§ 1945.169 - Security.

Each EM loan will be secured by chattels, real estate, and/or other security and nonessential assets in accordance with this section. The same collateral may be used to secure two or more loans made, direct or guaranteed, to the same borrower. Thus, a junior lien on property serving as collateral for a guaranteed loan(s) is acceptable. In cases when a loan is being made in conjunction with a servicing action, the security requirements as stated in subpart S of part 1951 of this chapter will prevail.

(a) Security for operating type purposes. Primary security must be available for the loan, except as provided for in paragraph (g) of this section. Any additional security available up to and including 150 percent of the loan amount also will be taken. Except as provided in paragraph (c) of this section, security in excess of 150 percent of the loan amount will only be taken when it is not practical to separate the property, i.e., same type of livestock (dairy cows, brood sows). In unusual cases, the loan approval official may require a cosigner in accordance with § 1910.3 (d) of subpart A of part 1910 of this chapter, or a pledge of security from a third party. A pledge of security is preferable to a cosigner.

(1) Chattels. The loan must be secured by:

(i) A first lien on all property or products acquired, produced, or refinanced with loan funds;

(ii) If the security for the loan under paragraph (a)(1)(i) of this section is not at least equal to 150 percent of the loan amount, the best lien obtainable will be taken on other chattel security owned by the applicant, if available, up to the point that security for the loan at least equals 150 percent of the loan amount.

(A) When there are several alternatives available (cattle, machinery), any one of which will meet the security requirements of this section, the approval official generally has the discretion to select the best alternative for obtaining security.

(B) When alternatives exist and the applicant has a preference as to the property to be taken for security, however, the approval official will honor the preference so long as the requirements of paragraphs (a)(1)(i) and (ii) of this section are met.

(iii) To comply with the 150 percent requirement, security values will be established as follows:

(A) Annual production. For the purposes of loan making only, the security value of the crop and/or livestock production is presumed to be 100 percent of the amount loaned for annual operating and family living expenses listed on Form FmHA or its successor agency under Public Law 103-354 Form 431-2, “Farm and Home Plan,” or other acceptable plan of operation.

(B) The specific livestock and/or equipment to be taken as security, along with the value of the security, will be documented in the case file. This information will be obtained from values established in accordance with § 1945.175 (c) of this subpart.

(2) Real estate. The loan approval official will require a lien on all or part of the applicant's real estate as security when chattel security alone is not at least equal to 150 percent of the amount of the loan. A lien, however, will not be taken on the applicant's personal residence and appurtenances, when the residence is located on a separate parcel and the farm tract(s) being used for collateral, in addition to any crops or chattels, meet the security requirement of at least equal to 150 percent of the loan. Different lien positions on real estate are considered separate and identifiable collateral. Real estate taken as security, along with its value established in accordance with § 1945.175 (c) of this subpart, will be documented in the case file. If the applicant disagrees with the values established, FmHA or its successor agency under Public Law 103-354 will accept an appraisal from the applicant, obtained at the applicant's expense, if the appraisal meets all FmHA or its successor agency under Public Law 103-354 requirements.

(3) Other security. (i) A pledge of real estate or chattels by a third party will be taken as security when the property owned by the applicant does not provide primary security.

(ii) Other available property that cannot be converted to cash without jeopardizing the applicant's farm operation or imposing substantial financial penalty on the applicant will be taken as security when the property owned by the applicant does not provide primary security. Examples of such security include, but are not limited to, cash surrender value of life insurance, securities, patents and copyrights, and membership or stock in cooperatives and associations.

(b) Security for real estate type purposes. Primary security must be available for the loan, except as provided for in paragraph (g) of this section. EM loans made for subtitle A (real estate) purposes will be secured by real estate. Chattels and/or other security will only be taken as security as set forth in paragraphs (b)(2), (b)(3), and (c) of this section. The total amount of security required will be the lesser of either 150 percent of the loan amount, or all real estate owned by the applicant. A loan will be considered adequately secured when the real estate security for the loan is at least equal to the loan amount. Except as provided in paragraph (c) of this section, security in excess of 150 percent of the loan amount will only be taken when it is not practical to separate the property, i.e., a tract of land. All security taken, along with the value of security, will be documented in the case file. This information will be obtained from values established in accordance with § 1945.175 (c) of this subpart. If the applicant disagrees with the real estate values established, FmHA or its successor agency under Public Law 103-354 will accept an appraisal from the applicant, obtained at the applicant's expense, if the appraisal meets all FmHA or its successor agency under Public Law 103-354 requirements. In unusual cases, the loan approval official may require a cosigner in accordance with § 1910.3 (d) of subpart A of part 1910 of this chapter, or a pledge of security from someone other than the applicant(s). A pledge of security is preferable to a cosigner.

(1) Real estate security. (i) A mortgage will be taken on all real estate repaired or rehabilitated, refinanced, or improved with EM funds, and by any additional real estate security needed to meet the requirements of this section.

(ii) Security will also include assignments of leases or leasehold interests which have mortgageable value, water rights, easements, rights of way, mineral rights, and royalties.

(iii) A first lien is required on real estate, when available. Loans may be secured by a junior lien on real estate provided:

(A) Prior lien instruments do not contain provisions for future advances (except for taxes, insurance, and other costs needed to protect the security, or reasonable foreclosure costs), cancellation, summary forfeiture, or other clauses that may jeopardize the Government's interest or the applicant's ability to pay the loan unless any such undesirable provision is waived, modified, or subordinated insofar as the Government is concerned.

(B) Agreements are obtained from prior lienholders to give notice of foreclosure to FmHA or its successor agency under Public Law 103-354 whenever State law or other arrangements do not require such a notice. Any agreements needed will be obtained as provided in subpart B of part 1927 of this chapter, except as modified by the “Memorandum of Understanding-FCA-FmHA or its successor agency under Public Law 103-354,” FmHA Instruction 2000-R (available in any FmHA or its successor agency under Public Law 103-354 office).

(2) Chattel security. Loans will be secured by chattels as follows:

(i) A first lien will be taken on equipment or fixtures purchased or refinanced with loan funds whenever such property cannot be included in the real estate lien and the best lien obtainable on all real estate does not provide primary security for the loan.

(ii) Chattel security will be obtained when the best lien obtainable on all real estate does not provide primary security for the loan.

(iii) The same collateral may be used to secure two or more loans made, direct or guaranteed, to the same borrower. Therefore, junior liens on chattels may be taken when there is enough equity in the property. However, when possible, a first lien on selected chattel items should be obtained.

(iv) Chattel security liens will be obtained and kept effective, as provided in subpart A of part 1962 of this chapter.

(3) Other security. (i) A pledge of real estate by a third party may be taken as security when the real estate owned and to be acquired by the applicant does not provide primary security for the loan.

(ii) Other property may be taken as security when the real estate owned and to be acquired by the applicant does not provide primary security. Examples of such security include but are not limited to cash surrender value of life insurance, securities, patents and copyrights, and membership or stock in cooperatives and associations.

(c) Nonessential assets. Nonessential assets are assets which the applicant has an ownership interest in that do not contribute a net income to pay family living expenses or to maintain a sound farming operation (see § 1962.17 of subpart A of part 1962 of this chapter for further guidance). A lien will be taken on all nonessential assets, with an aggregate value exceeding $5,000, if an applicant cannot or will not dispose of the assets and use the proceeds to reduce the FmHA or its successor agency under Public Law 103-354 credit needs prior to loan closing. When the value does not exceed $5,000, the County Supervisor will estimate and document such value in the case file, but will not take a lien on the assets. The 150 percent security requirement does not apply to nonessential assets.

(d) Exceptions. The County Supervisor will clearly document in the file when security is not taken for any of the following reasons:

(1) A lien will not be taken on property that could have significant environmental problems/costs (e.g., known or suspected underground storage tanks or hazardous wastes, contingent liabilities, wetlands, endangered species, historic properties). Guidance is provided in part II, item H of exhibit A of FmHA Instruction 1922-E (available in any FmHA or its successor agency under Public Law 103-354 office) as to the action to be taken when the appraiser indicates that the property is subject to any hazards, detriments or limiting conditions.

(2) A lien will not be taken on property that cannot be made subject to a valid lien.

(3) A lien will not be taken on the applicant's personal residence and appurtenances, when the residence is located on a separate parcel and the farm tract being financed, refinanced, improved, or otherwise used for collateral provides primary security for the loan(s).

(4) A lien will not be taken on subsistence livestock; cash or special cash collateral accounts to be used for the farming operation or for necessary family living expenses; all types of retirement accounts; personal vehicles necessary for family living and farm operating purposes; household goods; and small tools and small equipment, such as hand tools, power lawn mowers, and other similar items not needed for security purposes.

(5) When title to a livestock or crop enterprise is held by a contractor under a written contract or the enterprise is to be managed by the applicant under a share lease agreement, an assignment of all or part of the applicant's share of the income will be taken. A form approved by OGC will be used to obtain the assignment.

(6) A lien will not be taken on marginal land, including timber, when a softwood timber (ST) loan is secured by such land.

(7) When a loan is made for real estate purposes, a lien will not be taken on chattels if it will prevent the applicant, or members of an entity applicant, from obtaining operating credit from other sources or the FmHA or its successor agency under Public Law 103-354.

(8) Chattel security liens will be obtained and kept effective as notice to third parties as provided in subpart B of part 1941 and subpart A of part 1962 of this chapter.

(e) Personal liability. The promissory will be signed as follows:

(1) Individuals. Only the applicant will sign the note as a borrower. If a cosigner is needed (see § 1910.3(d) of subpart A of part 1910 of this chapter), the cosigner will also sign the note. Any other signatures needed to assure the required security will be obtained as provided in State supplements. Persons who are minors or mental incompetents will not execute a promissory note. Except when a person has pledged only property as security for a loan, the purpose and effect of signing a promissory note or other evidence of indebtedness for a loan made or insured by FmHA or its successor agency under Public Law 103-354 is to incur individual personal liability regardless of any State law to the contrary.

(2) Cooperatives or corporations. The promissory note(s) will be executed so as to evidence liability of the entity as well as individual liability of all member(s) or stockholder(s) in the entity.

(3) Partnerships or joint operations. The note will be executed by the partner or joint operator authorized to sign for the entity, and all partners in the partnership or joint operators in the joint operation, as individuals.

(f) Personal and corporate guarantees by cosigners. (1) The loan approval official may require additional personal and/or corporate guarantees by a cosigner(s), including guarantees from parent, subsidiary or affiliated companies; relatives of the applicant; or any other willing party having equity in mortgageable assets. The loan approval official will require that such guarantees be secured by collateral which has equity value.

(2) Guarantors of applicants will:

(i) In the case of personal guarantees, provide current financial statements (not over 30 days old at time of filing), signed by the guarantors and disclosing community or homestead property.

(ii) In the case of corporate guarantees, provide current financial statements (not over 30 days old at time of filing), certified by an officer of the corporation.

(3) When security is taken under paragraph (f) of this section, chattel security will be serviced in accordance with subpart A of part 1962 of this chapter. Real estate security will be serviced in accordance with subpart A of part 1965 of this chapter.

(g) Applicant's repayment ability. When adequate security is not available because of the disaster, the loan approval official will accept as security such collateral as is available, if the following conditions are met:

(1) A portion or all of the security has depreciated in value due to the disaster; and

(2) The available security, together with the approval official's confidence in the applicant's repayment ability, is adequate to secure the loan. When considering “repayment ability” as a form of security, the reserve or margin between the balance available for debt repayment shown on the farm and home plan, and the principal and interest scheduled for payment is the “repayment ability” collateral which may be considered in loan making actions when this plan is developed for the typical year. The “typical year” plan must show that the portion of the loan secured by “repayment ability” will be paid back in a reasonable period of time, i.e., the loan balance will be reduced to a fully secured loan within 3 years.

(h) Purchase contracts. If the real estate offered as security is held under a purchase contract, the following conditions must exist:

(1) The applicant must be able to provide a mortgageable interest in the real estate.

(2) The applicant and the seller must agree in writing that any insurance proceeds received for real estate losses will be used only to replace or repair the damaged real estate improvements which are essential to the farming operation; or used for other essential real estate improvements; or paid on the EM loan or on any prior real estate indebtedness, including the purchase contract. If necessary, the applicant will negotiate with the seller to arrive at a new contract without any provisions objectionable to FmHA or its successor agency under Public Law 103-354.

(3) If a satisfactory contract for sale cannot be negotiated or the seller refuses to enter into the agreement described in paragraph (h)(2) of this section, the applicant will make every effort to refinance the existing purchase contract. If the applicant cannot obtain refinancing from another source, EM loan funds may be considered to pay off the contract.

(4) If the conditions set out in paragraphs (h)(1), (2), and (3) of this section exist and an EM loan is approved, it can be closed provided the FmHA or its successor agency under Public Law 103-354 escrow agent or approved attorney certifies on Form 1927-10, “Final Title Opinion,” or in separate writing that:

(i) The purchase contract is not subject to summary cancellation on default and does not contain any other provisions which might jeopardize either the Government's security position or the borrower's ability to repay the loan.

(ii) The seller has agreed, in writing, to give FmHA or its successor agency under Public Law 103-354 notice of any breach by the purchaser, and has also agreed to give FmHA or its successor agency under Public Law 103-354 the option to rectify the condition(s) which amounts to a breach within thirty days. The thirty days begin to run on the day FmHA or its successor agency under Public Law 103-354 receives written notice of the breach.

(i) Prior liens which may jeopardize the Government's security position. If any prior liens against real estate offered as security contain future advance provisions or other provisions which might jeopardize the security position of the Government or the applicant's ability to meet the obligations of these prior liens and to pay the EM loan, the prior lienholders involved must agree in writing, before the loan is closed, to modify, waive, or subordinate such objectionable provisions to the interest of the Government. However, the Government's lien may be subject to the lien of another creditor for amounts advanced or to be advanced for annual operating and family living expenses for the operating or calendar year. The County Supervisor will determine if the creditor will be required to execute Form FmHA or its successor agency under Public Law 103-354 441-13, “Division of Income and Nondisturbance Agreement,” or a similar form approved by the OGC.

(j) Circumstances under which advance notice of foreclosure or assignment is required. When a junior lien on real estate is to be taken as security for a loan in States where a prior lienholder may foreclose the security instrument under power of sale, or otherwise, and extinguish junior liens of private parties without giving junior lienholders actual notice of the foreclosure proceedings, the prior lienholder must agree in writing to give FmHA or its successor agency under Public Law 103-354 advance notice of foreclosure or will offer to assign the mortgage to FmHA or its successor agency under Public Law 103-354 for the amount of the outstanding debt owed to the prior lienholder.

(k) Hazard insurance. Hazard insurance with a standard mortgage clause naming FmHA or its successor agency under Public Law 103-354 as beneficiary may be required for every loan made. The minimum amount of insurance required is the lesser of the replacement cost of the property being insured or the amount of the loan. If essential insurable buildings are located on the property, or if new buildings are to be erected or major improvements are to be made to existing buildings, the applicant will provide adequate hazard insurance coverage at the time of loan closing, or as of the date materials are delivered to the property, whichever is appropriate. Notwithstanding the requirements of subpart A of part 1806 (FmHA Instruction 426.1) of this chapter, when the real estate appraisal report shows that the present market value of the land after deducting the value of buildings shown on the report exceeds the amount of the debt (including the EM loan) and the owner has equity equal to or exceeding the amount of the debt (including the EM loan), real estate property insurance may not be required. However, the applicant will be encouraged to obtain such insurance, if the applicant does not already have it, to protect the applicant's interest. If insurance claims for loss or damage to buildings to be replaced or repaired with loan funds are outstanding at the time the loan is approved, the applicant will be required to agree in writing that, when settlement is made, the proceeds of such claims will be used for replacement or repair of buildings, application on debts secured by prior liens, or application on the EM loan.

(l) Crop insurance. If crop insurance is obtained, an assignment of indemnity is required. When payment of the insurance premium is not required until after harvest, crops may be released to make the payment. If a loss claim is paid to the borrower, the premium will be first deducted by the insurance carrier before making security releases.

(m) Indian trust lands. EM loans which are secured by trust or restricted land will be handled as follows: USDA and the Department of the Interior have agreed that FmHA or its successor agency under Public Law 103-354 loans which are to be secured by real estate liens may be made to Indians holding land in severalty under trust patents or deeds containing restrictions against alienation, subject to statutes under which they may, with the approval of the Secretary of the Interior, give valid and enforceable mortgages on their land. These statutes include, but are not limited to, the Act of March 29, 1956 (70 Stat. 62). When a lien is to be taken on trust or restricted property in connection with a loan to be made or insured by FmHA or its successor agency under Public Law 103-354, the local representatives of the Bureau of Indian Affairs (BIA) will furnish requested advice and information with respect to the property and each applicant. The FmHA or its successor agency under Public Law 103-354 State Director should arrange with the Area Director or other appropriate local official of the BIA as to the manner in which the information will be requested and furnished. A State supplement will be issued to prescribe the actions to be taken by FmHA or its successor agency under Public Law 103-354 personnel to implement the making of loans under these conditions.

(n)-(o) [Reserved]

(p) Assignments and consents. (1) The value of stock required to be purchased by the Federal Land Bank (FLB) Association borrowers may be added to the recommended market value of real estate, provided:

(i) An assignment can be obtained on the stock; and

(ii) An agreement is obtained which provides that:

(A) The value of the stock at the time the FLB loan is satisfied will be applied on the FLB loan as long as any FmHA or its successor agency under Public Law 103-354 loan is outstanding, or

(B) The stock refund check is made payable to the borrower and FmHA or its successor agency under Public Law 103-354.

(iii) The total of the stock value and the recommended market value of real estate is indicated on the real estate appraisal.

(2) An assignment of all or part of the applicant's share of income is required when title to a livestock or crop enterprise is held by a contractor under a written contract or when the enterprise is to be managed by the applicant under a share lease or share agreement. The contract, share lease or share agreement will be described specifically as “Contract Rights” or “Contract Rights in Livestock or Crops,” (or as “Accounts” or “Accounts in Livestock or Crops,” if required by a State supplement) and so forth, in paragraph 1. (b) of Form FmHA or its successor agency under Public Law 103-354 440-25, “Financing Statement”. A form approved by OGC will be used to obtain the assignment.