[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
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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-fa