[Code of Federal Regulations]

[Title 7, Volume 14]

[Revised as of January 1, 2007]

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

[CITE: 7CFR1965.13]



[Page 291-296]

 

                          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.  1965.13  Consent by partial release or otherwise to sale, exchange or 



other disposition of a portion of or interest in security, except leases.



    See subpart S of part 1951 of this chapter when a combination of NP, 

ST and other FP loans are involved. If a FP loan is being deferred and 

reamortized as an ST loan, partial releases are authorized as provided 

in Subpart S of Part 1951 of this chapter. However, there is no 

authority for FmHA or its



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successor agency under Public Law 103-354 employees to consent to 

partial release or sale, exchange or other disposition of a portion of 

the security for an existing ST loan.

    (a) Provisions of FmHA or its successor agency under Public Law 103-

354 mortgages. In all FmHA or its successor agency under Public Law 103-

354 mortgages except SFH loan mortgages prepared before October 1, 1950, 

and a few OL, EM, Special Livestock (SL), and Water Facilities (WF) loan 

mortgages, the borrower has agreed not to sell, transfer, assign, 

mortgage, or otherwise encumber the security or any portion of or 

interest in it without the prior written consent of the mortgagee. 

Furthermore, in the case of the few SFH, OL, EM, SL, and WF loan 

mortgages not requiring FmHA or its successor agency under Public Law 

103-354 consent, any property, or any part of it or interest in it, 

which is subject to the FmHA or its successor agency under Public Law 

103-354 mortgage and which is disposed of by the borrower without 

consent remains subject to the mortgage lien. In all FmHA or its 

successor agency under Public Law 103-354 mortgages the borrower 

expressly agrees not to engage, without prior consent, in certain 

specified transactions, including the cutting or removal of timber, or 

mining or removal of gravel, oil, gas, coal, or other minerals, except 

small amounts used by the borrower for ordinary domestic purposes. The 

sale of timber (other than harvests for thinning purposes approved by 

FmHA or its successor agency under Public Law 103-354 on a farm plan), 

mining products, removal of gravel, oil, gas, coal, or other minerals by 

unit or lump sum payments will be considered as disposition of a portion 

of the security, except: For Farmer Program loans approved after 

December 23, 1985, the sale of such products, other than timber, will be 

considered a disposition of a portion of the security only if the rights 

to the products were specifically included as a part of the appraisal 

value of the real estate securing the loan; if the rights were not 

included in the appraisal, then FmHA or its successor agency under 

Public Law 103-354 has no lien on the rights to oil, gas or other 

minerals located under the real estate. Any payment or other 

compensation the borrower may receive for damages to the surface of the 

collateral real estate resulting from exploration for or recovery of 

minerals will be assigned to FmHA or its successor agency under Public 

Law 103-354 and will be used to repair the damage or used as authorized 

in Sec.  1965.13(f) of this subpart. This section explains how and under 

what circumstances FmHA or its successor agency under Public Law 103-354 

will grant partial releases, and give its consent to certain 

transactions affecting the security. Subordinations, transfers, consents 

to junior liens, leases and severance agreements are discussed 

individually in other sections of this subpart. Releases granted in 

connection with a final payment on real estate will be handled in 

accordance with subpart D of part 1951 of this chapter.

    (b) Conditions of FmHA or its successor agency under Public Law 103-

354 consent. A State Supplement will be developed, with guidance of OGC, 

and issued to provide guidance for handling of easements or rights-of-

way in connection with the development, extension, construction or 

modification of community based programs, such as rural water districts, 

drainage, and irrigation districts, without requiring monetary 

consideration or detailed appraisals. Otherwise, FmHA or its successor 

agency under Public Law 103-354 may consent to certain transactions 

affecting the security (for example, a sale or an exchange of security 

or granting a right-of-way across security) and/or grant a partial 

release if:

    (1) The transaction will further the objectives for which the FmHA 

or its successor agency under Public Law 103-354 loan or loans were 

made;

    (2) The proposed use of the funds including the payment of 

reasonable costs and expenses incident to the transaction will improve 

the borrower's ability to repay the FmHA or its successor agency under 

Public Law 103-354 loan(s) or is necessary to place the borrower's 

operation on a sound basis;

    (3) The consideration is adequate for the security being disposed of 

or the rights granted (see paragraph (c) of this section);



[[Page 293]]



    (4) Orderly repayment of the FmHA or its successor agency under 

Public Law 103-354 indebtedness will not be impaired (does not apply in 

condemnation cases after final judgment or award which is not appealed);

    (5) The transaction will not interfere with successful operation of 

any farming or other enterprise providing the borrower with repayment 

ability (does not apply in condemntation cases after final judgment or 

award which is not appealed);

    (6) The market value of the remaining security is adequate to secure 

the unpaid balance of the FmHA or its successor agency under Public Law 

103-354 debts, or if the market value of the security before the 

transaction was inadequate to fully secure the FmHA or its successor 

agency under Public Law 103-354 debts, the FmHA or its successor agency 

under Public Law 103-354's security interest is not adversely affected;

    (7) The requirements of Sec.  1965.6 of this subpart are met; and

    (8) The borrower cannot graduate to other credit.

    (c) Exchange of property. When an exchange of property serving as 

security for an FmHA or its successor agency under Public Law 103-354 

loan results in a balance owing to the FmHA or its successor agency 

under Public Law 103-354 borrower, the provisions of this section 

applicable to a sale of a portion of the security will apply as to 

disposition of proceeds. When property is exchanged, the property 

acquired by the FmHA or its successor agency under Public Law 103-354 

borrower must meet requirements of the program objectives, purposes and 

limitations outlined in this subpart relating to the type of loan 

involved as well as respective requirements for appraisal, title 

clearance and security. Requests for exchange of property which cannot 

be approved under this section may be submitted to the National Office 

for consideration, provided the request meets conditions in Sec.  

1965.35 of this subpart.

    (d) Appraisals. A new appraisal report for the security to be 

transferred or released will be obtained in accordance with Sec.  761.7 

of this title as necessary to protect the financial interests of the 

Government or when the transaction involves more than $25,000. A new 

appraisal report for the security to be retained will be obtained in 

accordance with that section as necessary to protect the financial 

interests of the Government. Appraisal reports under this section may 

show the present market value of the property being transferred or 

released and the property being retained on a single appraisal report or 

on separate appraisal reports. The value of rights to mining products, 

gravel, oil, gas, coal or other minerals will be specifically included 

as a part of the appraised value of the real estate security.

    (1) Stationary units. If timber or minerals, including sand, gravel, 

and stone which appear to be worth more than $2,000 are to be sold on 

the basis of the timber stand or the mineral deposit rather than the 

units to be removed, the borrower will be encouraged to obtain the 

assistance of a qualified technician other than an FmHA or its successor 

agency under Public Law 103-354 employee to provide advice on the 

quality or value of the timber or minerals, and the manner in which they 

should be sold. Generally, assistance can be obtained from State or 

Federal employees who are located in the area, such as U.S. Department 

of Agriculture Forest Service employees.

    (2) Units removed. When timber or minerals including sand, gravel, 

or stone, are to be sold on the basis of the units to be removed, or 

when an easement or a right-of-way is to be sold or granted, the 

employee authorized to make the appraisal may insert the date, and 

initial a notation on the existing appraisal report instead of making a 

new appraisal report. The notation should show (i) the unit value of 

timber or minerals, or the value of the easement or right-of-way, based 

on the consideration being paid for similar items in the area; and (ii) 

the manner in which the remaining property will be affected. If the 

market value of the remaining property is significantly decreased, a 

market value appraisal of the remaining property usually will be 

required.

    (e) Authority of the County Supervisor and District Director--(1) 

Forest products.



[[Page 294]]



County Supervisors and District Directors can approve most applications 

for consent or release involving the harvest or sale of forest products. 

In the case of 3 percent loans for forestry purposes, applications for 

consent or release will be forwarded to the State Director for approval 

if:

    (i) The harvest or sale is not in accordance with strict provisions 

of the initially approval forestry plan,

    (ii) Future repayments on the 3 percent advance are scheduled on any 

basis other than equal annual installments,

    (iii) There is a lien on the forest land prior to the lien of the 

FmHA or its successor agency under Public Law 103-354, or

    (iv) There is a delinquency on any FmHA or its successor agency 

under Public Law 103-354 real estate loan.

    (2) Terms of a sale. County Supervisors and District Directors may 

approve sales made on the following terms.

    (i) Sale of a portion of the security for its market value on the 

following terms:

    (A) For SFH loans, refer to Sec.  1965.110 of subpart C of part 1965 

of this chapter.

    (B) For all other loans, not less than 10 percent (of the purchase 

price) down and payments not to exceed ten annual installments of 

principal plus interest at not less than the current rate being charged 

on regular FO loans plus 1 percent or the rate on the borrower's 

note(s), whichever is greater. Payments may be in equal or unequal 

installments with a balloon final installment. For farmer program loans 

approved after December 23, 1985, the sale of mining products gravel, 

oil, gas, coal, or other minerals will be considered a sale of security 

only if the rights to such products were specifically included as a part 

of the appraised value of the real estate securing the loan; if the 

rights were not included in the appraisal, then FmHA or its successor 

agency under Public Law 103-354 has no lien on the rights to such 

products located under the real estate.

    (ii) In each case it must be determined that:

    (A) The government's security rights, including the right to 

foreclose on either the portion being sold or retained, are not 

impaired,

    (B) The down payment and any subsequent payments are applied to the 

FmHA or its successor agency under Public Law 103-354 debt(s), prior 

lien(s), or otherwise used as authorized in this section under paragraph 

(f) of this section, and

    (C) If applicable, the requirements of subpart G of part 1940 of 

this chapter must be met.

    (iii) In each case the following conditions must be met:

    (A) Any amount to be paid FmHA or its successor agency under Public 

Law 103-354 from the down payment and subsequent payments must be 

assigned to FmHA or its successor agency under Public Law 103-354,

    (B) The property sold will not be released prior to either full 

payment of the borrower's account or receipt of full amount of sale 

proceeds with proper application or release of the proceeds, and

    (C) The borrower must agree in writing that the sale proceeds will 

not affect the borrower's primary and continued obligation for making 

payments under terms of the note or any other agreements approved by 

FmHA or its successor agency under Public Law 103-354.

    (f) Use of proceeds. County Supervisors or District Directors may 

approve transactions if the proceeds will be used in one of the 

following ways.

    (1) Proceeds may be applied on liens in order of priority. Written 

consent of any prior or junior lienholder will be obtained by the 

borrower and delivered to the FmHA or its successor agency under Public 

Law 103-354 if any proceeds are not to be applied in accordance with 

lien priorities.

    (2) The borrower may use a portion of any proceeds to pay customary 

incidental costs appropriate to the transaction and reasonable in amount 

which the borrower cannot arrange to pay for personal funds or cannot 

have the purchaser pay. The costs may, for example include real estate 

taxes which must be paid to consummate the transaction; cost of title 

examination, surveys, abstracts, title insurance, reasonable attorney's 

fees, real estate broker's commissions and judgment liens. In any



[[Page 295]]



State in which it is necessary to obtain the insured note from the 

lender to present to the recorder before a release of a portion of the 

land from the mortgage, the borrower must pay any cost for postage and 

insurance of the note while in transit. The County Supervisor will 

advise the borrower when requesting a partial release that the borrower 

must pay the cost. If the borrower is unable to pay the costs from 

personal funds, they may be deducted from the sale proceeds. The amount 

of the charge will be based on the statement of actual cost furnished by 

the payee.

    (3) Proceeds may be used for development of land owned by the 

borrower or for enlargement, if development or enlargement is necessary 

to improve the borrower's debt-payment ability and to place the 

borrower's operation on a sound basis, or to otherwise further the 

objectives of the loan. The use of proceeds for these purposes will not 

conflict with the loan purposes, restrictions or requirements of the 

type loan(s) involved. Any proposed development work will be in 

accordance with subpart A of part 1924 of this chapter. Funds to be used 

for development or enlargement will be handled under subpart A of part 

1902 of this chapter.

    (4) When FmHA or its successor agency under Public Law 103-354 loans 

secured by a lien on real estate will be adequately secured after a 

transaction affecting the real estate takes place, proceeds may, with 

the consent of the State Director and other lienholders on the real 

estate, be used as follows:

    (i) Applied to delinquent or unmatured FmHA or its successor agency 

under Public Law 103-354 loan installments when the borrower is 

otherwise unable to meet the installments.

    (ii) For other than SFH loans, applied on debts owed creditors other 

than FSA Farm Credit Programs to the extent needed to establish a basis 

for continuation of the other creditor's account, if the following 

requirements are met:

    (A) A feasible farm and home plan will be developed in accordance 

with Sec.  1924.56 of subpart B of part 1924 of this chapter. Voluntary 

debt adjustment will be utilized, as appropriate, in accordance with 

subpart A of part 1903 of this chapter.

    (B) Proceeds will not be used to pay current crop/operating year 

family living and/or operating expenses, as developed in the Annual Plan 

in accordance with Sec.  1924.56 of subpart B of part 1924 of this 

chapter.

    (iii) Develop land not owned by the borrower which is essential to 

the borrower's operation in an amount not to exceed $10,000, provided: 

the improvements are needed to improve the borrower's repayment ability 

and the borrower has tenure arrangements which justify the use of the 

proceeds on the land not owned by the borrower. Development work 

performed will be in accordance with subpart A of part 1924 of this 

chapter. Funds will be handled under subpart A of part 1902 of this 

chapter.

    (5) When liquidation action is pending in accordance with Sec.  

1965.26 of this subpart, the County Supervisor or District Director is 

authorized to approve transactions only when all the proceeds (other 

than costs authorized in paragraph (f)(2) of this section) will be 

applied to the liens against the security in the order of their 

priority.

    (g) Authority of the State Director. The State Director is 

authorized to approve transactions that exceed the approval authority 

granted in paragraph (e) of this section to the County Supervisor and 

District Director, or that involve an easement or right-of-way granted 

or conveyed without monetary compensation or for a token consideration. 

When approving these transactions, the State Director must determine 

that the requirements of paragraph (b) of this section are met.

    (h) Processing. FmHA or its successor agency under Public Law 103-

354's consent will be given by approving a completed Form FmHA or its 

successor agency under Public Law 103-354 465-1 if the transaction meets 

the conditions of paragraph (b) of this section. Also, when requested, 

FmHA or its successor agency under Public Law 103-354 will give a 

written partial release on Form FmHA or its successor agency under 

Public Law 103-354 460-1, ``Partial Release,'' or other form approved by 

OGC. A formal release may not be delivered



[[Page 296]]



for 15 days after the payment is received unless payment is made in the 

form of cash, money order, certified check, or check from a reputable 

lending agency. Releases not delivered will usually be voided 30 days 

after notification to the requesting party that the release is 

available. When an insured FO mortgage is held by the lender, the 

holder's consent will be obtained only if a written partial release or 

other written servicing document is requested by the borrower. When the 

approval of a transaction by the State Director is required, or when the 

County Supervisor or District Director desires advice in connection with 

approval of a transaction, the borrower's case folder, Form FmHA or its 

successor agency under Public Law 103-354 465-1, and any other 

information pertinent to the transaction will be sent to the State 

Office.

    (i) Liquidation. If FmHA or its successor agency under Public Law 

103-354 is unable to approve a partial sale, the partial sale cannot be 

used as the basis for liquidation in the following circumstances:

    (1) The spouse or children of the borrower become the owner of the 

property.

    (2) The sale results from a divorce or legal separation and the 

spouse of the borrower becomes the owner of the property.

    (3) An intervivos trust becomes the owner of the property so long as 

the borrower is a beneficiary of the trust and there is no change in 

occupancy of the property.



[51 FR 4140, Feb. 3, 1986, as amended at 52 FR 26139, July 13, 1987; 53 

FR 35795, Sept. 14, 1988; 56 FR 10154, Mar. 11, 1991; 57 FR 775, Jan. 9, 

1992; 58 FR 44752, Aug. 25, 1993; 58 FR 52654, Oct. 12, 1993; 61 FR 

35931, July 9, 1996; 64 FR 62569, Nov. 17, 1999; 66 FR 7568, Jan. 24, 

2001; 69 FR 30999, June 2, 2004]