[Federal Register: November 8, 2007 (Volume 72, Number 216)]
[Rules and Regulations]
[Page 63241-63361]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08no07-15]
[[Page 63241]]
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Part II
Department of Agriculture
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Farm Service Agency
Commodity Credit Corporation
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7 CFR Parts 718, 761, 762 et al.
Regulatory Streamlining of the Farm Service Agency's Direct Farm Loan
Programs; Final Rule
[[Page 63242]]
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DEPARTMENT OF AGRICULTURE
Farm Service Agency
7 CFR Parts 718, 761, 762, 763, 764, 765, 766, 767, 768, and 769
Commodity Credit Corporation
7 CFR Part 1405
RIN 0560-AF60
Regulatory Streamlining of the Farm Service Agency's Direct Farm
Loan Programs
AGENCY: Farm Service Agency, USDA.
ACTION: Final rule.
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SUMMARY: This rule streamlines the Farm Service Agency's (FSA)
regulations governing its direct Farm Loan Programs. The final rule
simplifies and clarifies FSA's direct loan regulations; implements the
recommendations of the USDA Civil Rights Action Team; meets the
objectives of the Paperwork Reduction Act of 1995; and separates FSA's
direct Farm Loan Programs regulations from the Rural Development
mission area's loan program regulations.
DATES: Effective Date: December 31, 2007.
FOR FURTHER INFORMATION CONTACT: William D. Cobb; USDA/FSA/DAFLP/STOP
0520, 1400 Independence Avenue, SW., Washington, DC 20250-0520;
telephone (202) 720-1059; electronic mail: bill.cobb@wdc.usda.gov.
SUPPLEMENTARY INFORMATION:
Discussion of the Final Rule
On February 9, 2004, the agency published a proposed rule (69 FR
6056-6121) to streamline regulations governing its direct Farm Loan
Programs (FLP). The comment period closed on April 9, 2004. The agency
received several comments requesting the comment period to be reopened.
The agency reopened the comment period until May 4, 2004 (69 FR 20834).
In response to the proposed rule the agency received 1,583 comments
from 593 individuals and organizations, including 181 banks or banking
organizations, 168 individuals, 81 FSA employees, 71 Farm Credit
Administration offices or employees, 42 agricultural organizations, 18
state agencies or officials, 13 Farm Bureaus, five State
representatives, three Federal agencies, two FSA County Committee
members, one tribal association, one university and one loan packager.
In addition, six comment letters signed by multiple Members of the
United States Congress were received.
Seven comments addressed the agency's decision to move the
administrative provisions of program delivery from the Code of Federal
Regulations (CFR) to a series of agency handbooks. Three comments
opposed the agency's decision while four comments supported it. In
accordance with the Administrative Procedures Act, both the proposed
and the final rules provide the substantive requirements applicable to
the public requesting assistance or benefits from FSA, not internal
agency procedures and processes. The agency will issue its internal
guidance in handbooks simultaneously with the final rule, since
internal guidance only describes the operating procedures of the agency
and does not impact services provided to applicants and borrowers.
Further, the agency is working on making all its handbooks available on
the internet so that any interested party may view, download, and print
agency handbooks as appropriate. Therefore, these comments were not
adopted.
Four comments were received requesting the agency reopen the
comment period. As noted above, the agency reopened and extended the
comment period from April 9, 2004, to May 4, 2004, and published a
Federal Register notice to that effect on April 19, 2004.
Eleven comments provided general comments not related to any
specific part, section, or policy of the proposed rule. Therefore, the
agency did not take any action regarding these comments.
The following provides a summary of the comments received and the
agency's response by CFR part.
Part 761--General Program Administration
The following discussion addresses the comments received on Part
761.
Section 761.2 Abbreviations and Definitions
Three comments were received on the ``active borrower'' and
``borrower'' definitions. Two comments stated the definitions as
written are very similar, and therefore, the definition of ``active
borrower'' should be removed from the CFR. The other comment stated the
term ``active borrower'' is not used in the proposed rule. The agency
agrees with the comments and has removed the definition.
One comment was received on the ``agreement for the use of
proceeds'' definition. The comment stated the agreement for the use of
proceeds has not benefited borrowers or the agency since its inception.
Further, the comment stated if the comment is not adopted, the agency
should initiate a study on how the agreement for the use of proceeds
has benefited the agency's borrowers. Section 335(f) of the
Consolidated Farm and Rural Development Act (Act) (7 U.S.C. 1985(f))
requires the agency to release normal income security proceeds to
borrowers for essential family living and farm operating expenses until
the loan is accelerated. Further, Section 335(f)(6) of the Act provides
if a borrower is required to plan or report how proceeds from the sale
of security will be used, the agency must notify the borrower of (a)
the reporting requirement; (b) the right to release proceeds; and (c)
how to request such funds. The agency implemented the Act's requirement
with the agreement for the use of proceeds that provides a means for
reaching a consensus with a borrower regarding the use of proceeds from
the sale of security property when the farm operating plan is
developed. In addition, the agency delegates the authority to release
proceeds to borrowers according to an established agreement for the use
of proceeds to agency officials who do not have loan approval
authority. Further, the agency utilizes the agreement for the use of
proceeds to account for the agency's security. Moreover, the agency
continuously evaluates forms utilized in administering its programs for
effectiveness. Therefore, based on this comment as well as the comments
received on Sec. 765.302, the agency may conduct further analysis to
determine if changes are warranted. Lastly, the agency did not propose
to make changes to the agreement for the use of proceeds; therefore,
the agency will not take any action on this comment at this time.
One comment stated the term ``agribusiness'' is not defined in the
proposed rule. The agency does not use the term in the CFR; therefore,
it does not need to include a definition for ``agribusiness.''
Two comments were received on the ``agricultural commodity''
definition. One comment stated the agency must define ``agriculture''
in general to clarify and distinguish that agriculture does not solely
consist of commodities and large-scale operations. The definition as
written, the comment stated, will make many Indian farm operators
ineligible for loans. The other comment stated that the narrow
definition of ``agricultural commodity'' adversely impacts the
definition of ``basic part of the applicant's total farming operation''
and urged that the definition of ``agricultural commodity'' be
broadened to include a
[[Page 63243]]
specific list of agricultural products. The agency believes the
definition is reasonably broad and provides the agency discretion in
determining what constitutes an agricultural commodity. The agency does
not use this term in the regulations to suggest that agriculture
consists only of commodities and large-scale operations. Furthermore,
the definitions of both ``agricultural commodity'' and ``basic part of
an applicant's total farming operation'' included in the proposed rule
are identical to existing definitions established in the agency's
emergency loan regulations by a final rule (67 FR 791-801) published on
January 8, 2002, after considering public comments. Based on reviews of
assistance provided since the implementation of that final rule, the
agency believes both definitions have resulted in the achievement of
the program's mission and the agency is not aware of any adverse impact
on the public. Therefore, neither comment is adopted.
Two comments were received on the ``applicant'' definition. One
comment stated the definition is not clear if husband and wife
applicants are considered as a joint operation. Further, the comment
objected to husband and wife applicants being considered joint
operations. The agency has not revised the definition based on this
comment, but, the agency has revised the applicant eligibility
requirements under Sec. 764.51, as discussed under that section
heading. The other comment stated the agency should eliminate the
definition and use ``lender applicant'' in the guaranteed loan program.
The agency clarified the definition of ``applicant'' to be applicable
to both direct and guaranteed loan programs. The agency believes using
the terms ``lender applicant'' and ``lender'' in the guaranteed loan
program, however, would be confusing, therefore, the comment is not
adopted. Further, to avoid confusion, the agency removed the definition
``loan applicant'' in the final rule. Therefore, the comment is not
adopted.
One comment was received on the ``approval official'' definition.
The comment stated the definition as written is confusing, because it
contains the term ``field official'' which is not defined. The agency
agrees with the comment, and removed the definition and replaced the
term in the text with the word ``Agency.''
One comment was received on the ``aquaculture'' definition. The
comment stated the agency should work with Tribes in the Northwestern,
Northeastern and Midwestern United States to ensure the definition
covers aquaculture on Tribal reservations. The agency believes the
definition as written is broad enough to cover aquaculture operations
in every part of the country. Further, the agency evaluates each
operation on its merits. Therefore, the comment is not adopted.
Three comments were received on the ``average farm customer''
definition. Two comments supported the definition as written. One
comment stated the definition as proposed eliminates Indian producers
with niche markets who farm traditionally and practice sustainable
agriculture. The agency does not foresee that Indian producers will be
impacted by the definition since producers eligible to receive
guaranteed loans will remain eligible. Therefore, the comment is not
adopted.
One comment was received on the ``basic part of an applicant's
total farming operation'' definition. The comment stated the definition
as written is narrowly based on the definition of ``agricultural
commodity'' without a definition of agriculture. Section 329 of the Act
(7 U.S.C. 1970), in part, provides the agency may make emergency loans
to applicants based on production losses if the applicant shows that a
single enterprise that is a ``basic part of the applicant's farming,
ranching, or aquaculture operation'' has suffered at least a 30 percent
loss of normal per acre or per animal production. The definition
clarifies the agency's implementation of the Act's provisions and as
discussed in the agency's response to comments on the definition of
``agricultural commodity,'' the agency does not believe either
definition as written, has an adverse impact on an applicant's
eligibility. Therefore, the comment is not adopted.
Five comments were received on the ``beginning farmer'' definition.
Three comments stated that the definition precludes applicants with
less than 3 years of experience from meeting the conditions of the
beginning farmer definition. Further, the comments stated an applicant
with less than 3 years of experience is eligible for a direct farm
ownership loan, but is not eligible for a beginning farmer downpayment
farm ownership loan. The agency agrees with the comments and has
revised the definition accordingly. One comment stated the agency
should revise the definition to remove the word ``direct'' in
describing ``OL applicant'' from subparagraph (5). The subparagraph is
not applicable to direct or guaranteed operating loans (OL) under the
statutory definition, therefore, the agency agrees and has revised the
definition accordingly. Further, the comment stated the agency should
use the median acreage, as provided in Section 343(a)(11)(F) (7 U.S.C.
1991(a)(11)(F)) of the Act, to determine if an applicant is a beginning
farmer. Section 343(a)(11)(F) of the Act was enacted under the
provisions of the Agricultural Credit Improvement Act of 1992. As
addressed in the preamble of the agency's 1993 final rule (58 FR 48275)
published on September 15, 1993, implementing the regulatory definition
of ``beginning farmer,'' while the statute referred to ``the median
acreage of farm * * * as reported in the most recent census of
agriculture,'' the agency utilized the term ``average acreage'' in its
regulations as the census of agriculture did not capture ``median
acreage'' at that time. The National Agricultural Statistics Service
now publishes both the median and average farm size by county. Analysis
of the data reveals that the median acreage is typically lower than the
average acreage. Adoption of the comment may result in some applicants,
who meet the existing requirements of the definition, not being
considered a ``beginning farmer.'' However, the comment is correct in
that both the existing and proposed regulations do not match the
statute. Therefore, the comment is adopted and the definition has been
revised accordingly.
One comment stated the agency should remove the requirement that
all members of an entity must materially and substantially participate
in the operation. Section 343(a)(11) (7 U.S.C. 1991(a(11)) of the Act
defines the term ``qualified beginning farmer or rancher'' and provides
that for loans made to entities, the entity members must materially and
substantially participate in the operation of the farm. The definition
was based on the Act's provision, therefore, the comment cannot be
adopted.
Three comments were received on the ``borrower'' definition. One
comment stated the definition does not seem to be applicable to the
guaranteed loan program. The agency agrees with the comment and has
revised the definition accordingly. Another comment stated the agency
should revise the definition to exclude cosigners since cosigners
merely sign the promissory note to assure repayment of the loan and are
not program borrowers as defined in the agency's regulations. The
agency does not agree with the comment because a cosigner has the same
liability for the debt as any other borrower who signed the promissory
note. Therefore, the comment is not adopted. The last comment stated
the agency should clarify the definition to provide if the borrower's
name should match the
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operator's name utilized by Farm Programs in their internal agency
systems. The agency believes the definition as written is clear;
signature requirements are a separate issue. Further, as stated in
Sec. 761.2, the definitions included in this part are applicable to
FLP only. Therefore, the comment is not adopted.
One comment was received on the ``cash flow budget'' definition.
The comment stated that commercial lenders have adopted the practice of
not including advances or principal repayments on lines of credit in
the cash flow, since they are considered cash flow neutral. The comment
stated the agency should revise the definition to match commercial
lenders' standards. The agency agrees with the comment and has revised
the definition accordingly.
One comment was received on the ``chattel security'' definition.
The comment stated the agency should clarify the definition to state
that chattel is non-real estate property. The agency obtains a security
interest using mortgages, deeds of trust, financing statements and
security agreements. The agency believes the comment is proposing to
delineate between chattels and real estate which cannot be done
uniformly in all cases, especially for loans for which security is
growing crops and fixtures. Further, the agency believes the definition
as written is reasonably clear. Therefore, the comment is not adopted.
One comment stated the term ``commercial classified account'' is
not used in the rule, while the terms ``immediate family'' and
``immediate family member'' even though they are used, are not defined.
The agency agrees and, in the final rule, the agency has removed the
term ``commercial classified account'' and replaced the terms
``immediate family'' and ``immediate family member'' with the defined
``family member'' term.
Two comments were received on the ``conservation contract review
team'' definition. Both comments stated the agency should remove the
adjacent public landowners from the definition. The comments did not
provide any reason for removing public landowners from the conservation
contract review team. The agency has utilized the definition, as
published in the proposed rule, since September 14, 1988, and has not
encountered any difficulties or concerns. Further, the agency believes
public landowners may have concerns or relevant information regarding
the potential easement that may affect the agency's decision.
Therefore, the comments are not adopted.
One comment was received on the ``cosigner'' definition. The
comment stated the agency should revise the definition to state that
cosigners are not eligible to receive loan servicing. The agency agrees
that cosigners do not have independent rights to receive loan
servicing, but may submit a joint application for servicing with all
other liable parties. Therefore, the definition is revised accordingly.
One comment was received on the ``current market value buyout''
definition. The comment stated the agency should revise the definition
to remove liquidation costs as the definition conflicts with the
explanation of current market value buyout included in Appendix B of 7
CFR part 766. The agency agrees with the comment and has revised the
definition as the provisions of Appendix B are identical to existing
regulations published in subpart S of 7 CFR part 1951. Furthermore, the
Agency did not address a revision to the existing regulations in the
preamble of the proposed rule.
One comment was received on the ``debt forgiveness'' definition.
The comment stated the agency should include in the definition the
Act's provision, found in Section 343(a)(12)(B)(ii), which provides
that ``any write-down provided as part of a resolution of a
discrimination complaint against the Secretary'' is not considered debt
forgiveness. The agency agrees with the comment and has revised the
definition. The agency also has clarified the definition to state that
the term does not include prior debt forgiveness that is repaid in full
and debt reduction in exchange for a conservation contract.
One comment was received on the ``debt service margin'' definition.
The comment stated the proposed calculation would take a borrower off
of limited resource rates if the borrower has atypical or one-time high
inventories or cash. Therefore, the comment stated the agency should
use the term debt and capital lease coverage ratio, which is the
industry standard to calculate the debt service margin. The agency uses
a typical plan to calculate the debt service margin and does not
consider atypical high inventories or cash when running the Debt and
Loan Restructuring System (DALR$) for primary loan servicing. Further,
the definition of ``feasible plan'' provides that the farm operating
plan will not be based on atypical or one-time high inventories, or
cash on hand. Therefore, the comment is not adopted.
Six comments were received on the ``delinquent borrower''
definition. All comments stated the definition contained in the
proposed rule did not match the definition in the agency's final rule
published on February 4, 2004 (69 FR 5264-5267). The agency agrees with
the comments, and has revised the definition accordingly.
Three comments were received on the ``entity'' definition. One
comment stated that the term ``trust,'' as used in the definition, must
be more clearly defined ``so that it includes trusts established in
treaties'' making tribal farms eligible for assistance. Two comments
stated that it was not clear in the proposed rule how less than
traditional entity structures would be handled. Act section 302(a) (7
U.S.C. 1922(a)) for farm ownership loans, section 311(a) (7 U.S.C.
1941(a)) for operating loans, and section 321(a) (7 U.S.C. 1961(a)) for
emergency loans specifically provide the types of entities eligible to
receive loans; entity applicants must fit within at least one of the
types listed. The agency does not believe the definition, as written,
limits the type of trust, or other organization listed, that are
considered an entity under the Act's provisions. However, entity
applicants must meet the statutory eligibility requirement of being the
owner-operator or tenant-operator of a family farm, as well as all
other applicable eligibility and loan making requirements. The agency
believes the definition, as written, will not result in the adverse
impacts suggested in the comments; therefore, the comments are not
adopted.
Two comments were received on the ``essential family household
expenses'' definition. One comment stated that the definition, along
with the definition of ``essential family living and farm operating
expenses,'' makes the rule unclear. The agency believes the ``essential
family household expenses'' and the ``essential family living and farm
operating expenses'' definitions are similar, and has therefore,
removed the definition of ``essential family household expenses'' in
the final rule as unnecessary and replaced the term throughout the CFR.
The other comment stated the agency should revise the text ``the
borrower and the immediate family of the borrower'' to read ``the
borrower, spouse, and immediate family members'' since the agency
defined the term ``family member.'' Since the agency removed the
definition of ``essential family household expenses,'' the agency
revised the definition of ``family living expenses'' to include
expenses for the borrower's spouse and immediate family members.
Two comments were received on the ``essential family living and
farm operating expenses'' definition. One comment stated that the
agency should
[[Page 63245]]
revise the definition to provide that the agency will consider the
expenses typical for the local community, instead of expenses typical
for that type of operation in the area. Further, the comment stated the
agency should remove the provision that the agency will consider what
constitutes an efficient method of production for the borrower's
resources because it is ambiguous. The agency believes using the term
``local community'' will make the definition unclear when applied to a
rural area. Further, the agency believes the provision, as written,
furthers the agency's mission of providing supervised credit and
allowing the agency and the applicant to adjust to the needs of the
operation. Therefore, this part of the comment is not adopted. The
comment also stated the agency should include in the definition nursing
care of immediate family members not living in the same household. The
agency has revised the definition of ``family living expenses'' to
include the costs of providing for the needs of family members and
those for whom the borrower has a financial obligation, such as
alimony, child support, or nursing care of an elderly parent. The
agency agrees that nursing care of immediate family members is a family
living expense, but the agency believes it is not always an essential
family living expense. Therefore, this part of the comment is not
adopted. Lastly, the comment stated the agency should remove the
reference to church expenses from the definition and replace it with
religious expenses. The other comment stated the agency should revise
the definition to remove the reference to ``church.'' The agency agrees
with the comments and has revised the definition accordingly.
Eight comments were received on the ``established farmer''
definition. Two comments stated the agency should remove the
subparagraph describing entity eligibility from the definition because
it limits the use of different legal structures for families attempting
to transfer the farm to a new generation. The term ``established
farmer'' is used only in subpart H of 7 CFR part 764 which addresses
requirements specific to emergency loans in accordance with section 321
of the Act (7 U.S.C. 1961). The authorized uses for emergency loan
funds include the repair or replacement of essential property damaged
or destroyed as a result of a disaster; however, emergency loan funds
would not be used to finance the transfer of a farm to a new
generation. The agency does not agree that the provision of the
definition adversely impacts inter-generational transfers and
therefore, the comments are not adopted.
Similar concerns regarding the impact of entity eligibility
requirements were received in response to regulations at Sec. 764.101.
As described in the agency's response to those comments, the agency
revised the entity eligibility requirements contained in that section,
and as a result made conforming changes to the definition of
``established farmer'' by revising the provision that an established
farmer is not ``an entity with an ownership interest of 50 percent or
more held by one or more entities'' to require that an entity cannot be
``an entity whose members are themselves entities.''
One comment stated that the ``established farmer'' definition
should be revised to recognize that Tribal farms have sovereign rights
that allow for complex land issues, which often require the use of a
full time farm manager. As discussed in the response to comments for
the definition of entity, the agency does not believe the regulations,
as written, impose any additional limitations on a particular type of
entity. However, agency assistance is only available to entity
operations that are family farms and, therefore, must have a majority
of the day-to-day operational and strategic management decisions made
by the members operating the farm, as well as meet all other
requirements established within the definition of family farm.
Therefore, this portion of the comment is not adopted. Further, the
comment stated that the ``established farmer'' definition requirement
that 50 percent or more of the ownership in the entity cannot be held
by another entity will exclude Tribal farms. As discussed in the
response to comments received on the general eligibility requirements
for loan making (Sec. 764.101), the agency has revised the eligibility
requirements regarding entities to provide that an entity applicant
cannot be composed of members that are themselves entities. Therefore,
appropriate conforming changes have been made in the CFR, and this
portion of the comment is not adopted.
Two comments stated the requirement in the ``established farmer''
definition that the entity is primarily engaged in farming and has over
50 percent of its gross income from all sources from farming, is
detrimental to small or beginning farmers who rely on non-farm income
to meet operating and family living expenses. This requirement is
supported by the ``family farm'' requirement that the farm produce
``agricultural commodities for sale in sufficient quantities to be
recognized as a farm rather than a rural residence.'' Furthermore, the
50 percent gross income requirement is included in existing regulations
published in 7 CFR 764.2 and the agency is not aware of any adverse
impacts on the public; therefore, the comments are not adopted. One
comment stated it is not clear what the term ``such loans'' refers to
in subparagraph (5)(ii) of the definition. The agency agrees with the
comment and has revised the definition to refer to ``Agency loans.''
Two comments suggested that the word ``employees'' in the last sentence
of the definition be replaced with the word ``employs.'' The agency
agrees with the comments and has revised the definition accordingly.
Two comments were received on the ``false information'' definition.
One comment stated the agency should revise the definition to include
information the applicant or borrower should have known to be false,
because it is difficult for the agency to prove the information the
applicant or borrower submitted to the agency was false. While the
agency agrees with the comment, the agency believes it is even more
difficult to prove the applicant or borrower should have known
information submitted to the agency was false. Therefore, the comment
is not adopted. The other comment stated the agency should revise the
definition to include information the applicant or borrower chose to
withhold from the agency. The term is used only in subpart F of 7 CFR
part 766 for the submission of false information. Since the proposal
concerns information not submitted to the agency, and therefore not
relied on, the comment is not adopted. Practically, however, in such
cases the information submitted to the agency may be false in light of
conflicting information not submitted and would, therefore, be covered
by the definition.
Five hundred sixty-four comments were received on the ``family
farm'' definition. Of the comments received, 12 supported the
definition as proposed while 552 comments opposed it. The proposed
definition would establish that the typical year gross income of the
operation could not exceed the greater of $750,000 in annual sales, or
the 95th percentile of the statistical distribution of the income of
farms in the state with gross sales in excess of $10,000, based on the
farm data and survey of farm economic factors published by the National
Agricultural Statistics Service. The opposing comments stated the
proposed definition would make a large number of family farms
ineligible for direct and guaranteed agency loans. One hundred seventy
comments
[[Page 63246]]
recommended the gross income limit be increased from $750,000 to
$1,000,000, $1,500,000, or $2,500,000. Seventy-four comments opposed
the use of any gross income limit. Fifty-two comments stated that the
use of annual sales to determine eligibility was arbitrary. Thirty-one
comments stated the proposed definition would exclude high value crop
producing farms. Seventy comments stated the agency provided little
justification in the proposed rule for using a gross farm income cap.
Fourteen comments stated the agency does not have a statutory basis for
changing the family farm definition. Thirteen comments opposed using a
gross income limit that was not indexed to inflation. Therefore,
because of the overwhelming opposition to the proposed requirement, the
agency will not include a gross annual income in its family farm
definition. However, as noted in the discussion of the proposed rule
published on February 9, 2004, the broad guidelines contained within
the existing definition have resulted in inconsistencies in applying
the definition on a nationwide basis. The agency believes that the
``family farm'' definition in this final rule will minimize
inconsistencies regarding management and labor requirements. Based upon
comments received, the Office of Management and Budget recommends the
agency seek public input as part of a further analysis regarding the
inclusion of an appropriate nation-wide income limitation, which may
necessitate future action. It is important to note that the definition
of a ``family farm'' as stated in this final rule only applies to farm
loan program eligibility requirements.
Further, the proposed ``family farm'' definition included the
provision that the majority of the day-to-day operational and
management decisions are made by the applicant and persons related to
the applicant by blood or marriage. One hundred sixteen comments were
received on the ``related by blood or marriage'' definition. All
comments stated the definition as written excludes certain
relationships, including, but not limited to, cousins, uncles, aunts,
and grandparents and that as a result, partnerships or entities
comprised of these individuals would not be considered a family farm.
The agency agrees with the comments and revised the definition to
include the relationships except cousins. In addition, in response to
the concerns expressed, the agency revised the definition of
``relative'' to include cousin in the covered relationships.
Furthermore, the agency revised the ``family farm'' definition to
provide that the day-to-day operational and management decisions be
made by the applicant and persons related to the applicant by blood or
marriage or a relative of the applicant.
One comment expressed concern regarding the provision in the
``family farm'' definition that the farm ``in a typical year generates
net cash income that improves the family's standard of living'' as the
term ``typical year'' is not defined in the rule. The agency agrees
that the provision is subject to different interpretations and could
adversely impact applicants that have been subject to recent disasters.
Therefore, the agency removed the provision from the definition.
One comment was received on the ``family living expenses''
definition. The comment stated the agency should remove the definition
because the CFR already includes the ``essential family living and farm
operating expenses'' definition. The agency believes the terms are not
synonymous as all family living expenses are not considered essential.
Further, the terms are utilized under different circumstances in the
loan making and servicing process when the distinction is necessary.
Therefore, the comment is not adopted.
One comment was received on the ``family member'' definition. The
comment stated the agency should revise the definition to provide
family members include the immediate members of the family for whom the
borrower has a financial obligation, e.g., child support payments,
alimony, nursing care for an elderly parent. The agency revised the
definition of ``family living expenses'' to include the expenses
provided in the comment, for family members who are the borrower's
responsibility, as revising that definition is more appropriate.
One comment was received on the ``farmer'' definition. The comment
stated the agency should revise the definition to provide that farmer
is an individual or entity who is a family farmer. The agency believes
the definition as written is adequate as not every farmer in the United
States is a family farmer. Therefore, the comment is not adopted.
Two comments were received on the ``feasible plan'' definition. One
comment stated the agency should revise the definition to state
``feasible plan is when the cash flow budget shows total income equals
or exceeds total cash outflow.'' The agency does not agree with the
comment to limit the evaluation of feasibility to include only ``total
income'' as there may be other non-income sources of cash inflows, such
as cash on hand, that impact the borrower's repayment ability.
Therefore, the comment is not adopted. The other comment stated the
agency should clarify the definition to provide that the margin after
debt service and ending cash, depending on the loan requested,
determine if the operation projects a feasible plan. The agency agrees
that the feasibility for an annual operating loan should be evaluated
differently than for a term loan. However, ``margin after debt
service'' and ``ending cash'' are terms that apply to the Farm Business
Plan, a software application utilized by the agency to determine
feasibility for direct loan making and servicing requests. ``Feasible
plan'' is a term applicable to regulations for both the direct and
guaranteed loan programs. While the term ``ending cash'' refers to the
applicant or borrower having ``sufficient cash inflow to pay all cash
outflow'' and the term ``margin after debt service'' applies to
consideration of a typical plan when the ``loan approval or servicing
action exceeds one production cycle,'' the agency believes the
definition, as written, adequately describes the requirements for both
the direct and guaranteed loan programs. Therefore, the comment is not
adopted.
One comment was received on the ``financially distressed borrower''
definition. The comment stated the definition should include borrowers
who do not have a 110 percent debt service margin to match the DALR$
software program. The agency disagrees. The agency notifies financially
distressed borrowers of the availability of loan servicing programs as
provided under Sec. 766.101. The agency does not consider a borrower
who can develop a feasible plan, which does not require a margin, with
less than 10 percent margin to be financially distressed. However, a
borrower who is not delinquent, but cannot develop a feasible plan for
the current or next production cycle, is considered financially
distressed and in need of loan servicing. Further, Sec. 766.105(b)(1)
provides the agency will attempt to achieve a 110 percent of debt
service margin; however, under Sec. 766.105(b)(3) the agency only
requires the borrower ``be able to develop a feasible plan with at
least 100 percent of debt service margin'' to be considered for loan
servicing programs. If the agency revises the definition as provided in
the comment, the agency would have to re-notify all borrowers
restructured with a debt service margin of less than 110 percent
immediately after the restructuring is complete. Therefore, the comment
is not adopted. However, the
[[Page 63247]]
agency did revise the definition by removing the text, ``unable to make
payments as planned for the current or next business accounting period
or to project a feasible plan of operation for the next business
accounting period'' as the term ``business accounting period'' is not
defined. The removed text was replaced by the text, ``unable to develop
a feasible plan for the current or next production cycle'' as the term
``production cycle'' is defined in the rule, and is more easily
understood.
Six comments were received on the ``financially viable operation''
definition. One comment recommended the words ``basic family living
expenses'' in the definition be revised to read ``essential family
living expenses.'' One comment stated the agency should revise the
definition to provide the operation must generate sufficient income to
meet essential family living expenses to the extent they are not met by
dependable non-farm income. The agency agrees with the comments and has
revised the definition accordingly. In addition, the agency clarified
the definition further to provide that it is applicable only under
Sec. 764.252, which provides the conditions applicants have to meet to
request a waiver of the operating loan term limit. Four comments stated
the definition requires the operation to generate sufficient income to
provide for replacement of capital items and long-term financial
growth, and that such an operation should qualify for commercial
credit, with no agency assistance. Therefore, the comments stated the
agency should either remove the definition or make it identical to the
``feasible plan'' definition. In addition, one of the comments stated
the definition seems to provide that non-farm income can only be used
to meet family living expenses, but that non-farm income is used to
make debt payments, replace capital items and supplement working
capital. Section 311(c)(4)(B) of the Act (7 U.S.C. 1941(c)(4)(B))
requires the applicant to have a financially viable operation for the
agency to consider granting a one-time 2-year waiver of operating loan
limits. The agency believes the definition as revised to refer to
essential family living expenses should allow flexibility to small
operations while meeting the statutory requirements; therefore, the
comments are not adopted.
One comment was received on the ``foreclosed'' definition. The
comment stated the agency should revise the definition to provide
``foreclosed'' is the completed act of selling real estate security
under the power of sale in the security instrument or through judicial
proceedings. The agency agrees with the comment and has revised the
definition to refer to judicial proceedings.
One similar comment was received on the ``foreclosure sale''
definition. The comment stated the agency should revise the definition
to provide ``foreclosure sale'' is the act of selling real estate
security. The agency believes the definition as written is adequate
since the agency can also foreclose on loans secured by chattels.
Therefore, the comment is not adopted.
Two comments were received on the ``good faith'' definition. One
comment supported the definition as written. Further, it stated it is
not necessary for the agency to consult the Office of General Counsel
to determine findings of fraud, waste or conversion. The other comment
stated the agency should retain the requirement for a written Office of
General Counsel opinion that has been a regulatory requirement since
September of 1988, as such determinations have ``grave consequences for
the rights and interest of FLP borrowers * * *'' The agency recognizes
the seriousness of allegations of fraud, waste, and conversion and
therefore has revised the definition to include the requirement that an
opinion be obtained form the Office of the General Counsel. Further,
the comment stated the ``good faith'' definition should allow for
inadvertent departures from the agreements with the agency because good
faith deals with the borrower's state of mind at the time the violation
of the agreement occurs. The agency does not believe its staff can make
determinations regarding a borrower's state of mind. The text, ``The
Agency considers a borrower to act in good faith, however, when the
borrower is unable to adhere to all agreements due to circumstances
beyond the borrower's control'' adequately addresses this concern;
therefore, the comment is not adopted. In addition, the comment stated
the statutory requirement that a borrower who disposed of security and
used proceeds for essential household and operating expenses prior to
October 14, 1988, is not considered to lack good faith is not included
in the definition. While the agency agrees with the comment, the agency
does not believe a borrower will be determined to lack good faith based
on events that occurred more than 15 years prior to a current loan or
servicing application. However, as an added precaution, the agency
handbook will provide guidance on dealing with applicants and borrowers
who disposed of security and used proceeds for essential family living
and farm operating expenses prior to October 14, 1988. Therefore, the
comment is not adopted.
Lastly, the agency made an administrative revision to the ``good
faith'' definition by clarifying that good faith requires an applicant
or borrower to provide ``current, complete, and truthful information
when applying for assistance and in all past dealings with the
Agency.'' This text supports the acknowledgment currently included on
each loan or servicing application.
One comment was received on the ``graduation'' definition. The
comment stated the agency should revise the definition as the payment
in full of one or more direct FLP loans. The agency believes the
payment in full of one or more loans of the same type, when the
borrower has several outstanding loans, cannot be considered as
graduation because the borrower is still depending on the agency to
obtain necessary credit for the operation. As agency loans are a
temporary source of credit for borrowers, for the agency to measure its
borrowers' success, borrowers have to obtain their credit needs from
another source with or without an agency guarantee. Therefore, the
comment is not adopted.
One comment was received on the ``homestead protection''
definition. The comment stated the agency should clarify that homestead
protection applies to direct loan borrowers only. The agency agrees
with the comment and has revised the definition accordingly.
One comment was received on the ``homestead protection property''
definition. The comment stated the agency should revise the definition
to clarify that homestead protection property secured direct loans
only. The agency agrees with the comment and has revised the definition
accordingly.
One comment was received on the ``household contents'' definition.
The comment stated the agency should remove the second sentence of the
proposed definition with exclusions for luxury items. The agency
believes the definition as written is reasonable. The term is used in
Parts 764 and 766 in relation to disaster-related damages and taking
additional security refers to needed, not luxury household items.
Therefore, the comment is not adopted.
One comment was received on the ``inaccurate information''
definition. The comment stated the agency should revise the definition
to include information provided by an applicant without the intent of
fraudulently obtaining benefits. The agency agrees with the comment and
has revised the definition to refer to applicants, borrowers, lenders,
and other sources.
[[Page 63248]]
Two comments were received on the ``inventory property''
definition. One comment stated the definition as written includes all
Federal property, such as Federal buildings and public land. Further,
the comment stated the agency should clarify the definition to include
real estate property held by guaranteed lenders after liquidation of
guaranteed loans. The other comment stated the agency should revise the
definition as real estate and chattel property to which the United
States has acquired ownership rights. In response to the comments, the
agency has clarified that the term covers such property that formerly
secured an FLP loan and to which the Government has acquired title. The
definition would not cover former security property held by the
guaranteed lender.
One comment was received on the ``joint operation'' definition. The
comment stated the agency should remove the definition. Section
343(a)(7) of the Act (7 U.S.C. 1991(a)(7)) defines the term ``joint
operation'' and this type of entity is specifically listed as an
eligible entity for farm loans. The proposed rule was based on the
Act's provision; therefore, the comment cannot be adopted.
One comment was received on the ``lien'' definition. The comment
stated the agency should revise the definition as a legally enforceable
claim against real or chattel property. The agency agrees with the
comment and has revised the definition to refer to real or chattel
property.
One comment was received on the ``line of credit agreement''
definition. The comment stated the agency should revise the definition
as a contract between the lender and the borrower that contains certain
lender and borrower conditions, limitations, and responsibilities for
revolving or non-revolving credit. The agency's current guaranteed
regulations and handbook have contained the definition as published in
the proposed rule since February 12, 1999, without causing adverse
impacts on the program. The agency believes the less technical
definition is reasonable and easily understood. Therefore, the comment
is not adopted.
One comment was received on the ``loss rate'' definition. The
comment stated the agency should revise the definition as the net
amount of loan loss claims paid on loans made in the previous 7 years
divided by the total loan amount guaranteed during the same period. The
agency's current guaranteed regulations and handbook have contained the
definition as published in the proposed rule since February 12, 1999,
without causing adverse impacts on the program. Therefore, the comment
is not adopted. The agency did however make an administrative revision
to the definition to replace the text ``guaranteed OL, Farm Ownership
(FO), and Soil and Water (SW) loans'' with the text ``FSA guaranteed
loans'' as the agency has not made guaranteed SW loans in the last 7
years.
One comment was received on the ``mortgage'' definition. The
comment stated the agency should revise the definition as a security
instrument. The agency defines the term ``mortgage'' to clarify that it
is synonymous with the term ``deed of trust'' in those States that use
a deed of trust to obtain a lien on real estate. Further, the agency
has added the definition for the term ``security instrument'' to
describe any document that provides the agency with a security interest
in real or personal property. Therefore, the comment is not adopted.
One comment was received on the ``net recovery value of security
property'' definition. The comment stated the agency should include a
separate definition for the term ``net recovery value of non-essential
assets'' instead of including it in the definition of ``net recovery
value of security property.'' The agency agrees with the comment.
Therefore, the agency defined the term ``net recovery value of non-
essential assets'' and revised the ``net recovery value of security
property'' definition accordingly.
Seventeen comments were received on the ``non-eligible enterprise''
definition. Four comments supported the agency's proposed definition as
written. One comment stated the agency should remove the definition and
provide the eligible enterprises under the applicable loan purpose
sections. The agency believes enumerating all the eligible enterprises
will make the applicable loan purpose sections voluminous. Further, by
not enumerating the eligible enterprises in the rule the agency
eliminates the possibility of inadvertently omitting an eligible
enterprise. Therefore, the comment is not adopted.
Another comment stated the ``non-eligible enterprise'' definition
as written could be confusing to the public. The agency believes that
by defining the term and providing in the CFR text that loan funds may
not be used to finance a non-eligible enterprise, it eliminates
confusion. Therefore, the comment is not adopted. One comment, while it
supported the definition, stated the agency should provide that an
economically viable transportation situation does not exist for the
non-eligible enterprise's products. The agency believes that it is not
the expenses associated with the enterprise that makes the enterprise
ineligible for agency loans, it is the products the enterprise
produces. Further, when considering any enterprise, the agency includes
transportation expenses when it determines the operation's feasibility,
since transportation costs can vary greatly from locality to locality.
It is not the agency's intent to allow financing of non-eligible
enterprises in one area and not in other areas based on transportation
costs. Therefore, the comment is not adopted.
Five comments opposed the ``non-eligible enterprise'' definition as
proposed because it eliminates tropical fish farming, the equine
industry, llamas, alpacas, and ratites from being eligible for agency
loans. The agency has a long-standing policy not to finance the
production of animals kept solely for pleasure or companionship. This
policy will continue. Therefore, the comments are not adopted. Two
comments stated it is not clear if the definition includes products
bought and further grown, and then resold, or otherwise having value
added to the products. ``Non-eligible enterprise'' would not include
common farming operations that buy chickens, piglets, seedling, etc.,
and resell them when fully grown; it would include operations that
purchase ripened fruit and resell it as jam, for example. No change is
being made in relation to the comments. Further, the comments stated it
is not clear if the requirement that the ``majority of the commodities
processed or marketed'' by the enterprise is based on dollar sales or
the number of items. The agency believes the requirement as written is
applicable only to the number of items processed or sold. Therefore,
the comments are not adopted.
Another comment stated the ``non-eligible enterprise'' definition
adds another tier of inquiry in determining if a particular enterprise
is eligible for agency loans. Further, the comment stated the
definition provides enterprises that produce exotic or non-farm animals
are not eligible for loans, however, the terms ``exotic'' and ``non-
farm animals'' are not defined. In response to the comment, the agency
revised the definition to clarify what the agency considers exotic or
non-farm animal; however, the term is still needed. The Federal
Agriculture Improvement and Reform Act of 1996 (Public Law 104-127),
removed financing of non-farm enterprises as an authorized use of loan
funds. The agency needs to specify the type of
[[Page 63249]]
enterprises that will not be financed to avoid confusion and
inconsistent application of this restriction. Further, financing
enterprises producing animals or products for which there is not an
established market is inconsistent with prudent lending objectives.
Another comment stated the agency must allow Tribal input to
determine what tribal agricultural enterprises consist of, and set
guidelines to recognize traditional tribal markets. Further, the
comment stated the production of leeches, vermiculture and aquaculture
must not be included in the non-eligible enterprise definition. The
agency believes the definition as revised, along with the definitions
of agricultural commodity and aquaculture, adequately identify the
enterprises eligible for receiving loans. Further, the agency evaluates
each individual operation requesting assistance on its own merits.
Therefore, the comment is not adopted.
One comment was received on the ``non-essential assets''
definition. The comment stated the agency should revise the definition
to include assets that may contribute a small amount of income to the
farming operation but are clearly non-essential for the operation to
function. The agency believes the definition as written is adequate,
especially when read in the context of the CFR text. Therefore, the
comment is not adopted.
One comment was received on the ``non-program loan'' definition.
The comment stated the definition as written is too narrow and the
agency should continue to use the definition found in current Sec.
1951.451. The agency agrees with the comment and has revised CFR
accordingly.
One comment was received on the ``normal production yield''
definition. The comment stated the definition as written is confusing
and that the current definition, found in Sec. 764.2, provides the
priority for the types of records the agency will use. The proposed
definition made no substantive changes from current Sec. 764.2. Some
clarifying language has been added in response to the comment.
One comment was received on the ``note'' definition. The comment
stated the agency should remove the definition, as the term ``note'' is
included in the ``debt instrument'' definition. The agency believes the
term ``debt instrument'' does not adequately describe the instruments
the agency uses to evidence debt and therefore, the agency removed it
in the final rule. However, the agency added the term ``promissory
note'' which is used in several sections of the CFR to replace the term
``note,'' and further added the term ``assumption agreement'' for
clarity since it is distinguished from the term ``promissory note'' in
the text.
The agency revised the definition of ``Operating loan'' to include
a youth loan as provided in Sec. 764.1(b).
One comment was received on the ``owner-operator'' definition. The
comment stated the definition should be revised to read ``* * *is the
individual or entity that owns the farm and provides the labor,
management, and capital to operate the farm. An entity must have one or
more members operating the farm.'' The terms ``owner-operator'' and
``tenant-operator'' are used in the general eligibility requirements
established in 7 CFR 764.101, as well as the additional eligibility
requirements established for specific loan types in the applicable
subparts. While the proposed rule included a definition of the term
``owner-operator,'' the terms ``tenant-operator'' and ``operator'' were
not defined. The agency believes the key term that should be defined is
``operator,'' and has, therefore, removed the definition of ``owner-
operator'' in the final rule and has added ``operator.'' The agency
defined the term ``operator'' to include both an ``owner-operator'' or
``tenant-operator'' as applicable under each loan program. The agency
does not believe that a definition of either of these terms is
necessary as they are self explanatory. Further, the agency believes
that the new definition of ``operator'' uses the abbreviated text
suggested by the comment; therefore, this portion of the comment is
adopted. However, the agency did not adopt the portion of the comment
suggesting the inclusion of the text ``An entity must have one or more
members operating the farm'' as this requirement is adequately
addressed in the revisions made to the eligibility requirement
established in 7 CFR 764.101(k) requiring the applicant be the operator
of a family farm.
One comment was received on the ``partnership'' definition. The
comment stated the agency's requirement that partnerships must be
formally organized is out of date and unnecessary. The agency believes
the definition as written does not require a formal partnership
agreement, but instead it provides the agency will comply with State
requirements pertaining to partnerships. Therefore, the agency does not
believe a change to the definition is necessary.
One comment was received on the ``protective advance'' definition.
The comment stated since the definition will be applicable to the
guaranteed loan program also, the agency should continue to use the
definition found in current Sec. 762.102(b). The agency believes the
definition as written in the proposed rule is adequate to cover both
the direct and guaranteed loan programs. Further, under Sec. Sec.
765.203 and 762.149, respectively, the agency specifies the conditions
for making protective advances for the direct and guaranteed loan
programs. Therefore, the comment is not adopted.
One hundred sixteen comments were received on the ``related by
blood or marriage'' definition. As noted in the agency's response to
comments received on the definition of ``family farm,'' all comments
stated the definition as written excludes certain relationships,
including, but not limited to, cousins, uncles, aunts, and
grandparents. The agency agreed and revised the definition accordingly.
One comment was received on the ``relative'' definition. The
comment recommended the word ``of'' be inserted between the words
``one'' and ``the.'' The agency agrees and has revised the definition
accordingly. In addition, as discussed in the agency's response to
comments received on the definition of ``family farm,'' the definition
of ``relative'' was revised to include the term ``cousin.''
Two comments were received on the ``restructuring'' definition.
Both comments stated the definition as written does not cover the
guaranteed loan programs. The agency agrees with the comments and has
revised the CFR accordingly to adopt the definition from current Sec.
762.102.
Three comments were received on the ``rural youth'' definition. Two
comments supported the definition as written and opposed lowering the
age limit for youth loans from the proposed 10 years to 8 years of age.
One comment, while it supported the definition, stated the population
limit should not exceed 20,000 inhabitants. The agency disagrees. The
agency believes rural youth residing in areas of up to 50,000
inhabitants can benefit from the youth loan program and that the age
minimum should remain at 10 years of age.
Seven comments were received on the ``socially disadvantaged
applicant'' definition. Six comments stated that applicants who are
spouses are penalized under the definition when the wife is the
operator and owns 50 percent of the farming operation, because they do
not meet the majority ownership interest test. The agency agrees there
are circumstances where a spouse's ability to own the majority interest
in property is prohibited by State laws governing spousal rights.
Therefore, the agency revised the
[[Page 63250]]
definition to allow married couples to be considered socially
disadvantaged when the socially disadvantaged spouse owns 50 percent of
the farming operation and makes most of the management decisions,
contributes a significant amount of labor and is generally recognized
as the operator of the farm. Such construction of the term as used in
section 355 of the Act is reasonable under these circumstances.
Another comment stated the requirement for entities that the
socially disadvantaged member must have a majority ownership interest
in the operation to receive targeted funds reduces access to targeted
funds by eligible socially disadvantaged applicants. The Act's section
302(a) for farm ownership loans, section 311(a) for operating loans,
and 321(a) for emergency loans provide the eligibility requirements for
loans to entities. The statutory eligibility requirements apply to
members holding a majority interest in the entity. The proposed rule is
consistent with the Act's provisions in focusing on the majority
interest holder. The agency is taking a more lenient approach only in
the case of spouses as discussed above. Therefore, the comment is not
adopted.
One comment was received on the ``socially disadvantaged group''
definition. The comment stated the socially disadvantaged groups are
not specified in the proposed rule. The agency agrees with the comment
and has revised the definition to include the groups currently listed
in Sec. 1943.4.
One comment was received on the ``trust'' definition. The comment
stated the agency should revise the definition to reflect that Tribes,
as sovereign nations, have the ability to create and enforce laws to
regulate businesses conducted within their boundaries. The requirement
that a trust is recognized by the state in which it conducts business
is the same as the requirement applicable to all other entities. Agency
regulations cannot address every Tribe's unique situation; therefore,
state offices may develop guidance according to applicable state and
tribal laws in consultation with the Regional Office of General
Counsel. The agency believes the definition as written is adequate;
therefore, the comment is not adopted.
One comment was received on the ``United States'' definition. The
comment stated the definition as written excludes the Republic of
Palau, the Federated States of Micronesia, and the Republic of the
Marshall Islands. Further, the comment stated the Free Association
Treaty provides that the agency may enter into loan agreements with
citizens of the countries mentioned above. The agency agrees with the
comment and has revised the definition accordingly.
One comment was received on the ``working capital'' definition. The
comment stated the agency should revise the definition for clarity to
provide ``* * * including, but not limited to, paying for feed, seed *
* *'' The agency agrees and has revised the definition accordingly.
Four comments were received on the ``youth loan'' definition. Three
comments stated youth loans should not be restricted to agricultural
projects only. One comment stated that changing the youth loan purposes
to include financing agriculturally-related projects only will have a
devastating effect on Tribal youth. As stated in the discussion of
comments received under Sec. 764.301, the agency believes that youth
loan funds should be used for modest, income producing, agriculture-
related projects. Therefore, the comments are not adopted.
Section 761.6 Appeals
Five comments were received on the appeals provisions. Three
comments stated the agency should clarify the provision that an adverse
decision involving a guaranteed loan may be appealed by either the
lender or the applicant or borrower. One comment stated the agency
should revise Sec. 761.6 as well as Sec. 762.104 to provide a
guaranteed applicant or borrower may appeal an adverse agency decision
without the lender appealing. Requests for appeal are handled in
accordance with 7 CFR parts 11 and 780; therefore, the agency removed
the provisions regarding who may request an appeal from Sec. 761.6 and
revised Sec. 762.104 to remove the joint appeal requirement. One
comment stated that while Sec. 761.6 provides appeals will be handled
according to 7 CFR parts 11 and 780, Sec. 766.110 provides appeals of
NRCS' technical determinations on conservation contracts will be
handled according to 7 CFR part 614. The comment stated the rule as
written is not clear. The agency agrees with the comment and has
revised Sec. 766.110 to refer to 7 CFR parts 11 and 780.
Section 761.8 Loan Limitations
Thirty-two comments were received on the direct loan limits. One
comment stated that the agency should work with Congress to increase
the direct loan limit and include an inflation percentage increase as
provided for guaranteed loans under section 313(b) of the Act (7 U.S.C.
1943(b)). The agency believes that the impact of any legislative change
to increase the direct loan limits must be carefully analyzed as funds
provided for direct farm ownership and operating loans are usually
exhausted early in the fiscal year, and the Office of Management and
Budget (OMB), along with the President play a role in the
appropriations process. Therefore, the agency is limiting this rule to
revising its regulations within its current statutory authority.
However, the Administration's 2007 Farm Bill proposal recommends that
the loan limit for the direct loans be increased. The Agency will make
the appropriate regulatory changes in the future, in the event the
Administration's proposal is adopted.
All other comments on this section stated that the direct loan
limit of $200,000 is not adequate to cover the credit needs of socially
disadvantaged and limited resource applicants because they are denied
commercial loans more often. The proposed rule was based on Section
313(a)(1), limits for direct loans, therefore, the comments cannot be
adopted.
Section 761.9 Interest Rates for Direct Loans
One comment was received on the interest rate charged limited
resource borrowers. The comment stated the agency should reduce the
limited resource interest rate to three percent from five percent.
Section 316(a)(2) of the Act (7 U.S.C. 1946(a)(2)) sets the limited
resource interest rate minimum at five percent; therefore, the comment
cannot be adopted.
Section 761.10 Planning and Performing Construction and Other
Development
Five comments were received on the planning and performing
construction and other development provisions. Two comments supported
the agency's proposal to make the applicant or borrower responsible for
ensuring compliance with local construction standards. One comment
stated the agency should require the applicant to provide the plans and
specifications prior to the agency's loan approval and inspect the
planned development at least once. The agency believes the rule as
written is adequate as it requires the applicant to provide the plans
and specifications to the agency. The applicant or borrower must
inspect development work, as needed, to protect their financial
interest and provide written certification to the agency that the
development conforms to the plans and good construction practices,
applicable laws, ordinances, codes and regulations. Under Sec.
761.10(e)(4), the
[[Page 63251]]
agency inspections of the planned construction and development do not
create or imply any duty or obligation of the agency to the applicant
or borrower. The agency inspects the planned construction and
development solely to protect its financial interest. The agency's
inspection process is internal policy and will be addressed in the
appropriate agency handbook. Therefore, the comment is not adopted.
Another comment stated the agency should not require the same
process for insurance proceeds less than $5,000 as it requires for
direct loan funds, because the process is not cost-effective. In
accordance with 7 CFR 764.108, all security except growing crops must
be covered by hazard insurance, and the agency must be listed as the
beneficiary of a mortgage loss payable clause. Further, 7 CFR 765.152
provides that ``cash proceeds of insurance claims received on Agency
collateral, if not being used to repair or replace security items''
will be considered an ``extra payment.'' Therefore, the agency believes
it is essential that the provisions of 7 CFR 761.10 be adhered to,
regardless of the amount of insurance proceeds. To do otherwise would
expose the agency to potential losses as its security may deteriorate
in value. Therefore, the comment is not adopted.
One comment stated the provision that requires applicants not to
incur any debts for material, labor or other expenditures prior to loan
closing is unduly burdensome to applicants who may be able to begin the
project while waiting on loan funds. The comment further stated
applicants are informed at the beginning of the loan process that
agency funds may not be available to close the loan, and as such,
applicants are aware that they are responsible for any pre-loan
development work. It is important to highlight that the applicant shall
not be reimbursed for expenditures incurred prior to loan closing.
Further, agency assistance is only available to applicants unable to
obtain the needed credit from another source. Therefore, it is unlikely
that an applicant would have personal funds available or be able to
incur debts to initiate development prior to agency funds becoming
available. Therefore, the comment is not adopted.
Section 761.51 Establishing a Supervised Bank Account
Six comments were received on establishing a supervised bank
account. One comment stated the agency should clarify whether or not an
applicant has to consent to the establishment of a supervised bank
account. The agency agrees with the comment and has revised the section
to state that the account will be used to assist borrowers with limited
financial skills only when the borrower agrees. Three comments stated
it is not clear when the agency will use the supervised bank accounts.
The agency agrees with the comments and has revised the section to list
the conditions under which the agency will use supervised bank
accounts. In addition, one of these comments stated the requirement the
agency provide applicants $5,000 or 10 percent of the loan funds for
family living and operating expenses in a non-supervised bank account
was not included in the CFR. One comment supported the agency's
decision not to include the provision of providing $5,000 or 10 percent
of loan funds in a non-supervised bank account. As stated in the
proposed rule, Section 312 of the Act provides that the agency ``may
reserve a portion of the loan * * *'' but it is not required. The
payment of family living and operating expenses is an authorized use of
loan funds, and the agency provides loan funds directly to the
applicant to use as specified in the farm operating plan. Therefore,
supervised bank accounts for such use are not needed and no change has
been made based on these comments. One comment stated the agency should
add a section to explain the agency's policies regarding disbursement
of funds from a supervised bank account, use of electronic funds
transfer instead of supervised bank accounts, and the necessity of
supervised bank accounts. The agency believes the disbursement of funds
from a supervised bank account is already adequately addressed in Sec.
761.54. Section 764.402 requires the agency to use electronic funds
transfer when feasible, so supervised bank accounts are not expected to
be routinely used. Therefore, these parts of the comment are not
adopted. Lastly, as stated above, the agency has added language in
Sec. 761.51 on when supervised bank accounts are necessary.
Section 761.52 Deposits Into a Supervised Bank Account
One comment was received on the deposits into a supervised bank
account provisions. The comment stated it is not clear if a check made
jointly payable to the agency and the borrower can be deposited in a
supervised bank account. The agency believes the CFR as written is
clear as it only excludes checks made solely to the agency or the
Federal Government, or if it lists the Treasury of the United States as
joint payee. The jointly payable check to the agency and borrower could
be deposited in the supervised bank account. Therefore, the comment is
not adopted.
Section 761.54 Withdrawals From a Supervised Bank Account
Two comments were received on the withdrawals from a supervised
bank account provisions. Both comments stated the agency should clarify
the CFR to provide the borrower's account must be accelerated before
the agency can withdraw funds from a supervised bank account without
the borrower's signature. The proposed, as well as the final rule
provide the conditions under which the agency will withdraw funds from
the supervised bank account without the borrower's signature. It has
been the agency's policy to withdraw funds from the supervised bank
account when it is in the agency and the borrower's financial
interests. The borrower's account need not be accelerated; the agency
may withdraw such funds at any time to apply to the account or protect
its lien as necessary. The agency believes the limited withdrawals by
the agency are reasonable. Therefore, the comments are not adopted.
Section 761.55 Closing a Supervised Bank Account
One comment was received on closing supervised bank accounts. The
comment stated the agency should clarify the CFR to provide the
borrower's account must be accelerated before the agency can close the
supervised bank account. The proposed, as well as the final rule,
provide the conditions under which the agency will close the supervised
bank account. The supervised bank account can be closed when it is no
longer needed; the borrower's account need not be accelerated. The
agency believes the CFR as written is reasonable. Therefore, the
comment is not adopted.
Even though no comments were received on the provision, the agency
increased, from $100 to $1,000, the amount of loan funds remaining in
the supervised bank account that can be released to the borrower to use
for authorized loan purposes, at the time the account is closed. This
action is in the best interest of both the borrower and the agency, as
accounts with small loan balances remaining will not be maintained. The
agency, however, did not extend this provision to youth loans.
Section 761.104 Developing the Farm Operating Plan (As Numbered in
Final Rule)
One comment stated the agency must include in the final rule the
provisions of current Sec. 1924.56 that address the
[[Page 63252]]
development of farm and home plans used for loan making and servicing
actions. Further, the comment stated the agency did not address the
farm and home plan utilized by the agency. The agency inadvertently
omitted the provisions addressing the development of farm operating
plans, and has incorporated them in the final rule. The farm and home
plan has not been incorporated, however. As provided in the proposed
rule, the agency is removing all internal and administrative
provisions, which include identification of specific forms, from its
regulations. While specific form numbers are not included in the CFR,
both the proposed and final rules address the information collection
requirements. The agency no longer uses FSA 431-2 and therefore, it did
not include any references to, nor did it discuss the use of, the farm
and home plan form in the proposed rule. The agency has developed new
forms to replace the farm and home plan, however, the agency accepts
any format that provides the information required.
Section 761.105 Year-End Analysis (Sec. 761.104 in the Proposed Rule)
One comment was received on the year-end analysis provisions. The
comment stated the agency should require a year-end analysis for
borrowers who have received disaster set-aside. The agency utilizes
disaster set-aside to resolve borrowers' temporary financial set-backs
due to a natural disaster. Further, the agency requires that borrowers
who receive disaster set-aside be able to develop a feasible plan for
the next production cycle and provide the appropriate documentation to
support it. Since the agency will obtain the documentation needed
during the disaster set-aside determination, it does not believe an
annual year-end analysis is required. Therefore, the comment is not
adopted.
Section 761.208 Target Participation Rates for Socially Disadvantaged
Groups
Two comments were received on the target participation rates for
socially disadvantaged groups. Both comments questioned why the agency
sets the target participation rates for Farm Ownership (FO) loans based
on the total rural population in the State that are members of socially
disadvantaged groups but the target participation rates for farm
Operating loans (OL) are based on the total number of farmers in the
State that are members of socially disadvantaged groups. In addition,
one comment suggested that to achieve equality, all participation rates
should be based on the number of farmers in a State that are members of
a socially disadvantaged group. Section 355 of the Act (7 U.S.C. 2003)
establishes these different calculations for FO (subtitle A) and OL
(subtitle B) target participation rates. Therefore, the comments cannot
be adopted.
Section 761.210 Transfer of Funds
Section 346(b)(4) of the Act (7 U.S.C. 1994) provides that
beginning on September 1 of each FY, Emergency loan (EM) funds, not
resulting from supplemental appropriations, may be used to fund the
credit sale of real estate security in the agency's inventory. In the
last several FY's, the agency has received insufficient initial
appropriations to fund EM loan requests and has relied on supplemental
appropriations to meet the demand. Further, the agency does not
anticipate future appropriations actions to reverse this trend.
Moreover, the agency has not taken a large number of real estate
properties in inventory in the last several years. Lastly, other
sections of the Act mandate that real estate in the agency's inventory
be sold to beginning farmers. Therefore, the agency has not utilized
this authority and is removing Sec. 761.210(b) in the final rule.
Part 764--Direct Loan Making
The following discussion addresses the comments received on part
764.
One comment stated the provision from current Sec. 1910.3 that
provides persons wishing to apply for loans will be encouraged to do so
and that agency staff will explain available programs to applicants and
assist applicants as needed in completing farm operating plans, should
be included in the final rule. Further, the comment stated the agency
should include the provision from current Sec. 1943.11 that states the
agency will provide socially disadvantaged applicants with technical
assistance necessary when applying for farm ownership loans or other
assistance to acquire inventory farmland. The agency believes, through
outreach efforts, it provides explanation of available programs and
invites persons wishing to apply for loans to do so. Further, agency
personnel, as well as Extension agents, assist all applicants who
request it, in completing agency forms and farm operating plans. It is
the agency's mission to provide any necessary assistance, including
technical assistance, to all applicants and borrowers. It is not
necessary to publish the agency's mission or internal practices in the
CFR. Therefore, the first part of the comment is not adopted. Section
623 of the Agricultural Credit Act of 1987 (7 U.S.C. 1985 note), stated
the agency should inform socially disadvantaged applicants of the
possibility of acquiring inventory farmland and provide technical
assistance to such applicants, while section 335(c) of the Act (7
U.S.C. 1985 (c)) mandates the agency to offer to sell its inventory
property to beginning farmers. The agency advertises available
inventory property, provides priority to all beginning farmers to buy
the property, and assists applicants in completing forms and
information necessary to acquire real estate in the agency's inventory,
as required by the Act.
Section 764.51 Loan Application
One comment stated that it is not clear if the agency is
maintaining the requirement currently contained in 7 CFR 1910.3(c) that
provides ``For farmer program loans, there will only be one applicant.
If a husband and wife insist on applying as co-applicants for a farmer
program loan and the farming operation is a sole proprietorship, they
will be considered a joint operation and they both will have to meet
the eligibility requirements applicable to the joint operation.'' This
comment, as well as one other comment, stated the Internal Revenue
Service allows married couples operating a farm to file a joint tax
return and does not mandate they be considered a joint operation;
therefore, the agency should not treat them as joint operations either.
The agency's longstanding policy of considering spouses applying
jointly as a joint operation when a formal type of entity does not
exist is based on amendments to sections 302 and 311 of the Act. Many
of the general loan making requirements established at 7 CFR 764.101
are based on the provisions of sections 302 and 311 of the Act, which
specifically provide ``To be eligible for such loans, applicants who
are individuals, or in the case of cooperatives, corporations
partnerships, joint operations, trusts, and limited liability
companies, individuals holding a majority interest in such entity, must
* * *.'' Based on this text, each member of an entity applying for
assistance may not be required to meet all eligibility requirements,
whereas applicants applying as an individual must meet all the
eligibility requirements. Changing the agency's current policy to allow
spouses applying jointly to be considered an individual applicant,
rather than as an entity applicant in the form of a joint operation,
would require that each spouse meet all eligibility requirements. The
agency believes such a change would result in a more restrictive
application of eligibility requirements for spouses applying
[[Page 63253]]
jointly and could result in an increased number of these applicants
being determined ineligible. Therefore, while the comments are not
adopted, the agency did revise Sec. 764.51 to clarify its policy that
``Two or more applicants applying jointly will be considered an entity
applicant.'' In addition, the agency revised its application form to
clarify its policy, and for applicants applying as a joint operation,
the application form will serve as the entity agreement required as
part of a complete application under 7 CFR 764.51(a)(2)(iv), unless
State law requires otherwise.
One comment stated the agency should not require that a husband and
wife who apply for a loan together be treated as a joint operation. The
comment pointed out that almost all married individuals file taxes as a
married couple, not a joint operation. The agency agrees that
applicants should apply in the form of business organization that is
most consistent with the actual operating and financial structure of
the farm business. However, the Act does not permit the agency to make
loans to multiple individuals as one applicant. In situations where
more than one individual is applying for the same loan, the applicant
will be treated as an entity. The agency acknowledges that this
requirement may be confusing and burdensome for married couples in
particular, since many of them will file income tax returns and conduct
other business affairs as a married couple. To ease this burden, the
agency revised this section to recognize the existence of a marriage as
sufficient documentation of a joint operation and its structure.
Information beyond that required of an individual applicant will be
required only when necessary to evaluate specific financial situations
or contracts such as prenuptial agreements, which are unique to the
marriage, and pertinent to the evaluation of the loan request.
Twenty-two comments were received on the requirement for applicants
to provide 3 years of production and financial records (Sec.
764.51(a)(4) and (5), renumbered to Sec. 764.51(b)(4) and (5)). Eight
comments supported the agency's proposal as written. Seven comments,
while they supported the agency's proposal, suggested the agency retain
the ability to request additional years of records, if needed, to
evaluate properly the applicant's operation. The comments stated there
are circumstances beyond the applicant's control, such as adverse
weather, prolonged drought, and disease, which would require the agency
to have additional records at its disposal to accurately evaluate the
applicant's operation. Three comments, while they agreed with the
proposal, stated using only 3 years of records may not reflect the
farming operation's true capabilities. One comment opposed the agency's
proposal and further stated the CFR does not provide that for years an
applicant suffered a disaster, State or County records may be
substituted for the applicant's records. The agency believes the
provision as written is adequate. The agency requirements match those
of commercial lenders and at the same time reduce the burden imposed on
the public. In developing an accurate farm operating plan, Sec.
761.104 excludes the production year with the lowest actual or county
average yield if the applicant's yields were affected by disasters
during at least 2 of the 3 years. Therefore, no changes need to be made
to the records requirement, and the comments are not adopted.
Two other comments stated the agency should require applicants
submit 3 years of Federal tax returns to match commercial lenders'
requirements as well as the agency's loan servicing requirements. In
addition, one of the comments stated that by providing copies of
Federal tax returns, the agency will be able to verify other
information submitted by the applicant and will reduce the paperwork
burden the agency imposes. Further, the comment stated errors on the
applicants' part will be eliminated since applicants will no longer
have to copy information from their tax returns to the agency forms.
The agency agrees with the comments and has revised the section to
require 3 years of farm financial records, including Federal tax
returns, unless the applicant has been farming for less than 3 years.
One comment stated the records requirements under Sec.
764.355(c)(3) should be revised to match the requirements under Sec.
764.51(b) (renumbered from Sec. 764.51(a)). The agency believes that
the requirements should remain as proposed. Section 764.355(c) is
applicable only to emergency loan applicants, who lack security because
of a disaster. Section 324(d)(2) of the Act (7 U.S.C. 1964(d)(2))
provides that the agency may not deny an emergency loan because the
applicant lacks a particular amount of security; however, the agency is
authorized to make the loan provided the applicant has the ability to
repay the loan. For the agency to determine if an applicant who lacks
security has the ability to repay the loan, the agency needs access to
additional records, beyond what is required in Sec. 764.51(b)
(renumbered from Sec. 764.51(a)), to assess the applicant's income
generated by the farming operation. Therefore, the comment is not
adopted.
One comment supported the agency's clarification that the payment
of the credit report fee is the applicant's responsibility as part of a
complete application (Sec. 764.51(b)(11), renumbered from Sec.
764.51(a)(11)). No comments were received opposing this clarification;
therefore, no change was made to this paragraph.
Three comments were received on the verification of an applicant's
debts requirement (Sec. 764.51(b)(12), renumbered from Sec.
764.51(a)(12)). All comments stated it is not cost-effective for the
agency to verify debts under $1,000 (two comments), or $500 (one
comment). The agency handbook implementing the CFR will provide
additional guidance regarding alternatives available to verify an
applicant's debts. Therefore, the comments are not adopted.
Two comments were received on the ``additional information deemed
necessary by the agency'' provision (Sec. 764.51(b)(13), renumbered
from Sec. 764.51(a)(13)). One comment stated the CFR should provide
that the agency requires the additional information to better evaluate
the feasibility of the operation and identify any possible security
issues. The other comment stated the agency should identify general
categories of information that may be required to evaluate an
applicant's operation instead of including a general statement that the
agency may request additional information deemed necessary. The agency
believes the provision as written is adequate, as adoption of the
comments may limit the reasons additional information could be
requested. As stated in the preamble of the proposed rule, because
every farming operation is unique, different information is required
from each applicant for the agency to assess properly its risk. The
agency handbook implementing the CFR will provide examples of
additional information that may be requested. Therefore, the comments
were not adopted.
Three comments were received on the Low-Documentation Operating
loan (Lo-Doc) requirements Sec. 764.51(c), renumbered from Sec.
764.51(b)). All comments stated that certain information under Sec.
764.51(a) (Sec. 764.51(b) in final rule) should be required for Lo-Doc
applicants. Two of the comments stated the applicant should provide
documentation that other credit is not available; the other comment
stated the applicant should provide the legal description of the farm
[[Page 63254]]
property owned or to be acquired, when applicable. Section 764.51(b)(4)
(Sec. 764.51(c)(4) in final rule) states the agency may require a Lo-
Doc applicant to provide any other information listed in Sec.
764.51(a) (Sec. 764.51(b) in final rule), as needed to make a loan
determination in a particular case. In addition, the agency handbook
implementing the CFR will provide further guidance on when additional
information may be needed. Therefore, the comments are not adopted.
Nine comments were received on the youth loan application
requirements (Sec. 764.51(d) renumbered from Sec. 764.51(c)). One
comment supported the agency's decision to implement an abbreviated
application process for youth loans. Five comments stated that since
verification of non-farm income is not a requirement for Lo-Doc
applicants, it should not be required from youth loan applicants
either. In addition, one of the comments stated that since the youth
loan project is expected to generate sufficient income to repay the
loan, the agency does not need to obtain non-farm income information.
Further, two of the comments stated the agency official should have
discretion to determine if verification of non-farm income is needed
for youth loan applicants. The agency agrees with the comments and has
revised the CFR to remove the requirement for verification of non-farm
income for youth loan applicants. The flexibility to require additional
information as needed remains.
Two comments stated the requirement found in Sec. 764.51(a)(13)
(Sec. 764.51(b)(13) in final rule) pertaining to the agency's ability
to request additional information, as needed, to evaluate an
applicant's eligibility and plan of operation should also be applicable
to youth applicants. In addition, the comments stated that, for
applicants less than 18 years old, the agency should require written
permission from a parent or guardian, and require documentation from
the project advisor for all youth loan applicants. Under Sec.
764.51(c)(3) (Sec. 764.51(d)(3) in final rule), the agency can request
any information deemed necessary to evaluate a youth loan applicant's
operation. Further, under Sec. 764.302(f), the agency requires the
parent or guardian's written permission, so it is not necessary to
specifically list it under the general requirements for all youth
loans. Therefore, the comments are not adopted.
One comment stated that Indian youths have not purchased on credit
by the time they are 18 years old. Therefore, the comment stated if the
agency determines that additional information is needed, or the youth
may be able to obtain other credit, then the agency should process the
application as a guaranteed loan, as well as inquire with other sources
of credit before involving a youth already intimidated by the process.
The agency believes the youth loan requirements, as written, are
adequate. In most states, individuals reach the age of majority at 18,
therefore, youth loan applicants who have reached the age of 18, are
required to submit the credit report fee and verification of debts, if
any. Additionally, Sec. 764.302(a) provides the eligibility
requirements youth loan applicants must meet as mandated by Section
311(b)(1) of the Act (7 U.S.C. 1941 (b)(1)) and includes the ``no
credit elsewhere'' requirement. There is no guaranteed loan program
specifically for youths. Therefore, the comment is not adopted.
Lastly, the agency added the provision requiring applicants to
provide a current financial statement as part of a complete
application. This is a longstanding requirement that existed under the
loan making and loan servicing regulations. The agency's application
form contained the financial statement; however, due to agency's
paperwork reduction efforts, the financial statement part was removed
from the application form.
Section 764.52 Processing an Incomplete Application
Two comments were received on the provisions for processing an
incomplete application. Both comments stated the CFR provides that the
information requested by the agency must be received within 10 calendar
days from the day the agency sent the second incomplete application
notification to the applicant. However, the notice the agency uses
provides applicants must submit the information requested or contact
the agency within 10 days. The comments stated the CFR and the agency
notice should be consistent. The agency agrees with the comments and
has revised its notice accordingly.
Section 764.53 Processing the Complete Application
One comment was received on the processing the complete application
provisions. The comment stated the agency must include in the CFR the
requirement found in Section 333A(a)(1) of the Act which states the
agency shall approve or disapprove an application and notify the
applicant no later than 60 days after a complete application has been
received. In addition, the comment stated the reasons for the
disapproval must be included in the notification, as provided in
Section 333A(a)(3) of the Act. The agency agrees with the comment and
has revised the section to add that the agency will notify the
applicant of the decision reached and the reasons for any disapproval.
Section 764.54 Preferences When There Is Limited Funding (Renumbered in
the Final Rule)
One comment was received on the preferences when there is limited
funding. The comment stated the agency should consider funding
applications based on the date the application was determined to be
complete, regardless of whether there is a shortage of funds. Section
764.53 provides the order in which the agency processes loan
applications and states the agency considers applications in the order
received, based on the date the application is determined to be
complete. The agency cannot consider a loan application until all the
information required is received. Section 764.54 provides the
preference order in funding complete and approved loan applications.
The agency funds applications based on the date the application was
received, whether complete or incomplete, because that date provides an
easily identifiable benchmark that can be consistently applied.
Therefore, the comment is not adopted.
Section 764.101 General Eligibility Requirements
One comment on the general eligibility requirements suggested that
the requirements of sections 302 and 311 of the Act (7 U.S.C. 1922 and
1941) for Farm Ownership and Operating loans, which allow the agency to
make loans to entities engaged primarily and directly in farming in the
United States, be added. The agency agrees and has revised Sec. Sec.
764.152(c) and 764.252(d) to incorporate the requirement. In addition,
a similar provision is contained in section 321 of the Act for
emergency loans. Therefore, the agency revised Sec. 764.352(c) (Sec.
764.352(a)(4) in the proposed rule) accordingly.
Two comments were received on the no prior drug convictions
provisions under Sec. 764.101(a). One comment stated that, unless the
agency commences background checks on applicants, the requirement
should be removed from the CFR. Section 1764 of the Food Security Act
of 1985 (21 U.S.C. 889) provides, in part, that an applicant for
certain Federal loans or benefits cannot have been convicted under
Federal or State law of planting, cultivating, growing, producing,
harvesting or
[[Page 63255]]
storing a controlled substance within the previous 5 crop years. The
agency has complied with this provision since it was incorporated into
the law. Applicants are required to self-certify, on the agency's
application form, that they have not been convicted of controlled
substance violations. If it is later determined the applicant provided
false or inaccurate information on the application form, the agency can
deny further benefits and take other appropriate action. Lastly, the
proposed rule was based on the Food Security Act's requirements;
therefore, the comment cannot be adopted.
The other comment stated the agency should add in the CFR the
requirement that applicants have not been convicted of possession or
distribution of a controlled substance. Section 862 of 21 U.S.C.
provides, in part, that applicants may be made ineligible for Federal
benefits by court order as a result of a conviction for the
distribution of controlled substances or any offense involving the
possession of a controlled substance. Ineligibility is not automatic.
As stated above, applicants self-certify that they have not been
convicted of controlled substance violations. Further, both provisions
are applicable to multiple agency programs and are already addressed,
in part, in 7 CFR 718.6. The agency has modified 7 CFR part 718 to
clarify the impact of the statutory provisions on FLP. The comment,
therefore, is not adopted.
Five comments were received on the credit history provisions of the
general eligibility requirements (Sec. 764.101(d)). One comment, while
it agreed with the clause that unacceptable credit history is history
of failures to repay past debts when the ability to repay was within
the applicant's control, stated the agency should incorporate an
objective measurement of the criteria to protect the agency and avoid
the appearance of disparate treatment. The proposed rule reiterated the
agency's established policy. In addition, the agency finds it
impossible to anticipate every credit history scenario that may be
encountered. An inflexible and absolute standard, such as a minimum
credit score, would remove the agency's ability to consider the reasons
for an applicant's prior credit problems. Therefore, the comment is not
adopted.
Another comment stated the agency should include in the final rule
the circumstances currently found in Sec. 1910.5(c) that the agency
does not automatically consider unacceptable credit history. The agency
agrees with the comment and has revised the CFR for clarity. One
comment supported the removal of the requirement that the Office of the
General Counsel be involved when the agency believes applicants have
not dealt with the agency in good faith. The agency addressed this
issue under the ``good faith'' definition discussion.
Two comments stated the agency should remove the requirement that
an applicant will make a sincere effort to repay the loan and will
devote the effort required to carry out the terms and conditions of the
loan. The agency agrees, as it will be difficult to assess the efforts
the applicant will make. However, the agency believes the objective
requirement that the applicant will carry out the terms and conditions
of the loan should remain in the CFR. Therefore, that part of the
comment is not adopted.
Six comments were received on the not delinquent on Federal debt
provisions of the general eligibility requirements (Sec. 764.101(f)).
Two comments stated the agency should include a definition of Federal
debt in the CFR for clarification purposes. The agency agrees that a
clarification is needed to determine if an applicant or borrower is in
delinquent status of a Federal debt for purposes of automatic
ineligibility under 31 U.S.C. 3720B. However, the Department of
Treasury has responsibility to publishing standards determining
delinquent status on a Federal debt, under this Debt Collection
Improvement Act provision. Therefore, the agency simply has
incorporated a reference to the applicable Department of Treasury
regulation (31 CFR 285.13) in its CFR. Further, the agency handbook
will clarify application of this provision in the consideration of loan
applications.
Three comments stated the Federal debt rule as written is more
restrictive than it needs to be because the term ``delinquent
borrower'' is defined under Sec. 761.2(b) as a borrower with any
portion of a payment to the agency that is at least 30 days past due.
As addressed above on Sec. 761.2(b), the agency revised the
``delinquent borrower'' definition to match the definition included in
the final rule published on February 4, 2004. Further, as stated above,
the Department of Treasury's regulations provide when the borrower's
Federal debt is in ``delinquent status'' for purposes of loan
eligibility only. This rule incorporates the Department of Treasury's
statutory and regulatory requirements applicable to Federal agencies.
Therefore, the comments are not adopted.
One comment stated the agency should extend the prohibition to
emergency loans as well to ensure consistency between loan programs.
Section 3720B of the Debt Collection Improvement Act of 1996 (DCIA)
generally provides that, except for emergency loans, borrowers who are
in delinquent status on any non-tax Federal debt are not eligible to
obtain any Federal financial assistance. The proposed rule was based on
the DCIA; therefore, the comment cannot be adopted.
Three comments were received on the managerial ability provisions
of proposed Sec. 764.101(h) (Sec. 764.101(i) in final rule). One
comment stated the applicant's managerial experience should be in an
operation similar to the one the applicant proposes, as there are vast
differences between types of operations. The agency believes it is not
possible to differentiate between skills required by various
enterprises to draw the distinction the comment suggested. In addition,
the agency can require an applicant to take borrower training in areas
the agency considers the applicant to lack adequate experience.
Therefore, the comment is not adopted.
One comment disagreed with the provision that the applicant's
managerial experience must have been obtained within the last 5 years.
The agency believes recent training or experience is important for an
applicant to have a reasonable prospect for success, as farming is a
rapidly changing business and experience acquired more than 5 years ago
may no longer be relevant. Therefore, the comment is not adopted.
One comment stated the agency should add examples of documentation
necessary to demonstrate the applicant's managerial ability and clarify
whether managerial ability covers production only or all aspects of the
operation. The agency has provided extensive internal administrative
guidance on acceptable documentation to demonstrate managerial ability,
and believes examples of acceptable documentation are more appropriate
for inclusion in the agency handbook, available on the agency's
website. Further, the agency does not want to limit applicants to a
specific form of acceptable documentation and cannot provide an
exhaustive list of acceptable documentation to demonstrate managerial
ability in the CFR. The agency considers managerial ability to cover
both production and financial management because both are required to
ensure the applicant has reasonable prospects for loan repayment.
Therefore, the comment is not adopted.
Twenty-three comments were received on the general eligibility
requirements for loans to entity applicants (Sec. 764.101(k), renamed
and
[[Page 63256]]
renumbered to Sec. 764.101(l)). Fifteen comments stated that the
general eligibility requirements for entity applicants are unduly
restrictive, complicated, and may prevent the transfer of farms to
beginning farmers. Two comments stated that the requirement that all
entity members must be involved in the operation is restrictive and
does not take into consideration age and health issues. The comments
stated the agency should require that only the members of the entity
holding the majority interest be involved in the farming operation. One
comment stated the requirement is too restrictive especially in cases
where one family member becomes physically unable to assist in the
farming operation but the other members are not able to buy out the
physically unable member's share and suggested the agency only require
members holding a majority interest be involved in the operation of the
farm. The agency agrees and has revised the CFR accordingly.
Two comments stated that the requirement for entity members
involved in other farming operations, that the other operations must
not be larger than a family farm, is too restrictive because it does
not take into consideration that entity members may have an interest in
cooperatives to ensure a market for the farming operation's crop.
Further, the comments stated it would be difficult for the agency to
obtain income information on the other entities in which the member is
a participant, unless the agency revises the requirements applicable to
individuals to require all entity members provide income information
for any other farming operation in which they are participating. The
agency agrees with the comments and has revised the CFR accordingly to
clarify requirements for majority interest holders, members' collective
interests, and entity interests.
One comment stated it is not clear if each farming operation must
generate less than the maximum gross income threshold, as proposed in
the family farm definition, or if the member's combined share in all
entities they are participating in must be under the threshold, or the
combined gross income of all the farms must be under the threshold.
Further, the comment stated the CFR appears to prohibit financing an
applicant entity that has an ownership interest in another entity such
as a finishing cooperative. As stated above, the agency is not adopting
the proposed gross income requirement of the family farm definition.
Further, the agency revised Sec. 764.101(j) (Sec. 764.101(k) in final
rule) in response to comments received on proposed Sec. 764.101(j) and
(k) (Sec. 764.101(k) in final rule). Therefore, the agency believes
the comments are no longer applicable.
Two comments stated the family farm requirements for entities as
stated in Sec. 764.101(j) (renamed and renumbered to Sec. 764.101(k)
in final rule) do not match the eligibility requirements for EM loans
at Sec. 764.352. Both comments stated the agency should make Sec.
764.101(j) and Sec. 764.352 consistent. As stated above, the agency
revised Sec. 764.101(j) and (k) extensively. In the final rule, Sec.
764.101(k) provides the operator requirements for entities applicable
to all loan types, except that paragraph (k)(3) on collective interests
does not apply to EM loans. The statutory basis for this paragraph is
found in sections 302 and 311 of the Act, but not in section 321 for EM
loans. Section 764.352(j) provides EM loan eligibility requirements if
the entity composition changes between the time the disaster occurred
and the time the loan is closed. One EM loan eligibility requirement
applicable to entities is that the entity members operated the farm at
the time of the disaster. This requirement and other Sec. 764.352
requirements are based on section 321 of the Act (7 U.S.C. 1961) and do
not apply to any other loan type; therefore, the comments are not
adopted.
Twenty-nine comments were received on the entity eligibility
requirements under the general requirements provisions (Sec.
764.101(j) and (k)). Five comments supported the provisions as written.
Twenty-two comments opposed the provisions and stated the provisions as
written are difficult to understand and follow. The agency agrees with
the comments and has clarified the paragraph and further revised Sec.
764.352 for consistency. Two comments recommended that the family farm
and entity composition requirements under the general requirements
provisions be eliminated, as the requirements would have a negative
impact on the transition plans for some farm families. The agency
believes the revisions discussed above will address these comments and
that elimination of the requirements is not necessary. Furthermore, the
regulations as revised mirror existing regulatory requirements for
guaranteed loans, as well as direct farm ownership and operating loans.
The final rule, as written, eliminates inconsistencies in existing
regulations governing emergency loans.
Section 764.102 General Limitations
One comment was received on the general limitations requirement
that loan funds must be used by farms located in the United States
(Sec. 764.102(b)(2) renumbered to Sec. 764.102(c) in final rule). The
comment agrees that funds should not be used to obtain or improve land
not in the United States, but does not agree with making applicants
with farms split by the United States and Canadian border that have
been in operation or existence for years ineligible for loans. Sections
302(a) and 311(a) of the Act (7 U.S.C. 1922 and 1941) for farm
ownership and operating loans, respectively, provide that loans may be
made to applicants in the United States. The proposed rule was based on
the Act's provisions; therefore, the comment cannot be adopted.
Three comments were received on the highly erodible land and
wetlands conversion provision (Sec. 764.102(b)(3) renumbered to Sec.
764.102(d) in final rule). All comments stated the agency should
include the prohibition found in section 363 of the Act (7 U.S.C.
2006e), which provides loan funds may not be used to drain, dredge,
fill, level or otherwise manipulate a wetland, or in any activity that
will impair or reduce the flow, circulation, or reach of water, except
for an activity related to the maintenance of a previously converted
wetland. In addition, one of the comments stated the words ``to produce
an agricultural commodity'' should be removed. The agency agrees with
the comments, and has revised this section and Sec. 765.205(b)(10)
accordingly. Further, a definition of ``highly erodible land'' has been
added to Sec. 761.2.
Eleven comments were received on the noncontiguous tracts provision
(Sec. 764.102(b)(5)). Three of the comments supported the provision
while eight comments either opposed it in its entirety or stated
reasons the agency cannot realistically apply this specific provision
nation-wide. The agency considered the comments opposing the provision
and concluded that it is not possible to clarify the proposed
limitation in the CFR sufficiently, without making it overly burdensome
on the agency and applicants. Furthermore, the agency concluded that
there is not a policy concern associated with operating non-contiguous
tracts. The changing structure of agriculture and increased urban uses
of farmland in many localities require some operators to farm widely-
dispersed tracts in order to assemble an economically viable operation.
The concern addressed by the proposed requirement is actually that of
financial impact. Any increased costs and financial inefficiencies
resulting from operating non-contiguous tracts are most appropriately
addressed through the business planning process and the
[[Page 63257]]
loan feasibility analysis, however, rather than being a separate
limitation. Therefore, the agency agrees with the comments and has
removed the paragraph.
Section 764.103 General Security Requirements
Twenty comments were received on the general security requirements
provisions. One comment was in favor of requiring a lien on non-
essential assets for all loans except beginning farmer downpayment and
youth loans. The comment stated that by adopting this provision, the
agency will eliminate confusion on what liens have to be obtained for
what type loans. One comment stated the agency should apply the lien on
non-essential assets requirement to beginning farmer downpayment loans,
as these loans should not be made to borrowers with a significant
accumulation of non-essential assets. One comment stated all agency
direct loans, including beginning farmer downpayment and youth loans
should have the same security requirements and that such loans are
often the most poorly collateralized. The agency believes the
downpayment requirement and the short repayment term for beginning
farmer downpayment loans result in a better collateral position than
most agency loans. Due to the statutorily-mandated 10 percent
downpayment requirement, beginning farmers do not normally have
significant non-essential assets. The time spent in monitoring non-
essential assets is better spent in providing guidance and oversight to
beginning farmer borrowers. Therefore, the suggested changes are not
adopted.
One comment stated the agency should clarify that it is the
agency's choice of what constitutes ``best security available'' when
there are several options and that this determination is appealable.
The comment suggested the agency make the loan and obtain the best
security available to protect the taxpayer and the agency's financial
interests. The agency disagrees. The security requirements in part 764
adequately describe the required and preferred items of security. In
the rare cases where there are security options and the agency provides
financing based on the best security available, no appealable adverse
decision results. Applicants, however, can request National Appeals
Division (NAD) review of the agency's determination of appealability of
any issue. Therefore, the comment is not adopted.
One comment stated the agency should consider, in addition to
value, the lien position when choosing between available security. The
agency's handbook will provide guidance to agency officials in
considering lien position when choosing between available security.
Therefore, the comment is not adopted.
One comment suggested the agency obtain a lien on all titled assets
the applicant owns, and provided examples of non-titled assets on which
the agency should obtain a security interest. Two comments stated the
agency should replace the 150 percent additional security requirement
with a lien on all farm real estate for farm ownership loans and a lien
on all chattel property for operating loans. In addition, one of the
comments stated the agency should take a blanket lien appropriate for
the type of loan. The agency believes these proposals are overly
restrictive and do not provide the agency or applicants sufficient
flexibility. Further, a blanket requirement for liens on all titled
property would be overly burdensome on the agency to administer and
could prevent qualified applicants from receiving credit or from
obtaining part of their credit needs from other sources. Therefore, the
comments are not adopted.
One comment stated the agency should have discretion in obtaining
more than 150 percent of security, if available, and if the agency's
lien will not prevent the applicant from obtaining other credit. The
agency has determined that the existing 150 percent loan to value ratio
is adequate. Most agency applicants rely on other creditors for part of
their credit needs. A greater security requirement could weaken the
applicant's ability to obtain credit from other sources and would
increase administrative burden on agency staff unnecessarily.
Therefore, the comment is not adopted.
One comment stated the non-essential asset value should be
increased from $5,000 to $15,000 because taking a lien on an asset
valued at $5,000 is a burden for the agency to track and adds no value
to the agency loans. The agency believes that taking a lien on non-
essential assets of $5,000 is worthwhile. The average direct operating
loan is between $45,000 and $50,000. Assets that may provide a
secondary source of loan repayment of 10 percent or more of the loan
amount are considered significant, and the agency will continue to
require liens on such assets to reduce potential losses. Therefore, the
comment is not adopted.
One comment stated the agency should make liquidation of non-
essential assets a loan approval condition as an applicant unable to
obtain other credit may realize a greater financial benefit from the
liquidation of an asset than from retaining it. The agency believes
making liquidation of non-essential assets a mandatory loan condition
would potentially create additional financial obligations for
applicants due to tax consequences. In addition, the applicant may not
be able to sell the non-essential assets timely, and therefore, the
applicant's access to loan funds may be delayed for a considerable
amount of time and have a negative impact on the farming operation.
Therefore, the comment is not adopted.
One comment stated adequate security should have a ``market value
of at least 100 percent of the loan amount'' instead of ``security
value equal to 100 percent of the loan amount''. The agency defines
both ``market value'' and ``security value''. The difference between
the two is that the definition of ``market value'' does not include
reduction for any prior liens. Therefore, the agency believes the
provision as written is correct, and the comment is not adopted.
One comment stated the agency should add in the adequate security
provision that a guarantee from a Government or quasi-governmental
organization in the case of the Pacific Basin where lands are held in
communal, rather than fee simple, and where the U.S. Department of
Justice lacks jurisdiction will be acceptable. The agency believes the
provision as written, which allows the pledge of security from a third
party, permits the agency to accept the quasi-governmental guarantees.
Therefore, the agency believes no change is necessary.
One comment stated the agency should replace the 150 percent
security requirement with a lien on all assets used in or essential to
the farming operation. The comment stated if the comment is not
adopted, the agency should allow its officials discretionary authority
to waive the agency's lien on crops if the 150 percent requirement is
met and the agency is not providing annual operating credit to produce
the crops. Another comment stated agency officials should have
discretionary authority to waive a lien on crops if the 150 percent
security requirement is met and the agency is not providing annual
operating credit to produce the crops. As stated above, the agency
believes that obtaining a lien on all the applicant's assets may
prevent the applicant from obtaining needed credit from other sources.
Further, if the 150 percent requirement is met by other security and
the agency does not provide funds for crop production, the agency does
not obtain a lien on the crops under the
[[Page 63258]]
final rule. Therefore, the comments are not adopted.
One comment stated the agency, with applicant input, should make
the final decision on taking a lien on the applicant's non-essential
assets. The agency retains the discretion to administratively allow for
applicant input; however, the agency needs to make the final decision
as to the acceptability of loan collateral to protect its financial
interest. Therefore, the comment is not adopted.
Two comments stated it is not clear when the agency will take a
lien on each non-essential asset that has a value in excess of $5,000.
Both comments stated there are circumstances under which the agency may
not be able to obtain a lien if the CFR text is interpreted literally.
The agency agrees with the comments and has revised the CFR to require
a lien on such assets when each or the aggregate value of like assets
(such as stocks) has a value in excess of $5,000.
Section 764.104 General Real Estate Security Requirements
Three comments were received on the general real estate security
requirements provisions. One comment stated the provision that the
applicant must agree not to increase an existing prior lien without the
written consent of the agency should be removed because the agency
increases its debt by capitalizing interest, so other lenders should
not be held to a higher standard. It is agency policy to accept junior
lien positions as adequate collateral while other lenders, generally,
do not. The prohibition on increasing a prior lien holder's debt
without agency consent is critical to limiting the agency's loss and
assuring that loan objectives are met. Therefore, the comment is not
adopted.
One comment stated the agency should not take leaseholds as
security, because when the agency has taken leaseholds as security it
has suffered inordinate losses and that very few other lenders engage
in the practice. While the agency agrees that leaseholds may decline in
value during the term of the loan, it has determined leaseholds serve
as security for only a small percentage of its portfolio. Therefore,
the comment is not adopted.
One comment objected to the provision on Tribal lands held in
trust. The comment stated the agency should use the current provision
in Sec. 764.8(j) that provides the agency will take Indian trust lands
as security. Further, the comment stated if the applicant is required
to request title reports from the Bureau of Indian Affairs (BIA), it
should be stated in the CFR. Current Sec. 764.8(j) incorporates BIA
title status reports and approval requirements from Sec.
1943.19(a)(7). The agency agrees with the latter part of the comment
and has revised the CFR to require the applicant to request BIA to
furnish title status reports and BIA provides them and approves the
lien.
Section 764.105 General Chattel Security Requirements
Three comments were received on the general chattel security
requirements provisions. All comments stated the provision is too broad
and requested the agency clarify if the same chattel security can be
pledged for a direct and a guaranteed loan at the same time. The agency
believes the provision is adequate as written, and it allows the agency
flexibility needed to best meet the needs of applicants. The same
chattel security could be pledged for a direct and a guaranteed loan.
Therefore, the comments are not adopted.
Section 764.106 Exceptions to Security Requirements
Nine comments were received on the exceptions to security
requirements provisions. Three comments stated the agency should take a
lien on a non-farm residence only when other security property does not
provide a security value equal to 100 percent of the loan amount. The
comments stated that a lien on the non-farm residence may leave a
family homeless if the farming operation is not successful. In
addition, the comments stated the lien on the non-farm residence would
make it difficult for applicants to take advantage of low housing
interest rates and further impede their financial progress. One comment
stated the agency is inconsistent in its security requirements because
the agency will not obtain a lien on the non-farm residence but will
obtain a lien on crops and chattels to meet the 150 percent security
requirement for long-term loans. The comment stated crops and chattels
are typically considered short or intermediate term assets for loan
underwriting purposes. In addition, the comment stated the agency's
regulatory limits on security do not seem to be consistent with the
Debt Collection Improvement Act (DCIA). Therefore, the comment stated
the agency should remove Sec. 764.106(d). The agency disagrees. The
DCIA does not dictate appropriate types of loan security but provides
collection remedies upon delinquency. The proposed rule continued the
agency's existing policy in protecting its financial interest as well
as not imposing overly burdensome conditions on applicants. The
requirement, as published, provides for some collateral margin, when
available, to mitigate the agency's risk. The agency does not want to
encumber the applicant's home unnecessarily for the reasons raised, but
if the applicant becomes delinquent and loan servicing under 7 CFR part
766 is required to bring the account current, the agency will take a
lien on the non-farm residence at that time if it has not already.
Therefore, the comments are not adopted.
One comment stated the agency should use, in place of Sec.
764.106(d)(2), the language from existing 7 CFR 1941.19(c) because it
provides safeguards for applicants' non-farm residence. The agency
believes proposed Sec. 764.106(d)(2) provides the same safeguards as 7
CFR 1941.19(c); therefore, the comment is not adopted.
Three comments stated the agency should clarify the exception
applicable to special collateral accounts the applicant uses for the
farming operation. Two of the comments stated the provision as
proposed, can include almost any asset of the applicant. The agency
agrees with the comments and has revised Sec. 764.106(e) to refer to
working capital accounts the applicant uses for the farming operation.
One comment stated the agency should add the following to the
security exception provision: ``when the U.S. Department of Justice has
no jurisdiction or has advised the agency that they will not litigate
civil cases in areas lacking a Federal District Court.'' The agency
believes the existing provision under Sec. 764.106(c), which states
the agency will not take as security property on which it cannot obtain
a valid lien adequately addresses this concern. Therefore, the comment
is not adopted.
Section 764.107 General Appraisal Requirements for Real Estate and
Chattel
Four comments were received on the general appraisal requirements
for real estate and chattel provisions. All comments stated the
security value of livestock and crop production should remain 100
percent of the amount loaned for annual operating and family living
expenses instead of 100 percent of the projected annual income
generated from livestock and crop production. The agency agrees that
the loan amount is a known value, while the projected annual income
from livestock and crops is an estimate, which may be overstated. Use
of the projected annual income may significantly overstate the security
value of the anticipated production and result
[[Page 63259]]
in additional risk and higher loan losses to the agency in the event
the operation fails. The agency agrees with the comments and has
revised the CFR accordingly.
Section 764.108 General Insurance Requirements
Six comments were received on the general insurance requirements
provisions. One comment stated the term ``economically feasible'' under
Sec. 764.108(b) is not clear. In addition, the comment stated chattel
security need only be covered by hazard insurance if it is available,
and the cost of the insurance does not exceed its benefit. The agency
agrees with the comment and has revised the CFR text accordingly.
Three comments stated Sec. 764.108(d) and (e) seem to conflict
since subparagraph (d) requires crop insurance unless the applicant
signs a waiver for emergency crop loss assistance and subparagraph (e)
requires crop insurance must be obtained for crops providing adequate
security. The agency has revised the CFR to clarify that these are
separate requirements. The catastrophic risk protection level of crop
insurance is a minimum requirement under 7 U.S.C. 1508 (b)(7) and
section 371 of the Act. Insurance for adequate security is an
additional administrative requirement.
One comment stated the proposed rule did not provide guidance on
the type of insurance required, amount of insurance or insurance waiver
conditions. In addition, the comment stated it is not clear if
including the crop insurance premium does not result in a feasible
plan, would the decision to deny a loan be upheld if a feasible plan
can be developed without crop insurance. As stated above, the agency
has revised the insurance requirements for clarification and
elimination of conflicts. Therefore, this part of the comment is not
adopted. The agency considers crop insurance premiums to be essential
farm operating expenses and the applicant can utilize operating loan
funds to pay the premiums. Further, the agency requires the applicant
to obtain crop insurance for growing crops used to provide adequate
security for the agency loan. There is no economic feasibility
condition. Therefore, no change has been made in response to the latter
part of the comment.
One comment stated there is a conflict between the requirements for
FLP loans and Farm Program disaster benefits regarding insurance. The
comment stated that for FLP loans an applicant must either have crop
insurance or sign a crop insurance waiver, but to receive Farm Program
benefits after a disaster, an applicant must either have crop insurance
or not have insurance. The agency believes the CFR as written provides
clear guidance on the insurance requirements applicable to FLP loans
under the applicable statutes noted above. Therefore, the comment is
not adopted.
Section 764.151 Farm Ownership Loan Uses
One comment stated the agency should extend the provision of
refinancing a temporary bridge loan, made by a commercial lender for
the acquisition of a farm, to loans made under a private contract for
deed. The comment stated contracts for deed are a major source of funds
for beginning farmers and the restriction does not benefit the agency.
Section 303(a)(1)(E) of the Act provides that farm ownership loan funds
can be used to refinance temporary bridge loans made by commercial or
cooperative lenders to farmers to acquire a farm in certain instances.
In addition, section 310F of the Act authorizes the Secretary to
establish a pilot program to provide guarantees of loans made by
private sellers on a contract land-sale basis to qualified beginning
farmers. The agency implemented Section 310F in a Notice of Funds
Availability published in the Federal Register on September 4, 2003 (68
FR 52557-52562). The proposed rule was based on the Act's provisions,
which do not authorize refinancing contracts for deed on a permanent
basis; therefore, the comment cannot be adopted.
Section 764.152 Eligibility Requirements (Farm Ownership Loans)
Three comments were received on the prior debt forgiveness
provisions (Sec. Sec. 764.152(b) and 764.252(b)). One comment stated
the agency should revise Sec. 764.152(b) to include all the debt
forgiveness conditions found under Sec. 764.252(b) to make the
requirements for farm ownership and farm operating applicants the same.
One comment stated that applicants that have caused losses to the
agency through debt forgiveness should not be eligible for loans. The
comment stated the agency receives limited funding each year and it
should direct it to applicants who have not received debt forgiveness.
In addition, the comment stated the agency's reputation and integrity
is harmed from the policy of allowing any applicants who received
previous debt forgiveness to be eligible for loans. The third comment
objected to the provision that applicants that have received debt
forgiveness due to a Presidentially-designated emergency are still
eligible for operating loans. The comment stated that the determination
if the debt forgiveness was due to a Presidentially-designated
emergency would be very subjective and ripe for appeals. The agency
disagrees. Section 373(b)(1)(A) of the Act provides that borrowers that
have received debt forgiveness on a direct or guaranteed loan,
generally are no longer eligible for farm ownership or operating loans.
In addition, section 373 (b)(2) of the Act provides limited exceptions
under which an annual operating loan may be made to borrowers that
received debt forgiveness. The proposed rule was based on the Act's
provisions; therefore, the comments cannot be adopted.
Two comments stated changes to Federal and State laws on property
ownership have made the agency's owner-operator requirement a barrier
for some applicants. The comments stated if owners of the real estate
are the same persons who own the entity operating the real estate, the
agency should consider the owner-operator requirement to be met. The
agency understands that the entity ownership requirement may be a
barrier in some cases; however, the agency's application of the owner-
operator requirement to entity applicants is consistent with section
302 of the Act. The agency does not choose to make a policy change at
this time.
In the proposed rule, the agency inadvertently incorporated the
definition of ``participated in the business operation of a farm''
under Sec. 764.152(d). The agency received nine comments requesting
the definition be moved to Sec. 761.2(b) and Sec. 764.152 should only
provide FO loan eligibility requirements. The agency agrees with the
comments and has revised the CFR accordingly.
Four comments were received on acceptable documentation of an
applicant's participation in the business operations of a farm (Sec.
764.152(d)). One comment stated the agency should either publish
guidelines in the CFR on what it considers acceptable documentation or
develop a form for applicants to provide documentation. One comment
stated the agency should publish in the CFR acceptable documentation
required for applicants to establish participation in the business
operation of a farm. The comment stated the agency requires applicants
to provide tax returns, with no alternative form, to verify the
applicant's participation in the business operation of a farm. In
addition, the comment stated the agency should develop a
[[Page 63260]]
standard form for applicants to complete when applicants claim
participation in the business operation of a farm by virtue of being
raised on a farm. The agency believes the rule as written provides the
flexibility needed for applicants to document their participation in
the business operation of a farm. Typically, documents include tax
returns, FSA records, or W-2's. In addition, because of the different
skills acquired through participation in diverse agricultural
enterprises by the applicant, it will be difficult for the agency to
develop a standard form to cover all potential farming participations
that may occur throughout the country. Applicants can address their
participation in the business operations of a farm when documenting
their farming experience. Moreover, in the agency's experience,
applicants have not had difficulty in meeting the requirement as is
included in current Sec. 1943.12(a)(6). Therefore, the comments are
not adopted.
One comment stated the example of participation by the applicant
having been raised on a farm should be removed, as it may have occurred
more than 50 years ago. The agency believes it is unlikely the
situation the comment stated will occur, because as stated under the
general eligibility requirement provisions, the applicant must possess
managerial ability by farming experience obtained within the last 5
years. Therefore, the comment is not adopted.
One comment stated the eligibility requirements should require
timely experience relevant to the proposed operation to insure a
greater success rate for applicants as they will have recent experience
in the ever-changing agricultural technology and practices. In
addition, the comment stated the requirement the applicant must have
participated in the business operation of a farm in 3 out of the last
10 years currently in effect is often misunderstood by applicants, who
believe they are eligible for farm ownership loans if they farmed 8, 9,
and 10 years ago. The agency believes the farm ownership requirements
as written are clear and accurately reflect the statutory requirements
in section 302 of the Act. As stated previously, the agency does not
differentiate between the skills required to operate various types of
farms. The agency cannot make the farming experience timeframe any
different than specified in section 302(b)(1) of the Act and does not
choose to make the requirements overly burdensome to beginning farmers.
Therefore, the comment is not adopted.
One comment was received on the provision that an applicant for a
farm ownership loan must not have received a farm ownership loan. The
comment stated the provision as written implies that an applicant is
only eligible for one farm ownership loan. The agency disagrees. The
proposed language sets out alternatives. The agency, however, has
clarified that an applicant must ``satisfy at least one of the
following conditions'', and lists the alternative requirements from
section 302 of the Act. Generally, the applicant may have received a
prior farm ownership loan, but such loan may not have been outstanding
for more than a total of 10 years prior to the new closing date.
Two comments were received on the requirement that an applicant for
a farm ownership loan had been the operator of a farm. One comment
stated that changing the requirement is contrary to wise supervised
credit and will be a disservice to young individuals since, under the
new rule they will be eligible for loans without the necessary ability
to make wise financial decisions, as evidenced by filing Schedule F
with their Federal tax returns. The other comment stated that the 3-
year requirement for owning, managing or operating a farm should not
just be stated as ``a year's complete production and marketing cycle.''
Section 302(b)(1) of the Act provides that eligible applicants for farm
ownership loans are farmers who have participated in the business
operations of a farm for not less than 3 years. The proposed rule was
based on the Act's provisions; therefore, the comments cannot be
adopted.
The agency inadvertently omitted in the proposed rule the current
requirement that the entity must be authorized to own and operate a
farm in the state in which the farm is located. Therefore, the agency
is adding the requirement in the final rule at Sec. 764.152(c).
Lastly, the agency revised Sec. 764.152(e) in the final rule
because the transition rule established under section 302(b)(2) of the
Act (7 U.S.C. 1922) is no longer applicable.
Section 764.154 Rates and Terms (Farm Ownership Loans)
Three comments were received on the rates and terms provision
pertaining to the joint financing agreements. One comment supported the
joint financing agreement provision stating that the lower interest
rate offered through the joint financing agreements benefits beginning
farmers. Two comments stated the agency should extend it to all loan
types. Section 307(a)(3)(D) of the Act (7 U.S.C. 1927(a)(3)(D))
provides the minimum interest rate for a direct farm ownership loan
made as part of a joint financing arrangement. The Act does not
specifically authorize joint financing agreements with different
interest rates for any other type loans. The proposed rule was based on
the Act's provisions; therefore, the comments cannot be adopted.
Section 764.203 Limitations (Beginning Farmer Downpayment Loan)
Three comments were received on the limitations provisions under
the beginning farmer downpayment loan. One comment stated the Agency
should work with Congress to raise the limit from $250,000 to $500,000.
The agency believes the impact of any legislative change to increase
the beginning farmer downpayment loan limit must be carefully analyzed
as the Office of Management and Budget (OMB), along with the President
play a role in the appropriations process. Therefore, the agency is
limiting this rule to revising its regulations within its current
statutory authority. However, the Administration's 2007 Farm Bill
proposal recommends that the loan limit for the direct loans be
increased. The Agency will make the appropriate regulatory changes in
the future, in the event the Administration's proposal is adopted. Two
comments stated that this limit is too low for their areas since buying
adequate acreage to operate a farm efficiently far exceeds the limit.
Section 310E(c)(2) of the Act (7 U.S.C. 1935(c)(2)) provides the
maximum beginning farmer downpayment loan limit. The proposed rule was
based on the Act's current provision; therefore, the comments cannot be
adopted. However, as provided above, the agency will make the
appropriate regulatory changes should the Administration's proposal to
increase the direct loan limits be adopted.
Section 764.251 Operating Loan Uses
Fifteen comments were received on the operating loan uses. One
comment stated the operating loan uses should be clarified to indicate
whether income taxes can be paid for the current or prior year and
personal residence or personal car payments can be made with operating
loan funds. The operating loan uses as written provide for the payment
of family living and farm operating expenses. The term ``family living
expenses,'' as defined in Sec. 761.2(b), includes ``the cost of
providing for the needs of family members.'' The agency believes that
income taxes, personal residence and personal car payments are
considered a ``cost of providing for the needs of
[[Page 63261]]
family members'' and can, therefore, be paid using operating loan
funds. The agency believes no additional revisions to the operating
loan uses are necessary since it would be impossible to develop an all-
inclusive list of family living expenses.
Three comments supported the provision that up to $15,000 of
operating loan funds may be used for real estate repairs or
improvements. Eleven comments either wanted to raise the limit of
operating loan funds to $20,000 (1 comment), $25,000 (1 comment),
$30,000 (2 comments), $50,000 (3 comments), or did not want to impose a
limit as long as the farming operation's cash flow will sustain the
amount used for a 7 year term without balloon payments (3 comments).
Further, one of the comments stated the direct loan program should
match the guaranteed loan program, as there is no limit on the amount
of guaranteed operating loan funds that can be used for real estate
repairs. In response, the agency revised the CFR to provide that direct
operating loan funds can be used to pay costs for minor real estate
repairs or improvements, provided the loan can be repaid within 7
years. The agency agrees that the direct loan provision should be
consistent with the guaranteed loan provision.
Lastly, the agency inadvertently omitted the current provision that
the applicant may not use Lo-Doc loan funds for refinancing debt.
Therefore, the agency added the provision under Sec. 764.251(j)(1).
Section 764.252 Eligibility Requirements (Operating Loans)
Nine comments were received on the eligibility requirements for
operating loans. One comment stated the agency should change ``CONACT''
to ``Act'' and remove the definition of ``debt forgiveness'' found in
Sec. 764.252(b). In addition, the comment stated the applicant should
be eligible for loans by paying the amount of the debt forgiveness the
applicant received. The agency agrees. The agency changed the
references from ``CONACT'' to ``Act'' throughout the final rule,
wherever they occurred, and revised the definition of ``debt
forgiveness'' in Sec. 761.2 to provide that the term does not include
prior debt forgiveness that is repaid in its entirety.
One comment stated the one-time debt forgiveness exception due to a
Presidentially-declared disaster is also available to applicants
farming in contiguous counties. The agency agrees with the comment and
has revised the CFR accordingly. This change is allowed by section
373(b) of the Act (7 U.S.C. 2008h(b)) and is consistent with the
agency's policy of providing EM loans in these contiguous counties.
Seven comments were received requesting the agency clarify that
applicants who had reached the statutory limits were no longer eligible
for OL. In the preamble of the proposed rule, the agency provided ``The
OL loan eligibility requirement that the applicant and any persons
signing the promissory note may not close an OL loan in more than 7
calendar years will be modified to apply only after December 31, 2002.
This change is required by section 255 of the Agricultural Risk
Protection Act of 2000, Public Law 106-224, enacted on June 20, 2002.''
However, the agency removed the appropriate regulatory text since the
agency's authority to make operating loans to applicants that had
reached the statutory term limits expired on December 31, 2002. As
acknowledged in the preamble, the agency attempted to incorporate all
the regulatory and statutory revisions required since calendar year
1999. It was due to agency oversight the above text was included in the
proposed rule even though the regulatory text was removed. Therefore,
the agency will take no further action on these comments.
One comment stated the agency should revise Sec. 764.252(d) (Sec.
764.252(e) in the final rule) to provide that beginning farmers are
eligible for direct operating loans for 10 years as provided under
section 311 of the Act. The agency agrees that beginning farmers are
not subject to the 7-year limitation under that statutory provision and
has revised the CFR accordingly.
Five comments were received on the one time waiver for operating
loan term limits under the eligibility requirements provisions. One
comment disagreed with the continuous waivers of the operating loan
term limits enacted by Congress. The comment stated the term limits
either need to be removed completely or implemented fully as required
by section 311(c) of the Act. Two comments supported the removal of the
term limits and stated eligibility for loans should be based on the
applicant's credit worthiness instead of on the number of years an
applicant has obtained loans. Both comments, as well as an additional
comment, stated that if the term limits remain in effect, the agency
should use the term ``financially viable operation'' instead of
``feasible plan'' in Sec. 764.252(f)(1) (Sec. 764.252(e)(4)(i) in
final rule). Sections 311(c)(1) and (4) of the Act (7 U.S.C. 1941
(c)(1) and (4)) provide the term limits and waiver provisions for
operating loans. Paragraph (c)(4)(B)(i) specifically allows a borrower
to receive a one time waiver of 2 years, if ``the borrower has a viable
farm...operation.'' The agency has interpreted the ``financially viable
operation'' to mean an operation that will improve over time so that
agency assistance is no longer needed. The term ``feasible plan''
indicates the operation will generate inflows to cover outflows but it
is not necessarily reflective of a borrower's ability to graduate to
commercial credit or to provide for replacement of capital items and
long-term growth. The proposed rule was based on the Act's provisions;
therefore, the comments cannot be adopted.
One comment stated section 311(c)(4)(A) of the Act (7 U.S.C.
1941(c)(4)(A)) provides the Secretary shall waive the operating loan
term limits for farmers whose farm and security instruments are subject
to the jurisdiction of an Indian tribe if the Secretary determines that
commercial credit is not generally available; therefore, the comment
stated Sec. 764.252(g) (renumbered to Sec. 764.252(e)(2)) needs to
reflect the statutory requirement. The agency agrees with the comment
and has revised Sec. 764.252(e) accordingly.
In the proposed rule, the agency inadvertently stated that
applicants ``may request a one-time waiver of OL term limits * * *''
However, the agency's current policy is to automatically consider a
waiver for applicants who have reached the OL term limits and does not
require a formal waiver request. Therefore, the agency revised Sec.
764.252(e)(4) to provide that ``On a case-by-casis basis, [the
applicant] may be granted a one-time waiver of OL term limits * * *''
Lastly, the agency believes the Act's provisions regarding waiver
of the operating term limit were not clearly stated in the proposed
rule for entity applicants. Section 311 of the Act, which addresses
eligibility requirements for operating loans, including both the term
limit and the one-time waiver, specifically provides ``To be eligible
for such loans, applicants who are individuals, or, in the case of
cooperatives, corporations, partnerships, joint operations, trusts, and
limited liability companies, individuals holding a majority interest in
such entity, must * * *'' Proposed Sec. 764.252(f)(2) provided that
one condition for obtaining a waiver is the applicant ``Applied for
commercial credit from at least two lenders.'' As proposed, the rule
could be interpreted to imply that the applicant and all members of the
entity must ``be unable to obtain commercial credit'' when the
[[Page 63262]]
Act clearly provides the requirement applies only to the entity
applicant and entity members holding a majority interest. Therefore,
the Agency clarified the waiver requirements in the final rule by
revising Sec. 764.252(e)(4)(ii) to read the applicant ``And in the
case of an entity, the members holding the majority interest, applied
for commercial credit from at least two lenders and were unable to
obtain a commercial loan, including an Agency-guaranteed loan.''
Section 764.254 Rates and Terms (Operating Loans)
Three comments were received on the rates and terms provisions for
operating loans. One comment stated that balloon installments should be
authorized specifically for direct operating loans as they are for
guaranteed operating loans. One comment stated the rule establishes a
7-year maximum term for operating loans; however, the current agency
regulations permit unequal and balloon installments. In addition, the
comment stated it is not clear if unequal and balloon installments will
be allowed under the new rule. The last comment stated the agency
should incorporate the conditions currently in regulations under which
the agency will allow longer annual operating loan repayment terms. The
agency agrees with the comments and has added Sec. 764.254(b)(2)(i)
and (ii) to continue existing policies in these areas.
Section 764.255 Security Requirements (Operating Loans)
Two comments were received on the operating loan security
provisions. Both comments stated the agency omitted the requirement to
obtain a first lien on all property or products acquired or produced
with loan funds and the requirement to keep the same lien position when
refinancing secured debts. The comments are correct, in part, as the
proposed rule simply required a lien, rather than a ``first lien'' as
provided in existing regulations at 7 CFR 1941.19(a)(1). However,
existing regulations require ``a first lien on all property or products
acquired, produced, or refinanced with loan funds,'' not just
``property or products produced and acquired.'' The agency does
believe, however, that the comments have merit, as it may not be
possible for an applicant to ensure the agency can obtain a higher lien
position than the creditor being refinanced. Therefore, the agency is
adopting the comments as recommended and has revised the CFR
accordingly.
Section 764.301 Youth Loan Uses
Twenty comments were received on the youth loan uses. Four comments
supported the provisions as proposed. Four comments stated the agency
should continue making youth loans under the same provisions currently
utilized. Eleven comments opposed the agency's proposal and stated that
since the project advisors are involved in agriculture, the youth loan
project will be agriculture-related. In addition, some of the comments
stated that even if the project advisor is not involved in agriculture,
youth loans provide practical business skills and educational
experience. Further, two of the comments stated youth loan funds should
also be used for community projects and help children ``stay out of
trouble'' after school. One comment stated it is not clear if the youth
loan project should meet all of the following: be a modest, income-
producing, agriculture-related, educational project. The agency
disagrees. As stated in the preamble of the proposed rule, the Youth
Loan Program's objective is to provide credit to rural youths to
establish and operate modest, income-producing projects in connection
with 4-H clubs, FFA, and similar organizations. However, through the
years, the objectives of the Youth Loan Program have been interpreted
inconsistently to allow loan funds to be used for projects not related
to agriculture. The agency's proposal was intended to clarify that
section 311(b)(1) of the Act (7 U.S.C. 1941(b)(1)) specifically waives
only the managerial ability and borrower training requirements
applicable to operating loans. The statute does not waive the loan
purposes authorized in section 312 (a) of the Act; therefore, projects
should be agriculture-related. Therefore, the comments are not adopted.
Section 764.302 Eligibility Requirements (Youth Loans)
Fifty comments were received on the eligibility requirements for
youth loans. In the preamble of the proposed rule, the agency solicited
comments on lowering the youth applicant's age limit to 8 years to
coincide with the age limitation to participate in 4-H clubs (proposed
Sec. 764.302(b)). The agency received 35 comments. Twenty-three
comments opposed lowering the youth applicant's age limit, while seven
comments supported it. Three comments stated the agency should not
change the youth applicant age limit. Two comments stated the agency
should not lower the age limit but instead should increase it from 10
years of age to 12 or 14. In addition, one of the comments stated the
loan limit for youth applicants younger than 14 years old should be
$1,000 instead of $5,000. The agency considered all comments received
and determined that lowering the age for youth loan applicants will not
enhance applicants' chances of becoming successful farmers. Therefore,
the agency is not lowering the youth loan applicants' age limit.
Twelve comments were received on the provision that youth loan
applicants reside in a rural area, city, or town with a population of
50,000 or fewer people (proposed Sec. 764.302(c)). Four comments
supported the agency's proposal as written. Two comments stated the
provision is unnecessarily restrictive and will prevent minority
children living in urban areas, whose parents own or operate farms
outside of the urban area, from participating in this valuable program.
One comment stated youth loans should be available to youths residing
in towns with populations of less than 10,000. One comment supported
increasing the population's limit to 20,000 because cities with larger
populations are not considered rural areas. In addition, the comment
stated that by increasing the population limit, demand for youth loans
will increase and fewer funds will be available to make operating loans
to farmers. One comment opposed increasing the population to 50,000
inhabitants for youth loans. One comment stated the limitation should
be removed. One comment stated there is no need to impose additional
population restrictions since youth loan funds will be used for
agriculturally related projects only. One comment stated that by
increasing the population limit to 50,000 or fewer inhabitants and
restricting the use of youth loan funds to agricultural projects only,
the agency is not making the Youth Loan Program more accessible than it
currently is. These opposing comments do not consistently support a
specific alternative to the proposed Youth Loan Program provisions. The
agency believes that the Youth Loan Program, as proposed, will provide
valuable educational opportunities for youths to experience farming.
Therefore, no changes have been made in response to these comments.
One comment stated the agency should remove the home economics
teacher as an acceptable project advisor since the agency proposed to
finance only agriculture-related projects through the youth loan
program. The agency agrees with the comment and has revised the CFR
accordingly.
[[Page 63263]]
One comment stated the agency should include a definition for a
youth loan project. The comment stated that sometimes the project
advisor provides a written statement that the project under
consideration is educational, agriculture-related and beneficial to the
applicant; however, the project advisor does not monitor the
applicant's progress with the project. The comment stated, if the
applicant has difficulties, the project advisor is not available to
provide advice as required or needed. The project advisor mainly helps
the youth loan applicant develop the project. The agency cannot predict
in advance the advisor's willingness to provide assistance at a future
date and has no available means to exercise any authority over the
advisor. However, the agency provides assistance to youth loan
borrowers experiencing difficulties. The agency believes a definition
for a youth loan project is not needed since Sec. 764.301 provides the
types of projects for which a youth loan may be made; therefore, the
comment is not adopted.
One comment stated the word ``supervised'' should be replaced by
the word ``mentored'' in proposed Sec. 764.302(d). The agency believes
the term used in the CFR and the term provided in the comment are
largely the same, so the change would not make a meaningful difference.
Therefore, the comment is not adopted.
The agency inadvertently omitted in the proposed rule the
eligibility requirement that a youth loan applicant not have caused the
Agency a loss by receiving debt forgiveness currently established in 7
CFR 1941.12(a)(8). The agency, therefore, has incorporated the
provision in the final rule by adding new Sec. 764.302(b) and
redesignating proposed Sec. 764.302 paragraphs (b) through (e) as
paragraphs (c) through (f).
Section 764.305 Security Requirements (Youth Loans)
Nine comments were received on the youth loan security requirements
provisions. One comment supported the agency's proposal not to continue
the 150 percent security requirement for youth loans. One comment
stated the agency should require a cosigner for youth loans. One
comment stated if the agency will not continue the 150 percent security
requirement, the agency should require a cosigner for youth loans like
the Department of Education for student loans. Six comments stated the
security requirements for youth loans should remain the same as for
operating loans. The agency believes youth loan applicants have minimal
assets beyond those acquired with loan funds. In addition, the agency
has a limited loss exposure for youth loans because of the $5,000 loan
limit; therefore, the additional security requirements for operating
loans would impose a disproportional administrative burden on the
agency. Further, DCIA provisions provide more effective and less costly
collection tools than disposition of collateral when the loan amount is
small. Lastly, youth loans are made to finance income producing,
agriculture-related projects unlike student loans for which repayment
of principal is generally deferred until a date in the future.
Therefore, the agency does not believe a cosigner is necessary when the
cash flow projection reflects a feasible plan. However, the agency may
still require a cosigner for youth loans when the agency determines
there is not adequate cash flow for the proposed loan otherwise.
Therefore, the comments are not adopted.
Section 764.351 Emergency Loan Uses
Two comments stated it is not clear if an agency direct loan can be
refinanced with chattel physical loss loan funds or production loss
loan funds. Proposed Sec. 764.351 contains the conditions for
refinancing debts, including agency debt. The agency did not propose to
make policy changes to the existing emergency loan regulation.
Therefore, the comments are not adopted.
Three comments stated the agency should clarify in the final rule
that only essential property will be repaired or replaced with
emergency loan funds. The agency agrees with the comments and has
revised the CFR accordingly.
One comment stated the agency should revise Sec. 764.351(a)(2)(v)
to provide for ``essential farm operating and family living expenses''
instead of ``essential household expenses.'' The agency agrees with the
comment and has revised the CFR accordingly. Lastly, the agency added
the words ``not from breeding stock'' from current Sec. 764.3(a)(2)(v)
that were inadvertently omitted in the proposed rule.
The agency inadvertently omitted the words ``except that such costs
shall not include the payment of bankruptcy expenses'' from current
Sec. 764.3(b)(1). Therefore, the agency revised Sec. 764.351(b)(1)
accordingly.
Section 764.352 Eligibility Requirements (Emergency Loans)
Seven comments were received on the eligibility requirements for
emergency loans. One comment suggested that only the primary operators
should meet the eligibility requirements if the ownership structure of
a family farm changes from the time a qualified loss occurred to the
time the emergency loan is closed. The agency believes adoption of the
comment will result in more permissive requirements for entities that
underwent a change in their ownership structure than for entities that
remained the same. Further, the agency believes that change in the
ownership structure does not justify treating those entities any
different from entities that did not change ownership structure.
Therefore, the comment is not adopted.
Two comments stated the agency should make an eligibility
requirement, instead of a limitation, that the physical property must
have been covered by general hazard insurance at the time the disaster
occurred. The agency disagrees. The property insurance requirement
should not be made an eligibility requirement because applicants may
have insured only the most valuable physical property, and, therefore,
would be disqualified for assistance. Therefore, the comments are not
adopted.
One comment stated the agency should require the applicant to
obtain a formal denial on a loan application that specifies the
commercial lender's reasons for denying credit to the applicant. The
comment stated written declinations are not formal denials of credit
nor do they represent true analysis of the applicant's credit
worthiness. In addition, the comment stated commercial lenders provide
written declinations to their clients as a customer service. Another
comment stated the agency should remove the requirement that
applicants, depending on the amount of the loan request, provide up to
3 written declinations of credit. The comment stated if applicants seem
to be able to obtain credit elsewhere, they should apply for a loan
from a commercial lender. The agency disagrees. Section 322(b) of the
Act (7 U.S.C. 1962(b)) provides the specific number of written
declinations, based on the loan amount requested, applicants for
emergency loans have to provide the agency. Further, section 322(b)
states the specific reasons that have to be included in the declination
letter provided by the commercial lender. The agency has incorporated
these statutory provisions in Sec. 764.352(e). While there may be
cases where commercial lenders provide declinations of credit letters
to their customers, the agency has the flexibility under Sec.
764.352(e)(4) to contact other commercial lenders within reasonable
proximity of the applicant and make an independent determination of the
applicant's ability to obtain credit elsewhere. Lastly, the agency
based both the proposed as well as the final rule on the Act's
provisions; therefore, no
[[Page 63264]]
policy changes have been made in response to the comments.
One comment stated the test for credit requirement will keep a
wealthy partner from receiving disaster benefits. Therefore, the
comment stated the requirement that owners holding a majority interest
in the entity applicant, if not related by blood or marriage, must all
operate the farm, should be removed. Section 321 of the Act (7 U.S.C.
1961) provides the entity eligibility requirements for emergency loans.
The proposed rule was based on the Act's provisions; therefore, the
comment cannot be adopted.
One comment stated the agency should correct Sec. 764.352(b)(1) to
state the application for an emergency loan must be received within 8
months after the date the disaster is declared or designated. In
addition, the comment stated the agency should correct paragraph (a)(7)
to state an emergency loan applicant may have had one occasion of debt
forgiveness on or before April 4, 1996, but none after April 4, 1996.
The agency agrees with the comment and has revised the CFR.
Another comment suggested that proposed Sec. 764.352(b)(3) be
revised to provide that the applicant ``must have suffered disaster-
related damage to chattel or real estate essential to the farming
operation, or to household contents that must be repaired or replaced,
to harvested or stored crops, or to perennial crops for physical loss
loans.'' The agency agrees that this language from current Sec.
764.4(b)(2)(iii) was inadvertently omitted and has included the
provision in Sec. 764.352(i).
Further, the agency added the provision that applicants that
receive duplicative Federal assistance based on the same disaster must
agree to repay it to the agency that provided such assistance. This
provision is in current Sec. 764.4(a)(15) and was omitted in the
proposed rule. Lastly, the agency reorganized this section by removing
the subparagraph headings and renumbering the paragraphs.
Section 764.353 Limitations (Emergency Loans)
Two comments were received on the limitations for emergency loans
provisions. The comments stated section 321(b)(3) of the Act contains
specific provisions for hazard insurance requirements applicable to
poultry farmers requesting emergency loans that were not included in
the proposed rule. The agency agrees with the comments and has revised
paragraph (e) accordingly.
Another comment suggested that proposed Sec. 764.353(d)(3) on
calculating eligible physical losses be revised to include the value of
replacement livestock products as well as replacement livestock. The
agency agrees that such losses are covered under current Sec. 764.3
and has revised the paragraph accordingly.
Lastly, the agency added in Sec. 764.353(c)(4) and (d)(6) the
words ``or insurance indemnities received or to be received'' from
current Sec. 764.5(c)(4) and (e)(1)(vi) that were inadvertently
omitted in the proposed rule.
Section 764.354 Rates and Terms (Emergency Loans)
One comment suggested that Sec. 764.354(b)(3) be revised to
provide ``EM loans for annual operating expenses, except expenses
associated with establishing a perennial crop, must be repaid within 12
months.'' The agency agrees that this provision in current Sec.
764.7(c) was inadvertently omitted, in part, and has revised the
paragraph accordingly.
The agency inadvertently omitted in the proposed rule the provision
for expenses associated with establishing a perennial crop found in
current 764.7(c). The agency has therefore, incorporated the provision
in the final rule and has revised the CFR accordingly.
Section 764.355 Security Requirements (Emergency Loans)
Three comments were received on the security requirements for
emergency loans provisions. One comment stated the requirement the
applicant has had positive net cash farm income in at least three of
the past 5 years should be removed for applicants with no security
other than repayment ability, as it would prevent start-up and
struggling limited resource operations from obtaining needed
assistance. The agency believes that relying on the applicant's
repayment ability in lieu of chattel or real estate security
significantly increases the agency's level of risk associated with the
loan. Therefore, the agency believes the requirement as written is
essential to limit the agency's potential losses. In addition, the
existing regulation includes an identical requirement when the
applicant will utilize repayment ability as security. Further, the
agency has not experienced significant problems with the provision as
it currently exists and does not expect that it will in the future.
Two comments stated there is an inconsistency between the
requirement that applicants provide copies of records to show they had
positive net cash farm income in at least three of the past 5 years to
obtain an emergency loan based on their repayment ability, and the
requirement for applicants to provide records for only 3 years for any
other loan. Therefore, the comments stated the records requirements
under Sec. 764.355(c)(3) should be revised to match the requirements
under Sec. 764.51(a). For the reasons stated above as well as in
addressing comments for Sec. 764.51(a), the agency believes that the
requirements are reasonable. Therefore, the comments are not adopted.
Lastly, in Sec. 764.355(c)(4) the agency added the provision from
current Sec. 764.8(f)(4) that was inadvertently omitted in the
proposed rule.
Section 764.401 Loan Decision
Fourteen comments were received on the loan decision provisions.
Three comments stated the agency should clarify that the maximum loan
limits may be exceeded at the time of loan approval, however, loan
limits cannot be exceeded at the time of loan closing. The agency
agrees with the comments and has revised the CFR, at Sec. 761.8,
accordingly. In addition, the agency revised the guaranteed loan
regulation at Sec. 762.122 to incorporate the maximum loan limit of
Sec. 761.8.
One comment stated the CFR text does not address the requirement to
notify the applicant of loan denial. Such notification is covered under
Sec. 764.54(a), which provides that within 60 calendar days after
receiving a complete loan application, the agency must complete the
processing of the loan request and notify the applicant of the decision
reached. Further, the agency handbook provides guidance and information
needed to be included in the notification to the applicant of loan
denial. Therefore, the comment is not adopted.
Two comments stated the provisions on loan denial should be removed
because they are redundant with the loan approval provisions. The
agency disagrees. The loan denial provisions enumerate the conditions
under which loan denial is appropriate. Therefore, the comments are not
adopted.
One comment stated the CFR contains vague and not easily measurable
standards because the agency will not make a loan if the applicant's
circumstances may not permit continuous operation and management of the
farm or the applicant, the operation, or other circumstances
surrounding the loan are inconsistent with the authorizing statutes,
other Federal laws or Federal credit policies. The comment stated loan
denial should be based on objective standards. The agency has
responsibility, under sections 302, 311 and 321 of the Act, to
[[Page 63265]]
ensure it assists owner-operators or tenant-operators of family-sized
farms; providing financial assistance to applicants who may not be
available to continually operate the farm is not consistent with
program objectives. Loan denials based on the applicant's availability
to operate the farm are rare. The agency cannot anticipate every
possible scenario that may be encountered since each operation, and the
circumstances surrounding each one, in the country is unique, so some
flexibility is needed. Applicants denied financial assistance will be
advised of the reasons and provided appeal rights. In addition, the
agency has a responsibility to implement Federal laws and Federal
credit policies applicable to the Federal Government as a whole, not
just its authorizing statute. Therefore, the comment is not adopted.
One comment stated the agency should make the National Appeals
Division (NAD) official responsible for making a loan to an applicant
the agency cannot certify meets all the conditions for loan approval.
While the agency may not agree with all NAD final decisions, it is
responsible for implementing them. A reversal of loan denial by NAD,
however, does not automatically result in loan approval. The agency is
still responsible for administering the applicable rules in light of
the NAD decision and making a loan decision based on the particulars of
the case and the NAD determination. Therefore, the comment is not
adopted.
One comment stated the agency should establish timelines for
requiring additional information when an agency loan denial is
overturned in an appeal. The agency believes reasonable timelines for
requiring information from an applicant when the agency's loan denial
is overturned in an appeal are appropriate to be included in the agency
handbook and in direct notices to the applicant. Therefore, the comment
is not adopted.
Two comments stated the agency must implement the NAD decision when
the agency's loan denial is overturned in an appeal and not request,
what is in effect, a new application. The agency disagrees that updated
financial data may never be requested to implement a NAD decision. The
agency has the responsibility to make financial assistance available to
eligible applicants with feasible operations in accordance with
statutory and regulatory limitations, and at the same time protect the
taxpayer and agency's financial interest. In most cases, from the time
the agency denied a loan application to the time a final NAD decision
is granted several months have passed. The actual age of the
information would be substantially older in many cases. During that
time, applicants' circumstances can and do change significantly so that
the old financial information would inaccurately represent the current
financial condition of the appellant and could result in significant
losses to the agency. The amount of time that has passed may impact the
applicant's yields or the ability to even produce a crop. Therefore,
agency implementation of a final NAD decision without obtaining and
evaluating recent financial information is irresponsible and contrary
to sound loan making principles. The agency, however, will consider
making a loan for crop production if the applicant can produce a crop
in the production cycle in which the loan was requested or for the next
production cycle, upon review of current financial data and a farm
operating plan for the next production cycle, if the agency determines
the loan can be repaid.
One comment supported the requirements that must be met for the
loan to be approved after an agency decision is overturned in an
appeal. One comment stated the loan approval section should follow the
loan application section in the CFR. The proposed and final rules
follow the loan process step-by-step from the application stage,
through evaluation, to loan decision and closing. If the agency moves
the loan approval section to follow the loan application section the
step-by-step process will be broken, and thus, the rule will be more
difficult to follow and understand. Therefore, the comment is not
adopted.
Section 764.402 Loan Closing
Ten comments were received on the loan closing provisions. One
comment supported the agency's proposal as written. One comment
suggested that for entity applicants, all individuals with at least 10
percent ownership interest in the entity should be required to sign the
promissory note to evidence individual liability. The agency believes
the rule as written provides adequate and clear guidance on who is
required to sign the promissory note in the case of an entity
applicant. While the guaranteed regulation at Sec. 762.130 provides
for a waiver of individual liability in some cases for members with
less than 10 percent ownership interest, direct loans inherently carry
additional risk for the agency. Therefore, the comment is not adopted.
One comment stated the agency must provide additional guidance for
States with community property laws regarding who is required to sign
the promissory note. The comment stated it is not fair for a spouse in
community property States to be required to sign the promissory note.
Further, the comment stated the agency is vulnerable to lawsuits
because it does not provide guidance to spouses in such States on how
they can avoid signing the promissory note. Section 764.402(a) provides
the signatures required on the promissory note. However, marital
property rights and the requirements for obtaining a valid lien on
property are governed by State law; therefore, the agency relies on its
Regional Offices of General Counsel for guidance on compliance with
State laws and regulations. Requirements for valid liens are required
for all applicants. The agency does not provide legal advice to
applicants. Therefore, the comment is not adopted.
One comment stated the CFR text should specify the minimum
insurance and bonding requirements for closing agents. The agency
believes the rule as written provides adequate protection against
malfeasance or error by a closing agent. In the agency's experience,
closing agents carry adequate insurance and fidelity bond to protect
the integrity of the service they provide. Further, the documents
closing agents execute for providing services for the agency's
applicants specify the amount of insurance required. Therefore, the
comment is not adopted.
Four comments stated the requirement that a new security agreement
be obtained for each new loan prior to funds disbursement is overly
restrictive. All comments stated a new security agreement should be
required for each initial loan, when required under State law governing
secured lender transactions, when there were substantial changes to the
security, or the operation. In addition, one of the comments stated
some new loans, such as annual operating loans, do not result in new
security being taken. The agency agrees with the comments and has
revised the CFR to require a new chattel security agreement for new
loans as necessary to secure the loan under State law.
Two comments were received on the provision for making loan funds
available to applicants within 15 days of loan approval, subject to
funds availability. Both comments requested that the timeframe be
changed to 30 days. Section 333A(b) of the Act (7 U.S.C. 1983a(b))
provides that loan funds will be available to applicants within 15 days
of loan approval, unless the applicants agree otherwise or funds are
unavailable. The proposed rule was
[[Page 63266]]
based on the Act's provisions; therefore, the comments cannot be
adopted.
Section 764.451 Purpose (Borrower Training)
In the preamble of the proposed rule, the agency stated it was
eliminating the requirement to assess the need for borrower training
when a borrower requests primary loan servicing. Nine comments were
received on the agency's decision to eliminate borrower training in
primary loan servicing. Four comments fully supported the agency
decision. One of the supporting comments stated borrowers who failed to
complete borrower training as required, and have therefore become
ineligible for direct loan assistance, should become eligible again
under the provisions of the final rule. The agency will not
retroactively reinstate direct loan eligibility for borrowers who were
clearly required to complete borrower training but failed to do so.
Therefore, this part of the comment is not adopted.
One comment stated it is not clear how the agency will handle
delinquent borrowers applying for primary loan servicing who were
required to complete borrower training and did not do so. Further, the
comment stated it is not fair for borrowers who are currently
delinquent and have not completed borrower training because they are
not eligible for primary loan servicing, while borrowers who become
delinquent after the final rule is effective will still be eligible for
primary loan servicing even if they did not complete borrower training
as required. After the final rule becomes effective, the agency will
assess a borrower's training needs through the initial loan making
stage and continuously evaluate the borrower's training needs with the
year-end analysis, farm visits and information contained in the
borrower's case file. If there are indications the borrower may need
training, the agency may require the borrower to complete training when
evaluating subsequent requests for direct loan assistance. Therefore,
the comment is not adopted.
One comment stated delinquent borrowers requesting primary loan
servicing are prime candidates for borrower training since delinquency
indicates need for training. In addition, the comment stated primary
loan servicing provides a great incentive for the borrower to complete
required training. One comment stated borrower training can be helpful
in primary loan servicing since borrowers can see that recordkeeping is
a tool in the decision making process. The agency believes borrower
training is most effective and beneficial at the beginning of the loan
relationship with the borrower. The reason for eliminating the
requirement in primary loan servicing is that borrower training is most
beneficial in the loan making stages. When the borrower becomes
delinquent, borrower training actually hinders the agency's ability to
provide effective and timely primary loan servicing because the
borrower's training needs have to be assessed before primary loan
servicing can be considered. Moreover, eligibility requirements
established in Sec. 766.104 provide a borrower is eligible for primary
loan servicing when the financial distress or delinquency is due to
circumstances beyond the borrower's control. Therefore, the comments
are not adopted.
One comment stated the agency should develop a workbook/DVD
combination and provide it to all borrowers along with appropriate
software. Further, the comment stated the agency should not provide any
further direct assistance until borrowers complete all the assignments
included in the workbook. Section 359 of the Act (7 U.S.C. 2006a)
contains the agency's specific responsibilities for providing financial
and farm management training to its borrowers. The requirements as
stated in the Act cannot be met by a workbook/DVD combination as the
comment provides. Therefore, the comment is not adopted.
One comment stated the provisions under Sec. 764.452(f) and Sec.
764.454(a)(4), if taken together, can be construed to conflict with
each other. Therefore, the comment stated the agency should clarify the
provisions to ensure borrowers required to take borrower training
complete it. The provision under Sec. 764.452(f) states the agency
cannot reject an initial loan application based solely on the
applicant's need for training, while the provision under Sec.
764.454(a)(4) states that a borrower who is required to complete
training and does not do so within the required timeframe, will be
ineligible for additional FLP loans. This ineligibility is not based on
the need for training but the failure to meet a loan condition. The
agency does not believe the two provisions conflict with each other,
since they are applicable under different circumstances. Therefore, the
comment is not adopted.
Section 764.453 Agency Waiver of Borrower Training Requirements
Two comments were received on the agency waiver of borrower
training requirements. One comment stated the agency should clarify
whether or not a waiver of financial management training requires
evidence of formal coursework. The other comment stated the agency
should provide objective requirements that applicants must meet to
obtain a waiver of borrower training instead of the broad provision
that the applicant submit evidence to demonstrate to the agency's
satisfaction the applicant possesses experience and training necessary
for a waiver. The agency believes the rule as written provides adequate
flexibility for applicants to provide evidence of financial management
training through completion of a course as required by Sec.
764.453(b)(1) or other means. Further, the agency evaluates each case
based on its individual merits, since it is impossible to identify all
possible means through which financial management training can be
accomplished. Any additional specificity would limit the applicant and
the agency's flexibility. Lastly, rigid guidelines would place
excessive burden on some applicants and not require others who may
benefit from borrower training to take the opportunity. Therefore, the
comments are not adopted.
Section 764.454 Actions That an Applicant Must Take When Training Is
Required
Four comments were received on the actions an applicant must take
when training is required. Three comments stated it is not clear if a
borrower who completes the required training outside of the allowed
timeframe remains eligible for additional direct loans. The comments
suggested language to be added clarifying whether or not this will
affect the borrower's eligibility for primary loan servicing. The
agency agrees with the first part of the comments and has revised the
CFR to state that if such borrower later completes the training, the
borrower will then become eligible for additional direct loans.
However, the agency believes the impact on the borrower's eligibility
for primary loan servicing is adequately addressed above. While the
agency does not evaluate the need for borrower training when a borrower
requests primary loan servicing, the eligibility requirements under
Sec. 766.104 provide the borrower has acted in good faith. The
definition of good faith includes the borrower's adherence with all
written agreements with the agency. Therefore, the second part of the
comments is not adopted.
One comment stated the agency should replace the words ``direct FLP
loans'' with the words ``direct FLP assistance'' in Sec. 764.454(a)(4)
to strengthen the lack of good faith denial when delinquent borrowers
request
[[Page 63267]]
primary loan servicing. The agency believes the comment's concern is
sufficiently addressed above. Therefore, the comment is not adopted.
Section 764.458 Vendor Approval
One comment was received on the vendor approval provisions. The
comment stated the agreement to conduct training should be for five
instead of 3 years. The comment stated Certified and Preferred Lender
agreements are valid for 5 years, and lenders have greater fiscal
responsibility as opposed to borrower training vendors that only
provide training. In addition, the comment stated administrative time
spent on renewing vendors' agreements will be cut in half. The agency
believes the existing process is adequate. Vendor renewals require
minimal time in most cases, and while the vendor is being reviewed for
renewal, it is a great opportunity for the agency to assess the
vendor's performance. Further, because agriculture is a fast-changing
field, the agency needs to ensure that vendors provide cutting-edge
training to its borrowers. Therefore, the comment is not adopted.
Miscellaneous Comments in Part 764
Three comments stated the lack of the Administrator's exception
provision in the loan making CFR may adversely affect the agency's
ability to deal with unique issues for which action outside of the
CFR's provisions may be in the agency's financial interest. The agency
must administer its loan programs according to the Act and all other
Federal laws and regulations. Most loan making requirements are
required by law and exceptions would primarily be for the benefit of
the applicant only. In addition, the agency believes both the proposed
and the final rule have adequately addressed mandatory loan making
provisions and provided flexibility where needed. Further, existing
regulations applicable to loan servicing only contain the suggested
exception authority where exceptions may be needed to protect the
agency's financial interest in an existing loan, if not prohibited by
statute. Therefore, the comments are not adopted.
One comment stated the agency must implement the provision of the
Federal Agriculture Improvement and Reform Act of 1996 authorizing a
direct operating line of credit. The OMB has advised the agency that
for budgetary purposes, under the provisions of the Credit Reform Act
of 1992, a multi-year line of credit loan is treated as a series of
individual loans. As a result, a 5-year operating line of credit
requires the agency to obligate five times the budget authority as it
would for a 1-year operating loan. Program funding levels have been
limited so that the agency has exhausted or nearly exhausted operating
loan funds over the past several fiscal years. Implementation of an
operating line of credit, while it would benefit those who receive it,
would consume excessive budget authority and prevent others in need of
operating loan assistance from receiving it. As a compromise, the
agency implemented the Lo-Doc program in 2002, which with the exception
of a multi-year commitment, is similar in most respects to a line of
credit. Therefore, the comment is not adopted.
One comment stated the agency must not provide any loan funds to
agribusinesses that mistreat animals, but only to operations that grow
animals humanely. The agency relies on local and state authorities to
make determinations in cases of mistreatment of animals. Enforcement
actions against such operations would prevent them from submitting a
viable loan application. Moreover, the agency does not have authority
to impose certain animal husbandry practices on applicants and
borrowers. However, the agency does require production training for
applicants that lack experience or education. Therefore, the comment is
not adopted.
One comment stated the agency must include that an applicant must
request the lower of the interest rates in effect at the time of loan
approval or loan closing. In addition, the comment stated the provision
should be clearly offered on the agency loan application form. The
agency revised Part 764 to state the interest rate will be the lower at
the time of loan approval or loan closing. Therefore, the agency will
not take any further action on this comment.
Part 765--Direct Loan Servicing--Regular
The following discussion addresses the comments received on Part
765.
Section 765.51 Annual Review
Four comments were received on the provision for increasing a
borrower's limited resource interest rate. One comment stated that if
the regular interest rate becomes lower than the limited resource rate
charged on the borrower's loans, the agency should change the
borrower's interest rate from limited resource to the regular rate
without notifying the borrower. One comment stated the agency should be
allowed to change a borrower's limited resource interest rate to the
regular rate if the regular interest rate is lower than the limited
resource rate, as has occurred in recent years, and should not provide
appeal rights when notifying the borrower, since lowering the
borrower's interest rate is not an adverse action. The third comment
stated that there should be a mechanism for the agency to provide the
borrower with the lower interest rate when the regular interest rate
drops below the limited resource interest rate. The fourth comment
indicated that the proposed rule does not provide guidance to employees
performing limited resource reviews when the regular interest rates are
lower than the limited resource rates. The authority for limited
resource interest rates was established by Congress during a period of
high regular interest rates. The intent was to address high delinquency
rates and help farmers stay on the farm. Congress did not anticipate
that the regular interest rate would be lower than limited resource;
therefore, this situation was not anticipated or addressed in the Act.
The agency has established internal procedures to be followed in the
unusual situation where the limited resource interest rate is higher
than the regular interest rate. The lower of the regular or limited
resource interest rate has been used while conducting normal limited
resource reviews, year-end analyses, and primary loan servicing. Agency
borrowers with limited resource rate loans have been positively
impacted by the agency's internal procedures and the agency will
continue this established internal guidance in the future. Therefore,
the comments are not adopted.
Section 765.101 Borrower Graduation Requirements
Five comments were received on borrower graduation requirements.
One comment stated that requiring all loans of the same type be
refinanced undercuts graduation rates; therefore, the agency should
count any loan refinanced as partial graduation. In accordance with the
Act, the agency serves as a temporary source of credit. The agency does
not believe its mission of assisting its borrowers to obtain commercial
credit has been achieved unless all loans of the same type have been
refinanced as part of the graduation process. Therefore, the comment is
not adopted.
Three comments stated that, due to loan making and servicing
requirements, most borrowers' loans are cross-collateralized which
makes it virtually impossible for borrowers to partially graduate.
Further, all comments stated the State Executive Director should be
granted authority, in partial graduation cases, to release the
[[Page 63268]]
security typically associated with the loans under graduation provided
the remaining security is at least 150 percent of the remaining debt.
The agency disagrees. In loan making, the agency requires, except as
provided in Sec. 764.106, security up to 150 percent of the loan
amount, if available. The security value for loan making purposes is
established by an appraisal. In loan servicing under 7 CFR part 766,
the agency requires the best lien obtainable on all the borrower's
assets, except as provided in Sec. 766.112(b). Graduation generally
occurs a number of years after a loan is made. The borrower's assets
securing the agency loans are not appraised as part of the graduation
process; therefore, the agency would be basing the release of its liens
solely on the security's estimated value. The additional costs the
agency would incur by obtaining appraisals for such partial releases
would offset any benefits achieved by the partial graduation.
Therefore, the comments are not adopted.
One comment stated the agency should revise Sec. 765.101(d) to
include the statutory borrower notification requirement when the agency
provides the borrower's prospectus to lenders. The agency agrees with
the comment and has revised this paragraph accordingly.
Section 765.102 Borrower Noncompliance With Graduation Requirements
One comment was received on the provisions regarding borrower
noncompliance with graduation requirements. The comment stated that
only borrowers actually able to obtain commercial credit but refuse to
do so should be considered as failing to graduate, and will, therefore,
be in non-monetary default. In addition, the comment stated the agency
should add that a borrower, for good cause, may request additional time
to apply for commercial credit. The agency requires the borrower to
provide the information needed to determine if commercial credit may be
available, apply for a loan if a lender indicates interest in
refinancing the borrower's agency loan, and refinance the agency loan
if the lender extends credit. All of these requirements are well within
the borrower's control. The agency's determination of non-monetary
default, therefore, is not dependent on the borrower's successful
graduation. To add the provision that a borrower for good cause may
take additional time to apply for commercial credit unnecessarily
requires additional criteria and subjective decisions from the agency.
In addition, Section 319 of the Act (7 U.S.C. 1949) requires that
borrowers graduate to commercial credit when able to do so. Therefore,
the comment is not adopted.
Section 765.103 Transfer and Assignment of Agency Liens
In some States, graduation requirements are impeded by State laws
preventing a lender from obtaining a valid lied on homestead property
unless the lender has a purchase money interest in the property. As a
result, approval of the transfer and assignment of the agency's lien to
the lender refinancing the FLP loan must be approved on a case-by-case
basis using the exception authority currently published in 7 CFR
1965.35. The agency inadvertently failed to address this issue in the
proposed rule. The agency believes a provision allowing transfer and
assignment of its lien should be included in the final rule as it will
enable borrowers to graduate to commercial credit in a timely manner.
Section 765.152 Types of Payments
Five comments were received regarding types of payments. Three
comments stated the agency should expand the provision allowing
proceeds from the sale of real estate security to be applied as regular
payments to also include proceeds from the sale of basic chattel
security. In addition, the comments stated that the use of proceeds
from real estate and basic chattel security as regular payments should
be limited to only a delinquent and or current year's payments to
prevent basic security proceeds from being used to pay ahead several
years. The proposal limiting the use of proceeds from the sale of basic
security to only real estate security conforms to the agency's existing
regulations at Sec. 1965.13. Allowing the use of proceeds from the
sale of chattel basic security to be used as regular payments increases
the risk of loss to the agency because, unlike real estate security,
the value of chattel security generally declines each year due to
depreciation. Approval to use the proceeds from the sale of real estate
basic security as a regular payment is at the discretion of the agency;
and each situation will be evaluated on its merits. The agency believes
the CFR as written provides adequate clarification of its policy for
classifying proceeds a ``regular'' or ``extra'' payment. Further, the
agency clarified the authorized use for each type of payment it
receives. Therefore, the comments are not adopted.
Two comments stated the agency should specify in the CFR the agency
employee with the authority to determine if proceeds from the sale of
real estate can be applied as regular payments. It is the agency's
policy not to provide employee-specific titles in the CFR since they
are internal matters. The agency handbook will delegate necessary
responsibility. Therefore, the comments are not adopted.
Section 765.153 Application of Payments
Nine comments were received on the application of payments. Eight
comments stated publishing the order in which payments will be applied
to borrowers' accounts limits the borrower and agency official's
flexibility and discretion to apply payments in a manner each feels is
most beneficial. In addition, one comment suggested the agency consider
the borrower's preference on which loan payments are applied. The
agency believes that publishing the order in which payments are applied
removes inconsistencies, ensures all borrowers are treated the same,
and ensures payments are applied in a manner which best protects the
agency's financial interest. Therefore, the comments are not adopted.
One comment stated that it is not clear what happens to proceeds
after all payments due on FLP loans are made for the year. Sections
765.152, 765.153 and 765.154 describe the distinction between regular
and extra payments and the order in which proceeds will be applied to
agency loans. Release of proceeds after all FLP loan payments have been
paid is addressed in Sec. 765.301(h). The agency has modified that
paragraph to clarify that in those circumstances all proceeds from the
sale of normal income security will be released to the borrower.
Therefore, the clarification suggested by the comment has already been
adequately addressed.
Section 765.154 Distribution of Payments
Two comments were received on the distribution of payments. One
comment stated that it is not clear what percentage of each payment
will be applied to each of the items listed in Sec. 765.154. The
agency cannot assign a percentage to each of the items listed in Sec.
765.154 because outstanding recoverable costs and protective advances
must be paid in full before any of the other items listed can be paid.
Therefore, the comment is not adopted.
The other comment stated the agency should revise the provision on
the payment of accrued deferred interest to state ``only a pro-rata
portion of accrued deferred interest will be paid before loan principal
is paid.'' Accrued
[[Page 63269]]
deferred interest is scheduled for payment on an annual basis and
borrower payments received are applied accordingly. Therefore, the
comment is not adopted.
Section 765.155 Final Loan Payments
One comment was received on final loan payment provisions. The
comment stated that it is not clear how the agency will settle
underpayments of less than $10. The rule provides that the agency will
not attempt to collect amounts less than $10, and since there is no
impact on borrowers, guidance will be provided only in the agency
handbook. Therefore, the comment is not adopted.
Section 765.202 Borrower Responsibilities
One comment was received on borrower's responsibilities. The
comment stated that the agency should revise Sec. 765.202(a)(2) to
provide ``Borrower failure to keep agreements for reasons not beyond
the borrower's control, will be considered* * *'' The agency believes
that the provision as written allows the agency to consider
circumstances for the borrower's failure to keep agreements. Therefore,
the comment is not adopted.
Section 765.205 Subordination of Liens
Sixteen comments were received on subordination of liens. Two
comments stated the agency should approve subordinations made in
conjunction with a guaranteed loan only in a sufficient amount to cover
what is currently ahead of the agency loan. Section 762.142(c) provides
the conditions under which the agency will subordinate its liens to a
guaranteed lender. Therefore, no change is needed to Sec. 765.205, and
the comments are not adopted.
One comment stated that the application form required for chattel
subordinations is not referenced in the CFR. Another comment stated the
agency should provide the general information needed for any
subordination since the agency treats subordinations as a method to
meet borrowers' annual operating needs, and subordinations are an
important tool in assisting its borrowers to obtain commercial credit.
As provided in the preamble of the proposed rule, it is the agency's
policy not to publish form numbers in the CFR, except as provided by
the Act. The agency handbook will provide the forms needed to complete
requests for real estate and chattel subordinations, so that comment is
not adopted. However, the agency agrees the subordination application
requirements were inadvertently omitted in the proposed rule and has
included them in the final rule.
One comment stated that it is not clear what the term ``operating
cycle'' means under the subordination requirement that the borrower's
farm business plan shows that all debts scheduled during the operating
cycle will be paid. The agency agrees that the term ``operating cycle''
is not clear. Thus, the agency decided for consistency to use the term
``production cycle'' in place of ``operating cycle'' throughout the
final rule. Further, in the final rule the agency clarified the
definition of ``production cycle'' at Sec. 761.2.
One comment stated that borrowers with partial or complete
deferrals should not be eligible for subordinations. Further, the
comment stated that while a borrower's loans are deferred, the
borrower's payments are artificially low, and therefore, the operation
shows a feasible plan whereas a feasible plan might not be achieved if
the deferral is taken into consideration. The agency agrees the
deferral may have a significant impact on the borrower's repayment
ability. However, the agency makes decisions based on the borrower's
current farm operating plan. It would not be in the agency's best
interest to deny a subordination request if the subordination would
allow the operation to continue, thus increasing the probability of
repayment of the agency loan. Should the borrower experience financial
difficulty after the deferral period expires, the agency will consider
all available loan servicing options. Adoption of the comment would
change a longstanding policy that the agency did not propose to change.
Therefore, the comment is not adopted.
One comment stated the CFR should provide that the agency ``may''
approve a subordination, instead of ``will'' approve a subordination.
The agency cannot use ``may'' in this instance because it would
indicate that there are additional requirements beyond the requirements
published. In addition, the agency has no basis on which to deny the
subordination request if all conditions have been met. Therefore, the
comment is not adopted.
One comment stated the agency should clarify Sec. 765.205(a)(11)
(Sec. 765.205(b)(12) as renumbered in the final rule) to provide the
subordination has a definite maturity date. The agency agrees with the
comment and has revised the CFR accordingly.
Three comments stated the agency should allow multiple
subordinations on the same security to the same lender. The agency
agrees with the comments and has revised the CFR accordingly.
Two comments stated the agency should be able to subordinate its
lien a second time for the borrower to obtain crop insurance. This
provision is authorized under proposed Sec. 765.205(b)(2) (renumbered
to Sec. 765.205(c)(2) in final rule); therefore, no action is required
regarding the comments.
One comment stated the agency should allow multiple subordinations
of the same security to different lenders as the current regulations
allow. The agency believes allowing multiple subordinations to multiple
lenders on the same security increases the agency's risk because the
complexities of servicing the account would be increased. When
subordinations are granted to multiple lenders, agreements on
responsibilities and lien priorities, as well as lines of
communication, have to be established between all the lenders before
subordination is provided. The agency cannot become involved in these
agreements as a matter of course, nor can it be perceived as the
mediator in any future possible disagreement between multiple lenders.
Lastly, the agency has not allowed multiple subordinations of the same
security to multiple lenders in the past and did not propose to change
this longstanding policy. Therefore, the comment is not adopted.
One comment stated the agency should adopt a limited documentation
subordination application similar to the Lo-Doc application. The agency
believes Lo-Doc loans and subordinations are not similar actions since
subordination may be considered for any authorized loan purpose,
whereas Lo-Doc loan proceeds may only be utilized under limited
specific circumstances. Therefore, the comment is not adopted.
One comment stated the agency should require the lender, to whom
subordination is granted, to execute a prior lienholder's agreement.
Further, the comment stated the agency should not grant a
subordination, if agency calculations at the time the subordination is
being considered indicate the agency would not make a protective
advance to pay the prior lienholders, should default occur on the
subordinated loan. The agency believes its interests are adequately
protected as the provision was proposed. It is impracticable to approve
subordinations and protective advances using similar requirements.
Protective advances are generally necessary when a borrower's financial
condition has severely deteriorated, and are used to protect agency
security, while subordinations
[[Page 63270]]
are generally considered for borrowers able to meet commercial lenders'
requirements and demonstrate repayment ability. Further, the agency
believes adoption of the comment would impose unnecessary collections
of information on its borrowers. Therefore, the comment is not adopted.
Section 765.252 Lease of Security
Two comments were received on the provisions regarding lease of
security. One comment stated the agency should remove the provision
that the term of consecutive leases cannot exceed 3 years, and allow
additional years for the property to be leased if a generational
transfer is involved. The agency agrees with the comment and has
revised paragraph (a)(2) to allow lease of security for up to 5 years
when the lessee and the borrower are related by blood or marriage. This
will allow the lessee additional time to obtain the farming experience
and managerial ability necessary to operate the farm with the elder
farmer's guidance and help address the difficulties of affording
increasing real estate costs and inadequate farm ownership loan
funding. The 5-year limit should be sufficient time for agency funds to
become available or the lessee to obtain a commercial loan to finance
the purchase of the existing farm. Some lease limit is necessary in the
case of such leases because the borrower agreed to operate the farm as
a condition in obtaining the loan.
One comment stated the agency should provide the state level with
authority to approve lease of security for more than 3 years under
certain circumstances. The agency no longer includes in the CFR the
office responsible for approving leases of security. A consistent,
nation-wide policy is preferred. Further, the agency believes that by
adopting the first comment, it has addressed this comment's concerns.
Therefore, the comment is not adopted.
Section 765.253 Ceasing To Operate Security (Renamed in Final Rule)
One comment stated the provisions are not clear since it seems the
borrower must meet all conditions under Sec. 765.253. Further, the
comment stated the provisions do not allow the agency to consent to a
borrower's failure to operate the farm where the borrower transfers the
operation to an S corporation in which the borrower is the sole member.
The agency revised the CFR to provide that borrowers must meet the
conditions specified under subparagraphs (a) through (d) and any of the
conditions under subparagraph (e). However, the agency believes the
example the comment provided does not fit conditions for the agency to
consent to the borrower ceasing operating the security, as the borrower
would continue operating the security with a different composition. In
the example, the agency would proceed with a transfer and assumption
and allow the new borrower entity to continue the loan and operate the
security. Therefore, this part of the comment is not adopted.
Section 765.301 General
Six comments were received on the general requirements for
disposing of chattel security. One comment stated that, instead of
requiring the borrower to sell chattel security for the market value,
the agency should require that ``the borrower may not dispose of normal
income security for less than its market value and basic security for
not less than its recovery value.'' Further, the comment stated that
the net recovery value of basic security should be determined by an
appraisal, less sales expenses. When determining whether or not
adequate security is available at the time of loan approval, the agency
uses the market value of potential security. Therefore, the agency
cannot allow disposition of chattel security for less than its market
value. Nation-wide agency devaluation of security will increase losses
and is not in the agency's and the taxpayer's financial interests. In
addition, under regular servicing circumstances the agency has no
reason to calculate or accept estimated involuntary liquidation
amounts. Therefore, the comment is not accepted.
Five comments stated the agency should revise Sec. 765.301(h) to
state that if all agency loan installments and any past due
installments have been paid, checks from the sale of normal income
security may be payable solely to the borrower. The agency agrees with
the comments, and has revised the CFR accordingly.
Section 765.302 Use and Maintenance of Agreement for the Use of
Proceeds
Three comments were received on the use and maintenance of the
agreement for the use of proceeds. One comment stated that completing
the agreement for the use of proceeds is time consuming and confusing.
In addition, for the agreement to be properly completed, the borrower
must plan each expense for the year and identify the source of income
to pay for it. Then, at the end of the year, the agency needs to
reconcile each expense paid with the source of income. The agency
believes that the rule provides clear guidelines on when the agreement
for the use of proceeds will be completed. Further, as stated in the
agency's response to comments received on the definition of ``agreement
for the use of proceeds,'' the agency may conduct further analysis to
determine if changes are warranted. Therefore, the agency will take no
further action on these comments at this time.
Two comments stated that the requirement for the borrower to date
and initial changes made on the agreement for the use of proceeds
should be eliminated. The agency believes that since the agreement for
the use of proceeds is completed by both the borrower and the agency,
any changes made should be concurred with by both. Therefore, the
comments are not adopted.
Section 765.303 Use of Proceeds From Chattel Security
Three comments were received regarding the use of proceeds from the
sale of chattel security. One comment stated that the guidance provided
in the existing regulations under Sec. 1962.17 is confusing as to when
proceeds from the sale of normal income and basic security can be
released. The agency believes that both the proposed and final rules
clarified the use of proceeds from the sale of normal income and basic
chattel security without changing current policy. Therefore, the agency
believes the comment's concern is adequately addressed.
One comment stated the agency should add a provision to protect its
interests when crop security is used as feed for a third party's
livestock. This section allows for crop security that normally would be
sold, to be fed to livestock the borrower owns, if the agency obtains a
lien or an assignment on the livestock and the livestock products equal
to the lien on the crops. If the borrower feeds agency crop security to
a third party's livestock, the borrower has converted agency security
and is in non-monetary default with the borrower's agreements with the
agency. Agency actions when the borrower is in non-monetary default are
addressed in 7 CFR part 766. Therefore, the comment is not adopted.
One comment stated the agency should clarify that proceeds from the
sale of chattel security will not be used to acquire real estate but
may be used to acquire property that meets the operating loan program's
objectives. The agency agrees with the comment and has revised the CFR
accordingly.
[[Page 63271]]
Section 765.304 Unapproved Disposition
Ten comments were received on unapproved disposition of chattel
security. Six comments supported the provision as written. One comment
stated that there are no standards established on what information the
borrower has to provide for post-approval. In addition, the comment
stated that the agency has to release proceeds for family living and
farm operating expenses until the account is accelerated, implying that
the borrower does not need to provide any information to the agency for
post-approval. The agency disagrees. It is impossible to list all
possible sources of documentation that a borrower could submit to
provide evidence that proceeds were used for an authorized purpose.
Further, the essential family living and farm operating expenses
definition (Sec. 761.2(b)) establishes a list of expenses the agency
considers to be essential and states that the agency will consider each
expense on the list as it applies to each operation. Moreover, the
agency and the borrower complete the agreement for the use of proceeds
at the beginning of the production cycle. By establishing the
conditions under which proceeds can be released, a borrower should be
able to determine the type of documentation appropriate for post-
approval. Therefore, the comment is not adopted.
Three comments stated the agency does not clearly provide that
unauthorized dispositions of security are considered non-monetary
defaults. The agency agrees with the comments and has revised the CFR
accordingly.
Section 765.351 Requirements To Obtain Agency Consent
Six comments were received on the requirements to obtain agency
consent to a partial release of real estate security. Two comments
stated the agency should accept ``no less than the agency-defined
recovery value'' or ``95 percent of the market value'' for the real
estate proposed for partial release. Loan approvals are based on
evaluation of the loan security at its market value. Approving real
estate security releases for less than market value would be
inconsistent with loan making provisions and fiscally irresponsible as
doing so could increase the agency's losses. Therefore, the comments
are not adopted.
Three comments stated that because many loans are cross-
collateralized due to loan making or servicing actions, the agency
should allow exchange of real estate security for ``any authorized loan
purpose.'' The agency believes the loan purposes are broad enough to
accommodate the few cases where exchange of property is considered.
Therefore, the comments are not adopted.
One comment stated the agency should clarify that terms for
contracts for deed will not exceed the remaining loan term. The agency
agrees with the comment and has revised the CFR accordingly.
Section 765.352 Use of Proceeds
Eight comments were received on the use of proceeds from the
partial release of real estate. Two comments supported the agency's
decision not to allow proceeds from the sale of real estate to be used
for developing land not owned by the borrower. One comment disagreed
with the agency's decision to not allow borrowers to use proceeds from
the sale of real estate security to make improvements on rented land,
on which the agency does not have a lien. The comment stated in Sec.
764.151(b) the agency provides the conditions under which loan funds
can be used to make improvements on rented land. Moreover, the comment
stated the agency accepts security interests in property not owned by
the applicant, including leases that provide a mortgageable value.
Therefore, the comment stated, the agency should not eliminate the
provision. The agency disagrees. The agency accepts as security leases
that provide a mortgageable value as well as security pledged by third
parties to satisfy the agency's security requirements. Further, Sec.
764.151(b) provides that for the agency to make a farm ownership loan,
the applicant must have a lease to ensure the applicant will have use
of the improvement over its useful life or to ensure the applicant will
be compensated for any remaining economic life when the lease
terminates. In those cases, the agency has a security interest in the
land; therefore, loan funds can be used to make improvements. The
agency removed the provision that allowed borrowers to use sale
proceeds from agency security to make improvements on rented land,
because the majority of the applicants found it difficult to meet the
lease requirement. In addition, it is not prudent to release proceeds
from the sale of agency security to improve land on which the agency
does not have a lien. Therefore, the comment is not adopted.
One comment stated that the agency should not release proceeds from
the partial release of real estate to pay other creditors, unless the
amount is small and the agency debt to security ratio is over 1/1 after
the transaction is completed. Another comment expressed concern about
not allowing proceeds from partial real estate releases to be paid to
other creditors ``to the extent needed to establish a basis for
continuation of the other creditor's account.'' One comment stated that
the agency should allow for SED discretion as to how proceeds from the
partial release of real estate will be applied. The agency believes
that allowing proceeds to be distributed outside of established lien
priorities usually occurs at the expense of the agency, decreases the
agency's equity in the security, and increases the taxpayers' risk.
Therefore, the comments are not adopted.
One comment inquired about the interaction between Sec. 765.152(c)
and Sec. 765.352. Section 765.152(c) establishes that proceeds from
the sale of real estate security may be applied to the borrower's
account as a regular payment, in which case it is credited toward the
borrower's annual payment as opposed to an extra payment, which simply
reduces the unpaid loan balance, if the agency's loans will be
adequately secured after the transaction. Furthermore, Sec. Sec.
765.152 and 765.153 only address the order in which payments are
applied against agency loans, whereas Sec. 765.352 establishes the use
of proceeds from transactions affecting the real estate security. The
agency sees no conflict between these provisions; therefore, no change
has been made.
One comment stated the agency should replace the words, ``When
liquidation is pending,'' with the words, ``After acceleration'' in
Sec. 765.352(b) to explain when the agency will approve transactions
only in accordance with lien priorities and customary costs. The agency
agrees with the comment and has revised the CFR accordingly.
Section 765.353 Determining Market Value
In the preamble of the proposed rule, the agency proposed to
increase the estimated value of real estate security considered for
partial release to $25,000 before obtaining an appraisal. However, the
regulatory text provided that the agency would require an appraisal for
a partial release of real estate when its estimated value exceeded
$20,000. The agency's intent was to include in the regulatory text
$25,000 as evidenced by the final rule published by the agency on June
2, 2004 (69 FR 30997-30999). Fourteen comments were received on the
appraisal requirement for partial releases. Several comments pointed
out the discrepancy between the preamble
[[Page 63272]]
and the regulatory text; however, 10 comments supported the change,
while three comments stated the $25,000 limit is too low and should be
increased to $35,000 (one comment) or $50,000 (two comments). The
agency believes that changing the limit to $35,000 or $50,000, as
suggested, would increase the agency's risk to a level the agency
cannot accept. Therefore, the comments are not adopted and the $25,000
limit has been adopted.
One comment stated it was not clear who will determine the real
estate's estimated value and what qualifications are required to make
the determination, since agency personnel are no longer qualified. The
agency assigns employee responsibilities in its administrative
procedures. The agency handbook will provide the agency official
authorized to determine estimated value for real estate; therefore, the
comment is not adopted.
One comment was received on the provision not to appraise the
remaining security when only part of the security is released (Sec.
765.353(b)). The comment stated it is sometimes not possible to
determine the effect the security being released may have on the value
of the remaining security. The rule provides that the agency will
obtain an appraisal if the agency believes that the transaction will
reduce the remaining security's value. In addition, the agency's
handbook will provide further guidance, which will address the
comment's concern. Therefore, the comment is not adopted.
Section 765.402 Transfer of Security and Loan Assumption on Same Rates
and Terms
Five comments were received on the transfer of security and loan
assumption on same rates and terms. Three comments stated that the
process for releasing an entity member from liability in cases of
transfer and assumption should be similar to the process of releasing a
divorced spouse under Sec. 765.406(b). The agency disagrees. The
agency considers a change in the composition of the entity as a change
in the entity, while a sole proprietorship remains the same sole
proprietorship when a debtor leaves the farming operation. In addition,
this section provides guidance for situations where the agency debt is
being assumed by a party not currently liable for the debt. Section
765.406(b) is applicable in situations where both spouses are
individually liable for the debt, but one is withdrawing from the
operation. Therefore, the comments are not adopted.
Two comments stated the agency should allow assumptions by eligible
applicants on new rates and terms. Assumption of debt by eligible
borrowers is addressed in Sec. 765.403; however, in reviewing this
section, the agency determined that it failed to address the rates and
terms for this type of assumption. Therefore, the agency added new
paragraph (e) in the final rule to refer to the rates and terms in part
764 for the type of loan being assumed. The agency also revised
paragraph (a) to clarify that EM loans for physical and production
losses cannot be assumed under Sec. 765.403. These loans may only be
assumed by persons who were directly involved in the operation at the
time of the loss as provided in Sec. 765.402(e).
Section 765.404 Transfer of Security to and Assumption of Debt by
Ineligible Applicants (Renamed in Final Rule)
Three comments were received on the transfer of security to and
assumption of debt by ineligible applicants. Two comments supported the
agency's decision to change the term for Non-program loans secured by
real estate to 25 years or less, based on the applicant's repayment
ability. One comment stated the agency should prohibit transfer and
assumption by transferees who have received debt forgiveness from the
agency. The agency agrees with the comment and has revised the CFR
accordingly. This is a continuation of existing policy from 7 CFR
1962.34(b).
Section 765.451 Continuation of FLP Debt and Transfer of Security
Three comments were received on the continuation of FLP debt and
transfer of security when a borrower is deceased. All comments stated
the administrative processes the agency uses to continue FLP debt of
deceased borrowers are not clearly established in the CFR. The agency
disagrees. Section 765.451(a) provides the agency will continue the
loan with any individual who is liable for the debt. In addition, Sec.
765.451(b) provides the agency will continue the loan with any
individual not liable for the debt in accordance with the transfer and
assumption provisions established in Sec. 765.401 through Sec.
765.404. Therefore, the comments are not adopted.
Section 765.501 Agency Exception Authority
Two comments were received on the exception authority provisions.
The comments stated the agency should provide in the CFR the internal
process utilized by agency employees to request an exception. As stated
above, the agency, like most Federal agencies, does not promulgate
internal processes in the CFR. However, the agency handbook will
provide administrative guidance for agency staff to process requests.
Therefore, the comments are not adopted.
Miscellaneous Comments on Part 765
Six comments were received on the agency's decision to eliminate
accelerated repayment agreements for borrowers able to graduate to
commercial credit. One comment supported the agency's decision, while
the remaining opposed it. The opposing comments stated accelerated
repayment agreements are cost-efficient, because the agency collects
the funds loaned faster and without incurring additional costs, that
may result when taking action against a borrower for non-monetary
default. In addition, the comments stated that the United States
Attorney's offices usually will not pursue foreclosure on these cases.
The agency believes that accelerated repayment agreements for borrowers
who are able to graduate are not appropriate, since the agency has
limited enforcement ability for these agreements, and the agreements
cannot be applied consistently nation-wide. Therefore, the comments are
not adopted.
Part 766--Direct Loan Servicing--Special
The following discussion addresses the comments received on part
766.
Section 766.1 Introduction
While loan making regulations in 7 CFR 764.304 clearly establish
that the limited resource operating loan interest rate is not available
for youth loans, loan servicing limitations for youth loans were not so
clearly articulated. The agency is authorized under 311(b) of the Act
to use operating loan funds for youths, who are rural residents, to
enable them to operate enterprises in connection with their
participation in 4-H Clubs, Future Farmers of America, and similar
organizations. Youth loan enterprises are not the typical farming
operations financed with other types of agency farm loans and,
therefore, are treated differently in many respects. For example,
section 311(c)(2) of the Act does not count youth loans against the
applicant seeking a direct operating loan that are limited to beginning
farmers or farmers with 6 years or less of previous direct operating
loans. Section 302(b)(2) further provides that operation of a youth
enterprise does not count towards the required 3 years of participation
in a farm operation for a direct farm
[[Page 63273]]
ownership loan. Section 353(a)(2) of the Act provides one goal of
restructuring delinquent debts is ``to ensure that borrowers are able
to continue farming or ranching operations.'' Considering these
sections together, the Congress did not intend youth loan borrowers to
be treated like other delinquent loan borrowers and receive full
servicing rights under section 353 of the Act. The agency will continue
its current policy that provided youth loan borrowers may not receive
Disaster Set-Aside and may only be considered for rescheduling and
deferral under the primary loan servicing process. Therefore, the
agency has revised Sec. 766.1(b) to clearly reflect this existing
policy.
Section 766.51 General (Disaster Set-Aside)
Two comments were received on the general Disaster Set-Aside (DSA)
provisions. The comments stated the agency should not allow a borrower
to obtain DSA on Non-program loans, even if the borrower also has
program loans. The intent of DSA is to relieve the borrower's immediate
financial stress caused by a natural disaster. The agency believes it
is in both its and the borrower's financial interest to allow FLP
borrowers that also have Non-program loans to obtain DSA. In addition,
this policy has been in effect for several years without additional
loss to the agency. Therefore, the comments are not adopted.
Section 766.52 Eligibility
Five comments were received on the DSA eligibility provisions. Two
comments stated that it may be difficult for borrowers to meet the
requirement that all program and Non-program loans be current or less
than 90 days past due at the time the application for DSA is complete.
Borrowers with January 1st scheduled payments may become 90 days past
due before notice of DSA availability is published in local newspapers.
The agency disagrees. Under Sec. 766.101, borrowers are notified of
primary loan servicing when they become 90 days past due, and those
servicing options are designed to assist the borrower in resolving the
financial distress and provide long-term financial viability. DSA is
not intended to replace or supplant the statutorily mandated primary
loan servicing for financially distressed or delinquent borrowers.
Thus, DSA does not apply to the situation mentioned in the comments.
Therefore, the comments are not adopted.
One comment stated the agency should provide that borrowers must
not become 165 days past due before the appropriate agency documents
for DSA are executed. The agency agrees with the comment and has
revised the CFR accordingly. DSA must not interfere with statutory
primary loan servicing requirements. Allowing the agency 15 days to
send notices to borrowers 90 days past due and 60 days for the
borrowers to submit a complete application for primary loan servicing,
the DSA needs to be considered and closed prior to the borrower
becoming 165 days past due (90+15+60=165 days).
Two comments stated the agency should clarify that the borrower's
account may not have been accelerated or subject to any special
servicing. DSA may not interfere with other available statutory loan
servicing options. DSA is intended to be a temporary solution to
address the borrower's financial distress due to a natural disaster.
Distressed and delinquent borrower loan servicing options attempt to
address the borrower's financial distress and delinquency, which are
outside the borrower's control, and financially stabilize the operation
for the long term. The agency agrees with the comments and has revised
the CFR accordingly.
Section 766.54 Borrower Application Requirements
One comment was received on the borrower application requirements
for DSA. The comment stated the agency should require borrowers to
submit 3 years of Federal tax returns as part of the application for
DSA, since in many instances analysis of the account has not been
completed in several years. The agency believes that the rule as
written provides the flexibility needed for agency officials to request
information necessary to evaluate a borrower's application. Therefore,
the comment is not adopted.
Section 766.56 Security Requirements
Four comments were received on the DSA security requirements. Two
comments stated the requirements conflict with the requirements of
Sec. 766.52(b)(2). Two comments stated the security requirements are
not clear. The agency disagrees. Sections 766.52(b)(2) and 766.56 do
not conflict. The prior provision requires the loans to be current
after DSA; the latter provision requires certain security if the loans
are not current before and when the DSA is executed. The agency
believes the security requirements are adequate; therefore, the
comments are not adopted.
Section 766.57 Borrower Acceptance of Disaster Set-Aside
One comment was received on the borrower acceptance of DSA. The
comment stated the agency should retain the provisions from the current
regulations that allow: If a borrower repaid all previous DSA or all
the borrower's previous DSA were cancelled through primary loan
servicing, the loan is again eligible for DSA; if the borrower has more
than one DSA outstanding, payments received will be applied to the
oldest DSA until it is paid in full, before payments are applied to the
second DSA; and, borrowers receive additional time to accept DSA for
extenuating circumstances. The agency has clarified Sec. 766.52 to
state that to be eligible, the loan must not have a DSA outstanding. To
avoid confusion, because a second DSA on the same loan has not been
allowed since 2000, the agency did not include in the proposed rule how
payments to multiple DSA will be applied. However, the agency handbook
will provide guidance on such payment application and allow borrowers
additional time to accept DSA for extenuating circumstances. Therefore,
those portions of the comment are not adopted.
Section 766.101 Initial Agency Notification to Borrower of Loan
Servicing Programs
Eleven comments were received on the initial agency notification to
borrowers of loan servicing programs. Two comments stated the agency
should spell out the abbreviation ``SA'' throughout this part. In the
preamble of the proposed rule, the agency stated that all abbreviations
and definitions applicable to FLP will be included in a single section
of the CFR (Sec. 761.2) to eliminate the need for the public to search
multiple CFR parts to determine if and where a term is defined, this
includes Shared Appreciation loan. The abbreviation ``SA'' is included
in Sec. 761.2. Therefore, the comments are not adopted.
Two comments stated that the process of notifying borrowers with
only delinquent SA is not published in the CFR. One comment inquired on
the servicing available to borrowers with only SA. Borrowers with only
SA debt are considered Non-program borrowers and may only be considered
for reamortization under Sec. 766.108 as under current policy. In
addition, section 331D of the Act (7 U.S.C. 1981d) only requires the
agency to publish the initial notification provided to program
borrowers. The agency will address the
[[Page 63274]]
form of notification to borrowers with SA only in its handbook.
Therefore, the comments are not adopted.
Two comments stated that FSA-2512, FSA-2510, and FSA-2514 do not
identify their content. These notices are published in their entirety
as appendices to 7 CFR part 766 and are identified as such in the table
of contents. Therefore, no changes have been made in response to these
comments.
Two comments stated the CFR does not include notification of loan
servicing for borrowers who want to liquidate voluntarily. The agency
will no longer send primary loan servicing to borrowers who, while
current, request agency permission to voluntary liquidate the
operation. Current 7 CFR 1965.26(a) requires the agency to send primary
loan servicing notices under those circumstances and wait 60 days
(within which time the borrower has to provide a complete primary loan
servicing application) before the agency can process or consider the
request for voluntary liquidation. By that time, the prospective buyer
may no longer be interested and the borrower may be unable to sell the
security. Under those circumstances, the agency believes that forced
consideration of primary loan servicing would hinder the borrower's
effort to liquidate and could be detrimental to the Government,
especially if the agency loans will be paid in full with the
transaction. Furthermore, voluntary conveyance is not a forced
collection action by the agency requiring such notice under section
331D of the Act (7 U.S.C. 1981d). Therefore, the comments are not
adopted.
Two comments stated the CFR does not mention that if the borrower
does not accept the notice by certified mail, the agency will send it
by regular mail. The agency agrees with the comments and has revised
the CFR accordingly.
One comment stated that since FSA-2512 does not provide a deadline
for the borrower to submit a loan servicing application, the CFR should
state that borrowers who received an FSA-2512 and did not submit a loan
servicing application, will be renotified if they become 90 days past
due. This is covered in Sec. 766.103(a) and in FSA-2512 under the
paragraph heading ``What Happens if You Do Not Apply?'' Therefore, the
comment is not adopted.
Section 766.102 Borrower Application Requirements
Sixteen comments were received on the borrower application
requirements for loan servicing. One comment stated the CFR should
specify that in the case of an entity, all entity members must sign the
acknowledgment form. The agency agrees with the comments and has
revised the CFR accordingly.
Two comments supported the reduction in the amount of production
and financial records requirement to 3 years. Four comments stated the
agency should be allowed the flexibility to request additional years of
records to properly evaluate the borrower's request and assess the
agency's risk position. One comment stated that due to the number of
natural disasters that have occurred throughout the country, 3 years of
records may not be sufficient in providing an accurate assessment of a
borrower's operation, so the agency should require the borrower submit
records from ``normal'' years. For consistency, the agency desires to
have the same records requirements for both loan making and loan
servicing actions. In addition, the agency added in Sec. 761.104 the
methodology used by the agency to project yields and prices on farm
operating plans for both loan making and servicing purposes. As
mandated by section 331E(b) of the Act (7 U.S.C. 1981e), appropriate
adjustments to projected yields are made when the borrower's production
history has been substantially affected by a disaster. The agency
believes this addresses the concerns expressed in the comments and,
therefore, the comments are not adopted.
One comment stated that a complete application for loan servicing
should include all items required for a complete loan making
application, including legal description of property, leases,
contracts, etc. The agency disagrees. Borrowers provide copies of legal
description of property owned or operated, leases, and contracts at the
time they apply for a loan. The agency maintains the loan making
application records in the borrower's file and any updates as changes
in the borrower's operation occur. Therefore, the comment is not
adopted. However, the agency added the provision requiring borrowers to
provide a current financial statement as part of a complete loan
servicing application. This is a longstanding requirement that existed
under the loan making and loan servicing regulations. The agency's
application form contained the financial statement; however, due to
agency's paperwork reduction efforts, the financial statement part was
removed from the application form.
Two comments were received recommending that to be considered for a
conservation contract, the borrower must submit an aerial photograph
delineating the land proposed for a conservation contract and provide
the term of the conservation contract in writing when applying for
primary loan servicing. In Sec. 766.102(b), the agency already
proposed that the borrower must submit an aerial photograph delineating
the land for the proposed conservation contract. The agency, with
direct input of the borrower, utilizes a computer software program
known as the Debt and Loan Restructuring System (DALRS) to evaluate
each borrower's request for primary loan servicing. The agency and the
borrower can, and do, consider different terms offered in combination
with other servicing options available. Consequently, the agency and
the borrower need the flexibility to evaluate all possible options,
including conservation contracts, and enable the borrower to choose the
best loan servicing option possible for the operation. Therefore, there
would be no benefit from requiring the borrower to specify the
conservation contract term at the point of application. No changes have
been made in response to these comments.
Three comments suggested the requirement be added that, in cases
where jointly liable borrowers have been divorced and one has withdrawn
from the operation, to release the withdrawing individual from
liability the remaining individual must develop a feasible plan. In
many loan servicing cases, a feasible plan cannot be developed, yet it
is not in the financial interest of the agency to keep a divorced
spouse who has no repayment ability or non-essential assets liable for
the loan, since all future servicing can become unduly complicated.
Therefore, the comments are not adopted.
Two comments stated the agency should clarify that the financial
records requirement is applicable to the entity as well as the entity
members themselves. The agency does not agree. The agency believes the
provision as written is adequate and does not believe that further
clarification is needed, so no change has been made in response to
these comments.
Section 766.103 Borrower Does Not Respond or Does Not Submit a Complete
Application
Two comments were received on the provisions for notification
requirements for borrowers who do not respond or do not submit a
complete application. One comment supported the identical treatment of
borrowers in monetary and non-monetary default. One comment stated that
the agency's current internal policy of reminding borrowers that the
agency had not received a complete loan servicing application was not
included
[[Page 63275]]
in the CFR. The agency handbook will continue this policy. Therefore,
the comment is not adopted.
Section 766.104 Borrower Eligibility Requirements
One comment was received on the requirement that borrowers use the
net recovery value of any non-essential assets to resolve their
financial distress or pay the delinquent portion of the loan (Sec.
766.104(a)(2)). The comment stated the requirement is harsh for a
simple debt-restructuring request, may be overly burdensome, and may
discourage borrowers from applying for servicing to resolve the
financial distress or delinquency. Section 353(c)(2)(A)(ii) of the Act
(7 U.S.C. 200h) requires that the net recovery value of all non-
essential assets will be considered to determine if the borrower's
loans may be restructured. Therefore, the comment cannot be adopted.
One comment suggested the words, ``in accordance with all loan
agreements'' be dropped after the words, ``the borrower has acted in
good faith'' in Sec. 766.104(a)(4), since they are included in the
definition of good faith. The agency agrees with the comment, and has
revised the CFR accordingly.
One comment was received on the requirement that current or
financially distressed borrowers requesting primary loan servicing must
pay a portion of the interest due on the loans (Sec. 766.104(a)(5)).
The comment disagreed with this requirement and stated that it seems
the requirement is new. The requirement is currently published under
Sec. 1951.908(c)(5) and is not new. Further, Section 372 of the Act (7
U.S.C. 2008g) requires that to obtain servicing, non-delinquent
borrowers must pay a portion of the interest due on the loan.
Therefore, the comment cannot be adopted.
One comment stated the agency process of consulting the Office of
General Counsel (OGC) when the agency determines that a borrower has
not acted in good faith should be removed. The agency does not agree.
Therefore, the agency will continue its current policy of considering
acts of fraud, waste or conversion of security, when substantiated by a
legal opinion from OGC, when determining if an applicant or borrower
has acted in good faith. The comment is not adopted.
One comment supported the agency's inclusion of the list of
circumstances beyond the borrower's control that may result in a
borrower's failure to make payments as agreed. Another comment stated
the agency should clarify that the list of circumstances beyond the
control of the borrower is not exhaustive. In addition, the comment
stated the agency should state in Sec. 765.202(a)(2) that the
borrower's failure to keep agreements will be considered when making
eligibility determinations only when the failure is ``for reasons not
beyond the borrower's control.'' The agency believes the circumstances
as listed in Sec. 765.202(a)(2) encompass all causes for a borrower to
not make payments for reasons beyond their control. The agency believes
that the suggested language for Sec. 765.202(a)(2) is unnecessary as
all aspects of the borrower's failure are to be ``considered'' and
``may'' adversely impact future requests for loans or servicing.
Furthermore, a borrower's failure to keep agreements with the agency is
evaluated when determining if the borrower has ``acted in good faith''
as required under the loan making and servicing eligibility
requirements. The definition of ``good faith'' provides, ``the Agency
considers a borrower to act in good faith, however, when the borrower
is unable to adhere to all agreements due to circumstances beyond the
borrower's control.'' Therefore, the comment is not adopted.
Two comments stated the agency should spell out the abbreviation
``SA.'' As noted previously, all abbreviations and definitions used are
published in Sec. 761.2. Therefore, the comments are not adopted.
One comment stated the agency should continue to assess a
delinquent borrower's need for training to determine the reasons for
not being able to pay. In cases where the delinquency is due to lack of
financial management knowledge, the comment stated the agency should
require financial management training. The agency initially evaluates a
borrower's need for training in the loan making process according to
Sec. 764.452. As provided in Sec. 761.103, as part of the farm
assessment initiated in the loan making process, the agency reviews the
borrower's progress at least annually to evaluate training needs. While
the agency may recommend additional training, requiring training as a
condition of loan servicing only hinders debt restructuring.
Restructure of debt is a benefit to the borrower as they develop a
payment plan based on past history and is a benefit to the agency as
the debt continues to be repaid as serviced without liquidation.
Therefore, the comment is not adopted.
One comment stated subparagraph (a)(1) as written is not clear. The
agency agrees with the comment and has clarified the subparagraph
introduction to state that the delinquency or financial distress is the
result of reduced repayment ability due to one of the listed
circumstances beyond the borrower's control.
Section 766.105 Agency Consideration of Servicing Requests
Three comments were received on the appraisal of a borrower's
assets. All comments stated the agency should clarify if an appraisal
of the borrower's assets is needed only when a feasible plan cannot be
developed with a 110 percent debt service margin or when a write down
is required to achieve at least a 100 percent debt service margin. The
agency believes the rule as written specifies that the agency will not
forgive debt, through write down or current market value buyout, before
obtaining an appraisal of all the borrower's assets, without regard to
debt service margin. In addition, the agency handbook will provide
guidance on when the agency will obtain appraisals in loan servicing.
Therefore, the comments are not adopted.
Section 766.106 Agency Notification of Decision Regarding a Complete
Application
Nine comments were received on the agency notification of the
decision regarding a complete application. Three comments stated the
agency must continue to request mediation or voluntary meeting of
creditors if the borrower cannot develop a feasible plan. One comment
stated the agency should continue to initiate mediation proactively,
otherwise the number of appeals and foreclosures will increase. Two
comments stated section 353(d) of the Act (7 U.S.C. 2001) mandates the
agency to initiate mediation when a borrower cannot develop a feasible
plan for restructuring. The agency disagrees. This Section is
applicable only when write down is being considered as a restructuring
option. The section also provides that before eliminating the option
for writedown, the Secretary will make a reasonable effort to contact
the borrower's creditors, either directly or through the borrower to
encourage restructuring. This statutory requirement is met by the
agency's notification to the borrower of the availability of mediation
or voluntary meeting of creditors, as applicable. Further, the agency
participates in State-Certified mediation when available. Therefore,
the comments are not adopted.
Two comments stated the agency should replace the terms ``the
agency will notify the borrower'' and ``the agency will renotify the
borrower'' with the terms ``the agency will send the
[[Page 63276]]
borrower a notification'' and ``the agency will send the borrower
another notification.'' The agency agrees with this clarification and
has revised the CFR accordingly.
One comment stated the statutory requirements to provide the
borrower the agency's calculations and notify the borrower within 15
days of determining the borrower's ineligibility for loan servicing was
not included in the proposed CFR. The agency agrees with the comment
and has revised the CFR accordingly.
Section 766.109 Deferral
Five comments were received on the deferral provisions. Three
comments supported the agency's clarification that the deferral term
will be the shortest possible that provides a feasible plan. One
comment stated the agency should not grant deferrals to borrowers who
have accumulated excessive debt for non-essential expenses. The agency
agrees that in some cases, a borrower's financial distress or
delinquency may be the result of the borrower incurring excessive debt
for non-essential expenses. The eligibility requirement that the
financial distress or delinquency be the result of reduced repayment
ability due to circumstances beyond the borrower's control, however,
adequately addresses the concern. Therefore, the comment is not
adopted.
One comment stated deferrals should be cancelled when a borrower
files for bankruptcy protection, since by filing for bankruptcy, the
borrower has elected to restructure the agency debt. When the agency
restructures a borrower's loans with deferral of debt, the borrower
executes the promissory note establishing the repayment schedule. The
terms established by the promissory note take the deferral into
consideration. If a borrower files for bankruptcy protection, the
agency is not authorized to modify the repayment schedule without
obtaining the prior approval of the court. Therefore, the comment is
not adopted.
Section 766.110 Conservation Contract
Eighteen comments were received on the conservation contract
provisions. Three comments stated the agency should include SA debt
when calculating debt to be written down by a conservation contract.
The agency agrees with the comments, provided the borrower has other
outstanding program loans, and has revised the CFR accordingly. SA-only
debt may not be serviced with a conservation contract. SA-only debt is
classified as Non-program debt for borrowers who have no remaining
program loans. The purposes of conservation contracts include allowing
the borrower to timely repay the agency loans. Since those borrowers
have no program loans remaining, this particular purpose of the
conservation contract cannot be met. Therefore, the agency cannot offer
conservation contracts to those borrowers. The section has been revised
to provide that for borrowers who have at least one program loan
outstanding, the Non-program debt can be considered for conservation
contract because the conservation contract's purpose will be fulfilled
as the borrower will be in a better position to repay the debt timely.
Three comments stated the agency should clarify that borrowers can
appeal technical decisions made by NRCS according to NRCS's appeal
process. The agency agrees with the comments and has revised the
section to state that NRCS technical decisions will be handled in
accordance with applicable NRCS regulations. At this time, the
applicable NRCS regulations are published at 7 CFR part 614. Other
aspects of a denial of conservation contract by the agency would be
appealable under normal agency rules at 7 CFR parts 11 and 780.
Two comments stated the abbreviation ``SA'' should be spelled out;
the agency loan under consideration for conservation contract must be
secured by real estate; and that Non-program loans cannot be considered
for conservation contracts. As noted previously, all abbreviations and
definitions used are published in Sec. 761.2. Therefore, this part of
the comments is not adopted. The agency agrees that the loan under
consideration for conservation contract has to be secured by real
estate and has revised the CFR accordingly. The agency believes the
benefit of conserving the nation's precious natural resources cannot be
limited to program loans only. At least one program loan must be
involved, however, for the agency to enter into a conservation contract
with a Non-program borrower because the Act provides that only
``qualified'' borrowers may enter into conservation contracts. The CFR
has been revised to accurately reflect this requirement and therefore,
this part of the comments is not adopted.
Two comments suggested that the borrower select in writing the term
of the conservation contract. As previously explained in the response
to comments under Sec. 766.102, the agency and the borrower can, and
do, consider different options or combinations of options that will
allow the borrower's account to be restructured. Consequently, the
agency and the borrower need the flexibility to choose the best loan
servicing option possible for the borrower's operation. Therefore, the
comments are not adopted.
Two comments stated that NRCS should develop the conservation
management plan and the agency should approve it, as specified in the
Memorandum of Understanding between the agencies. The agency agrees and
has revised the CFR accordingly.
Two comments stated the CFR does not state the borrower has to sign
the conservation contract agreement nor does it provide the form number
for the conservation contract agreement. Section 766.109(j) requires
the borrower to sign the Conservation Contract Agreement. As stated
previously, the agency does not publish form numbers in the CFR;
however, the agency handbook will provide guidance for employees.
Therefore, the comments are not adopted.
Two comments suggested the agency include required servicing for
conservation contracts and agency actions if the borrower is not
following the management plan or if the borrower sells the property
under the conservation contract. One comment stated the penalties for
violating the conservation contract agreement must be more severe than
currently provided, because, if the only penalty the agency will assess
is the reinstatement of the debt, it is sometimes to the borrower's
economic benefit to violate the conservation contract. The agency did
not propose to make substantive changes to the conservation contract
requirements, but will do so through separate rulemaking procedures.
Therefore, the comments are not adopted.
One comment stated the agency should require subordination of any
prior liens and title clearance on the property under consideration for
a conservation contract and that the conservation contract should not
be renegotiated during its term or removed before expiration. The
agency requires the real estate property under a conservation contract
to be security for agency loans. Therefore, the agency would already
have a lien on the property and additional title clearance is not
required. Further, the agency, as a matter of policy, does not
renegotiate the terms of the conservation contract, nor does it remove
the conservation contract from the property until it expires. Some
flexibility, however, should remain in the contract for unusual cases.
Therefore, the comment is not adopted.
Two comments were received on the maximum debt reduction
calculation by
[[Page 63277]]
a conservation contract used for current or financially distressed and
delinquent borrowers (Sec. 766.110(h) and (i)). Both comments stated
that the calculations should be the same for all. Section 349(e) of the
Act (7 U.S.C. 1997) however, provides different calculations to be used
for debt reduction by conservation contract for delinquent borrowers
than non-delinquent borrowers. Therefore, the comments cannot be
adopted.
Section 766.111 Writedown
Two comments stated the reference to the 101 percent debt service
margin for writedown as provided in Sec. 766.111(b) should be changed
to 110 percent. The 101 percent reference is correct as used. When the
agency calculations in DALR$ reflect that a feasible plan can be
developed with writedown, the agency will determine if a feasible plan
and a debt service margin of 101 percent or more can be achieved
without a writedown. If so, the agency will provide the borrower the
option to choose the plan used in the restructuring. Therefore, the
comments are not adopted.
Three comments stated the agency should remove subparagraph (a)(2),
excluding debtors with SA only, since subparagraph (a)(1)(iii) provides
the borrower must not have received a previous debt forgiveness to be
eligible for writedown. The agency agrees with the comments and has
revised the CFR accordingly.
One comment stated the agency should clarify on FSA-2512 (Appendix
A to part 766, subpart C) that to receive writedown, the borrower must
be delinquent on the agency loans. The agency agrees with the comment
and has revised FSA-2512 accordingly.
Section 766.112 Additional Security for Restructured Loans
Eight comments were received on the additional security for
restructured loans provision. Two comments stated the agency should
continue its current policy of requiring a lien on all assets when
servicing delinquent borrowers' loans only. Three comments stated the
agency should not require a lien on all the borrower's assets when
servicing a financially distressed borrower's loans, but instead
require the borrower to provide security of up to 150 percent of the
agency loans. The comments stated that requiring a lien on all assets
may make financially distressed borrowers not apply for loan servicing
even when such servicing may move their operation towards financial
viability. The agency agrees and has revised the proposed language to
require a lien on all assets only when the borrower is delinquent prior
to restructuring. The agency does not agree with the comments on
requiring such borrowers to provide security of up to 150 percent of
the agency loans when servicing loans. This is consistent with current
policy.
Two comments suggested agency employees be granted authority to
waive the agency's lien on crops when the agency is not providing an
annual operating loan because a lien on crops in a subordinate position
frustrates lenders, borrowers, and employees when trying to secure new
crop production financing. The agency believes that the lien on crops
should continue to be taken as it helps secure the agency's interests
and provides a valid lien on future crops. In addition, it ensures that
crop proceeds, which are normal income security, are used to pay agency
debt, after the prior lien holder has been paid. Therefore, the
comments are not adopted.
One comment stated that when servicing loans, the agency should
obtain a lien on the borrower's personal residence, even if the
residence is not located on the farm, as the agency obtains a lien on
chattels and crops for long-term loans. When the agency provides
primary loan servicing to delinquent borrowers, the potential for loss
to the agency is increased due to the borrowers' deteriorated financial
position. Further, the agency will continue to obtain a lien on crops
to ensure that normal income is applied to the agency debt after prior
lien holders have been paid. Therefore, the agency agrees with the
comment and has revised the CFR to remove the security exception for
personal residences.
Section 766.113 Buyout of Loan at Current Market Value
One comment was received on the buyout of loan at current market
value provisions. The comment stated it is not clear if buyout of loans
at current market value is available for borrowers who are 90 days past
due only. The agency agrees with the comment and has clarified the CFR
to reflect its current policy making market value buyout is available
to delinquent borrowers. Further, the agency clarified FSA-2512 and
FSA-2514 to state that current market value buyout is available to
delinquent borrowers.
Section 766.115 Challenging the Agency Appraisal
Three comments were received on the appraisal options available to
a borrower requesting primary loan servicing. Two comments stated that
a borrower who does not agree with the agency's appraisal should only
be offered the option of a technical appraisal review. Further, one of
the comments stated that borrowers should only be allowed to obtain a
technical appraisal review to determine if the agency's appraisal meets
the Uniform Standards of Professional Appraisal Practice (USPAP)
requirements and if there are flaws in the agency's appraisal that
would change the appraised value of the property. In addition, the
comment stated if there are no flaws in the agency's appraisal there
should be no further challenge to the appraisal and no need for a
second appraisal. Section 353(c)(7) and (j) of the Act (7 U.S.C. 2001)
requires negotiation of appraisals and appellant rights to independent
appraisals. Therefore, the comments cannot be adopted.
Another comment stated that since the Act does not specify any
percentage that the appraisals may differ in the negotiation process,
the agency should not limit the borrower's right to have a third
appraisal conducted. While the agency agrees the Act does not specify
the percentage the appraisals may differ, the use of the five percent
difference is reasonable and does not create limitations on the
borrower's rights. If the appraisals differ by less than five percent,
the agency provides the borrower the option to choose the appraisal to
be used, thus saving the borrower and the agency the expense of a third
appraisal. It would be unrealistic and cost prohibitive not to include
any limit, and it would not be in the borrower and the agency's
financial interest if the limit were any lower than five percent.
Lastly, the agency has found that since its implementation, the
provision has worked well for both the borrowers and the agency.
Therefore, the comment is not adopted. However, the agency revised this
section to correct that the borrower selects the appraisal to be used
when the two appraisals differ by five percent or less (rather than by
less than five percent) to reflect the agency's current policy.
Section 766.151 Purpose (Homestead Protection)
Two comments were received on the homestead protection program
purpose provision. Both comments stated the agency should clarify that
the former borrower possesses no statutory right to remain in
possession of the acquired property. In addition, both comments stated
the agency should replace the word ``retain'' with the word ``re-
acquire.'' The agency agrees with the first part of the comments,
however, it believes they are more applicable under
[[Page 63278]]
the liquidation provisions. The agency, therefore, has added Sec.
766.353(e) to adopt the comments. This section has been removed as
unnecessary.
Section 766.152 Applying for Homestead Protection (Renumbered to
766.151 in the Final Rule)
Two comments were received on the provision for applying for
homestead protection. One comment stated that appeal rights should not
be provided to borrowers who do not submit a complete application. When
borrowers initially apply for loan servicing, homestead protection is
included in the loan servicing options for which borrowers may be
considered, and therefore, must automatically be considered for pre-
acquisition homestead protection. If that option is denied for any
reason, appeal rights will be provided. Therefore, the comment is not
adopted.
The other comment stated section 352(c)(6) of the Act (7 U.S.C.
2000) provides for notice ``no later than the date of acquisition of
the property'' but that the proposed rule requires notice ``After the
agency acquires title to the property.'' The comment stated the agency
should revise the CFR to comply with the Act's requirement. There is no
substantive difference between these provisions. The proposed and final
rule language mirrors existing language at 7 CFR 1951.911. Therefore,
the comment is not adopted.
Section 766.153 Eligibility (Renumbered to 766.152 in the Final Rule)
Seven comments were received on the eligibility requirements for
homestead protection. Two comments stated the former owner should be
responsible for paying costs associated with obtaining and meeting all
state and local requirements for dividing the homestead property;
otherwise the agency should deny the homestead protection request.
After the former owner's property becomes the agency's inventory
property, the agency is the legal owner and is responsible for the
costs associated with separating the homestead protection property.
This furthers the intent of the Act requiring that the agency offer
this benefit. Therefore, the comments are not adopted.
One comment stated the agency should only pay junior liens when a
positive recovery can be made and when the cost of foreclosure will
exceed the amount of the prior lien. The agency agrees, in part, with
the comment and has revised Sec. 766.152(a)(4) to reference the
voluntary conveyance requirements in Sec. 766.353. Further, Sec.
766.353 was revised to provide that the agency may attempt to negotiate
a settlement with the junior lienholder if it is in the agency's
financial interest; however, the agency's attempt to negotiate with the
junior lienholder does not imply or create a right for the borrower.
One comment stated the agency should clarify the homestead
protection provisions applicable to entities. The agency agrees with
the comment and has revised the CFR accordingly.
Three comments stated the agency should further clarify the
lessee's responsibilities regarding making improvements to the property
under the homestead protection lease provisions. The agency agrees with
the comments and has revised the CFR accordingly.
Three comments were received on the former owner eligibility
requirements for homestead protection. The comments stated that
borrowers requesting servicing are required to provide 3 years of
financial information, and, therefore, the Agency will not have
financial records available to it to make the proposed 60 percent
income determination from at least two of the preceding 6 years.
Section 352(c)(1)(B) and (C) of the Act (7 U.S.C. 2000) provide the
former owner eligibility requirements for homestead protection.
Additionally, borrowers requesting homestead protection will have
received assistance from the agency for a number of years and as a
result, prior years' income records are likely to be in the borrower's
agency file. If additional information is needed to satisfy this
eligibility requirement, it must be submitted with the application
under Sec. 766.152. Therefore, no changes have been made in response
to these comments.
Section 766.155 Homestead Protection Leases (Renumbered to 766.154 in
the Final Rule)
Three comments were received on homestead protection leases. All
comments stated the CFR does not specify that applicants can select the
appraiser to conduct the independent appraisal to determine the
property's market value. The agency agrees with the comments and has
revised the CFR accordingly.
Further, one of the comments stated the agency should incorporate
the Act's provisions requiring the agency to provide notice with appeal
rights to former owners for failing to make rental payments and to
comply with state and local laws governing evictions. The agency, at
Sec. 761.6, provided that review or appeal of adverse agency decisions
will be handled in accordance with 7 CFR parts 11 and 780. In addition,
the agency handbook will provide guidance for employees to implement
notice requirements. Moreover, the agency already consults with OGC for
the proper process to follow for evictions, due to the differences in
state and local requirements. Therefore, these comments are not
adopted.
The comment finally stated, the agency should not require borrowers
with homestead protection leases to make costly improvements or replace
systems during the lease term. The agency revised Sec. 766.152(b)(5)
to provide lessees will be responsible for the normal maintenance of
the homestead protection property.
One comment was received on the requirement that a homestead
protection lease term be no less than three and no more than 5 years.
The comment stated that the requirement should read ``the lease term
must be less than 5 years.'' Section 352(b)(3) of the Act provides that
a homestead protection lease may not exceed 5 years, but in no case
should it be less than 3 years. Therefore, the comment cannot be
adopted.
Section 766.201 Shared Appreciation Agreement
One comment questioned the term of the Shared Appreciation
Agreement as being 5 years instead of 10 years. The agency published a
final rule on August 18, 2000 (65 FR 50401-50405) and revised the term
for Shared Appreciation Agreements from 10 years to 5 years. The
agreement may be triggered earlier by one of the events described in
the agreement. Therefore, no change was made based on the comment.
Section 766.202 Determining Shared Appreciation Due
Five comments were received on determining the shared appreciation
due. One comment stated the agency should clarify the term ``remaining
contributory value'' as used in Sec. 766.202(a)(3). The agency agrees
inclusion of the word ``remaining'' in the phrase causes confusion and
has removed it.
Two comments stated that an appraisal completed according to Sec.
761.7 and within one year of the maturity date or the triggering event
of the shared appreciation agreement, is timely. The agency agrees with
the comments and has clarified the CFR accordingly.
Two comments stated the agency should clarify that the borrower is
responsible for providing the capital improvements added during the
term of the shared appreciation agreement and
[[Page 63279]]
should provide the information before the agency obtains the appraisal.
The agency agrees with the comments and has clarified the CFR
accordingly.
Section 766.203 Payment of Recapture
One comment was received regarding the payment of recapture. The
comment stated it is not clear what happens if the borrower does not
pay the recapture amount due within the timeframe provided. Section
766.204 describes the actions the agency will take if the borrower is
not able to pay the recapture amount due. Other internal collection
remedies available need not be discussed in the rule. Therefore, no
change has been made in response to the comment.
Section 766.252 Unauthorized Assistance Resulting From Submission of
False Information (Renumbered and Renamed in Final Rule)
Proposed Sec. 766.251 (types of unauthorized assistance) was
removed in the final rule as unnecessary
One comment was received regarding unauthorized assistance
resulting from false information (Sec. 766.253 in proposed rule). The
comment stated the agency should revise the section to state that false
information includes information the borrower should have known to be
false. As stated in the response to a similar comment regarding the
definition of ``false information,'' it would be very difficult for the
agency to prove the applicant or borrower should have known the
information submitted to the agency was false. Therefore, the comment
is not adopted.
Section 766.253 Unauthorized Assistance Resulting From Submission of
Inaccurate Information by Borrower or Agency Error (Renumbered and
Renamed in Final Rule)
Nine comments were received on the treatment of unauthorized
assistance received by borrowers (Sec. 766.254 in proposed rule).
Three comments stated that borrowers should be able to continue with
the loan under program rates and terms if they are unable to repay the
entire amount of unauthorized assistance in a lump sum. In addition,
two comments stated borrowers may not be able to repay the loan under
Non-program rates and terms. While the agency is willing to work with
such borrowers on a repayment plan, the unauthorized debt must be
repaid. The Act does not authorize the agency to allow borrowers who
have received unauthorized assistance to continue with the loan on
below market program rates and terms. Therefore, the comments are not
adopted.
Another comment stated that the agency's proposal to reclassify the
entire loan as a Non-program loan if a portion of the loan is
unauthorized seems to be extreme, if the unauthorized loan was the
result of employee misunderstanding. While the agency understands the
concern expressed in the comment, it does not have the authority to
allow continued assistance to an applicant or borrower that does not
meet statutory program requirements. Therefore, the comment is not
adopted.
One comment questioned the ability of the agency's Finance Office
to process an accelerated repayment agreement. Two comments stated the
provisions outlining possible resolutions needed to be clarified. Two
comments stated the agency should specify if the terms of current
accelerated repayment agreements (5 years or less), will be changed
according to the proposed provisions. In evaluating the comments, the
agency determined that use of an accelerated repayment agreement does
not resolve the unauthorized assistance received, but rather allows for
continued assistance during the period established by the agreement
without program compliance. Therefore, the agency removed accelerated
repayment agreements as an option for unauthorized assistance
repayment. In cases where the unauthorized assistance is the result of
borrower or agency error, the agency retained the option allowing the
borrower to repay the unauthorized assistance in a lump sum. If the
borrower is unable to repay all or part of the unauthorized amount in a
lump sum and has repayment ability, the agency may convert the loan to
a Non-program loan, using rates and terms identical to those proposed
for accelerated repayment agreements. In addition, the agency revised
Sec. 766.251 to provide that the agency may reverse any unauthorized
loan servicing received by the borrower, where possible. The agency
believes this action provides those borrowers whose unauthorized
assistance is the result of an error with reasonable alternatives,
ensures borrowers do not retain benefits for which they are not
entitled to, and establishes enforceable loan and security instruments
ensuring repayment of the debt.
Section 766.351 Liquidation
Two comments were received on the general liquidation provision.
Both comments stated the proposed rule did not provide for notification
of loan servicing for borrowers who want to liquidate voluntarily. The
agency disagrees. Section 766.351(b)(2)(ii) provides ``if the
conditions of (b)(1) of this section have not been met, the agency will
notify the borrower in accordance with subpart C of this part, prior to
acting on the request for voluntary liquidation.'' No changes,
therefore, are necessary.
Section 766.352 Voluntary Sale of Real Property and Chattel
Three comments were received regarding the voluntary sale of real
property and chattel. One comment stated that allowing borrowers to
sell security voluntarily in lieu of involuntary liquidation should
stop once the involuntary liquidation process has begun, otherwise the
remaining security has to continually be updated through the court as
the security changes with each partial sale. Sections 766.352(a)(1) and
(2) provide that a borrower must sell all security until the debt is
paid in full or all security is liquidated, if the agency approves the
sale. Further, paragraph (b)(4)(ii) provides the agency will only
approve a sale that does not result in full payment of the debt only
when it is in the agency's financial interest. In addition, as stated
in Sec. 766.351(b)(2)(i), the agency will not delay involuntary
liquidation for a voluntary sale to close. Therefore, the agency
believes the comment's concerns are adequately addressed in the CFR and
no action is required.
Two comments stated the sales proceeds in voluntary liquidation
situations, for both real estate and chattel security, should be
``equal to or greater than either the agency debt or the agency-defined
recovery value'' instead of ``equal to or greater than the market value
of the property.'' The comments stated that often the agency receives
only the recovery value if the agency has to liquidate the borrower's
security. The agency disagrees. When the agency evaluates a loan
request, the adequacy of the security is based on the market value of
the property, therefore, allowing liquidation of security for less than
its market value is not reasonable. Such policy would increase losses
and is not in the agency and the taxpayers' financial interest.
Therefore, the comments are not adopted.
Section 766.353 Voluntary Conveyance of Real Property
Four comments were received regarding the voluntary conveyance of
real property. Three comments stated the agency form for voluntary
conveyance is not addressed in the CFR. Two comments stated the same as
to chattel property. The agency does not publish form numbers in the
CFR;
[[Page 63280]]
however, the agency handbook will provide the form numbers required for
voluntary conveyance of chattel and real property. Therefore, no
changes have been made in response to the comments.
Two of the comments also stated junior liens, real estate taxes,
and judgments can be charged to the borrower's account as recoverable
costs. Recoverable costs may include administrative costs associated
with the agency's acquisition of the property such as lien search or
recording fees. The agency agrees that recoverable costs can be charged
to the borrower's account as provided in the proposed rule.
One comment stated there was a conflict between Sec. 766.353(c)(2)
that provides the borrower has to pay junior liens, real estate taxes,
judgments, and other assessments before the agency will accept a
voluntary conveyance of real property and paragraph (d)(1) that
provides the agency will charge the borrower's account for recoverable
costs incurred in connection with a voluntary conveyance. As stated
above, the agency has revised the CFR as proposed. Therefore, no
further action is required.
Section 766.357 Involuntary Liquidation of Real Property and Chattel
(as Renumbered in Final Rule)
Three comments were received regarding involuntary liquidation of
real property and chattel (Sec. 766.356 in proposed rule). Two
comments stated the agency should clarify that the borrower does not
retain statutory or implied or inherent regulatory right of possession
of the real estate property after the date of the foreclosure sale. The
agency agrees with the comments and has revised the CFR accordingly.
One comment stated the agency should incorporate the requirement
found in 25 U.S.C. Section 483a(a) which provides, in part, that
foreclosure proceedings involving Indian land will be in accordance
with Tribal laws, or if Tribal foreclosure laws are absent, according
to State laws. Further, the comment stated the agency should recognize
Indian reservations as political subdivisions and Tribal entities as
State-approved entities. Foreclosure proceedings differ from state to
state, thus, it would make for exceptionally voluminous regulations for
the agency to include all internal foreclosure procedures in its
regulations. The agency has adhered to Tribal and State-specific
foreclosure laws, as applicable, and will continue to do so.
Furthermore, the agency does not impose different requirements on
entities approved by States or by Tribes. Therefore, no changes have
been made in response to the comment.
One comment stated the agency should incorporate the provisions
found in Section 335(e) of the Act that provide detailed guidance for
disposition and administration of inventory property located within an
Indian reservation where the borrower is a member of the Tribe.
Furthermore, section 335(e) of the Act provides detailed guidance
regarding the acceleration of loans to Native American borrowers that
was not addressed in the proposed rule. The agency redesignated
proposed Sec. 766.356 as Sec. 766.357 in the final rule and added a
new Sec. 766.356 addressing statutory provisions regarding the
acceleration of loans to Native American borrowers in the final rule.
These policies are consistent with those currently addressed in
internal agency notices.
While no comment was received regarding Sec. 766.357(b)(2), the
agency determined that the proposed rule modified existing regulations
currently published in 7 CFR 1955.18(e)(2)(ii). Modification of the
existing policy was unintended and was not addressed in the discussion
of changes in the preamble of the proposed rule. Therefore, the agency
revised Sec. 766.357(b)(2) to provide that the agency will credit a
borrower's account after a foreclosure sale based on the amount of its
bid as provided in existing regulations, rather than the market value,
less prior liens, as provided in the proposed rule. No substantive
change was intended.
Appendices to 7 CFR Part 766
The agency renumbered all the Appendices in the final rule to
accommodate its new numbering system for all forms used in loan
servicing. Therefore, FSA-2501 has been renumbered to FSA-2512; FSA-
2503 has been renumbered to FSA-2510; and FSA-2505 has been renumbered
to FSA-2515. Further, under paragraph (f) in all appendices, the agency
rearranged the forms comprising a complete primary loan servicing
application in numerical order. Under current rules, applicants for
primary loan servicing are required to provide multiple copies of a
form to the agency to verify debts and assets of the applicant. Under
the final rule, applicants will sign only one authorization to release
information and provide it to the agency. The agency, in turn, will use
the authorization to verify debts and assets as well as non-farm
income. This process closely matches commercial lenders' practices.
Therefore, paragraph (f) in all appendices is revised to reflect the
agency's new policy.
Eight comments were received on the Appendices to 7 CFR part 766.
One comment stated the agency should replace the word ``mediation''
with the words ``Alternative Dispute Resolution (ADR)'' because ADR is
the term used in the agency's handbook and describes the agency's
informal process for resolving disputes. The agency uses the term
``mediation'' in all the Appendices sent to the borrowers because the
term covers both the formal and informal mediation process for
resolving disputes. In addition, agency borrowers are familiar with the
term ``mediation,'' while ADR encompasses a wider variety of techniques
not used by the agency. Therefore, the comment is not adopted.
Two comments stated the title for FSA-2512 should be revised to
``Notice of Availability of Loan Servicing to Borrowers Who Are
Current, Financially Distressed or Less Than 90 Days Past Due.'' In
addition, both comments stated FSA-2512 should not include the option
for writedown and shared appreciation agreement and inquired if a lien
on all assets will be required for current or financially distressed
borrowers. The agency agrees and has revised the Appendix's title as
suggested. The agency published a final rule on February 4, 2004 (69 FR
5264-5267), that eliminated the 30-day past due period prior to a
determination that a borrower is delinquent. As a result, borrowers are
eligible for writedown, and therefore, shared appreciation agreement,
the day after they miss a payment. Therefore, that part of the comments
is not adopted. The agency did, however, revise FSA-2512 to clarify
that writedown is only available to delinquent borrowers. The agency
will not require current or financially distressed borrowers to provide
a lien on all assets.
Three comments stated the agency should revise FSA-2510 to clarify
that after the agency sends it to the borrower, along with the separate
notice of administrative offset, administrative offset may occur at any
time. Offset of payments are initiated according to the timeframes
established in the offset notice and applicable regulations. Generally,
offset may begin prior to the timeframe provided to the borrower to
request loan servicing or pay the account current. As a result,
inclusion of the reference to administrative offset in the notice of
availability of primary and preservation loan servicing is misleading.
Therefore, the agency removed the administrative offset provision from
FSA-2510.
One comment stated the agency should revise the CFR to incorporate
the property restrictions and easement
[[Page 63281]]
provisions found in the Appendices. As stated in the preamble of the
proposed rule, the agency is eliminating the redundancy found in its
current regulations. Once the agency has acquired a property into
inventory, the property is subject to the provisions of 7 CFR 767,
including Subpart E, pertaining to real property with important
resources, or special hazard areas; therefore, the first part of the
comment is not adopted.
The comment also stated the agency should revise the Appendices to
inform borrowers that they can request a copy of the regulations and
agency handbooks. The agency agrees with the second part of the comment
and has revised the Appendices to state that regulatory text is
included in the agency handbooks. The information had already been
included on the availability of handbooks and forms. Regulations also
are published in the Code of Federal Regulations.
Further, the comment stated the agency should inform borrowers that
the negotiated appraisal non-appealability determination is appealable
to the NAD Director. The comment stated the non-appealability
determination of the negotiated appraisal is not statutory, and it
should therefore be removed. Moreover, the comment stated the agency
should remove the provision that only the balance of the 30 days will
be available to the borrower to request an appeal on issues other than
the negotiated appraisal since it is not statutory. According to
section 353(c)(7) of the Act (7 U.S.C. 2001), the negotiated appraisal
value by the appraiser mutually agreed upon becomes the final appraisal
of the borrower's assets. Therefore, the negotiated appraisals are not
appealable. The agency provides the borrower the opportunity to request
a NAD Director review of non-appealability determinations in subsequent
notices. In addition, 7 CFR 11.4(c)(1) provides if a borrower requests
mediation prior to requesting an appeal to NAD, this stops the running
of the 30-day period during which the borrower may appeal to NAD, and
the borrower will have the balance of days remaining in that period to
appeal to NAD once mediation has concluded. The agency, for consistency
reasons, provides the borrower the balance of days remaining to request
an appeal to NAD after the negotiation of the appraisal has concluded.
Therefore, the comment is not adopted.
Another comment stated the agency should revise the Appendices by
removing the last sentence under the reconsideration, mediation,
negotiation and appeal rights subparagraph and include in FSA-2510 that
the borrower may apply for debt settlement even if already applied for
and rejected. The agency agrees with the first part of the comment and
has revised all the Appendices accordingly. Further, the agency agrees
with the last part of the comment and has revised FSA-2510, paragraph
(i), accordingly.
One comment stated the agency should expressly provide, where not
clear, that timeframes for borrower response commence from the time the
agency's notice is received by the borrower. The agency believes that
the borrower response timeframes are clearly stated in all the
Appendices, so no change has been made in response to the comment.
Miscellaneous Comments on Part 766
Two comments were received requesting the agency continue to
provide notification of primary loan servicing when a borrower's
request to release proceeds of chattel security is denied. In addition,
the comments stated that the agency has to release proceeds for
essential family living and farm operating expenses until the loan is
accelerated. The agency may deny a borrower's request to release
proceeds of chattel security for expenses not considered essential
family living or farm operating expenses. The agency is committed to
helping borrowers resolve their financial distress at the earliest
opportunity, before the financial condition of the operation
deteriorates to the point that primary loan servicing is required. Such
notification is not required by the Act; however, it was the agency's
intent to continue notifying financially distressed and delinquent
borrowers of primary loan servicing availability under Sec. 766.101.
However, the agency believes that initiating primary loan servicing in
cases not related to financial distress or delinquency is a disservice
to borrowers since the primary loan servicing process can be lengthy
and complicated, when the benefits are not needed. Therefore, the
comments are not adopted.
Three comments were received in support of the agency's decision
not to provide appeal rights in the offer to restructure the account.
The comments stated that the borrowers' rights are protected because
borrowers are provided with appeal rights when the agency proposes to
take adverse action. In addition, the comments stated that the agency
and the taxpayers are benefiting from the change since it eliminates
the inefficiencies and administrative expenses associated with multiple
appeals. Two comments were received requesting the agency provide
appeal rights with the offer to restructure a borrower's account. The
agency's offer to restructure the account is a direct result of the
borrower's request for loan servicing and the agency is granting the
benefit. If a delinquent borrower does not accept the agency's offer to
restructure the account, the agency will send notification of its
intent to accelerate the account and will provide appeal rights. The
borrower can then appeal both the offer to restructure and the intent
to accelerate. Further, the borrower may seek NAD Director's review of
the appealability determination or otherwise attempt to appeal without
an adverse decision. Therefore, the comments are not adopted.
Part 767--Inventory Property Management
The following discussion addresses the comments received on Part
767.
Section 767.52 Disposition of Personal Property From Real Estate
Inventory Property
One comment was received on the disposition of personal property
from real estate inventory property. The comment stated the agency
should clarify in the CFR how the former owner and any known
lienholders will be notified when personal property has been left on
the real estate inventory property. The agency believes the CFR as
written adequately addresses the agency's obligation to provide notice,
and the agency handbook will provide further guidance to agency
personnel regarding the method for notifying former owners and prior
lienholders. Therefore, the comment is not adopted.
Section 767.101 Leasing Real Estate Inventory Property
Two comments were received on leasing real estate inventory
property. Both comments stated the agency should add that when the
borrower or any other party remains in possession of the real estate
property after the agency acquires the title to the property, that
person does so without the benefit of a written lease agreement with
the agency. Further, the comments stated, the agency, at its sole
discretion, can remove such parties and property, pursue civil or
criminal action, and pursue claims for use and occupancy of the
agency's property. The agency agrees with the concerns expressed in the
comments, and has revised Sec. 766.357 to clarify that after the date
of foreclosure, the former owner of the property does not retain any
rights, except rights granted under state law. Since property can
become inventory
[[Page 63282]]
only through foreclosure or voluntary conveyance, the agency believes
it is more appropriate to revise Sec. 766.353 similarly. Section
767.52 adequately addresses the removal of personal property. Lastly, 7
CFR 1955.61 provides that the agency will request OGC assistance when
eviction is necessary. The agency will continue this policy in its
handbook, since procedures may vary from state to state. Therefore, no
change has been made to this section in response to these comments.
Section 767.151 General Requirements
Three comments were received on the general requirements for
disposal of inventory property. All comments stated the proposed rule
requires non-beginning farmers to make a 10 percent downpayment when
purchasing inventory property. The comments stated non-beginning farmer
applicants eligible for farm ownership loans should be able to purchase
inventory property and the agency provide 100 percent of the financing
as when a non-beginning farmer purchases real estate from a third
party. The agency disagrees. Section 335 of the Act (7 U.S.C. 1985)
requires the agency to ensure prompt sale of acquired inventory
property, as well as the availability of acquired property to beginning
farmers. The purchase of inventory property by beginning farmers may be
financed with the agency's direct farm ownership loan allocation. As
provided in section 346 of the Act (7 U.S.C. 1994), farm ownership
funds are targeted for beginning farmers. Historically, non-targeted
farm ownership funds are exhausted early in the fiscal year. While
beginning farmer targeted farm ownership funds may also become
exhausted, section 335(c)(5) of the Act authorizes the lease of
inventory property only to beginning farmers when funds are not
available to consummate the sale. Further, section 335(c)(1)(C) of the
Act requires the sale of the property within 30 days after it is
determined an acceptable offer has not been received from a qualified
beginning farmer. To meet this timeframe, the purchaser generally is
required to have funds available from sources other than the agency
since non-targeted farm ownership funds are usually exhausted quickly.
The 10 percent deposit is required to ensure only those with the
necessary funds submit offers. Therefore, the comments are not adopted.
One comment stated the requirement in section 335(c)(1)(iv) of the
Act that the Secretary will combine or subdivide inventory property, as
appropriate, to maximize the opportunity for beginning farmers to
purchase inventory property, was not included in the proposed rule. The
agency agrees with the comment and has added the requirement in
paragraph (a).
Lastly, the agency revised Sec. 767.151(b) (renumbered from Sec.
767.151(a)) by removing the last sentence of the paragraph that
provided beginning farmers may apply up through 135 days after the
advertisement to purchase inventory property. Section 335(c) of the
Act, as well as existing regulations at 7 CFR 1955.107(a)(2)(i),
provide that the agency has 135 days from acquisition to complete the
sale to a beginning farmer. By providing beginning farmers up through
135 days after the advertisement to apply to purchase the inventory
property, the proposed rule text would prohibit the agency from meeting
the statutory deadline for closing the sale.
In addition, the agency revised Sec. 767.151(d) (renumbered from
767.151(c)) which provided if no acceptable offer was received from a
beginning farmer, the agency would offer to sell inventory property to
the general public between days 136 and 165 after the agency obtained
title to the property, As written, this requirement would prohibit the
agency from selling the inventory property within the 165-day
requirement as mandated under Section 335(c) of the Act.
Section 767.155 Selling Chattel Property
Five comments were received on selling chattel property. Three
comments stated it may be in the agency's financial interest to sell
specialty livestock and equipment by private contract instead of public
auction. In addition, all three comments did not support the removal of
the sealed bid method for selling chattel inventory property. One
comment stated the agency should not make any changes to the way it
currently sells chattel inventory property. The comment stated some
small items must be sold through methods other than auction as the
transportation costs to the auction site may be more than the value of
the items to be auctioned. The agency believes its financial interests
are protected when chattel inventory property is sold by public
auction. However, the agency recognizes that a greater recovery may
occur by selling specialty livestock and equipment by private contract.
The agency agrees with the comments and has revised the section to
provide for sealed bids.
One comment stated the agency should be prohibited from accepting
chattels into inventory as the agency does not have the resources to
manage the property and the property will depreciate while being held
by the agency. As provided in Sec. 766.354(b), the agency will only
accept a conveyance of chattel property if the borrower has made every
effort possible to sell the property voluntarily, the property is free
of other liens, and it is in the agency's financial interest. Based on
these requirements, the agency believes that the agency will rarely
accept chattels into inventory. Therefore, the comment is not adopted.
Section 767.203 Inventory Real Property Containing Environmental Risks
(Removed in Final Rule)
Three comments were received on the real estate inventory property
containing environmental risks provisions. All comments stated the
agency's proposed rule went far beyond the lender liability
responsibilities as provided in applicable Federal and State laws. The
comments stated the agency seems to take on the prior owner's
responsibility for environmental problems and hazardous waste cleanup
and provided the final rule should afford the lender liability
protection to the agency as stated in all applicable statutes. The
Comprehensive Environmental Response, Compensation, and Liability Act
and other applicable laws specify actions the agency has to undertake
when property held in inventory contains hazardous wastes and
materials. The agency recognizes that this law provides some protection
from lender liability for clean-up of hazardous waste. The agency,
however, may choose to do more than legally required when such action
is in the agency's best financial interests. The agency believes this
matter is internal policy and has removed the section in the final
rule. The agency handbook, however, will provide guidance to employees.
Miscellaneous Comments
Two comments were received supporting the elimination of the
definitions for suitable and surplus property from the CFR. The
comments stated the elimination of the definitions will help reduce
unnecessary administrative burden placed on the agency and free
employees' time to provide assistance to young and beginning farmers.
Miscellaneous CFR Parts
As stated in the preamble of the proposed rule, the agency intends
to amend 7 CFR part 799 to incorporate environmental policies currently
found in subpart G of 7 CFR part 1940. However, 7 CFR part 799 has not
been
[[Page 63283]]
amended yet, therefore, the agency will refer to subpart G of 7 CFR
part 1940 when environmental policies are discussed in the final rule.
The agency will make conforming changes to subpart G when the final
rule amending 7 CFR part 799 is published.
Further, as stated in the preamble of the proposed rule, the agency
intends to amend 7 CFR part 792 to incorporate offset of Federal
payments and debt settlement policies currently found in subpart C of 7
CFR part 1951 and subpart B of 7 CFR part 1956, respectively. However,
7 CFR part 792 has not been amended yet; therefore, the agency refers
to subpart C of 7 CFR part 1951 and subpart B of 7 CFR part 1956 when
offset of Federal payments and debt settlement policies are discussed
in the final rule. The agency will make conforming changes to subpart C
of 7 CFR part 1951 and subpart B of 7 CFR 1956 when the final rule
amending 7 CFR part 792 is published.
The agency's policies on controlled substances and disqualification
for Federal benefits due to Federal crop insurance violations are
currently addressed in 7 CFR part 718. However, the agency determined
that Farm Loan Programs were not adequately covered; therefore, the
agency revised 7 CFR part 718 where appropriate. In addition,
conforming changes were made to Commodity Credit Corporation
regulations in 7 CFR 1405.8.
Executive Order 12866
This rule has been determined to be significant under Executive
Order 12866 and was reviewed by OMB.
Regulatory Flexibility Act
In compliance with the Regulatory Flexibility Act (5 U.S.C. 601-
602), the undersigned has determined and certified by signature of this
document that this rule will not have a significant economic impact on
a substantial number of small entities. This rule does not impose any
new requirements on Agency applicants and borrowers. In some cases,
existing information collections and regulatory requirements have been
reduced as a result of streamlining the loan making and servicing
application processes.
Environmental Assessment
FSA has completed an Environmental Assessment (EA) 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. A finding of no
significant impact (FONSI) was determined as a result of the EA
process. The final EA and FONSI are available for review at http://www.fsa.usda.gov/FSA/webapp?area=home&subject=ecrc&topic=enl-ea.
The
agency will accept comments on the final EA and FONSI for a period of
30 days from the date of publication of this rule.
Executive Order 13132
The policies contained in this rule do not have a 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.
Executive Order 12988
This rule has been reviewed in accordance with Executive Order
12988, Civil Justice Reform. In accordance with this 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; and (3) administrative proceedings in accordance with 7 CFR
parts 11 and 780 must be exhausted before bringing suit in court
challenging action taken under this rule unless those regulations
specifically allow bringing suit at an earlier time.
Executive Order 12372
For reasons contained in the Notice to 7 CFR part 3015, subpart V
(48 FR 29115, June 24, 1983), the programs within this rule are
excluded from the scope of E.O. 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 of $100 million or more in any one year. When such a
statement is needed for a rule, section 205 of the UMRA requires FSA to
prepare a written statement, including a cost benefit assessment, for
proposed and final rules with ``Federal mandates'' that may result in
such expenditures 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 under 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 Information Collection Packages for the amendments to 7 CFR
parts 761, 764, 765, 766, and 767 contained in this final rule have
been submitted to OMB for approval. A proposed rule containing an
estimate of the burden impact of the rule was published on February 9,
2004 (69 FR 6055-6121). No comments regarding the burden estimates were
received.
E-Government Act Compliance
FSA is committed to complying with the E-Government Act, to promote
the use of the Internet and other information technologies to provide
increased opportunities for citizen access to Government information
and services, and for other purposes.
The agency has posted online at http://www.sc.egov.usda.gov all the
forms an applicant or borrower either has to complete in their entirety
or review and execute. For forms the applicant or borrower is required
to complete in their entirety, the fillable version of the form, as
well as detailed instructions on completing the form, are included
online. Forms prepared by the agency, that applicants or borrowers
simply review and sign, are also provided on the e-Gov Web site,
however, in lieu of detailed instructions for completing those forms,
the instructions state that the forms are provided on the Web site for
information purposes only. Applicants or borrowers may download and
review forms required to apply for benefits from the agency.
Lastly, the agency provides access to the handbooks that implement
the CFR parts included in the final rule and provide internal and
administrative guidance to its employees, at http://www.fsa.usda.gov/FSA/webapp?area=home&subject=lare&topic=hbk.
Applicants or borrowers
may download and review any agency handbook and become familiar with
the requirements for applying for benefits.
Federal Assistance Programs
These changes affect the following FSA programs as listed in the
Catalog of Federal Domestic Assistance:
10.404--Emergency Loans
[[Page 63284]]
10.406--Farm Operating Loans
10.407--Farm Ownership Loans
List of Subjects
7 CFR Part 718
Acreage allotments, Agricultural commodities, Reporting and
recordkeeping requirements.
7 CFR Part 761
Administrative practice and procedure, Agriculture, Authority
delegations, Credit, Loan programs--Agriculture.
7 CFR Part 762
Agriculture, Credit, Loan programs--Agriculture.
7 CFR Part 764
Agriculture, Agricultural commodities, Credit, Disaster assistance,
Livestock, Loan programs--Agriculture, Mortgages.
7 CFR Part 765
Agriculture, Agricultural commodities, Credit, Livestock, Loan
programs--Agriculture.
7 CFR Part 766
Agriculture, Agricultural commodities, Credit, Livestock, Loan
programs--Agriculture.
7 CFR Part 767
Agriculture, Credit, Government property, Government property
management, Indians--loans, Loan programs--Agriculture.
7 CFR Part 1405
Agricultural commodities, Feed grains, Grains, Loan programs
``Agriculture, Oilseeds, Price support programs, Reporting and record
keeping requirements.
0
Accordingly, 7 CFR chapters VII and XIV are amended as follows:
7 CFR Chapter VII
PART 718--PROVISIONS APPLICABLE TO MULTIPLE PROGRAMS
0
1. The authority citation for part 718 continues to read as follows:
Authority: 7 U.S.C. 1311 et seq., 1501 et seq., 1921 et seq.,
7201 et seq., 15 U.S.C. 714b.
0
2. Revise Sec. 718.1 to read as follows:
Sec. 718.1 Applicability.
(a) This part:
(1) Is applicable to all programs set forth in chapters VII and XIV
of this title which are administered by the Farm Service Agency (FSA),
except that only Sec. Sec. 718.6 and 718.11 are applicable to parts
761 through 774 of this chapter;
(2) Governs how FSA monitors marketing quotas, allotments, base
acres and acreage reports. The regulations affected are those that
establish procedures for measuring allotments and program eligible
acreage, and determining program compliance.
(b) For all programs, except for those administered under parts 761
through 774 of this chapter:
(1) The provisions of this part will be administered under the
general supervision of the Administrator, FSA, and carried out in the
field by State and county FSA committees (State and county committees);
(2) State and county committees, and representatives and employees
thereof, do not have authority to modify or waive any regulations in
this part;
(3) No provisions or delegation herein to a State or county
committee will preclude the Administrator, FSA, or a designee, from
determining any question arising under the program or from reversing or
modifying any determination made by a State or county committee;
(4) The Deputy Administrator, FSA, may authorize State and county
committees to waive or modify deadlines and other requirements in cases
where lateness or failure to meet such other requirements does not
adversely affect the operation of the program.
(c) The programs under parts 761 through 774 will be administered
according to the part, or parts, applicable to the specific program.
0
3. Revise Sec. 718.6 to read as follows:
Sec. 718.6 Controlled substance.
(a) The following terms apply to this section:
(1) USDA benefit means the issuance of any grant, contract, loan,
or payment by appropriated funds of the United States.
(2) Person means an individual.
(b) Notwithstanding any other provision of law, any person
convicted under Federal or State law of:
(1) Planting, cultivating, growing, producing, harvesting, or
storing a controlled substance in any crop year is ineligible during
the crop year of conviction and the four succeeding crop years, for any
of the following USDA benefits:
(i) Any payments or benefits under the Direct and Counter Cyclical
Program (DCP) in accordance with part 1412 of this title;
(ii) Any payments or benefits for losses to trees, crops, or
livestock covered under disaster programs administered by FSA;
(iii) Any price support loan available in accordance with part 1421
of this title;
(iv) Any price support or payment made under the Commodity Credit
Corporation Charter Act;
(v) A farm storage facility loan made under section 4(h) of the
Commodity Credit Corporation Charter Act or any other Act;
(vi) Crop Insurance under the Federal Crop Insurance Act;
(vii) A loan made or guaranteed under the Consolidated Farm and
Rural Development Act or any other law administered by FSA's Farm Loan
Programs.
(2) Possession or trafficking of a controlled substance, is
ineligible for any or all USDA benefits:
(i) At the discretion of the court,
(ii) To the extent and for a period of time the court determines.
(c) If a person denied benefits under this section is a
shareholder, beneficiary, or member of an entity or joint operation,
benefits for which the entity or joint operation is eligible will be
reduced, for the appropriate period, by a percentage equal to the total
interest of the shareholder, beneficiary, or member.
0
4. Revise Sec. 718.11 to read as follows:
Sec. 718.11 Disqualification due to Federal crop insurance violation.
(a) Section 515(h) of the Federal Crop Insurance Act (FCIA)
provides that a person who willfully and intentionally provides false
or inaccurate information to the Federal Crop Insurance Corporation
(FCIC) or to an approved insurance provider with respect to a policy or
plan of FCIC insurance, after notice and an opportunity for a hearing
on the record, will be subject to one or more of the sanctions
described in section 515(h)(3). In section 515(h)(3), the FCIA
specifies that in the case of a violation committed by a producer, the
producer may be disqualified for a period of up to 5 years from
receiving any monetary or non-monetary benefit under a number of
programs. The list includes, but is not limited to, benefits under:
(1) The FCIA.
(2) The Agricultural Market Transition Act (7 U.S.C. 7201 et seq.),
including the Noninsured Crop Disaster Assistance Program under section
196 of that Act (7 U.S.C. 7333).
(3) The Agricultural Act of 1949 (7 U.S.C. 1421 et seq.).
(4) The Commodity Credit Corporation Charter Act (15 U.S.C. 714 et
seq.).
(5) The Agricultural Adjustment Act of 1938 (7 U.S.C. 1281 et
seq.).
[[Page 63285]]
(6) Title XII of the Food Security Act of 1985 (16 U.S.C. 3801 et
seq.).
(7) The Consolidated Farm and Rural Development Act (7 U.S.C. 1921
et seq.).
(8) Any law that provides assistance to a producer of an
agricultural commodity affected by a crop loss or a decline in prices
of agricultural commodities.
(b) Violation determinations are made by FCIC. However, upon notice
from FCIC to FSA that a producer has been found to have committed a
violation to which paragraph (a) of this section applies, that person
will be ineligible for payments under the programs specified in
paragraph (a) of this section that are funded by FSA for the same
period of time for which, as determined by FCIC, the producer will be
ineligible for crop insurance benefits of the kind referred to in
paragraph (a)(1) of this section. Appeals of the determination of
ineligibility will be administered under the rules set by FCIC.
(c) Other sanctions may also apply.
0
5. Revise part 761 to read as follows:
PART 761--GENERAL PROGRAM ADMINISTRATION
Subpart A--General Provisions
Sec.
761.1 Introduction.
761.2 Abbreviations and definitions.
761.3 Civil rights.
761.4 Conflict of interest.
761.5 Restrictions on lobbying.
761.6 Appeals.
761.7 Appraisals.
761.8 Loan limitations.
761.9 Interest rates for direct loans.
761.10 Planning and performing construction and other development.
761.11-761.50 [Reserved]
Subpart B--Supervised Bank Accounts
761.51 Establishing a supervised bank account.
761.52 Deposits into a supervised bank account.
761.53 Interest bearing accounts.
761.54 Withdrawals from a supervised bank account.
761.55 Closing a supervised bank account.
761.56-761.100 [Reserved]
Subpart C--Supervised Credit
761.101 Applicability.
761.102 Borrower recordkeeping, reporting, and supervision.
761.103 Farm assessment.
761.104 Developing the farm operating plan.
761.105 Year-end analysis.
761.106-761.200 [Reserved]
Subpart D--Allocation of Farm Loan Programs Funds to State Offices
761.201 Purpose.
761.202 Timing of allocations.
761.203 National reserves for Farm Ownership and Operating loans.
761.204 Methods of allocating funds to State Offices.
761.205 Computing the formula allocation.
761.206 Pooling of unobligated funds allocated to State Offices.
761.207 Distribution of loan funds by State Offices.
761.208 Target participation rates for socially disadvantaged
groups.
761.209 Loan funds for beginning farmers.
761.210 Transfer of funds.
Authority: 5 U.S.C. 301 and 7 U.S.C. 1989.
Subpart A--General Provisions
Sec. 761.1 Introduction.
(a) The Administrator delegates the responsibility to administer
Farm Loan Programs of the Consolidated Farm and Rural Development Act
(7 U.S.C. 1921 et seq.) to the Deputy Administrator for Farm Loan
Programs subject to any limitations established in 7 CFR 2.16(a)(2) and
7 CFR 2.42.
(b) The Deputy Administrator may:
(1) Redelegate authorities received under subparagraph (a); and
(2) Establish procedures for further redelegation of authority.
(c) Parts 761 through 767 describe the Agency's policies for its
Farm Loan Programs. The objective of these programs is to provide
supervised credit and management assistance to eligible farmers to
become owners or operators, or both, of family farms, to continue such
operations when credit is not available elsewhere, or to return to
normal farming operations after sustaining substantial losses as a
result of a designated or declared disaster. These regulations apply to
loan applicants, borrowers, lenders, holders, Agency personnel, and
other parties involved in making, guaranteeing, holding, servicing, or
liquidating such loans.
(d) This part describes the Agency's general and administrative
policies for its guaranteed and direct Farm Loan Programs. In general,
this part addresses issues that affect both guaranteed and direct loan
programs.
Sec. 761.2 Abbreviations and definitions.
The following abbreviations and definitions are applicable to the
Farm Loan Programs addressed in parts 761 through 767 unless otherwise
noted.
(a) Abbreviations.
CLP Certified Lender Program.
DSA Disaster Set-Aside.
EE Economic Emergency loan.
EM Emergency loan.
FLP Farm Loan Programs.
FO Farm Ownership loan.
FSA Farm Service Agency, an Agency of the USDA, including its
personnel and any successor Agency.
Lo-Doc Low-Documentation Operating loan.
OGC Office of the General Counsel of the USDA.
OL Operating loan.
PLP Preferred Lender Program.
RHF Rural Housing loan for farm service buildings.
RL Recreation loan.
SAA Shared Appreciation Agreement.
SA Shared Appreciation loan.
SEL Standard Eligible Lender.
ST Softwood Timber loan.
SW Soil and Water loan.
USDA United States Department of Agriculture.
USPAP Uniform Standards of Professional Appraisal Practice.
(b) Definitions.
Abandoned security property is security property that a borrower is
not occupying, is not in possession of, or has relinquished control of
and has not made arrangements for its care or sale.
Accrued deferred interest is unpaid interest from past due
installments posted to a borrower's loan account.
Act is the Consolidated Farm and Rural Development Act (7 U.S.C.
1921 et seq.).
Additional security is property which provides security in excess
of the amount of security value equal to the loan amount.
Adequate security is property which is required to provide security
value at least equal to the direct loan amount.
Adjustment is a form of settlement that reduces the financial
obligation to the Agency, conditioned upon the completion of payment of
a specified amount at a future time. An adjustment is not a final
settlement until all payments have been made under the agreement.
Administrative appraisal review is a review of an appraisal to
determine if the appraisal:
(1) Meets applicable Agency requirements; and
(2) Is accurate outside the requirements of standard 3 of USPAP.
Agency is the FSA.
Agreement for the use of proceeds is an agreement between the
borrower and the Agency that reflects how, when, and to whom the
borrower will sell, exchange, or consume chattel security and the
planned use of any proceeds during a specific production cycle.
Agricultural commodity is livestock, livestock products, grains,
cotton, oilseeds, dry beans, tobacco, peanuts, sugar beets, sugar cane,
fruit, vegetable, forage, tree farming, nursery crops, nuts,
aquaculture species, and other plant and animal production, as
determined by the Agency.
Allonge is an attachment or an addendum to a promissory note.
Allowable costs are those costs for replacement or repair that are
supported
[[Page 63286]]
by acceptable documentation, including, but not limited to, written
estimates, invoices, and bills.
Applicant is the individual or entity applying for a loan or loan
servicing under either the direct or guaranteed loan program.
Aquaculture is the husbandry of any aquatic organisms (including
fish, mollusks, crustaceans or other invertebrates, amphibians,
reptiles, or aquatic plants) raised in a controlled or selected
environment of which the applicant has exclusive rights to use.
Assignment of guaranteed portion is a process by which the lender
transfers the right to receive payments or income on a guaranteed loan
to another party, usually in return for payment in the amount of the
loan's guaranteed principal. The lender retains the unguaranteed
portion in its portfolio and receives a fee from the purchaser or
assignee to service the loan and receive and remit payments according
to a written assignment agreement. This assignment can be reassigned or
sold multiple times.
Assignment of indemnity is the transfer of rights to compensation
under an insurance contract.
Assistance is financial assistance in the form of a direct or
guaranteed loan or interest subsidy or servicing action.
Assumption is the act of agreeing to be legally responsible for
another party's indebtedness.
Assumption agreement is a written agreement on the appropriate
Agency form to pay the FLP debt incurred by another.
Average agricultural loan customer is a conventional farm borrower
who is required to pledge crops, livestock, other chattel and/or real
estate security for the loan. This term does not include a high-risk
farmer with limited security and management ability who is generally
charged a higher interest rate by conventional agricultural lenders.
Also, this term does not include a low-risk farm customer who obtains
financing on a secured or unsecured basis, who is able to pledge as
collateral for a loan items such as savings accounts, time deposits,
certificates of deposit, stocks and bonds, and life insurance.
Basic part of an applicant's total farming operation is any single
agricultural commodity or livestock production enterprise of an
applicant's farming operation which normally generates sufficient
income to be considered essential to the success of such farming
operation.
Basic security is all farm machinery, equipment, vehicles,
foundation and breeding livestock herds and flocks, including
replacements, and real estate that serves as security for a loan made
or guaranteed by the Agency.
Beginning farmer is an individual or entity who:
(1) Meets the loan eligibility requirements for a direct or
guaranteed OL or FO loan, as applicable;
(2) Has not operated a farm for more than 10 years. This
requirement applies to all members of an entity;
(3) Will materially and substantially participate in the operation
of the farm:
(i) In the case of a loan made to an individual, individually or
with the family members, material and substantial participation
requires that the individual provide substantial day-to-day labor and
management of the farm, consistent with the practices in the county or
State where the farm is located.
(ii) In the case of a loan made to an entity, all members must
materially and substantially participate in the operation of the farm.
Material and substantial participation requires that the member provide
some amount of the management, or labor and management necessary for
day-to-day activities, such that if the individual did not provide
these inputs, operation of the farm would be seriously impaired;
(4) Agrees to participate in any loan assessment and borrower
training required by Agency regulations;
(5) Except for an OL applicant, does not own real farm property or
who, directly or through interests in family farm entities owns real
farm property, the aggregate acreage of which does not exceed 30
percent of the acreage of the farms in the county where the property is
located. If the farm is located in more than one county, the median
farm acreage of the county where the applicant's residence is located
will be used in the calculation. If the applicant's residence is not
located on the farm or if the applicant is an entity, the median farm
acreage of the county where the major portion of the farm is located
will be used. The median county farm acreage will be determined from
the most recent Census of Agriculture;
(6) Demonstrates that the available resources of the applicant and
spouse (if any) are not sufficient to enable the applicant to enter or
continue farming on a viable scale; and
(7) In the case of an entity:
(i) All the members are related by blood or marriage; and
(ii) All the members are beginning farmers.
Beginning Farmer Downpayment Loan is a type of FO loan made to
eligible applicants to finance a portion of a real estate purchase
under part 764, subpart E of this chapter.
Borrower (or debtor) is an individual or entity that has an
outstanding obligation to the Agency or to a lender under any direct or
guaranteed FLP loan, without regard to whether the loan has been
accelerated. The term ``borrower'' includes all parties liable for such
obligation, including collection-only borrowers, except for debtors
whose total loans and accounts have been voluntarily or involuntarily
foreclosed, sold, or conveyed, or who have been discharged of all such
obligations owed to the Agency or guaranteed lender.
Cancellation is the final discharge of, and release of liability
for, a financial obligation to the Agency on which no settlement amount
has been paid.
Cash flow budget is a projection listing all anticipated cash
inflows (including all farm income, nonfarm income and all loan
advances) and all cash outflows (including all farm and nonfarm debt
service and other expenses) to be incurred during the period of the
budget. Advances and principal repayments of lines of credit may be
excluded from a cash flow budget. Cash flow budgets for guaranteed
loans under $125,000 do not require income and expenses itemized by
categories. A cash flow budget may be completed either for a 12-month
period, a typical production cycle, or the life of the loan, as
appropriate. It may also be prepared with a breakdown of cash inflows
and outflows for each month of the review period and include the
expected outstanding operating credit balance for the end of each
month. The latter type is referred to as a ``monthly cash flow
budget.''
Chattel or real estate essential to the operation is chattel or
real estate that would be necessary for the applicant to continue
operating the farm after the disaster in a manner similar to the manner
in which the farm was operated immediately prior to the disaster, as
determined by the Agency.
Chattel security is property that may consist of, but is not
limited to: Crops; livestock; aquaculture species; farm equipment;
inventory; accounts; contract rights; general intangibles; and supplies
that are covered by financing statements and security agreements,
chattel mortgages, and other security instruments.
Civil action is a court proceeding to protect the Agency's
financial interests. A civil action does not include bankruptcy and
similar proceedings to impound and distribute the bankrupt's assets to
creditors, or probate or similar proceedings to settle and distribute
[[Page 63287]]
estates of incompetents or decedents, and pay claims of creditors.
Closing agent is the attorney or title insurance company selected
by the applicant and approved by the Agency to provide closing services
for the proposed loan or servicing action. Unless a title insurance
company provides loan closing services, the term ``title company'' does
not include ``title insurance company.''
Coastal barrier is an area of land identified as part of the
national Coastal Barrier Resources System under the Coastal Barrier
Resources Act of 1980.
Compromise is the settlement of an FLP debt or claim by a lump-sum
payment of less than the total amount owed in satisfaction of the debt
or claim.
Conditional commitment is the Agency's commitment to a lender that
the material the lender has submitted is approved subject to the
completion of all listed conditions and requirements.
Conservation Contract is a contract under which a borrower agrees
to set aside land for conservation, recreation or wildlife purposes in
exchange for reduction of a portion of an outstanding FLP debt.
Conservation Contract review team is comprised by the appropriate
offices of FSA, the Natural Resources Conservation Service, U.S. Fish
and Wildlife Service, State Fish and Wildlife Agencies, Conservation
Districts, National Park Service, Forest Service, State Historic
Preservation Officer, State Conservation Agencies, State Environmental
Protection Agency, State Natural Resource Agencies, adjacent public
landowner, and any other entity that may have an interest and qualifies
to be a management authority for a proposed conservation contract.
Consolidation is the process of combining the outstanding principal
and interest balance of two or more loans of the same type made for
operating purposes.
Construction is work such as erecting, repairing, remodeling,
relocating, adding to, or salvaging any building or structure, and the
installing, repairing, or adding to heating and electrical systems,
water systems, sewage disposal systems, walks, steps, and driveways.
Controlled is when a director or an employee has more than a 50
percent ownership in an entity or, the director or employee, together
with relatives of the director or employee, have more than a 50 percent
ownership.
Controlled substance is the term as defined in 21 U.S.C. 812.
Cooperative is an entity that has farming as its purpose, whose
members have agreed to share the profits of the farming enterprise, and
is recognized as a farm cooperative by the laws of the state in which
the entity will operate a farm.
Corporation is a private domestic corporation created and organized
under the laws of the state in which it will operate a farm.
Cosigner is a party, other than the applicant, who joins in the
execution of a promissory note to assure its repayment. The cosigner
becomes jointly and severally liable to comply with the repayment terms
of the note, but is not authorized to severally receive loan servicing
available under 7 CFR parts 765 and 766. In the case of an entity
applicant, the cosigner cannot be a member of the entity.
County is a local administrative subdivision of a State or similar
political subdivision of the United States.
County average yield is the historical average yield for an
agricultural commodity in a particular political subdivision, as
determined or published by a government entity or other recognized
source.
Criminal action is the prosecution by the United States to exact
punishment in the form of fines or imprisonment for alleged violation
of criminal statutes.
Crop allotment or quota is a farm's share of an approved national
tobacco or peanut allotment or quota.
Current market value buyout is the termination of a borrower's loan
obligations to the Agency in exchange for payment of the current
appraised value of the borrower's security property and non-essential
assets, less any prior liens.
Debt forgiveness is a reduction or termination of a debt under the
Act in a manner that results in a loss to the Agency, through:
(1) Writing down or writing off a debt pursuant to 7 U.S.C. 2001;
(2) Compromising, adjusting, reducing, or charging off a debt or
claim pursuant to 7 U.S.C. 1981; or
(3) Paying a loss pursuant to 7 U.S.C. 2005 on a FLP loan
guaranteed by the Agency.
Debt forgiveness does not include:
(1) Debt reduction through a conservation contract;
(2) Any writedown provided as part of the resolution of a
discrimination complaint against the Agency;
(3) Prior debt forgiveness that has been repaid in its entirety;
and
(4) Consolidation, rescheduling, reamortization, or deferral of a
loan.
Debt settlement is a compromise, adjustment, or cancellation of an
FLP debt.
Debt service margin is the difference between all of the borrower's
expected expenditures in a planning period (including farm operating
expenses, capital expenses, essential family living expenses, and debt
payments) and the borrower's projected funds available to pay all
expenses and payments.
Debt writedown is the reduction of the borrower's debt to that
amount the Agency determines to be collectible based on an analysis of
the security value and the borrower's ability to pay.
Default is the failure of a borrower to observe any agreement with
the Agency, or the lender in the case of a guaranteed loan, as
contained in promissory notes, security instruments, and similar or
related instruments.
Deferral is a postponement of the payment of interest or principal,
or both.
Delinquent borrower, for loan servicing purposes, is a borrower who
has failed to make all scheduled payments by the due date.
Direct loan is a loan funded and serviced by the Agency as the
lender.
Disaster is an event of unusual and adverse weather conditions or
other natural phenomena, or quarantine, that has substantially affected
the production of agricultural commodities by causing physical property
or production losses in a county, or similar political subdivision,
that triggered the inclusion of such county or political subdivision in
the disaster area as designated by the Agency.
Disaster area is the county or counties declared or designated as a
disaster area for EM loan assistance as a result of disaster related
losses. This area includes counties contiguous to those counties
declared or designated as disaster areas.
Disaster set-aside is the deferral of payment of an annual loan
installment to the Agency to the end of the loan term in accordance
with part 766, subpart B of this chapter.
Disaster yield is the per-acre yield of an agricultural commodity
for the operation during the production cycle when the disaster
occurred.
Economic Emergency loan is a loan that was made or guaranteed to an
eligible applicant to allow for continuation of the operation during an
economic emergency which was caused by a lack of agricultural credit or
an unfavorable relationship between production costs and prices
received for agricultural commodities. EE loans are not currently
funded; however, such outstanding loans are serviced by the Agency or
the lender in the case of a guaranteed EE loan.
Emergency loan is a loan made to eligible applicants who have
incurred
[[Page 63288]]
substantial financial losses from a disaster.
Entity is a corporation, partnership, joint operation, cooperative,
limited liability company or trust.
Essential family living and farm operating expenses:
(1) Are those that are basic, crucial or indispensable.
(2) Are determined by the Agency based on the following
considerations:
(i) The specific borrower's operation;
(ii) What is typical for that type of operation in the area; and
(iii) What is an efficient method of production considering the
borrower's resources.
(3) Include, but are not limited to, essential: Household operating
expenses; food, including lunches; clothing and personal care; health
and medical expenses, including medical insurance; house repair and
sanitation; school and religious expenses; transportation; hired labor;
machinery repair; farm building and fence repair; interest on loans and
credit or purchase agreement; rent on equipment, land, and buildings;
feed for animals; seed, fertilizer, pesticides, herbicides, spray
materials and other necessary farm supplies; livestock expenses,
including medical supplies, artificial insemination, and veterinarian
bills; machinery hire; fuel and oil; taxes; water charges; personal,
property and crop insurance; auto and truck expenses; and utility
payments.
Established farmer is a farmer who operates the farm (in the case
of an entity, its members as a group) who:
(1) Actively participated in the operation and the management,
including, but not limited to, exercising control over, making
decisions regarding, and establishing the direction of, the farming
operation at the time of the disaster;
(2) Spends a substantial portion of time in carrying out the
farming operation;
(3) Planted the crop, or purchased or produced the livestock on the
farming operation;
(4) In the case of an entity, is primarily engaged in farming and
has over 50 percent of its gross income from all sources from its
farming operation based on the operation's projected cash flow for the
next crop year or the next 12-month period, as mutually determined; and
(5) Is not:
(i) An entity whose members are themselves entities;
(ii) An integrated livestock, poultry, or fish processor who
operates primarily and directly as a commercial business through
contracts or business arrangements with farmers, except a grower under
contract with an integrator or processor may be considered an
established farmer, provided the farming operation is not managed by an
outside full-time manager or management service and Agency loans shall
be based on the applicant's share of the agricultural production as set
forth in the contract; or
(iii) An operation which employs a full time farm manager.
False information is information provided by an applicant, borrower
or other source to the Agency that the applicant or borrower knows to
be incorrect.
Family farm is a farm that:
(1) Produces agricultural commodities for sale in sufficient
quantities so that it is recognized as a farm rather than a rural
residence;
(2) Has both physical labor and management provided as follows:
(i) The majority of day-to-day, operational decisions, and all
strategic management decisions are made by:
(A) The borrower and persons who are either related to the borrower
by blood or marriage, or are a relative, for an individual borrower; or
(B) The members responsible for operating the farm, in the case of
an entity.
(ii) A substantial amount of labor to operate the farm is provided
by:
(A) The borrower and persons who are either related to the borrower
by blood or marriage, or are a relative, for an individual borrower; or
(B) The members responsible for operating the farm, in the case of
an entity.
(3) May use full-time hired labor in amounts only to supplement
family labor.
(4) May use reasonable amounts of temporary labor for seasonal peak
workload periods or intermittently for labor intensive activities.
Family living expenses are the costs of providing for the needs of
family members and those for whom the borrower has a financial
obligation, such as alimony, child support, and care expenses of an
elderly parent.
Family members are the immediate members of the family residing in
the same household with the borrower.
Farm is a tract or tracts of land, improvements, and other
appurtenances that are used or will be used in the production of crops,
livestock, or aquaculture products for sale in sufficient quantities so
that the property is recognized as a farm rather than a rural
residence. The term ``farm'' also includes the term ``ranch.'' It may
also include land and improvements and facilities used in a non-
eligible enterprise or the residence which, although physically
separate from the farm acreage, is ordinarily treated as part of the
farm in the local community.
Farmer is an individual, corporation, partnership, joint operation,
cooperative, trust, or limited liability company that is the operator
of a farm.
Farm income is the proceeds from the sale of agricultural
commodities that are normally sold annually during the regular course
of business, such as crops, feeder livestock, and other farm products.
Farm Loan Programs are Agency programs to make, guarantee, and
service loans to family farmers authorized under the Act or Agency
regulations.
Farm Ownership loan is a loan made to eligible applicants to
purchase, enlarge, or make capital improvements to family farms, or to
promote soil and water conservation and protection. It also includes
the Beginning Farmer Downpayment loan.
Farm Program payments are benefits received from FSA for any
commodity, disaster, or cost share program.
Feasible plan is when an applicant or borrower's cash flow budget
or farm operating plan indicates that there is sufficient cash inflow
to pay all cash outflow. If a loan approval or servicing action exceeds
one production cycle and the planned cash flow budget or farm operating
plan is atypical due to cash or inventory on hand, new enterprises,
carryover debt, atypical planned purchases, important operating
changes, or other reasons, a cash flow budget or farm operating plan
must be prepared that reflects a typical cycle. If the request is for
only one cycle, a feasible plan for only one production cycle is
required for approval.
Financially distressed borrower is a borrower unable to develop a
feasible plan for the current or next production cycle.
Financially viable operation, for the purposes of considering a
waiver of OL term limits under Sec. 764.252 of this chapter, is a
farming operation that, with Agency assistance, is projected to improve
its financial condition over a period of time to the point that the
operator can obtain commercial credit without further Agency
assistance. Such an operation must generate sufficient income to:
(1) Meet annual operating expenses and debt payments as they become
due;
(2) Meet essential family living expenses to the extent they are
not met by dependable non-farm income;
(3) Provide for replacement of capital items; and
[[Page 63289]]
(4) Provide for long-term financial growth.
Fixture is an item of personal property attached to real estate in
such a way that it cannot be removed without defacing or dismantling
the structure, or damaging the item itself.
Floodplains are lowland and relatively flat areas adjoining inland
and coastal waters, including flood-prone areas of offshore islands,
including at a minimum, that area subject to a one percent or greater
chance of flooding in any given year. The base floodplain is used to
designate the 100-year floodplain (one percent chance floodplain). The
critical floodplain is defined as the 500-year floodplain (0.2 percent
chance floodplain).
Foreclosed is the completed act of selling security either under
the power of sale in the security instrument or through judicial
proceedings.
Foreclosure sale is the act of selling security either under the
power of sale in the security instrument or through judicial
proceedings.
Good faith is when an applicant or borrower provides current,
complete, and truthful information when applying for assistance and in
all past dealings with the Agency, and adheres to all written
agreements with the Agency including, but not limited to, loan
agreement, security instruments, farm operating plans, and agreements
for use of proceeds. The Agency considers a borrower to act in good
faith, however, if the borrower's inability to adhere to all agreements
is due to circumstances beyond the borrower's control. In addition, the
Agency will consider fraud, waste, or conversion actions, when
substantiated by a legal opinion from OGC, when determining if an
applicant or borrower has acted in good faith.
Graduation is the payment in full of all direct FLP loans made for
operating, real estate, or both purposes by refinancing with other
credit sources either with or without an Agency guarantee.
Guaranteed loan is a loan made and serviced by a lender for which
the Agency has entered into a Lender's Agreement and for which the
Agency has issued a Loan Guarantee. This term also includes guaranteed
lines of credit except where otherwise indicated.
Guarantor is a party not included in the farming operation who
assumes responsibility for repayment in the event of default.
Hazard insurance is insurance covering fire, windstorm, lightning,
hail, explosion, riot, civil commotion, aircraft, vehicles, smoke,
builder's risk, public liability, property damage, flood or mudslide,
workers compensation, or any similar insurance that is available and
needed to protect the Agency security or that is required by law.
Highly erodible land is land as determined by Natural Resources
Conservation Service to meet the requirements provided in section 1201
of the Food Security Act of 1985.
Holder is a person or organization other than the lender that holds
all or a part of the guaranteed portion of an Agency guaranteed loan
but has no servicing responsibilities. When the lender assigns a part
of the guaranteed loan by executing an Agency assignment form, the
assignee becomes a holder.
Homestead protection is the previous owner's right to lease with an
option to purchase the principal residence and up to 10 acres of
adjoining land which secured an FLP direct loan.
Homestead protection property is the principal residence that
secured an FLP direct loan and is subject to homestead protection.
Household contents are essential household items necessary to
maintain viable living quarters. Household contents exclude all luxury
items such as jewelry, furs, antiques, paintings, etc.
Inaccurate information is incorrect information provided by an
applicant, borrower, lender, or other source without the intent of
fraudulently obtaining benefits.
Indian reservation is all land located within the limits of any
Indian reservation under the jurisdiction of the United States,
notwithstanding the issuance of any patent, and including rights-of-way
running through the reservation; trust or restricted land located
within the boundaries of a former reservation of a Federally recognized
Indian Tribe in the State of Oklahoma; or all Indian allotments the
Indian titles to which have not been extinguished if such allotments
are subject to the jurisdiction of a Federally recognized Indian Tribe.
In-house expenses are expenses associated with credit management
and loan servicing by the lender and the lender's contractor. In-house
expenses include, but are not limited to, employee salaries, staff
lawyers, travel, supplies, and overhead.
Interest Assistance Agreement is the appropriate Agency form
executed by the Agency and the lender containing the terms and
conditions under which the Agency will make interest assistance
payments to the lender on behalf of the guaranteed loan borrower.
Inventory property is real estate or chattel property and related
rights that formerly secured an FLP loan and to which the Federal
Government has acquired title.
Joint financing arrangement is an arrangement in which two or more
lenders make separate loans simultaneously to supply the funds required
by one applicant.
Joint operation is an operation run by individuals who have agreed
to operate a farm or farms together as an entity, sharing equally or
unequally land, labor, equipment, expenses, or income, or some
combination of these items. The real and personal property is owned
separately or jointly by the individuals.
Leasehold is a right to use farm property for a specific period of
time under conditions provided for in a lease agreement.
Lender is the organization making and servicing a loan, or
advancing and servicing a line of credit that is guaranteed by the
Agency. The lender is also the party requesting a guarantee.
Lender's Agreement is the appropriate Agency form executed by the
Agency and the lender setting forth their loan responsibilities when
the Loan Guarantee is issued.
Lien is a legally enforceable claim against real or chattel
property of another obtained as security for the repayment of
indebtedness or an encumbrance on property to enforce payment of an
obligation.
Limited resource interest rate is an interest rate normally below
the Agency's regular interest rate, which is available to applicants
unable to develop a feasible plan at regular rates and are requesting:
(1) FO or OL loan assistance under part 764 of this title; or
(2) Primary loan servicing on an FO, OL, or SW loan under part 766
of this title.
Line of Credit Agreement is a contract between the borrower and the
lender that contains certain lender and borrower conditions,
limitations, and responsibilities for credit extension and acceptance
where loan principal balance may fluctuate throughout the term of the
contract.
Liquidation is the act of selling security for recovery of amounts
owed to the Agency or lender.
Liquidation expenses are the costs of an appraisal, due diligence
evaluation, environmental assessment, outside attorney fees, and other
costs incurred as a direct result of liquidating the security for a
direct or guaranteed loan. Liquidation expenses do not include internal
Agency expenses for a direct loan or in-house expenses for a guaranteed
loan.
[[Page 63290]]
Livestock is a member of the animal kingdom, or product thereof, as
determined by the Agency.
Loan Agreement is a contract between the borrower and the lender
that contains certain lender and borrower agreements, conditions,
limitations, and responsibilities for credit extension and acceptance.
Loan servicing programs include any primary loan servicing program,
conservation contract, current market value buyout, and homestead
protection.
Loan transaction is any loan approval or servicing action.
Loss claim is a request made to the Agency by a lender to receive a
reimbursement based on a percentage of the lender's loss on a loan
covered by an Agency guarantee.
Loss rate is the net amount of loan loss claims paid on FSA
guaranteed loans made in the previous 7 years divided by the total loan
amount of all such loans guaranteed during the same period.
Low-Documentation Operating loan is an OL loan made to eligible
applicants based on reduced documentation.
Major deficiency is a deficiency that directly affects the
soundness of the loan.
Majority interest is more than a 50 percent interest in an entity
held by an individual or group of individuals.
Market value is the amount that an informed and willing buyer would
pay an informed and willing, but not forced, seller in a completely
voluntary sale.
Mineral right is an ownership interest in minerals in land, with or
without ownership of the surface of the land.
Minor deficiency is a deficiency that violates Agency regulations,
but does not affect the soundness of the loan.
Mortgage is a legal instrument giving the lender a security
interest or lien on real or personal property of any kind. The term
``mortgage'' also includes the terms ``deed of trust'' and ``security
agreement.''
Natural disaster is unusual and adverse weather conditions or
natural phenomena that have substantially affected farmers by causing
severe physical or production, or both, losses.
Negligent servicing is servicing that fails to include those
actions that are considered normal industry standards of loan
management or comply with the lender's agreement or the guarantee.
Negligent servicing includes failure to act or failure to act in a
timely manner consistent with actions of a reasonable lender in loan
making, servicing, and collection.
Negotiated sale is a sale in which there is a bargaining of price
or terms, or both.
Net recovery value of security is the market value of the security
property, assuming that the lender in the case of a guaranteed loan, or
the Agency in the case of a direct loan, will acquire the property and
sell it for its highest and best use, less the lender's or the Agency's
costs of property acquisition, retention, maintenance, and liquidation.
Net recovery value of non-essential assets is the appraised market
value of the non-essential assets less any prior liens and any selling
costs that may include such items as taxes due, commissions, and
advertising costs. However, no deduction is made for maintenance of the
property while in inventory.
Non-capitalized interest is accrued interest on a loan that was not
reclassified as principal at the time of restructuring. Between October
10, 1988, and November 27, 1990, the Agency did not capitalize interest
that was less than 90 days past due when restructuring a direct loan.
Non-eligible enterprise is a business that meets the criteria in
any one of the following categories:
(1) Produces exotic animals, birds, or aquatic organisms or their
products which may be agricultural in nature, but are not normally
associated with agricultural production, e.g. there is no established
or stable market for them or production is speculative in nature.
(2) Produces non-farm animals, birds, or aquatic organisms
ordinarily used for pets, companionship, or pleasure and not typically
associated with human consumption, fiber, or draft use.
(3) Markets non-farm goods or provides services which might be
agriculturally related, but are not produced by the farming operation.
(4) Processes or markets farm products when the majority of the
commodities processed or marketed are not produced by the farming
operation.
Non-essential assets are assets in which the borrower has an
ownership interest, that:
(1) Do not contribute to:
(i) Income to pay essential family living expenses, or
(ii) The farming operation; and
(2) Are not exempt from judgment creditors or in a bankruptcy
action.
Non-program loan is a loan on terms more stringent than terms for a
program loan that is an extension of credit for the convenience of the
Agency, because the applicant does not qualify for program assistance
or the property to be financed is not suited for program purposes. Such
loans are made or continued only when it is in the best interest of the
Agency.
Normal income security is all security not considered basic
security, including crops, livestock, poultry products, other property
covered by Agency liens that is sold in conjunction with the operation
of a farm or other business, and FSA Farm Program payments.
Normal production yield as used in 7 CFR part 764 for EM loans, is:
(1) The per acre actual production history of the crops produced by
the farming operation used to determine Federal crop insurance payments
or payment under the Noninsured Crop Disaster Assistance Program for
the production year during which the disaster occurred;
(2) The applicant's own production records, or the records of
production on which FSA Farm Program payments are made contained in the
applicant's Farm Program file, if available, for the previous 3 years,
when the actual production history in paragraph (1) of this definition
is not available;
(3) The county average production yield, when the production
records outlined in paragraphs (1) and (2) of this definition are not
available.
Operating loan is a loan made to an eligible applicant to assist
with the financial costs of operating a farm. The term also includes a
Youth loan.
Operator is the individual or entity that provides the labor,
management, and capital to operate the farm. The operator can be either
an owner-operator or tenant-operator. Under applicable State law, an
entity may have to receive authorization from the State in which the
farm is located to be the owner and/or operator of the farm.
Participated in the business operations of a farm requires that an
applicant has:
(1) Been the owner, manager or operator of a farming operation for
the year's complete production cycle as evidenced by tax returns, FSA
farm records or similar documentation;
(2) Been employed as a farm manager or farm management consultant
for the year's complete production cycle; or
(3) Participated in the operation of a farm by virtue of being
raised on a farm or having worked on a farm with significant
responsibility for the day-to-day decisions for the year's complete
production cycle, which may include selection of seed varieties, weed
control programs, input suppliers, or livestock feeding programs or
decisions to replace or repair equipment.
Partnership is any entity consisting of two or more individuals who
have agreed to operate a farm as one business unit. The entity must be
recognized as
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[[pp. 63291-63340]] Regulatory Streamlining of the Farm Service Agency's Direct Farm
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[[Continued from page 63290]]
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a partnership by the laws of the State in which the partnership will
operate a farm. It also must be authorized to own both real and
personal property and to incur debt in its own name.
Past due is when a payment is not made by the due date.
Physical loss is verifiable damage or destruction with respect to
real estate or chattel, excluding annual growing crops.
Potential liquidation value is the amount of a lender's protective
bid at a foreclosure sale. Potential liquidation value is determined by
an independent appraiser using comparables from other forced
liquidation sales.
Present value is the present worth of a future stream of payments
discounted to the current date.
Presidentially-designated emergency is a major disaster or
emergency designated by the President under the Robert T. Stafford
Disaster Relief and Emergency Assistance Act (42 U.S.C. 5121 et seq.).
Primary loan servicing programs include:
(1) Loan consolidation and rescheduling, or reamortization;
(2) Interest rate reduction, including use of the limited resource
rate program;
(3) Deferral;
(4) Write-down of the principal or accumulated interest; or
(5) Any combination of paragraphs (1) through (4) of this
definition.
Production cycle is the time it takes to produce an agricultural
commodity from the beginning of the production process until it is
normally disposed of or sold.
Production loss is verifiable damage or destruction with respect to
annual growing crops.
Program loans include FO, OL, and EM. In addition, for loan
servicing purposes the term includes existing loans for the following
programs no longer funded: SW, RL, EE, ST, and RHF.
Promissory note is a written agreement to pay a specified sum on
demand or at a specified time to the party designated. The terms
``promissory note'' and ``note'' are interchangeable.
Prospectus consists of a transmittal letter, a current balance
sheet and projected year's budget which is sent to commercial lenders
to determine their interest in financing or refinancing specific Agency
direct loan applicants and borrowers.
Protective advance is an advance made by the Agency or a lender to
protect or preserve the collateral from loss or deterioration.
Quarantine is a quarantine imposed by the Secretary under the Plant
Protection Act or animal quarantine laws (as defined in section 2509 of
the Food, Agriculture, Conservation and Trade Act of 1990).
Reamortization is the rewriting of rates or terms, or both, of a
loan made for real estate purposes.
Reasonable rates and terms are those commercial rates and terms
that other farmers are expected to meet when borrowing from a
commercial lender or private source for a similar purpose and similar
period of time. The ``similar period of time'' of available commercial
loans will be measured against, but need not be the same as, the
remaining or original term of the loan.
Recoverable cost is a loan cost expense chargeable to either a
borrower or property account.
Recreation loan is a loan that was made to eligible applicants to
assist in the conversion of all or a portion of the farm they owned or
operated to outdoor income producing recreation enterprises to
supplement or supplant farm income. RL's are no longer funded, however,
such outstanding loans are serviced by the Agency.
Redemption right is a Federal or state right to reclaim property
for a period of time established by law, by paying the amount paid at
the involuntary sale plus accrued interest and costs.
Related by blood or marriage is being connected to one another as
husband, wife, parent, child, brother, sister, uncle, aunt, or
grandparent.
Relative is the spouse and anyone having one of the following
relationships to an applicant or borrower: parent, son, daughter,
sibling, stepparent, stepson, stepdaughter, stepbrother, stepsister,
half brother, half sister, uncle, aunt, nephew, niece, cousin,
grandparent, grandson, granddaughter, or the spouses of the foregoing.
Repossessed property is security property in the Agency's custody.
Rescheduling is the rewriting of the rates or terms, or both, of a
loan made for operating purposes.
Restructuring is changing the terms of a debt through rescheduling,
reamortization, deferral, writedown, or a combination thereof.
Rural youth is a person who has reached the age of 10 but has not
reached the age of 21 and resides in a rural area or any city or town
with a population of 50,000 or fewer people.
Security is property or right of any kind that is subject to a real
or personal property lien. Any reference to ``collateral'' or
``security property'' will be considered a reference to the term
``security.''
Security instrument includes any document giving the Agency a
security interest on real or personal property.
Security value is the market value of real estate or chattel
property (less the value of any prior liens) used as security for an
Agency loan.
Shared Appreciation Agreement is an agreement between the Agency,
or a lender in the case of a guaranteed loan, and a borrower on the
appropriate Agency form that requires the borrower who has received a
writedown on a direct or guaranteed loan to repay the Agency or the
lender some or all of the writedown received, based on a percentage of
any increase in the value of the real estate securing an SAA at a
future date.
Socially disadvantaged applicant is an applicant who is a member of
a socially disadvantaged group. For entity applicants, the majority
interest must be held by socially disadvantaged individuals. For
married couples, the socially disadvantaged individual must have at
least 50 percent ownership in the farm business and make most of the
management decisions, contribute a significant amount of labor, and
generally be recognized as the operator of the farm.
Socially disadvantaged group is a group whose members have been
subject to racial, ethnic, or gender prejudice because of their
identity as members of a group without regard to their individual
qualities. These groups consist of: American Indians or Alaskan
Natives, Asians, Blacks or African Americans, Native Hawaiians or other
Pacific Islanders, Hispanics, and women.
Softwood Timber Program loan was available to eligible financially
distressed borrowers who would take marginal land, including highly
erodible land, out of production of agricultural commodities other than
the production of softwood timber. ST loans are no longer available,
however, such outstanding loans are serviced by the Agency.
Soil and Water loan is a loan that was made to an eligible
applicant to encourage and facilitate the improvement, protection, and
proper use of farmland by providing financing for soil conservation,
water development, conservation, and use; forestation; drainage of
farmland; the establishment and improvement of permanent pasture;
pollution abatement and control; and other related measures consistent
with all Federal, State and local environmental standards. SW loans are
no longer funded, however, such outstanding loans are serviced by the
Agency.
[[Page 63292]]
Subordination is a creditor's temporary relinquishment of all or a
portion of its lien priority in favor of another creditor, providing
the other creditor with a priority right to collect a debt of a
specific dollar amount from the sale of the same collateral.
Subsequent loan is any FLP loan processed by the Agency after an
initial loan of the same type has been made to the same borrower.
Supervised bank account is an account with a financial institution
established through a deposit agreement entered into between the
borrower, the Agency, and the financial institution.
Technical appraisal review is a review of an appraisal to determine
if such appraisal meets the requirements of USPAP pursuant to standard
3 of USPAP.
Transfer and assumption is the conveyance by a debtor to an
assuming party of the assets, collateral, and liabilities of a loan in
return for the assuming party's binding promise to pay the debt
outstanding or the market value of the collateral.
Trust is an entity that under applicable state law meets the
criteria of being a trust of any kind but does not meet the criteria of
being a farm cooperative, private domestic corporation, partnership, or
joint operation.
Unaccounted for security is security for a direct or guaranteed
loan that was misplaced, stolen, sold, or otherwise missing, where
replacement security was not obtained or the proceeds from its sale
have not been applied to the loan.
Unauthorized assistance is any loan, loan servicing action, lower
interest rate, loan guarantee, or subsidy received by a borrower, or
lender, for which the borrower or lender was not eligible, which was
not made in accordance with all Agency procedures and requirements, or
which the Agency obligated from the wrong appropriation or fund.
Unauthorized assistance may result from borrower, lender, or Agency
error.
Uniform Standards of Professional Appraisal Practice are standards
governing the preparation, reporting, and reviewing of appraisals
established by the Appraisal Foundation pursuant to the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989.
United States is any of the 50 States, the Commonwealth of Puerto
Rico, the Virgin Islands of the United States, Guam, American Samoa,
the Commonwealth of the Northern Mariana Islands, Republic of Palau,
Federated States of Micronesia, and the Republic of the Marshall
Islands.
U. S. Attorney is an attorney for the United States Department of
Justice.
Veteran is any person who served in the military, naval, or air
service during any war as defined in section 101(12) of title 38,
United States Code.
Wetlands are those lands or areas of land as determined by the
Natural Resources Conservation Service to meet the requirements
provided in section 1201 of the Food Security Act of 1985.
Working capital is cash available to conduct normal daily
operations including, but not limited to, paying for feed, seed,
fertilizer, pesticides, farm supplies, cooperative stock, and cash
rent.
Youth loan is an operating type loan made to an eligible rural
youth applicant to finance a modest income-producing agricultural
project.
Sec. 761.3 Civil rights.
Part 15d of this title contains applicable regulations pertaining
to civil rights and filing of discrimination complaints by program
participants.
Sec. 761.4 Conflict of interest.
The Agency enforces conflict of interest policies to maintain high
standards of honesty, integrity, and impartiality in the making and
servicing of direct and guaranteed loans. These requirements are
established in 5 CFR parts 2635 and 8301.
Sec. 761.5 Restrictions on lobbying.
A person who applies for or receives a loan made or guaranteed by
the Agency must comply with the restrictions on lobbying in 7 CFR part
3018.
Sec. 761.6 Appeals.
Except as provided in 7 CFR part 762, appeal of an adverse decision
made by the Agency will be handled in accordance with 7 CFR parts 11
and 780.
Sec. 761.7 Appraisals.
(a) General. This section describes Agency requirements for:
(1) Real estate and chattel appraisals made in connection with the
making and servicing of direct FLP and Non-program loans; and
(2) Appraisal reviews conducted on appraisals made in connection
with the making and servicing of direct and guaranteed FLP and Non-
program loans.
(b) Appraisal standards. (1) Real estate appraisals, technical
appraisal reviews and their respective forms must comply with the
standards contained in USPAP, as well as applicable Agency regulations
and procedures for the specific FLP activity involved. A current copy
of USPAP along with other applicable procedures and regulations are
available for review in each Agency State Office.
(2) When a chattel appraisal is required, it must be completed on
an applicable Agency form (available in each Agency State Office) or
other format containing the same information.
(c) Use of an existing real estate appraisal. Except where
specified elsewhere, when a real estate appraisal is required, the
Agency will use the existing real estate appraisal to reach loan making
or servicing decisions under either of the following conditions:
(1) The appraisal was completed within the previous 12 months and
the Agency determines that:
(i) The appraisal meets the provisions of this section and the
applicable Agency loan making or servicing requirements; and
(ii) Market values have remained stable since the appraisal was
completed; or
(2) The appraisal was not completed in the previous 12 months, but
has been updated by the appraiser or appraisal firm that completed the
appraisal, and both the update and the original appraisal were
completed in accordance with USPAP.
(d) Appraisal reviews. (1) With respect to a real estate appraisal,
the Agency may conduct a technical appraisal review or an
administrative appraisal review, or both.
(2) With respect to a chattel appraisal, the Agency may conduct an
administrative appraisal review.
Sec. 761.8 Loan Limitations.
(a) Dollar limits. The outstanding principal balances for an
applicant or anyone who will sign the promissory note cannot exceed any
of the following at the time of loan closing or assumption of
indebtedness. If the outstanding principal balance exceeds any of the
limits at the time of approval, the farm operating plan must reflect
that funds will be available to reduce the indebtedness prior to loan
closing or assumption of indebtedness.
(1) Farm Ownership loans, Beginning Farmer Down payment loans and
Soil and Water loans:
(i) Direct--$200,000;
(ii) Guaranteed--$700,000 (for fiscal year 2000 and increased at
the beginning of each fiscal year in accordance with paragraph (b) of
this section);
(iii) Any combination of a direct Soil and Water loan, direct Farm
Ownership loan, guaranteed Soil and Water loan, and guaranteed Farm
Ownership loan--$700,000 (for fiscal year 2000 and increased each
fiscal year in accordance with paragraph (b) of this section);
[[Page 63293]]
(2) Operating loans:
(i) Direct--$200,000;
(ii) Guaranteed--$700,000 (for fiscal year 2000 and increased each
fiscal year in accordance with paragraph (b) of this section);
(iii) Any combination of a direct Operating loan and guaranteed
Operating loan--$700,000 (for fiscal year 2000 and increased each
fiscal year in accordance with paragraph (b) of this section);
(3) Any combination of guaranteed Farm Ownership loan, guaranteed
Soil and Water loan, and guaranteed Operating loan--$700,000 (for
fiscal year 2000 and increased each fiscal year in accordance with
paragraph (b) of this section);
(4) Any combination of direct Farm Ownership loan, direct Soil and
Water loan, direct Operating loan, guaranteed Farm Ownership loan,
guaranteed Soil and Water loan, and guaranteed Operating loan--the
amount in paragraph (a)(1)(ii) of this section plus $200,000;
(5) Emergency loans--$500,000;
(6) Any combination of direct Farm Ownership loan, direct Soil and
Water loan, direct Operating loan, guaranteed Farm Ownership loan,
guaranteed Soil and Water loan, guaranteed Operating loan, and
Emergency loan--the amount in paragraph (a)(1)(ii) of this section plus
$700,000.
(b) Guaranteed loan limit. The dollar limits of guaranteed loans
will be increased each fiscal year based on the percentage change in
the Prices Paid by Farmers Index as compiled by the National
Agricultural Statistics Service, USDA. The maximum loan limits for the
current fiscal year are available in any FSA office and on the FSA
website at http://www.fsa.usda.gov.
(c) Line of credit advances. The total dollar amount of guaranteed
line of credit advances and income releases cannot exceed the total
estimated expenses, less interest expense, as indicated on the
borrower's cash flow budget, unless the cash flow budget is revised and
continues to reflect a feasible plan.
Sec. 761.9 Interest rates for direct loans.
Interest rates for all direct loans are set in accordance with the
Act. A copy of the current interest rates may be obtained in any Agency
office.
Sec. 761.10 Planning and performing construction and other
development.
(a) Purpose. This section describes Agency policies regarding the
planning and performing of construction and other development work
performed with:
(1) Direct FLP loan funds; or
(2) Insurance or other proceeds resulting from damage or loss to
direct loan security.
(b) Funds for development work. The applicant or borrower:
(1) Must provide the Agency with an estimate of the total cash cost
of all planned development prior to loan approval;
(2) Must show proof of sufficient funds to pay for the total cash
cost of all planned development at or before loan closing;
(3) Must not incur any debts for materials or labor or make any
expenditures for development purposes prior to loan closing with the
expectation of being reimbursed from Agency loan funds.
(c) Scheduling, planning, and completing development work. The
applicant or borrower:
(1) Is responsible for scheduling and planning development work in
a manner acceptable to the Agency and must furnish the Agency
information fully describing the planned development, the proposed
schedule, and the manner in which it will be accomplished;
(2) Is responsible for obtaining all necessary State and local
construction approvals and permits prior to loan closing;
(3) Must ensure that all development work meets the environmental
requirements established in subpart G of 7 CFR part 1940;
(4) Must schedule development work to start as soon as feasible
after the loan is closed and complete work as quickly as practicable;
(5) Is responsible for obtaining any required technical services
from qualified technicians, tradespeople, and contractors.
(d) Construction and repair standards. (1) The construction of a
new building and the alteration or repair of an existing building must
conform with industry-acceptable construction practices and standards.
(2) All improvements to a property must conform to applicable laws,
ordinances, codes, and regulations.
(3) The applicant or borrower is responsible for selecting a design
standard that meets all applicable local and state laws, ordinances,
codes, and regulations, including building, plumbing, mechanical,
electrical, water, and waste management.
(4) The Agency will require drawings, specifications, and estimates
to fully describe the work as necessary to protect the Agency's
financial interests. The drawings and specifications must identify any
specific development standards being used. Such information must be
sufficiently complete to avoid any misunderstanding as to the extent,
kind, and quality of work to be performed.
(5) The Agency will require technical data, tests, or engineering
evaluations to support the design of the development as necessary to
protect its financial interests.
(6) The Agency will require the applicant or borrower to provide
written certification that final drawings and specifications conform
with the applicable development standard as necessary to protect its
financial interests. Certification must be obtained from individuals or
organizations trained and experienced in the compliance,
interpretation, or enforcement of the applicable development standards,
such as licensed architects, professional engineers, persons certified
by a relevant national model code organization, authorized local
building officials, or national code organizations.
(e) Inspection. (1) The applicant or borrower is responsible for
inspecting development work as necessary to protect their interest.
(2) The applicant or borrower must provide the Agency written
certification that the development conforms to the plans and good
construction practices, and complies with applicable laws, ordinances,
codes, and regulations.
(3) The Agency will require the applicant or borrower to obtain
professional inspection services during construction as necessary to
protect its financial interests.
(4) Agency inspections do not create or imply any duty or
obligation of the Agency to the applicant or borrower.
(f) Warranty and lien waivers. The applicant or borrower must
obtain and submit all lien waivers on any construction before the
Agency will issue final payment.
(g) Surety. The Agency will require surety to guarantee both
payment and performance for construction contracts as necessary to
protect its financial interests.
(h) Changing the planned development. An applicant or borrower must
request, in writing, Agency approval for any change to a planned
development. The Agency will approve a change if all of the following
are met:
(1) It will not reduce the value of the Agency's security;
(2) It will not adversely affect the soundness of the farming
operation;
(3) It complies with all applicable laws and regulations;
(4) It is for an authorized loan purpose;
[[Page 63294]]
(5) It is within the scope of the original loan proposal;
(6) If required, documentation that sufficient funding for the full
amount of the planned development is approved and available;
(7) If required, surety to cover the full revised development
amount has been provided; and
(8) The modification is certified in accordance with paragraph (d)
(6) of this section.
Sec. Sec. 761.11-761.50 [Reserved]
Subpart B--Supervised Bank Accounts
Sec. 761.51 Establishing a supervised bank account.
(a) Supervised bank accounts will be used to:
(1) Assure correct use of funds planned for capital purchases or
debt refinancing and perfection of the Agency's security interest in
the assets purchased or refinanced when electronic funds transfer or
treasury check processes are not practicable;
(2) Protect the Agency's security interest in insurance indemnities
or other loss compensation resulting from loss or damage to loan
security; or
(3) Assist borrowers with limited financial skills with cash
management, subject to the following conditions:
(i) Use of a supervised bank for this purpose will be temporary and
infrequent;
(ii) The need for a supervised bank account in this situation will
be determined on a case-by-case basis; and
(iii) The borrower agrees to the use of a supervised bank account
for this purpose by executing the deposit agreement.
(b) The borrower may select the financial institution in which the
account will be established, provided the institution is Federally
insured. If the borrower does not select an institution, the Agency
will choose one.
(c) Only one supervised bank account will be established for any
borrower.
(d) If both spouses sign an FLP note and security agreement, the
supervised bank account will be established as a joint tenancy account
with right of survivorship from which either borrower can withdraw
funds.
(e) If the funds to be deposited into the account cause the balance
to exceed $100,000, the financial institution must agree to pledge
acceptable collateral with the Federal Reserve Bank for the excess over
$100,000, before the deposit is made.
(1) If the financial institution is not a member of the Federal
Reserve System, the institution must pledge acceptable collateral with
a correspondent bank that is a member of the Federal Reserve System.
The correspondent bank must inform the Federal Reserve Bank that it is
holding securities pledged for the supervised bank account in
accordance with 31 CFR part 202 (Treasury Circular 176).
(2) When the balance in the account has been reduced, the financial
institution may request a release of part or all of the collateral, as
applicable, from the Agency.
Sec. 761.52 Deposits into a supervised bank account.
(a) Checks or money orders may be deposited into a supervised bank
account provided they are not payable:
(1) Solely to the Federal Government or any agency thereof; or
(2) To the Treasury of the United States as a joint payee.
(b) Loan proceeds may be deposited electronically.
Sec. 761.53 Interest bearing accounts.
(a) A supervised bank account, if possible, will be established as
an interest bearing deposit account provided that the funds will not be
immediately disbursed, and the account is held jointly by the borrower
and the Agency if this arrangement will benefit the borrower.
(b) Interest earned on a supervised bank account will be treated as
normal income security.
Sec. 761.54 Withdrawals from a supervised bank account.
(a) The Agency will authorize a withdrawal from the supervised bank
account for an approved purpose after ensuring that:
(1) Sufficient funds in the supervised bank account are available;
(2) No loan proceeds are disbursed prior to confirmation of proper
lien position, except to pay for lien search if needed;
(3) No checks are issued to ``cash;'' and
(4) The use of funds is consistent with the current farm operating
plan or other agreement with the Agency.
(b) A check must be signed by the borrower with countersignature of
the Agency, except as provided in paragraph (c) of this section. All
checks must bear the legend ``countersigned, not as co-maker or
endorser.''
(c) The Agency will withdraw funds from a supervised bank account
without borrower counter-signature only for the following purposes:
(1) For application on Agency indebtedness;
(2) To refund Agency loan funds;
(3) To protect the Agency's lien or security;
(4) To accomplish a purpose for which such advance was made; or
(5) In the case of a deceased borrower, to continue to pay
necessary farm expenses to protect Agency security in conjunction with
the borrower's estate.
Sec. 761.55 Closing a supervised bank account.
(a) If the supervised bank account is no longer needed and the loan
account is not paid in full, the Agency will determine the source of
the remaining funds in the supervised bank account. If the funds are
determined to be:
(1) Loan funds:
(i) From any loan type, except Youth loan, and the balance is less
than $1,000, the Agency will provide the balance to the borrower to use
for authorized loan purposes;
(ii) From a Youth loan, and the balance is less than $100, the
Agency will provide the balance to the borrower to use for authorized
loan purposes;
(2) Loan funds:
(i) From any loan type, except Youth loan, and the balance is
$1,000 or greater, the Agency will apply the balance to the FLP loan;
(ii) From a Youth loan, and the balance is $100 or greater, the
Agency will apply the balance to the FLP loan;
(3) Normal income funds, the Agency will apply the balance to the
remaining current year's scheduled payments and pay any remaining
balance to the borrower; and
(4) Basic security funds, the Agency will apply the balance to the
FLP loan as an extra payment or the borrower may apply the balance
toward the purchase of basic security, provided the Agency obtains a
lien on such security and its security position is not diminished.
(b) If the borrower is uncooperative in closing a supervised bank
account, the Agency will make written demand to the financial
institution for the balance and apply it in accordance with paragraph
(a) of this section.
(c) In the event of a borrower's death, the Agency may:
(1) Apply the balance to the borrower's FLP loan;
(2) Continue with a remaining borrower, provided the supervised
bank account was established as a joint tenancy with right of
survivorship account;
(3) Refund unobligated balances from other creditors in the
supervised bank account for specific operating purposes in accordance
with any prior written agreement between the Agency and the deceased
borrower; or
[[Page 63295]]
(4) Continue to pay expenses from the supervised bank account in
conjunction with the borrower's estate.
Sec. Sec. 761.56-761.100 [Reserved]
Subpart C--Supervised Credit
Sec. 761.101 Applicability.
This subpart applies to all direct applicants and borrowers, except
borrowers with only Non-program loans.
Sec. 761.102 Borrower recordkeeping, reporting, and supervision.
(a) A borrower must maintain accurate records sufficient to make
informed management decisions and to allow the Agency to render loan
making and servicing decisions in accordance with Agency regulations.
These records must include the following:
(1) Production (e.g., total and per unit for livestock and crops);
(2) Revenues, by source;
(3) Other sources of funds, including borrowed funds;
(4) Operating expenses;
(5) Interest;
(6) Family living expenses;
(7) Profit and loss;
(8) Tax-related information;
(9) Capital expenses;
(10) Outstanding debt; and
(11) Debt repayment.
(b) A borrower also must agree in writing to:
(1) Cooperate with the Agency and comply with all supervisory
agreements, farm assessments, farm operating plans, year-end analyses,
and all other loan-related requirements and documents;
(2) Submit financial information and an updated farm operating plan
when requested by the Agency;
(3) Immediately notify the Agency of any proposed or actual
significant change in the farming operation, any significant changes in
family income, expenses, or the development of problem situations, or
any losses or proposed significant changes in security.
(c) If the borrower fails to comply with these requirements, unless
due to reasons outside the borrower's control, the non-compliance may
adversely impact future requests for assistance.
Sec. 761.103 Farm assessment.
(a) The Agency assesses each farming operation to determine the
applicant's financial condition, organizational structure, management
strengths and weaknesses, appropriate levels of Agency oversight,
credit counseling needs, and training needs. The applicant will
participate in developing the assessment.
(b) The initial assessment must evaluate, at a minimum, the:
(1) Farm organization and key personnel qualifications;
(2) Type of farming operation;
(3) Goals for the operation;
(4) Adequacy of real estate, including facilities, to conduct the
farming operation;
(5) Adequacy of chattel property used to conduct the farming
operation;
(6) Historical performance;
(7) Farm operating plan;
(8) Loan evaluation;
(9) Supervisory plan; and
(10) Training plan.
(c) An assessment update must be prepared for each subsequent loan.
The update must include a farm operating plan, a loan evaluation, and
any other items discussed in paragraph (b) of this section that have
significantly changed since the initial assessment.
(d) The Agency reviews the assessment to determine a borrower's
progress at least annually. The review will be in the form of an office
visit, field visit, letter, phone conversation, or year-end analysis,
as determined by the Agency.
Sec. 761.104 Developing the farm operating plan.
(a) An applicant or borrower must submit a farm operating plan to
the Agency, upon request, for loan making or servicing purposes.
(b) An applicant or borrower may request Agency assistance in
developing the farm operating plan.
(c) The farm operating plan will be based on accurate and
verifiable information.
(1) Historical information will be used as a guide.
(2) Positive and negative trends, mutually agreed upon changes and
improvements, and current input prices will be taken into consideration
when arriving at reasonable projections.
(3) Projected yields will be calculated according to the following
priorities:
(i) The applicant or borrower's own production records for the
previous 3 years;
(ii) The per-acre actual production history of the crops produced
by the farming operation used to determine Federal crop insurance
payments, if available;
(iii) FSA Farm Program actual yield records;
(iv) County averages;
(v) State averages.
(4) If the applicant or borrower's production history has been
substantially affected by a disaster declared by the President or
designated by the Secretary of Agriculture, or the applicant or
borrower has had a qualifying loss from such disaster but the farming
operation was not located in a declared or designated disaster area,
the applicant or borrower may:
(i) Use county average yields, or state average yields if county
average yields are not available, in place of the disaster year yields;
or
(ii) Exclude the production year with the lowest actual or county
average yield if their yields were affected by disasters during at
least 2 of the 3 years.
(d) Unit prices for agricultural commodities established by the
Agency will generally be used. Applicants and borrowers that provide
evidence that they will receive a premium price for a commodity may use
a price above the price established by the Agency.
(e) Except as provided in paragraph (f) of this section, the
applicant or borrower must sign the final farm operating plan prior to
approval of any loan or servicing action.
(f) If the Agency believes the applicant or borrower's farm
operating plan is inaccurate, or the information upon which it is based
cannot be verified, the Agency will discuss and try to resolve the
concerns with the applicant or borrower. If an agreement cannot be
reached, the Agency will make loan approval and servicing
determinations based on the Agency's revised farm operating plan.
Sec. 761.105 Year-end analysis.
(a) The Agency conducts a year-end analysis at its discretion or if
the borrower:
(1) Has received any direct loan, chattel subordination, or primary
loan servicing action within the last year;
(2) Is financially distressed or delinquent;
(3) Has a loan deferred, excluding deferral of an installment under
subpart B of part 766; or
(4) Is receiving a limited resource interest rate on any loan.
(b) To the extent practicable, the year-end analysis will be
completed within 60 days after the end of the business year or farm
budget planning period and must include:
(1) An analysis comparing actual income, expenses, and production
to projected income, expenses, and production for the preceding
production cycle; and
(2) An updated farm operating plan.
Sec. Sec. 761.106-761.200 [Reserved]
Subpart D--Allocation of Farm Loan Programs Funds to State Offices
Sec. 761.201 Purpose.
(a) This subpart addresses:
[[Page 63296]]
(1) The allocation of funds for direct and guaranteed FO and OL
loans;
(2) The establishment of socially disadvantaged target
participation rates; and
(3) The reservation of loan funds for beginning farmers.
(b) The Agency does not allocate EM loan funds to State Offices but
makes funds available following a designated or declared disaster. EM
loan funds are available on a first-come first-served basis.
(c) State funding information is available for review in any State
Office.
Sec. 761.202 Timing of allocations.
The Agency's National Office allocates funds for FO and OL loans to
the State Offices on a fiscal year basis, as made available by the
Office of Management and Budget. However, the National Office will
retain control over the funds when funding or administrative
constraints make allocation to State Offices impractical.
Sec. 761.203 National reserves for Farm Ownership and Operating
loans.
(a) Reservation of funds. At the start of each fiscal year, the
National Office reserves a portion of the funds available for each
direct and guaranteed loan program. These reserves enable the Agency to
meet unexpected or justifiable program needs during the fiscal year.
(b) Allocation of reserved funds. The National Office distributes
funds from the reserve to one or more State Offices to meet a program
need or Agency objective.
Sec. 761.204 Methods of allocating funds to State Offices.
FO and OL loan funds are allocated to State Offices using one or
more of the following allocation methods:
(a) Formula allocation, if data, as specified in Sec. 761.205, is
available to use the formula for the State.
(b) Administrative allocation, if the Agency cannot adequately meet
program objectives with a formula allocation. The National Office
determines the amount of an administrative allocation on a case-by-case
basis.
(c) Base allocation, to ensure funding for at least one loan in
each State, District, or County Office. In making a base allocation,
the National Office may use criteria other than those used in the
formula allocation, such as historical Agency funding information.
Sec. 761.205 Computing the formula allocation.
(a) The formula allocation for FO or OL loan funds is equal to:
(1) The amount available for allocation by the Agency minus the
amounts held in the National Office reserve and distributed by base and
administrative allocation, multiplied by
(2) The State Factor, which represents the percentage of the total
amount of the funds for a loan program that the National Office
allocates to a State Office.
formula allocation = (amount available for allocation-national
reserve-base allocation-administrative allocation) x State Factor
(b) To calculate the State Factor, the Agency:
(1) Uses the following criteria, data sources, and weights:
----------------------------------------------------------------------------------------------------------------
Weight for Weight for
Criteria Loan type criterion is Data source FO loans OL loans
used for (percent) (percent)
----------------------------------------------------------------------------------------------------------------
Farm operators with sales of $2,500- FO and OL loans........ U.S. Census of 15 15
$39,999 and less than 200 days work Agriculture.
off the farm.
Farm operators with sales of $40,000 FO and OL loans........ U.S. Census of 35 35
or more and less than 200 days work Agriculture.
off farm.
Tenant farm operators............... FO and OL loans........ U.S. Census of 25 20
Agriculture.
3-year average net farm income...... FO and OL loans........ USDA Economic Research 15 15
Service.
Value of farm real estate assets.... FO loans............... USDA Economic Research 10 N/A
Service.
Value of farm non-real estate assets OL loans............... USDA Economic Research N/A 15
Service.
----------------------------------------------------------------------------------------------------------------
(2) Determines each State's percentage of the national total for
each criterion;
(3) Multiplies the percentage for each State determined in
paragraph (b)(2) of this section by the applicable weight for that
criterion;
(4) Sums the weighted criteria for each State to obtain the State
factor.
Sec. 761.206 Pooling of unobligated funds allocated to State Offices.
The Agency periodically pools unobligated FO and OL loan funds that
have been allocated to State Offices. When pooling these funds, the
Agency places all unobligated funds in the appropriate National Office
reserve. The pooled funds may be retained in the national reserve or
reallocated to the States.
Sec. 761.207 Distribution of loan funds by State Offices.
A State Office may distribute its allocation of loan funds to
District or County level using the same allocation methods that are
available to the National Office. State Offices may reserve a portion
of the funds to meet unexpected or justifiable program needs during the
fiscal year.
Sec. 761.208 Target participation rates for socially disadvantaged
groups.
(a) General. (1) The Agency establishes target participation rates
for providing FO and OL loans to members of socially disadvantaged
groups.
(2) The Agency sets the target participation rates for State and
County levels annually.
(3) When distributing loan funds in counties within Indian
reservations, the Agency will allocate the funds on a reservation-wide
basis.
(4) The Agency reserves and allocates sufficient loan funds to
achieve these target participation rates. The Agency may also use funds
that are not reserved and allocated for socially disadvantaged groups
to make or guarantee loans to members of socially disadvantaged groups.
(b) FO loans based on ethnicity or race. The FO loan target
participation rate based on ethnicity or race in each:
(1) State is equal to the percent of the total rural population in
the State who are members of such socially disadvantaged groups.
(2) County is equal to the percent of rural population in the
county who are members of such socially disadvantaged groups.
[[Page 63297]]
(c) OL loans based on ethnicity or race. The OL loan target
participation rate based on ethnicity or race in each:
(1) State is equal to the percent of the total number of farmers in
the State who are members of such socially disadvantaged groups.
(2) County is equal to the percent of the total number of farmers
in the county who are members of socially disadvantaged ethnic groups.
(d) Women farmers. (1) The target participation rate for women
farmers in each:
(i) State is equal to the percent of farmers in the State who are
women.
(ii) County is equal to the percent of farmers in the county who
are women.
(2) In developing target participation rates for women, the Agency
will consider the number of women who are current farmers and potential
farmers.
Sec. 761.209 Loan funds for beginning farmers.
Each fiscal year, the Agency reserves a portion of direct and
guaranteed FO and OL loan funds for beginning farmers in accordance
with section 346(b)(2) of the Act.
Sec. 761.210 Transfer of funds.
If sufficient unsubsidized guaranteed OL funds are available, then
beginning on:
(a) August 1 of each fiscal year, the Agency will use available
unsubsidized guaranteed OL loan funds to make approved direct FO loans
to beginning farmers under the Beginning Farmer Downpayment loan
program; and
(b) September 1 of each fiscal year the Agency will use available
unsubsidized guaranteed OL loan funds to make approved direct FO loans
to beginning farmers.
PART 762--GUARANTEED FARM LOANS
0
6. The authority citation for part 762 continues to read as follows:
Authority: 5 U.S.C. 301, 7 U.S.C. 1989, 42 U.S.C. 1480.
PART 762--[AMENDED]
0
7. Amend part 762 to read as follows:
0
a. Remove the phrase ``farm or ranch'' each time it appears and add in
its place the term ``farm''.
0
b. Remove the phrase ``farmer or rancher'' each time it appears and add
in its place the term ``farmer''.
0
c. Remove the phrase ``farmers or ranchers'' each time it appears and
add in its place the term ``farmers''.
0
d. Remove the phrase ``Loan Applicant'' each time it appears and add in
its place the term ``Applicant''.
0
e. Remove the phrase ``loan applicant'' each time it ppears and add in
its place the term ``applicant''
0
f. Remove the phrase ``loan applicant's'' each time it appears and add
in its place the term ``applicant's''.
0
g. Remove the phrase ``loan applicants'' each time it appears and add
in its place the term ``applicants''.
0
h. Remove the phrase ``Non-farm enterprises'' each time it appears and
add in its place the term ``Non-eligible enterprises''.
0
8. Amend Sec. 762.101 by revising paragraphs (b) and (c) to read as
follows:
Sec. 762.101 Introduction.
* * * * *
(b) Lender list. The Agency maintains a current list of lenders who
express a desire to participate in the guaranteed loan program. This
list is made available to farmers upon request.
(c) Lender classification. Lenders who participate in the Agency
guaranteed loan program will be classified into one of the following
categories:
(1) Standard Eligible Lender under Sec. 762.105;
(2) Certified Lender, or
(3) Preferred Lender under Sec. 762.106.
* * * * *
0
9. Revise Sec. 762.102 to read as follows:
Sec. 762.102 Abbreviations and definitions.
Abbreviations and definitions for terms used in this part are
provided in Sec. 761.2 of this chapter.
Sec. 762.104 [Amended]
0
10. Amend Sec. 762.104 by removing paragraph (a) and redesignating
paragraphs (b) through (d) as (a) through (c).
0
11. Amend Sec. 762.110 by adding a new paragraph (g) to to read as
follows:
Sec. 762.110 Loan applications.
* * * * *
(g) Market Placement Program. When the Agency determines that a
direct loan applicant or borrower may qualify for guaranteed credit,
the Agency may submit the applicant or borrower's financial information
to one or more guaranteed lenders. If a lender indicates interest in
providing financing to the applicant or borrower through the guaranteed
loan program, the Agency will assist in completing the application for
a guarantee.
0
12. Amend Sec. 762.120 as follows:
0
a. In paragraph (a), remove the word ``CONACT'' everywhere it appears
and add the word ``Act'' in its place.
0
b. Revise paragraph (l) to read as follows:
Sec. 762.120 Applicant eligibility.
* * * * *
(l) Controlled substances. The applicant, and anyone who will sign
the promissory note, must not be ineligible as a result of a conviction
for controlled substances according to 7 CFR part 718 of this chapter.
If the lender uses the lender's Agency approved forms, the
certification may be an attachment to the form.
Sec. 762.121 [Amended]
0
13. Amend Sec. 762.121(b)(1) by removing the words ``1943, subpart A
of this title'' and adding the words ``764 of this chapter'' in their
place.
0
14. Amend Sec. 762.122 by redesignating paragraphs (a) through (d) as
(b) through (e) and adding a new paragraph (a) to read as follows.
Sec. 762.122 Loan limitations.
(a) Dollar limits. The Agency will not guarantee any loan that
would result in the applicant's total indebtedness exceeding the limits
established in Sec. 761.8 of this chapter.
* * * * *
Sec. 762.123 [Amended]
0
15. Amend Sec. 762.123(a)(2)(ii) by removing the words ``1945, subpart
D, of this title'' and adding the words ``764 of this chapter'' in
their place.
Sec. 762.124 [Amended]
0
16. Amend Sec. 762.124(e)(3) by removing the words ``1943, subpart A,
of this title'' and adding the words ``764 of this chapter'' in their
place.
Sec. 762.128 [Amended]
0
17. Amend Sec. 762.128 as follows:
0
a. In paragraph (c)(3), remove the words, ``and part 1901, subpart F,
of this title.''
0
b. In paragraph (c)(4), remove the word ``CONACT'' and add the word
``Act'' in its place.
Sec. 762.129 [Amended]
0
18. Amend Sec. 762.129(b)(1) by removing the words ``farm credit
program'' in the second sentence.
Sec. 762.130 [Amended]
0
19. Amend Sec. 762.130(d)(4)(iii)(C) by removing the words ``beginning
farmers or ranchers,'' and adding the words ``beginning farmers'' in
their place.
0
20. Revise Sec. 762.130(e) by removing the words ``in Louisiana and
Puerto Rico.''
Sec. 762.143 [Amended]
0
21. Revise Sec. 762.143(b)(3)(ii) by removing the words ``credit
officer,'' wherever they appear and adding the word, ``official'' in
their place.
[[Page 63298]]
PART 763--[RESERVED]
0
22. Add and reserve part 763.
0
23. Revise part 764 to read as follows:
PART 764--DIRECT LOAN MAKING
Subpart A--Overview
Sec.
764.1 Introduction.
764.2 Abbreviations and definitions.
764.3-764.50 [Reserved]
Subpart B--Loan Application Process
764.51 Loan application.
764.52 Processing an incomplete application.
764.53 Processing the complete application.
764.54 Preferences when there is limited funding.
764.55-764.100 [Reserved]
Subpart C--Requirements for All Direct Program Loans
764.101 General eligibility requirements.
764.102 General limitations.
764.103 General security requirements.
764.104 General real estate security requirements.
764.105 General chattel security requirements.
764.106 Exceptions to security requirements.
764.107 General appraisal requirements.
764.108 General insurance requirements.
764.109-764.150 [Reserved]
Subpart D--Farm Ownership Loan Program
764.151 Farm Ownership loan uses.
764.152 Eligibility requirements.
764.153 Limitations.
764.154 Rates and terms.
764.155 Security requirements.
764.156-764.200 [Reserved]
Subpart E--Beginning Farmer Downpayment Loan Program
764.201 Beginning Farmer Downpayment loan uses.
764.202 Eligibility requirements.
764.203 Limitations.
764.204 Rates and terms.
764.205 Security requirements.
764.206-764.250 [Reserved]
Subpart F--Operating Loan Program
764.251 Operating loan uses.
764.252 Eligibility requirements.
764.253 Limitations.
764.254 Rates and terms.
764.255 Security requirements.
764.256-764.300 [Reserved]
Subpart G--Youth Loan Program
764.301 Youth loan uses.
764.302 Eligibility requirements.
764.303 Limitations.
764.304 Rates and terms.
764.305 Security requirements.
764.306-764.350 [Reserved]
Subpart H--Emergency Loan Program
764.351 Emergency loan uses.
764.352 Eligibility requirements.
764.353 Limitations.
764.354 Rates and terms.
764.355 Security requirements.
764.356 Appraisal and valuation requirements.
764.357-764.400 [Reserved]
Subpart I--Loan Decision and Closing
764.401 Loan decision.
764.402 Loan closing.
764.403-764.450 [Reserved]
Subpart J--Borrower Training and Training Vendor Requirements
764.451 Purpose.
764.452 Borrower training requirements.
764.453 Agency waiver of training requirements.
764.454 Actions that an applicant must take when training is
required.
764.455 Potential training vendors.
764.456 Applying to be a vendor.
764.457 Vendor requirements.
764.458 Vendor approval.
764.459 Evaluation of borrower progress.
Authority: 5 U.S.C. 301 and 7 U.S.C. 1989.
Subpart A--Overview
Sec. 764.1 Introduction.
(a) Purpose. This part describes the Agency's policies for making
direct FLP loans.
(b) Types of loans. The Agency makes the following types of loans:
(1) FO, including Beginning Farmer Downpayment loans;
(2) OL, including Youth loans; and
(3) EM.
Sec. 764.2 Abbreviations and definitions.
Abbreviations and definitions for terms used in this part are
provided in Sec. 761.2 of this chapter.
Sec. Sec. 764.3-764.50 [Reserved]
Subpart B--Loan Application Process
Sec. 764.51 Loan application.
(a) A loan application must be submitted in the name of the actual
operator of the farm. Two or more applicants applying jointly will be
considered an entity applicant. The Agency will consider tax filing
status and other business dealings as indicators of the operator of the
farm.
(b) A complete loan application, except as provided in paragraphs
(c) through (e) of this section, will include:
(1) The completed Agency application form;
(2) If the applicant is an entity:
(i) A complete list of entity members showing the address,
citizenship, principal occupation, and the number of shares and
percentage of ownership or stock held in the entity by each member, or
the percentage of interest in the entity held by each member;
(ii) A current personal financial statement from each member of the
entity;
(iii) A current financial statement from the entity itself;
(iv) A copy of the entity's charter or any entity agreement, any
articles of incorporation and bylaws, any certificate or evidence of
current registration (good standing), and a resolution adopted by the
Board of Directors or entity members authorizing specified officers of
the entity to apply for and obtain the desired loan and execute
required debt, security and other loan instruments and agreements;
(v) In the form of married couples applying as a joint operation,
items (i) and (iv) will not be required. The Agency may request copies
of the marriage license, prenuptial agreement or similar documents as
needed to verify loan eligibility and security. Items (ii) and (iii)
are only required to the extent needed to show the individual and joint
finances of the husband and wife without duplication.
(3) A written description of the applicant's farm training and
experience, including each entity member who will be involved in
managing or operating the farm;
(4) The last 3 years of farm financial records, including tax
returns, unless the applicant has been farming less than three years;
(5) The last 3 years of farm production records, unless the
applicant has been farming less than 3 years;
(6) Documentation that the applicant and each member of an entity
applicant cannot obtain sufficient credit elsewhere on reasonable rates
and terms, including a loan guaranteed by the Agency;
(7) Documentation of compliance with the Agency's environmental
regulations contained in subpart G of 7 CFR part 1940;
(8) Verification of all non-farm income;
(9) A current financial statement and the operation's farm
operating plan, including the projected cash flow budget reflecting
production, income, expenses, and loan repayment plan;
(10) A legal description of the farm property owned or to be
acquired and, if applicable, any leases, contracts, options, and other
agreements with regard to the property;
(11) Payment to the Agency for ordering a credit report on the
applicant;
(12) Verification of all debts;
(13) Any additional information deemed necessary by the Agency to
effectively evaluate the applicant's eligibility and farm operating
plan; and
(14) For EM loans, a statement of loss or damage on the appropriate
Agency form.
(c) For a Lo-Doc OL request, the applicant must:
[[Page 63299]]
(1) Be current on all payments to all creditors including the
Agency (if an Agency borrower);
(2) Have not received primary loan servicing on any FLP debt within
the past 5 years; and
(3) Meet one of the following sets of criteria:
(i) The loan requested is $50,000 or less and the total outstanding
Agency OL loan debt at the time of loan closing will be less than
$100,000; or
(ii) The loan requested is to pay annual operating expenses and the
applicant is an existing Agency borrower who has received and timely
repaid at least two previous annual OL loans from the Agency.
(4) Submit items (1), (2), (7), (9), and (11) of paragraph (b) of
this section. The Agency may require a Lo-Doc applicant to submit any
other information listed in paragraph (b) of this section as needed to
make a determination on the loan application.
(d) For a youth loan request:
(1) The applicant must submit items (1), (7), and (9) of paragraph
(b) of this section.
(2) Applicants 18 years or older, must also provide items (11) and
(12) of paragraph (b) of this section.
(3) The Agency may require a youth loan applicant to submit any
other information listed in paragraph (b) of this section as needed to
make a determination on the loan application.
(e) The applicant need not submit any information under this
section that already exists in the applicant's Agency file and is still
current.
Sec. 764.52 Processing an incomplete application.
(a) Within 10 days of receipt of an incomplete application, the
Agency will provide the applicant written notice of any additional
information which must be provided. The applicant must provide the
additional information within 20 calendar days of the date of this
notice.
(b) If the additional information is not received, the Agency will
provide written notice that the application will be withdrawn if the
information is not received within 10 calendar days of the date of this
second notice.
Sec. 764.53 Processing the complete application.
Upon receiving a complete loan application, the Agency will:
(a) Consider the loan application in the order received, based on
the date the application was determined to be complete.
(b) Provide written notice to the applicant that the application is
complete.
(c) Within 60 calendar days after receiving a complete loan
application, the Agency will complete the processing of the loan
request and notify the applicant of the decision reached, and the
reason for any disapproval.
(d) If, based on the Agency's review of the application, it appears
the applicant's credit needs could be met through the guaranteed loan
program, the Agency will assist the applicant in securing guaranteed
loan assistance under the market placement program in accordance with
Sec. 762.110(g) of this chapter.
(e) In the absence of funds for a direct loan, the Agency will keep
an approved loan application on file until funding is available. At
least annually, the Agency will contact the applicant to determine if
the Agency should retain the application or if the applicant wants the
application withdrawn.
(f) If funding becomes available, the Agency will resume processing
of approved loans in accordance with this part.
Sec. 764.54 Preferences when there is limited funding.
(a) First priority. When there is a shortage of loan funds,
approved applications will be funded in the order of the date the
application was received, whether or not complete.
(b) Secondary priorities. If two or more applications were received
on the same date, the Agency will give preference to:
(1) First, an applicant who is a veteran of any war;
(2) Second, an applicant who is not a veteran, but:
(i) Has a dependent family;
(ii) Is able to make a downpayment; or
(iii) Owns livestock and farm implements necessary to farm
successfully.
(3) Third, to other eligible applicants.
Sec. Sec. 764.55-764.100 [Reserved]
Subpart C--Requirements for All Direct Program Loans
Sec. 764.101 General eligibility requirements.
The following requirements must be met unless otherwise provided in
the eligibility requirements for the particular type of loan.
(a) Controlled substances. The applicant, and anyone who will sign
the promissory note, must not be ineligible for loans as a result of a
conviction for controlled substances according to 7 CFR part 718 of
this chapter.
(b) Legal capacity. The applicant, and anyone who will sign the
promissory note, must possess the legal capacity to incur the
obligation of the loan. A Youth loan applicant will incur full personal
liability upon execution of the promissory note without regard to the
applicant's minority status.
(c) Citizenship. The applicant, and anyone who will sign the
promissory note, must be a citizen of the United States, United States
non-citizen national, or a qualified alien under applicable Federal
immigration laws.
(d) Credit history. The applicant must have acceptable credit
history demonstrated by debt repayment.
(1) As part of the credit history, the Agency will determine
whether the applicant will carry out the terms and conditions of the
loan and deal with the Agency in good faith. In making this
determination, the Agency may examine whether the applicant has
properly fulfilled its obligations to other parties, including other
agencies of the Federal Government.
(2) When the applicant caused the Agency a loss by receiving debt
forgiveness, the applicant may be ineligible for assistance in
accordance with eligibility requirements for the specific loan type. If
the debt forgiveness is cured by repayment of the Agency's loss, the
Agency may still consider the debt forgiveness in determining the
applicant's credit worthiness.
(3) A history of failures to repay past debts as they came due when
the ability to repay was within the applicant's control will
demonstrate unacceptable credit history. The following circumstances,
for example, do not automatically indicate an unacceptable credit
history:
(i) Foreclosures, judgments, delinquent payments of the applicant
which occurred more than 36 months before the application, if no recent
similar situations have occurred, or Agency delinquencies that have
been resolved through loan servicing programs available under 7 CFR
part 766.
(ii) Isolated incidents of delinquent payments which do not
represent a general pattern of unsatisfactory or slow payment.
(iii) ``No history'' of credit transactions by the applicant.
(iv) Recent foreclosure, judgment, bankruptcy, or delinquent
payment when the applicant can satisfactorily demonstrate that the
adverse action or delinquency was caused by circumstances that were of
a temporary nature and beyond the applicant's control; or the result of
a refusal to make full payment because of defective goods or services
or other justifiable dispute
[[Page 63300]]
relating to the purchase or contract for goods or services.
(e) Availability of credit elsewhere. The applicant, and all entity
members in the case of an entity, must be unable to obtain sufficient
credit elsewhere to finance actual needs at reasonable rates and terms.
The Agency will evaluate the ability to obtain credit based on factors
including, but not limited to:
(1) Loan amounts, rates, and terms available in the marketplace;
and
(2) Property interests, income, and significant non-essential
assets.
(f) Not in delinquent status on Federal debt. As provided in 31 CFR
part 285, except for EM loan applicants, the applicant, and anyone who
will sign the promissory note, must not be in delinquent status on any
Federal debt, other than a debt under the Internal Revenue Code of 1986
at the time of loan closing. All delinquent debts, however, will be
considered in determining credit history and ability to repay under
this part.
(g) Outstanding judgments. The applicant, and anyone who will sign
the promissory note, must have no outstanding unpaid judgments obtained
by the United States in any court. Such judgments do not include those
filed as a result of action in the United States Tax Courts.
(h) Federal crop insurance violation. The applicant, and all entity
members in the case of an entity, must not be ineligible due to
disqualification resulting from Federal crop insurance violation
according to 7 CFR part 718.
(i) Managerial ability. The applicant must have sufficient
managerial ability to assure reasonable prospects of loan repayment, as
determined by the Agency. The applicant must demonstrate this
managerial ability by:
(1) Education. For example, the applicant obtained a 4-year college
degree in agricultural business, horticulture, animal science,
agronomy, or other agricultural-related field.
(2) On-the-job training. For example, the applicant is currently
working on a farm as part of an apprenticeship program.
(3) Farming experience. For example, the applicant has been an
owner, manager, or operator of a farm business for at least one entire
production cycle. The farming experience must have been obtained within
the last 5 years.
(j) Borrower training. The applicant must agree to meet the
training requirements in subpart J of this part.
(k) Operator of a family farm. (1) The applicant must be the
operator of a family farm after the loan is closed.
(2) For an entity applicant, if the entity members holding a
majority interest are:
(i) Related by blood or marriage, at least one member must be the
operator of a family farm;
(ii) Not related by blood or marriage, the entity members holding a
majority interest must be operators of a family farm.
(3) Except for EM loans, the collective interests of the members
may be larger than a family farm only if:
(i) Each member's ownership interest is not larger than a family
farm;
(ii) All of the members of the entity are related by blood or
marriage; and
(iii) All of the members are or will become operators of the family
farm; and
(4) If the entity applicant has an operator and ownership interest
for farm ownership loans and emergency loans for farm ownership loan
purposes, in any other farming operation, that farming operation must
not exceed the requirements of a family farm.
(l) Entity composition. If the applicant is an entity, the entity
members are not themselves entities.
Sec. 764.102 General limitations.
(a) Limitations specific to each loan program are contained in
subparts D through H of this part.
(b) The total principal balance owed to the Agency at any one time
by the applicant, or any one who will sign the promissory note, cannot
exceed the limits established in Sec. 761.8 of this chapter.
(c) The funds from the FLP loan must be used for farming operations
located in the United States.
(d) The Agency will not make a loan if the proceeds will be used:
(1) For any purpose that contributes to excessive erosion of highly
erodible land, or to the conversion of wetlands;
(2) To drain, dredge, fill, level, or otherwise manipulate a
wetland; or
(3) To engage in any activity that results in impairing or reducing
the flow, circulation, or reach of water, except in the case of
activity related to the maintenance of previously converted wetlands as
defined in the Food Security Act of 1985.
(e) Any construction financed by the Agency must comply with the
standards established in Sec. 761.10 of this chapter.
(f) Loan funds will not be used to establish or support a non-
eligible enterprise, even if the non-eligible enterprise contributes to
the farm.
Sec. 764.103 General security requirements.
(a) Security requirements specific to each loan program are
outlined in subparts D through H of this part.
(b) All loans must be secured by assets having a security value of
at least 100 percent of the loan amount, except for EM loans as
provided in subpart H of this part. If the applicant's assets do not
provide adequate security, the Agency may accept:
(1) A pledge of security from a third party; or
(2) Interests in property not owned by the applicant (such as
leases that provide a mortgageable value, water rights, easements,
mineral rights, and royalties).
(c) An additional amount of security up to 150 percent of the loan
amount will be taken when available, except for beginning farmer
downpayment loans and youth loans.
(d) The Agency will choose the best security available when there
are several alternatives that meet the Agency's security requirements.
(e) The Agency will take a lien on all assets that are not
essential to the farming operation and are not being converted to cash
to reduce the loan amount when each such asset, or aggregate value of
like assets (such as stocks), has a value in excess of $5,000. The
value of this security is not included in the Agency's additional
security requirement stated in paragraph (c) of this section. This
requirement does not apply to beginning farmer downpayment loans and
youth loans.
Sec. 764.104 General real estate security requirements.
(a) Agency lien position requirements. If real estate is pledged as
security for a loan, the Agency must obtain a first lien, if available.
When a first lien is not available, the Agency may take a junior lien
under the following conditions:
(1) The prior lien does not contain any provisions that may
jeopardize the Agency's interest or the applicant's ability to repay
the FLP loan;
(2) Prior lienholders agree to notify the Agency prior to
foreclosure;
(3) The applicant must agree not to increase an existing prior lien
without the written consent of the Agency; and
(4) Equity in the collateral exists.
(b) Real estate held under a purchase contract. If the real estate
offered as security is held under a recorded purchase contract:
(1) The applicant must provide a security interest in the real
estate;
(2) The applicant and the purchase contract holder must agree in
writing that any insurance proceeds received for real estate losses
will be used only for one or more of the following purposes:
(i) To replace or repair the damaged real estate improvements which
are essential to the farming operation;
[[Page 63301]]
(ii) To make other essential real estate improvements; or
(iii) To pay any prior real estate lien, including the purchase
contract.
(3) The purchase contract must provide the applicant with
possession, control and beneficial use of the property, and entitle the
applicant to marketable title upon fulfillment of the contract terms.
(4) The purchase contract must not:
(i) Be subject to summary cancellation upon default;
(ii) Contain provisions which jeopardize the Agency's security
position or the applicant's ability to repay the loan.
(5) The purchase contract holder must agree in writing to:
(i) Not sell or voluntarily transfer their interest without prior
written consent of the Agency;
(ii) Not encumber or cause any liens to be levied against the
property;
(iii) Not take any action to accelerate, forfeit, or foreclose the
applicant's interest in the security property until a specified period
of time after notifying the Agency of the intent to do so;
(iv) Consent to the Agency making the loan and taking a security
interest in the applicant's interest under the purchase contract as
security for the FLP loan;
(v) Not take any action to foreclose or forfeit the interest of the
applicant under the purchase contract because the Agency has acquired
the applicant's interest by foreclosure or voluntary conveyance, or
because the Agency has subsequently sold or assigned the applicant's
interest to a third party who will assume the applicant's obligations
under the purchase contract;
(vi) Notify the Agency in writing of any breach by the applicant;
and
(vii) Give the Agency the option to rectify the conditions that
amount to a breach within 30 days after the date the Agency receives
written notice of the breach.
(6) If the Agency acquires the applicant's interest under the
purchase contract by foreclosure or voluntary conveyance, the Agency
will not be deemed to have assumed any of the applicant's obligations
under the contract, provided that if the Agency fails to perform the
applicant's obligations while it holds the applicant's interest is
grounds for terminating the purchase contract.
(c) Tribal lands held in trust or restricted. The Agency may take a
lien on Indian Trust lands as security provided the applicant requests
the Bureau of Indian Affairs to furnish Title Status Reports to the
agency and the Bureau of Indian Affairs provides the reports and
approves the lien.
(d) Security for more than one loan. The same real estate may be
pledged as security for more than one direct or guaranteed loan.
(e) Loans secured by leaseholds. A loan may be secured by a
mortgage on a leasehold, if the leasehold has negotiable value and can
be mortgaged.
Sec. 764.105 General chattel security requirements.
The same chattel may be pledged as security for more than one
direct or guaranteed loan.
Sec. 764.106 Exceptions to security requirements.
Notwithstanding any other provision of this part, the Agency will
not take a security interest:
(a) When adequate security is otherwise available and the lien will
prevent the applicant from obtaining credit from other sources;
(b) When the property could have significant environmental problems
or costs as described in subpart G of 7 CFR part 1940;
(c) When the Agency cannot obtain a valid lien;
(d) When the property is the applicant's personal residence and
appurtenances and:
(1) They are located on a separate parcel; and
(2) The real estate that serves as security for the FLP loan plus
crops and chattels are greater than or equal to 150 percent of the
unpaid balance due on the loan;
(e) When the property is subsistence livestock, cash, working
capital accounts the applicant uses for the farming operation,
retirement accounts, personal vehicles necessary for family living,
household contents, or small equipment such as hand tools and lawn
mowers; or
(f) On marginal land and timber that secures an outstanding ST
loan.
Sec. 764.107 General appraisal requirements.
(a) Establishing value for real estate. The value of real estate
will be established by an appraisal completed in accordance with Sec.
761.7 of this chapter.
(b) Establishing value for chattels. The value of chattels will be
established as follows:
(1) Annual production. The security value of annual livestock and
crop production is presumed to be 100 percent of the amount loaned for
annual operating and family living expenses, as outlined in the
approved farm operating plan.
(2) Livestock and equipment. The value of livestock and equipment
will be established by an appraisal completed in accordance with Sec.
761.7 of this chapter.
Sec. 764.108 General insurance requirements.
The applicant must obtain and maintain insurance, equal to the
lesser of the value of the security at the time of loan closing or the
principal of all FLP and non-FLP loans secured by the property, subject
to the following:
(a) All security, except growing crops, must be covered by hazard
insurance if it is readily available (sold by insurance agents in the
applicant's normal trade area) and insurance premiums do not exceed the
benefit. The Agency must be listed as loss payee for the insurance
indemnity payment or as a beneficiary in the mortgagee loss payable
clause.
(b) Real estate security located in flood or mudslide prone areas
must be covered by flood or mudslide insurance. The Agency must be
listed as a beneficiary in the mortgagee loss payable clause.
(c) Growing crops used to provide adequate security must be covered
by crop insurance if such insurance is available. The Agency must be
listed as loss payee for the insurance indemnity payment.
(d) Prior to closing the loan, the applicant must have obtained at
least the catastrophic risk protection level of crop insurance coverage
for each crop which is a basic part of the applicant's total operation,
if such insurance is available, unless the applicant executes a written
waiver of any emergency crop loss assistance with respect to such crop.
The applicant must execute an assignment of indemnity in favor of the
Agency for this coverage.
Sec. Sec. 764.109-764.150 [Reserved]
Subpart D--Farm Ownership Loan Program
Sec. 764.151 Farm Ownership loan uses.
FO loan funds may only be used to:
(a) Acquire or enlarge a farm or make a down payment on a farm;
(b) Make capital improvements to a farm owned by the applicant, for
construction, purchase or improvement of farm dwellings, service
buildings or other facilities and improvements essential to the farming
operation. In the case of leased property, the applicant must have a
lease to ensure use of the improvement over its useful life or to
ensure that the applicant receives compensation for any remaining
economic life upon termination of the lease;
(c) Promote soil and water conservation and protection;
(d) Pay loan closing costs;
[[Page 63302]]
(e) Refinance a bridge loan if the following conditions are met:
(1) The applicant obtained the loan to be refinanced to purchase a
farm after a direct FO was approved;
(2) Direct FO funds were not available to fund the loan at the time
of approval;
(3) The loan to be refinanced is temporary financing; and
(4) The loan was made by a commercial or cooperative lender.
Sec. 764.152 Eligibility requirements.
The applicant:
(a) Must comply with the general eligibility requirements
established at Sec. 764.101;
(b) And anyone who will sign the promissory note, must not have
received debt forgiveness from the Agency on any direct or guaranteed
loan;
(c) Must be the owner-operator of the farm financed with Agency
funds after the loan is closed. In the case of an entity:
(1) The entity is controlled by farmers engaged primarily and
directly in farming in the United States, after the loan is made;
(2) The entity must be authorized to own and operate the farm in
the State in which the farm is located;
(3) If the entity members holding a majority interest are:
(i) Related by blood or marriage, at least one member of the entity
must operate the farm;
(ii) Not related by blood or marriage, the entity members holding a
majority interest must own and operate the farm.
(d) And in the case of an entity, one or more members constituting
a majority interest, must have participated in the business operations
of a farm for at least 3 years out of the 10 years prior to the date
the application is submitted.
(e) And anyone who will sign the promissory note, must satisfy at
least one of the following conditions:
(1) Meet the definition of a beginning farmer;
(2) Have not had a direct FO loan outstanding for more than a total
of 10 years prior to the date the new FO loan is closed;
(3) Have never received a direct FO loan.
Sec. 764.153 Limitations.
The applicant must:
(a) Comply with the general limitations established at Sec.
764.102;
(b) Have dwellings and other buildings necessary for the planned
operation of the farm available for use after the loan is made.
Sec. 764.154 Rates and terms.
(a) Rates. (1) The interest rate is the Agency's Direct Farm
Ownership rate, available in each Agency office.
(2) The limited resource Farm Ownership interest rate is available
to applicants who are unable to develop a feasible plan at regular
interest rates.
(3) If the FO loan is part of a joint financing arrangement and the
amount of the Agency's loan does not exceed 50 percent of the total
amount financed, the Agency will use the Farm Ownership participation
rate, available in each Agency office.
(4) The interest rate charged will be the lower of the rate in
effect at the time of loan approval or loan closing.
(b) Terms. The Agency schedules repayment of an FO loan based on
the applicant's ability to repay and the useful life of the security.
In no event will the term be more than 40 years from the date of the
note.
Sec. 764.155 Security requirements.
An FO loan must be secured:
(a) In accordance with Sec. Sec. 764.103 through 764.106;
(b) At a minimum, by the real estate being purchased or improved.
Sec. Sec. 764.156-764.200 [Reserved]
Subpart E--Beginning Farmer Downpayment Loan Program
Sec. 764.201 Beginning Farmer Downpayment loan uses.
Beginning Farmer Downpayment loan funds may be used to partially
finance the purchase of a family farm by an eligible beginning farmer.
Sec. 764.202 Eligibility requirements.
The applicant must:
(a) Comply with the general eligibility requirements established at
Sec. 764.101 and the FO eligibility requirements of Sec. 764.152; and
(b) Be a beginning farmer.
Sec. 764.203 Limitations.
(a) The applicant must:
(1) Comply with the general limitations established at Sec.
764.102; and
(2) Provide a minimum downpayment of 10 percent of the purchase
price of the farm.
(b) The purchase price or appraised value of the farm, whichever is
lower, must not exceed $250,000.
(c) Beginning Farmer Downpayment loans will not exceed 40 percent
of the lesser of the purchase price or appraised value of the farm to
be acquired.
(d) Financing provided by the Agency and all other creditors must
not exceed 90 percent of the lesser of the purchase price or appraised
value of the farm and may be guaranteed by the Agency under part 762 of
this chapter.
Sec. 764.204 Rates and terms.
(a) Rates. The interest rate for Beginning Farmer Downpayment loans
shall be 4 percent.
(b) Terms. (1) The Agency schedules repayment of Beginning Farmer
Downpayment loans in equal, annual installments over a term not to
exceed 15 years.
(2) The non-Agency financing must have an amortization period of at
least 30 years and cannot have a balloon payment due within the first
15 years of the loan.
Sec. 764.205 Security requirements.
A Beginning Farmer Downpayment loan must:
(a) Be secured in accordance with Sec. Sec. 764.103 through
764.106;
(b) Be secured by a lien on the property being acquired with the
loan funds and junior only to the party financing the balance of the
purchase price.
Sec. Sec. 764.206-764.250 [Reserved]
Subpart F--Operating Loan Program
Sec. 764.251 Operating loan uses.
(a) Except as provided in paragraph (b), OL loan funds may only be
used for:
(1) Costs associated with reorganizing a farm to improve its
profitability;
(2) Purchase of livestock, including poultry, farm equipment,
quotas and bases, and cooperative stock for credit, production,
processing or marketing purposes;
(3) Farm operating expenses, including, but not limited to, feed,
seed, fertilizer, pesticides, farm supplies, repairs and improvements
which are to be expensed, cash rent and family living expenses;
(4) Scheduled principal and interest payments on term debt provided
the debt is for authorized FO or OL purposes;
(5) Other farm needs;
(6) Costs associated with land and water development, use, or
conservation;
(7) Loan closing costs;
(8) Costs associated with Federal or State-approved standards under
the Occupational Safety and Health Act of 1970 (29 U.S.C. 655 and 667)
if the applicant can show that compliance or non-compliance with the
standards will cause substantial economic injury;
(9) Borrower training costs required or recommended by the Agency;
(10) Refinancing farm-related debts other than real estate to
improve the farm's profitability provided the applicant has refinanced
direct or guaranteed OL loans four times or fewer
[[Page 63303]]
and one of the following conditions is met:
(i) A designated or declared disaster caused the need for
refinancing; or
(ii) The debts to be refinanced are owed to a creditor other than
the USDA;
(11) Costs for minor real estate repairs or improvements, provided
the loan can be repaid within 7 years.
(b) Lo-Doc funds approved under:
(1) Section 764.51(c)(3)(i) may be used for any OL purpose except
for refinancing debt under paragraph (a)(10);
(2) Section 764.51(c)(3)(ii) may only be used for expenses under
paragraph (a)(3).
Sec. 764.252 Eligibility requirements.
The applicant:
(a) Must comply with the general eligibility requirements
established at Sec. 764.101.
(b) And anyone who will sign the promissory note, except as
provided in paragraph (c) of this section, must not have received debt
forgiveness from the Agency on any direct or guaranteed loan.
(c) And anyone who will sign the promissory note, may receive
direct OL loans to pay annual farm operating and family living
expenses, provided that the applicant meets all other applicable
requirements under this part, if the applicant:
(1) Received a write-down under section 353 of the Act;
(2) Is current on payments under a confirmed reorganization plan
under Chapter 11, 12, or 13 of Title 11 of the United States Code; or
(3) Received debt forgiveness on not more than one occasion after
April 4, 1996, resulting directly and primarily from a Presidentially-
designated emergency for the county or contiguous county in which the
applicant operates. Only applicants who were current on all existing
direct and guaranteed FLP loans prior to the beginning date of the
incidence period of a Presidentially-designated emergency and received
debt forgiveness on that debt within 3 years after the designation of
such emergency meet this exception.
(d) And in the case of an entity, the entity must be:
(1) Controlled by farmers engaged primarily and directly in farming
in the United States; and
(2) Authorized to operate the farm in the State in which the farm
is located.
(e) And anyone who will sign the promissory note, may close an OL
loan in no more than 7 calendar years, either as an individual or as a
member of an entity, except as provided in paragraphs (e)(1) through
(4) of this section. The years may be consecutive or nonconsecutive,
and there is no limit on the number of loans closed in a year. Youth
loans are not counted toward this limitation. The following exceptions
are applicable.
(1) This limitation does not apply if the applicant and anyone who
will sign the promissory note is a beginning farmer.
(2) This limitation does not apply if the applicant's land is
subject to the jurisdiction of an Indian tribe, the loan is secured by
one or more security instruments subject to the jurisdiction of an
Indian tribe, and commercial credit is generally not available to such
farm operations.
(3) If the applicant, and anyone who will sign the promissory note,
has closed direct OL loans in four or more previous calendar years as
of April 4, 1996, the applicant is eligible to close OL loans in any
three additional years after that date.
(4) On a case-by-case basis, may be granted a one-time waiver of OL
term limits for a period of 2 years, not subject to administrative
appeal, if the applicant:
(i) Has a financially viable operation;
(ii) And in the case of an entity, the members holding the majority
interest, applied for commercial credit from at least two lenders and
were unable to obtain a commercial loan, including an Agency-guaranteed
loan; and
(iii) Has successfully completed, or will complete within one year,
borrower training. Previous waivers to the borrower training
requirements are not applicable under this paragraph.
Sec. 764.253 Limitations.
The applicant must comply with the general limitations established
at Sec. 764.102.
Sec. 764.254 Rates and terms.
(a) Rates. (1) The interest rate is the Agency's Direct Operating
Loan rate, available in each Agency office.
(2) The limited resource Operating Loan interest rate is available
to applicants who are unable to develop a feasible plan at regular
interest rates.
(3) The interest rate charged will be the lower rate in effect at
the time of loan approval or loan closing.
(b) Terms. (1) The Agency schedules repayment of annual OL loans
made for family living and farm operating expenses when planned income
is projected to be available.
(i) The term of the loan may not exceed 18 months from the date of
the note.
(ii) The term of the loan may exceed 18 months in unusual
situations such as establishing a new enterprise, developing a farm,
purchasing feed while crops are being established, marketing plans, or
recovery from a disaster or economic reverse. In no event will the term
of the loan exceed 7 years from the date of the note. Crops and
livestock produced for sale will not be considered adequate security
for such loans.
(2) The Agency schedules the repayment of all other OL loans based
on the applicant's ability to repay and the useful life of the
security. In no event will the term of the loan exceed 7 years from the
date of the note. Repayment schedules may include equal, unequal, or
balloon installments if needed to establish a new enterprise, develop a
farm, or recover from a disaster or economic reversal. Loans with
balloon installments:
(i) Must have adequate security at the time the balloon installment
comes due. Crops, livestock other than breeding stock, or livestock
products produced are not adequate collateral for such loans;
(ii) Are only authorized when the applicant can project the ability
to refinance the remaining debt at the time the balloon payment comes
due based on the expected financial condition of the operation, the
depreciated value of the collateral, and the principal balance on the
loan;
(iii) Are not authorized when loan funds are used for real estate
repairs or improvements.
Sec. 764.255 Security requirements.
An OL loan must be secured:
(a) In accordance with Sec. Sec. 764.103 through 764.106.
(b) By a:
(1) First lien on all property or products acquired or produced
with loan funds;
(2) Lien of equal or higher position of that held by the creditor
being refinanced with loan funds.
Sec. Sec. 764.256-764.300 [Reserved]
Subpart G--Youth Loan Program
Sec. 764.301 Youth loan uses.
Youth loan funds may only be used to finance a modest, income-
producing, agriculture-related, educational project while participating
in 4-H, FFA, or a similar organization.
Sec. 764.302 Eligibility requirements.
The applicant:
(a) Must comply with the general eligibility requirements
established at Sec. 764.101(a) through (g);
(b) And anyone who will sign the promissory note, must not have
received
[[Page 63304]]
debt forgiveness from the Agency on any direct or guaranteed loan;
(c) Must be at least 10 but not yet 21 years of age at the time the
loan is closed;
(d) Must reside in a rural area, city or town with a population of
50,000 or fewer people;
(e) Must be recommended and continuously supervised by a project
advisor, such as a 4-H Club advisor, a vocational teacher, a county
extension agent, or other agriculture-related organizational sponsor;
and
(f) Must obtain a written recommendation and consent from a parent
or guardian if the applicant has not reached the age of majority under
state law.
Sec. 764.303 Limitations.
(a) The applicant must comply with the general limitations
established at Sec. 764.102.
(b) The total principal balance owed by the applicant to the Agency
on all Youth loans at any one time cannot exceed $5,000.
Sec. 764.304 Rates and terms.
(a) Rates. (1) The interest rate is the Agency's Direct Operating
Loan rate, available in each Agency office.
(2) The limited resource Operating Loan interest rate is not
available for Youth loans.
(3) The interest rate charged will be the lower rate in effect at
the time of loan approval or loan closing.
(b) Terms. Youth loan terms are the same as for an OL established
at Sec. 764.254(b).
Sec. 764.305 Security requirements.
A first lien will be obtained on property or products acquired or
produced with loan funds.
Sec. Sec. 764.306-764.350 [Reserved]
Subpart H--Emergency Loan Program
Sec. 764.351 Emergency loan uses.
(a) Physical losses--(1) Real estate losses. EM loan funds for real
estate physical losses may only be used to repair or replace essential
property damaged or destroyed as a result of a disaster as follows:
(i) For any FO purpose, as specified in Sec. 764.151, except
subparagraph (e) of that section;
(ii) To establish a new site for farm dwelling and service
buildings outside of a flood or mudslide area; and
(iii) To replace land from the farm that was sold or conveyed, if
such land is necessary for the farming operation to be effective.
(2) Chattel losses. EM loan funds for chattel physical losses may
only be used to repair or replace essential property damaged or
destroyed as a result of a disaster as follows:
(i) Purchase livestock, farm equipment, quotas and bases, and
cooperative stock for credit, production, processing, or marketing
purposes;
(ii) Pay customary costs associated with obtaining and closing a
loan that an applicant cannot pay from other sources (e.g., fees for
legal, architectural, and other technical services, but not fees for
agricultural management consultation, or preparation of Agency forms);
(iii) Repair or replace household contents damaged in the disaster;
(iv) Pay the costs to restore perennials, which produce an
agricultural commodity, to the stage of development the damaged
perennials had obtained prior to the disaster;
(v) Pay essential family living and farm operating expenses, in the
case of an operation that has suffered livestock losses not from
breeding stock, or losses to stored crops held for sale; and
(vi) Refinance farm-related debts other than real estate to improve
farm profitability, if the applicant has refinanced direct or
guaranteed loans four times or fewer and one of the following
conditions is met:
(A) A designated or declared disaster caused the need for
refinancing; or
(B) The debts to be refinanced are owed to a creditor other than
the USDA.
(b) Production losses. EM loan funds for production losses to
agricultural commodities (except the losses associated with the loss of
livestock) may be used to:
(1) Pay costs associated with reorganizing the farm to improve its
profitability except that such costs must not include the payment of
bankruptcy expenses;
(2) Pay annual operating expenses, which include, but are not
limited to, feed, seed, fertilizer, pesticides, farm supplies, and cash
rent;
(3) Pay costs associated with Federal or State-approved standards
under the Occupational Safety and Health Act of 1970 (29 U.S.C. 655 and
667) if the applicant can show that compliance or non-compliance with
the standards will cause substantial economic injury;
(4) Pay borrower training costs required or recommended by the
Agency;
(5) Pay essential family living expenses;
(6) Refinance farm-related debts other than real estate to improve
farm profitability, if the applicant has refinanced direct or
guaranteed loans four times or fewer and one of the following
conditions is met:
(i) A designated or declared disaster caused the need for
refinancing; or
(ii) The debts to be refinanced are owed to a creditor other than
the USDA; and
(7) Replace lost working capital.
Sec. 764.352 Eligibility requirements.
The applicant:
(a) Must comply with the general eligibility requirements
established at Sec. 764.101;
(b) Must be an established farmer;
(c) Must be the owner-operator or tenant-operator as follows:
(1) For a loan made under Sec. 764.351(a)(1), must have been:
(i) The owner-operator of the farm at the time of the disaster; or
(ii) The tenant-operator of the farm at the time of the disaster
whose lease on the affected real estate exceeds the term of the loan.
The operator will provide prior notification to the Agency if the lease
is proposed to terminate during the term of the loan. The lessor will
provide the Agency a mortgage on the real estate as security for the
loan;
(2) For a loan made under Sec. 764.351(a) (2) or (b), must have
been the operator of the farm at the time of the disaster; and
(3) In the case of an entity, the entity must be:
(i) Engaged primarily and directly in farming in the United States;
(ii) Authorized to operate and own the farm, if the funds are used
for farm ownership loan purposes, in the State in which the farm is
located;
(d) Must demonstrate the intent to continue the farming operation
after the designated or declared disaster;
(e) And all entity members must be unable to obtain sufficient
credit elsewhere at reasonable rates and terms. To establish this, the
applicant must obtain written declinations of credit, specifying the
reasons for declination, from legally organized commercial lending
institutions within reasonable proximity of the applicant as follows:
(1) In the case of a loan in excess of $300,000, two written
declinations of credit are required;
(2) In the case of a loan of $300,000 or less, one written
declination of credit is required; and
(3) In the case of a loan of $100,000 or less, the Agency may waive
the requirement for obtaining a written declination of credit, if the
Agency determines that it would pose an undue burden on the applicant,
the applicant certifies that they cannot get credit elsewhere, and
based on the applicant's circumstances credit is not likely to be
available;
(4) Notwithstanding the applicant's submission of the required
written
[[Page 63305]]
declinations of credit, the Agency may contact other commercial lending
institutions within reasonable proximity of the applicant and make an
independent determination of the applicant's ability to obtain credit
elsewhere;
(f) And all entity members in the case of an entity, must not have
received debt forgiveness from the Agency on more than one occasion on
or before April 4, 1996, or any time after April 4, 1996.
(g) Must submit an application to be received by the Agency no
later than 8 months after the date the disaster is declared or
designated in the county of the applicant's operation.
(h) For production loss loans, must have a disaster yield that is
at least 30 percent below the normal production yield of the crop, as
determined by the Agency, which comprises a basic part of an
applicant's total farming operation.
(i) For physical loss loans, must have suffered disaster-related
damage to chattel or real estate essential to the farming operation, or
to household contents that must be repaired or replaced, to harvested
or stored crops, or to perennial crops.
(j) Must meet all of the following requirements if the ownership
structure of the family farm changes between the time of a qualifying
loss and the time an EM loan is closed:
(1) The applicant, including all owners must meet all of the
eligibility requirements;
(2) The individual applicant, or all owners of a entity applicant,
must have had an ownership interest in the farming operation at the
time of the disaster; and
(3) The amount of the loan will be based on the percentage of the
former farming operation transferred to the applicant and in no event
will the individual portions aggregated equal more than would have been
authorized for the former farming operation.
(k) Must agree to repay any duplicative Federal assistance to the
agency providing such assistance. An applicant receiving Federal
assistance for a major disaster or emergency is liable to the United
States to the extent that the assistance duplicates benefits available
to the applicant for the same purpose from another source.
Sec. 764.353 Limitations.
(a) EM loans must comply with the general limitations established
at Sec. 764.102.
(b) EM loans may not exceed the lesser of:
(1) The amount of credit necessary to restore the farming operation
to its pre-disaster condition;
(2) In the case of a physical loss loan, the total eligible
physical losses caused by the disaster; or
(3) In the case of a production loss loan, 100 percent of the total
actual production loss sustained by the applicant as calculated in
paragraph (c) of this section.
(c) For production loss loans, the applicant's actual crop
production loss will be calculated as follows:
(1) Subtract the disaster yield from the normal yield to determine
the per acre production loss;
(2) Multiply the per acre production loss by the number of acres of
the farming operation devoted to the crop to determine the volume of
the production loss;
(3) Multiply the volume of the production loss by the market price
for such crop as determined by the Agency to determine the dollar value
for the production loss; and
(4) Subtract any other disaster related compensation or insurance
indemnities received or to be received by the applicant for the
production loss.
(d) For a physical loss loan, the applicant's total eligible
physical losses will be calculated as follows:
(1) Add the allowable costs associated with replacing or repairing
chattel covered by hazard insurance (excluding labor, machinery,
equipment, or materials contributed by the applicant to repair or
replace chattel);
(2) Add the allowable costs associated with repairing or replacing
real estate, covered by hazard insurance;
(3) Add the value of replacement livestock and livestock products
for which the applicant provided:
(i) Written documentation of inventory on hand immediately
preceding the loss;
(ii) Records of livestock product sales sufficient to allow the
Agency to establish a value;
(4) Add the allowable costs to restore perennials to the stage of
development the damaged perennials had obtained prior to the disaster;
(5) Add, in the case of an individual applicant, the allowable
costs associated with repairing or replacing household contents, not to
exceed $20,000; and
(6) Subtract any other disaster related compensation or insurance
indemnities received or to be received by the applicant for the loss or
damage to the chattel or real estate.
(e) EM loan funds may not be used for physical loss purposes
unless:
(1) The physical property was covered by general hazard insurance
at the time that the damage caused by the natural disaster occurred.
The level of the coverage in effect at the time of the disaster must
have been the tax or cost depreciated value, whichever is less. Chattel
property must have been covered at the tax or cost depreciated value,
whichever is less, when such insurance was readily available and the
benefit of the coverage was greater than the cost of the insurance; or
(2) The loan is to a poultry farmer to cover the loss of a chicken
house for which the applicant did not have hazard insurance at the time
of the loss and the applicant:
(i) Applied for, but was unable to obtain hazard insurance for the
chicken house;
(ii) Uses the loan to rebuild the chicken house in accordance with
industry standards in effect on the date the applicant submits an
application for the loan;
(iii) Obtains, for the term of the loan, hazard insurance for the
full market value of the chicken house; and
(iv) Meets all other requirements for the loan.
(f) EM loan funds may not be used to refinance consumer debt, such
as automobile loans, or credit card debt unless such credit card debt
is directly attributable to the farming operation.
Sec. 764.354 Rates and terms.
(a) Rates. (1) The interest rate is the Agency's Emergency Loan
Actual Loss rate, available in each Agency office.
(2) The interest rate charged will be the lower rate in effect at
the time of loan approval or loan closing.
(b) Terms. (1) The Agency schedules repayment of EM loans based on
the useful life of the security, the applicant's repayment ability, and
the type of loss.
(2) The repayment schedule must include at least one payment every
year.
(3) EM loans for annual operating expenses, except expenses
associated with establishing a perennial crop that are subject to
paragraph (b)(4), must be repaid within 12 months. The Agency may
extend this term to not more than 18 months to accommodate the
production cycle of the agricultural commodities.
(4) EM loans for production losses or physical losses to chattel
(including, but not limited to, assets with an expected life between
one and 7 years) may not exceed 7 years. The Agency may extend this
term up to a total length not to exceed 20 years, if necessary to
improve the applicant's repayment ability and real estate security is
available.
(5) The repayment schedule for EM loans for physical losses to real
estate is
[[Page 63306]]
based on the applicant's repayment ability and the useful life of the
security, but in no case will the term exceed 40 years.
Sec. 764.355 Security requirements.
(a) EM loans made under Sec. 764.351(a)(1) must comply with the
general security requirements established at Sec. Sec. 764.103,
764.104 and 764.155(b).
(b) EM loans made under Sec. 764.351(a)(2) and (b) must comply
with the general security requirements established at Sec. Sec.
764.103, 764.104 and 764.255(b).
(c) Notwithstanding the requirements of paragraphs (a) and (b) of
this section, when adequate security is not available because of the
disaster, the loan may be approved if the Agency determines, based on
an otherwise feasible plan, there is a reasonable assurance that the
applicant has the ability to repay the loan provided:
(1) The applicant has pledged as security for the loan all
available personal and business security, except as provided in Sec.
764.106;
(2) The farm operating plan, approved by the Agency, indicates the
loan will be repaid based upon the applicant's production and income
history; addresses applicable pricing risks through the use of
marketing contracts, hedging, options, or other revenue protection
mechanisms, and includes a marketing plan or similar risk management
practice;
(3) The applicant has had positive net cash farm income in at least
3 of the past 5 years; and
(4) The applicant has provided the Agency an assignment on any USDA
program payments to be received.
(d) For loans over $25,000, title clearance is required when real
estate is taken as security.
(e) For loans of $25,000 or less, when real estate is taken as
security, a certification of ownership in real estate is required.
Certification of ownership may be in the form of an affidavit which is
signed by the applicant, names the record owner of the real estate in
question and lists the balances due on all known debts against the real
estate. Whenever the Agency is uncertain of the record owner or debts
against the real estate security, a title search is required.
Sec. 764.356 Appraisal and valuation requirements.
(a) In the case of physical losses associated with livestock, the
applicant must have written documentation of the inventory of livestock
and records of livestock product sales sufficient to allow the Agency
to value such livestock or livestock products just prior to the loss.
(b) In the case of farm assets damaged by the disaster, the value
of such security shall be established as of the day before the disaster
occurred.
Sec. Sec. 764.357-764.400 [Reserved]
Subpart I--Loan Decision and Closing
Sec. 764.401 Loan decision.
(a) Loan approval. (1) The Agency will approve a loan only if it
determines that:
(i) The applicant's farm operating plan reflects a feasible plan,
which includes repayment of the proposed loan and demonstrates that all
other credit needs can be met;
(ii) The proposed use of loan funds is authorized for the type of
loan requested;
(iii) The applicant has been determined eligible for the type of
loan requested;
(iv) All security requirements for the type of loan requested have
been, or will be met before the loan is closed;
(v) The applicant's total indebtedness to the Agency, including the
proposed loan, will not exceed the maximum limits established in Sec.
761.8 of this chapter;
(vi) There have been no significant changes in the farm operating
plan or the applicant's financial condition since the time the Agency
received a complete application; and
(vii) All other pertinent requirements have been, or will be met
before the loan is closed.
(2) The Agency will place conditions upon loan approval it
determines necessary to protect its interest and maximize the
applicant's potential for success.
(b) Loan denial. The Agency will not approve a loan if it
determines that:
(1) The applicant's farm operating plan does not reflect a feasible
plan;
(2) The proposed use of loan funds is not authorized for the type
of loan requested;
(3) The applicant does not meet the eligibility requirements for
the type of loan requested;
(4) There is inadequate security for the type of loan requested;
(5) Approval of the loan would cause the applicant's total
indebtedness to the Agency to exceed the maximum limits established in
Sec. 761.8 of this chapter;
(6) The applicant's circumstances may not permit continuous
operation and management of the farm; or
(7) The applicant, the farming operation, or other circumstances
surrounding the loan are inconsistent with the authorizing statutes,
other Federal laws, or Federal credit policies.
(c) Overturn of an Agency decision by appeal. If an FLP loan denial
is overturned on administrative appeal, the Agency will not
automatically approve the loan. Unless prohibited by the final appeal
determination or otherwise advised by the Office of General Counsel,
the Agency will:
(1) Request current financial information from the applicant as
necessary to determine whether any changes in the applicant's financial
condition or agricultural conditions which occurred after the Agency's
adverse decision was made will adversely affect the applicant's farming
operation;
(2) Approve a loan for crop production:
(i) Only if the Agency can determine that the applicant will be
able to produce a crop in the production cycle for which the loan is
requested; or
(ii) For the next production cycle, upon review of current
financial data and a farm operating plan for the next production cycle,
if the Agency determines the loan can be repaid. The new farm operating
plan must reflect any financial issues resolved in the appeal.
(3) Determine whether the applicant's farm operating plan, as
modified based on the appeal decision, reflects a feasible plan, which
includes repayment of the proposed loan and demonstrates that all other
credit needs can be met.
Sec. 764.402 Loan closing.
(a) Signature requirements. Signatures on loan documents are
required as follows:
(1) For individual applicants, only the applicant is required to
sign the promissory note.
(2) For entity applicants, the promissory note will be executed to
evidence the liability of the entity and the individual liability of
all members of the entity.
(3) Despite minority status, a youth executing a promissory note
for a Youth loan will incur full personal liability for the debt.
(4) A cosigner will be required to sign the promissory note if they
assist the applicant in meeting the repayment requirements for the loan
requested.
(5) All signatures needed for the Agency to acquire the required
security interests will be obtained according to State law.
(b) Payment of fees. The applicant, or in the case of a real estate
purchase, the applicant and seller, must pay all filing, recording,
notary, lien search, and any
[[Page 63307]]
other fees necessary to process and close a loan.
(c) Chattel-secured loans. The following requirements apply to
loans secured by chattel:
(1) The Agency will close a chattel loan only when it determines
the Agency requirements for the loan have been satisfied;
(2) A financing statement is required for every loan except when a
filed financing statement covering the applicant's property is still
effective, covers all types of chattel property that will serve as
security for the loan, describes the land on which crops and fixtures
are or will be located, and complies with the law of the jurisdiction
where filed;
(3) A new security agreement is required for new loans, as
necessary to secure the loan under State law, prior to the disbursement
of loan funds.
(d) Real estate-secured loans. (1) The Agency will close a real
estate loan only when it determines that the Agency requirements for
the loan have been satisfied and the closing agent can issue a policy
of title insurance or final title opinion as of the date of closing.
The title insurance or final title opinion requirement may be waived:
(i) For loans of $10,000 or less;
(ii) As provided in Sec. 764.355 for EM loans;
(iii) When the real estate is considered additional security by the
Agency; or
(iv) When the real estate is a non-essential asset.
(2) The title insurance or final title opinion must show title
vested as required by the Agency, the lien of the Agency's security
instrument in the priority required by the Agency, and title to the
security property, subject only to those exceptions approved in writing
by the Agency.
(3) The Agency must approve agents who will close FLP loans.
Closing agents must meet all of the following requirements to the
Agency's satisfaction:
(i) Be licensed in the state where the loan will be closed;
(ii) Not be debarred or suspended from participating in any Federal
programs;
(iii) Maintain liability insurance;
(iv) Have a fidelity bond that covers all employees with access to
loan funds;
(v) Have current knowledge of the requirements of State law in
connection with the loan closing and title clearance;
(vi) Not represent both the buyer and seller in the transaction;
(vii) Not be related as a family member or business associate with
the applicant; and
(viii) Act promptly to provide required services.
(e) Disbursement of funds. (1) Loan funds will be made available to
the applicant within 15 days of loan approval, subject to the
availability of funding.
(2) If the loan is not closed within 90 days of loan approval or if
the applicant's financial condition changes significantly, the Agency
must reconfirm the requirements for loan approval prior to loan
closing. The applicant may be required to provide updated information
for the Agency to reconfirm approval and proceed with loan closing.
(3) The Agency or closing agent will be responsible for disbursing
loan funds. The electronic funds transfer process, followed by Treasury
checks, are the Agency's preferred methods of loan funds disbursement.
The Agency will use these processes on behalf of borrowers to disburse
loan proceeds directly to creditors being refinanced with loan funds or
to sellers of chattel property that is being acquired with loan funds.
A supervised bank account will be used according to subpart B of part
761 of this chapter when these processes are not practicable.
Sec. Sec. 764.403-764.450 [Reserved]
Subpart J--Borrower Training and Training Vendor Requirements
Sec. 764.451 Purpose.
The purpose of production and financial management training is to
help an applicant develop and improve skills necessary to:
(a) Successfully operate a farm;
(b) Build equity in the operation; and
(c) Become financially successful and prepared to graduate from
Agency financing to commercial sources of credit.
Sec. 764.452 Borrower training requirements.
(a) The applicant must agree to complete production and financial
management training, unless the Agency provides a waiver in accordance
with Sec. 764.453, or the applicant has previously satisfied the
training requirements. In the case of an entity:
(1) Any individual member holding a majority interest in the entity
or who is operating the farm must complete training on behalf of the
entity, except as provided in paragraph (a)(2) of this section;
(2) If one entity member is solely responsible for production or
financial management, then only that member will be required to
complete training.
(b) When the Agency determines that production training is
required, the applicant must agree to complete course work covering
production management in each crop or livestock enterprise the Agency
determines necessary.
(c) When the Agency determines that financial management training
is required, the applicant must agree to complete course work covering
all aspects of farm accounting and integrating accounting elements into
a financial management system.
(d) An applicant who applies for a loan to finance a new
enterprise, such as a new crop or a new type of livestock, must agree
to complete production training with regard to that enterprise, even if
production training requirements were waived or satisfied under a
previous loan request, unless the Agency provides a waiver in
accordance with Sec. 764.453.
(e) Even if a waiver is granted, the borrower must complete
borrower training as a condition for future loans if and when Agency
supervision provided in 7 CFR part 761 subpart C reflects that such
training is needed.
(f) The Agency cannot reject a request for a direct loan based
solely on an applicant's need for training.
(g) The Agency will provide written notification of required
training or waiver of training.
Sec. 764.453 Agency waiver of training requirements.
(a) The applicant must request the waiver in writing.
(b) The Agency will grant a waiver for training in production,
financial management, or both, under the following conditions:
(1) The applicant submits evidence of successful completion of a
course similar to a course approved under section Sec. 764.457 and the
Agency determines that additional training is not needed; or
(2) The applicant submits evidence which demonstrates to the
Agency's satisfaction the applicant's experience and training necessary
for a successful and efficient operation.
(c) If the production and financial functions of the operation are
shared among individual entity members, the Agency will consider the
collective knowledge and skills of those individuals when determining
whether to waive training requirements.
Sec. 764.454 Actions that an applicant must take when training is
required.
(a) Deadline for completion of training. (1) If the Agency requires
an applicant to complete training, at loan closing the applicant must
agree in writing to complete all required training within 2 years.
(2) The Agency will grant a one-year extension to complete training
if the
[[Page 63308]]
applicant is unable to complete training within the 2-year period due
to circumstances beyond the applicant's control.
(3) The Agency will grant an extension longer than one year for
extraordinary circumstances as determined by the Agency.
(4) An applicant who does not complete the required training within
the specified time-period will be ineligible for additional direct FLP
loans until the training is completed.
(b) Arranging training with a vendor. The applicant must select and
contact an Agency approved vendor and make all arrangements to begin
training.
(c) Payment of training fees. (1) The applicant is responsible for
the cost of training and must include training fees in the farm
operating plan as a farm operating expense.
(2) The payment of training fees is an authorized use of OL funds.
(3) The Agency is not a party to fee or other agreements between
the applicant and the vendor.
(d) Evaluation of a vendor. Upon completion of the required
training, the applicant will complete an evaluation of the course and
submit it to the vendor. The vendor will forward the completed
evaluation forms to the Agency.
Sec. 764.455 Potential training vendors.
The Agency will contract for training services with State or
private providers of production and financial management training
services.
Sec. 764.456 Applying to be a vendor.
(a) A vendor for borrower training services must apply to the
Agency for approval.
(b) The vendor application must include:
(1) A sample of the course materials and a description of the
vendor's training methods;
(2) Specific training objectives for each section of the course;
(3) A detailed course agenda specifying the topics to be covered,
the time devoted to each topic, and the number of sessions to be
attended;
(4) A list of instructors and their qualifications;
(5) The criteria by which additional instructors will be selected;
(6) The proposed locations where training will take place;
(7) The cost per participant, including cost for additional members
of a farming operation;
(8) The minimum and maximum class size;
(9) The vendor's experience in developing and administering
training to farmers;
(10) The monitoring and quality control methods the vendor will
use;
(11) The policy on allowing Agency employees to attend the course
for monitoring purposes;
(12) A plan of how the needs of applicants with physical, mental,
or learning disabilities will be met; and
(13) A plan of how the needs of applicants who do not speak English
as their primary language will be met.
Sec. 764.457 Vendor requirements.
(a) Minimum experience. The vendor must demonstrate a minimum of 3
years of experience in conducting training courses or teaching the
subject matter.
(b) Training objectives. The courses provided by a vendor must
enable the applicant to accomplish one or more of the following
objectives:
(1) Describe the specific goals of the farming operation, any
changes required to attain the goals, and outline how these changes
will occur using present and projected cash flow budgets;
(2) Maintain and use a financial management information system to
make financial decisions;
(3) Understand and use an income statement;
(4) Understand and use a balance sheet;
(5) Understand and use a cash flow budget; and
(6) Use production records and other production information to
identify problems, evaluate alternatives, and correct current
production practices to improve efficiency and profitability.
(c) Curriculum. At least one of the following subjects must be
covered:
(1) Business planning courses, covering general goal setting, risk
management, and planning.
(2) Financial management courses, covering all aspects of farm
accounting and focusing on integrating accounting elements into a
financial management system.
(3) Crop and livestock production courses focusing on improving the
profitability of the farm.
(d) Instructor qualifications. All instructors must have:
(1) Sufficient knowledge of the material and experience in adult
education;
(2) A bachelor's degree or comparable experience in the subject
area to be taught; and
(3) A minimum of 3 years experience in conducting training courses
or teaching.
Sec. 764.458 Vendor approval.
(a) Agreement to conduct training. (1) Upon approval, the vendor
must sign an agreement to conduct training for the Agency's borrowers.
(2) The agreement to conduct training is valid for 3 years.
(3) Any changes in curriculum, instructor, or cost require prior
approval by the Agency.
(4) The vendor may revoke the agreement by giving the Agency a
written 30-day notice.
(5) The Agency may revoke the agreement if the vendor does not
comply with the responsibilities listed in the agreement by giving the
vendor a written 30-day notice.
(b) Renewal of agreement to conduct training. (1) To renew the
agreement to conduct training, the vendor must submit in writing to the
Agency:
(i) A request to renew the agreement;
(ii) Any changes in curricula, instructor, or cost; and
(iii) Documentation that the vendor is providing effective
training.
(2) The Agency will review renewal requests in accordance with
Sec. 764.457.
Sec. 764.459 Evaluation of borrower progress.
(a) The vendor must provide the Agency with a periodic progress
report for each borrower enrolled in training in accordance with the
agreement to complete training. The reports will indicate whether the
borrower is attending sessions, completing the training program, and
demonstrating an understanding of the course material.
(b) Upon borrower completion of the training, the vendor must
provide the Agency with an evaluation of the borrower's knowledge of
the course material and assign a score. The following table lists the
possible scores, the criteria used to assign each score, and Agency
consideration of each score:
------------------------------------------------------------------------
Criteria used to
Score determine score Agency consideration
------------------------------------------------------------------------
1................. If the borrower:
Attended Training requirement
sessions as agreed,. associated with course
Satisfactorily is complete.
completed all
assignments, and.
Demonstrated an
understanding of the
course material..
2................. If the borrower:
[[Page 63309]]
Attended Training requirement
sessions as agreed, associated with couse is
and. complete. Additional
Attempted to Agency supervision may
complete all be necessary.
assignments, but.
Does not
demonstrate an
understanding of the
course material..
3................. If the borrower did not:
Attend Training requirement
sessions as agreed, or. associated with course
Attempt to is not complete. The
complete assignments, or. borrower is ineligible
Otherwise make a for future direct loans
good faith effort to until the training is
complete the training.. completed.
------------------------------------------------------------------------
0
24. Add part 765 to read as follows:
PART 765--DIRECT LOAN SERVICING--REGULAR
Sec.
Subpart A--Overview
765.1 Introduction.
765.2 Abbreviations and definitions.
765.3-765.50 [Reserved]
Subpart B--Borrowers with Limited Resource Interest Rate Loans
765.51 Annual review.
765.52-765.100 [Reserved]
Subpart C--Borrower Graduation
765.101 Borrower graduation requirements.
765.102 Borrower noncompliance with graduation requirements.
765.103 Transfer and assignment of Agency liens.
765.104--765.150 [Reserved]
Subpart D--Borrower Payments
765.151 Handling payments.
765.152 Types of payments.
765.153 Application of payments.
765.154 Distribution of payments.
765.155 Final loan payments.
765.156-765.200 [Reserved]
Subpart E--Protecting the Agency's Security Interest
765.201 General policy.
765.202 Borrower responsibilities.
765.203 Protective advances.
765.204 Notifying potential purchasers.
765.205 Subordination of liens.
765.206 Junior liens.
765.207 Conditions for severance agreements.
765.208-765.250 [Reserved]
Subpart F--Required Use and Operation of Agency Security
765.251 General.
765.252 Lease of security.
765.253 Ceasing to operate security.
765.254-765.300 [Reserved]
Subpart G--Disposal of Chattel Security
765.301 General.
765.302 Use and maintenance of the agreement for the use of
proceeds.
765.303 Use of proceeds from chattel security.
765.304 Unapproved disposition.
765.305 Release of security interest.
765.306-765.350 [Reserved]
Subpart H--Partial Release of Real Estate Security
765.351 Requirements to obtain Agency consent.
765.352 Use of proceeds.
765.353 Determining market value.
765.354-765.400 [Reserved]
Subpart I--Transfer of Security and Assumption of Debt
765.401 Conditions for transfer of real estate and chattel security.
765.402 Transfer of security and loan assumption on same rates and
terms.
765.403 Transfer of security to and assumption of debt by eligible
applicants.
765.404 Transfer of security to and assumption of debt by ineligible
applicants.
765.405 Payment of costs associated with transfers.
765.406 Release of transferor from liability.
765.407-765.450 [Reserved]
Subpart J--Deceased Borrowers
765.451 Continuation of FLP debt and transfer of security.
765.452 Borrowers with Non-program loans.
765.453-765.500 [Reserved]
Subpart K--Exception Authority
765.501 Agency exception authority.
Authority: 5 U.S.C. 301 and 7 U.S.C. 1989.
Subpart A--Overview
Sec. 765.1 Introduction.
(a) Purpose. This part describes the policies for servicing direct
FLP loans, except for borrowers who are delinquent, financially
distressed, or otherwise in default on their loan.
(b) Servicing actions. Servicing actions described in this part
include:
(1) Limited resource reviews;
(2) Graduation to commercial credit;
(3) Application of payments;
(4) Maintaining and disposing of security;
(5) Transfer of security and assumption of debt; and
(6) Servicing accounts of deceased borrowers.
(c) Loans covered. The Agency services direct FLP loans under the
policies contained in this part. This part is not applicable to Non-
program loans, except where noted.
Sec. 765.2 Abbreviations and definitions.
Abbreviations and definitions for terms used in this part are
provided in Sec. 761.2 of this chapter.
Sec. Sec. 765.3-765.50 [Reserved]
Subpart B--Borrowers With Limited Resource Interest Rate Loans
Sec. 765.51 Annual review.
(a) A borrower with limited resource interest rate loans is
required to provide the Agency annually the operation's financial
information to determine if the borrower can afford to pay a higher
interest rate on the loan. The Agency will review the information
provided in accordance with Sec. 761.105 of this chapter.
(b) If the borrower's farm operating plan shows that the debt
service margin exceeds 110 percent, the Agency will increase the
interest rate on the loans with a limited resource interest rate until:
(1) A further increase in the interest rate results in a debt
service margin of less than 110 percent; or
(2) The interest rate is equal to the interest rate currently in
effect for the type of loan.
(c) Except as provided in paragraph (d) of this section, the Agency
will increase the limited resource interest rate to the current
interest rate for the type of loan, if the borrower:
(1) Purchases items not planned during the term of the loan;
(2) Refuses to submit information the Agency requests for use in
reviewing the borrower's financial condition;
(3) Ceases farming, as described in Sec. 765.253; or
(4) Is ineligible due to disqualification resulting from Federal
crop insurance violation according to 7 CFR part 718.
(d) If the borrower has limited resource interest rate loans that
are deferred, the Agency will not change the interest rate during the
deferral period.
[[Page 63310]]
Sec. 765.52-765.100 [Reserved]
Subpart C--Borrower Graduation
Sec. 765.101 Borrower graduation requirements.
(a) In accordance with the promissory note and security
instruments, the borrower must graduate to another source of credit if
the Agency determines that:
(1) The borrower has the ability to obtain credit from other
sources; and
(2) Adequate credit is available from other sources at reasonable
rates and terms.
(b) The Agency may require partial or full graduation.
(1) In a partial graduation, all FLP loans of one type (i.e. all
chattel loans or all real estate loans) must be paid in full by
refinancing with other credit with or without an Agency guarantee.
(2) In a full graduation, all FLP loans are paid in full by
refinancing with other credit with or without an Agency guarantee.
(3) A loan made for chattel and real estate purposes will be
categorized according to how the majority of the loan's funds are
expended.
(c) The borrower must submit all information that the Agency
requests in conjunction with the review of the borrower's financial
condition.
(d) The Agency may provide a borrower's prospectus to lenders in an
attempt to identify sources of non-Agency credit and assess the
lenders' interest in refinancing the borrower's loan. The Agency will
notify the borrower when the borrower's prospectus is provided to one
or more lenders.
(e) If a lender expresses an interest in refinancing the borrower's
FLP loan, the borrower must:
(1) Apply for a loan from the interested lender within 30 days of
notice; or
(2) Seek guaranteed loan assistance under the market placement
program in accordance with Sec. 762.110(g) of this chapter.
(f) The borrower will be responsible for any application fees or
purchase of stock in conjunction with graduation.
Sec. 765.102 Borrower noncompliance with graduation requirements.
Borrower failure to fulfill all graduation requirements within the
time-period specified by the Agency constitutes default on the loan.
The Agency will accelerate the borrower's loan without offering
servicing options provided in 7 CFR part 766.
Sec. 765.103 Transfer and assignment of Agency liens.
The Agency may assign its lien to the new lender when the borrower
is graduating and all FLP debt will be paid in full.
Sec. Sec. 765.104-765.150 [Reserved]
Subpart D--Borrower Payments
Sec. 765.151 Handling payments.
(a) Borrower payments. Borrowers must submit their loan payments in
a form acceptable to the Agency, such as checks, cash, and money
orders. Forms of payment not acceptable to the Agency include, but are
not limited to, foreign currency, foreign checks, and sight drafts.
(b) Crediting account. The Agency credits the borrower's account as
of the date the Agency receives payment.
Sec. 765.152 Types of payments.
(a) Regular payments. Regular payments are derived from, but are
not limited to:
(1) The sale of normal income security;
(2) The sale of farm products;
(3) Lease income, including mineral lease signing bonus;
(4) Program or disaster-related disbursements from USDA or crop
insurance entities; and
(5) Non-farm income.
(b) Extra payments. Extra payments are derived from any of the
following:
(1) Sale of chattel security other than normal income security;
(2) Sale of real estate security;
(3) Refinancing of FLP debt;
(4) Cash proceeds of insurance claims received on Agency security,
if not being used to repair or replace the security;
(5) Any transaction that results in a loss in the value of any
Agency basic security;
(6) Refunds of duplicate disaster program benefits to be applied on
an EM loan; or
(7) Refunds of unused loan funds.
(c) Payments from sale of real estate. Notwithstanding any other
provision of this section, payments derived from the sale of real
estate security will be treated as regular payments at the Agency's
discretion, if the FLP loans will be adequately secured after the
transaction.
Sec. 765.153 Application of payments.
(a) Regular payments. A regular payment is credited to a scheduled
installment on program and non-program loans. Regular payments are
applied to loans in the following order:
(1) Annual operating loan;
(2) Delinquent FLP installments, paying least secured loans first;
(3) Non-delinquent FLP installments due in the current production
cycle in order of security priority, paying least secured loans first;
(4) Any future installments due.
(b) Extra payments. An extra payment is not credited to a scheduled
installment and does not relieve the borrower's responsibility to make
scheduled loan installments, but will reduce the borrower's FLP
indebtedness. Extra payments are applied to FLP loans in order of lien
priority except for refunds of unused loan funds, which shall be
applied to the loan for which the funds were advanced.
Sec. 765.154 Distribution of payments.
The Agency applies both regular and extra payments to each loan in
the following order, as applicable:
(a) Recoverable costs and protective advances plus interest;
(b) Deferred non-capitalized interest;
(c) Accrued deferred interest;
(d) Interest accrued to date of payment; and
(e) Loan principal.
Sec. 765.155 Final loan payments.
(a) General. (1) Unless the Agency has reservations regarding the
validity of the payment, the Agency may release the borrower's security
instruments at the time payment is made, if the borrower makes a final
payment by one of the following methods:
(i) Cash;
(ii) U.S. Treasury check;
(iii) Cashier's check; or
(iv) Certified check.
(2) Security instruments will only be released when all loans
secured by the instruments have been paid in full or otherwise
satisfied.
(3) The Agency will return the paid note and satisfied security
instruments to the borrower after the Agency processes the final
payment and determines that the total indebtedness is paid in full.
(b) Borrower refunds. If the borrower refunds the entire loan after
the loan is closed, the borrower must pay interest from the date of the
note to the date the Agency received the funds.
(c) Overpayments. If an Agency miscalculation of a final payment
results in an overpayment by the borrower of less than $10, the
borrower must request a refund from the Agency in writing. Overpayments
of $10 or more automatically will be refunded by the Agency.
(d) Underpayments. If an Agency miscalculation of a final payment
amount results in an underpayment, the Agency may collect all account
balances
[[Page 63311]]
resulting from its error. If the Agency cannot collect an underpayment
from the borrower, the Agency will attempt to settle the debt in
accordance with subpart B of 7 CFR part 1956.
Sec. Sec. 765.156-765.200 [Reserved]
Subpart E--Protecting the Agency's Security Interest
Sec. 765.201 General policy.
All Agency servicing actions regarding preservation and protection
of Agency security will be consistent with the covenants and agreements
contained in all loan agreements and security instruments.
Sec. 765.202 Borrower responsibilities.
The borrower must:
(a) Comply with all provisions of the loan agreements;
(1) Non-compliance with the provisions of loan agreements and
documents, other than failure to meet scheduled loan repayment
installments contained in the promissory note, constitutes non-monetary
default on FLP loans by the borrower;
(2) Borrower non-compliance will be considered by the Agency when
making eligibility determinations for future requests for assistance
and may adversely impact such requests;
(b) Maintain, protect, and account for all security;
(c) Pay the following, unless State law requires the Agency to pay:
(1) Fees for executing, filing or recording financing statements,
continuation statements or other security instruments; and
(2) The cost of lien search reports;
(d) Pay taxes on property securing FLP loans when they become due;
(e) Maintain insurance coverage in an amount specified by the
Agency;
(f) Protect the interests of the Agency when a third party brings
suit or takes other action that could affect Agency security.
Sec. 765.203 Protective advances.
When necessary to protect the Agency's security interest, costs
incurred for the following actions will be charged to the borrower's
account:
(a) Maintain abandoned security property;
(b) Preserve inadequately maintained security;
(c) Pay real estate taxes and assessments;
(d) Pay property, hazard, or flood insurance;
(e) Pay harvesting costs;
(f) Maintain Agency security instruments;
(g) Pay ground rents;
(h) Pay expenses for emergency measures to protect the Agency's
collateral; and
(i) Protect the Agency from actions by third parties.
Sec. 765.204 Notifying potential purchasers.
(a) States with Central Filing System (CFS). The Agency
participates and complies with central filing systems in States where
CFS has been organized. In a State with a CFS, the Agency is not
required to additionally notify potential purchasers that the Agency
has a lien on a borrower's chattel security, unless specifically
required by State law.
(b) States without CFS. In a State without CFS, the Agency follows
the filing requirements specified for perfecting a lien on a borrower's
chattel security under State law. The Agency will distribute the list
of chattel and crop borrowers to sale barns, warehouses, and other
businesses that buy or sell chattels or crops. In addition, the Agency
may provide the list of borrowers to potential purchasers upon request.
Sec. 765.205 Subordination of liens.
(a) Borrower application requirements. The borrower must submit the
following, unless it already exists in the Agency's file and is still
current as determined by the Agency:
(1) Completed Agency application for subordination form;
(2) A current financial statement, including, in the case of an
entity, financial statements from all entity members;
(3) Documentation of compliance with the Agency's environmental
regulations contained in subpart G of 7 CFR part 1940;
(4) Verification of all non-farm income;
(5) The farm's operating plan, including a projected cash flow
budget reflecting production, income, expenses, and debt repayment
plan; and
(6) Verification of all debts.
(b) Real estate security. For loans secured by real estate, the
Agency will approve a request for subordination if all of the following
conditions are met:
(1) The borrower is not in default or will not be in default on FLP
loans by the time the subordination closing is complete;
(2) The loan will be used for an authorized loan purpose or is made
in conjunction with a guaranteed loan;
(3) The credit is essential to the farming operation, and the
borrower cannot obtain the credit without a subordination;
(4) The borrower can demonstrate, through a current farm operating
plan, the ability to repay all debt payments scheduled, and to be
scheduled, during the production cycle;
(5) The FLP loan is still adequately secured after the
subordination, or the value of the loan security will be increased by
an amount at least equal to the advance to be made under the
subordination;
(6) The borrower is not able to graduate;
(7) If the borrower is an entity and the Agency has taken real
estate as additional security on property owned by a member, a
subordination for any authorized loan purpose may be approved when it
is needed for the entity member to finance a separate farming
operation, provided the subordination does not cause the unpaid
principal and interest on the FLP loans to exceed the value of loan
security or otherwise adversely affect the security;
(8) The borrower must not be ineligible as a result of a conviction
for controlled substances according to 7 CFR part 718 of this chapter;
(9) The borrower must not be ineligible due to disqualification
resulting from Federal crop insurance violation according to 7 CFR part
718 of this chapter;
(10) The borrower will not use loan funds in a way that will
contribute to erosion of highly erodible land or conversion of wetlands
as described in subpart G of 7 CFR part 1940;
(11) There is no other subordination outstanding with another
lender in connection with the same security;
(12) The subordination is limited to a specific amount; the loan
made in conjunction with the subordination will be closed within a
reasonable time and has a definite maturity date;
(13) In the case of real property purchase or exchange, the Agency
will obtain a valid mortgage and the required lien position on the real
property. The Agency will require title clearance and loan closing for
the property in accordance with Sec. 764.402 of this chapter;
(14) Any planned development of real estate security will be
performed as directed by the creditor, approved by the Agency, and will
comply with the terms and conditions of Sec. 761.10 of this chapter;
(15) Subordinations of SAA mortgages may only be approved when
there is no increase in the debt which is prior to the SAA debt; and
(16) If a borrower has only a Non-program loan, the Agency does not
permit subordination. The Agency may subordinate Non-program security
when it is also security for a program loan
[[Page 63312]]
with the same borrower in accordance with this section.
(c) Chattel security. (1) For loans secured by chattel, the
subordination must meet the conditions contained in paragraphs (b)(1)
through (12) of this section.
(2) The Agency will approve a request for a second subordination to
enable a borrower to obtain crop insurance, if the following conditions
are met:
(i) The creditor to whom the first subordination was given did not
provide for payment of the current year's crop insurance premium, and
consents in writing to the provisions of the second subordination to
pay insurance premiums from the crop or insurance proceeds;
(ii) The borrower assigns the insurance proceeds to the Agency or
names the Agency in the loss payable clause of the policy; and
(iii) The subordination meets the conditions under paragraphs
(b)(1) through (12) of this section.
(d) Appraisals. An appraisal of the property that secures the FLP
loan will be required when the Agency determines it necessary to
protect its interest. Appraisals will be obtained in accordance with
Sec. 761.7 of this chapter.
Sec. 765.206 Junior liens.