[Code of Federal Regulations]

[Title 7, Volume 7]

[Revised as of January 1, 2006]

From the U.S. Government Printing Office via GPO Access

[CITE: 7CFR762.102]



[Page 127-133]

 

                          TITLE 7--AGRICULTURE

 

       CHAPTER VII--FARM SERVICE AGENCY, DEPARTMENT OF AGRICULTURE

 

PART 762_GUARANTEED FARM LOANS--Table of Contents

 

Sec. 762.102  Abbreviations and definitions.



    (a) Abbreviations.

    ALP--Approved lender program

    CLP--Certified lender program

    CONACT--Consolidated Farm and Rural Development Act (7 U.S.C. 1921 

et seq.)

    EPA--Environmental Protection Agency

    EIS--Environmental impact statement

    EM--Emergency loans

    FO--Farm ownership loans

    FSA--Farm Service Agency

    OL--Operating loans

    PLP--Preferred lender program

    SW--Soil and water

    USDA--United States Department of Agriculture

    (b) Definitions.

    Additional security. Collateral in excess of that needed to fully 

secure the loan.

    Agency. The Farm Service Agency, including its employees and state 

and area committee members, and any successor agency.

    Allonge. An attachment or an addendum to a note.

    Applicant. For guaranteed loans, the lender requesting a guarantee 

is the applicant. The party applying to the lender for a loan will be 

considered the loan applicant.

    Aquaculture. The husbandry of aquatic organisms in a controlled or 

selected environment. An aquatic organism is any fish, amphibian, 

reptile, or aquatic



[[Page 128]]



plant. An aquaculture operation is considered to be a farm only if it is 

conducted on the grounds which the loan applicant owns, leases, or has 

an exclusive right to use. An exclusive right to use must be evidenced 

by a permit issued to the loan applicant and the permit must 

specifically identify the waters available to be used by the loan 

applicant only.

    Assignment of guaranteed portion. A process by which the lender 

transfers the right to receive payments or income on the guaranteed loan 

to another party, usually in return for payment in the amount of the 

loan's guaranteed principal. The lender retains the unguaranteed portion 

in its portfolio and receives a fee from the purchaser or assignee to 

service the loan, and receive and remit payments according to a written 

assignment agreement. This assignment can be reassigned or sold multiple 

times.

    Average farm customers. Those conventional farm borrowers who are 

required to pledge their crops, livestock, and other chattel and real 

estate security for the loan. This does not include those high-risk 

farmers with limited security and management ability who are generally 

charged a higher interest rate by conventional agricultural lenders. 

Also, this does not include those low-risk farm customers who obtain 

financing on a secured or unsecured basis, who have as collateral such 

items as savings accounts, time deposits, certificates of deposit, 

stocks and bonds, and life insurance, which they are able to pledge for 

the loan.

    Basic Security. All farm machinery, equipment, vehicles, foundation 

and breeding livestock herds and flocks, including replacements, and 

real estate which serves as security for a loan guaranteed by the 

Agency.

    Beginning farmer or rancher. A beginning farmer or rancher is an 

individual or entity who:

    (1) Meets the loan eligibility requirements for OL or FO assistance, 

as applicable, in accordance with this subpart;

    (2) Has not operated a farm or ranch, or who has operated a farm or 

ranch for not more than 10 years. This requirement applies to all 

members of an entity;

    (3) Will materially and substantially participate in the operation 

of the farm or ranch:

    (i) In the case of a loan made to an individual, individually or 

with the immediate family, material and substantial participation 

requires that the individual provide substantial day-to-day labor and 

management of the farm or ranch, consistent with the practices in the 

county or State where the farm is located.

    (ii) In the case of a loan made to an entity, all members must 

materially and substantially participate in the operation of the farm or 

ranch. Material and substantial participation requires that the 

individual provide some amount of the management, or labor and 

management necessary for day-to-day activities, such that if the 

individual did not provide these inputs, operation of the farm or ranch 

would be seriously impaired;

    (4) Agrees to participate in any loan assessment and financial 

management programs required by Agency regulations;

    (5) Does not own real farm or ranch property or who, directly or 

through interests in family farm entities, owns real farm or ranch 

property, the aggregate acreage of which does not exceed 30 percent of 

the average farm or ranch acreage of the farms or ranches in the county 

where the property is located. If the farm is located in more than one 

county, the average farm acreage of the county where the loan 

applicant's residence is located will be used in the calculation. If the 

applicant's residence is not located on the farm or if the loan 

applicant is an entity, the average farm acreage of the county where the 

major portion of the farm is located will be used. The average county 

farm or ranch acreage will be determined from the most recent Census of 

Agriculture developed by the U.S. Department of Commerce, Bureau of the 

Census or USDA;

    (6) Demonstrates that the available resources of the loan applicant 

and spouse (if any) are not sufficient to enable the loan applicant to 

enter or continue farming or ranching on a viable scale; and

    (7) In the case of an entity:



[[Page 129]]



    (i) All the members are related by blood or marriage; and

    (ii) All the stockholders in a corporation are beginning farmers or 

ranchers.

    Borrower. An individual or entity which has outstanding obligations 

to the lender under any Agency loan or loan guarantee program. A 

borrower includes all parties liable for Agency debt, including 

collection-only borrowers, except those whose total loan and accounts 

have been voluntarily or involuntarily foreclosed or liquidated, or who 

have been discharged of all Agency debt.

    Capital leases. Agreements under which the lessee effectively 

acquires ownership of the asset being leased. A lease is a capital lease 

if it meets any one of the following criteria:

    (1) The lease transfers ownership of the property to the lessee at 

the end of the lease term.

    (2) The lessee has the right to purchase the property for 

significantly less than its market value at the end of the lease.

    (3) The term of the lease is at least 75 percent of the estimated 

economic life of the leased property.

    (4) The present value of the minimum lease payments equals or 

exceeds 90 percent of the fair market value of the leased property.

    Cash flow budget. A projection listing all anticipated cash inflows 

(including all farm income, nonfarm income and all loan advances) and 

all cash outflows (including all farm and nonfarm debt service and other 

expenses) to be incurred by the borrower during the period of the 

budget. Cash flow budgets for loans under $50,000 do not require income 

and expenses itemized by categories. Cash flow budgets for loans under 

$125,000 do not require income and expenses itemized by categories. It 

may also be prepared with a breakdown of cash inflows and outflows for 

each month of the review period and includes the expected outstanding 

operating credit balance for the end of each month. The latter type is 

referred to as a ``monthly cash flow budget''.

    Collateral. Property pledged as security for a loan to ensure 

repayment of an obligation.

    Conditional commitment. The Agency's commitment to the lender that 

the material it has submitted is approved subject to the completion of 

all conditions and requirements contained therein.

    Consolidation. The combination of outstanding principal and interest 

balance of two or more OL loans.

    Controlled. When a director or employee has more than a 50 percent 

ownership in the entity or, the director or employee, together with 

relatives of the director or employee, have more than a 50 percent 

ownership.

    Cooperative. An entity which has farming as its purpose and whose 

members have agreed to share the profits of the farming enterprise. The 

entity must be recognized as a farm cooperative by the laws of the State 

in which the entity will operate a farm.

    Cosigner. A party who joins in the execution of a promissory note to 

assure its repayment. The cosigner becomes jointly and severally liable 

to comply with the terms of the note. In the case of an entity 

applicant, the cosigner cannot be a member, partner, joint operator, or 

stockholder of the entity.

    County average yield. The historical average yield for a commodity 

in a particular political subdivision, as determined or published by a 

government entity or other recognized source.

    Debt writedown. To reduce the amount of the borrower's debt to that 

amount that is determined to be collectible based on an analysis of the 

security value and the borrower's ability to pay.

    Deferral. A postponement of the payment of interest or principal or 

both. Principal may be deferred in whole or in part, interest may only 

be partially deferred.

    Depreciation and amortization expenses. An annual allocation of the 

cost or other basic value of tangible capital assets, less salvage 

value, over the estimated life of the unit (which may be a group of 

assets), in a systematic and rational manner.

    Direct loan. A loan serviced by the Agency as lender.

    Entity. Cooperatives, corporations, partnerships, joint operations, 

trusts, or limited liability companies.

    Family farm. A farm which:

    (1) Produces agricultural commodities for sale in sufficient 

quantities so



[[Page 130]]



that it is recognized in the community as a farm rather than a rural 

residence;

    (2) Provides enough agricultural income by itself, including rented 

land, or together with any other dependable income to enable the 

borrower to:

    (i) Pay necessary family living and operating expenses;

    (ii) Maintain essential chattel and real property; and

    (iii) Pay debts;

    (3) Is managed by:

    (i) The borrower when a loan is made to an individual; or,

    (ii) The members, stockholders, partners, or joint operators 

responsible for operating the farm when a loan is made to an entity;

    (4) Has a substantial amount of the labor requirement for the farm 

and nonfarm enterprise provided by:

    (i) The borrower and the borrower's immediate family for a loan made 

to an individual; or

    (ii) The members, stockholders, partners, or joint operators 

responsible for operating the farm, along with the families of these 

individuals, for a loan made to an entity; and

    (5) May use a reasonable amount of full-time hired labor and 

seasonal labor during peak load periods.

    Family living expenses. Any withdrawals from income to provide for 

needs of family members.

    Family members. The immediate members of the family residing in the 

same household with the individual borrower, or, in the case of an 

entity, with the operator.

    Farm. A tract or tracts of land, improvements, and other 

appurtenances which are used or will be used in the production of crops, 

livestock, or aquaculture products for sale in sufficient quantities so 

that the property is recognized as a farm rather than a rural residence. 

The term ``farm'' also includes any such land and improvements and 

facilities used in a nonfarm enterprise. It may also include the 

residence which, although physically separate from the farm acreage, is 

ordinarily treated as part of the farm in the local community.

    Feasible plan. A plan is feasible when a borrower or applicant's 

cash flow budget indicates that there is sufficient cash inflow to pay 

all cash outflow each year during the term of the loan. If a loan 

approval or restructuring action exceeds one production cycle and the 

planned cash flow budget is atypical due to cash or inventory on hand, 

new enterprises, carryover debt, atypical planned purchases, important 

operating changes, or other reasons, a cash flow budget must be prepared 

that reflects a typical cycle. If the request is for only one cycle, a 

feasible plan for only one cycle is required for approval.

    Fish. Any aquatic, gilled animal commonly known as ``fish'' as well 

as mollusks, or crustaceans (or other invertebrates) produced under 

controlled conditions (that is, feeding, tending, harvesting, and such 

other activities as are necessary to properly raise and market the 

products) in ponds, lakes, streams, artificial enclosures, or similar 

holding areas.

    Fixture. An item of personal property attached to real estate in 

such a way that it cannot be removed without defacing or dismantling the 

structure, or substantially damaging the structure itself.

    Graduation. The Agency's determination that a borrower of a direct 

loan, is financially stable enough to refinance that loan with a 

commercial lender with or without a guarantee.

    Guaranteed loan. A loan made and serviced by a lender for which the 

Agency has entered into a lenders agreement and for which the Agency has 

issued a loan note guarantee. This term also includes lines of credit 

except where otherwise indicated.

    Hazard insurance. Includes fire, windstorm, lightning, hail, 

explosion, riot, civil commotion, aircraft, vehicles, smoke, builder's 

risk, public liability, property damage, flood or mudslide, workers 

compensation, or any similar insurance that is available and needed to 

protect the security, or that is required by law.

    Holder. The person or organization other than the lender who holds 

all or a part of the guaranteed portion of an Agency guaranteed loan but 

who has no servicing responsibilities. When the lender assigns a part of 

the guaranteed loan to an assignee by way of execution of an assignment 

form, the assignee becomes a holder.



[[Page 131]]



    In-house expenses. Expenses associated with credit management and 

loan servicing by the lender and the lender's contractor. In-house 

expenses include, but are not limited to: employee salaries, staff 

lawyers, travel, supplies, and overhead.

    Interest assistance agreement. The signed agreement between the 

Agency and the lender setting forth the terms and conditions of the 

interest assistance.

    Interest assistance anniversary date. Date on which interest 

assistance reviews and claims will be effective. This date is 

established by the lender. Once established, it will not change unless 

the loan is restructured.

    Interest assistance review. The yearly review process which includes 

an analysis of the borrower or applicant's farming operation and need 

for continued interest assistance, completion of the needs test and 

request for continuation of interest assistance.

    Joint operation. Individuals that have agreed to operate a farm or 

farms together as a business unit. The real and personal property may be 

owned separately or jointly by the individuals.

    Land development. Items such as terracing, clearing, leveling, 

fencing, drainage and irrigation systems, ponds, forestation, permanent 

pastures, perennial hay crops, basic soil amendments, and other items of 

land improvements which conserve or permanently enhance productivity.

    Lender. The organization making and servicing the loan or advancing 

and servicing the line of credit which is guaranteed under the 

provisions of Agency regulations. The lender is also the party 

requesting a guarantee.

    Lender's agreement. The appropriate Agency form executed by the 

Agency and the lender setting forth the loan responsibilities of the 

lender and agency when the loan guarantee is issued.

    Lien.A legally enforceable hold or claim on the property of another 

obtained as security for the repayment of indebtedness or an encumbrance 

on property to enforce payment of an obligation.

    Liquidation expenses. The cost of an appraisal, due diligence 

evaluation, environmental assessment, outside attorney fees and other 

costs incurred as a direct result of liquidating the security for the 

guaranteed loan. Liquidation fees do not include in-house expenses.

    Loan or line of credit agreement. A document which contains certain 

lender and borrower agreements, conditions, limitations, and 

responsibilities for credit extension and acceptance in a loan format 

where loan principal balance may fluctuate throughout the term of the 

document.

    Loan applicant. The party applying to a lender for a guaranteed loan 

or line of credit.

    Loan transaction. Any loan approval or servicing action.

    Loss claim. A request made to the Agency by a lender to receive a 

reimbursement based on a percentage of the lender's loss on a loan 

covered by an Agency guarantee.

    Loss rate. The net amount of guaranteed OL, FO, and SW loss claims 

paid on loans made in the past 7 years divided by the total loan amount 

of OL, FO, and SW made in the past 7 years.

    Major deficiency. A deficiency that directly affects the soundness 

of the loan.

    Majority interest. Any individual or a combination of individuals 

owning more than a 50 percent interest in a cooperative, corporation, 

joint operation, or partnership.

    Market value. The amount which an informed and willing buyer would 

pay an informed and willing, but not forced, seller in a completely 

voluntary sale.

    Minor deficiency. A deficiency that violates Agency regulations, but 

does not affect the soundness of a loan.

    Mortgage. A legal instrument giving the lender a security interest 

or lien on real or personal property of any kind.

    Negligent servicing. The failure to perform those services which 

would be considered normal industry standards of loan management or 

failure to comply with any servicing requirement of this subpart or the 

lenders agreement or the guarantee. The term includes the concept of a 

failure to act or failure to act timely consistent with actions of a 

reasonable lender in loan making, servicing, and collection.



[[Page 132]]



    Net farm operating income. The gross income generated by a farming 

operation annually, minus all yearly operating expenses (including 

withdrawals from entities for living expenses), operating loan interest, 

interest on term debt and capital lease payments, and depreciation and 

amortization expenses. Net farm operating income does not include off-

farm income and social security taxes, carryover debt and delinquent 

interest.

    Net recovery value. The market value of the security property 

assuming that it will be acquired by the lender, and sold for its 

highest and best use, less the lender's costs of property acquisition, 

retention, maintenance, and liquidation.

    Nonessential asset. Assets in which the borrower has an ownership 

interest that do not contribute an income to pay essential family living 

expenses or maintain a sound farming operation, and are not exempt from 

judgment creditors.

    Normal income security. All security not considered basic security.

    Partnership. Any entity consisting of two or more individuals who 

have agreed to operate a farm as one business unit. The entity must be 

recognized as a partnership by the laws of the State in which the entity 

will operate and must be authorized to own both real estate and personal 

property and to incur debts in its own name.

    Potential liquidation value. The amount of the lender's protective 

bid at the foreclosure sale. Potential liquidation value is determined 

by an independent appraiser using comparables from other forced 

liquidation sales.

    Present value. The present worth of a future stream of payments 

discounted to the current date.

    Presidentially-designated emergency. A major disaster or emergency 

designated by the President under the Robert T. Stafford Disaster Relief 

and Emergency Assistance Act (42 U.S.C. 5121 et seq.)

    Primary security. The minimum amount of collateral needed to fully 

secure a proposed loan.

    Principals of borrowers. Includes owners, officers, directors, 

entities and others directly involved in the operation and management of 

a business.

    Protective advances. Advances made by a lender to protect or 

preserve the collateral itself from loss or deterioration. Protective 

advances include but are not limited to:

    (1) Payment of delinquent taxes,

    (2) Annual assessments,

    (3) Ground rents,

    (4) Hazard or flood insurance premiums against or affecting the 

collateral,

    (5) Harvesting costs,

    (6) Other expenses needed for emergency measures to protect the 

collateral.

    Recapture. The amount that a guaranteed lender is entitled to 

recover from a guaranteed loan borrower in consideration for the lender 

writing down a portion of their guaranteed loan debt when that loan was 

secured by real estate and that real estate increases in value. Also, 

the act of collecting shared appreciation.

    Related by blood or marriage. Individuals who are connected to one 

another as husband, wife, parent, child, brother, or sister.

    Relative. An individual or spouse and anyone having the following 

relationship to either: parent, son, daughter, sibling, stepparent, 

stepson, stepdaughter, stepbrother, stepsister, half brother, half 

sister, uncle, aunt, nephew, niece, grandparent, granddaughter, 

grandson, and the spouses of the foregoing.

    Rescheduling. To rewrite the rates and terms of a single note or 

line of credit agreement.

    Restructuring. Changing terms of a debt through either a 

rescheduling, deferral, or writedown or a combination thereof.

    Security. Property of any kind subject to a real or personal 

property lien. Any reference to ``collateral'' or ``security property'' 

shall be considered a reference to the term ``security.''

    Shared appreciation agreement. An agreement between a guaranteed 

lender and borrower that requires a borrower that has received a write 

down on a guaranteed loan secured by real estate to repay the lender 

some or all of the writedown received, based on a percentage of any 

increase in the value



[[Page 133]]



of that real estate at some future date, if certain conditions exist.

    State. The major political subdivision of the United States and the 

organization of program delivery for the Agency.

    Subordination. A document executed by a lender to relinquish their 

priority of lien in favor of another lender that provides the other 

lender with a priority right to collect a debt of a specific dollar 

amount from the sale of the same collateral.

    Subsequent loans. Any loans processed by the Agency after an initial 

loan has been made to the same borrower.

    Transfer and assumption. The conveyance by a debtor to an assuming 

party of the assets, collateral, and liabilities of the loan in return 

for the assuming party's binding promise to pay the debt outstanding.

    Typical plan. A projected income and expense statement listing all 

anticipated cash flows for a typical 12-month production cycle; 

including all farm and nonfarm income and all expenses (including debt 

service) to be incurred by the borrower during such period.

    Unaccounted for security. Items, as indicated on the lender's loan 

application, request for guarantee, or any interim agreements provided 

to the Agency, that are security for the guaranteed loan that were 

misplaced, stolen, sold, or otherwise missing, where replacement 

security was not obtained or the proceeds from their sale have not been 

applied to the loan.

    United States. The United States itself, each of the several States, 

the Commonwealth of Puerto Rico, the Virgin Islands of the United 

States, Guam, American Samoa, and the Commonwealth of the Northern 

Mariana Islands.

    Veteran. Any person who served in the military, naval, or air 

service during any war as defined in section 101(12) of title 38, United 

States Code.



[64 FR 7378, Feb. 12, 1999, as amended at 66 FR 7567, Jan. 24, 2001; 68 

FR 7695, Feb. 18, 2003; 69 FR 5262, Feb. 4, 2004; 70 FR 56107, Sept. 26, 

2005]