[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: 7CFR762.126]



[Page 143-144]

 

                          TITLE 7--AGRICULTURE

 

       CHAPTER VII--FARM SERVICE AGENCY, DEPARTMENT OF AGRICULTURE

 

PART 762_GUARANTEED FARM LOANS--Table of Contents

 

Sec. 762.126  Security requirements.



    (a) General. (1) The lender is responsible for ensuring that proper 

and adequate security is obtained and maintained to fully secure the 

loan, protect the interest of the lender and the Agency, and assure 

repayment of the loan or line of credit.

    (2) The lender will obtain a lien on additional security when 

necessary to protect the Agency's interest.

    (b) Guaranteed and unguaranteed portions. (1) All security must 

secure the entire loan or line of credit. The lender may not take 

separate security to secure only that portion of the loan or line of 

credit not covered by the guarantee.

    (2) The lender may not require compensating balances or certificates 

of deposit as means of eliminating the lender's exposure on the 

unguaranteed portion of the loan or line of credit. However, 

compensating balances or certificates of deposit as otherwise used in 

the ordinary course of business are allowed for both the guaranteed and 

unguaranteed portions.

    (c) Identifiable security. The guaranteed loan must be secured by 

identifiable collateral. To be identifiable, the lender must be able to 

distinguish the collateral item and adequately describe it in the 

security instrument.

    (d) Type of security. (1) Guaranteed loans may be secured by any 

property if the term of the loan and expected life of the property will 

not cause the loan to be undersecured.



[[Page 144]]



    (2) For loans with terms greater than 7 years, a lien must be taken 

on real estate.

    (3) Loans can be secured by a mortgage on leasehold properties if 

the lease has a negotiable value and is subject to being mortgaged.

    (4) The lender or Agency may require additional personal and 

corporate guarantees to adequately secure the loan. These guarantees are 

separate from, and in addition to, the personal obligations arising from 

members of an entity signing the note as individuals.

    (e) Lien position. All guaranteed loans will be secured by the best 

lien obtainable. Provided that:

    (1) Any chattel-secured guaranteed loan must have a higher lien 

priority (including purchase money interest) than an unguaranteed loan 

secured by the same chattels and held by the same lender.

    (2) Junior lien positions are acceptable only if the total amount of 

debt with liens on the security, including the debt in junior lien 

position, is less than or equal to 85 percent of the value of the 

security. Junior liens on crops or livestock products will not be relied 

upon for security unless the lender is involved in multiple guaranteed 

loans to the same borrower and also has the first lien on the 

collateral.

    (3) When taking a junior lien, prior lien instruments will not 

contain future advance clauses (except for taxes, insurance, or other 

reasonable costs to protect security), or cancellation, summary 

forfeiture, or other clauses that jeopardize the Government's or the 

lender's interest or the borrower's ability to pay the guaranteed loan, 

unless any such undesirable provisions are limited, modified, waived or 

subordinated by the lienholder for the benefit of the Agency and the 

lender.

    (f) Additional security, or any loan of $10,000 or less may be 

secured by the best lien obtainable on real estate without title 

clearance or legal services normally required, provided the lender 

believes from a search of the county records that the loan applicant can 

give a mortgage on the farm and provided that the lender would, in the 

normal course of business, waive the title search. This exception to 

title clearance will not apply when land is to be purchased.

    (g) Multiple owners. If security has multiple owners, all owners 

must execute the security documents for the loan.

    (h) Exceptions. The Deputy Administrator for Farm Loan Programs has 

the authority to grant an exception to any of the requirements involving 

security, if the proposed change is in the best interest of the 

Government and the collection of the loan will not be impaired.



[64 FR 7378, Feb. 12, 1999, as amended at 70 FR 56107, Sept. 26, 2005]