§ 1980.175 - Operating loans.

(a) Objectives. The basic objective of the guaranteed OL loan program is to provide credit for family farmers and ranchers to conduct operations when credit is not available without a guarantee. This assistance provides family farm operators an opportunity to make efficient use of their land, labor and other resources, to improve their living conditions and to improve their overall economic situation.

(b) The applicant, and anyone who will execute the promissory note, has not caused the Agency a loss by receiving debt forgiveness on all or a portion of any direct or guranteed loan made under the authority of the Consolidated Farm and Rural Development Act (CONACT) by debt write-down, write-off, compromise under the provisions of section 331 of the CONACT, adjustment, reduction, charge-off or discharge in bankruptcy or through any payment of a guaranteed loss claim under the same circumstances. Notwithstanding the restrictive provisions of this paragraph, applicants who received a write-down under section 353 of the CONACT may receive direct and guaranteed OL loans to pay annual farm and ranch operating expenses, which includes family subsistence if the applicant meets all other eligibility requirements. Further, the applicant, and anyone who will execute the promissory note, cannot be delinquent on any federal debt. The restriction will not apply if the Federal delinquency is cured on or before the loan closing date.

(1) An individual must:

(i) Be a citizen of the United States (See § 1980.106(b) of this subpart for the definition of “United States”) or an alien lawfully admitted to the United States for permanent residence under the Immigration and Nationality Act. Aliens must provide INS Forms I-151 or I-551, “Alien Registration Receipt Card.” Indefinite parolees are not eligible. If the authenticity of the information shown on the alien's identification document is questioned, the County Supervisor may request the Immigration and Naturalization Service (INS) to verify the information appearing on the alien's identification card by completing INS Form G-641, “Application for Verification of Information from Immigration and Naturalization Records,” obtainable from the nearest INS district. (See Exhibit B of Subpart A of Part 1944 of this chapter.) Mail the completed form to INS. The payment of a service fee by Agency to INS is waived by inserting in the upper right hand corner of INS Form G-641, the following: “INTERAGENCY LAW ENFORCEMENT REQUEST.”

(ii) Possess the legal capacity to incur the obligations of the loan.

(iii) Have sufficient applicable educational and/or on the job training or farming experience in managing and operating a farm or ranch (within 1 of the last 5 years) which indicates the managerial ability necessary to assure reasonable prospects of success in the proposed plan of operation.

(iv) Have the character (emphasizing credit history, past record of debt repayment and reliability), and industry to carry out the proposed operation. Past record of debt repayment will not be cause for a determination that the applicant is not eligible if an honest attempt has been made to meet the obligation.

(v) Honestly try to carry out the conditions and terms of the loan.

(vi) Be unable to obtain sufficient credit without a guarantee to finance actual needs at reasonable rates and terms, taking into consideration prevailing private and cooperative rates and terms in the community in or near which the applicant resides for loans for similar purposes and periods of time.

(vii) Be an owner-operator or tenant-operator of not larger than a family farm after the loan is closed.

(2) A cooperative, corporation, partnership or joint operation must:

(i) Be unable to obtain sufficient credit without a guarantee to finance actual needs at reasonable rates and terms, taking into account prevailing private and cooperative rates and terms in or near the community for loans for similar purposes and periods of time. This applies to the entity and all of its members, stockholders, partners, or joint operators, as individuals.

(ii) Be controlled by farmers or ranchers engaged primarily and directly in farming or ranching in the United States after the loan is made.

(iii) Consist of members, stockholders, partners or joint operators who are individuals and not a cooperative(s), corporation(s), partnership(s), or joint operation(s).

(iv) If the members, stockholders, partners, or joint operators holding a majority interest are related by marriage or blood:

(A) They must be citizens of the United States (see § 1980.106(b) of this subpart for the definition of “United States”) or an alien lawfully admitted to the United States for permanent residence under the Immigration and Nationality Act. Aliens must provide INS Forms I-151 or I-551, “Alien Registration Receipt Card.” Indefinite parolees are not eligible. If the authenticity of the information shown on the alien's identification document is questioned, the County Supervisor may request INS to verify the information appearing on the alien's identification card by completing INS Form G-641, “Application for Verification of Information from Immigration and Naturalization Records,” obtainable from the nearest INS district (see exhibit B of subpart A of part 1944 of this chapter). Mail the completed form to INS. The payment of a service fee by FmHA or its successor agency under Public Law 103-354 to INS is waived by inserting in the upper right hand corner of INS Form G-641, the following: “INTERAGENCY LAW ENFORCEMENT REQUEST.”

(B) They must have sufficient educational or on the job training or farming experience in managing and operating a farm or ranch (within 1 of the last 5 years) which indicates the managerial ability necessary to assure reasonable prospects of success in the proposed plan of operation.

(C) They and the entity itself must have the character (emphasizing credit history, past record of debt repayment and reliability), and industry to carry out the proposed operation. Past record of debt repayment will not be cause for a determination that the applicant is not eligible if an honest attempt has been made to meet the obligation.

(D) They and the entity itself will honestly try to carry out the conditions and terms of the loan.

(E) At least one member, stockholder, partner or joint operator must operate the family farm.

(F) The entity must operate the farm and be authorized to own or operate a farm in the State(s) in which the farm is located.

(v) If the members, stockholders, partners or joint operators holding a majority interest are not related by marriage or blood:

(A) The requirements of paragraphs (b)(2)(iv) (A) through (D) must be met.

(B) They and the entity itself must operate the family farm.

(C) The entity must operate the farm and be authorized to do so in the State(s) in which the farm is located.

(vi) If each member's, partner's, stockholder's or joint operator's ownership interest does not exceed the family farm definition limits, their collective interests can exceed the family farm definition limits only if: all of the members of the entity are related by blood or marriage, all of the members are or will be operators of the entity, and the majority interest holders of the entity meet the requirements of paragraphs (b)(2)(iv) (A) through (D) and (F) of this section.

(3) [Reserved]

(4) The loan applicant must agree to meet the training requirements of § 1980.191 of this subpart unless a waiver is granted as set forth in that section. In the case of a cooperative, corporation, partnership, or joint operation, any individual member, stockholder, partner, or joint operator holding a majority interest in the operation or who is operating the farm must agree to complete the training or qualify for the waiver on behalf of the entity. However, if one entity member is solely responsible for financial or production management, then only that entity member will be required to complete the training in that area for the entity or qualify for a partial waiver. If the financial and production functions of the farming operation are shared, the knowledge and skills of the individual(s) with the responsibility of production and/or financial management of the operation will be considered in the aggregate for granting a waiver or requiring that training be completed. If a waiver is not granted, these individuals will be required to complete the training in accordance with their responsibilities. If the loan applicant has previously been required to obtain training, the loan applicant must be enrolled in and attending, or have satisfactorily completed, the training required. Borrowers applying for restructuring of guaranteed loans will not be required to complete training; however, if training has been required as part of a previous loan making action, the borrower must be enrolled and attending, or have satisfactorily completed, the training required.

(c) Loan purposes—(1) Loan note guarantee. Loan funds may only be used for the following purposes:

(i) Payment of costs associated with reorganizing a farm or ranch to improve its profitability.

(ii) Purchase of livestock, including poultry, and farm or ranch equipment, including quotas and bases, and cooperative stock for credit, production, processing or marketing purposes.

(iii) Payment of annual farm or ranch operating expenses, examples of which include feed, seed, fertilizer, pesticides, farm or ranch supplies, cash rent, family subsistence, and other farm and ranch needs.

(iv) Payment of costs associated with land and water development for conservation or use purposes.

(v) Refinancing indebtedness incurred for any authorized OL loan purpose, when the lender and loan applicant can demonstrate the need to refinance.

(vi) Payment of loan closing costs.

(vii) Payment of costs associated with complying with Federal or State-approved standards under the Occupational Safety and Health Act of 1970 (29 U.S.C. 655 and 29 U.S.C. 667). This purpose is limited to applicants who demonstrate that compliance with the standards will cause them substantial economic injury.

(viii) Payment of training costs required or recommended by the approval official.

(2) Contract of guarantee—line of credit. Lines of credit may be advanced for the following purposes:

(i) Payment of annual operating expenses, family subsistence, and purchase of feeder animals.

(ii) Payment of current annual operating debts advanced by other creditors or the lender. Under no circumstances can carry-over operating debts be refinanced.

(d) Loan limitations. (1) No guaranteed OL loan shall be made to any applicant after the 15th year that an applicant, or any individual signing the promissory note, received direct or guaranteed OL loans. Transition rule: If a borrower was indebted for a direct or guaranteed OL loan on October 28, 1992, and had any combination of direct or guaranteed OL loans closed in 10 or more prior calendar years, eligibility to receive new guaranteed OL loans is extended for 5 additional years from October 28, 1992, and the years need not run consecutively. However, in the case of a line of credit, each year in which an advance is made after October 28, 1992, counts toward the 5 additional years.

(2) Real estate improvements and repairs can be made only when the loan applicant owns the property, or the loan applicant has a lease that either ensures use of the improvement or repair over its useful life or provides fair compensation for the unused economic life.

(3) The total outstanding direct and guaranteed OL principal balance owed by the loan applicant or owed by anyone who will sign the note/line of credit agreement as a cosigner may not exceed a total of $400,000 at loan closing. The amount of principal outstanding at any time on a guaranteed line of credit also must never exceed the ceiling set out on the Contract of Guarantee.

(4) Loans may not be made for: (i) The purchase of real estate, or (ii) Making principal payments on real estate.

(5) Guaranteed lines of credit will not be used for capital expenditures.

(6) Loans also may not be made for any purpose that will contribute to excessive erosion or highly erodible land or to the conversion of wetlands to produce an agricultural commodity, as further explained in exhibit M to subpart G of part 1940 of this chapter. A decision by FmHA or its successor agency under Public Law 103-354 to reject an application for this reason is appealable. However, an appeal questioning either the presence of a wetland, converted wetland, or highly erodible land must be filed directly with the USDA agency making the determination in accordance with its appeal procedures.

(7) Multiple Guarantees. More than one Loan Note Guarantee or Contract of Guarantee may be executed with the same or different lenders to a borrower so long as each loan/line of credit is secured with separate collateral that is clearly identified. This requirement does not preclude cross-collateralization of loans/lines of credit with other guaranteed loans/lines of credit to obtain additional collateral provided that the loans/lines of credit are held by the same lender. Total loans or line of credit ceilings must not exceed $400,000 at any time.

(e) Interest rates. (1) The interest rate for the entire loan may be a fixed or variable rate as agreed upon by the borrower and the lender. The guaranteed portion of the loan may carry an interest rate lower than the rate on the nonguaranteed portion. Lines of credit may also have fixed or variable rates but the rate must be the same on the guaranteed and nonguaranteed portions.

(2) The lender may charge a rate on both the guaranteed and nonguaranteed loan portion, not to exceed the rate the lender charges its average farm customer. Average farm customers are those conventional 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 that 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 items such as saving accounts, time deposits, certificates of deposit, stocks and bonds, and life insurance which they are able to pledge for the loan. At the request of FmHA or its successor agency under Public Law 103-354 the lender will provide evidence of the rate charged the average farm customers. Such evidence may consist of average yield data, or documented administrative differential rate schedule formulas used by the lender.

(3) Except for Farm Credit System member institutions, if a variable rate is used, it must be tied to a rate specifically agreed to by the lender and borrower. Such agreement on interest rate must be documented in the borrower/lender's loan agreement. The interest rate on loans made by a Farm Credit System member institution will be a fixed or variable rate based on their administrative and borrowing costs. Variable rates may change according to the normal practices of the lender for its average farm customers, but frequency of change must be set forth in the loan/line of credit intstrument.

(4) The lender, borrower and holder (if any) may collectively effect a temporary reduction in the interest rate when processing an Interest Rate Buydown under exhibit E of this subpart. The reduced rate of interest must be a fixed rate for the term of the buydown. The lender is responsible for the legal documentation of interest rate changes by an “allonge” attached to the promissory note(s) or line of credit agreement or other legally effective amendment of the interest rate; however, no new note(s) or line of credit agreement(s) may be issued. If the amendment is attached to a variable rate note or line of credit agreement, the fixed rate of interest charged during the buydown period will be calculated not to exceed the average variable rate charged the lender's average farm customer over the past 90 days.

(5) Interest will be charged only on the actual amount of funds loaned and for the actual time the loan is outstanding. Interest on protective advances made by the lender to protect the security may be charged at the rate specified in the security instruments.

(6) The lender and borrower may collectively effect a temporary reduction in the interest rate when processing an Interest Assistance under exhibit D of this subpart. The lender may charge a fixed or variable interest rate during the term of the Interest Assistance Agreement. The type of rate must be the same as the type of rate in the underlying note or line of credit agreement. If the lender uses a variable rate, the rate may only be changed once each year. During the term of the Interest Assistance Agreement, variable interest rates may not be increased by more than a total of 3 percent above the effective note rate of interest at the time this agreement is entered into. This cap on interest increases will be clearly spelled out in the note/line of credit agreement or in an allonge attached to the note/line of credit agreement or other legally effective amendment of the interest rate; however, no new note or line of credit agreement may be issued. The date of interest rate adjustment shall coincide with the annual payment date on loans/lines of credit with annual payments. On other loans/lines of credit, the annual review dates will be clearly set out in the note/line of credit agreement.

(f) Terms. (1) The final maturity date for each loan/line of credit cannot exceed 7 years from the date of the promissory note/line of credit agreement.

(2) Except for lines of credit made under the CLP program, all advances on a line of credit must be made within 3 years from the date of the Contract of Guarantee. For lines of credit made under the CLP program, all advances must be made within 5 years from the date of the Contract of Guarantee.

(3) Ordinarily, loan funds used to pay annual operating expenses or bills incurred for such purposes for the crop year being financed will be scheduled for payment when the income from the year's operation is to be received. Under certain circumstances these payments may be scheduled over longer periods. Circumstances which warrant an extended repayment schedule are factors such as establishing a new enterprise, developing a farm, or during recovery from disaster or economic reverses. Crops only are not sufficient security when repayment is scheduled over the longer period.

(4) Advances for purposes other then those for annual operating expenses will be scheduled for payment over the minimum period necessary considering the applicant's ability to pay and the useful life of the security, but not in excess of seven years.

(5) When conditions warrant, installments scheduled in accordance with paragraph (f)(4) of this section may include equal, unequal, or balloon installments. In each case warranting balloon installments there must be adequate collateral for the loan/line of credit at the time the balloon installment becomes due. In no case will annual crops and/or machinery be used as the sole collateral securing a loan with a balloon installment. Circumstances which warrant balloon payments are factors such as establishing a new enterprise, developing a farm, or during recovery from a disaster or economic reverses. The amount ballooned should not exceed that which the borrower could reasonably expect to pay during a maximum additional 15-year period except for NFE loans, which will be a maximum additional 7 years. The applicant must be advised before the loan is closed that the lender will review each case at the end of the initial loan term to determine if such rescheduling is warranted. (See § 1980.124 of this subpart.)

(g) Security. Ordinarily, the security must be adequate in the opinion of the lender and FmHA or its successor agency under Public Law 103-354 to assure repayment of the loan/line of credit. If the security alone is inadequate, then the applicant's repayment ability will also be considered by the lender and FmHA or its successor agency under Public Law 103-354 (provided the FmHA or its successor agency under Public Law 103-354 approval official's opinion is based on the evaluation set forth in § 1980.114 of this subpart) in determining whether the loan/line of credit should be made. However, when a loan is made for refinancing purposes. the amount refinanced may not exceed the value of the security. The loan/line of credit must be secured by a first lien on all property or products acquired or produced with loan funds and by any additional security needed. Any loans made for refinancing when the debt refinanced is secured by real estate or chattels will be secured by a first lien on the property securing the debt which is being refinanced or when the debt refinanced is secured by real estate by a junior lien which is no lower than the lien presently held on the property securing the debt being refinanced, and by any additional security needed. Additional security may consist of the best lien obtainable on chattels, real estate or other property.

(h) Special security requirements. (1) Operating loans shall not be guaranteed where multiple entities own the chattel unless all entities guarantee and pledge security for the loan and no entity may transfer ownership or security value to another entity without the lender and FmHA or its successor agency under Public Law 103-354 concurrence.

(2) When guaranteed OL loans are made to eligible entities that consist of members, stockholders, partners or joint operators who are presently indebted for a guaranteed OL loan(s) as individual(s) or when guaranteed OL loans are made to eligible individuals, who are members, stockholders, partners or joint operators of an entity which is presently indebted for a guaranteed OL loans(s), security must consist, of chattel and/or real estate security that is separate and identifiable from the security pledged to FmHA or its successor agency under Public Law 103-354 for any other farmer program direct or guaranteed loans. Different lien positions on real estate are considered separate and identifiable collateral.

(3) Subject to the requirements of this section, the Agency may approve a Contract of Guarantee for a line of credit to be secured by basic chattel or real estate security in which the Agency has subordinated its lien position in accordance with § 1980.108.

(i) Insurance. Insurance for property, public liability, and crops should be obtained before or at the time of loan closing.

(1) Chattel property. Borrowers should be encouraged to carry insurance on chattel property, including growing crops, which serves as security for a loan and on other chattel or real property, in order to protect themselves against losses resulting from hazards existing in an area. It is especially desirable that insurance be obtained by applicants who receive large loans and have considerable chattel property including feed, supplies, and inventory centrally stored over an extended period. Such insurance may be required by the loan approval official in individual cases.

(2) Real estate. If essential insurable buildings are located on the property, or improvements are to be made to existing buildings, the applicant, when required, will provide adequate property insurance coverage at the time of the loan closing or as of the date materials are delivered to the property, whichever is appropriate.

Real property insurance will not be required when a real estate appraisal report shows that both the present market value of the land (after deducting the value of buildings) and the owner's equity in the land exceed the amount of the debt, including the debts for the loan being made. However, the applicant will be encouraged to carry insurance. If insurance claims for loss or damage to buildings to be replaced or repaired with loan funds are outstanding at the time the guarantee is approved, the applicant will be required to agree in writing that when settlement of these is made, the proceeds will be used to replace or repair buildings, to apply to debts secured by prior liens, or to apply to the guaranteed OL loan/line of credit being made.

(3) Public liability and property damage. Borrowers, should be advised of the possibilities of incurring liability and encouraged to obtain public liability and property damage insurance, including insurance on a customer's property in the custody of the borrower.

(j) Other considerations. (1) Applicants will be advised by the lender that they are expected to comply with any applicable special laws and regulations.

(2) Applicants receiving loans for nonfarm enterprises will be advised of the possibility of incurring liability and encouraged to obtain public liability and property damage insurance.