[Code of Federal Regulations]
[Title 7, Volume 14]
[Revised as of January 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 7CFR1965.12]

[Page 325-326]
 
                          TITLE 7--AGRICULTURE
 
   CHAPTER XVIII--RURAL HOUSING SERVICE, RURAL BUSINESS--COOPERATIVE 
SERVICE, RURAL UTILITIES SERVICE, AND FARM SERVICE AGENCY, DEPARTMENT OF 
                         AGRICULTURE (CONTINUED)
 
PART 1965--REAL PROPERTY--Table of Contents
 
  Subpart A--Servicing of Real Estate Security for Farm Loan Programs 
                    Loans and Certain Note-Only Cases
 
Sec.  1965.12  Subordination of an Agency mortgage.

    (a) Conditions. A subordination may be granted if all of the 
following conditions are met:
    (1) The subordination is to refinance debt or for an authorized 
direct loan purpose;
    (2) The Agency debt cannot be refinanced without a subordination;
    (3) The borrower can document the ability to repay the total amount 
due under subordination and pay all other debt payments scheduled for 
the subject operating cycle;
    (4) The loan funds will not be used in such a way that will 
contribute to erosion of highly erodible land or conversion of wetlands 
for the production of an agricultural commodity according to subpart G 
of part 1940 of this chapter;
    (5) Any planned development is performed in a manner directed by the 
creditor and agreed to by the Agency and reasonably attains the 
objectives of subpart A of part 1924 of this chapter;
    (6) Funds to be used to develop or to acquire land will be deposited 
in a supervised bank account that is subject to signature by the Agency 
and the borrower, or in a similar arrangement, to ensure that funds will 
be spent for the planned purposes;
    (7) In cases of land purchase or exchange of property, the Agency 
will obtain a valid mortgage on the acquired land. Title clearance and 
loan closing will be required as for an initial or subsequent FO loan, 
as appropriate;
    (8) The borrower has not been convicted of planting, cultivating, 
growing, producing, harvesting or storing a controlled substance under 
Federal or state law. ``Borrower'' for purposes of this provision, 
specifically includes an individual or entity borrower and any member 
stockholder, partner, or joint operator, of an entity borrower and any 
member, stockholder, partner, or joint operator of an entity borrower. 
``Controlled substance'' is defined at 21 CFR part 1308. The borrower 
will be ineligible for a subordination for the crop year in which the 
conviction occurred and the four succeeding crop years. An applicant 
must attest on the Agency application form that it and its members, if 
an entity, have not been convicted of such a crime;
    (9) The Agency loan is still adequately secured after the 
subordination, or the value of the loan security will be increased by at 
least the amount of the advances to be made under the terms of the 
subordination;
    (10) The subordination is limited to a specific amount and the loan 
to be secured by the subordination is closed within a reasonable time; 
and
    (11) Only one subordination to one creditor may be outstanding at 
any one time in connection with the same security.
    (b) Subordination on real estate owned by an entity member. 
Notwithstanding the provisions of paragraph (a) of this section, when 
the borrower is an entity and the Agency has taken real estate as 
additional security on property owned by an entity member, a 
subordination for any authorized Farm Loan Programs loan purpose may be 
approved when it is needed for the entity member to finance a separate 
operation. The subordination, however, may be approved only if it does 
not cause the unpaid principal and accrued interest balance of the 
Agency loan to

[[Page 326]]

exceed the value of the loan security or otherwise adversely affect the 
security.
    (c) Request for subordination. A borrower must complete an 
application provided by the Agency to receive consideration for a 
subordination.
    (d) Notice of foreclosure. The lienholder requesting the 
subordination will agree to give notice of foreclosure as required by 
the Agency.
    (e) Appraisal. The Agency will prepare a current appraisal report in 
accordance with Sec.  761.7 of this title when property is to be 
purchased or exchanged, or when the existing appraisal report is more 
than 1 year old or is inadequate to make the determination required in 
this section. The Agency may use the appraisal report prepared for 
another lender if it complies with the requirements of Sec.  761.7 of 
this title.
    (f) Reamortizing existing Agency debts. The Agency may consent to a 
reamortization of an existing Agency debt when a subordination is 
granted to the debt of another lender. The reamortization will be 
allowed only when the borrower cannot reasonably be expected to meet all 
currently scheduled installments when due and the conditions of subpart 
S of part 1951 of this chapter are met.
    (g) Subordination to make a guaranteed loan. In addition to the 
requirements of this section, subordinations of liens on real estate 
security to make a guaranteed loan will be approved in accordance with 
Sec.  1980.108 of this chapter.

[63 FR 20297, Apr. 24, 1998, as amended at 64 FR 62569, Nov. 17, 1999]