[Federal Register Volume 71, Number 149 (Thursday, August 3, 2006)]
[Rules and Regulations]
[Pages 43955-43958]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-12503]
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Rules and Regulations
Federal Register
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Federal Register / Vol. 71, No. 149 / Thursday, August 3, 2006 /
Rules and Regulations
[[Page 43955]]
DEPARTMENT OF AGRICULTURE
Farm Service Agency
7 CFR Part 762
RIN 0560-AH07
Guaranteed Loans--Retaining PLP Status and Payment of Interest
Accrued During Bankruptcy and Redemption Rights Periods
AGENCY: Farm Service Agency, USDA.
ACTION: Final rule.
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SUMMARY: The Farm Service Agency (FSA) is amending its regulations
pertaining to the retention of Preferred Lender Program (PLP) status by
lenders in certain situations, and the payment of interest in cases
where the lender is unable to take action due to bankruptcy or state
redemption laws. This rule will allow PLP lenders, under certain
conditions, to retain their PLP status for a period, not to exceed two
years, after their loss ratio exceeds the standard established by the
Agency. It will also allow for the payment of additional interest on a
final loss claim if a bankruptcy prevents the lender from taking
liquidation action or a state's mandatory redemption law prevents the
lender from disposing of property acquired through foreclosure.
DATES: Effective Date: September 5, 2006.
FOR FURTHER INFORMATION CONTACT: Joseph Pruss, Senior Loan Officer,
Farm Service Agency; telephone: (202) 690-2854; facsimile: (202) 690-
1196; e-mail: [email protected].
SUPPLEMENTARY INFORMATION:
Background
FSA published a proposed rule on August 15, 2005, (70 FR 47730-
47733) to amend its regulations governing the servicing of loans made
under the guaranteed farm loan program. The comment period ended
October 14, 2005.
Summary of Public Comments
All of the issues related to the proposed rule were commented on.
FSA considered the comments and incorporated some of the
recommendations and suggestions in this rule. Following is a review of
the comments and the changes made in the final rule in response to the
comments.
Retaining PLP Status
Six comments were received regarding the proposal to amend 7 CFR
762.106(g)(2)(ii). The proposal would recognize additional situations
where a PLP lender could be allowed to retain their status as a PLP
lender if, due to circumstances beyond their control they no longer met
the eligibility requirements concerning loss ratios. All of the
commenters were in favor of the proposal, with one specifically
mentioning that the current regulation is inadequate without any
change. One comment suggested that the Agency should enlarge the
maximum period of waiver from one year to three years, subject to
earlier revocation by the Agency if the lender was not making progress
toward meeting the requirements of its approved loss reduction plan.
Another commenter favored the extension of the one year period only in
cases of extreme disasters. One commenter also suggested that the
decision on whether or not the extension was to be granted should be
made administratively final, since it is subjective and could subject
the Agency to appeals and litigation.
In consideration of the comments received, the Agency is making
changes in the final rule. Because recovery from disasters can take
several years to accomplish, the Agency is going to extend the time
period for which an exception can be granted from one year to two
years. Past experience shows that one year is an inadequate amount of
time to fully recover.
Present regulations allow the Agency to grant a waiver to PLP
lenders to allow them to retain their PLP status when they exceed the
maximum loss ratio, currently set at three percent, but only under
natural disasters that are widespread enough to be declared a disaster.
There are many other reasons that are totally beyond the control of the
lender that could cause a lender's loss ratio to exceed three percent,
even if the lender normally does an outstanding job in making and
servicing loans guaranteed by the Agency. Some of the possibilities
could include an untimely freeze of only local impact, an economic
downturn in a local area, or perhaps very low commodity prices for a
specialty crop only grown in one or two localities. Land values could
drop drastically in a local area only, possibly due to industry moving
in or out of an area, loss of access to markets, or biological or
chemical damage that is not widespread, but negatively affects a small
area. A limited area may experience localized flooding due to locally
severe thunderstorms, or a large amount of hail in a small area.
Smaller banks that make and service loans in a local area only are
more likely to incur losses above the three percent maximum loss ratio
because all of their portfolio is concentrated in a small area and the
volume of their portfolio is such that as little as one or two loans
incurring large loss claims could cause their loss ratio to go up
greatly. Larger lenders with loans spread out over a large area would
not suffer as greatly and it would take more losses before they would
reach the maximum loss limit. Whether a large or small lender, either
one would suffer the loss for reasons totally beyond their control.
PLP Lenders who exceed the maximum loss ratio and want to retain
their status will contact their FSA State Office and explain why they
believe their excessive losses are beyond their control. They will be
required to develop a plan to reduce their losses below the three
percent loss ratio, the current maximum allowed by regulations to
retain PLP status. If the FSA State Office determines there is adequate
justification for allowing the lender to retain PLP status, the State
Office will make their recommendation and send an exception request to
the Deputy Administrator of Farm Loan Programs, who will make the final
decision on granting the exception. If the State Office determines that
an exception is not justified, they will decline to send a request for
an exception. If granted, the exception may be renewed at the end of
the two year period for another two year period if the lender is making
satisfactory progress toward reducing their loss ratio below the
standard, currently set at three
[[Page 43956]]
percent. No further renewals or extensions would be granted.
The Deputy Administrator for Farm Loan Programs would not
automatically grant the request for retention of PLP status. A careful
analysis would be performed on the information provided by the lender
and the State Office of the Agency. A comparison would be made with
loss ratios of other lenders in the same area. If there are several
local lenders, and only one is experiencing excessive loss claims, the
request would be denied, unless there were other extenuating
circumstances that would justify the request.
The Agency does not adopt the suggestion that the decision on
granting an exception be administratively final in order to avoid
appeals. The Agency anticipates that such exceptions rarely will be
made, and any denials will be upheld in an appeal.
Interest Accrual on Loan Liquidations
Nine comments were received on this subject; all were supportive of
the proposal, and saw it as a good start, but some believe it does not
go far enough. One mentioned that they appreciated that FSA is
responding to the concerns of the commercial lenders on the issue of
interest accrual in Chapter 7 bankruptcies and in redemption rights
cases. Several commenters believed the Agency should relax its
requirements further than proposed, to pay interest for a longer
period. These comments stated that while 45 days is enough time to
liquidate chattel security, 45 days in some cases is not enough time to
liquidate real estate.
In response to these comments, the Agency will pay interest on the
unsecured amount for up to 90 days, instead of the 45 days originally
proposed, after the earlier of the relief from stay or discharge of the
Chapter 7 bankruptcy for real estate secured loans. The Agency still
believes that, when the security is chattels, paying interest on the
unsecured amount for up to 45 days after the earlier of the relief from
stay or discharge of the Chapter 7 bankruptcy is adequate. Forty five
days is generally enough time to accomplish liquidation after the
relief from stay or discharge since, for chattels there should be few
legal impediments; however, this amount of time often is inadequate
when real estate serves as collateral. That is because lenders are
typically unable to liquidate real estate in the same timeframe as
chattels. Thus, the Agency has amended this final rule accordingly.
One comment indicated that the Agency was establishing the date of
filing a Chapter 7 bankruptcy as the date from which the 90 day time
limit on interest was to be paid. That, in fact, is already the current
policy of FSA, and the revision is simply stating this more clearly in
Sec. 762.148 in order to reduce confusion.
Another suggestion was that the time period should be based on the
unique circumstances of each case, and suggested that Farm Credit is at
a disadvantage because they are required to offer a right of first
refusal in all states, regardless of whether or not redemption rights
apply. Establishing an indefinite period of time to pay interest based
on the particulars of each case would not be appropriate, as lenders
would not all be treated equally, so the Agency does not adopt this
comment.
The suggestion also was made that the additional interest should
apply to the entire amount of the debt and not just the unsecured
portion. The Agency does not adopt this comment as the process of the
estimated loss claim allows the lender to receive immediate
compensation upon which they can invest to offset any earnings
reductions.
Another commenter assumed that the filing of Chapter 7 bankruptcy
would serve as the lender's liquidation plan. This is not the case.
Lenders shall continue to follow those existing regulations at 7 CFR
762.149(b). This section makes very clear the requirements a lender
must follow in developing a liquidation plan, including timeframes and
submission requirements to the Agency. A lender is still required to
appraise the collateral, determine the method to obtain the greatest
return, and submit an estimated loss claim if liquidation cannot be
completed within 90 days.
Other comments were that the Agency should use some other date for
starting the 90 day clock, such as the date the bankruptcy is closed,
when the trustee abandons the security, or the date of discharge. The
Agency carefully considered these comments, but believes using the date
of filing for Chapter 7 bankruptcy as the date of the decision to
liquidate is most reasonable as previously explained. When a borrower
files for a Chapter 7 bankruptcy, the lender can immediately submit an
estimated loss claim, even with incomplete information concerning the
collateral. There is limited justification in using the date the
bankruptcy is closed, when the trustee abandons the security, or the
date of discharge, as the starting date of the 90 day interest accrual
the Agency will pay, because there is no reason a lender cannot file an
estimated loss claim upon notification of the borrower filing for a
Chapter 7 Bankruptcy.
The proposal to pay additional interest on the amount that was
estimated to be secured but was eventually found to be unsecured
removes the penalty that a lender effectively receives for
underestimating their loss under existing regulations. This rule will
encourage the lender to file an estimated loss claim since the lender
will be paid additional interest on any unsecured debt remaining only
if the lender filed an estimated loss claim. Thus the lender will not
lose interest due to an inaccurate estimated loss claim.
Another commenter suggested that the Agency include Chapter 11
bankruptcies along with Chapter 7 bankruptcies in the proposal to pay
additional interest. The existing regulations concerning Chapter 11
bankruptcies are adequate to cover those situations, so no changes will
be made in response to this comment.
Another comment was that the Agency should put some reasonable caps
on default interest rates and attorney fees that lenders charge. The
Agency has no authority to establish maximum default interest rates.
Default interest rates are often spelled out in the promissory note
and, by signing promissory notes, borrowers agree to the default
interest rate. The Agency is not involved in negotiating loan terms
between lenders and their customers beyond the term limits imposed for
guaranteed loan origination and rescheduling, and no change will be
made in response to the comment. In addition, the Agency does not cover
default interest as part of any loss claims.
As for the comment suggesting a particular limitation on attorney
fees, the Agency has no authority to establish what reasonable legal
fees are. The Agency does often negotiate with lenders to reduce loss
claims that include attorney fees that seem unreasonable in a
particular case. Explicitly stating in the regulation what is
reasonable, is not necessary or appropriate and no change will be made
in response to the comment.
Several comments were received which addressed the proposed payment
of interest in cases where state redemption rights apply. Commenters
generally combined comments concerning interest where state redemption
rights apply with the comments on Chapter 7 Bankruptcy. No commenter
was opposed to the proposal, but, just as in the case of Chapter 7
bankruptcies, several thought the 45 day proposal was inadequate in
some cases, and should be longer. The Agency agrees with the
suggestions and
[[Page 43957]]
amending the final regulation to allow for the payment of interest for
a period of up to 90 days after the end of the redemption period for
real estate secured loans.
One commenter suggested that there has been an increasing
marginalization of borrowers in the program in recent years, and
objects to the use of the language that identifies lenders as the
Agency's customers. The guaranteed loan program was created to make
credit available to farmers and ranchers who may not have credit
available to them. This is accomplished by providing a guarantee to a
commercial lender to reduce most of their risk of loss on the loan they
make to the farmer/rancher. The loans guaranteed are those that the
lender would not have made without a guarantee. Thus, farmers and
ranchers are ultimate beneficiaries of the program by being able to
obtain credit, or credit at competitive rates and better terms. In
making and servicing guaranteed loans, no direct contact between the
farmer and the Agency is required; the Agency conducts its program by
dealing with the lenders. For guaranteed loans, the farm borrowers make
application to, and are customers of the lender. The lender makes
application to the Agency for the guarantee, and thus is the customer
of the Agency. No changes were made to the rule as a result of this
comment.
Executive Order 12866
This rule has been determined to be not significant under Executive
Order 12866 and was not reviewed by the Office of Management and
Budget.
Regulatory Flexibility Act
The Agency certifies that this rule will not have a significant
economic effect on a substantial number of small entities, because it
does not require any specific actions on the part of the borrower or
the lenders. The Agency made this certification in the proposed rule
and no comments were received in this area. The Agency, therefore, is
not required to perform a Regulatory Flexibility Analysis as required
by the Regulatory Flexibility Act, Public Law 96-534, as amended (5
U.S.C. 601).
Environmental Evaluation
The environmental impacts of this final rule have been considered
in accordance with the provisions of the National Environmental Policy
Act of 1969 (NEPA), 42 U.S.C. 4321 et seq., the regulations of the
Council on Environmental Quality (40 CFR parts 1500-1508), and the FSA
regulations for compliance with NEPA, 7 CFR part 1940, subpart G. FSA
concluded that the rule does not require preparation of an
environmental assessment or environmental impact statement.
Executive Order 12988
This rule has been reviewed in accordance with E.O. 12988, Civil
Justice Reform. In accordance with that Executive Order: (1) All State
and local laws and regulations that are in conflict with this rule will
be preempted; (2) no retroactive effect will be given to this rule
except that lender servicing under this rule will apply to loans
guaranteed prior to the effective date of the rule; and (3)
administrative proceedings in accordance with 7 CFR part 11 must be
exhausted before requesting judicial review.
Executive Order 12372
For reasons contained in the Notice related to 7 CFR part 3015,
subpart V (48 FR 29115, June 24, 1983) the programs and activities
within this rule are excluded from the scope of Executive Order 12372,
which requires intergovernmental consultation with state and local
officials.
Unfunded Mandates
This rule contains no Federal mandates, as defined by title II of
Unfunded Mandates Reform Act of 1995 (UMRA), Public Law 104-4, for
State, local, and tribal governments or the private sector. Therefore,
this rule is not subject to the requirements of sections 202 and 205 of
UMRA.
Executive Order 13132
The policies contained in this rule do not have any substantial
direct effect on states, on the relationship between the national
government and the states, or on the distribution of power and
responsibilities among the various levels of government. Nor does this
rule impose substantial direct compliance costs on state and local
governments. Therefore, consultation with the states is not required.
Paperwork Reduction Act
The amendments to 7 CFR part 762 contained in this rule require no
revisions to the information collection requirements that were
previously approved by OMB under control number 0560-0155.
Federal Assistance Programs
These changes affect the following FSA programs as listed in the
Catalog of Federal Domestic Assistance: 10.406 Farm Operating Loans;
10.407 Farm Ownership Loans.
List of Subjects in 7 CFR Part 762
Agriculture, Banks, Credit, Loan programs--agriculture.
0
Accordingly, Title 7 of the Code of Federal Regulations is amended as
follows:
PART 762--GUARANTEED FARM LOANS
0
1. The authority citation for part 762 continues to read as follows:
Authority: 5 U.S.C. 301; 7 U.S.C. 1989.
0
2. Amend Sec. 762.106 by revising paragraph (g)(2)(ii) to read as
follows:
Sec. 762.106 Preferred and certified lender programs.
* * * * *
(g) * * *
(2) * * *
(ii) Failure to maintain PLP or CLP eligibility criteria. The
Agency may allow a PLP lender with a loss rate which exceeds the
maximum PLP loss rate, to retain its PLP status for a two-year period,
if:
(A) The lender documents in writing why the excessive loss rate is
beyond their control;
(B) The lender provides a written plan that will reduce the loss
rate to the PLP maximum rate within two years from the date of the
plan, and
(C) The Agency determines that exceeding the maximum PLP loss rate
standard was beyond the control of the lender. Examples include, but
are not limited to, a freeze with only local impact, economic downturn
in a local area, drop in local land values, industries moving into or
out of an area, loss of access to a market, and biological or chemical
damage.
(D) The Agency will revoke PLP status if the maximum PLP loss rate
is not met at the end of the two-year period, unless a second two year
extension is granted under this subsection.
* * * * *
0
3. Amend Sec. 762.148(d)(1) by adding a sentence to the end of the
paragraph to read as follows:
Sec. 762.148 Bankruptcy.
* * * * *
(d) * * *
(1) * * * For purposes of calculating the time frames required
under Sec. 762.149 of this part, for a borrower who is or will be
liquidated, the date the borrower files for bankruptcy protection under
Chapter 7 shall be the date of the decision to liquidate.
* * * * *
0
4. Amend Sec. 762.149 by revising paragraph (d)(2) to read as follows:
Sec. 762.149 Liquidation.
* * * * *
(d) * * *
[[Page 43958]]
(2) The lender generally will discontinue interest accrual on the
defaulted loan at the time the estimated loss claim is paid by the
Agency. The following exceptions apply:
(i) If the lender estimates that there will be no loss after
considering the costs of liquidation, interest accrual will cease 90
days after the decision to liquidate,
(ii) In the case of a Chapter 7 bankruptcy, in cases where the
lender filed an estimated loss claim, the Agency will pay the lender
interest which accrues during and up to 45 days after the date of
discharge on the portion of the chattel only secured debt that was
estimated to be secured but upon final liquidation was found to be
unsecured, and up to 90 days after the date of discharge on the portion
of real estate secured debt that was estimated to be secured but was
found to be unsecured upon final disposition,
(iii) The Agency will pay the lender interest which accrues during
and up to 90 days after the time period the lender is unable to dispose
of acquired property due to state imposed redemption rights on any
unsecured portion of the loan during the redemption period, if an
estimated loss claim was paid by the Agency during the liquidation
action.
* * * * *
Signed at Washington, DC, on July 18, 2006.
Teresa C. Lasseter,
Administrator, Farm Service Agency.
[FR Doc. E6-12503 Filed 8-2-06; 8:45 am]
BILLING CODE 3410-05-P