[Federal Register: September 26, 2005 (Volume 70, Number 185)]
[Rules and Regulations]
[Page 56105-56107]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26se05-1]
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Rules and Regulations
Federal Register
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[[Page 56105]]
DEPARTMENT OF AGRICULTURE
Farm Service Agency
7 CFR Part 762
RIN: 0560-AG65
Guaranteed Farm Ownership and Operating Loan Requirements
AGENCY: Farm Service Agency, USDA.
ACTION: Final rule.
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SUMMARY: The Farm Service Agency (FSA) is amending its regulations
governing loans made under the guaranteed farm loan program to
specifically allow lenders to use the loans as security for loans to
the lenders, remove certain documentation and designation requirements
for lenders, and modify security restrictions as to refinancing and
junior liens.
DATES: This rule is effective September 26, 2005.
FOR FURTHER INFORMATION CONTACT: Galen VanVleet, Senior Loan Officer,
Farm Service Agency; telephone: (202) 720-3889; Facsimile: (202) 720-
6797; E-mail: Galen.VanVleet@wdc.usda.gov.
SUPPLEMENTARY INFORMATION:
Background
FSA published a proposed rule on May 4, 2004, (69 FR 24537-24539)
to amend its regulations governing loans made under the guaranteed farm
loan program. The comment period ended July 6, 2004.
Summary of Public Comments
In response to the proposed rule, 125 respondents from 25 States
and the District of Columbia commented. The following is a summary of
the comments and the changes made in the final rule in response to the
comments.
Certified Lender Program
FSA proposed to remove the requirement that lenders applying for
Certified Lender Program (CLP) status submit copies of forms to be used
for farm loan processing and servicing, such as financial statements,
cash-flow plans, and budgets. One respondent noted that the existing
requirement was of little burden and recommended that no change be
made. However, 75 respondents endorsed the change; based on this
response, the Agency adopts its proposed rule on CLP as final.
Preferred Lender Program
FSA proposed to remove the requirement that Preferred Lender
Program (PLP) lenders designate a person or persons, approved by the
Agency, to process and service PLP loans. Under the proposed rule PLP
lenders would designate the responsible party by name, title, or
position. All respondents supported this change, therefore, the Agency
adopts its proposed rule on PLP as final.
Interest Rates and Fees
The existing rule at Sec. 762.124(e)(1) provides that the lender
may charge fees provided they are no greater than those charged to
unguaranteed customers for similar transactions. FSA proposed that the
lender not charge, or cause to be charged, any processing, servicing,
or packaging fees that are not charged to nonguaranteed customers for
similar transactions. Only three respondents supported the change,
while 100 respondents opposed it because they interpreted that the
change would disallow ``packager'' fees and they believed fewer
guaranteed loans would be made as a result. Because of the overwhelming
opposition, the proposal was not adopted nor the existing regulation
changed.
Security Requirements
The existing rule at Sec. 762.126(e) establishes restrictions on
acceptable lien positions for security on guaranteed loans. The Agency
proposed removing a restriction requiring that, when a loan is made for
refinancing purposes, the guaranteed loan must hold a security position
no lower than that on the refinanced loan. One respondent expressed
concern that removal of the restriction would greatly increase the
Government's risk of loss without any direct benefit to the loan
applicant. That respondent suggested that in any case where the
guaranteed loan debt is greater than or equal to 75 percent of the
proposed security, the security position must be the same or better
lien position than on the refinanced loan. Another respondent
recommended that removal of the restriction be limited to situations
where real estate loans are made to refinance operating carry-over
debt. Another respondent recommended that the lender must hold a
security position in the same or better collateral than on the
refinanced loan. The other 74 respondents who commented on this section
supported the change because it will help reduce confusion about proper
lien positions and give lenders additional flexibility. The Agency does
not agree that the removal of this restriction will greatly increase
the risk of loss since the lenders are still responsible for ensuring
that proper and adequate security is obtained to fully secure the loan,
protect the interest of the lender and the Agency and assure repayment
of the loan. Accordingly, the proposal is adopted as final.
Another restriction under the same section limits junior lien
positions to situations where equity position is strong. Because this
restriction has been confusing due to varying interpretations of
``strong,'' the Agency proposed clarifying the equity requirement by
limiting junior liens to situations where the amount of debt is less
than or equal to 75 percent of the value of the security. One
respondent, who strongly supported the revision, recommended that the
Agency clarify that this change applies to all lender types, including
PLP. The Agency agrees with the point of this comment, but made no
specific change to the regulation because all of Sec. 762.126 already
applies to all lender types.
Five respondents opposed the establishment of the 75-percent
criterion. One respondent expressed concern that the requirement was
too restrictive and recommended that no specific requirement be
required for real estate, and a less restrictive requirement of 20
percent equity (80 percent debt-to-value of security) be established
for chattels. Similarly, another respondent stated that the proposed
requirement would be excessive when dealing with real estate security.
A third respondent pointed out that the 75-percent loan-to-
[[Page 56106]]
value limit is more restrictive than supervisory limits established by
Federal banking regulatory agencies. The fourth respondent opposed the
change because it would be, in their view, detrimental to borrowers.
The respondent stated that they, as a lender, would not take a second
lien behind a large guaranteed loan. The final opposing respondent
expressed concern that the establishment of a 75 percent requirement
overemphasizes collateral while capacity and capital evaluation should
be the deciding factors. The Agency agrees that the 75 percent
requirement may be too restrictive and has increased the maximum loan
to value limit to 85 percent accordingly.
Restructuring Guaranteed Loans
The existing regulation at Sec. 762.145 (b)(6)(i) contains an
incorrect citation to the loan limits, which the proposed rule
corrected. No respondent commented on this provision and the proposed
correction is adopted as final.
Sale, Assignment, and Participation
A new section, Sec. 762.159, was proposed to address the use of
guaranteed loans as security for lender funding. Many lenders routinely
borrow money from Federal Home Loan Banks or Federal Reserve Banks to
meet funding or liquidity needs. They are usually required to pledge
loan assets, which may include guaranteed loans, as security for the
loans. The existing regulation's restrictions on assignments have led
to confusion as to how or whether a lender can pledge guaranteed loans.
The proposed rule explicitly allowed the pledging to Federal Home Loan
Banks or Federal Reserve Banks. The Agency received 93 comments
concerning this proposal. While all respondents supported the goal of
clarifying that guaranteed loans can be pledged as security for
collateral, they also expressed some concerns. The respondents
recommended that the proposed language saying that the guarantee would
be unenforceable until a new eligible lender is substituted be removed.
They correctly pointed out that other parts of the regulation provide
protection to the Agency due to negligent servicing. The lender will
remain responsible for properly servicing the account until an eligible
lender is substituted, and deductions otherwise will be made according
to Sec. 762.149 as appropriate. The Agency agrees and has deleted the
last two sentences in the final rule as unnecessary.
Respondents also recommended that the Agency provide users with any
information about how to make the pledge; specifically, the respondents
recommended that there be a proposed format to follow. The Agency
determined that it is not appropriate to dictate a format or advise the
lenders how to make a pledge because the Agency will not be a direct
party to the pledging activity. Therefore, no change has been made in
response to these comments.
Two respondents recommended that additional language be added to
provide that a Federal Home Loan Bank or Federal Reserve Bank, as
pledgee, be deemed a ``holder.'' These respondents correctly pointed
out that, under the regulations, a holder may enforce the guarantee
even if it is contestable, or unenforceable by the lender. There are
other rights that holders have, in particular, the right to require
purchase, however, that cannot accrue to a pledgee. Therefore, the
Agency did not add language to deem the pledgee a holder.
One respondent pointed out that Farm Credit System institutions are
required to, and routinely do, pledge all their loan assets, including
those with Federal guarantees, to their funding bank. For clarity and
consistency, in the final rule Farm Credit System Banks were added to
the institutions that may pledge guaranteed loans, as well as other
funding sources determined acceptable by the Agency.
Section Sec. 762.160 deals with the sale, assignment, and
participation of guarantees. The proposed rule clarified confusing
portions and removed unnecessarily restrictive provisions. As used in
the existing section and as defined in Sec. 762.102, ``sale of
guarantee'' and ``assignment of guarantee'' are synonymous. To reduce
confusion, reference to ``sale of guarantee'' is removed. The one
respondent who commented on the proposed changes to Sec. 762.160
supported the changes; therefore, the Agency adopts this portion of the
proposed rule as final.
Executive Order 12866
This rule has been determined to be not significant for purposes of
Executive Order 12866 and, therefore, was not reviewed by the Office of
Management and Budget.
Regulatory Flexibility Act
FSA certifies that this rule will not have a significant economic
effect on a substantial number of small entities and 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). An insignificant number of guaranteed loan borrowers and no
lenders are small entities. This rule does not impact the small
entities to a greater extent than large entities.
Environmental Impact Statement
FSA has determined that this action is not a major Federal action
significantly affecting the environment. Therefore, in accordance with
the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.),
neither an Environmental Impact Statement nor an environmental
assessment is required.
Executive Order 12988
This rule has been reviewed in accordance with E.O. 12988, Civil
Justice Reform. All State and local laws and regulations that are in
conflict with this rule will be preempted. No retroactive effect will
be given to this rule. It will not affect agreements entered into prior
to the effective date of the rule. The administrative appeal provisions
published at 7 CFR parts 11 and 780 must be exhausted before bringing
any action for judicial review.
Executive Order 12372
For reasons set forth in the Notice 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
Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (Pub.
L. 104-4), requires Federal agencies to assess the effects of their
regulatory actions on State, local, and tribal governments or the
private sector. Agencies generally must prepare a written statement,
including a cost-benefit assessment, for proposed and final rules with
Federal mandates that may result in expenditures of $100 million or
more in any 1 year for state, local, or tribal governments, in the
aggregate, or to the private sector. UMRA generally requires agencies
to consider alternatives and adopt the more cost-effective or least
burdensome alternative that achieves the objectives of the rule.
This rule contains no Federal mandates, as defined by title II of
the UMRA, for State, local, and tribal governments or the private
sector. Thus, this rule is not subject to the requirements of sections
202 and 205 of UMRA.
Paperwork Reduction Act
The amendments to 7 CFR part 762 contained in this final rule
require no
[[Page 56107]]
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
Agriculture, Loan programs--Agriculture.
0
Accordingly, 7 CFR chapter VII 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.
Sec. 762.102 [Amended]
0
2. In Sec. 762.102 remove the definitions of ``Financially viable
operation'', ``Participation'' and ``Sale of guaranteed portion.''
0
3. Amend Sec. 762.106 by removing paragraph (b)(8) and revising
paragraph (c)(8) to read as follows:
Sec. 762.106 Preferred and certified lender programs.
* * * * *
(c) * * *
(8) Designate a person or persons, either by name, title, or
position within the organization, to process and service PLP loans for
the Agency.
* * * * *
0
4. In Sec. 762.126, remove paragraph (e)(1), redesignate paragraphs
(e)(2), (e)(3), and (e)(4) as (e)(1), (e)(2), and (e)(3), respectively,
and revise newly designated (e)(2) to read as follows:
Sec. 762.126 Security requirements.
(e) * * *
(2) Junior lien positions are acceptable only if the total amount
of debt with liens on the security, including the debt in junior lien
position, is less than or equal to 85 percent of the value of the
security. Junior liens on crops or livestock products will not be
relied upon for security unless the lender is involved in multiple
guaranteed loans to the same borrower and also has the first lien on
the collateral.
* * * * *
0
5. Revise Sec. 762.145 (b)(6)(i) to read as follows:
Sec. 762.145 Restructuring guaranteed loans.
* * * * *
(b) * * *
(6) * * *
(i) As a result of the capitalization of interest, a rescheduled
promissory note may increase the amount of principal the borrower is
required to pay. However, in no case will such principal amount exceed
the statutory loan limits contained in Sec. 761.8 of this chapter.
* * * * *
0
6. Add Sec. 762.159 to read as follows:
Sec. 762.159 Pledging of guarantee.
A lender may pledge all or part of the guaranteed or unguaranteed
portion of the loan as security to a Federal Home Loan Bank, a Federal
Reserve Bank, a Farm Credit System Bank, or any other funding source
determined acceptable by the Agency.
0
7. Revise Sec. 762.160 to read as follows:
Sec. 762.160 Assignment of guarantee.
(a) The following general requirements apply to assigning
guaranteed loans:
(1) Subject to Agency concurrence, the lender may assign all or
part of the guaranteed portion of the loan to one or more holders at or
after loan closing, if the loan is not in default. However, a line of
credit cannot be assigned. The lender must always retain the
unguaranteed portion in their portfolio, regardless of how the loan is
funded.
(2) The Agency may refuse to execute the Assignment of Guarantee
and prohibit the assignment in case of the following:
(i) The Agency purchased and is holder of a loan that was assigned
by the lender that is requesting the assignment.
(ii) The lender has not complied with the reimbursement
requirements of Sec. 762.144(c)(7), except when the 180 day
reimbursement or liquidation requirement has been waived by the Agency.
(3) The lender will provide the Agency with copies of all
appropriate forms used in the assignment.
(4) The guaranteed portion of the loan may not be assigned by the
lender until the loan has been fully disbursed to the borrower.
(5) The lender is not permitted to assign any amount of the
guaranteed or unguaranteed portion of the loan to the loan applicant or
borrower, or members of their immediate families, their officers,
directors, stockholders, other owners, or any parent, subsidiary, or
affiliate.
(6) Upon the lender's assignment of the guaranteed portion of the
loan, the lender will remain bound to all obligations indicated in the
Guarantee, Lender's Agreement, the Agency program regulations, and to
future program regulations not inconsistent with the provisions of the
Lenders Agreement. The lender retains all rights under the security
instruments for the protection of the lender and the United States.
(b) The following will occur upon the lender's assignment of the
guaranteed portion of the loan:
(1) The holder will succeed to all rights of the Guarantee
pertaining to the portion of the loan assigned.
(2) The lender will send the holder the borrower's executed note
attached to the Guarantee.
(3) The holder, upon written notice to the lender and the Agency,
may assign the unpaid guaranteed portion of the loan. The holder must
assign the guaranteed portion back to the original lender if requested
for servicing or liquidation of the account.
(4) The Guarantee or Assignment of Guarantee in the holder's
possession does not cover:
(i) Interest accruing 90 days after the holder has demanded
repurchase by the lender, except as provided in the Assignment of
Guarantee and Sec. 762.144(c)(3)(iii).
(ii) Interest accruing 90 days after the lender or the Agency has
requested the holder to surrender evidence of debt repurchase, if the
holder has not previously demanded repurchase.
(c) Negotiations concerning premiums, fees, and additional payments
for loans are to take place between the holder and the lender. The
Agency will participate in such negotiations only as a provider of
information.
Signed in Washington, DC, on September 1, 2005.
James R. Little,
Administrator, Farm Service Agency.
[FR Doc. 05-19126 Filed 9-23-05; 8:45 am]
BILLING CODE 3410-05-P