewrite of the
rule, we deleted the specific phrase ``preliminary restructuring plan
proposed by the borrower'' from existing Sec. 614.4440(c)(1). That
requirement is contained in the Act at section 4.14A(a)(1)(A);
therefore a regulatory provision with the same requirement is
unnecessary. Although we deleted the specific phrase, we did not delete
the requirement that a borrower submit an application for restructuring
that includes a preliminary plan.
3. Independent Evaluator [Sec. 614.4440(f) to New Sec. 617.7000]
Our proposed rule clarified the definition of ``independent
evaluator'' by specifically including the term ``agent'' in the
definition instead of referencing it through part 612. A
[[Page 10903]]
System association commented that adding ``agent'' to the definition of
an independent evaluator makes the term too restrictive. The
association recommended adding a time element to the definition so that
an independent evaluator would not be considered an agent if he or she
did not have a contractual relationship with a qualified lender within
1 year of being selected as an independent evaluator. We declined to
make this change, as adding the term ``agent'' to new Sec. 617.7000
does not modify the existing definition.
4. Restructure and Restructuring of a Loan [Sec. Sec. 614.4440(i) and
614.4512(h) to New Sec. 617.7000]
A System association commented that using ``best opportunity'' in
the definition of ``restructure'' was troublesome. A borrower could
argue that the restructuring was not the best opportunity or suggest
that the lender had somehow influenced the success of the plan. The
association suggested changing ``best'' to ``reasonable.'' The purpose
of restructuring is not necessarily to return the operation to
viability. As such, we removed the phrase referring to viability in the
proposed definition to focus the definition on the loan terms.
B. What Happens to Borrower Rights When a Loan is Sold? [New Sec.
617.7015]
A System association commented that the 180-day period for loans
designated for sale into a secondary market should be changed to 365
days. We cannot agree to this change since the 180-day period is
required by section 4.14A(a)(5)(B)(ii) of the Act.
C. When Acting on a Loan Application, What Are the Notice Requirements
and Review Rights? [New Sec. 617.7300 et seq.]
1. What Documents May the CRC Consider? [New Sec. 617.7310(c)]
A System association commented that we limit a borrower's or
applicant's entitlement to a copy of a qualified lender's collateral
evaluation to just the collateral in connection with the adverse credit
decision under review. We do not agree with this comment. Section 4.13A
of the Act provides borrowers the right to receive copies of all
appraisals of borrower assets made or used by the qualified lender, not
just the independent collateral evaluation made in connection with a
CRC review.
2. May an Applicant Obtain a New Collateral Evaluation Even if
Collateral Was Not a Reason for the Adverse Credit Decision? [New Sec.
617.7310(d)]
Five System associations, a System bank, and the FCC commented that
applicants and borrowers receiving notices of the adverse credit
decision should not have the right to obtain an independent collateral
evaluation unless inadequate collateral was a basis for the adverse
credit decisions. We do not agree with the comment. The Act clearly
states that applicants and borrowers have the right to request
collateral evaluations without regard to whether the evaluations are
part of the reasons for the adverse credit decision. We believe
restricting this right might cause harm to an applicant or borrower.
For example, a notice of the adverse credit decision may not state that
collateral was a reason for an adverse credit decision, but the loan
might have been approved if the collateral evaluation had resulted in a
higher value. We also want to preclude institutions listing reasons
other than collateral for the adverse credit decision to avoid
providing the right to an independent collateral evaluation.
A System bank also commented that section 4.14(d)(1) of the Act
states that a request for a CRC review of an adverse credit decision
``may include'' independent appraisals. The bank argued that ``may
include'' is permissive and may be interpreted to mean that the Act
does not entitle every applicant or borrower to an independent
collateral evaluation when requesting a CRC review. We interpret the
Act as expressly providing an applicant or borrower the option of
obtaining an independent collateral evaluation when seeking a CRC
review. Applicants and borrowers, though not required to, may choose to
obtain independent collateral evaluations and submit them as part of
CRC review requests. We believe complete disclosure of the reasons for
an adverse credit decision will help applicants and borrowers decide
whether the expenditure of time and money for an independent collateral
evaluation will benefit their CRC reviews. We note, however, that
Congress limited such requests to only collateral being offered to
secure loans related to the adverse credit decision.
The FCC separately commented that permitting an applicant or
borrower to obtain an independent collateral evaluation when inadequate
collateral was not among the reasons for the adverse credit decision is
at odds with section 4.14(d)(2) of the Act. Section 4.14(d)(2) requires
the CRC to provide an applicant or borrower with an approved list of
appraisers within 30 days after request, instructs the applicant or
borrower to bear the cost of the evaluation, and requires the CRC to
include the evaluation in its reconsideration of an adverse credit
decision. We do not see a conflict between the applicant's or
borrower's right to include independent collateral evaluations in CRC
reviews and the procedures for responding to the exercise of this
right.
3. When Must an Applicant or Borrower Obtain the Independent Collateral
Evaluation? [New Sec. 617.7310(d)(2)]
Three System associations and the FCC disagreed with the proposed
30-day time period for an applicant or borrower to enter into a
contractual arrangement with an independent evaluator. The commenters
instead requested that we establish a time limit for completing the
independent evaluation, such as 30 or 60 days. We do not believe a
regulatory time limit to obtain an independent evaluation is
appropriate. There may be instances where an applicant or borrower
needs a longer time than the 30 or 60 days suggested. Further, we do
not believe that restricting a process that is not in the complete
control of the qualified lender, applicant, or borrower is in keeping
with the spirit of the borrower rights provisions.
Five System associations commented that the 30-day time period to
contract with an independent evaluator is too long. Two of the
associations provided alternative time periods ranging from 7 days to 2
weeks. One of the associations also suggested that an applicant or
borrower execute a written contract for services that complies with the
qualified lender's standards. We are maintaining the 30-day period.
However, we agree that a written contract for appraisal services should
be executed and should comply with a qualified lender's appraisal
standards. We have amended our proposal to reflect this change.
D. When and How Does a Qualified Lender Notify a Borrower of the Right
to Seek Loan Restructuring? [New Sec. 617.7410]
1. What Notice Should the Qualified Lender Send to a Borrower Who Is a
Debtor in a Bankruptcy Proceeding? [New Sec. 617.7410(c)]
A System association, a System bank, and the FCC commented that
sending a notice of restructuring to a borrower who has filed
bankruptcy violates the automatic stay of a bankruptcy proceeding. The
System bank also asked that the notice be made optional to address
jurisdictional variations. The FCC argued that some bankruptcy judges
have viewed any such letters as a violation of the automatic stay. We
do not agree that sending notice of a restructuring opportunity is a
violation of the automatic stay. Debtors do not
[[Page 10904]]
forfeit borrower rights, including notice of the opportunity to
restructure under the Act, when filing for bankruptcy. The automatic
stay prohibits creditors from making collection efforts. The notice
required by the Act is not a collection effort. It is a means of
informing a borrower of his rights under the Act. We believe a properly
worded notice is not an effort to collect. However, if a qualified
lender is concerned about potential misunderstandings, the qualified
lender should include language in the notice that the notice is not a
collection attempt. Qualified lenders should check with their own
counsel for appropriate wording.
2. Whom Should the Qualified Lender Notify? [New Sec. 617.7410(d)]
Two System associations commented on our proposal to send
distressed loan notices to a borrower's attorney in bankruptcy. Both
associations stated that not all debtors in bankruptcy have legal
representation, and one suggested that the notices be sent directly to
the borrower. We agree that not all borrowers retain counsel for a
bankruptcy proceeding and we have amended our rule accordingly. The
final rule allows for sending notice to the borrower and the borrower's
counsel, if known.
A System association asked what notice is required when a borrower
has been discharged of debt in a Chapter 7 bankruptcy. When a
Bankruptcy Court has discharged a debt, the debt is eliminated. Thus,
no borrower rights obligations remain, absent the right of first
refusal that may apply.
3. When Is a Qualified Lender Required To Send Another Restructure
Notice to a Borrower Whose Loan Was Previously Restructed? [New Sec.
617.7410(e)]
Two System associations commented that we should expand our
definition of performance under a restructure agreement beyond payment
terms. One association suggested the definition include nonperformance
of contractual requirements, such as liquidating a piece of equipment.
The other association suggested that a qualified lender and borrower be
given the latitude to define compliance. We recognize that loan
restructuring often includes performance criteria in addition to
repayment. However, nonpayment criteria cannot be used to determine
default under the Act. Section 4.14D(c) of the Act prohibits a
qualified lender from initiating foreclosure on a loan that is not past
due. Thus, a qualified lender cannot accelerate a borrower's loan if
the borrower has made all scheduled payments.
E. How Does a Qualified Lender Decide To Restructure a Loan? [New Sec.
617.7415]
1. How Does a Qualified Lender Decide Whether To Restructure or
Foreclose? [New Sec. 617.7415 (a), (b) and (d)]
Two System associations commented that viability should be the
deciding factor in determining whether to restructure or foreclose,
rather than least cost. We disagree with the comment. Section 4.14A(f)
requires that the least cost, that is, the lesser of the cost of
restructuring versus the cost of foreclosure, be used when determining
whether to restructure or foreclose. Therefore, a restructured loan
does not have to restore the farming operation to viability; it only
has to be the least-cost alternative. We note however, that viability
is an important consideration when calculating the cost of restructure.
One association went on to comment that our position on least cost
is contrary to portions of the proposed rule, where we stated that
deficient management should weigh heavily in determining the future
viability of the operation. We do not agree that our position regarding
viability and least cost is in conflict with our statement that
deficient management should weigh heavily in determining the future
viability of a borrower's operation. Both are relevant factors. The
capability of farm management weighs heavily in the potential viability
of the operation, and determining viability is part of the overall
least-cost analysis.
2. What Should the Qualified Lender Do if the Borrower and the
Qualified Lender Cannot Agree on the Financial Inputs Used in the
Application for Restructuring? [New Sec. 617.7415(c)]
A System association commented that we define the term ``financial
inputs'' and allow benchmarks to include any source or mechanism
regularly used by a qualified lender. We agree that benchmarks include
any objective source or mechanism regularly used by a qualified lender,
which is why we use the phrase ``or other such support'' in the rule.
Further, to alleviate any confusion, we have replaced the term
``input'' with ``projections.''
F. How Will a Decision on an Application for Restructuring Be Issued?
[New Sec. Sec. 617.7420 to 617.7425]
1. What Notice Is Required if the Restructuring Request Is Denied? [New
Sec. 617.7420(c)]
A System association commented that the notice of the adverse
credit decision does not need to include every reason for the denial of
an application for restructuring. The association stated that we have
exceeded what is necessary and have created an administrative burden.
The commenter also stated that our proposal was contradictory to the
FRB's staff commentary to Regulation B that a combination of more than
four principal reasons for an adverse action is not likely to be
helpful to applicants. We disagree with the comment. Borrowers have the
right to know all the reasons leading to a denial. Failure to provide
all reasons for a denial deprives borrowers of complete information
needed to decide whether to request a CRC review of an adverse credit
decision. Although the FRB has noted in staff commentary to Regulation
B that more than four reasons may not be helpful, it does not limit
disclosure to only four or less reasons. We believe including all the
reasons for a denial is not unreasonable.
As a general rule, we encourage open and complete communication
with borrowers and applicants at every stage of the loan-making
process, especially in ensuring that applicants and borrowers receive
the rights intended by Congress. At the outset, System institutions
should be open to accepting loan applications from all eligible
parties. We further encourage System institutions to process those
applications, using open, helpful communication. If the loan is denied,
qualified lenders should provide complete communication of the specific
reasons for denial so that applicants are able to determine whether to
seek review of a denial. In the situation where a borrower has a
distressed loan, qualified lenders should provide full information on
restructuring rights and then engage in meaningful, open negotiations
with borrowers to identify and evaluate restructuring opportunities.
Again, complete communication of the specific reasons for restructuring
denials enable borrowers to make informed decisions on whether to seek
CRC reviews.
[[Page 10905]]
G. What Type of Notice Should Be Given to a Borrower Before
Foreclosure? [New Sec. 617.7425]
Two System associations and the FCC provided comment on the
treatment of chronically delinquent borrowers.\4\ The two associations
commented that we should change our regulations to require only one
distressed loan notice per 12-month period. The FCC supported the 12-
month comment and suggested linking this requirement to the performance
provision on restructuring in new Sec. 617.7410(e). We do not agree
that chronically delinquent borrowers should receive limited
restructuring opportunities, but we recognize that these borrowers can
create a burden for some institutions.
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\4\ We refer to borrowers who repeatedly default as chronically
delinquent.
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A distressed loan is one where the borrower does not have the
financial capacity to pay. In some instances, a chronically delinquent
borrower has the financial capacity to pay, so by definition the loan
is not distressed. If qualified lenders send distressed loan notices in
these cases, they may be using the notices as servicing letters. By
doing so, they invoke the requirements of borrower rights, which are
only intended for distressed loans. We encourage qualified lenders to
use caution when determining whether chronically delinquent loans are
distressed, as defined by the Act. However, if a loan is distressed,
the qualified lender must send a restructuring notice at least 45 days
prior to beginning foreclosure.
H. Distressed Loan Restructuring Directive [New Sec. 617.7500 et seq.]
Two System associations and the FCC questioned the need for
regulations on issuing borrower rights directives and stated that
existing FCA enforcement authorities are adequate. One association
commented that these regulations would provide borrowers additional
opportunities to delay the restructuring process. Another remarked that
our examination process provides an adequate check and balance on
borrower rights. The FCC commented that a distinct enforcement process
for borrower rights does not provide any additional benefit.
We do not agree with the comments. As discussed in the proposed
rule, Congress expressly provided FCA with directive authorities for
distressed loan restructurings. However, the Act does not describe the
procedures used when issuing directives. Therefore, we are adopting the
directive authority, as proposed, to implement our statutory authority.
I. Right of First Refusal [New Sec. 617.7600 et seq.]
1. What Are the Definitions Used in This Subpart? [New Sec. 617.7600]
a. What Property Is Included in the Term ``Acquired Agricultural
Real Estate or Property''? A System bank, an association, and the FCC
commented that the definition of ``acquired agricultural real estate or
property'' does not include property acquired through bankruptcy
proceedings. All three commenters claim that the right of first refusal
should not apply when a System institution obtains title to
agricultural real estate in a Chapter 7 trustee sale because this type
of sale is not a foreclosure or a voluntary conveyance. The System bank
also commented that a bankruptcy sale is outside the language of the
Act, and offering the right of first refusal is inconsistent with the
Bankruptcy Court's determination that a debtor's sale of property is
conducive to reorganization or liquidation.
We do not agree with these comments. Section 4.36 of the Act states
that agricultural real estate acquired by a System institution from
loan foreclosure or a voluntary conveyance by a borrower is subject to
the right of first refusal. Because of the similarities between a
Bankruptcy Trustee sale and a loan foreclosure, property acquired by a
System institution under these circumstances would be subject to the
right of first refusal.
b. Who is the Previous Owner? [New Sec. 617.7600] The FCC
commented that it does not agree that a previous owner includes a prior
record owner of the property in question. They argue that the Act
restricts the term previous owner to the borrower on the loan for which
the property served as collateral. Further, the FCC contends our
definition complicates the process of determining the previous owner's
ability to avoid foreclosure since a previous owner who is not a
borrower has little or no opportunity to prevent foreclosure. We do not
agree that the Act intended to restrict the term ``previous owner'' to
a borrower only. We believe the legislative history clearly explains
that the intention of the right of first refusal is to preserve the
family farm. Restricting the definition of previous owner to
individuals signing a debt instrument may not achieve this goal. We
believe the System is able to determine the ability of a borrower to
avoid foreclosure and then, when appropriate, to offer first refusal
rights to the previous owner. If the borrower could have avoided
foreclosure, then the previous owner would have no first refusal
rights.
2. May a Previous Owner Waive the Right of First Refusal?
The FCC requested clarification on whether a waiver of the right of
first refusal may be obtained. The FCC stated that a borrower should be
able to freely waive the right of first refusal as part of a debt
settlement. The FCC specified that such a waiver would be appropriate
when there has been bona fide consideration, the borrower has been
specifically advised of his rights, and the borrower has had the
opportunity to obtain counsel. In addition, the FCC commented that a
borrower should be able to waive this right subsequent to the System
institution acquiring the property. We proposed no waiver of the right
of first refusal, and the Act does not provide for a waiver. Further,
we do not believe a waiver in this situation is appropriate, nor should
borrower rights be used as a basis for negotiation in the servicing of
a loan. A borrower in a distressed loan situation, including debt
settlement, cannot be considered free of duress when the lender is
initiating ``waiver'' discussions.
3. How Should System Institutions Document Whether the Borrower Had the
Financial Resources To Avoid Foreclosure? [New Sec. 617.7605].
A System association and the FCC asked if a System institution
would violate our regulations by offering the right of first refusal to
a borrower who may have had the ability to avoid foreclosure or
voluntary conveyance. The Act requires System institutions to provide
the right of first refusal to borrowers who do not have the financial
resources to avoid foreclosure or voluntary conveyance. It does not
prohibit offering this opportunity to other borrowers. However, a
System institution should establish an objective standard for making
such an opportunity available. The lack of established standards poses
a risk of perceived discrimination or favoritism. Also, once the right
of first refusal is offered optionally by the institution, the
provisions of the Act and regulations governing the means of processing
the exercise of that right become applicable.
4. What Should the System Institution Do When It Decides To Sell
Acquired Agricultural Real Estate? [New Sec. 617.7610]
A System association requested guidance regarding a System
institution's ability to reject an offer to
[[Page 10906]]
purchase agricultural real estate if the offer contains unusual or
unacceptable contingencies, such as an unreasonable timeframe to
settle. The association also requested that we add a regulatory
provision requiring offers from previous owners to be made in writing,
dated, and signed. We believe this comment has merit, and we are
considering resoliciting comments on this issue.
VII. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), the FCA hereby certifies that the final rule will
not have a significant economic impact on a substantial number of small
entities. Each of the banks in the System, considered together with its
affiliated associations, has assets and annual income in excess of the
amounts that would qualify them as small entities. Therefore, System
institutions are not ``small entities'' as defined in the Regulatory
Flexibility Act.
List of Subjects
12 CFR Part 609
Agriculture, Banks, banking, Electronic commerce, Reporting and
recordkeeping requirements, Rural areas.
12 CFR Part 611
Agriculture, Banks, banking, Rural areas.
12 CFR Part 612
Agriculture, Banks, banking, Conflict of interests, Rural areas.
12 CFR Part 614
Agriculture, Banks, banking, Flood insurance, Foreign trade,
Reporting and recordkeeping requirements, Rural areas.
12 CFR Part 615
Accounting, Agriculture, Banks, banking, Government securities,
Investments, Rural areas.
12 CFR Part 617
Banks, banking, Criminal referrals, Criminal transactions,
Embezzlement, Insider abuse, Investigations, Money laundering, Theft.
0
For the reasons stated in the preamble, parts 609, 611, 612, 614, 615,
and 617, chapter VI, title 12 of the Code of Federal Regulations are
amended as follows:
PART 609--ELECTRONIC COMMERCE
0
1. The authority citation for part 609 continues to read as follows:
Authority: Sec. 5.9 of the Farm Credit Act (12 U.S.C. 2243); 5
U.S.C. 301; Pub. L. 106-229 (114 Stat. 464).
Subpart A--General Rules
0
2. Amend Sec. 609.910(c) by revising the fourth sentence to read as
follows:
Sec. 609.910 Compliance with the Electronic Signatures in Global and
National Commerce Act (Public Law 106-229)(E-SIGN).
* * * * *
(c) * * * Thus, System institutions cannot use electronic
notification to deliver some notices that must be provided under part
617, subparts A, D, E, and G of this chapter. * * *
* * * * *
PART 611--ORGANIZATION
0
3. The authority citation for part 611 continues to read as follows:
Authority: Secs. 1.3, 1.13, 2.0, 2.10, 3.0, 3.21, 4.12, 4.15,
4.20, 4.21, 5.9, 5.10, 5.17, 6.9, 6.26, 7.0-7.13, 8.5(e) of the Farm
Credit Act (12 U.S.C. 2011, 2021, 2071, 2091, 2121, 2142, 2183,
2203, 2208, 2209, 2243, 2244, 2252, 2278a-9, 2278b-6, 2279a-2279f-1,
2279aa-5(e)); secs. 411 and 412 of Pub. L. 100-233, 101 Stat. 1568,
1638; secs. 409 and 414 of Pub. L. 100-399, 102 Stat. 989, 1003, and
1004.
Subpart P--Termination of System Institution Status
0
4. Amend Sec. 611.1223(d)(6) by revising the second sentence to read
as follows:
Sec. 611.1223 Information statement--contents.
* * * * *
(d) * * *
(6) * * * You must explain the effect termination will have on
borrower rights granted in the Act and part 617 of this chapter.
* * * * *
0
5. Amend Sec. 611.1290 by revising the second sentence to read as
follows:
Sec. 611.1290 Continuation of borrower rights.
* * * Institutions that become other financing institutions on
termination must comply with the applicable borrower rights provisions
in the Act and part 617 of this chapter.
PART 612--STANDARDS OF CONDUCT AND REFERRAL OF KNOWN OR SUSPECTED
CRIMINAL VIOLATIONS
0
6. The authority citation for part 612 continues to read as follows:
Authority: Secs. 5.9, 5.17, 5.19 of the Farm Credit Act (12
U.S.C. 2243, 2252, 2254).
0
7. Revise the heading of part 612 to read as set forth above.
0
8. Redesignate Sec. Sec. 612.2130 through 612.2270 as subpart A and
add a heading for new subpart A to read as follows:
Subpart A--Standards of Conduct
PART 614--LOAN POLICIES AND OPERATIONS
0
9. The authority citation for part 614 is revised to read as follows:
Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; secs.
1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12,
2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A,
4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.18A, 4.19, 4.25,
4.26, 4.27, 4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.8,
7.12, 7.13, 8.0, 8.5 of the Farm Credit Act (12 U.S.C. 2011, 2013,
2014, 2015, 2017, 2018, 2019, 2071, 2073, 2074, 2075, 2091, 2093,
2094, 2097, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183,
2184, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2206a, 2207,
2211, 2212, 2213, 2214, 2219a, 2219b, 2243, 2244, 2252, 2279a,
2279a-2, 2279b, 2279c-1, 2279f, 2279f-1, 2279aa, 2279aa-5); sec. 413
of Pub. L. 100-233, 101 Stat. 1568, 1639.
Subpart H--Loan Purchases and Sales
Sec. 614.4336 [Removed]
0
10. Remove Sec. 614.4336.
Subpart L--[Removed]
0
11. Remove subpart L, consisting of Sec. Sec. 614.4440 through
614.4444.
Subpart N--Loan Servicing Requirements; State Agricultural Loan
Mediation Programs; Right of First Refusal
Sec. Sec. 614.4514-614.4522 [Removed]
0
12. Remove Sec. Sec. 614.4514 through 614.4522 in subpart N.
Subpart P--Farm Credit Bank and Agricultural Credit Bank Financing
of Other Financing Institutions
0
13. Revise Sec. 614.4560(d) to read as follows:
Sec. 614.4560 Requirements for OFI funding relationships.
* * * * *
(d) The borrower rights requirements in part C of title IV of the
Act, and section 4.36 of the Act, and the regulations in part 617 of
this chapter shall apply to all loans that an OFI funds or discounts
through a Farm Credit Bank or agricultural credit bank, unless such
loans are subject to the Truth in Lending Act, 15 U.S.C. 1601 et seq.
* * * * *
[[Page 10907]]
PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS,
AND FUNDING OPERATIONS
0
14. The authority citation for part 615 continues to read as follows:
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5,
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17,
6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm
Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074,
2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b,
2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4,
2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a) of
Pub. L. 100-233, 101 Stat. 1568, 1608.
Subpart J--Retirement of Equities
0
15. Section 615.5280(h) is revised to read as follows:
Sec. 615.5280 Retirement in event of default.
* * * * *
(h) The requirements of this section may be satisfied by notices
given pursuant to Sec. Sec. 617.7405, 617.7410, 617.7420, and 617.7425
of this chapter that contain the information required by this section.
0
16. Amend Sec. 615.5290 by revising paragraphs (a) and (b) to read as
follows:
Sec. 615.5290 Retirement of capital stock and participation
certificates in event of restructuring.
(a) If a Farm Credit Bank or agricultural credit bank forgives and
writes off, under Sec. 617.7415, any of the principal outstanding on a
loan made to any borrower, where appropriate the Federal land bank
association of which the borrower is a member and stockholder shall
cancel the same dollar amount of borrower stock held by the borrower in
respect of the loan, up to the total amount of such stock, and to the
extent provided for in the bylaws of the Bank relating to its
capitalization, the Farm Credit Bank or agricultural credit bank shall
retire an equal amount of stock owned by the Federal land bank
association.
(b) If a production credit association or merged association
forgives and writes off, under Sec. 617.7415, any of the principal
outstanding on a loan made to any borrower, the association shall
cancel the same dollar amount of borrower stock held by the borrower in
respect of the loan, up to the total amount of such loan.
* * * * *
PART 617--REFERRAL OF KNOWN OR SUSPECTED CRIMINAL VIOLATIONS
0
17. The authority citation for part 617 is revised to read as follows:
Authority: Secs. 4.13, 4.13A, 4.13B, 4.14, 4.14A, 4.14C, 4.14D,
4.14E, 4.36, 5.9, 5.17 of the Farm Credit Act (12 U.S.C. 2199, 2200,
2201, 2202, 2202a, 2202c, 2202d, 2202e, 2219a, 2243, 2252).
PART 617--[REMOVED]
Sec. Sec. 617.1-617.4 [Redesignated as Sec. Sec. 612.2300-612.2303]
0
18. Redesignate Sec. Sec. 617.1 through 617.4 as new Sec. Sec.
612.2300 through 612.2303.
0
19. Remove part 617.
0
20. Redesignate newly designated Sec. Sec. 612.2300-612.2303 as
subpart B and add a heading for Subpart B to read as follows:
Subpart B--Referral of Known or Suspected Criminal Violations
Sec. 612.2300 [Amended]
0
21. Amend newly designated Sec. 612.2300 by removing the reference
``Sec. 617.2'' each place it appears and add in its place, the
reference ``Sec. 612.2301'' in paragraphs (a), (c), and (e).
0
22. Add a new part 617, subpart A, to read as follows:
PART 617--BORROWER RIGHTS
Subpart A--General
Sec.
617.7000 Definitions
617.7005 When may electronic communications be used in the borrower
rights process?
617.7010 May borrower rights be waived?
Subpart A--General
Sec. 617.7000 Definitions.
For the purposes of this part, the following terms apply:
Adverse credit decision means a credit decision where a qualified
lender:
(1) Decides not to make a loan to an applicant;
(2) Approves a loan in an amount less than the applicant requested;
or
(3) Denies an application for restructuring.
Applicant means any person who completes and executes a loan
application from a qualified lender.
Application for restructuring means a written request from a
borrower to restructure a distressed loan. The request must be
submitted on the appropriate forms prescribed by the qualified lender
and accompanied by sufficient financial information and repayment
projections, where appropriate, as required by the qualified lender to
support a sound credit decision.
Distressed loan means a loan that the borrower does not have the
financial capacity to pay according to its terms, as determined by the
qualified lender, and exhibits one or more of the following
characteristics:
(1) The borrower is demonstrating adverse financial and repayment
trends.
(2) The loan is delinquent or past due under the terms of the loan
contract.
(3) One or both of the factors listed in paragraphs (1) and (2) of
this section, together with inadequate collateralization, present a
high probability of loss to the qualified lender.
Foreclosure proceeding means:
(1) A foreclosure or similar legal proceeding to enforce a lien on
property, whether real or personal, that secures a non-interest-earning
asset or distressed loan; or
(2) The seizing of and realizing on non-real property collateral,
other than collateral subject to a statutory lien arising under titles
I and II of the Act, to effect collection of a nonaccrual or distressed
loan.
Independent evaluator means an individual who is a qualified
evaluator and who satisfies the standards of Sec. 614.4260, subpart F
of this chapter, and the standards set by the qualified lender for the
type of property to be evaluated. The independent evaluator may not be
an employee or agent of a qualified lender or have a relationship with
the lender or any of its officers or directors in contravention of part
612 of this chapter.
Loan means an extension of credit made to a farmer, rancher, or
producer or harvester of aquatic products, for any agricultural or
aquatic purpose and other credit needs of the borrower, including
financing for basic processing and marketing that directly relates to
the borrower's operations and those of other eligible farmers,
ranchers, and producers or harvesters of aquatic products.
Loan application means a complete oral or written request for an
extension of credit made in accordance with a qualified lender's
procedures for the type of credit requested. An application is complete
when the qualified lender receives all the information normally
obtained and used in evaluating applications for credit. This
information may include credit reports, supporting information for the
credit requested, and reports by governmental agencies or other persons
necessary to guarantee, insure, or provide security for the credit or
collateral.
[[Page 10908]]
Qualified lender means:
(1) A System institution, except a bank for cooperatives, that
makes loans as defined in this section; and
(2) Each bank, institution, corporation, company, credit union, and
association described in section 1.7(b)(1)(B) of the Act (commonly
referred to as an other financing institution), but only with respect
to loans discounted or pledged under section 1.7(b)(1).
Restructure and restructuring of a loan means a reamortization,
renewal, deferral of principal or interest, monetary concessions, or
the taking of any other action to modify the terms of, or forbear on, a
loan.
Sec. 617.7005 When may electronic communications be used in the
borrower rights process?
Qualified lenders may use, with the parties' agreement, electronic
commerce (E-commerce), including electronic communications for borrower
rights disclosures. Part 609 of this chapter addresses when a qualified
lender may use E-commerce. Consistent with these rules, a qualified
lender should interpret part 617 broadly to allow electronic
transmissions, communications, records, and submissions. However,
electronic communications may not be used for a notice of default,
acceleration, repossession, foreclosure, eviction, or the right to cure
when a borrower's primary residence secures the loan. In these
instances, a qualified lender must use paper disclosures.
Sec. 617.7010 May borrower rights be waived?
(a) A qualified lender may not obtain a waiver of borrower rights,
except as indicated in paragraph (b) of this section.
(b) A borrower may waive rights relating to distressed loan
restructuring, credit reviews, and the right of first refusal as
follows:
(1) When a loan is guaranteed by the Small Business Administration.
(2) In connection with a loan sale as provided in Sec. 617.7015.
(c) All waivers must be voluntary and in writing. The document
evidencing the waiver must clearly explain the rights the borrower is
being asked to waive and provide an explanation of such rights.
Sec. 617.7015 What happens to borrower rights when a loan is sold?
(a) What happens when a qualified lender sells a loan to another
qualified lender? A loan made by a qualified lender and subsequently
sold, in whole or in part, to another qualified lender is subject to
the borrower rights provisions of title IV of the Act.
(b) What happens when a qualified lender sells a loan into the
secondary market?
(1) Except as provided in paragraph (b)(2) of this section, the
borrower rights provisions of sections 4.14, 4.14A, 4.14B, 4.14C,
4.14D, and 4.36 of the Act do not apply to a loan made on or after
February 10, 1996, and designated for sale into a secondary market at
the time the loan was made.
(2) Borrower rights apply to a loan designated for sale under
paragraph (b)(1) of this section but not sold into a secondary market
during the 180-day period that begins on the date of designation. The
provisions of paragraph (b)(1) of this section will subsequently apply
on the date of sale if the loan is later sold into a secondary market.
(c) What happens when a qualified lender sells a loan to a
nonqualified lender?
(1) Except for loans sold to another qualified lender or designated
for sale into a secondary market, a qualified lender must comply with
one of the following requirements before selling a loan or interest in
a loan subject to borrower rights:
(i) The qualified lender and borrower must agree to include
provisions in the loan contract with the borrower, or a written
modification thereto, that ensure that the buyer of the loan will be
obligated to provide the borrower the same rights a qualified lender
must provide; or
(ii) The qualified lender must obtain from the borrower a signed
written consent to the sale, which clearly states the borrower waives
statutory borrower rights.
(2) Before the qualified lender obtains the borrower's consent to
the sale of the loan and the waiver of borrower rights under paragraph
(c)(1)(ii) of this section, the qualified lender must disclose in
writing to the borrower:
(i) A complete description of the statutory rights the borrower
will waive;
(ii) Any changes in the loan terms or conditions that will occur if
the qualified lender does not sell the loan;
(iii) That waiving borrower rights will not become effective unless
the qualified lender sells the loan; and
(iv) That borrower rights will become effective again if any
qualified lender repurchases the loan or any interest in the loan.
(3) The consent to the loan sale and waiver of borrower rights
shall have no effect until the qualified lender sells the loan.
Borrower rights become effective again if any qualified lender
repurchases the loan or any interest in the loan.
(4) A qualified lender may not make a loan conditioned on the
borrower consenting to the loan's sale and a waiver of borrower rights.
0
23. Amend part 617 by adding new subparts D, E, F, and G to read as
follows:
Subpart D--Actions on Applications; Review of Credit Decisions
Sec.
617.7300 When acting on a loan application, what are the notice
requirements and review rights?
617.7305 What is a CRC and who are the members?
617.7310 What is the review process of the CRC?
617.7315 What records must the qualified lender maintain on behalf
of the CRC?
Subpart D--Actions on Applications; Review of Credit Decisions
Sec. 617.7300 When acting on a loan application, what are the notice
requirements and review rights?
Each qualified lender must make its decision on a loan application
as quickly as possible. The qualified lender must provide prompt
written notice of its decision to the applicant. The qualified lender
is required to notify all primary applicants. If a loan application has
more than one primary applicant, the qualified lender may send the
original notice to the applicant designated to receive notices and may
send copies to all other applicants. If the qualified lender makes an
adverse credit decision on a loan application, the notice must include:
(a) The specific reasons for the qualified lender's decision;
(b) A statement that the applicant may request a review of the
decision;
(c) A statement that a written request for review must be made
within 30 days after the applicant receives the qualified lender's
notice; and
(d) A brief explanation of the process for seeking review of the
decision, including the independent collateral evaluation review
process, whom to contact for access to information, and the applicant's
right to appear in person before the credit review committee (CRC).
Sec. 617.7305 What is a CRC and who are the members?
The board of directors of each qualified lender must establish one
or more CRCs to review adverse credit decisions made by a qualified
lender. The CRC may only review adverse credit decisions at the request
of the applicant or borrower. The CRC has the ultimate decision-making
authority on the loan or application under review.
[[Page 10909]]
CRC members are selected by the board of directors of each qualified
lender and must include at least one of the qualified lender's farmer-
elected board members. The loan officer involved in the adverse credit
decision being reviewed may not serve on the CRC when it reviews that
loan.
Sec. 617.7310 What is the review process of the CRC?
(a) How will an applicant or borrower know when the CRC will
consider the review request? The qualified lender must inform the
applicant or borrower 15 days in advance of the CRC meeting where the
applicant or borrower's request will be reviewed.
(b) Who may make a personal appearance before the CRC? Each
applicant or borrower who has requested a review may appear in person
before the CRC. The applicant or borrower may be accompanied by counsel
or other representative when seeking a reversal of a decision on a loan
or an application for restructuring.
(c) What documents may the CRC consider? An applicant or borrower
may submit any documents or other evidence to support the information
contained in the loan or application for restructuring. The documents
should demonstrate that the application for a loan or restructuring
satisfies the credit standards of the qualified lender and is an
eligible loan or application for restructuring. Additionally, the
applicant or borrower is entitled to a copy of each independent
collateral evaluation used by the qualified lender.
(d) May an applicant obtain a new collateral evaluation even if
collateral was not a reason for the adverse credit decision? As part of
a CRC review, an applicant may request an independent collateral
evaluation of the agricultural real estate securing the loan or being
offered as security, regardless of whether collateral was an identified
reason for the adverse credit decision. The independent collateral
evaluation may be for any interest(s) in the property securing the
loan, except stock or participation certificates issued by the
qualified lender and held by the applicant or borrower.
(1) Who may conduct an independent collateral evaluation? The
independent collateral evaluation must be conducted by an independent
evaluator. The CRC must provide the applicant or borrower with a list
of three independent evaluators approved by the qualified lender within
30 days of the request for an independent collateral evaluation. The
applicant or borrower must select and engage the services of an
evaluator from the list. The evaluation must comply with the collateral
evaluation requirements of part 614, subpart F, of this chapter. The
qualified lender must provide the applicant or borrower a copy of part
614, subpart F, for presentation to the selected independent evaluator.
A copy of part 614, subpart F, signed by the evaluator is a required
exhibit in the subsequent evaluation report.
(2) When must an applicant or borrower obtain the independent
collateral evaluation and who pays for the evaluation? The applicant or
borrower must enter into a contractual arrangement for evaluation
services within 30 days of receiving the names of three approved
independent evaluators. The contractual arrangement must be a written
contract for services that complies with the lender's appraisal
standards. The evaluation must be completed within a reasonable period
of time, taking into consideration any extenuating circumstance. The
applicant or borrower is responsible for the costs of the independent
evaluation.
(3) How does the CRC use an independent collateral evaluation when
making a decision? The CRC will consider the results of any independent
collateral evaluation before making a final determination with respect
to the loan or restructuring, except the CRC is not required to
consider a collateral evaluation that does not conform to the
collateral evaluation standards described in part 614, subpart F, of
this chapter.
(e) When must the CRC issue a decision? The CRC must reach a
decision, and it must be the final decision of the qualified lender,
not later than 30 days after the meeting on the request under review.
The CRC must make every reasonable effort to conduct reviews and render
decisions in as expeditious a manner as possible. After making its
decision, the committee must promptly notify the applicant or borrower
in writing of the decision and the reasons for the decision.
Sec. 617.7315 What records must the qualified lender maintain on
behalf of the CRC?
A qualified lender must maintain a complete file of all requests
for CRC reviews, including participation in state mediation programs,
the minutes of each CRC meeting, and the disposition of each review by
the CRC.
Subpart E--Distressed Loan Restructuring; State Agricultural Loan
Mediation Programs
Sec.
617.7400 What protections exist for borrowers who meet all loan
obligations?
617.7405 On what policies are loan restructurings based?
617.7410 When and how does a qualified lender notify a borrower of
the right to seek loan restructuring?
617.7415 How does a qualified lender decide to restructure a loan?
617.7420 How will a decision on an application for restructuring be
issued?
617.7425 What type of notice should be given to a borrower before
foreclosure?
617.7430 Are institutions required to participate in state
agricultural loan mediation programs?
Subpart E--Distressed Loan Restructuring; State Agricultural Loan
Mediation Programs
Sec. 617.7400 What protections exist for borrowers who meet all loan
obligations?
(a) A qualified lender may not foreclose on a loan because the
borrower failed to post additional collateral when the borrower has
made all accrued payments of principal, interest, and penalties on the
loan.
(b) A qualified lender may not require a borrower to reduce the
outstanding principal balance of a loan by any amount that exceeds the
regularly scheduled principal installment when due and payable, unless:
(1) The borrower sells or otherwise disposes of part, or all, of
the collateral without the prior approval of the qualified lender and
the proceeds from the sale or disposition are not applied to the loan;
or
(2) The parties agree otherwise in writing.
(c) After a borrower has made all accrued payments of principal,
interest, and penalties on a loan, the qualified lender may not enforce
acceleration of the borrower's repayment schedule due to the borrower's
untimely payment of those principal, interest, or penalty payments.
(d) If a qualified lender places a loan in non-interest-earning
status and this results in an adverse action being taken against the
borrower, such as revoking any undisbursed loan commitment, the lender
must document the change of status and promptly notify the borrower in
writing of the action and the reasons for taking it. If the borrower
was not delinquent on any principal, interest, or penalty payment at
the time of such action and the borrower's request to have the loan
placed back into accrual status is denied, the borrower may obtain a
review of the denial before the CRC pursuant to Sec. 617.7310 of this
part. The borrower must request this review within 30 days after
receiving the lender's notice.
Sec. 617.7405 On what policies are loan restructurings based?
Loan restructurings must be made in accordance with the policy
adopted by
[[Page 10910]]
the supervising bank board of directors under section 4.14A(g) of the
Act.
Sec. 617.7410 When and how does a qualified lender notify a borrower
of the right to seek loan restructuring?
(a) What are the notice requirements?
When a qualified lender determines that a loan is, or has become,
distressed, the lender must provide one of the following written
notices to the borrower stating that the loan may be suitable for
restructuring.
(1) A notice stating that the loan has been identified as
distressed and that the borrower has the right to request a
restructuring of the loan (nonforeclosure notice).
(2) A notice that the loan has been identified as distressed, that
the borrower has the right to request a restructuring of the loan, and
that the alternative to restructuring may be foreclosure (45-day
notice). The qualified lender must provide this notice to the borrower
no later than 45 days before the qualified lender begins foreclosure
proceedings with respect to any loan outstanding to the borrower. This
notice must specifically state that if the loan is restructured and the
borrower does not perform under the restructure agreement (as described
in Sec. 617.7410(e)), the qualified lender may initiate foreclosure
proceedings without further notice.
(b) What should each notice include?
(1) A copy of the policy the qualified lender established governing
the treatment of distressed loans; and
(2) All materials necessary for the borrower to submit an
application for restructuring.
(c) What notice should a qualified lender send to a borrower who is
a debtor in a bankruptcy proceeding? The qualified lender should send a
notice that identifies the loan as distressed and the statutory right
to file an application for a restructuring. The notice may also restate
the language from the automatic stay provision to emphasize that the
notice is not intended as an attempt to collect, assess, or recover a
claim.
(d) Whom should the qualified lender notify? The qualified lender
is required to notify all primary obligors. If the obligors identify
one party to receive notices, the qualified lender should send the
original notice to that person and send copies to the other obligors.
For borrowers in a bankruptcy proceeding, the qualified lender should
send the notice to the borrower and, if retained, the borrower's
counsel.
(e) When is a qualified lender required to send another restructure
notice to a borrower whose loan was previously restructured? A
qualified lender must notify a borrower of the right to file another
application to restructure the loan if the qualified lender sent the
nonforeclosure notice to the borrower and the borrower has performed on
the previous restructure agreement. Performance means that a borrower
has made six consecutive monthly payments, four consecutive quarterly
payments, three consecutive semiannual payments, or two consecutive
annual payments. However, a qualified lender is not required to send
another notice if they previously sent a 45-day notice, as described in
Sec. 617.7410(a)(2), and a borrower did not perform under a
restructure agreement, as described above.
(f) Does the borrower have the opportunity to meet with the
qualified lender after receiving the restructure notice? The qualified
lender must provide any borrower to whom a notice has been sent with a
reasonable opportunity to meet personally with a representative of the
lender. The borrower and lender may meet to review the status of the
loan, the financial condition of the borrower, and the suitability of
the loan for restructuring. A meeting to discuss a loan that is in a
non-interest-earning status may also involve developing a plan for
restructuring, if the qualified lender determines the loan is suitable
for restructuring.
(g) May the qualified lender voluntarily consider restructuring for
a borrower who did not submit a restructuring application? A qualified
lender may, in the absence of an application for restructuring from a
borrower, propose restructuring to an individual borrower.
Sec. 617.7415 How does a qualified lender decide to restructure a
loan?
(a) What criteria does a qualified lender use to evaluate an
application for restructuring? The qualified lender should consider the
following:
(1) Whether the cost to the lender of restructuring the loan is
equal to or less than the cost of foreclosure, considering all relevant
criteria. These criteria include:
(i) The present value of interest and principal foregone by the
lender in carrying out the application for restructuring;
(ii) Reasonable and necessary administrative expenses involved in
working with the borrower to finalize and implement the application for
restructuring;
(iii) Whether the borrower's application for restructuring included
a preliminary restructuring plan and cash flow analysis, taking into
account income from all sources to be applied to the debt and all
assets to be pledged, that show a reasonable probability that orderly
debt retirement will occur as a result of the proposed restructuring;
and
(iv) Whether the borrower has furnished, or is willing to furnish,
complete and current financial statements in a form acceptable to the
qualified lender.
(2) Whether the borrower is applying all income over and above
necessary and reasonable living and operating expenses to the payment
of primary obligations;
(3) Whether the borrower has the financial capacity and the
management skills to protect the collateral from diversion,
dissipation, or deterioration;
(4) Whether the borrower is capable of working out existing
financial difficulties, taking into consideration any prior
restructuring of the loan, reestablishing a viable operation, and
repaying the loan on a rescheduled basis; and
(5) In the case of a distressed loan that is not delinquent,
whether restructuring consistent with sound lending practices may be
taken to reasonably ensure that the loan will not have to be placed
into non-interest-earning status in the future.
(b) What should be included in determining the cost of foreclosure?
(1) The difference between the outstanding balance due, as provided
by the loan documents, and the liquidation value of the loan, taking
into consideration the borrower's repayment capacity and the
liquidation value of the collateral used to secure the loan;
(2) The estimated cost of maintaining a loan classified as a high-
risk asset;
(3) The estimated cost of administrative and legal actions
necessary to foreclose a loan and dispose of property acquired as the
result of the foreclosure, including attorneys' fees and court costs;
(4) The estimated cost of value changes in collateral used to
secure a loan during the period beginning on the date of the initiation
of an action to foreclose or liquidate the loan and ending on the date
of the disposition of the collateral; and
(5) All other costs incurred as the result of the foreclosure or
liquidation of a loan.
(c) What should the qualified lender do if the borrower and the
qualified lender cannot agree on the financial projections used in the
application for restructuring? If the borrower and lender are not able
to agree on supportable or realistic financial projections, the lender
may use benchmarks to determine the operational input costs and chattel
[[Page 10911]]
security values. These benchmarks may include, but are not limited to,
the borrower's 5-year production average; averages in the county where
the farming operation is located, based on data from United States
Department of Agriculture, local colleges or universities, or other
recognized authority; and other such reasonable sources.
(d) How does the qualified lender decide whether to restructure or
foreclose? If a qualified lender determines the potential cost to the
lender of restructuring the loan as proposed in the application for
restructuring is less than or equal to the potential cost of
foreclosure, the qualified lender must restructure the loan. If two or
more restructuring alternatives are available, the qualified lender
must restructure the loan using the alternative that results in the
least cost to the lender.
(e) What documentation should the qualified lender retain? In the
event that an application for restructuring is denied, a qualified
lender must maintain sufficient documentation to demonstrate compliance
with paragraphs (a), (b), and (c) of this section, as applicable.
Sec. 617.7420 How will a decision on an application for restructuring
be issued?
(a) When must a qualified lender make a decision on an application
for restructuring? Each qualified lender must provide a written
decision on an application for restructuring and provide this decision
to the borrower within 15 days from the conclusion of the negotiations
used to develop the application for restructuring.
(b) How does a qualified lender notify the borrower of the
decision? On reaching a decision on an application for restructuring,
the qualified lender must provide written notice in any manner that
requires a primary obligor to acknowledge receipt of the lender's
decision. In the case of a loan involving one or more primary obligors,
the original notice may be provided to the primary obligor identified
to receive such notice, with copies provided by regular mail to the
other obligors.
(c) What notice is required if the restructuring request is denied?
When an application for restructuring is denied, the notice must
include:
(1) The specific reason(s) for the denial and any critical
assumptions and relevant information on which the specific reasons are
based, except that any confidential information shall not be disclosed;
(2) A statement that the borrower may request a review of the
denial;
(3) A statement that any request for review must be made in writing
within 7 days after receiving such notice.
(4) A brief explanation of the process for seeking review of the
denial, including the appraisal review process and the right to appear
before the CRC, pursuant to Sec. 617.7310 of this part, accompanied by
counsel or any other representative, if the borrower chooses.
Sec. 617.7425 What type of notice should be given to a borrower
before foreclosure?
The qualified lender must send the 45-day notice, as described in
Sec. 617.7410(a)(2), no later than 45 days before any qualified lender
begins foreclosure proceedings. The notice informs the borrower in
writing that the loan may be suitable for restructuring and that the
qualified lender will review any suitable loan for possible
restructuring. The 45-day notice must include a copy of the policy and
the materials described in Sec. 617.7410(b). The notice must also
state that if the loan is restructured, the borrower must perform under
this restructure agreement. If the borrower does not perform, the
qualified lender may initiate foreclosure.
(a) Does the notice have to inform the borrower that foreclosure is
possible? The notice must inform the borrower that the alternative to
restructuring may be foreclosure. If the notice does not inform the
borrower of potential foreclosure, then the qualified lender must send
a second notice at least 45 days before foreclosure is initiated.
(b) How are borrowers who are debtors in a bankruptcy proceeding
notified? A qualified lender must restate the language from the
automatic stay provision to emphasize that the notice is not intended
to be an attempt to collect, assess, or recover a claim. The qualified
lender should send the notice to the borrower and, if retained, the
borrower's counsel.
(c) May a qualified lender foreclose on a loan when there is a
restructuring application on file? No qualified lender may foreclose or
continue any foreclosure proceeding with respect to a distressed loan
before the lender has completed consideration of any pending
application for restructuring and CRC consideration, if applicable.
This section does not prevent a lender from taking any action necessary
to avoid the dissipation of assets or the diversion, dissipation, or
deterioration of collateral if the lender has reasonable grounds to
believe that such diversion, dissipation, or deterioration may occur.
Sec. 617.7430 Are institutions required to participate in state
agricultural loan mediation programs?
(a) If initiated by a borrower, System institutions must
participate in state mediation programs certified under section 501 of
the Agricultural Credit Act of 1987 and present and explore debt
restructuring proposals advanced in the course of such mediation. If
provided in the certified program, System institutions may initiate
mediation at any time.
(b) System institutions must cooperate in good faith with requests
for information or analysis of information made in the course of
mediation under any loan mediation program.
(c) No System institution may make a loan secured by a mortgage or
lien on agricultural property to a borrower on the condition that the
borrower waive any right under the agricultural loan mediation program
of any state.
(d) A state mediation may proceed at the same time as the loan
restructuring process of Sec. 617.7415 or at any other appropriate
time.
Subpart F--Distressed Loan Restructuring Directive
Sec.
617.7500 What is a directive used for and what may it require?
617.7505 How will the qualified lender know when FCA is considering
issuing a distressed loan restructuring directive?
617.7510 What should the qualified lender do when it receives notice
of a distressed loan restructuring directive?
617.7515 How does the FCA decide whether to issue a directive?
617.7520 How does the FCA issue a directive and when will it be
effective?
617.7525 May FCA use other enforcement actions?
Subpart F--Distressed Loan Restructuring Directive
Sec. 617.7500 What is a directive used for and what may it require?
(a) A distressed loan restructuring directive is an order issued to
a qualified lender when FCA has determined that the lender has violated
section 4.14A of the Act.
(b) A distressed loan restructuring directive requires the
qualified lender to comply with the specific distressed loan
restructuring requirements in the Act.
(c) A distressed loan restructuring directive is enforceable in the
same manner and to the same extent as an effective and outstanding
cease and desist order that has become final. Any violation of a
distressed loan restructuring directive may result in FCA assessing
civil money penalties or seeking a court order pursuant to section 5.31
or 5.32 of the Act.
[[Page 10912]]
Sec. 617.7505 How will the qualified lender know when FCA is
considering issuing a distressed loan restructuring directive?
When FCA intends to issue a distressed loan restructuring
directive, it will notify the qualified lender in writing. The notice
will state:
(a) The reasons FCA intends to issue a distressed loan
restructuring directive;
(b) The proposed contents of the distressed loan restructuring
directive; and
(c) Any other relevant information.
Sec. 617.7510 What should the qualified lender do when it receives
notice of a distressed loan restructuring directive?
(a) A qualified lender should respond to the notice by stating why
FCA should not issue a distressed loan restructuring directive, by
proposing changes to the directive, or by seeking other suitable
relief. The response must include any information, documentation, or
other relevant evidence that supports the qualified lender's position.
The response may include a plan for achieving compliance with the
distressed loan restructuring requirements of the Act. The response
must be in writing and delivered to FCA within 30 days after the date
on which the qualified lender received the notice. In its discretion,
FCA may extend the time period for good cause. FCA may shorten the 30-
day period with the consent of the qualified lender or when FCA
determines that providing the full 30 days would result in a borrower
not receiving distressed loan restructuring rights.
(b) If the qualified lender fails to respond within 30 days or such
other time period specified by FCA, this failure will constitute a
waiver of any objections to the proposed distressed loan restructuring
directive.
Sec. 617.7515 How does the FCA decide whether to issue a directive?
After the closing date of the qualified lender's response period,
or following receipt of the qualified lender's response, FCA must
decide if there is sufficient information to support the issuance of a
directive or if additional information is necessary. Once FCA has
received sufficient information, it must decide whether to issue a
directive as originally proposed or as modified.
Sec. 617.7520 How does the FCA issue a directive and when will it be
effective?
A distressed loan restructuring directive is effective immediately
on receipt by the qualified lender, or on such later date as may be
specified by FCA, and will remain effective and enforceable until it is
stayed, modified, or terminated by FCA.
Sec. 617.7525 May FCA use other enforcement actions?
FCA may issue a distressed loan restructuring directive in addition
to, or instead of, any other action allowed by law, including cease and
desist proceedings, civil money penalties, or the granting or
conditioning of any application or other requests by the System
institution.
Subpart G--Right of First Refusal
Sec.
617.7600 What are the definitions used in this subpart?
617.7605 How should System institutions document whether the
borrower had the financial resources to avoid foreclosure?
617.7610 What should the System institution do when it decides to
sell acquired agricultural real estate?
617.7615 What should the System institution do when it decides to
lease acquired agricultural real estate?
617.7620 What should the System institution do when it decides to
sell acquired agricultural real estate at a public auction?
617.7625 Whom should the System institution notify?
617.7630 Does this Federal requirement affect any state property
laws?
Subpart G--Right of First Refusal
Sec. 617.7600 What are the definitions used in this subpart?
In addition to the definitions in Sec. 617.7000, the following
definitions apply to this subpart.
Acquired agricultural real estate or property means agricultural
real estate acquired by a System institution as a result of a loan
foreclosure or a voluntary conveyance by a borrower who, as determined
by the institution, does not have the financial resources to avoid
foreclosure.
Previous owner means:
(1) The prior record owner who was a borrower from a System
institution and did not have the financial resources, as determined by
the institution, to avoid foreclosure on acquired agricultural real
estate; or
(2) The prior record owner who is not a borrower and whose acquired
agricultural real estate was used as collateral for a loan to a System
borrower.
System institution means a Farm Credit System institution, except a
bank for cooperatives, which makes loans as defined in Sec. 617.7000.
Sec. 617.7605 How should System institutions document whether the
borrower had the financial resources to avoid foreclosure?
The right of first refusal applies only to borrowers who did not
have the financial resources to avoid foreclosure or voluntary
conveyance. A System institution must clearly document in its files
whether the borrower had the resources to avoid foreclosure or
voluntary conveyance.
Sec. 617.7610 What should the System institution do when it decides
to sell acquired agricultural real estate?
(a) Notify the previous owner,
(1) Within 15 days of the System institution's decision to sell
acquired agricultural real estate, it must notify the previous owner,
by certified mail, of the property's appraised fair market value as
established by an accredited appraiser and of the previous owner's
right to:
(i) Buy the property at the appraised fair market value, or
(ii) Offer to buy the property at a price less than the appraised
value.
(2) That any offer must be received within 30 days of receipt of
the notice.
(b) Act on an offer to buy the acquired agricultural real estate at
the appraised value. Within 15 days after the receipt of the previous
owner's offer to buy the acquired agricultural real estate at the
appraised value, the System institution must accept the offer and sell
the property to the previous owner if the offer was received within 30
days of the notice required in paragraph (a)(2) of this section.
(c) Act on an offer to buy the acquired agricultural real estate at
less than the appraised value.
(1) The System institution must consider the offer if it was
received within 30 days of the notice required in paragraph (a)(2) of
this section.
(2) If the System institution accepts this offer, it must notify
the previous owner of the decision and sell the acquired agricultural
real estate to the previous owner within 15 days of receiving the offer
to buy the acquired agricultural real estate at a value less than the
appraised value.
(3) If the System institution rejects this offer, it must notify
the previous owner of the decision within 15 days of receiving the
offer to buy the acquired agricultural real estate at a value less than
the appraised value. The previous owner has 15 days from receipt of the
notice to submit an offer to buy at such price or under such terms and
conditions. The System institution may not sell the acquired
agricultural real estate to any other person:
(i) At a price equal to, or less than, that offered by the previous
owner; or
(ii) On different terms or conditions than those extended to the
previous owner without first notifying the previous owner by certified
mail and providing an opportunity to buy the
[[Page 10913]]
property at such price or under such terms and conditions.
(d) For purposes of this section, financing by the System
institution is not a term or condition of the sale of acquired
agricultural real estate. A System institution is not required to
provide financing to the previous owner for purchase of acquired
agricultural real estate.
Sec. 617.7615 What should the System institution do when it decides
to lease acquired agricultural real estate?
(a) Notify the previous owner,
(1) Within 15 days of the System institution's decision to lease
acquired agricultural real estate, it must notify the previous owner,
by certified mail, of the property's appraised rental value, as
established by an accredited appraiser, and of the previous owner's
right to:
(i) Lease the property at a rate equivalent to the appraised rental
value of the property, or
(ii) Offer to lease the property at rate that is less than the
appraised rental value of the property.
(2) That any offer must be received within 15 days of receipt of
the notice.
(b) Act on an offer to lease the acquired agricultural real estate
at a rate equivalent to the appraised rental value of the property.
(1) Within 15 days after receipt of such offer, the System
institution may accept the offer to lease the property at the appraised
rental value and lease the property to the previous owner, or
(2) Within 15 days after receipt of such offer, the System
institution may reject the offer to lease the property at the appraised
rental value when the institution determines that the previous owner:
(i) Does not have the resources available to conduct a successful
farming or ranching operation; or
(ii) Cannot meet all the payments, terms, and conditions of such
lease.
(c) Act on an offer to lease the acquired agricultural real estate
at a rate that is less than the appraised rental value of the property.
(1) The System institution must consider the offer to lease the
property at a rate that is less than the appraised rental value of the
property. Notice of the decision to accept or reject such offer must be
provided to the previous owner within 15 days of receipt of the offer.
(2) If the System institution accepts the offer to lease the
property at less than the appraised rental value, it must notify the
previous owner and lease the property to the previous owner.
(3) If the institution rejects the offer, the System institution
must notify the previous owner of this decision. The previous owner has
15 days after receipt of the notice in which to agree to lease the
property at such rate or under such terms and conditions. The System
institution may not lease the property to any other person:
(i) At a rate equal to or less than that offered by the previous
owner; or
(ii) On different terms and conditions than those that were
extended to the previous owner without first informing the previous
owner by certified mail and providing an opportunity to lease the
property at such rate or under such terms and conditions.
Sec. 617.7620 What should the System institution do when it decides
to sell acquired agricultural real estate at a public auction?
System institutions electing to sell or lease acquired agricultural
real estate or a portion of it through a public auction, competitive
bidding process, or other similar public offering must:
(a) Notify the previous owner, by certified mail, of the
availability of such property. The notice must contain the minimum
amount, if any, required to qualify a bid as acceptable to the
institution and any terms or conditions to which such sale or lease
will be subject;
(b) Accept the offer by the previous owner if the System
institution receives two or more qualified bids in the same amount, the
bids are the highest received, and one of the qualified bids is from
the previous owner; and
(c) Not discriminate against a previous owner in these proceedings.
Sec. 617.7625 Whom should the System institution notify?
Each certified mail notice requirement in this section is fully
satisfied by mailing one certified mail notice to the last known
address of the previous owner or owners.
Sec. 617.7630 Does this Federal requirement affect any state property
laws?
The rights provided under section 4.36 of the Act and this section
do not affect any right of first refusal under the law of the state in
which the property is located.
Dated: March 3, 2004.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 04-5138 Filed 3-8-04; 8:45 am]
BILLING CODE 6705-01-P