[Federal Register Volume 64, Number 29 (Friday, February 12, 1999)]
[Rules and Regulations]
[Pages 7358-7403]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-3256]
[[Page 7357]]
_______________________________________________________________________
Part V
Department of Agriculture
_______________________________________________________________________
Farm Service Agency
Rural Housing Service
Rural Business-Cooperative Service
Rural Utilities Service
_______________________________________________________________________
7 CFR Parts 762 and 1980
Implementation of Preferred Lender Program and Streamlining of
Guaranteed Loan Regulations; Final Rule
Eligibility Criteria for Certified and Preferred Lenders; Notice
Federal Register / Vol. 64, No. 29 / Friday, February 12, 1999 /
Rules and Regulations
[[Page 7358]]
DEPARTMENT OF AGRICULTURE
Farm Service Agency
7 CFR Part 762
Rural Housing Service
Rural Business-Cooperative Service
Rural Utilities Service
Farm Service Agency
7 CFR Part 1980
RIN 0560-AF38
Implementation of Preferred Lender Program and Streamlining of
Guaranteed Loan Regulations
AGENCY: Rural Housing Service, Rural Business-Cooperative Service,
Rural Utilities Service, and Farm Service Agency, USDA.
ACTION: Final rule and request for comments.
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SUMMARY: This action amends the regulations governing the Farm Service
Agency's (FSA) guaranteed farm loan programs. It clarifies, simplifies,
and streamlines the procedures to apply for, make, and service FSA
guaranteed loans. This action also establishes the Preferred Lender
Program.
This action also provides for an Interest Assistance Program to
replace the former interest rate buydown program (IRBD). The intended
effect of this rule is to clarify and simplify the rules, and to
finalize the interim rule which implemented the provisions of the
Omnibus Budget Reconciliation Act of 1990. As contained in the final
rule, FSA grants interest assistance at a 4 percent subsidy rate in all
situations that qualify for interest assistance. FSA is requesting
comments on alternative methods of determining the amount of subsidy
paid, including granting interest assistance at incremental rates based
upon the borrower's needs.
FSA is also incorporating changes mandated by Agriculture, Rural
Development, Food and Drug Administration and Related Agencies
Appropriations Act, 1999, (1999 Act), signed on October 21, 1998.
DATES: This regulation is effective on February 12, 1999. Comments on
the alternative interest assistance subsidy rate calculation must be
received on or before April 13, 1999.
ADDRESSES: Submit written comments to the Farm Service Agency, U.S.
Department of Agriculture, Farm Loan Programs Loan Making Division,
Attention: Director, Room 5438-S, 1400 Independence Avenue, SW, STOP
0522, Washington, DC 20250-0522. All written comments received in
connection with this rule will be available for public inspection 8:15
am--4:45 pm, Washington, DC time, except holidays, at 1400 Independence
Avenue, SW, Washington, DC 20250-0522.
FOR FURTHER INFORMATION CONTACT: Steven K. Ford, Senior Loan Officer,
Farm Service Agency; telephone: 202-720-3889; Facsimile: 202-690-1117;
E-mail: sford@wdc.fsa.usda.gov
SUPPLEMENTARY INFORMATION:
Executive Order 12866
This rule has been determined to be significant and was reviewed by
the Office of Management and Budget under Executive Order 12866.
This rule substantially streamlines FSA's procedures implementing
the guaranteed loan program. By making FSA's guaranteed loan program
more consistent with standard practices used within the lending
industry, use by lenders will be simplified and they will be more
willing to use the program. This will increase the availability of
commercial credit for family size farmers.
FSA currently guarantees repayment on approximately 65,000 farm
loans to 40,000 farmers. Each year, FSA receives 15,000 requests for
new loans. By reducing the application burden on lenders, and making
FSA rules more consistent with industry practices, we expect lenders
will increase requests for loan guarantees by 25 percent, or an
additional $395 million. This means an additional 3,000 farmers will be
able to receive commercial credit. These farmers would otherwise have
gone without credit or required assistance through FSA's direct loan
programs.
Regulatory Flexibility Act
The Agency certifies that this rule will not have a significant
economic effect on a substantial number of small entities and therefore
is not required to perform a Regulatory Flexibility Analysis as
required by the Regulatory Flexibility Act, Pub. L. 96-534, as amended
(5 U.S.C. 601). An insignificant number of guaranteed loan borrowers
and no lenders are small entities. This rule does not impact the small
entities to a greater extent than large entities.
Environmental Impact Statement
It is the determination of FSA that this action is not a major
Federal action significantly affecting the environment. Therefore, in
accordance with the National Environmental Policy Act of 1969, Pub. L.
91-190, and 7 CFR part 1940, subpart G, an Environmental Impact
Statement is not required.
Executive Order 12988
This rule has been reviewed in accordance with E.O. 12988, Civil
Justice Reform. In accordance with that Executive Order: (1) All State
and local laws and regulations that are in conflict with this rule will
be preempted; (2) no retroactive effect will be given to this rule
except that Agency servicing under this rule will apply to loans
guaranteed prior to the effective date of the rule; and (3)
administrative proceedings in accordance with 7 CFR parts 11 and 780
must be exhausted before requesting judicial review.
Executive Order 12372
For reasons set forth in the Notice to 7 CFR part 3015, subpart V
(48 FR 29115, June 24, 1983) the programs and activities within this
rule are excluded from the scope of Executive Order 12372, which
requires intergovernmental consultation with state and local officials.
Unfunded Mandates
Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub.L.
104-4, requires Federal agencies to assess the effects of their
regulatory actions on State, local, and tribal governments or the
private sector. Agencies generally must prepare a written statement,
including a cost benefit assessment, for proposed and final rules with
``Federal mandates'' that may result in expenditures of $100 million or
more in any 1 year for state, local, or tribal governments, in the
aggregate, or to the private sector. UMRA generally requires agencies
to consider alternatives and adopt the more cost effective or least
burdensome alternative that achieves the objectives of the rule.
The rule contains no Federal mandates, as defined by title II of
the UMRA, for State, local, and tribal governments or the private
sector. Thus, this rule is not subject to the requirements of sections
202 and 205 of UMRA.
Paperwork Reduction Act
The amendments to 7 CFR parts 762 and 1980 contained in this final
rule require no revisions to the information collection requirements
that were previously approved by OMB under control number 0560-0155. A
proposed rule containing an estimate of the burden impact of this rule
was published on September 25, 1998 [63 FR 51458--51488]. No comments
regarding
[[Page 7359]]
the burden estimates were received. Comments received relating to forms
and the information collected are addressed in the discussion below.
Federal Assistance Program
These changes affect the following FSA programs as listed in the
Catalog of Federal Domestic Assistance:
10.406--Farm Operating Loans
10.407--Farm Ownership Loans
Change in CFR Parts
FSA is moving its regulations governing the guaranteed farm loan
program from 7 CFR part 1980, subparts A and B to 7 CFR part 762. This
will better organize FSA regulations and incorporate farm loan program
regulations with other FSA programs.
Discussion of the Final Rule
In response to the proposed rule published September 25, 1998, 231
respondents from 35 States and the District of Columbia commented. Most
of the comments involved a number of different sections of the proposed
rule. Comments were received from Agency employees, farm interest
groups, lenders, lender and employee associations, individuals, and
Members of Congress. The comments received on the proposed rule were
overwhelmingly in support of most of the changes proposed by the
Agency.
This regulation provides the features, requirements, and
restrictions of the program. However, internal Agency procedures and
processes were excluded. The Agency will issue a handbook and update
its lender manual. These documents will, within the framework of these
published regulations, more thoroughly describe processes for the
Agency and lenders, identify and discuss the completion of specific
Agency forms, and otherwise provide more detail than is in the Federal
Register.
There were many comments concerning problems with program delivery.
Issues included Agency employees not following or knowing regulations,
slow processing, inconsistency between offices, lack of staff, and need
for training. These issues will be handled internally by the Agency and
are not addressed in this document.
The 1999 Act contains several revisions to the statute governing
the Agency`s farm loan programs. Statutory changes that impact
guaranteed loan limits and borrower training requirements are discussed
below in response to comments received on the proposed rule.
The 1999 Act also eased the debt forgiveness restrictions which
were mandated by the Federal Agriculture Improvement and Reform Act of
1996 (1996 Act). Previously, any FSA borrower receiving debt
forgiveness would be ineligible for additional FSA credit. The 1999 Act
provides that a borrower may have received debt forgiveness on three
occasions prior to or on April 4, 1998, and still be determined
eligible for guaranteed credit. Borrowers receiving debt forgiveness on
more than three occasions, or any debt forgiveness after April 4, 1996,
will be ineligible for FSA guaranteed loans.
The 1996 Act provided an additional exception to the debt
forgiveness provision. A borrower who received debt write down, as
compared with other types of debt forgiveness, previously could receive
an annual operating loan. The 1999 Act expanded this exception to
include borrowers who are current on confirmed bankruptcy
reorganization plans. These changes have been incorporated into the
final regulation at Sec. 762.120.
Appraisals
One hundred and nine comments were received concerning raising the
threshold for requiring a certified general appraiser from $100,000 to
$250,000. Nine comments objected to the change, 94 supported it, and
six requested clarification or modifications. Those supporting the
change cited reduced costs, shortened application process and
compliance with their regulatory requirements as reasons. The concern,
expressed by all of those opposed to the change, is that relaxing the
policy will adversely affect the quality of the appraisals. Most of the
commenters objecting to the change stated that many of the appraisals
currently received from certified general appraisers are not correct
and do not adhere to Uniform Standards of Professional Appraisal
Practice (USPAP). Another concern was that less qualified licensed
appraisers (previously used for transactions up to $100,000) were more
experienced with residential rather than agricultural appraising and
not qualified to perform the more complicated appraisals of agriculture
property.
On transactions of $250,000 or less, the proposed rule provided
that the Agency would determine if the appraiser possessed adequate
experience and training to estimate the value of the type property in
question. It also required appraisals to be completed in accordance
with USPAP. The Agency desires to comply with industry standards, and
with the controls in place, is convinced that relaxing the policy will
not adversely affect appraisal quality. Therefore, the Agency has
decided to leave the threshold at $250,000, as in the proposed rule
with minor editorial changes in Sec. 762.127(d)(3) to clarify that the
entire appraisal process, not just the report, will be completed in
accordance with USPAP. The Agency has requested and the Office of
Management of Budget (OMB) has granted an exception from OMB circular
A-129 for this purpose.
Three comments requested additional clarification of what is an
acceptable appraiser. The proposed rule stated that the lender must
demonstrate to the Agency's satisfaction that the appraiser possesses
sufficient experience or training to estimate values. As proposed, the
lender could provide any documentation considered appropriate to
demonstrate this expertise. The level of expertise could vary by region
and complexity of agriculture. The Agency did not want to dictate and
limit what could be used to demonstrate appraiser competency. However,
a revision has been made to Sec. 762.127(d)(2)(i) to require the
appraisal expertise to be in appraising agricultural property.
Additional guidance consistent with this standard will be placed in the
agency handbook and lender manual.
Several comments noted an inconsistency between the proposed rule
and the preamble. The preamble incorrectly stated that the appraiser
must use all three approaches to value, while the regulation required
that appraisal reports comply with USPAP standards. The final rule at
Sec. 762.127(d)(3) should eliminate any confusion concerning this
matter. It states that real estate appraisals must be completed in
accordance with USPAP.
Two respondents suggested we permit only the original appraiser to
update an appraisal. One of the comments went on to say USPAP requires
that the original appraiser be involved in an update. These suggestions
were not adopted because the Agency believes that the requirement that
appraisals be performed in accordance with USPAP adequately covers the
respondents' concern. The agency handbook and lender manual will
include clarification and guidance of the standard published in this
final rule.
Two comments objected to approving a loan subject to an adequate
appraisal. Eighty-five respondents supported this change. A concern
appears to be that the lender may ignore the conditions of approval and
close the loan without adequate security. The Agency would then refuse
to issue the guarantee. The
[[Page 7360]]
Agency has determined that the benefits of a simplified application
process outweigh the minimal risk to the lender that the Agency would
so act and will not adopt this suggestion.
Another comment suggested an estimate of value be included with the
application. This will be included on the application form.
One respondent suggested the regulation include the specific items
needed in a chattel appraisal. The regulation states that lenders may
use the Agency's form or any other form containing at least the same
information. The Agency feels this adequately identifies the
information required for a valid appraisal.
Two comments were received suggesting outside chattel appraisers be
required for refinancing bank debt. Another comment suggested bank loan
officers not be permitted to perform real estate appraisals over
$100,000. Since the regulation permits the Agency to determine if the
appraiser possesses adequate experience or training, the Agency feels
safeguards are adequate to assure valid appraisals by lenders.
Therefore, these suggestions are not being adopted.
Packager Requirements
Ninety-seven comments were opposed to the proposal to restrict
lender use of loan packagers. Many of the comments preferred to address
excessive fees by simplifying the paperwork requirements and making
packaging services unnecessary. Six comments suggested varying levels
of restrictions or clarification such as limiting the fee to a certain
percentage of the loan, prohibiting packager use entirely, or
clarification of how any limitations would be enforced. Although the
Agency feels that the proposed rule change reduced paperwork
requirements, it agrees that packagers do provide a valuable service to
some farmers and any arbitrary limitations would not be warranted.
Therefore, the use of packagers will not be prohibited or restricted in
the final rule.
Loan Limits
Twenty-eight comments were received indicating the maximum
guarantee loan limits of $300,000 for Farm Ownership (FO) loans and
$400,000 for Operating loans (OL) were too low. Numerous suggestions to
raise or modify the limits were provided. Loan limits are established
by statute and the Agency has no authority to raise them. However, the
1999 Act did modify the loan limits and provided for a maximum of
$700,000 total guaranteed FO and OL indebtedness. This will permit an
applicant to receive a total of $700,000 guaranteed OL and FO loans.
The $200,000 Direct FO and OL limitations remain in place. The result
is that in some situations, the borrowing limit may be $900,000. The
revised limitation was incorporated into Sec. 762.122.
One comment was received concerning the need to conform approval
authorities with other FSA regulations. This suggestion will be
implemented administratively.
Loan Restrictions
One comment suggested that lenders be permitted to advance funds to
purchase cooperative membership stock outside the guarantee. There is
nothing in existing or proposed regulations that would prevent a lender
from financing stock purchases with unguaranteed funds. Therefore, no
change to the regulation is needed.
One comment was received concerning joint ventures, suggesting a
relaxing of the requirement that members of an entity must operate the
farm. The proposal is that the applicant only need take an active role
in management. The Agency is unable to adopt this suggestion as
Secs. 302 and 311 of the CONACT requires that the members holding a
majority interest in the entity must operate the farm. However, the
Agency has clarified the regulation to say only the members holding a
majority interest must operate the farm. See Sec. 762.120(e) and (f).
One respondent suggested limiting the size of the farm dwelling to
be financed with a guarantee. Such a restriction would be arbitrary and
contrary to the Agency's policy of reducing regulatory limitations. The
Agency is not directly supervising the loan, does not wish to become
actively involved in the loan applicant's management decisions and is
not in a position to dictate the maximum size of a dwelling. The lender
is required to place limits on borrower expenditures to prevent the
buildup of excessive debt, with the resulting inability to repay the
loan. The suggestion was not adopted.
One comment stated that the guaranteed program is designed for row
crop loans and does not fully address the needs of livestock producers.
No specific examples were provided. The Agency does not agree with this
comment because livestock issues are specifically discussed throughout
the regulation.
This same individual objected to the lender certification
requirements. Since the Agency is unable to identify the specific
objectionable requirements the commentor is referring to, the Agency is
unable to address this comment.
One comment was received requesting that ``bridge'' loans made by
the lender while waiting for a final decision from the Agency can be
included under the guarantee, once it is approved. This practice,
although not prohibited by regulation, is strongly discouraged. There
could be a question of the need for a guarantee if the lender was
willing to close the loan without one. However, if the lender is
willing to assume the risk of making a bridge loan prior to any Agency
decision to guarantee the permanent loan, the final rule does not
prohibit including such debt under the guarantee. This will be further
discussed in the agency handbook and lender manual.
One comment suggested that the lender should certify at loan
closing that no material adverse change has occurred in the operation
since the request for guarantee was submitted. The existing regulation
requires this certification to reveal changes since the conditional
commitment was issued. The Agency agrees with this suggestion and
adopted it in the final rule.
Five comments suggested removing the prohibition of additional
guaranteed OLs after a borrower has received loans for 15 years. This
requirement is statutory and cannot be eliminated without legislative
action.
One comment suggested the Agency treat a husband and wife applicant
as an individual, rather than a joint operation. The Agency agrees that
this can be burdensome for some lenders. However the Agency desires to
maintain continuity with its direct loan programs and will reevaluate
this issue as the direct loan program regulations are revised.
One respondent suggested that veterans preference for funding be
expanded. The Agency feels the current policy, which was not changed in
this rule, is appropriate.
Conflict of Interest
One comment indicated that the conflict of interest changes will
permit a loan to be made where a conflict of interest exists. This is
not correct. The lender is required to provide information concerning
ownership or business relationships, and the Agency will determine if
these relationships are sufficiently likely to result in a conflict.
The Agency revised Sec. 762.110(f) to say relationships, rather than
conflicts will be reported to the Agency.
Another respondent suggested specifying a penalty for the lender if
a relationship is not reported, but is later identified. A specific
penalty is not
[[Page 7361]]
being adopted for not reporting conflicts. Such situations are case
specific and depending on the severity of the situation, such a
violation will be handled with regulations already in place. Additional
guidance will be provided in the agency handbook and lender manual.
Interest Assistance
There were seven comments requesting an extension of interest
assistance beyond the 7 or 10 years, making the argument that the
limits are arbitrary and will result in failure. While the Agency
sympathizes with the plight of individuals in need of a subsidy which
is expiring, the Agency's mission is one of temporary assistance to
farm families. In addition, the interest assistance program is the most
expensive of the Agency's guaranteed farm loan programs and limits must
be placed to control costs. This recommendation was not adopted.
One respondent requested that interest assistance be available for
existing guaranteed loans. The Agency agrees that this would be ideal,
and this is currently not prohibited by regulation. However, the
interest assistance program is very expensive and funding for paying a
subsidy on existing loans is not available. Including this option for
all guaranteed loans would result in a dramatic increase in costs for
the entire guarantee program or reduce the number of applicants that
could receive credit. Therefore, the Agency will not adopt this
recommendation.
Additional public comments received concerning the interest
assistance program interim rule are discussed below.
Preferred and Certified Lender Programs
The Agency received 131 comments concerning various aspects of the
preferred lender program (PLP) and certified lender programs (CLP).
Comments from almost all of the respondents supported the introduction
of PLP and the minor modifications made to the existing CLP.
The proposed rule provided that lenders could request either PLP or
CLP status. One comment suggested that lenders be permitted to operate
under both the CLP and PLP if they desired. For administrative
simplification and clarity, it is desirable for each lender to operate
under only one status. PLP lenders will be able to receive 95 percent
guarantees when refinancing Agency direct farm loans or when the
borrower will be participating in the Agency's down payment loan
program. The Agency did not adopt the suggestion to allow lenders to
request both PLP and CLP status.
The proposed rule provided that the Agency will determine which
branches of the lender have the necessary experience and ability to
participate in CLP or PLP. Comments from 82 respondents suggested that
it would be more expedient if the applying institution designate those
branches it wishes to be considered for certification, followed by
Agency approval or disapproval. The Agency intended this in the
proposed rule. The proposed rule provided that lenders desiring PLP or
CLP status address, in their request, the State in which they desire
status. One comment suggested that applicants specify the county or
parish in which they desire status, to assure consistency with the
requirement that an office be located near enough to the collateral's
location to efficiently discharge loan making and servicing
responsibilities. In response to these comments the Agency has included
a provision in Sec. 762.106(a)(1)(i) that lenders requesting PLP or CLP
status indicate the branch offices they want considered for status.
The proposed rule provided that lenders desiring PLP or CLP status
must send their request to the Agency State office for the State in
which the lender's headquarters are located. One comment suggested that
the lender send the request to the Agency state office for each State
in which the lender intends to make guaranteed loans. This suggested
change was based upon the fact that banking laws, security
requirements, and other lending procedures vary from one State to
another and each Agency State office is independently responsible for
maintaining credit quality and consistency within the State. The Agency
recognizes the administrative need to coordinate among various Agency
State offices; however, the Agency believes it would be unnecessarily
burdensome to require a lender to apply for status at several Agency
offices. The administrative details of coordinating requests that cover
several States will be addressed in the agency handbook and lender
manual. The Agency did not adopt the suggested change.
Three comments suggested the Agency centralize the processing of
CLP and PLP loan making and servicing activities, pointing out that
centralization would promote uniformity. The proposed and final rule
purposely does not specify where the Agency will process guarantee
applications. This will allow the Agency administrative flexibility to
configure operations in the most effective manner.
One comment expressed concern about the ``10 loan [sic] in 2 year
requirement'' under the CLP. The proposed rule continued existing
Agency policy at 7 CFR Sec. 1980.190(b)(1)(vii) and required, for CLP
eligibility, that a lender have closed a minimum of ten Agency
guaranteed loans or lines of credit and have closed a total of five
Agency loans in the past 2 years. The Agency developed these
requirements to assure that CLP lenders have a reasonable amount of
experience with the guaranteed program. The Agency believes that these
requirements are reasonable and will not change them.
The proposed rule provided that, to be eligible for PLP status, a
lender must have made at least 20 PLP, CLP, or approved lender program
(ALP) loans, or a combination of these type loans within the past 5
years. The ALP is another level of lender status and is being
discontinued with this rule. This requirement was established at a
level designed to permit the Agency to grant PLP status to one percent
of the 2,500 lenders that make guaranteed farm loans each year.
Clarification or reconsideration of this requirement was requested by
98 respondents. Several respondents expressed concern that criteria
that limited the program to only 25 lenders was too restrictive. Most
commenters suggested that the Agency clarify that 20 individual loans,
as opposed to 20 borrowers, be the criteria. Comments from two
respondents suggested that the 20 should refer to borrowers. Another
respondent suggested that either all guaranteed loans or just PLP and
CLP loans be considered, suggesting that ALP doesn't show any better
quality than a loan from a standard lender. Other comments suggested
that all guaranteed loans be considered. Three respondents suggested
that the number of loans be eliminated as an eligibility criteria or
alternate criteria be considered. One respondent suggested that
agricultural banks (as defined by either the Federal Reserve or FDIC)
be PLP lenders based on the lenders call report data. The respondent
pointed out that call report data is the proven result of the quality
of the lender's credit management system. The Agency considered the
various comments and determined that criteria that restrict PLP status
to one percent of the 2,500 lenders that make guaranteed farm loans
each year is too restrictive. The Agency also agrees that all FSA
guaranteed loans that a lender has made should be considered.
The Agency wants to establish the PLP eligibility criteria at a
level where the lenders have demonstrated adequate
[[Page 7362]]
recent experience with the guaranteed program while not being too
restrictive. The Agency modified Sec. 762.106(c)(3) to provide that the
lender will have made a minimum number of guaranteed loans within the
previous 3 years as set out in a separate published notice. As the
Agency and lenders become accustomed to these PLP process, the volume
requirements may be changed. These changes will be established in a
Federal Register notice.
One comment requested clarification of the rating service
acceptable to the Agency for determining an acceptable level of
financial soundness for Farm Credit System institutions. Instead of
defining a particular rating or rating service, the Agency has
determined a more appropriate requirement is that the lender not be
under any regulatory enforcement action based upon financial condition.
The Agency's National office will work with the financial institution
regulators to assure that lenders holding CLP or PLP status are
financially sound. Section 762.106(b)(6) has been modified to include
this requirement.
The Agency received 82 comments requesting clarification or
parameters as to what elements comprise a satisfactory credit
management system. The comments pointed out that more specific criteria
that the lender must address would help promote uniformity and assure
that objective criteria are considered when the Agency evaluates the
lender's credit management systems. The respondents suggested that the
Agency use a methodology similar to that contained in bank and thrift
regulators manuals. The Agency does not want to unnecessarily limit a
PLP lender in the methods used to administer their credit transactions,
therefore the Agency has not added additional specificity or regulatory
requirements for a satisfactory credit management system. However, the
Agency agrees that additional guidance of what should be addressed in
the lender's credit management system would result in more uniformity
and it will provide such guidance in the agency handbook and lender
manual. In addition, Sec. 1980.106(d)(4) has been modified to state
that any lending criteria not specifically addressed in the lender's
credit management system will be governed by the CLP requirements.
One respondent stated that requiring that the PLP lender show a
consistent practice of submitting applications that are detailed with
complete information that supports the loan proposal is subjective, and
questioned how to ensure consistency across State lines. The Agency
will gather and review information from all of the States in which the
lender wishes to do business. The process by which this information
will be gathered will be addressed in the agency handbook and lender
manual.
The Agency proposed that a PLP lender have a history of using the
guaranteed programs for new loans instead of refinancing the lender's
existing debts. Comments from 93 respondents addressed this
requirement. Comments from seven respondents supported this requirement
or suggested that the restriction be expanded. One comment suggested
that the Agency disallow all refinancing of existing debt, another
suggested the Agency limit the guarantee to 80 percent in all cases of
refinancing, another suggested that refinancing not be allowed under
CLP or PLP, and another recommended that PLP be ``limited to lenders
with a past history of promoting new credit and willing to continue
activity promoting new credit.'' Comments from 88 respondents either
opposed the requirement or suggested that the requirement was too
ambiguous and counterproductive. These comments pointed out that the
requirement was not amenable to a bright line of interpretation and
that the Agency had provided little rationale for imposing the
criteria. They commented that this burdensome requirement would cause
some lenders to not participate in the program and could adversely
impact borrowers. The Agency agrees that the requirement is ambiguous,
of limited value, is burdensome and would cause some lenders not to
participate. The requirement has been removed.
Three comments suggested that the Agency pre-approve all Farm
Credit System lenders for CLP or PLP. Because each separate Farm Credit
System entity will need to select which status they desire and meet
those eligibility criteria, the Agency cannot adopt this recommended
change.
One respondent suggested that applicants for CLP and PLP status
should be required to have fulfilled obligations regarding graduation
and market placement. Since the Agency is responsible for these
programs and cannot transfer these obligations to a lending
institution. The Agency did not adopt the suggested additional
eligibility requirement.
One respondent suggested that the Agency revoke CLP or PLP status
if the lender does not make 40 percent of the guaranteed operating
loans and 25 percent of the guaranteed farm ownership loans to
beginning farmers. While the Agency agrees with the need to encourage
lending to beginning farmers and does target guarantee funds for that
purpose, the Agency does not feel revocation of lender status would be
a reasonable method of encouragement; therefore the Agency did not
adopt this suggestion.
Lender Eligibility
One respondent suggested that standard eligible lenders be approved
for 5 years, rather than demonstrating eligibility for each guarantee
request submitted. The Agency did not change the requirements from
existing practice and does not contemplate that a standard eligible
lender will need to provide all evidence demonstrating eligibility with
each guarantee request. The Agency did not adopt the multi-year
eligibility suggestion for standard eligible lenders. However, the
language in the introductory paragraph of Sec. 762.105(a) is clarified
so that the lender must demonstrate eligibility and provide evidence
when the Agency requests.
One comment suggested that the Agency use the terminology
``standard lender'' rather than ``standard eligible lender'' to
simplify reference and that the Agency add an abbreviation for
``standard lender.'' Another comment suggested the terminology should
be ``eligible lender.'' Since the use of terminology and an
abbreviation is within the Agency's discretion, FSA decided that its
own terminology is reasonably descriptive and did not to adopt either
recommendation for publication.
One respondent suggested that the Agency require lenders to have
agricultural loan experience. The respondent was concerned that without
this requirement, the lenders may not have the necessary experience to
properly make and service agricultural loans. The Agency generally
agrees with this concern, and has added clarifying language to
Sec. 762.105(b)(1) to require that the lender must have experience in
making and servicing agricultural loans.
One respondent suggested that the Agency require that lenders have
a permanent presence in the State where they originate loans. The
Agency believes that the eligibility requirement contained in the
proposed rule concerning lender locations is adequate to assure good
loan servicing and did not revise the rule.
The Agency received two comments requesting that the Agency clarify
or remove the requirement that a lender be in ``good standing'' with
all applicable State or Federal regulatory agencies. The Agency agrees
that this requirement was ambiguous and removed it.
Two comments suggested that a ``maximum loss rate'' eligibility
[[Page 7363]]
requirement for standard eligible lenders be established. The Agency
did not establish a ``maximum loss rate'' for Standard Eligible
Lenders; however, in response to these comments, it added a requirement
in Sec. 762.105(b)(2) that the lender must not have losses or
deficiencies in processing and servicing guaranteed loans above a level
which would indicate an inability to properly process and service a
guaranteed loan.
One respondent recommended that the Agency establish a method to
remove standard eligible lenders from the guaranteed loan program when
the lender does not perform in accordance with its agreements. The
Agency may revoke a lender's PLP or CLP status for failure to meet a
regulatory requirement, but the Agency has no comparable ``penalty''
for standard eligible lenders. The Agency may recommend that a lender
be debarred or suspended from participation in all Government programs,
but cannot merely revoke participation in the Agency's guaranteed
programs. The Agency agrees with the concern and Sec. 762.105 allows
the Agency to determine that a lender may no longer participate in the
guaranteed farm loan programs. This provides a less severe penalty than
debarment or suspension, which would restrict participation in all
Government programs. Additional guidance will be provided in the agency
handbook and lender manual.
One respondent suggested that lenders notify the Agency when the
lender assigns responsibilities to other than the authorized designee
and that the Agency should reconsider the lender's CLP or PLP status at
that time. The commenter noted that CLP loan making and servicing
quality often deteriorate when the lender changes their ``authorized
designee''. The purpose in revising the regulation was to reasonably
increase lender loan making and servicing flexibility. Therefore, the
Agency chose not to adopt the suggestion.
One respondent recommended that consideration be given to allowing
standard eligible lenders make farm ownership loans. The proposed and
final regulation allows all lenders, regardless of status, to make
either operating loans or farm ownership loans.
The agency received 161 comments concerning the Agency's
consideration of allowing certain non-traditional financial entities to
make guaranteed loans. The respondents in 156 comments opposed the
expansion of lender eligibility criteria, citing concerns that
unregulated lenders such as machinery manufacturers and agricultural
supply firms lack credit expertise and have an inherent conflict when
they are trying to provide financing for a sale. Two commenters
suggested that eligibility should be expanded based on financial
strength, while one commenter suggested that it would be ``beneficial''
to expand eligibility to some mortgage or insurance companies. One
respondent suggested that the guarantee program eligibility be expanded
to authorize guarantees for farmers when the individual is a retiring
farmer selling land to a beginning farmer. The general tenor of the
comments was that a lender must have experience in making and servicing
agricultural loans and have the capability to make and service the loan
for which a guarantee is requested. The Agency agrees and has decided
not to expand the eligibility to nontraditional lenders.
Several respondents suggested that the Agency not require lenders
to provide information to consumer and commercial credit reporting
agencies. The comments noted that this requirement is inconsistent with
standard practices of many lenders. Rather than requiring lenders to
provide the information, the Agency will provide the information on
guaranteed loan extension to credit reporting agencies, as required by
the Debt Collection Improvement Act of 1996. The proposed lender
requirement was removed.
Percent of Guarantee and Maximum Loss
The proposed regulation provided that all guarantees issued to PLP
lenders would be at 80 percent, unless the loan was eligible for a 95
percent guarantee. Comments from 15 respondents suggested that PLP
guarantees should be at a higher percentage, arguing that lenders would
not use the PLP if only an 80 percent guarantee was available and it is
inconsistent for the Agency to penalize the program's best performing
lenders with a lower percent of guarantee. The Agency should encourage
its best lenders to be active. The Agency agrees with these comments.
Loss rates for CLP lenders have been lower than those for other lenders
and the Agency expects this to continue under the PLP program. In
addition, since the PLP will take less time to process, the Agency's
administrative cost savings will be greater if more lenders participate
in the PLP. Also, the statutory language prescribing the percent of
guarantees for CLP and PLP lenders is identical. For these reasons, the
Agency has revised Sec. 762.129(c) to authorize up to a 90 percent
guarantee for PLP lenders.
Loan Approval and Issuing the Guarantee
Eight respondents suggested that the 14 day automatic approval for
PLP should be removed, arguing that it is unreasonable, a bad business
practice, and not in the best interest of the Government. The Agency is
sympathetic to these arguments, but disagrees with them. The review of
PLP applications will be significantly reduced from present guarantee
application review requirements and the Agency has management methods
and responsibilities to assure that the PLP loans are timely reviewed.
The automatic approval is statutorily mandated and will not be modified
in the final rule. One comment suggested that, at a minimum, the
automatic PLP approval requirement be changed to 14 business days,
citing concern for Agency office coverage. Because calendar days are
also statutorily mandated, this suggestion was not adopted.
Two respondents recommended requiring applications be submitted by
certified mail to document the beginning of the 14 day time period. The
Agency chose not to impose this additional burden; however, the Agency
will send the lender a letter confirming receipt of the application and
indicating the date of receipt. Section 762.130(a)(3) has been added to
include this procedure.
Two respondents suggested the Agency clarify what happens in cases
where the Agency has asked for additional information or clarification.
The Agency is committed to providing a response to the lender within 14
days of receipt of a complete application. However, in some situations,
it will be impossible for the Agency to satisfy its environmental
responsibilities based on the information supplied with a PLP
application. In those situations, the Agency will notify the lender
within the 14 day time period of the additional information that is
needed to complete the Agency's environmental review, and that the 14
day automatic approval is suspended until this information is received.
After the Agency receives this additional information, another 14 day
approval period will start. The Agency does not anticipate this
additional information will be required in a large number of cases.
Section 762.130(a)(2)(ii) has been revised to provide for this
procedure.
One respondent suggested the 14 day processing timeframe for CLP be
removed. Since this is a statutory
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requirement at Sec. 339(c)(4)(C) of the CONACT, no modification was
made in response to the comment.
Another respondent requested that the Agency ensure that all
approvals are made within 14 days. Since the Agency's methods to ensure
that all approvals are timely issued is an administrative matter, this
issue will be addressed in the agency handbook. No changes were made in
the regulation as a result of this comment.
Insurance and Farm Inspection Requirements
One comment suggested that the lender be required to obtain an
assignment of crop insurance and be shown as loss payee. This
requirement can be addressed, as necessary, as part of collateral
requirements in the agency's conditional commitment for guarantee. This
will be further clarified in the Agency handbook and lender manual.
Security Requirements
One respondent suggested that the requirement that a lien be taken
on all ``significant nonessential assets'' is contradictory to the
requirement that the lender is responsible for ensuring that adequate
security is obtained. A lien on nonessential assets is often
unnecessary for security purposes, and does not improve the quality of
the loan. The Agency agrees with the comment and removed the
requirement. If the Agency determines, on a case by case basis, that a
lien on a nonessential asset is needed, to assure that the loan has
adequate security that requirement may be included as a condition for
issuing the guarantee. Additional guidance will be provided in the
agency handbook and lender manual.
One respondent requested the Agency amend the proposed rule to
allow individual principals to own collateral where the borrower is a
legal entity. The proposed rule at Sec. 1980.126 did not specify who
has to own the collateral, therefore no change was made in Sec. 762.126
to address this comment.
One respondent suggested limiting real estate financing to no more
than 90 percent of the appraised value. While the Agency recognizes the
risk of 100 percent financing, and that additional collateral should be
taken when available to adequately secure the debt, the Agency does not
want to prohibit lenders from providing credit to otherwise viable
operations, because of tight collateral margins. This suggestion was
not adopted, however the agency handbook and lender manual will provide
guidance on this issue.
One respondent recommended that the Agency should clearly specify
that a line of credit used for the purchase of feeder livestock must
always be secured by a first lien on the livestock. The regulation
states at Sec. 762.126(e)(3) that junior liens on livestock will not be
relied upon for security unless the lender is involved in multiple
loans to the same borrower and also has first lien on the collateral.
This requirement adequately addresses the respondent's concern in that
it will assure a first lien on livestock except in very limited
situations. The suggestion to add an additional regulatory requirement
was therefore not adopted.
One respondent requested the regulation be clarified regarding
acceptable differentiation on identifiable livestock. The final
regulation, in Sec. 762.126(c) explains that, for security to be
identifiable, the lender must be able to distinguish the collateral
item and adequately describe it in the security instrument. This
requirement applies to all security, including livestock. The Agency
does not believe additional regulatory clarification is necessary,
however, additional guidance will be provided in the agency handbook
and lender manual.
Line of Credit
The proposed rule allows lenders to advance funds from a line of
credit for a borrower to make term debt payments on capital items.
Comments were received from 109 respondents concerning this proposed
change, with 98 comments supporting the change because it will conform
the guaranteed program more closely to current industry practices.
Eight respondents recommended the Agency not allow lenders to advance
funds from a line of credit for a borrower to make term debt payments
on capital items. Two comments were concerned that this use would
reduce the number of loans the Agency could guarantee as each
borrower's lending needs would increase. The other opposing respondents
argued that advancing for term payments was not prudent lending, and
should be restricted. One respondent suggested that the Agency restrict
payments on non-agricultural and real estate debts. The Agency
considered the comments and determined that the practice of making term
payments on capital items cannot be deemed imprudent lending, because
that practice is customary in much of the agriculture lending industry.
While the Agency recognizes that this additional authorized purpose may
marginally impact funding availability, the advantages of a less
restrictive program that will benefit more borrowers outweigh that
concern. The Agency determined that an overall limitation on non-
agricultural and real estate debts was too restrictive, however the
Agency addressed the concern by clarifying in Sec. 762.121 that the
debt be for authorized FO loan or OL purposes.
One respondent recommended that the Agency eliminate the line of
credit program and allow the lender to renew loans annually without
submitting a complete new application. The Agency could not discern an
advantage for the lenders or borrowers from the suggested change and so
chose not to implement this recommendation.
One respondent suggested that the Agency authorize revolving lines
of credit for capital purchases and term loans. The Agency chose not to
implement this recommendation because it is concerned that adequate
controls cannot be effectively implemented to assure proper supervision
of major financial planning decisions.
Interest Rates, Terms, Charges, and Fees
The Agency provided the interest rate may not exceed the rate the
lender charges its average farm customer. Two comments recommended that
the Agency remove restrictions on the interest rate or allow a more
reasonable range of interest rate. One comment recommended that the
interest rate ceiling should be the rate paid by the average farm
customer in the same interest rate program. The comment explained that
a lender may have many rate options that are based on the risk profile
of the borrower and other factors, and it would be more acceptable to
limit the rate on guaranteed loans to no greater than some specific
spread over the lender's index rate. The comment argued that the
proposed regulation may not permit lenders to price to market in many
instances. Because the Agency believes that the interest rate
limitation is a reasonable, understandable restriction, and that the
guarantee reduces the lender's credit risk in loans, the Agency did not
adopt the proposal.
One respondent recommended that the Agency clarify what penalties
will be imposed upon a lender that charges more than the rate charged
to their average customer. A lender that charges more than the rate
charged to their average customer is in violation of the terms of the
lender's agreement and subject to revocation of PLP or CLP status under
Sec. 762.106(g). A standard eligible lender in violation of the terms
of the lender's agreement could be prohibited from making additional
loans under Sec. 762.105(b)(2). In addition, the
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Agency may contest the guarantee under Sec. 762.103(a) if the lender
misrepresents the interest rate charged. Because these penalties were
already contained in the regulation, the Agency did not add any
clarifying language to the regulation in response to this comment.
One comment recommended creating incentives for lenders who seek
low cost funding sources, limit spreads and guide borrowers toward the
use of long term fixed rate loans. The Agency fully supports the goal
of providing competitive as well as fixed rates to guarantee borrowers,
the advantages to financially stressed producers are well documented.
Many lenders are able to provide such rates through participation in
the secondary market and such activity is encouraged by the Agency. The
comment did not provide specific suggestions, but encouraged the Agency
to study these issues further. The Agency agrees that this issue
warrants further study.
One respondent recommended that the 7 year limitation on operating
loans be removed because it is unrealistic for a young farmer to
completely pay for cattle and machinery in 7 years. Section 316(b) of
the CONACT requires that guarantees on all operating loans be repaid in
a term not to exceed 7 years; therefore, the Agency did not adopt the
recommendation. The regulation at Sec. 762.124(d) does provide that
repayment schedules may include unequal or balloon installments if
needed to establish a new enterprise.
The proposed rule stated that crops, livestock, or livestock
products produced are not sufficient collateral for loans with balloon
installments. Two comments recommended that breeding livestock should
be acceptable collateral. The Agency agrees with this recommendation
and has modified the rule accordingly.
One respondent recommended that balloon installments must be
secured by real estate. The Agency did not adopt this recommendation
because it would be too restrictive.
Two respondents recommended that balloon installments should be
authorized for FO loans. The final rule modified Sec. 762.124 to
provide that balloon installments are authorized for any loan issued
under a loan guarantee.
One respondent recommended that balloon installments should not be
authorized because the use of balloon payments will cause excessive
future servicing requirements and future losses. The Agency does not
agree with the rationale for limiting balloon installments and believes
there will be situations where a balloon payment is prudent, such as
when reduced installments are needed to establish a new enterprise,
develop a farm, or recover from a disaster or an economic reversal.
Therefore, the Agency did not change the rule.
Year 2000 Compliance
The proposed rule stated the Agency was considering adding a
requirement that lenders have computer systems which are year 2000
compliant and requested comments on this requirement. The Agency
received seven comments opposing this requirement and five comments in
support. Comments pointed out that lenders were already addressing the
issue internally and regulators are closely monitoring this problem.
Regulators already require lenders to have a year 2000 action plan and
have been incorporating this into lender reviews. Therefore, the Agency
did not adopt this requirement, however, lenders are encouraged to
ensure their systems are compliant.
Application and Forms
The proposed rule reduced application requirements to minimize
burden on all lenders applying for guarantees. Eliminating the need for
the lender to submit copies of all leases and contracts, and the need
to submit detailed legal documentation for all entity loan applicants
were adopted. The rule also permitted the agency to approve a loan
subject to an acceptable appraisal. The Agency received 90 comments
supporting its reduced application requirements.
The agency received one comment requesting articles of
incorporation or partnership agreements be submitted as part of a
complete application and one comment requesting the application provide
information on entity members. The comment requesting entity legal
documents indicated concerns that the Agency's approval official would
not be familiar with the entity's structure. The lender's loan
narrative submitted with each application will contain sufficient
description of the entity's structure, owners, and roles of the entity
members; therefore, no changes are being made regarding entity
information.
One comment requested the Agency specify the items which must be
contained in a line of credit agreement. In response to this comment
and to reduce the burden, the Agency removed the requirement in the
proposed Sec. 1980.110(b)(5) that a loan agreement be submitted to the
Agency. The information generally included in a loan agreement is
adequately addressed in the loan narrative.
Two comments were received regarding credit reports. One comment
requested all lenders submit credit reports or certify to credit
history. The Agency does not believe this is necessary and has proposed
no changes. Credit reports will be required for all loans and CLP
lenders may certify to satisfactory credit history. Any unusual items
will be addressed in the lender's loan narrative. One comment also
requested that commercial credit reports not be required for small,
closely held farm entities. The Agency does not specify when a
commercial credit report is required. We believe this is best addressed
on a case by case basis between the Agency's responsible office and the
lender. No changes are being made regarding credit reports.
Financial and Production History
The proposed rule reduced the amount of financial and production
history required to be gathered and analyzed by lenders. The Agency
reduced the history from 5 years to 3 years on loans above $50,000,
eliminated history requirements for loans under $50,000, and permitted
CLP lenders to base cash flows on financial history rather than
requiring production history. In addition to the 90 comments supporting
reduced application requirements, 17 comments specifically supported
reducing the financial history requirement from 5 years to 3 years.
The Agency received ten comments requesting the proposed
requirement be strengthened. Four comments requested 3 years of
production history be required in all cases; three comments requested 5
years of financial and production history be required in all cases; and
three comments requested the Agency require 5 years financial and
production history if the loan purpose is for refinancing debt. Two
comments suggested the lender's file contain production and financial
history. Comments requesting additional financial and production
history cited concerns over credit quality; specifically, the ability
of Agency loan officers to determine whether the loan applicant's
cashflow projection was reasonable.
The Agency has considered the credit quality concerns and continues
to believe that 3 years financial and production history is sufficient
to arrive at reasonable cashflow projections. In addition, CLP and PLP
lenders have already demonstrated the ability to properly process a
loan application and should not be required to submit financial and
production history. Therefore, the suggestions are not being adopted.
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Regarding small loans, the risk of loss on loans under $50,000 is
much smaller and does not warrant the same amount of documentation.
Also, under past procedures, lenders often could not justify making
small loans under the guaranteed program because of the excessive
administrative costs to gather and process the required information.
However, operations requesting these loans are likely to be smaller,
and the lender typically can estimate the feasibility using industry
standards. Therefore, the Agency is not making any changes from the
proposed rule regarding financial and production history.
PLP Application
The Agency proposed that a complete application will consist of at
a least (1) an application form, (2) a loan narrative, and (3) any
other items agreed to during the approval of the PLP lender's status.
The Agency received two comments requesting PLP lenders be required to
submit a cashflow and one comment requesting the Agency to require PLP
lenders to certify their cashflow is based on past history. Feasibility
of the loan applicant's request will be addressed in the lender's loan
narrative. Furthermore, as part of the request for PLP status, a lender
will describe their application requirements and underwriting
standards. The PLP lender will certify that each application is
processed as proposed in their application for status; therefore, the
proposed requirements are sufficient.
The Agency received one comment requesting the Agency clarify what
is required of PLP. PLP lenders will be required to submit an
application form and loan narrative to the Agency. The particular items
the lender maintains in their file will vary depending on that lender's
procedures and will be defined during application for PLP status.
Therefore, it would not be appropriate for the Agency to further define
the requirement in the Federal Register.
Small Loan Applications
In the proposed rule, the Agency substantially reduced the amount
of documentation required for loans under $50,000. This was directed by
333A(g)(1) of the CONACT. The Agency received 96 comments supporting
the abbreviated application requirements for loans under $50,000.
The Agency received four comments requesting the $50,000 threshold
be increased. While the Agency does have some administrative latitude
to increase this threshold, the CONACT clearly identifies $50,000 as
Congress' intended level. After the Agency has more experience and
historical data to analyze the impact of reduced documentation
requirements on its small loans, the level may be increased beyond
$50,000.
The Agency received four comments requesting lenders be able to
determine whether a sufficiently strong equity position exists to
require an appraisal. The proposed Sec. 1980.127(b)(2) stated that the
Agency determined whether a strong equity position exists. This
requirement was removed from Sec. 762(b)(2). As with most other
requirements, the lender is expected to make the initial determination
subject to Agency approval. On a case-by-case basis, if the Agency
disagrees with the lender's recommendation, they can require an
appraisal as an approval condition.
The Agency received three comments requesting clarification that a
lender's cash flow budget may be abbreviated. The Agency agrees with
this comment and clarified in the definition of cash flow budget at
Sec. 762.102(b) that cash flow budgets for loans under $50,000 are not
required to have income and expenses itemized by categories.
The Agency received three comments requesting it include the
ability to require lenders with excessive losses or poor performance to
submit full documentation required on loans above $50,000. The comments
were concerned about potential lender abuse with no Agency authority to
require needed documentation. The Agency agrees with these comments and
included the authority in Sec. 762.110(a)(4) to require lenders with
losses in excess of the maximum CLP loss rate to submit those
additional items required of loans above $50,000.
The proposed rule stated the Agency expects lenders to utilize the
same level of documentation and evaluation as they require for their
nonguaranteed loans under $50,000. The Agency received one comment
requesting banks be required to submit their written policies for
approval before the loan is made. While the Agency understands the
potential for lenders to perform lesser evaluation for Agency
guaranteed loans under $50,000 than it does for its nonguaranteed
loans, it believes sufficient safeguards are already in place to
prevent this from becoming a major problem. Lenders will be aware of
the requirement through the lender manual and training. Lenders who do
not perform the same level of evaluation may have a loss claim under
the guarantee adjusted or denied. Therefore, this recommendation was
not adopted.
The Agency received one comment requesting additional information
requirements be reduced, not just the application form. The Agency
already had language to reduce information required on the application
by eliminating financial and production history and verifications of
debt and income. The Agency feels the remaining requirements for
information are necessary for adequate oversight and program
administration. No further changes are being made.
The Agency received one comment requesting lenders be prohibited
from making two $50,000 loans to same borrower in order to circumvent
the threshold. The Agency agrees. The regulation as proposed did not
prevent this circumstance. The Agency revised the language in section
Sec. 762.110 to apply the $50,000 to any one package of loan guarantee
proposals.
Forms
Four comments requested the Agency automate forms or allow
applications to be filed electronically. Several private companies
provide financial software packages which print Agency application
forms. Many Agency forms are now available through the Agency internet
site. In addition, the Agency is working on the problem of applying
through the Internet. At this time, many of the Agency's local offices
do not have the ability to receive electronic applications. As our
automation system is updated we will pursue electronic applications.
Eligibility
The Agency received one comment requesting the Agency revise its
loan applicant eligibility criteria to require loan applicants to have
been truthful and not have provided false or misleading information.
The comment expressed concerns that the Agency has no way to deny loan
guarantees to these loan applicants. The Agency agrees with this
comment and has included the eligibility condition in Sec. 762.120(f).
The Agency received one comment requesting delinquent IRS debt be
included in the requirement that a borrower cannot be delinquent on
Federal Debt. This exception to the definition of a Federal Debt is
permitted by 31 U.S.C. 3720B(a). Rather than administratively modify
the definition of Federal Debt, the Agency considers delinquent IRS
debt as part of its creditworthiness determination and also in the cash
flow budget used to determine feasibility.
Family Farm Definition
Four comments suggested the Agency remove its requirement that a
loan applicant has been a family farmer, or
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that the Agency provide a uniform definition of family farmer. Two
comments recommended simply ensuring the loan applicants were producers
of agricultural products. Any modification of the family farmer
definition should be consistent between the Agency's direct and
guaranteed programs; therefore, these comments will be addressed when
the Agency revises its direct program regulations.
Financial Feasibility
The Agency received one comment that financial feasibility
requirements be clarified to state that in cases of startup or
expansion, factors beyond financial history should be considered. This
was included under projecting yields, but not for other projections in
cash flows. This was an oversight and the Agency has added the ability
to use other sources to develop a cashflow projection when actual
history is not available or not appropriate to Sec. 762.125(a)(5).
Advancing Funds
The Agency received one comment recommending that the lender be
required to only advance funds when needed by the borrower. The
commenter was concerned that some lenders advance more funds than
needed by the borrower at that time, thereby accruing excessive
interest charges. While the Agency understands this does occur in
isolated cases, the problem should be worked out between the lender and
the borrower. The Agency believes it is the borrower's responsibility
as manager of the farm operation to decide when funds are needed.
Furthermore, identifying what amount is excessive would be unreasonably
burdensome for the Agency and the lender. No changes were made
regarding advancing of funds.
Environmental
The Agency received 82 comments requesting clarification of the
impact on a lender of finding a previously undetected environmental
hazard, particularly whether the guarantee will be put in jeopardy. The
proposed regulations require the lender to perform a due diligence
investigation for any guarantee request involving real estate. Unless
the lender fails to perform the due diligence investigation, or the
Agency can demonstrate that the lender was negligent in performing the
investigation, the guarantee will not be in jeopardy. Further
clarification may be incorporated into Agency environmental
regulations, agency handbook, and lender manual, see also the
discussion below concerning the use of the American Society of Testing
Materials (ASTM) transaction screen questionnaire.
The Agency received 72 comments requesting reduced environmental
review for small loans or expressing concern with the cost associated
with the reviews. In addition, the Agency received one comment
requesting the lender be required to provide evidence of environmental
compliance with a small loan application. The environmental statutes
governing Farm Loan Programs do not permit the Agency to differentiate
its review based solely on the amount of the transaction. However, the
Agency believes loan requests under $50,000 involving real estate will
normally not require a complicated environmental review. These loans
are typically made to smaller operations and do not involve extensive
land development or large animal populations. The Agency intends to
simplify its environmental review process as it revises its
environmental regulations.
The Agency received two comments requesting the ASTM transaction
screen questionnaire not be required. In considering this requirement,
the Agency believed a standard for due diligence needed to be
identified. In our research, the Agency selected ASTM as the most
widely accepted industry standard for a due diligence investigation.
The Agency also recognizes that many lenders already have adopted
investigation forms and procedures comparable with the ASTM form. To
permit lenders to use their own forms and processes, the proposed rule
stated the Agency will accept any similar documentation to the ASTM
transaction screen questionnaire. The Agency believes this provides
sufficient flexibility.
The Agency received one comment requesting clarification of lender
and Agency environmental responsibilities. Section 762.128 provides
that lenders will assist in the environmental review process by
providing environmental information, and enumerates the specific
requirements and documentation expectations. Any remaining
investigation or determination is the Agency's responsibility. There
are many environmental laws applying to Agency loans. Only those which
require direct input from the lender have been addressed in the these
regulations. Rather than duplicate the requirements for Agency review,
the environmental regulations governing the Agency's review are
presently published in 7 CFR part 1940 subpart G. The agency handbooks
will clarify the procedures for the Agency's review.
The Agency received one comment requesting that compliance with
wetlands and HEL be included as an eligibility requirement. This
requirement is already part of 7 CFR part 1940, subpart G. To avoid
duplication and potential conflicts between regulations, the Agency has
decided to reference the environmental regulations rather than repeat
the requirements in these regulations.
Lender's Debt Instruments
The Agency proposed removing the requirement that a lender's
promissory note not contain a ``payment on demand'' clause. The Agency
received two comments requesting this restriction be retained. This
long standing requirement was intended to ensure lenders clearly
establish the payment schedule on the promissory note. In evaluating
debt instruments, the Agency found that many contained industry
accepted language which ensured the lender's ability to accelerate a
note in the event the collection of the loan was impaired. Many Agency
offices interpreted this language to be in violation of the regulations
when the note satisfied the intent of the regulations. The Agency
therefore clarified its intent by stating the lenders note must clearly
state the principal and interest repayment schedule, but the regulation
does not prohibit demand clauses.
Loan Underwriting
The Agency requested comments on its underwriting standards,
particularly whether the Agency should adopt more comprehensive
criteria. The Agency received 16 comments on its underwriting criteria.
Seven comments suggested the Agency remove its requirement for a 1.10
term debt and capital lease coverage ratio (TDCLCR), with one commenter
offering the alternative of incorporating exception authority. Comments
stated that during years of depressed prices, disasters, or other
unforseen problems a 10 percent margin was not possible to project. The
Agency adopted the 10 percent margin as a provision for future capital
replacement as required by Sec. 339(b) of the CONACT. Approving a loan
to an operation unable to project a 10 percent margin would be
imprudent lending and surely result in higher default rates for the
program. The Agency continues to believe that a TDCLCR of 1.10 is
necessary, particularly in the absence of any other criteria to measure
financial feasibility.
One comment recommended the Agency implement a credit scoring
system and several comments suggested
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the Agency incorporate additional financial ratios into its decision.
While the Agency is aware of the merits of incorporating financial
ratios or a credit scoring system, further analysis is needed before
implementing such a change. The Agency will continue to study improved
methods to underwrite its loans.
The Agency received 82 comments requesting clarification of its
positive cash flow definition. While the Agency did not add more detail
to this already extensive definition, it added a definition of the cash
flow budget in Sec. 762.102 to provide a mechanism for achieving a
positive cash flow.
Loan Servicing Comments
The comments received regarding loan servicing were overwhelmingly
in support of most of the changes proposed by the Agency. Most of the
comments received were from lenders that participate in the Agency's
guaranteed loan program, Agency field office personnel, or associations
that represent the interests of those groups. The lending community
unanimously supported the Agency's efforts to revise its guaranteed
lending regulations, as did the large majority of Agency personnel and
others who commented. However, there were some proposals, such as
mandatory lender buyback of loans sold on the secondary market, that
caused extensive concern. Numerous other comments were made requesting
clarification, pointing out potential problems with the proposed rule
or expressing personal opinion on a particular issue. The following is
a discussion of specific comments, grouped into main subject areas,
with Agency information providing clarification of some comments,
adoption of others, and explanations for those that are not being
incorporated into the final rule.
Mandatory Repurchase
The secondary market repurchase requirements proposed in
Sec. 1980.144 generated many comments. Of the 231 total comments
received on the proposed rule, 105 expressed vehement opposition to the
Agency proposal to require mandatory lender buyback of loans sold on
the secondary market. The overwhelmingly negative comments were
provided by farmer associations, secondary market purchasers, lenders
and lender associations, including the American Bankers Association
(ABA) and the Independent Bankers Association of America (IBAA). The
proposed change was supported by two Agency employees, two Agency
employee associations, and one bank. Most of the 105 negative comments
indicated that the requirement seems to punish all participating
lenders for the errors of a few. In summary, these comments said that
this policy would cause irreparable harm to the fledgling secondary
market for FSA guaranteed loans, and that lenders would be discouraged
from making long term fixed rate loans. The commenters almost all
agreed that it is essential for many banks to sell fixed rate loans
because they do not have the ability to match loan funding to the loan
term unless they structure the loans to be sold in the secondary
market. By selling the loan, the bank is better able to match its
interest rate risk. Also, by removing the loans from their books, they
obtain liquidity to make more loans. According to the ABA, requiring
the lender to buy the loan back is tantamount to restructuring them as
full recourse loans. As a result, the ABA and IBAA are concerned that
bank regulators may hold the full capital charge against these loans,
thereby increasing the cost of capital for banks and causing higher
interest rates for borrowers. Liquidity planning would be more
difficult because banks would be uncertain of funding capacity if they
must maintain reserves to potentially buy back loans that were sold.
As a result of these comments, the Agency has eliminated mandatory
repurchase of loans sold, and addressed problems with repurchased loans
in other ways. First, delinquent account servicing regulations in
Sec. 762.143(b)(2) now spell out that the lender consider repurchasing
the guaranteed portion of the loan sold on the secondary market.
Second, Sec. 762.144(b)(1) requires the lender to consider the request
according to the servicing actions that are necessary on the loan, and
encourages lenders to repurchase the loan upon the holder's request.
Third, direct consequences of a lender's failure to comply with
Sec. 762.144(c) were added at Sec. 762.160(a)(2). This states that if
the lender does not comply with requirements to reimburse the Agency
for the repurchase within 180 days, the Agency will not execute the
Assignment of Guarantee, and will prohibit the sale of future loans on
the secondary market. Provisions were included for waiver of this
prohibition if the lender is in compliance with an Agency approved
liquidation plan. The 180 day liquidation or reimbursement requirement
in Secs. 762.144(c)(7)(ii) and 762.144(c)(7)(iii) were proposed in
Sec. 1980.144(c)(6) and no negative comments were received. Finally,
the Agency has clarified proposed Sec. 1980.106(g)(2)(ix) by requiring
in Sec. 762.106(g) that consistent deficiencies in servicing loans sold
on the secondary market will be considered when reviewing PLP or CLP
status as part of the assessment of the lender's abilities. The agency
handbook will provide guidelines for implementing this requirement,
such as considering whether those repurchases resulted in increased
losses or servicing problems for the borrowers.
Reporting Requirements
Comments were received requesting the Agency specify the lender's
reporting requirements in the lenders agreement. The lenders agreement
for guaranteed loans currently references the Code of Federal
Regulations (CFR) for all reporting requirements. The Agency recognizes
that there are older loans with specific reporting requirements that
may differ from the CFR, but they represent a very small portion of the
existing portfolio. Several years ago it was recognized that different
lender designations had different reporting requirements in the
respective lender's agreements, that were inconsistent with
regulations. It was because of this inconsistency that a change was
made to have the new lender's agreement for guaranteed loans refer to
the CFR. The comment is not being adopted.
A comment was received requesting that the Agency reduce lender
status reporting from semi-annual to annual. The Department of Treasury
requires the Agency to report the condition of its loan portfolio on a
semi-annual basis. In the recent past, the Agency was able to reduce
the burden of its guaranteed loan status report by allowing multiple
loans to be included on one report and automating its input at the
local level. The Agency will continue to explore areas where it can
reduce reporting burdens; however, the comment cannot be adopted and
the semi-annual status requirement has not been revised.
Servicing Actions
Numerous comments were received on the Agency's various proposals
to authorize lenders to conduct servicing actions on their guaranteed
loans. One comment felt that lenders should conduct all servicing
actions and, to enforce this, suggested that the Agency provide for
revocation of preferred or certified status when a lender assigns or
contracts for applications or servicing with an outside agent. The
Agency did not adopt this comment. Part of the reason for this rule is
that the lending industry, especially in agriculture, is changing. For
the Agency to continue to
[[Page 7369]]
encourage lenders to provide credit to family farmers and ranchers, it
is critical that the Agency also change and adapt with the industry.
The rule will maintain the provisions that exist today in that a lender
has authority to contract with outside agents to service guaranteed
loans. However, under the guarantee, the lender remains accountable for
any actions of its agents or assignees that are inconsistent with the
loan requirements, regulations and statutes.
Another comment was made requesting that lender servicing
authorities be decided on a case by case basis, rather than basing this
on the particular lender designation (Preferred Lender Program (PLP),
Certified Lender Program (CLP), Standard Eligible Lender (SEL)). The
comment was assumed to mean a loan by loan basis, since these statuses
will be awarded on a per lender basis, as proposed. The comment is not
being adopted because lender status designation will be based on its
overall experience, including servicing, and expertise in conducting
business with the Agency. The lender is responsible for servicing the
loan in accordance with its agreements with the Agency. If a lender
chooses to ignore these requirements, that noncompliance will result in
the reduction or denial of a loss claim, should one be submitted. The
Agency cannot assume that lenders will purposely ignore Agency
requirements. The guaranteed loan is the lender's loan; lenders have
requested the additional responsibility placed upon them in this rule
with the full understanding that the Agency will hold them accountable
for carrying out servicing in accordance with regulations and loan
agreements.
A comment requested that the Agency require an annual loan
classification of the guaranteed loan in order to determine the risk of
loss. Currently the Agency uses existing loss rates on guaranteed loans
in determining the subsidy cost for this program. Guaranteed loan loss
rates have remained fairly stable since the farm crisis of the mid
1980's and, as a result, the Agency's current method of projecting
losses, which does take into effect noted weather or related economic
setbacks, is adequate for risk determination. Therefore, the Agency is
not adopting the comment at this time.
Another comment requested that the Agency not allow retroactive
servicing authority. In order to maintain consistency and provide a
more simplified approach for Agency personnel, the rule must be
retroactive. For example, Agency internal review procedures provide
that 20 percent of an SEL lender's loans and 40 percent of a CLP
lender's loan files will be reviewed annually. If the lender is worthy
of an enhanced status, it will likely service all loans equally well.
Requiring FSA field office review of 40 percent of a lender's loans
made before a certain date and 20 percent of the loans made after that
date would be burdensome and confusing.
A comment was made requesting that the Agency clarify that a line
of credit balance can go to zero. In the past the Agency has heard
concern from lenders that if a line is paid to a zero balance, then it
is paid in full. This is not an Agency requirement and our
interpretation is that a line of credit must be paid as its security is
sold. The fact that a multiple advance note may be paid to $0 does not
terminate it. Thus, no change was made in the final rule. The rule does
not prohibit or require an annual balance of zero.
Negligent Servicing
The Agency received multiple comments requesting clarification of
the definition of negligent servicing and how it would affect the
determination of a loss payment as stated in Sec. 762.149(c)(6).
Negligent servicing was defined in Sec. 1980.102(b) of the proposed
rule as follows:
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. 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.
In addition, the Agency's guaranteed documents under the full faith
and credit provisions describe negligent servicing as those actions
which a reasonably prudent lender will take in the servicing of a loan
if such loan were not guaranteed. Moreover, failure to service a loan
in accordance with the corresponding lender's agreements and Agency
regulations can lead to reduction or denial of a loss claim due to
negligent servicing. The Agency believes that to protect the
government's interest, the definition of negligent servicing must
remain flexible, and no change is being made.
Borrower Analysis
One comment requested that the Agency remove the requirement that
all lenders complete a borrower analysis for chattel secured loans.
Along this same line, a few comments suggested that the Agency delete
the requirement for SEL to provide an annual statement of financial
condition. Since chattel loan security often depreciates quickly, and
is likely to deteriorate very quickly if an operation is struggling
financially, the first suggestion is not being adopted. Contrary to the
comment, the Agency has found that some level of security monitoring
and financial performance measurement is performed by most lenders on
their chattel secured agricultural loans. This analysis quickly
identifies potential problems and can be used to correct the problem,
change the operation or avoid future problems. It is a valuable
decision making tool for any chattel secured loan and is not overly
burdensome to lenders. As far as an annual balance sheet or statement
of financial condition is concerned, this comment appears to address
real estate loans and the SEL reporting requirements. While the Agency
has removed this requirement for CLP lenders, SEL may be more
inexperienced and may require a closer level of monitoring by the
Agency. The Agency will only review a sample of an SEL guaranteed loan
files in a given year; therefore a balance sheet in the Agency loan
file will assist monitoring of these loans.
A comment requested that the Agency clarify the rule to state that
any decision not to perform an annual analysis will be made after
consultation with the Agency. This comment deals with proposed
Sec. 1980.141(d)(1) that allowed CLP lenders to forgo a complete
analysis if there is sufficient financial strength to support the
decision. The comment is not being adopted. A large number of comments
indicated their support for the analysis requirements as proposed. The
Agency's internal handbook will provide examples of financial strength
factors that may be acceptable as reasons to waive the analysis. If
lenders do not perform an analysis, Sec. 762.141(d)(1) requires that
the reasons be documented in their file and in their narrative, which
is submitted to the Agency. FSA will review the narrative and the case
file can be audited during a routine lender monitoring visit.
Consolidation
Several comments were received discussing loan consolidation. The
Agency is also making some clarifications and minor modifications.
First, the Agency has removed consolidation from the distressed
servicing section. As used by FSA, consolidation is simply a
combination of two or more similar performing loans into one loan and,
thus, is not a distressed servicing action and is not useful as a tool
to correct default. Therefore, in the final rule, proposed
Sec. 1980.145(b) has been moved from the distressed servicing section
to Sec. 762.146(e), other servicing procedures.
[[Page 7370]]
A comment requested that loan consolidation authority be
eliminated. Loan consolidation is included as an authorized loan
restructuring action in the Consolidated Farm and Rural Development Act
and must be maintained as an authorized action. Moreover, loan
consolidation is a standard industry practice and, in the interest of
allowing lenders to conduct business as usual on their guaranteed
loans, the Agency wishes to allow the practice to continue.
A comment suggested that the prohibition against consolidating
loans made prior to fiscal year (FY) 1992 with those made after FY
1992, proposed in Sec. 1980.145(b)(3), be eliminated. The proposed rule
provided that consolidation of an FY 1991 loan with a post FY 1991 loan
that did not have interest assistance would eliminate the ability to
provide interest assistance for servicing on the consolidated loan.
This result ensues because, under Agency budgeting procedures, the
consolidated loan becomes an FY 1992 loan. The Budget Reconciliation
Act of 1991 eliminated budget authority for interest assistance on FO
loans and greatly restricted the Agency's ability to provide interest
assistance for servicing actions by, in effect, making the awarding of
subsidy on these loans cost prohibitive. To implement this authority
and adopt the comment would result in a dramatic increase in the
assumed cost of the guaranteed OL program and a commensurate decrease
in its loan funds. The result would be a drastic reduction in the
number of loans the Agency could guarantee and the number of farmers it
would be able to assist. Therefore, the comment was not adopted.
Comments were received requesting that consolidations be limited to
only those loans with the same percent of guarantee. The comment was
not adopted; however, the final rule provides that when a new guarantee
will be provided for a consolidated loan, the percentage of guarantee
will be the lesser of the loans being consolidated.
Interest Rates
Comments were received requesting that the Agency allow for
refinancing of existing guaranteed loans when the interest rate can be
fixed. The proposed rule at Sec. 1980.146(d) and the final rule at
Sec. 762.146(d)(3) provide for a change in rates from variable to fixed
even if the loan is not delinquent. Therefore refinancing for this
purpose is not necessary.
Substitution of Lenders
One comment was received requesting the Agency to clarify
substitution of lenders. When a borrower wishes to move a guaranteed
loan from one lender to another, or a lender wishes to sell a
guaranteed loan to another lender, with or without the borrower's
consent, FSA must process a substitution of lender. When a substitution
occurs, the existing guaranteed documents must be assigned to the new
lender. The Agency agrees with the comment that the lender substitution
provisions in Sec. 1980.105(c) were inadequate. The Agency has revised
Sec. 762.105 to clarify that the original lender and the Agency must
concur with the substitution. If the original lender does not agree to
assign their promissory note, lien instruments, loan agreements, and
other documents to the new lender, then the substitution cannot take
place and the new lender could only refinance the original lender.
Refinancing would require the use of new loan funds and a guarantee
fee. The Agency believes that the new authorities provided to lenders
in this rule, such as partial release, subordination and change in
interest rates will provide lenders with additional tools to continue
to service existing borrowers, so that a substitution request will be
less likely.
Partial Releases
Almost every comment received was in support of the Agency proposal
to add partial release authorities to its guaranteed lending
regulations. Additionally, many comments suggested that we, ``clarify
that partial release authority would be at the field office level,''
and ``clarify when appraisals will be required for partial releases.''
Agency approval authorities for partial releases is an administrative
matter and will be delegated through internal FSA directives. It is not
included as part of this rule. Authority is likely to be extended to
local offices. However, the Agency agrees that the proposed rule
contained excessive application requirements for some types of partial
releases. Therefore, Sec. 762.142 has been revised to clarify what
items are needed to request a partial release by CLP lenders and SELs.
Similarly, the proposed rule is revised from requiring Agency
concurrence to not requiring Agency approval when the security is being
sold for market value, and the proceeds will be applied in accordance
with lien priorities, when the security will be used as a trade-in or
as a source of down payment funds for a like item that will be taken as
security, or when the security item has no present or prospective
value. Agency concurrence is required only when the proceeds will be
used to make improvements to real estate in an amount equal to the
amount being released, as stated in the proposed rule, security is
being released without consideration but the loan to value after the
release will be .75 (loan balance to collateral value) or less. The
handbook will provide guidance as far as how proceeds would be applied
on the loan, and how input may be requested when there is a question of
whether reasonable value is being obtained for the security.
As for appraisals, the proposed rule at Sec. 1980.142(d)(2)(i)
provided that, for CLP lenders and SEL, the Agency would determine the
need for any chattel appraisals and that real estate appraisals will
not be required of the lender unless the Agency specifically requests
them. Section 762.142(b)(2)(vi) provides that appraisals will be
required when security is released without consideration. A suggestion
that the Agency never require an appraisal for restructuring a loan, or
for a partial release, was not adopted. Appraisals are not required to
reschedule a loan, but since partial releases involve releasing loan
security, an appraisal was not viewed as overly burdensome.
Subordination
Several commenters suggested that the Agency delegate to local
county offices concurrence with a lender's request to subordinate a
guaranteed loan. This comment is being partially adopted. The Agency
has revised Sec. 762.142(c)(3) to allow for the subordination of normal
income security for the guaranteed lender or another lender to make an
operating expense loan without Agency concurrence. The Agency agrees
that the subordination of normal income security for a lender to make
an operating loan is consistent with the mission of the Agency, to help
borrowers progress to the point of obtaining credit without Agency
assistance.
Some comments were received requesting that the Agency expand its
subordination authority to include real estate loans. This comment was
not adopted because, in most cases, subordination of guaranteed loan
security increases the risk of loss to the Government. The Agency will
continue to discourage subordination of real estate security and not
provide regulatory approval authority at levels lower than the Deputy
Administrator for Farm Loan Programs. See Sec. 762.142(c)(3). If a
request is received
[[Page 7371]]
that the State Executive Director feels is in the best interest of the
Government and the borrower, it can be forwarded to National office for
final consideration.
Other comments suggested that the Agency subordinate for tax exempt
transactions. This comment is not being adopted. The Agency understands
that tax exempt transactions often result in a lower interest rate for
the borrower; however, has determined that a subordination of a Federal
loan guarantee will not be provided in these types of transactions.
Emergency Advances
Overall comments were very favorable toward the proposal to add an
emergency line of credit advance provision, although, several comments
were received requesting that Agency approval be obtained on all
emergency advances. The proposed rule did not specifically require
Agency approval on emergency advances. The Agency recognizes that this
may be confusing, so the suggestion to clarify approval is being
adopted in Sec. 762.146(a)(2), which will require CLP lenders and SEL
to obtain prior FSA concurrence for emergency advances. PLP lenders
will make these advances in accordance with the provisions of the PLP
agreement. In all cases, the financial benefit to the lender and the
Government must exceed the amount of the advance and the lender must
document the financial justification for the advance.
Another comment requested that the Agency limit emergency advances
to 10 percent of the line of credit ceiling or set a dollar limit. This
comment is not being adopted. The Agency understands the comment's
concern that there be a limit to the amount of the advances. However,
if a specific percentage or dollar amount were established, it could
have the opposite effect of what the comment intended. This policy
would encourage lenders to assume 10 percent or a certain dollar limit
is always acceptable. Therefore, FSA will not adopt this policy. The
experiences supporting this proposal have shown that when this
situation arises, the need is usually less than 10 percent of the line.
However, in a few instances, a greater advance is required. In any
case, the benefit to the lender and the Government must exceed the
advance. For example, if a lender with a $400,000 line of credit
advances $20,000 as an emergency advance for irrigation and saves a
crop, the Government may pay $20,000 in losses on the loan. But had the
crop not been watered, it may have been a total loss and the Agency
loss may have been $400,000. In this example, the benefits derived
obviously exceed the advance amount.
Several comments requested that the Agency clarify the emergency
advance lien priority as it relates to the guaranteed loan and how it
is paid, and a few comments indicated confusion regarding the
difference among an emergency advance, protective advance, and an
additional loan. These comments are addressed in Sec. 762.146(a)(3)(iv)
by requiring that the emergency advance must constitute an advance
against the line of credit and be secured by the same lien instruments.
Emergency advances are not a separate loan, but part of the guaranteed
loan. To subordinate this advance in favor of the lender on a non
guaranteed basis, as was suggested by some, would provide an effective
100 percent guarantee of repayment of the advance, because the
emergency advance would be paid in full before application of payments
to the line of credit. Because the emergency advance is necessary for
the guaranteed loan, the lender should share the risk in proportion to
the guarantee. Emergency advances are similar to protective advances in
that they are made to protect security from being lost, constitute an
obligation under the promissory note, and cannot be made in lieu of a
new loan. They differ from protective advances in that emergency
advances are made only in the case of a line of credit to protect,
harvest or market only normal income security, when the borrower is not
in liquidation. Protective advances are made to protect any type of
security for a multitude of purposes, when a loan is in default and
liquidation is likely.
The Agency received a comment requesting expansion of the lender's
authority to make emergency advances in situations outside the
limitations placed in the rule. This comment is not being adopted. The
Agency does not agree that there are any circumstances justifying
further exposure on the guarantee, other than when loss of crops or
livestock is imminent, the advance is for authorized operating loan
purposes, and the benefit derived will exceed the amount of the
advance. These situations are covered by Sec. 762.146(a)(3).
Restructuring
In the proposed rule, only SELs required Agency approval when
restructuring a guaranteed loan. CLP and PLP lenders would not require
Agency approval with restructuring actions, except for loan writedowns.
While a majority of the comments were in favor of the rule, several
commenters felt that Agency approval of all restructuring actions was
necessary to assure that the restructuring is in accordance with
regulations. This suggestion was not adopted. PLP and CLP lenders are
more experienced lenders and they are more familiar with Agency
requirements. Still, they must restructure loans in accordance with the
minimum Agency requirements for restructuring for all lenders. Lenders
who do not restructure in accordance with minimum regulatory
requirements risk not being paid in the event of a loss. Furthermore,
Agency approval of a lender's restructuring action does not endorse
servicing that occurred prior to the restructuring, nor does a note's
compliance with Agency regulations ensure that the restructuring was
completed correctly. Agency officials often do not have the time to
thoroughly analyze all facets of a lender's restructuring request, and
lenders and their associations have suggested that Agency employees be
less involved with approval of a lender's actions. Therefore, the
Agency is placing this responsibility upon the more experienced lender.
A similar comment requested that the Agency require PLP lenders to
submit a credit analysis prior to Agency approval of rescheduling. PLP
lenders have significant agricultural lending experience in addition to
their familiarity with Agency guaranteed loan programs. Having the
Agency review the PLP lender analysis, in most instances serves no
useful purpose. PLP lenders know how to analyze credit and make loan
restructuring decisions based upon those analyses. In addition, they
are required to have documentation of their analysis in the file. If a
PLP lender does not take those actions required by the lender's
agreement and Agency regulations prior to restructuring, in the event
of a loss, the lender's loss claim under the guarantee may be reduced
or denied.
One comment requested that the Agency make a decision on the PLP or
CLP lender's servicing requests within 14 days, rather than state that
the Agency will ``consider the request.'' Proposed
Sec. 1980.145(a)(1)(i)(C) states that only SELs are required to obtain
Agency approval and the Agency must notify the SEL within 14 days of
the request. The comment apparently mistook the Agency's discussion of
proposed changes in the rule, which used the word ``consider'', for the
regulatory requirement.
Another comment suggested that the Agency not be required to act in
14 days if the borrower has a direct loan that is being serviced under
the provisions of 7 CFR part 1951, subpart S. This comment is also
apparently a
[[Page 7372]]
misunderstanding, because the rule stipulates certain items to be
submitted to the Agency for approval before the 14 day period begins.
If a guaranteed borrower is having direct loans rescheduled by the
Agency, much of the required information, such as a feasible plan,
cannot be provided by the lender until direct loan servicing is
complete.
One comment requested that the Agency require the lender to account
for security and provide a loan history as part of any loan
restructuring action. The Agency believes that the adoption of this
suggestion would not provide additional assurance that the loan was
adequately serviced. The existing rule states that a final loss claim
may be reduced, adjusted, or rejected as a result of negligent
servicing after the concurrence with a restructuring action. The intent
of this statement is to remind SELs that Agency concurrence with an
action does not mean that all actions up to that point regarding
servicing are satisfactory. The statement in the rule also applies to
CLP and PLP lenders, who do not require Agency concurrence prior to
restructuring.
Balloon Payments
Several comments were received requesting the Agency allow for the
reamortization and restructuring of loans with a balloon payment in the
repayment schedule. The Agency agreed to add a regulatory prohibition
against rescheduling loans with balloon payments several years ago in
response to a recommendation of the USDA Office of Inspector General
(OIG). OIG determined that many Agency guaranteed loans were being
restructured with no realistic planned repayment when the balloon
payment came due. As a result, the borrower did not receive any real
benefit and, in many cases, the balloon payment was used to simply put
off the inevitable. This caused continuing difficulties for the
borrower and, ultimately, a larger loss to the Agency. However, the
Agency does recognize the need for the lender to have the flexibility
of being able to restructure a loan with a payment schedule other than
equal amortized payments. Thus, Sec. 762.145(a)(3) allows a loan to be
rescheduled with uneven payments provided the borrower projects a
feasible plan for the upcoming year and can reasonably demonstrate that
when the installments increase they will be repaid without further
restructuring. The Agency intends that unequal installments will
coincide with the need to re-establish an enterprise or an unusual cash
flow cycle.
Prohibition of Advances on Rescheduled Lines of Credit
One comment requested that prohibiting advances on rescheduled
lines of credit should not apply to those lines of credit already in
effect. The comment suggested that FSA ``grandfather in'' all existing
lines of credit to allow them to be rescheduled, and permit advances on
the difference between the line maximum and the rescheduled balance.
FSA's intent in Sec. 762.145(b)(1)(ii) is that, on the effective date
of this rule, the change will apply to all lines of credit except those
that have been previously restructured. To adopt the comment's
suggestion would require gradual implementation of the restriction for
up to five years on existing lines of credit. This would create
problems in administering the restriction. Therefore, the Agency will
not adopt this suggestion for all lines of credit. While the final rule
will allow rescheduled lines of credit with remaining balances to be
re-advanced, on the effective date of this rule, the Agency will not
allow advances on lines of credit where restructuring has not already
occurred.
Debt Writedown
Several comments were received from Agency field offices concerning
the Agency's debt writedown provisions proposed in Sec. 1980.145(e).
One comment was received suggesting that the Agency require an OL loan
that is being written down to be amortized over a minimum of 10 years,
as opposed to the 5 year minimum that was proposed in
Sec. 1980.145(e)(5). The Agency understands the commenter's concern
that the amount written off and the resulting loss claim payment is
higher when the loan has a shorter term. However, the Agency intends to
be flexible in those situations where the life of the security is less
than 10 years and it is the lender's policy to not restructure beyond
the life of the security. This may provide an incentive for lenders to
provide a writedown to a farmer that needs one to stay in business.
Another comment requested that the Agency require the lender to
take a lien on all assets when writing down a guaranteed loan. The
Agency considered this option; however, it was not adopted because it
would create future credit problems for the operation. The Agency felt
that this situation should be handled on a case-by-case basis, with
guidance provided in the Agency handbook and in consideration of the
lender's internal policies. Also, Sec. 762.145(e)(9) does require a
cross collateralization of security if the borrower has other
guaranteed loans that are not secured with the same security as the
loan being written down.
Several comments expressed concern over the 20 year minimum
amortization for an FO loan that is being written down. For example,
there is concern that if there are only 19 years left on a 40 year FO
loan, in accordance with Sec. 307(a)(1) of the CONACT, it cannot be
reamortized to exceed 40 years from the original date of the loan. The
Agency has written Sec. 762.145(e)(5) to state that the loan will have
a 20 year term minimum, unless the remaining term exceeds the statutory
term. If the term cannot be extended to 20 years, it will be extended
to the maximum term available under the CONACT.
Servicing Fees
One comment requested the Agency not pay the holder a servicing fee
when repurchasing a guaranteed loan from the secondary market. The
proposed rule at Sec. 1980.144(b)(3) stated that the Agency will not
reimburse the lender for any servicing fees which have been assessed to
the holder. The comment is being adopted in Sec. 762.144(b)(3) of the
final rule by adding the words ``after the Agency repurchase.''
Bankruptcy Costs
The proposed rule at Sec. 1980.148 contained several revisions to
the Agency's loss claim procedures with regard to the costs incurred
when a borrower files for protection under the provisions of the
bankruptcy code. The most consequential of these changes is the
reversal of current policy prohibiting the payment of legal fees and
appraisal fees in a bankruptcy. A large number of comments were
received on this proposal, with the majority in favor of the change.
However, several comments were received requesting that these fees not
be covered or that they be covered at a reduced percentage. The
comments suggest that inclusion of these fees in the lender's
guaranteed loss will reduce a lender's incentive to minimize these
expenses and exacerbate the Government's losses on these loans. As
stated in the discussion of this change in the proposed rule, the
Agency believes that payment of the guaranteed percentage of legal fees
in a bankruptcy is a legitimate and logical extension of current
policies on the payment of a lender's losses. Also, this change will
benefit more family farmers and ranchers by encouraging lenders who
have not previously participated in the guaranteed loan program to now
make loans. Many lenders have said that one
[[Page 7373]]
of the reasons they do not participate, or participate at a minimum
level in the Agency's guaranteed loan program, is because the Agency
does not cover all fees with the guarantee. Maintaining the
reasonableness of legal fees is an issue that will have to be dealt
with through appropriate guaranteed loan portfolio management. The
Agency will retain the option of scrutinizing a lender's claimed
expenses and reducing a loss claim request when a lender has not
monitored expenses and has allowed unfettered fees to accumulate.
Where appraisals are concerned, the court often requires the lender
to have the collateral appraised, or at least share in the cost of an
appraisal. The Agency allows appraisal costs in a liquidation loss
claim, and this change will make bankruptcy procedures more consistent.
More importantly, the coverage of the cost of an appraisal will assure
that, in bankruptcy cases, accurate representations of security values
will be obtained.
Several comments suggested modifications in the final rule, such as
limiting coverage of lender legal fees to 50 percent, making sure that
the fees are not excessive, clarifying what expenses are reasonable,
requiring prior approval of estimated legal fees, and not guaranteeing
legal fees at all. One comment suggested that covering legal fees is
detrimental to the borrower. The Agency will only guarantee reasonable
legal fees. We believe, and lenders have stated, that they are more
likely to aggressively act in bankruptcy cases if they know that such
costs are covered by the guarantee. While a lender's aggressive action
in bankruptcy may be viewed as adverse to a borrower, the borrower's
interest is protected by the court. The Agency's exposure on the
guarantee is with the lender. The Agency believes it is unlikely that a
borrower will lack due process as a result of covering legal fees under
the guarantee. Since the Agency believes that the commenter's
suggestion embellishes the likely effect of the rule, it will not adopt
the comment. It is in the Government's interest to assure that the
lender takes every action to protect its loan security and ensure that
losses are minimized. The overriding consideration is that more lenders
will participate in the guaranteed loan program, increasing credit
availability and providing a benefit to family farmers and ranchers.
The suggestion that the Agency pre-approve estimates of fees was
also not adopted. Agency approval of an estimated expense is time
consuming and burdensome on both the Agency and the lender and serves
no purpose other than to have an estimate which may be higher or lower
than the actual amount.
Also, in response to another comment, the Agency will guarantee
attorney fees based upon the assumption that lenders will be using
sound, licensed, professional legal counsel when involved in such an
action. Losses incurred as a result of servicing deficiencies may not
be paid under a loss claim. Such deficiencies may include the failure
of a lender's legal counsel to represent its interest by not filing
objections where appropriate or other actions.
On a related subject, a comment suggested that FSA guarantee legal
fees incurred outside of bankruptcy, as well as fees incurred as a
result of lender liability suits brought by the borrower. For the
former, the rule provides that lenders subtract reasonable liquidation
expenses from the proceeds received from a liquidation action. However,
lender liability suits are actions specific to the relationship between
the lender and the borrower. As such, they are recognized as a risk of
business for which the Government is neither responsible, nor prepared
to assume responsibility for under the guarantee.
This rule does not expound on what the Agency regards as reasonable
or frivolous expenses as suggested by several comments. The Agency
acknowledges the potential for inconsistency in how ``frivolous'' or
``unreasonable'' is determined. By ``frivolous'', the Agency is
referring to those expenses which, in its opinion, the lender's
attorney cannot legitimately claim, or the lender cannot legitimately
request coverage of by FSA. The decision of what is ``reasonable'' is
situational. The Agency believes that the terms ``frivolous'' and
``unreasonable'' are sufficiently precise to establish standards of
``reasonable'' expenses. The standards are based on each case
considering the legal costs in the locality, the size of the debt, the
type of security, and the amount of opposition encountered. The
expenses will be adjusted based on a comparison of each of these items
for similar cases in the area. Guidance on review and approval of
bankruptcy loss claims will be included in the Agency field office
handbooks. Current policy of not covering the lender's in house, or
normal operating expenses, will continue. See Sec. 762.148(b)(1)(i) of
the final rule.
Default Meeting
One comment requested that the Agency require its personnel to be
included in a meeting described in the proposed rule at
Sec. 1980.143(b)(3). The Agency does not feel that it is necessary to
attend the meeting between the lender and the borrower to discuss the
loan delinquency. Agency personnel have the option to attend the
meeting, if requested by the lender, if they are unsure what actions
may or may not jeopardize the guarantee. However, the lender often
needs to act quickly and there may be scheduling conflicts. Placing
Agency employees at the meeting can leave the impression with the
borrower that Agency guidance regarding regulations means the FSA
employee is making the decisions. The loan is the lender's and it is
the lender's responsibility to service it.
Liquidation
Several comments were received regarding the time frames lenders
are required to meet in a liquidation action. A similar comment
suggested that the Agency not require the consideration of interest
assistance prior to liquidation. Both comments suggest removal of
proposed Sec. 1980.143(b)(3)(v). The reasons for the suggestion are
understandable, as nothing is accomplished by the required 60 day
waiting period. Nonetheless, lenders who participate in the Agency
guaranteed loan program are required by Sec. 351(g) the CONACT to wait
60 days after considering interest assistance before initiating
liquidation. However, if restructuring is not an option and liquidation
should proceed, the lender can conduct preliminary activities to
liquidation, to expedite recoveries after the 60 day period has passed.
Also, if the borrower waives interest assistance, liquidation may begin
immediately. This rule includes clarification of how interest
assistance is considered in conjunction with a distressed servicing
action and the FSA handbooks will include additional guidance on how
this provision is to be dealt with. The Agency believes the other time
frames for liquidations provided are reasonable considering the
complexities involved in any liquidation action.
A similar comment asked the Agency to clarify how the borrower's
eligibility for interest assistance is automatically determined upon
receipt of the default status report. As stated above, interest
assistance will not cure a default, except as part of a rescheduling
proposal. In response to this comment, the Agency added language to
Sec. 762.143(b)(iii) to state that lender's consideration of a borrower
for interest assistance will be included on a default status report.
This amended procedure will advise the Agency that interest assistance
has been considered, and to assure that the
[[Page 7374]]
interest assistance has been considered in all cases.
Liquidation Plans
Several comments requested that the Agency not require PLP lenders
to submit liquidation plans, while other comments requested that the
Agency not require lenders prepare liquidation plans. The first
suggestion is being adopted and Sec. 762.149(b)(2) is revised so that
PLP lenders are not required to submit liquidation plans unless the
lender's agreement requires it. PLP lenders will be required to have a
plan developed for liquidation, although each PLP liquidation plan may
differ slightly, as spelled out in the PLP agreement. Agency monitoring
of default status reports, which will contain previous actions and
planned actions, will allow Agency officials to monitor PLP progress on
liquidations. As far as non PLP lenders are concerned, the Agency feels
that a liquidation plan is necessary to protect the Government's
interest, and provide guidance on the status of defaulted guaranteed
loans. Plans can be brief as long as they include the items required to
be addressed by Sec. 762.149(b). Agency personnel must be kept informed
when a guaranteed loan moves to the liquidation stage. The liquidation
plan's preparation assures the Agency that repurchase from a secondary
market holder has been considered and advance preparation to minimize
losses has begun. Also it serves to assure the lender that the Agency
is in agreement with its actions, so misunderstandings may be avoided.
The Agency was requested not to specify how estimated loss payments
will be applied. The comment stated that since interest accrual ceases
upon payment of the estimated loss claim, it does not matter how the
lender applies the loss claim payment. The application of the proceeds
becomes insignificant because interest accrual on the defaulted loan
ceases. The Agency is adopting this comment and has amended
Sec. 762.149(d)(2) accordingly.
The Agency was also requested to respond to lenders' liquidation
plans sooner than 30 days. The Agency agrees that there is little
justification for the 30 day period since the Agency reply requirement
is based on a complete plan and the Agency must simply respond with an
approval, request for clarification or additional information. As a
result, Sec. 762.149(c)(2) was revised to state that the Agency will
respond within 20 calendar days; otherwise, the lender may assume the
plan is approved and proceed with reasonable actions to protect its
interest and liquidate the loan.
A commenter suggested that the Agency hold a lender harmless for
liquidation actions taken prior to FSA concurrence as long as they are
prudent and reasonable. The standard to which a lender will be held is
``reasonableness.'' The Agency will not penalize a lender in this
situation for reasonable actions. This comment will be addressed
further as an administrative matter in the Agency handbook, providing
that loss claims will only be reduced as far as the lender's actions
contributed to the loss.
Several comments requested that the Agency not require a
liquidation value appraisal be provided with a liquidation plan and
another suggested requiring a value in between the liquidation value
and the market value to be bid at any forced security sale. The
comment's suggestion that all estimated losses be based upon a market
value appraisal, less estimated liquidation costs, is being adopted.
The Agency agrees that the ``liquidation value'' term is confusing when
used in context of liquidation plans and estimated loss claims. Section
762.149(b)(4) has been revised to require the lender to provide a net
recovery value determination, defined in the final rule as the
difference between market value and anticipated selling expenses. At a
minimum the lender must bid the lesser of this value or the unpaid
guaranteed loan balance at any forced sale. See Sec. 762.149(h). This
complies with standard industry practices and the Agency sees no
benefit in bidding higher than net recovery value at a distress sale.
Another comment on this section requested that the Agency be flexible
on the requirement to obtain a balance sheet as part of the liquidation
plan, as it may be difficult for a lender to obtain a current balance
sheet from a distressed borrower. The comment is not being adopted;
however, clarification of expectations when a borrower is uncooperative
has been added to Sec. 762.149(b)(1). The Agency would expect the
lender to provide the most recent financial information available in
these instances.
Protective Advances
Comments were received requesting the Agency raise the limits on
protective advances proposed in Sec. 1980.149(e)(1). The proposed rule
required that protective advances in excess of $500 for SELs and $3,000
for CLP lenders must be approved in writing by the Agency. These limits
have been in place for several years and the Agency agrees that costs
have increased and these limits may be outdated. Therefore the rule has
been revised to raise the limits for CLP lenders to $5,000 and SELs to
$3,000. The Agency believes that these limits are sufficient for
advances that a lender must make before receiving a written response
from the Agency. PLP lenders will make protective advances in
accordance with the PLP agreement. These limits do not apply to
emergency advances described in Sec. 762.146(a).
Net Recovery Value
The Agency received a comment suggesting that it amend the
definition of net recovery value to reflect the difference between the
market value and the lender's cost of liquidation, instead of the
Government's cost. We have adopted this suggestion and made the change
in Sec. 762.102(b).
Another comment suggested the Agency define net recovery value. The
proposed rule at Sec. 1980.102(b) did define net recovery value;
however, further clarification was needed regarding the term
``estimated future value'' which was used in the definition. Section
762.102(b) has been revised to replace that element of net recovery
value with ``market value.'' This value, less the lender's estimated
cost associated with the disposal of the property, is the net recovery
value. Further guidance on net recovery value calculations and their
use in loan servicing actions will be provided in FSA handbooks.
Interest Accrual
One comment requested that the Agency clarify interest accrual on
loss claims. The suggestion is being adopted. While the rule clearly
states that interest accrual will cease upon the payment of an
estimated loss claim, the comment is concerned about a case where no
loss is expected, but there is a loss after final disposition. Section
762.149(d)(2) requires the lender to provide the Agency a loss estimate
of zero, whereupon interest accrual will cease on the defaulted loan.
This will encourage the lender to liquidate the account expeditiously
and provide the Agency with a record of a liquidating account. The
lender may collect all manner of late charges, fees, costs, and
interest on the loan up to the point it is paid in full, as long as
security proceeds are sufficient to pay the entire debt. If a loss
occurs upon submission of the final claim, the guaranteed percentage of
the loss will be paid; however, interest that accrues after receipt of
the no-loss estimate will not. This is consistent with the handling of
those accounts that have an additional final loss, not including
interest accrual which ceased
[[Page 7375]]
upon the Agency's payment of an estimated loss claim.
Final Loss Payment
Several comments suggested clarification of the Agency's policies
and procedures on payment of final loss settlements contained in
proposed Sec. 1980.149(i). One comment dealt with losses when a lender
takes possession of real estate collateral. The comment requested that
the Agency allow lenders to request a final loss payment upon the
borrower's transfer of the security, provided the lender receives the
full appraised value of the security. A related comment requested that
all final losses be based upon the ultimate disposition of collateral.
Agency experience and common sense, as discussed in the proposed rule,
indicates that few lenders opt for final payment prior to ultimate
disposition. In order to establish consistency in the final payment
process and avoid the misunderstandings that have occurred, this seldom
used option was eliminated.
One comment requested the Agency clarify proposed
Sec. 1980.149(i)(6) as to how the deduction for the value of security
that has not been accounted for will be calculated. Failure to obtain a
lien on, monitor, inspect, or properly apply proceeds from the sale of
collateral in most cases will be used as a reason for a reduction or
denial of a lender's claim under a guarantee due to negligent
servicing. However, the fact that there is unaccounted for security
will not necessarily cause a reduction because of negligent servicing.
The decision will be based upon the lender's servicing and collection
efforts. Also the Agency will not penalize a lender for servicing
deficiencies that did not contribute materially to a loss. The Agency
has clarified this provision in Sec. 762.149(i)(6) as suggested.
Future Recovery
Another comment requested that the Agency include specific
procedures and time frames for additional collection actions after a
guaranteed loan loss claim has been paid. The proposed rule at
Secs. 1980.149(j) and 1980.141(f) outlined what the lender's
responsibility is for future collections. The rule proposed submission
of an annual report on all unsatisfied accounts for three years
following payment of a claim. Sections 762.149(j) and 762.141(f) adopts
these provisions unchanged. Further explanation of the administrative
aspects of the rule will be provided in the Agency handbook.
Release of Liability
One commenter questioned why the Agency is giving the lender
release of liability authority. The meaning of the comment is unclear
since Secs. 1980.146(b) and (c) of the proposed rule provided for
Agency approval of release of liability in the case of SEL and CLP
lenders. Also, as outlined in the proposed rule, releases of liability
will only occur in cases of divorce, bankruptcy, withdrawal from the
operation (without retention of any farm assets), and liquidation, and
will be based on the strength of the remaining liable party. The Agency
estimates that this new authority will not impact current loss levels.
Termination
One comment was received requesting that the termination of
guaranteed loans be expanded to include the denial of loss claims upon
written notification by the Agency. The comment is not being adopted,
as such a provision is included in the guarantee document itself. Also,
termination of the guarantee automatically occurs upon the denial of a
loss claim after all appeal rights are concluded. Requiring Agency
personnel to specifically state this in a letter is an administrative
issue that will be covered in the Agency handbook. Similarly, it was
suggested that the Agency require lenders to return guarantees marked
paid in full on all paid guaranteed loans. The Agency has revised
Sec. 762.149(i)(11) to require this.
Interest Assistance
On February 28, 1991, Farmers Home Administration (FmHA) published
an interim rule [56 Fed. Reg. 8258-8272] with a comment period ending
April 29, 1991. The Omnibus Budget Reconciliation Act of 1990: (1)
increased the potential level of government reimbursement for interest
rate reductions made by lenders on guaranteed farm loans; (2) extended
the potential term of interest rate reduction on guaranteed farm loans;
and (3) extended authorization for the subsidy program through
September 30, 1995. On February 10, 1996, it was extended until
November 30, 2002. See Pub. L. 104-105 Sec. 220. It was necessary to
implement this rule upon publication to provide assistance to a large
number of farmers who would otherwise be unable to obtain sufficient
credit to operate in 1991. In response to the interim rule, 175
respondents from 24 States and the District of Columbia commented in
writing. Many of the respondents' letters contained comments on a
number of the sections of the interim rule. Comments were received from
individuals, Agency employees, interest groups, lenders, bankers
associations, Farmer Mac, Members of the Congress, and the Department
of Treasury. Several comments complimented various segments of the
program.
There were four comments on the consideration of significant non-
essential assets. Of those, one comment recommended that significant
non-essential assets be made available for security but that their sale
not be forced or assumed in cash flow. A second comment suggested that
all members of entities be required to pledge all non-essential assets.
Two respondents requested that borrowers be required to liquidate
significant non-essential assets before the interest assistance loan is
closed or before the subsidy is continued. In the interim rule, cash
flow is calculated based on the assumption that significant non-
essential assets will be sold. There is no requirement to actually sell
non-essential assets if the obligations can be met otherwise. The
Agency has adopted the recommendation to continue with the policy of
the interim rule, with a clarification in Sec. 762.150(b)(3) to
consider non-essential assets of entity members. FSA has a long-
standing policy not to provide subsidized credit to enable applicants
to retain assets which are not essential to the farming operation.
The interim rule provided for a floating maximum subsidy rate not
to exceed 4 percent. Two respondents commented that it was clearly the
intent of the legislation that the 4 percent subsidy be made available
to all eligible borrowers based on need. One comment suggested that the
maximum rate available be reduced in stages over the life of the
agreement.
Under the interim rule, the level of interest assistance to be
received is determined and set at .25 percent increments. One hundred
fourteen comments objected to the use of the increments. The Agency
agrees that projected farm budgets cannot be as precise as the .25
percent increment required and implied. Granting interest assistance at
the 4 percent level in every case would give recipients subsidy for
their need, and increase their probability of remaining a viable
farming enterprise. On December 17, 1993, the Agency published a change
at 58 FR 65871,65887 adopting the recommendation to determine and set
interest assistance at 4 percent in all interest assistance situations
which require any level of subsidy. This is adopted at
Sec. 762.150(d)(1)(i).
[[Page 7376]]
The Agency changed from incremental amounts of interest assistance
to a straight subsidy amount of 4 percent on December 17, 1993. The
Agency is considering whether alternative methods such as a return to
the use of increments in determining subsidy levels would be
appropriate. During the review of the regulations, questions were
raised as to whether alternative subsidy calculation methods would
produce a cost savings and increase the number of producers that could
be helped. By using incremental subsidy, rather than a 4 percent
subsidy, the Agency might be able to target the amount of interest
assistance subsidy paid more closely to borrower need, reducing the
assistance in some cases, so that more qualifying producers could be
assisted with the available subsidy. To assist us in considering
alternative proposals, we are specifically asking for comments
regarding the use of incremental subsidies, at what increments should
the subsidy be established, and any other alternative methods of
establishing the subsidy rate.
The interim rule provides for interest assistance payments to be
made to lenders on the basis of claims which can be submitted only once
annually. All comments on this issue wanted to be able to submit claims
more often than once annually. Various methods of payment were
suggested by the comments. Based upon the comments received, the Agency
believes that more frequent claims may be conducive to lenders sale of
the guaranteed portion of loans with interest assistance into the
secondary market and may allow the lender to offer a slightly lower
interest rate to the borrower. However, the lender's increased earnings
would be minimal and may or may not be passed on to the borrower in the
form of lower rates. Because Agency resources are limited, processing
frequent (i.e., monthly) claims would overload Agency offices.
Therefore, the Agency has decided to continue to allow claims only at
12-month intervals.
All comments regarding the cap on variable interest rates were in
opposition to it. The Agency has adopted the recommendation to remove
the cap on variable interest rate increases to be consistent with other
loan programs and the industry standard. See Sec. 762.150(b)(7).
The interim rule required that the need for interest assistance be
reviewed annually, and the level of assistance be adjusted if
necessary. One hundred twenty-one separate comments requested various
changes in this requirement. Most of the comments recommended the
review period be increased to 2 or 3 years, several recommended a 5
year interval and others objected the review, but offered no
alternative. The Agency acknowledges that periodic reviews place a
burden on the lender. However, this requirement was established as a
control to prevent borrowers whose financial position improves from
receiving unneeded subsidy in later years of the loan. The Agency has
considered the comments and believes that less frequent reviews will
create a significant risk of payment of excess subsidy. Therefore, the
Agency has decided to not change the review period.
Eight comments were received regarding the minimum loan terms for
interest assistance. Minimum terms are specified as a safeguard to
prevent use of a reduced payment term which would increase installments
so that an applicant or borrower, who would otherwise not need interest
assistance, might qualify. Two of these comments suggested that
existing loans whose original terms met the requirements, even though
they do not meet them now, should qualify for interest assistance.
Other comments suggested permitting a balloon payment in 5 or 10 years.
Balloon installments place additional risk on the long term viability
of the operation and are not acceptable for borrowers in need of a
subsidy. The Agency has changed Sec. 762.150(b)(1)(iii) to consider the
20-year requirement on farm ownership and soil and water loans secured
by real estate, to begin on the loan closing date (on loans with
existing guarantees) instead of the effective date of the interest
assistance agreement. This is consistent with the intent of the
provision, and reduces the cost and paperwork for borrowers who had a
loan with terms of 20 years or more, but have less than 20 years
remaining.
The interim rule required that requests for interest assistance on
annual operating loans and lines of credit be accompanied by a monthly
cash-flow budget. The Agency received seven comments in opposition to
the requirement. The purpose of this budget is to accurately estimate
the maximum credit needs of the borrower and the average loan balance.
This is a fundamental part of sound credit analysis. Therefore, the
Agency is not adopting this suggestion, since it would reduce the
quality of the analysis.
Three comments discussed the issue of the inadequacy of
compensation for lenders for the extra work required by the subsidy
program. Two of them suggested higher interest rates or assessing fees
to the borrower as compensation. One comment suggested that the Agency
pay a fee to the lender to cover additional costs. It is not reasonable
to expect that borrowers whose financial position allows them to
qualify for the subsidy program to afford the additional cost for
payment of a fee. Section 351(c) of the CONACT prohibits the Agency
from paying a fee in addition to 100% of the cost of interest
reduction. Therefore, the Agency has not adopted these suggestions.
One comment requested clarification of the penalty for lenders who
fail to complete annual analyses or submit claims within the 60-day
timeframe. The Agency is concerned that the analysis needs to be tied
to the claim to encourage timely analysis and planning. Section
762.150(d)(1)(ii) has been revised to encourage filing within 60 days
and state that failure to submit a claim within 1 year will result in
forfeiture of the payment.
Several comments requested that the Agency establish timeframes to
process claims. The Agency agrees that claims should be processed in a
timely manner. Suggested timeframes have been established in the agency
handbook.
The interim rule limited the term of interest assistance to 10
years on each loan. Eighty-seven comments were received on this
subject; one suggested that we should make the term of eligibility
limitation per borrower rather than per loan, two suggested allowing
interest assistance for the life of the loan, one was concerned that
the period of assistance is too long, and 83 were pleased to see the
increase from 3 to 10 years. The program is designed to provide
temporary assistance to borrowers. It is most reasonable to tie the
eligibility period to the borrower rather than any particular loan.
Tying eligibility to any loan provides an almost unending subsidy as
borrowers can receive additional loans and continue the subsidy almost
indefinitely. The Agency adopted the recommendation to limit the term
of interest assistance to 10 consecutive years per borrower.
The interim rule required a positive cash flow (with a 10-percent
margin) to be eligible for interest assistance. This subject drew a
variety of comments from 94 respondents. A few comments were in support
of the interim rule while the vast majority were opposed to various
aspects of the margin requirement. Recommendations ranged from deleting
the requirement altogether to allowing a greater than 10-percent
margin. Many respondents suggested allowing continuation of interest
assistance or applying subsidy to existing guaranteed
[[Page 7377]]
loans, with no margin requirement. The Agency continues to believe that
as a cash flow lender, a margin of at least 10 percent of the term debt
payments is essential for an applicant to have reasonable prospects for
success. See the definition of positive cash flow contained in
Sec. 762.102, which is required in Sec. 762.150(b)(4)(i) for interest
assistance on new guaranteed loans. However, it also agrees that
withdrawing or prohibiting subsidy in cases where the Agency already
has exposure only increases that exposure and is not consistent with
program objectives. The Agency partially adopted this recommendation by
deleting the requirement for a margin on continuation requests or
existing loans. See Sec. 762.150(b)(5)(i).
The interim rule provides for the level of need for subsidy to be
based upon a projected cash flow. One comment suggested that a second
needs test should be calculated at the end of the claim period based on
the borrower's actual performance, to determine the level of subsidy to
be paid. In order for the borrower and lender to make sound business
decisions, they must be able to project the effective interest rate for
the next plan period. Since this recommendation would reduce the
ability to plan, the Agency is not adopting it.
One respondent requested clarification on the method of performing
the needs test on multiple loans. This clarification has been provided
in the Agency handbook and lender manual.
One comment suggested that the definition of ``positive cash flow''
be added. An explanation of positive cash flow has been added in
Sec. 762.102.
Two respondents requested guidance on accounting for the subsidy
portion of the interest payment. This is a management decision to be
made by each individual lender and should not be dictated by the
Agency. Therefore, no change is made.
One respondent requested clarification as to whether ``other debt''
is to be considered for restructuring before interest assistance is to
be considered. This is not a requirement but an option under the
interim rule. No change is being made.
Many of the respondents who sent similar letters, recommended that
the Agency not cancel interest assistance due to a court ordered
reduction in the interest rate. Such a policy could result in having to
process two claims. For administrative simplicity, the Agency prefers
that the lender request the interest reduction through the loss claim
process rather than through an interest assistance claim. The interest
assistance agreement is changed to clarify this point. The interest
assistance agreement will also be revised for administrative
simplicity, to say that interest assistance will be canceled when a
debt write down is approved.
One comment requested clarification that lenders can reduce their
interest rate voluntarily in conjunction with interest assistance. This
has always been the policy and clarification is added to
Sec. 762.150(b)(7).
One comment feels that the proposed rule contains more stringent
rules and will hinder the ability of Agency direct loan customers to
graduate to guaranteed loans. The Agency feels that the new program is
less stringent and should be more appealing as several of the changes
being made with this final rule will be more beneficial to the loan
applicant and lender. Examples of these changes include a simplified
claim process, Agency timeframes to process claims, reduced margin
requirements for servicing, and elimination of .25 percent increments.
One respondent commented that the Agency does not seem to trust the
commercial lender in implementing the interest assistance program. The
regulations of this program reflect a balance of internal controls to
protect the Government's interest, with a workable program to benefit
the borrower and to appeal to lenders. No change will be made.
One comment suggested that mid-year adjustments of the subsidy
level should be available. Such an adjustment would not be significant
to either the lender or the borrower, especially since elimination of
the .25 percent increments, and would add to the administrative time
required of all parties. No change is made.
Thirty-four comments recommended limiting a borrower's effective
interest rate to a level no lower than the limited resource rate for
the same loan type. The limited resource rate is the lowest rate
charged for Agency direct loans. However, the standards for the
guaranteed program do not correlate with the direct loans program. Such
a limitation would be administratively burdensome to the lender and
would complicate the program. Therefore, the Agency is not adopting
this recommendation.
Seventy-nine respondents, requested that the Agency adopt a policy
that no guarantee fee will be charged for loans in which a majority of
the funds are used to refinance Agency loans. This would encourage
graduation of borrowers from the direct loan program to the guaranteed
loan program. The Agency implemented this recommendation without
publication in 1993 and in Sec. 762.130(d)(4).
Eighty-three comments, stated the amount of paperwork and
preparation time involved with the interest assistance application
process will prove too difficult and costly for borrowers and banks and
will decrease participation in the program. No specific changes were
recommended. Every effort has been made to minimize paperwork, while
protecting the interest of the Government and meeting statutory
requirements. Many changes that are being made in this rule will reduce
the paperwork associated with interest assistance loans. Examples
include a much less complex claims process, simplified needs test, and
elimination of an amortization schedule for loans with equal payments.
The Agency will continue to accept comments on specific changes which
will result in a burden reduction.
Twenty-two comments requested that consideration be given to an
Agency developed software program that would complete forms associated
with interest assistance. Development of software for public use is
outside the scope of the Agency's current focus. Commitment of time
necessary for development, service and maintenance of such software
would reduce the effectiveness of the Agency's other loan programs and
the software is available commercially. The Agency will not adopt this
recommendation at this time.
One comment suggested that an amortization table beyond the initial
24 months is not useful in analyzing the request. For loans with
unequal payments, this schedule is necessary to evaluate the long-term
viability of the plan. Since it is not essential for loans with equally
amortized installments, the Agency is changing the requirement to
exclude loans with equal payments from the amortization table.
Four comments recommended allowing lenders to cancel interest rate
buy down (IRBD) and have the interest rate revert back to the rate in
effect before IRBD. This recommendation cannot be adopted because it
would result in windfall gains to lenders while offering no benefit to
the borrower or the Agency.
One comment recommended that a provision be made for the Agency to
cancel interest assistance if borrowers do not adhere to their plan.
While this would be prudent lending, it is nearly impossible to monitor
and enforce such a requirement and would be primarily subjective. If
borrowers do not adhere to the plan, the appropriate remedy is
[[Page 7378]]
liquidation. The change will not be adopted.
Various comments concerning forms were received; as a result, the
forms were redesigned for clarity.
Justification for Effective Date
Good cause is shown for an immediate effective date because of the
need to accelerate the availability of assistance under this program.
Numerous natural disasters throughout the country have reduced farm
production and widespread reductions in commodity prices have lowered
income which has resulted in deteriorating financial conditions for
many producers. As a result of those deteriorating financial
conditions, we anticipate an increased demand for guaranteed farm
loans. These streamlining regulations will enable the Agency to serve
the needs of the financially stressed farmers and lenders more quickly
and efficiently; therefore an immediate implementation is justified.
List of Subjects
7 CFR Part 762
Agriculture, Loan programs--Agriculture.
7 CFR Part 1980
Agriculture, Loan programs--Agriculture.
The Farm Service Agency adopts the proposed rule published
September 25, 1998, in the Federal Register [63 FR 51458-51488] and
also adopts its interim rule published February 28, 1991, in the
Federal Register [56 FR 8258-8272] with changes based upon comments
received. Accordingly, 7 CFR chapters VII and XVIII are amended as
follows:
7 CFR Chapter VII
1. Part 762 is added to read as follows:
PART 762--GUARANTEED FARM LOANS
Sec.
762.1-762.100 [Reserved].
762.101 Introduction.
762.102 Abbreviations and definitions.
762.103 Full faith and credit.
762.104 Appeals.
762.105 Eligibility and substitution of lenders.
762.106 Preferred and certified lender programs.
762.107-762.109 [Reserved].
762.110 Loan application.
762.111-762.119 [Reserved].
762.120 Loan applicant eligibility.
762.121 Loan purposes.
762.122 Loan limitations.
762.123 Insurance and farm inspection requirements.
762.124 Interest rates, terms, charges, and fees.
762.125 Financial feasibility.
762.126 Security requirements.
762.127 Appraisal requirements.
762.128 Environmental and special laws.
762.129 Percent of guarantee and maximum loss.
762.130 Loan approval and issuing the guarantee.
762.131-762.139 [Reserved].
762.140 General servicing responsibilities.
762.141 Reporting requirements.
762.142 Servicing related to collateral.
762.143 Servicing distressed accounts.
762.144 Repurchase of guaranteed portion from a secondary market
holder.
762.145 Restructuring guaranteed loans.
762.146 Other servicing procedures.
762.147 Servicing shared appreciation agreements.
762.148 Bankruptcy.
762.149 Liquidation.
762.150 Interest assistance program.
762.151-762.159 [Reserved].
762.160 Sale, assignment and participation.
Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 42 U.S.C. 1480.
PART 762--GUARANTEED FARM LOANS
Secs. 762.1-762.100 [Reserved].
Sec. 762.101 Introduction.
(a) Scope. This subpart contains regulations governing Operating
Loans and Farm Ownership loans guaranteed by the Farm Service Agency.
This subpart applies to lenders, holders, borrowers, Agency personnel,
and other parties involved in making, guaranteeing, holding, servicing,
or liquidating such loans.
(b) Policy. The Agency issues guarantees on loans made to qualified
loan applicants without regard to race, color, religion, sex, national
origin, marital status, or age, provided the loan applicant can enter
into a legal and binding contract, or whether all or part of the
applicant's income derives from any public assistance program or
whether the applicant, in good faith, exercises any rights under the
Consumer Protection Act.
(c) Lender list and classification.
(1) The Agency maintains a current list of lenders who express a
desire to participate in the guaranteed loan program. This list is made
available to farmers upon request.
(2) Lenders who participate in the Agency guaranteed loan program
will be classified into one of the following categories:
(i) Standard Eligible Lender under Sec. 762.105,
(ii) Certified Lender, or
(iii) Preferred Lender under Sec. 762.106.
(3) Lenders may continue to make loans under Approved Lender
Program (ALP) agreements until they expire; however, these agreements
will not be renewed when they expire. All ALP agreements with farm
credit institutions will expire on February 12, 2001.
(d) Type of guarantee. Guarantees are available for both a loan
note or a line of credit. A loan note is used for a loan of fixed
amount and term. A line of credit has a fixed term, but no fixed
amount. The principal amount outstanding at any time, however, may not
exceed the line of credit ceiling contained in the contract. Both
guarantees are evidenced by the same loan guarantee form.
(e) Termination of loan guarantee. The loan guarantee will
automatically terminate as follows:
(1) Upon full payment of the guaranteed loan. A zero balance within
the period authorized for advances on a line of credit will not
terminate the guarantee;
(2) Upon payment of a final loss claim; or
(3) Upon written notice from the lender to the Agency that a
guarantee is no longer desired provided the lender holds all of the
guaranteed portion of the loan. The loan guarantee will be returned to
the Agency office for cancellation within 30 days of the date of the
notice by the lender.
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
[[Page 7379]]
selected environment. An aquatic organism is any fish, amphibian,
reptile, or aquatic 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 25 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:
(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. A cash flow budget may be
completed either for a 12 month period, a typical production cycle or
the life of the loan, as appropriate. 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
[[Page 7380]]
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, or joint
operations.
Family farm. A farm which:
(1) Produces agricultural commodities for sale in sufficient
quantities so 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 for loan servicing purposes which shows the
elements of ``positive cash flow'' except that the minimum acceptable
``Term Debt and Capital Lease Coverage Ratio'' is 1.0 rather than 1.1
required for ``positive cash flow.''
Financially viable operation. An operation which, with Agency
assistance, is projected to improve its financial condition over a
period of time to the point that the operator can obtain commercial
credit without further Agency direct or guaranteed assistance. A
borrower that will meet the Agency classification of ``commercial,'' as
defined in Agency Instruction 2006-W, available in any Agency office,
will be considered to be financially viable. Such an operation must
generate sufficient income to:
(1) Meet annual operating expenses and debt payments as they become
due;
(2) Meet basic family living expenses to the extent they are not
met by dependable nonfarm income;
(3) Provide for replacement of capital items; and
(4) Provide for long-term financial growth.
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.
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 is
owned separately or jointly by the individuals. Joint operations
include limited liability companies having more than one member.
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
[[Page 7381]]
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.
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.
Participation. A loan arrangement where a primary or lead lender is
typically the lender of record but the loan funds may be provided by
one or more other lenders due to loan size or other factors. Typically,
participating lenders share in the interest income or profit on the
loan based on the relative amount of the loan funds provided after
deducting the servicing fees of the primary or lead lender.
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.
Positive cash flow. The ability of a borrower's operation to
demonstrate: a term debt and capital lease coverage ratio of at least
1.1; and a capital replacement and term debt repayment margin equal to
or greater than any planned capital asset purchases not financed. The
term debt and capital lease coverage ratio and the capital replacement
and term debt repayment margin are calculated as follows:
(1) Add projected net farm operating income, projected annual
nonfarm income, projected capital depreciation and amortization
expenses, scheduled annual interest on term debt, and scheduled annual
interest on capital leases.
(2) Subtract from this sum projected annual income and social
security tax payments, including any delinquent taxes, and family
living expenses. The difference is the balance available for term debt
repayment.
(3) Divide the balance available for term debt repayment by the sum
of the annual scheduled principal and interest payments on term debt,
plus the annual scheduled principal and interest payments on capital
leases, excluding delinquent installments. The quotient is the term
debt and capital lease coverage ratio.
(4) Add the balance available for term debt repayment to any cash
carryover from the preceding year.
(5) Subtract from this sum the amount of the total annual scheduled
term debt and capital lease payments, and any debt carried over from
the previous year. The difference is the capital replacement and term
debt repayment margin.
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.
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.
[[Page 7382]]
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.
Sale of guaranteed portion. See assignment of guaranteed portion.
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 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.
Sec. 762.103 Full faith and credit.
(a) Fraud and misrepresentation. The loan guarantee constitutes an
obligation supported by the full faith and credit of the United States.
The Agency may contest the guarantee only in cases of fraud or
misrepresentation by a lender or holder, in which:
(1) The lender or holder had actual knowledge of the fraud or
misrepresentation at the time it became the lender or holder, or
(2) The lender or holder participated in or condoned the fraud or
misrepresentation.
(b) Lender violations. The loan guarantee cannot be enforced by the
lender, regardless of when the Agency discovers the violation, to the
extent that the loss is a result of:
(1) Violation of usury laws;
(2) Negligent servicing;
(3) Failure to obtain the required security; or,
(4) Failure to use loan funds for purposes specifically approved by
the Agency.
(c) Enforcement by holder. The guarantee and right to require
purchase will be directly enforceable by the holder even if:
(1) The loan guarantee is contestable based on the lender's fraud
or misrepresentation; or
(2) The loan note guarantee is unenforceable by the lender based on
a lender violation.
Sec. 762.104 Appeals.
(a) The loan applicant or borrower and lender must jointly execute
the written request for review of an alleged adverse decision made by
the Agency. However, in cases where the Agency has denied or reduced
the amount of the final loss payment, the decision may be appealed by
the lender only.
(b) A decision made by the lender adverse to the borrower is not a
decision by the Agency, whether or not concurred in by the Agency, and
may not be appealed.
(c) The lender or Agency may request updated information from the
borrower to implement an appeal decision.
(d) Appeals will be handled in accordance with parts 11 and 780 of
this title.
Sec. 762.105 Eligibility and substitution of lenders.
(a) General. To participate in FSA guaranteed farm loan programs, a
lender must meet the eligibility criteria in this part. The standard
eligible lender must demonstrate eligibility and provide such evidence
as the Agency may request.
(b) Standard eligible lender eligibility criteria.
(1) A lender must have experience in making and servicing
agricultural loans and have the capability to make and service the loan
for which a guarantee is requested;
(2) The lenders must not have losses or deficiencies in processing
and servicing guaranteed loans above a level which would indicate an
inability to properly process and service a guaranteed agricultural
loan.
(3) A lender must be subject to credit examination and supervision
by an acceptable State or Federal regulatory agency;
(4) The lender must maintain an office near enough to the
collateral's location so it can properly and efficiently discharge its
loan making and loan servicing responsibilities or use Agency approved
agents, correspondents, branches, or other institutions or persons to
provide expertise to assist in carrying out its responsibilities. The
lender must be a local lender unless it:
(i) normally makes loans in the region or geographic location in
which the loan applicant's operation being financed is located, or
(ii) demonstrates specific expertise in making and servicing loans
for the proposed operation.
(5) The lender, its officers, or agents must not be debarred or
suspended from participation in Government contracts or programs or be
delinquent on a Government debt.
(c) Substitution of lenders. A new eligible lender may be
substituted for the original lender, upon the original lender's
concurrence, under the following conditions:
(1) The Agency approves of the substitution in writing;
(2) The new lender agrees in writing to:
(i) Assume all servicing and other responsibilities of the original
lender and to acquire the unguaranteed portion of the loan;
(ii) Execute a lender's agreement if one is not in effect;
(iii) Execute a modification of the guarantee provided by the
Agency to identify the new lender, and contain the
[[Page 7383]]
amount of debt at the time of the substitution and the new loan terms
if applicable; and,
(iv) Give any holder written notice of the substitution. If the
rate and terms are changed, written concurrence from the holder is
required.
(3) The original lender will:
(i) Assign their promissory note, lien instruments, loan
agreements, and other documents to the new lender.
(ii) If the loan is subject to an existing interest assistance
agreement, submit a request for subsidy for the partial year that it
has owned the loan.
(d) Lender name or ownership changes.
(1) When a lender begins doing business under a new name or
undergoes an ownership change the lender will notify the Agency.
(2) The lender's CLP or PLP status is subject to reconsideration
when ownership changes.
(3) The lender will execute a new lender's agreement when ownership
changes.
Sec. 762.106 Preferred and certified lender programs.
(a) General.
(1) Lenders who desire PLP or CLP status must prepare a written
request addressing:
(i) The States in which they desire to receive PLP or CLP status
and their branch offices which they desire to be considered by the
Agency for approval; and
(ii) Each item of the eligibility criteria for PLP or CLP approval
in this section, as appropriate.
(2) The lender may include any additional supporting evidence or
other information the lender believes would be helpful to the Agency in
making its determination.
(3) The lender must send its request to the Agency State office for
the State in which the lender's headquarters is located.
(4) The lender must provide any additional information requested by
the Agency to process a PLP or CLP request if the lender continues with
the approval process.
(b) CLP criteria. The lender must meet the following requirements
to obtain CLP status:
(1) Qualify as a standard eligible lender under Sec. 762.105;
(2) Have a lender loss rate not in excess of the maximum CLP loss
rate established by the Agency and published periodically in a Federal
Register Notice. The Agency may waive the loss rate criteria for those
lenders whose loss rate was substantially affected by a disaster as
defined in part 1945, subpart A, of this title.
(3) Have proven an ability to process and service Agency guaranteed
loans by showing that the lender:
(i) Submitted substantially complete and correct guaranteed loan
applications; and
(ii) Serviced all guaranteed loans according to Agency regulations;
(4) Have made the minimum number of guaranteed OL, FO, or Soil and
Water (SW) loans established by the Agency and published periodically
in a Federal Register Notice.
(5) Not be under any regulatory enforcement action such as a cease
and desist order, written agreement, or an appointment of conservator
or receiver, based upon financial condition;
(6) Designate a qualified person or persons to process and service
Agency guaranteed loans for each of the lender offices which will
process CLP loans. To be qualified, the person must meet the following
conditions:
(i) Have attended Agency sponsored training in the past 12 months
or will attend training in the next 12 months; and
(ii) Agree to attend Agency sponsored training each year;
(7) Use forms acceptable to the Agency for processing, analyzing,
securing, and servicing Agency guaranteed loans and lines of credit;
(8) Submit to the Agency copies of financial statements, cash flow
plans, budgets, promissory notes, analysis sheets, collateral control
sheets, security agreements and other forms to be used for farm loan
processing and servicing;
(c) PLP criteria. The lender must meet the following requirements
to obtain PLP status:
(1) Meet the CLP eligibility criteria under this section.
(2) Have a credit management system, satisfactory to the Agency,
based on the following:
(i) The lender's written credit policies and underwriting
standards;
(ii) Loan documentation requirements;
(iii) Exceptions to policies;
(iv) Analysis of new loan requests;
(v) Credit file management;
(vi) Loan funds and collateral management system;
(vii) Portfolio management;
(viii) Loan reviews;
(ix) Internal credit review process;
(x) Loan monitoring system; and
(xi) The board of director's responsibilities.
(3) Have made the minimum number of guaranteed OL, FO, or SW loans
established by the Agency and published periodically in a Federal
Register Notice.
(4) Have a lender loss rate not in excess of the rate of the
maximum PLP loss rate established by the Agency and published
periodically in a Federal Register Notice. The Agency may waive the
loss rate criteria for those lenders whose loss rate was substantially
affected by a disaster as defined in part 1945, subpart A, of this
title.
(5) Show a consistent practice of submitting applications for
guaranteed loans containing accurate information supporting a sound
loan proposal.
(6) Show a consistent practice of processing Agency guaranteed
loans without recurring major or minor deficiencies.
(7) Demonstrate a consistent, above average ability to service
guaranteed loans based on the following:
(i) Borrower supervision and assistance;
(ii) Timely and effective servicing; and
(iii) Communication with the Agency.
(8) Designate a person or persons, approved by the Agency, to
process and service PLP loans for the Agency.
(d) CLP and PLP approval.
(1) If a lender applying for CLP or PLP status is or has recently
been involved in a merger or acquisition, all loans and losses
attributed to both lenders will be considered in the eligibility
calculations.
(2) The Agency will determine which branches of the lender have the
necessary experience and ability to participate in the CLP or PLP
program based on the information submitted in the lender application
and on Agency experience.
(3) Lenders who meet the criteria will be granted CLP or PLP status
for a period not to exceed 5 years.
(4) PLP status will be conditioned on the lender carrying out its
credit management system as proposed in its request for PLP status and
any additional loan making or servicing requirements agreed to and
documented the PLP lender's agreement. If the PLP lender's agreement
does not specify any agreed upon process for a particular action, the
PLP lender will act according to regulations governing CLP lenders.
(e) Monitoring CLP and PLP lenders. CLP and PLP lenders will
provide information and access to records upon Agency request to permit
the Agency to audit the lender for compliance with these regulations.
(f) Renewal of CLP or PLP status.
(1) PLP or CLP status will expire within a period not to exceed 5
years from the date the lender's agreement is executed, unless a new
lender's Agreement is executed.
(2) Renewal of PLP or CLP status is not automatic. A lender must
submit a written request for renewal of a lender's
[[Page 7384]]
agreement with PLP or CLP status which includes information:
(i) Updating the material submitted in the initial application;
and,
(ii) Addressing any new criteria established by the Agency since
the initial application.
(3) PLP or CLP status will be renewed if the applicable eligibility
criteria under this section are met, and no cause exists for denying
renewal under paragraph (g) of this section.
(g) Revocation of PLP or CLP status.
(1) The Agency may revoke the lender's PLP or CLP status at any
time during the 5 year term for cause.
(2) Any of the following instances constitute cause for revoking or
not renewing PLP or CLP status:
(i) Violation of the terms of the lender's agreement;
(ii) Failure to maintain PLP or CLP eligibility criteria;
(iii) Knowingly submitting false or misleading information to the
Agency;
(iv) Basing a request on information known to be false;
(v) Deficiencies that indicate an inability to process or service
Agency guaranteed farm loan programs loans in accordance with this
subpart;
(vi) Failure to correct cited deficiencies in loan documents upon
notification by the Agency;
(vii) Failure to submit status reports in a timely manner;
(viii) Failure to use forms, or follow credit management systems
(for PLP lenders) accepted by the Agency; or
(ix) Failure to comply with the reimbursement requirements of
Sec. 762.146(c)(7).
(3) A lender which has lost PLP or CLP status must be reconsidered
for eligibility to continue as a Standard Eligible Lender (for former
PLP and CLP lenders), or as a CLP lender (for former PLP lenders) in
submitting loan guarantee requests. They may reapply for CLP or PLP
status when the problem causing them to lose their status has been
resolved.
Secs. 762.107-762.109 [Reserved]
Sec. 762.110 Loan Application.
(a) Loans for $50,000 or less. All lenders except PLP lenders will
submit the following items:
(1) A complete application for loans of $50,000 or less must, at
least, consist of:
(i) The application form;
(ii) Loan narrative;
(iii) Balance sheet;
(iv) Cash flow budget;
(v) Credit report;
(vi) A plan for servicing the loan.
(2) In addition to the minimum requirements, the lender will
perform at least the same level of evaluation and documentation for a
guaranteed loan that the lender typically performs for non-guaranteed
loans of a similar type and amount.
(3) The $50,000 threshold includes any single loan, or package of
loans submitted for consideration at any one time. A lender must not
split a loan into two or more parts to meet the threshold thereby
avoiding additional documentation.
(4) The Agency may require lenders with a lender loss rate in
excess of the rate for CLP lenders to assemble additional documentation
from paragraph (b) of this section.
(b) Loans over $50,000. A complete application for loans over
$50,000 will consist of the items required in paragraph (a) of this
section plus the following:
(1) Verification of income;
(2) Verification of debts over $1,000;
(3) Three years financial history;
(4) Three years of production history (for standard eligible
lenders only);
(5) Proposed loan agreements; and,
(6) If construction or development is planned, a copy of the plans,
specifications, and development schedule.
(c) Applications from PLP lenders. Notwithstanding paragraphs (a)
and (b) of this section, a complete application for PLP lenders will
consist of at least:
(1) An application form;
(2) A loan narrative; and
(3) Any other items agreed to during the approval of the PLP
lender's status and contained in the PLP lender agreement.
(d) Submitting applications.
(1) All lenders must compile and maintain in their files a complete
application for each guaranteed loan. See paragraphs (a), (b), and (c)
of this section.
(2) The Agency will notify CLP lenders which items to submit to the
Agency.
(3) PLP lenders will submit applications in accordance with their
agreement with the Agency for PLP status.
(4) CLP and PLP lenders must certify that the required items, not
submitted, are in their files.
(5) The Agency may request additional information from any lender
or review the lender's loan file as needed to make eligibility and
approval decisions.
(e) Incomplete applications. If the lender does not provide the
information needed to complete its application by the deadline
established in an Agency request for the information, the application
will be considered withdrawn by the lender.
(f) Conflict of interest.
(1) When a lender submits the application for a guaranteed loan,
the lender will inform the Agency in writing of any relationship which
may cause an actual or potential conflict of interest.
(2) Relationships include:
(i) The lender or its officers, directors, principal stockholders
(except stockholders in a Farm Credit System institution that have
stock requirements to obtain a loan), or other principal owners having
a financial interest (other than lending relationships in the normal
course of business) in the loan applicant or borrower.
(ii) The loan applicant or borrower, a relative of the loan
applicant or borrower, anyone residing in the household of the loan
applicant or borrower, any officer, director, stockholder or other
owner of the loan applicant or borrower holds any stock or other
evidence of ownership in the lender.
(iii) The loan applicant or borrower, a relative of the loan
applicant or borrower, or anyone residing in the household of the loan
applicant or borrower is an Agency employee.
(iv) The officers, directors, principal stockholders (except
stockholders in a Farm Credit System institution that have stock
requirements to obtain a loan), or other principal owners of the lender
have substantial business dealings (other than in the normal course of
business) with the loan applicant or borrower.
(v) The lender or its officers, directors, principal stockholders,
or other principal owners have substantial business dealings with an
Agency employee.
(3) The lender must furnish additional information to the Agency
upon request.
(4) The Agency will not approve the application until the lender
develops acceptable safeguards to control any actual or potential
conflicts of interest.
Secs. 762.111-762.119 [Reserved]
Sec. 762.120 Loan applicant eligibility.
Loan applicants must meet all of the following requirements to be
eligible for a guaranteed OL or a guaranteed FO:
(a) Agency loss. The loan applicant, and anyone who will execute
the promissory note, have not caused the Agency a loss by receiving
debt forgiveness on more than three occasions on or prior to April 4,
1996, or on any occasion after April 4, 1996, on all or a portion of
any direct or guaranteed loan made under the authority of the CONACT by
debt write-down, write-off, compromise under the
[[Page 7385]]
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 preceding
sentence, applicants who receive a write-down under section 353 of the
CONACT, or are current on payments under a confirmed bankruptcy
reorganization plan, may receive direct and guaranteed OL loans to pay
annual farm and ranch operating expenses, which include family
subsistence, if the applicant meets all other requirements for the
loan.
(b) Delinquent Federal debt. The loan applicant, and anyone who
will execute the promissory note, is not delinquent on any Federal
debt, other than a debt under the Internal Revenue Code of 1986. (Any
debt under the Internal Revenue Code of 1986 may be considered by the
lender in determining cash flow and creditworthiness.)
(c) Outstanding judgments. The loan applicant, and anyone who will
execute the promissory note, have no outstanding unpaid judgment
obtained by the United States in any court. Such judgments do not
include those filed as a result of action in the United States Tax
Courts.
(d) Citizenship.
(1) The loan applicant is a citizen of the United States or an
alien lawfully admitted to the United States for permanent residence
under the Immigration and Nationalization Act. Indefinite parolees are
not eligible. For an entity applicant, all members of an entity must
meet this citizenship test.
(2) Aliens must provide the appropriate Immigration and
Naturalization Service forms to document their permanent residency.
(e) Legal capacity. The loan applicant and all borrowers on the
loan must possess the legal capacity to incur the obligations of the
loan.
(f) False or misleading information. The loan applicant, in past
dealings with the Agency, must not have provided the Agency with false
or misleading documents or statements.
(g) Credit history.
(1) The individual or entity loan applicant and all entity members
must have acceptable credit history demonstrated by debt repayment.
(2) A history of failures to repay past debts as they came due when
the ability to repay was within their control will demonstrate
unacceptable credit history.
(3) Unacceptable credit history will not include:
(i) Isolated instances of late payments which do not represent a
pattern and were clearly beyond their control; or,
(ii) Lack of credit history.
(h) Test for credit.
(1) The loan applicant is unable to obtain sufficient credit
elsewhere without a guarantee to finance actual needs at reasonable
rates and terms.
(2) The potential for sale of any significant nonessential assets
will be considered when evaluating the availability of other credit.
(3) Ownership interests in property and income received by an
individual or entity loan applicant, and any entity members as
individuals will be considered when evaluating the availability of
other credit to the loan applicant.
(i) For OLs:
(1) The individual or entity loan applicant must be an operator of
not larger than a family farm after the loan is closed.
(2) In the case of an entity borrower:
(i) The entity must be authorized to operate, and own if the entity
is also an owner, a farm in the State or States in which the farm is
located; and
(ii) If the entity members holding a majority interest are related
by marriage or blood, at least one member of the entity must operate
the family farm; or,
(iii) If the entity members holding a majority interest are not
related by marriage or blood, the entity members holding a majority
interest must also operate the family farm.
(j) For FOs:
(1) The individual must be the operator and owner of not larger
than a family farm after the loan is closed.
(2) In the case of an entity borrower:
(i) The entity must be authorized to own and operate a farm in the
state or states in which the farm is located; and
(ii) If the entity members holding a majority interest are related
by marriage or blood, at least one member of the entity also must
operate the family farm and at least one member of the entity or the
entity must own the family farm; or,
(iii) If the entity members holding a majority interest are not
related by marriage or blood, the entity members holding a majority
interest must operate the family farm and the entity members holding a
majority interest or the entity must own the family farm.
(k) For entity loan applicants. Entity loan applicants must meet
the following additional eligibility criteria:
(1) Each entity member's ownership interest may not exceed the
family farm definition limits;
(2) The collective ownership interest of all entity members may
exceed the family farm definition limits only if the following
conditions are met:
(i) All of the entity members are related by blood or marriage;
(ii) All of the members are or will be operators of the entity;
and,
(iii) The majority interest holders of the entity must meet the
requirements of paragraphs (d), (f), (g), and (i) through (j) of this
section;
(3) The entity must be controlled by farmers or ranchers engaged
primarily and directly in farming or ranching in the United States
after the loan is made; and
(4) The entity members are not themselves entities.
(l) Neither the applicant nor any entity member has been convicted
of planting, cultivating, growing, producing, harvesting, or storing a
controlled substance under Federal or state law within the last five
crop years. ``Controlled substance'' is defined at 21 CFR 1308.
Applicants must certify on the application that it and its members, if
an entity, have not been convicted of such a crime within the relevant
period. If the lender uses the lender's Agency approved forms, the
certification may be an attachment to the form.
Sec. 762.121 Loan purposes.
(a) Operating Loan purposes.
(1) Loan funds disbursed under an OL guarantee 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 or fixtures, 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, repairs and improvements which are to be expensed, cash rent
and family subsistence;
(iv) Payment of scheduled principal and interest payments on term
debt provided the debt is for authorized FO or OL purposes;
(v) Other farm and ranch needs;
(vi) Payment of costs associated with land and water development
for conservation or use purposes;
(vii) Refinancing indebtedness incurred for any authorized OL
purpose, when the lender and loan applicant can demonstrate the need to
refinance;
(viii) Payment of loan closing costs;
(ix) 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, 667). This purpose is limited to applicants who
[[Page 7386]]
demonstrate that compliance with the standards will cause them
substantial economic injury; and
(x) Payment of training costs required or recommended by the
Agency.
(2) Loan funds under a line of credit may be advanced only 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 for the
current operating cycle; (Under no circumstances can carry-over
operating debts from a previous operating cycle be refinanced);
(iii) Purchase of routine capital assets, such as replacement of
livestock, that will be repaid within the operating cycle;
(iv) Payment of scheduled, non-delinquent, term debt payments
provided the debt is for authorized FO or OL purposes.
(v) Purchase of cooperative stock for credit, production,
processing or marketing purposes; and
(vi) Payment of loan closing costs.
(b) Farm ownership loan purposes. Guaranteed FO are authorized only
to:
(1) Acquire or enlarge a farm or ranch; examples include, but are
not limited to, providing down payments, purchasing easements for the
loan applicant's portion of land being subdivided, and participating in
the beginning farmer downpayment FO program under part 1943, subpart A,
of this title;
(2) Make capital improvements; examples include, but are not
limited to, the construction, purchase, and improvement of a farm
dwelling, service buildings and facilities that can be made fixtures to
the real estate, (Capital improvements to leased land may be financed
subject to the limitations in Sec. 762.122);
(3) Promote soil and water conservation and protection; examples
include the correction of hazardous environmental conditions, and the
construction or installation of tiles, terraces and waterways;
(4) Pay closing costs, including but not limited to, purchasing
stock in a cooperative and appraisal and survey fees; and
(5) Refinancing indebtedness incurred for authorized FO and OL
purposes, provided the lender and loan applicant demonstrate the need
to refinance the debt.
(c) Highly erodible land or wetlands conservation. Loans may not be
made for any purpose which contributes to excessive erosion of highly
erodible land or to the conversion of wetlands to produce an
agricultural commodity. A decision by the Agency to reject an
application for this reason may be appealable. An appeal questioning
whether the presence of a wetland, converted wetland, or highly
erodible land on a particular property must be filed directly with the
USDA agency making the determination in accordance with the agency's
appeal procedures.
(d) Judgment debts. Loans may not be used to satisfy judgments
obtained in the United States District courts. However, Internal
Revenue Service judgment liens may be paid with loan funds.
Sec. 762.122 Loan limitations.
(a) Dollar limits. Guaranteed loans are limited to the following:
(1) The total outstanding combined Direct and Guaranteed FO and OL
principal balance cannot exceed $700,000 and,
(2) The total outstanding direct and guaranteed FO principal
balance cannot exceed $700,000 and,
(3) The total outstanding direct and guaranteed OL principal
balance cannot exceed $700,000 and,
(4) The total combined outstanding direct and guaranteed FO and OL
balance cannot exceed $900,000.
(b) Line of credit advances. The total dollar amount of line of
credit advances and income releases cannot exceed the total estimated
expenses, less interest expense, as indicated on the borrower's cash
flow budget, unless the cash flow budget is revised and continues to
reflect a feasible plan.
(c) OL term limitations.
(1) No guaranteed OL shall be made to any loan applicant after the
15th year that a loan applicant, or any individual signing the
promissory note, first received direct or guaranteed OL.
(2) Notwithstanding paragraph (c)(1) of this section, if a borrower
had any combination of direct or guaranteed OL closed in 10 or more
prior calendar years prior to October 28, 1992, eligibility to receive
new guaranteed OL 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. Once determined
eligible, a loan or line of credit may be approved for any authorized
term.
(d) Leased land. When FO funds are used for improvements to leased
land the terms of the lease must provide reasonable assurance that the
loan applicant will have use of the improvement over its useful life,
or provide compensation for any unexhausted value of the improvement if
the lease is terminated.
(e) Tax-exempt transactions. The Agency will not guarantee any loan
made with the proceeds of any obligation the interest on which is
excluded from income under section 103 of the Internal Revenue Code of
1986. Funds generated through the issuance of tax-exempt obligations
may not be used to purchase the guaranteed portion of any Agency
guaranteed loan. An Agency guaranteed loan may not serve as collateral
for a tax-exempt bond issue.
(f) Floodplain restrictions. The Agency will not guarantee any loan
to purchase, build, or expand buildings located in a special 100 year
floodplain as defined by FEMA flood hazard area maps unless flood
insurance is available and purchased.
Sec. 762.123 Insurance and farm inspection requirements.
(a) Insurance.
(1) Lenders must require borrowers to maintain adequate property,
public liability, and crop insurance to protect the lender and
Government's interests.
(2) By loan closing, loan applicants must either:
(i) Obtain at least the catastrophic risk protection (CAT) level of
crop insurance coverage, if available, for each crop of economic
significance, as defined by part 402 of this title, or
(ii) Waive eligibility for emergency crop loss assistance in
connection with the uninsured crop. EM loan assistance under part 1945,
subpart D, of this title is not considered emergency crop loss
assistance for purposes of this waiver and execution of the waiver does
not render the borrower ineligible for EM loans.
(3) Loan applicants must purchase flood insurance if buildings are
or will be located in a special flood hazard area as defined by FEMA
flood hazard area maps and if flood insurance is available.
(4) Insurance, including crop insurance, must be obtained as
required by the lender or the Agency based on the strengths and
weaknesses of the loan.
(b) Farm inspections. Before submitting an application the lender
must make an inspection of the farm to assess the suitability of the
farm and to determine any development that is needed to make it a
suitable farm.
Sec. 762.124 Interest rates, terms, charges, and fees.
(a) Interest rates.
(1) The interest rate on a guaranteed loan or line of credit may be
fixed or variable as agreed upon between the
[[Page 7387]]
borrower and the lender. The lender may charge different rates on the
guaranteed and the non-guaranteed portions of the note. The guaranteed
portion may be fixed while the unguaranteed portion may be variable, or
vice versa. If both portions are variable, different bases may be used.
(2) If a variable rate is used, it must be tied to a rate
specifically agreed to between the lender and borrower in the loan
instruments. Variable rates may change according to the normal
practices of the lender for its average farm customers, but the
frequency of change must be specified in the loan or line of credit
instrument.
(3) Neither the interest rate on the guaranteed portion nor the
unguaranteed portion may exceed the rate the lender charges its average
agricultural loan customer. At the request of the Agency, the lender
must provide evidence of the rate charged the average agricultural loan
customer. This evidence may consist of average yield data, or
documented administrative differential rate schedule formulas used by
the lender.
(4) Interest must be charged only on the actual amount of funds
advanced and for the actual time the funds are outstanding. Interest on
protective advances made by the lender to protect the security will be
charged at the note rate but limited to paragraph (a)(3) of this
section.
(5) The lender and borrower may collectively obtain a temporary
reduction in the interest rate through the interest assistance program
in accordance with Sec. 762.150.
(b) OL terms.
(1) Loan funds or advances on a line of credit used to pay annual
operating expenses will be repaid when the income from the year's
operation is received, except when the borrower is establishing a new
enterprise, developing a farm, purchasing feed while feed crops are
being established, or recovering from disaster or economic reverses.
(2) The final maturity date for each loan cannot exceed 7 years
from the date of the promissory note or line of credit agreement.
Advances for purposes other than for annual operating expenses will be
scheduled for repayment over the minimum period necessary considering
the loan applicant's ability to repay and the useful life of the
security, but not in excess of 7 years.
(3) All advances on a line of credit must be made within 5 years
from the date of the Loan Guarantee.
(c) FO terms. Each loan must be scheduled for repayment over a
period not to exceed 40 years from the date of the note or such shorter
period as may be necessary to assure that the loan will be adequately
secured, taking into account the probable depreciation of the security.
(d) Balloon installments under loan note guarantee. Balloon payment
terms are permitted on FO or OL subject to the following:
(1) Extended repayment schedules may include equal, unequal, or
balloon installments if needed on any guaranteed loan to establish a
new enterprise, develop a farm, or recover from a disaster or an
economical reversal.
(2) Loans with balloon installments must have adequate collateral
at the time the balloon installment comes due. Crops, livestock other
than breeding livestock, or livestock products produced are not
sufficient collateral for securing such a loan.
(3) The borrower must be projected to be able to refinance the
remaining debt at the time the balloon payment comes due based on the
expected financial condition of the operation, the depreciated value of
the collateral, and the principal balance on the loan.
(e) Charges and Fees.
(1) The lender may charge the loan applicant and borrower fees for
the loan provided they are no greater than those charged to
unguaranteed customers for similar transactions. Similar transactions
are those involving the same type of loan requested (for example,
operating loans or farm real estate loans).
(2) Late payment charges (including default interest charges) are
not covered by the guarantee. These charges may not be added to the
principal and interest due under any guaranteed note or line of credit.
However, late payment charges may be made outside of the guarantee if
they are routinely made by the lender in similar types of loan
transactions.
(3) Lenders may not charge a loan origination and servicing fee
greater than 1 percent of the loan amount for the life of the loan when
a guaranteed loan is made in conjunction with a down payment FO for
beginning farmers under part 1943, subpart A, of this title.
Sec. 762.125 Financial feasibility.
(a) General.
(1) Notwithstanding any other provision of this section, PLP
lenders will follow their internal procedures on financial feasibility
as agreed to by the Agency during PLP certification.
(2) The loan applicant's proposed operation must project a positive
cash flow.
(3) For standard eligible lenders, the projected income and
expenses of the borrower and operation used to determine positive cash
flow must be based on the loan applicant's proven record of production
and financial management.
(4) For CLP lenders, the projected income and expenses of the
borrower and the operation must be based on the loan applicant's
financial history and proven record of financial management.
(5) For those farmers without a proven history, a combination of
any actual history and any other reliable source of information that
are agreeable with the lender, the loan applicant, and the Agency will
be used.
(6) The cash flow budget analyzed to determine positive cash flow
must represent the predicted cash flow of the operating cycle.
(7) Lenders must use price forecasts that are reasonable and
defensible. Sources must be documented by the lender and acceptable to
the Agency.
(8) When positive cash flow depends on income from other sources in
addition to income from owned land, the income must be dependable and
likely to continue.
(9) The lender will analyze business ventures other than the farm
operation to determine their soundness and contribution to the
operation. Guaranteed loan funds will not be used to finance a nonfarm
enterprise. Nonfarm enterprises include, but are not limited to:
raising earthworms, exotic birds, tropical fish, dogs, or horses for
nonfarm purposes; welding shops; boarding horses; and riding stables.
(10) When the loan applicant has or will have a cash flow budget
developed in conjunction with a proposed or existing Agency direct
loan, the two cash flow budgets must be consistent.
(b) Estimating production.
(1) Standard eligible lenders must use the best sources of
information available for estimating production in accordance with this
subsection when developing cash flow budgets.
(2) Deviations from historical performance may be acceptable, if
specific to changes in operation and adequately justified and
acceptable to the Agency.
(3) For existing farmers, actual production for the past 3 years
will be utilized.
(4) For those farmers without a proven history, a combination of
any actual history and any other reliable source of information that
are agreeable with the lender, the loan applicant, and the Agency will
be used.
[[Page 7388]]
(5) When the production of a growing commodity can be estimated, it
must be considered when projecting yields.
(6) When the loan applicant's production history has been so
severely affected by a declared disaster that an accurate projection
cannot be made, the following applies:
(i) County average yields are used for the disaster year if the
loan applicant's disaster year yields are less than the county average
yields. If county average yields are not available, State average
yields are used. Adjustments can be made, provided there is factual
evidence to demonstrate that the yield used in the farm plan is the
most probable to be realized.
(ii) To calculate a historical yield, the crop year with the lowest
actual or county average yield may be excluded, provided the loan
applicant's yields were affected by disasters at least 2 of the
previous 5 consecutive years.
(c) Refinancing. Loan guarantee requests for refinancing must
ensure that a reasonable chance for success still exists. The lender
must demonstrate that problems with the loan applicant's operation that
have been identified, can be corrected, and the operation returned to a
sound financial basis.
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.
(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) When the loan is made for refinancing purposes, the guaranteed
loan must hold a security position no lower than on the refinanced
loan.
(2) 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.
(3) Junior lien positions are acceptable only if the equity
position is strong. 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.
(4) 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.
Sec. 762.127 Appraisal requirements.
(a) General. The Agency may require a lender to obtain an appraisal
based on the type of security, loan size, and whether it is primary or
additional security. Except for authorized liquidation expenses, the
lender is responsible for all appraisal costs, which may be passed on
to the borrower, or a transferee in the case of a transfer and
assumption.
(b) Exception. Notwithstanding other provisions of this section, an
appraisal is not required for any additional security, or for loans of
$50,000 or less if a strong equity position exists.
(c) Chattel appraisals. A current appraisal (not more than 12
months old) of primary chattel security is generally required on all
loans. An appraisal for loans or lines of credit for annual production
purposes that are secured by crops is only required when a guarantee is
requested late in the current production year and actual yields can be
reasonably estimated. The appraised value of chattel property will be
based on public sales of the same, or similar, property in the market
area. In the absence of such public sales, reputable publications
reflecting market values may be used. Appraisal reports may be on the
Agency's appraisal of chattel property form or on any other appraisal
form containing at least the same information. Chattel appraisals will
be performed by appraisers who possess sufficient experience or
training to establish market (not retail) values as determined by the
Agency.
(d) Real estate appraisals. A current real estate appraisal is
required when real estate will be primary security. Agency officials
may accept an appraisal that is not current if there have been no
significant changes in the market or on the subject real estate and the
appraisal was either completed within the past 12 months or updated by
a qualified appraiser if not completed within the past 12 months.
(1) Appraiser qualifications. On loan transactions of $250,000 or
less, the lender must demonstrate to the Agency's satisfaction that the
appraiser possesses sufficient experience or training to estimate the
market value of agricultural property. On loan
[[Page 7389]]
transactions greater than $250,000, which includes principal plus
accrued interest through the closing date, the appraisal must be
completed by a State certified general appraiser.
(2) Appraisals. Real estate appraisals must be completed in
accordance with the Uniform Standards of Professional Appraisal
Practice. Appraisals may be either a complete or limited appraisal
provided in a self-contained or summary format. Restricted reports, as
defined in the Uniform Standards of Professional Appraisal Practice,
are not acceptable.
Sec. 762.128 Environmental and special laws.
(a) Environmental requirements. The requirements found in part
1940, subpart G, of this title must be met for guaranteed OL and FO.
CLP and PLP lenders may certify that they have documentation in their
file to demonstrate compliance with paragraph (c) of this section.
Standard eligible lenders must submit evidence supporting compliance
with this section.
(b) Determination. The Agency determination of whether an
environmental problem exists will be based on:
(1) The information supplied with the application;
(2) The Agency Official's personal knowledge of the operation;
(3) Environmental resources available to the Agency including, but
not limited to, documents, third parties, and governmental agencies;
(4) A visit to the farm operation when the available information is
insufficient to make a determination;
(5) Other information supplied by the lender or loan applicant upon
Agency request. If necessary, information not supplied with the
application will be requested by the Agency.
(c) Special requirements. Lenders will assist in the environmental
review process by providing environmental information. In all cases,
the lender must retain documentation of their investigation in the loan
applicant's case file.
(1) A determination must be made as to whether there are any
potential impacts to a 100 year floodplain as defined by Federal
Emergency Management Agency floodplain maps, Natural Resources
Conservation Service data, or other appropriate documentation.
(2) The lender will assist the borrower in securing any applicable
permits or waste management plans. The lender may consult with the
Agency for guidance on activities which require consultation with State
regulatory agencies, special permitting or waste management plans.
(3) The lender will examine the security property to determine if
there are any structures or archeological sites which are listed or may
be eligible for listing in the National Register of Historic Places.
The lender may consult with the Agency for guidance on which situations
will need further review in accordance with the National Historical
Preservation Act and part 1940, subpart G, and part 1901, subpart F, of
this title.
(4) The loan applicant must certify they will not violate the
provisions of Sec. 363 of the CONACT, the Food Security Act of 1985,
and Executive Order 11990 relating to Highly Erodible Land and
Wetlands.
(5) All lenders are required to ensure that due diligence is
performed in conjunction with a request for guarantee of a loan
involving real estate. Due diligence is the process of evaluating real
estate in the context of a real estate transaction to determine the
presence of contamination from release of hazardous substances,
petroleum products, or other environmental hazards and determining what
effect, if any, the contamination has on the security value of the
property. The Agency will accept as evidence of due diligence the most
current version of the American Society of Testing Materials (ASTM)
transaction screen questionnaire available from 100 Barr Harbor Drive,
West Conshohocken, Pennsylvania 19428-2959, or similar documentation,
approved for use by the Agency, supplemented as necessary by the ASTM
phase I environmental site assessments form.
(d) Equal opportunity and nondiscrimination.
(1) With respect to any aspect of a credit transaction, the lender
will not discriminate against any applicant on the basis of race,
color, religion, national origin, sex, marital status, or age, provided
the applicant can execute a legal contract. Nor will the lender
discriminate on the basis of whether all or a part of the applicant's
income derives from any public assistance program, or whether the
applicant in good faith, exercises any rights under the Consumer
Protection Act.
(2) Where the guaranteed loan involves construction, the contractor
or subcontractor must file all compliance reports, equal opportunity
and nondiscrimination forms, and otherwise comply with all regulations
prescribed by the Secretary of Labor pursuant to Executive Orders 11246
and 11375.
(e) Other Federal, State and local requirements. Lenders are
required to coordinate with all appropriate Federal, State, and local
agencies and comply with special laws and regulations applicable to the
loan proposal.
Sec. 762.129 Percent of guarantee and maximum loss.
(a) General. The percent of guarantee will not exceed 90 percent
based on the credit risk to the lender and the Agency both before and
after the transaction. The Agency will determine the percentage of
guarantee.
(b) Exceptions. The guarantee will be issued at 95 percent in any
of the following circumstances:
(1) The sole purpose of a guaranteed FO or OL is to refinance an
Agency direct farm loan. When only a portion of the loan is used to
refinance a direct Agency farm credit program loan, a weighted
percentage of a guarantee will be provided;
(2) When the purpose of an FO guarantee is to participate in the
down payment loan program; or
(3) When a guaranteed OL is made to a farmer or rancher who is
participating in the Agency's down payment loan program. The guaranteed
OL must be made during the period that a borrower has the down payment
loan outstanding.
(c) CLP and PLP guarantees. All guarantees issued to CLP or PLP
lenders will not be less than 80 percent.
(d) Maximum loss. The maximum amount the Agency will pay the lender
under the loan guarantee will be any loss sustained by such lender on
the guaranteed portion including:
(1) The pro rata share of principal and interest indebtedness as
evidenced by the note or by assumption agreement;
(2) Any loan subsidy due and owing;
(3) The pro rata share of principal and interest indebtedness on
secured protective and emergency advances made in accordance with this
subpart; and
(4) Principal and interest indebtedness on recapture debt pursuant
to a shared appreciation agreement. Provided that the lender has paid
the Agency its pro rata share of the recapture amount due.
Sec. 762.130 Loan approval and issuing the guarantee.
(a) Processing timeframes.
(1) Standard Eligible Lenders. Complete applications from Standard
Eligible Lenders will be approved or rejected, and the lender notified
in writing, no later than 30 calendar days after receipt.
(2) CLP and PLP lenders.
(i) Complete applications from CLP or PLP lenders will be approved
or rejected not later than 14 calendar days after receipt.
[[Page 7390]]
(ii) For PLP lenders, if this time frame is not met, the proposed
guaranteed loan will automatically be approved, subject to funding, and
receive an 80 or 95 percent guarantee, as appropriate.
(3) Complete applications. For purposes of determining the
application processing timeframes, an application will be not be
considered complete until all information required to make an approval
decision, including the information for an environmental review, is
received by the Agency.
(4) The Agency will confirm the date an application is received
with a written notification to the lender.
(b) Funding preference. Loans are approved subject to the
availability of funding. When it appears that there are not adequate
funds to meet the needs of all approved loan applicants, applications
that have been approved will be placed on a preference list according
to the date of receipt of a complete application. If approved
applications have been received on the same day, the following will be
given priority:
(1) An application from a veteran
(2) An application from an Agency direct loan borrower
(3) An application from a loan applicant who:
(i) Has a dependent family,
(ii) Is an owner of livestock and farm implements necessary to
successfully carry out farming operations, or
(iii) Is able to make down payments.
(4) Any other approved application.
(c) Conditional commitment.
(1) The lender must meet all of the conditions specified in the
conditional commitment to secure final Agency approval of the
guarantee.
(2) The lender, after reviewing the conditions listed on the
conditional commitment, will complete, execute, and return the form to
the Agency. If the conditions are not acceptable to the lender, the
Agency may agree to alternatives or inform the lender and the loan
applicant of their appeal rights.
(d) Lender requirements prior to issuing the guarantee.
(1) Lender certification. The lender will certify as to the
following on the appropriate Agency form:
(i) No major changes have been made in the lender's loan or line of
credit conditions and requirements since submission of the application
(except those approved in the interim by the Agency in writing);
(ii) Required hazard, flood, crop, worker's compensation, and
personal life insurance (when required) are in effect;
(iii) Truth in lending requirements have been met;
(iv) All equal employment and equal credit opportunity and
nondiscrimination requirements have been or will be met at the
appropriate time;
(v) The loan or line of credit has been properly closed, and the
required security instruments have been obtained, or will be obtained,
on any acquired property that cannot be covered initially under State
law;
(vi) The borrower has marketable title to the collateral owned by
the borrower, subject to the instrument securing the loan or line of
credit to be guaranteed and subject to any other exceptions approved in
writing by the Agency. When required, an assignment on all USDA crop
and livestock program payments has been obtained;
(vii) When required, personal, joint operation, partnership, or
corporate guarantees have been obtained;
(viii) Liens have been perfected and priorities are consistent with
requirements of the conditional commitment;
(ix) Loan proceeds have been, or will be disbursed for purposes and
in amounts consistent with the conditional commitment and as specified
on the loan application. In line of credit cases, if any advances have
occurred, advances have been disbursed for purposes and in amounts
consistent with the conditional commitment and line of credit
agreements;
(x) There has been no material adverse change in the borrower's
condition, financial or otherwise, since submission of the application;
and
(xi) All other requirements specified in the conditional commitment
have been met.
(2) Inspections. The lender must notify the Agency of any scheduled
inspections during construction and after the guarantee has been
issued. The Agency may attend these field inspections. Any inspections
or review performed by the Agency, including those with the lender, are
solely for the benefit of the Agency. Agency inspections do not relieve
any other parties of their inspection responsibilities, nor can these
parties rely on Agency inspections for any purpose.
(3) Execution of lender's agreement. The lender must execute the
Agency's lender's agreement and deliver it to the Agency.
(4) Closing report and guarantee fees.
(i) The lender must complete an Agency closing report form and
return it to the Agency along with any guarantee fees.
(ii) Guarantee fees are 1 percent and are calculated as follows:
Fee = Loan Amount x % Guaranteed x .01. The nonrefundable fee is paid
to the Agency by the lender. The fee may be passed on to the borrower
and included in loan funds.
(iii) The following guaranteed loan transactions are not charged a
fee:
(A) Loans involving interest assistance;
(B) Loans where a majority of the funds are used to refinance an
Agency direct loan; and
(C) Loans to beginning farmers or ranchers involved in the direct
beginning farmer downpayment program.
(e) Promissory notes, line of credit agreements, mortgages, and
security agreements. The lender will use its own promissory notes, line
of credit agreements, real estate mortgages (including deeds of trust
and similar instruments), and security agreements (including chattel
mortgages in Louisiana and Puerto Rico), provided:
(1) The forms meet Agency requirements;
(2) Documents comply with State law and regulation;
(3) The principal and interest repayment schedules are stated
clearly in the notes and are consistent with the conditional
commitment;
(4) The note is executed by the individual liable for the loan. For
entities, the note is executed by the member who is authorized to sign
for the entity, and by all members of the entity as individuals.
Individual liability can be waived by the Agency for members holding
less than 10 percent ownership in the entity if the collectability of
the loan will not be impaired; and
(5) When the loan purpose is to refinance or restructure the
lender's own debt, the lender may continue to use the existing debt
instrument and attach an allonge that modifies the terms of the
original note.
(f) Replacement of loan guarantee, or assignment guarantee
agreement. If the guarantee or assignment guarantee agreements are
lost, stolen, destroyed, mutilated, or defaced, except where the
evidence of debt was or is a bearer instrument, the Agency will issue a
replacement to the lender or holder upon receipt of acceptable
documentation including a certificate of loss and an indemnity bond.
Secs. 762.131-762.139 [Reserved]
Sec. 762.140 General servicing responsibilities.
(a) General.
(1) Lenders are responsible for servicing the entire loan in a
reasonable
[[Page 7391]]
and prudent manner, protecting and accounting for the collateral, and
remaining the mortgagee or secured party of record.
(2) The lender cannot enforce the guarantee to the extent that a
loss results from a violation of usury laws or negligent servicing.
(b) Borrower supervision. The lender's responsibilities regarding
borrower supervision include, but are not limited to the following:
(1) Ensuring loan funds are not used for unauthorized purposes.
(2) Ensuring borrower compliance with the covenants and provisions
contained in the promissory note, loan agreement, mortgage, security
instruments, any other agreements, and this part. Any violations which
indicate non-compliance on the part of the borrower must be reported,
in writing, to both the Agency and the borrower.
(3) Ensuring the borrower is in compliance with all laws and
regulations applicable to the loan, the collateral, and the operations
of the farm.
(4) Receiving all payments of principal and interest on the loan as
they fall due and promptly disbursing to any holder its pro-rata share
according to the amount of interest the holder has in the loan, less
only the lender's servicing fee.
(5) Performing an annual analysis of the borrower's financial
condition to determine the borrower's progress. The annual analysis
will include:
(i) For loans secured by real estate only, the analysis for
standard eligible lenders must include an analysis of the borrower's
balance sheet. CLP lenders will determine the need for the annual
analysis based on the financial strength of the borrower and document
the file accordingly. PLP lenders will perform an annual analysis in
accordance with the requirements established in the lender's agreement.
(ii) For loans secured by chattels, all lenders will review the
borrower's progress regarding business goals, trends and changes in
financial performance, and compare actual to planned income and
expenses for the past year.
(iii) An account of the whereabouts or disposition of all
collateral.
(iv) A discussion of any observations about the farm business with
the borrower.
(c) Monitoring of development. The lender's responsibilities
regarding the construction, repairs, or other development include, but
are not limited to:
(1) Determining that all construction is completed as proposed in
the loan application;
(2) Making periodic inspections during construction to ensure that
any development is properly completed within a reasonable period of
time; and
(3) Verification that the security is free of any mechanic's,
materialmen's, or other liens which would affect the lender's lien or
result in a different lien priority from that proposed in the request
for guarantee.
(d) The guaranteed loan installments will be paid before
unguaranteed loans held by the same lender.
Sec. 762.141 Reporting requirements.
Lenders are responsible for providing the local Agency credit
officer with all of the following information on the loan and the
borrower:
(a) When the guaranteed loan becomes 30 days past due, and
following the lender's meeting or attempts to meet with the borrower,
all lenders will submit the appropriate Agency form showing guaranteed
loan borrower default status. The form will be resubmitted every 60
days until the default is cured either through restructuring or
liquidation.
(b) All lenders will submit the appropriate guaranteed loan status
reports as of March 31 and September 30 of each year;
(c) CLP lenders also must provide the following:
(1) A written summary of the lender's annual analysis of the
borrower's operation. This summary should describe the borrower's
progress and prospects for the upcoming operating cycle. This annual
analysis may be waived or postponed if the borrower is financially
strong. The summary will include a description of the reasons an
analysis was not necessary.
(2) For lines of credit, an annual certification stating that a
cash flow projecting at least a feasible plan has been developed, that
the borrower is in compliance with the provisions of the line of credit
agreement, and that the previous year income and loan funds and
security proceeds have been accounted for.
(d) In addition to the requirements of paragraphs (a), (b), and (c)
of this section, the standard eligible lender also will provide:
(1) Borrower's balance sheet, and income and expense statement for
the previous year.
(2) For lines of credit, the cash flow for the borrower's operation
that projects a feasible plan or better for the upcoming operating
cycle. The standard eligible lender must receive approval from the
Agency before advancing future years' funds.
(3) An annual farm visit report or collateral inspection.
(e) PLP lenders will submit additional reports as required in their
lender's agreement.
(f) A lender receiving a final loss payment must complete and
return an annual report on its collection activities for each
unsatisfied account for 3 years following payment of the final loss
claim.
Sec. 762.142 Servicing related to collateral.
(a) General. The lender's responsibilities regarding servicing
collateral include, but are not limited to, the following:
(1) Obtain income and insurance assignments when required.
(2) Ensure the borrower has or obtains marketable title to the
collateral.
(3) Inspect the collateral as often as deemed necessary to properly
service the loan.
(4) Ensure the borrower does not convert loan security.
(5) Ensure the proceeds from the sale or other disposition of
collateral are accounted for and applied in accordance with the lien
priorities on which the guarantee is based or used for the purchase of
replacement collateral.
(6) Ensure the loan and the collateral are protected in the event
of foreclosure, bankruptcy, receivership, insolvency, condemnation, or
other litigation.
(7) Ensure taxes, assessments, or ground rents against or affecting
the collateral are paid.
(8) Ensure adequate insurance is maintained.
(9) Ensure that insurance loss payments, condemnation awards, or
similar proceeds are applied on debts in accordance with lien
priorities on which the guarantee was based, or used to rebuild or
acquire needed replacement collateral.
(b) Partial releases.
(1) A lender may release guaranteed loan security without FSA
concurrence as follows:
(i) When the security item is being sold for market value and the
proceeds will be applied to the loan in accordance with lien
priorities. In the case of term loans, proceeds will be applied as
extra payments and not as a regular installment on the loan.
(ii) The security item will be used as a trade-in or source of down
payment funds for a like item that will be taken as security.
(iii) The security item has no present or prospective value.
(2) A partial release of security may be approved in writing by the
Agency upon the lender's request when:
[[Page 7392]]
(i) Proceeds will be used to make improvements to real estate that
increase the value of the security by an amount equal to or greater
than the value of the security being released.
(ii) Security will be released outright with no consideration, but
the total unpaid balance of the guaranteed loan is less than or equal
to 75 percent of the value of the security for the loan after the
release, excluding the value of growing crops or planned production,
based on a current appraisal of the security.
(iii) Significant income generating property will not be released
unless it is being replaced and business assets will not be released
for use as a gift or any similar purpose.
(iv) Agency concurrence is provided in writing to the lender's
written request. Standard eligible lenders and CLP lenders will submit
the following to the Agency:
(A) A current balance sheet on the borrower; and
(B) A current appraisal of the security. Based on the level of risk
and estimated equity involved, the Agency will determine what security
needs to be appraised. Any required security appraisals must meet the
requirements of Sec. 762.127; and
(C) A description of the purpose of the release; and
(D) Any other information requested by the Agency to evaluate the
proposed servicing action.
(3) The lender will provide the Agency copies of any agreements
executed to carry out the servicing action.
(4) PLP lenders will request servicing approval in accordance with
their agreement with the Agency at the time of PLP status
certification.
(c) Subordinations.
(1) The Agency may subordinate its security interest on a direct
loan when a guaranteed loan is being made if the requirements of the
regulations governing Agency direct loan subordinations are met and
only in the following circumstances:
(i) To permit a guaranteed lender to advance funds and perfect a
security interest in crops, feeder livestock, livestock offspring, or
livestock products;
(ii) When the lender requesting the guarantee needs the
subordination of the Agency's lien position to maintain its lien
position when servicing or restructuring;
(iii) When the lender requesting the guarantee is refinancing the
debt of another lender and the Agency's position on real estate
security will not be adversely affected; or
(iv) To permit a line of credit to be advanced for annual operating
expenses.
(2) The Agency may subordinate its basic security in a direct loan
to permit guaranteed line of credit only when both of the following
additional conditions are met:
(i) The total unpaid balance of the direct loans is less than or
equal to 75 percent of the value of all of the security for the direct
loans, excluding the value of growing crops or planned production, at
the time of the subordination. The direct loan security value will be
determined by an appraisal. The lender requesting the subordination and
guarantee is responsible for providing the appraisal and may charge the
applicant a reasonable appraisal fee.
(ii) The applicant cannot obtain sufficient credit through a
conventional guaranteed loan without a subordination.
(3) The lender may not subordinate its interest in property which
secures a guaranteed loan except as follows:
(i) The lender may subordinate its security interest in crops,
feeder livestock, livestock offspring, or livestock products when no
funds have been advanced from the guaranteed loan for their production,
so a lender can make a loan for annual production expenses; or
(ii) The Agency's national office may provide an exception to the
subordination prohibition if such action is in the Agency's best
interest. However, in no case can the loan made under the subordination
include tax exempt financing.
(d) Transfer and assumption. Transfers and assumptions are subject
to the following conditions:
(1) For standard eligible and CLP lenders, the servicing action
must be approved by the Agency in writing.
(2) For standard eligible and CLP lenders, the transferee must
apply for a loan in accordance with Sec. 762.110, including a current
appraisal, unless the lien position of the guaranteed loan will not
change, and any other information requested by the Agency to evaluate
the transfer and assumption.
(3) PLP lenders may process transfers and assumptions in accordance
with their agreement with the Agency.
(4) Any required security appraisals must meet the requirements of
Sec. 762.127.
(5) The Agency will review, approve or reject the request in
accordance with the time frames in Sec. 762.130.
(6) The transferee must meet the eligibility requirements and loan
limitations for the loan being transferred, all requirements relating
to loan rates and terms, loan security, feasibility, and environmental
and other laws applicable to a loan applicant under this part.
(7) The lender will use its own assumption agreements or conveyance
instruments, providing they are legally sufficient to obligate the
transferee for the total outstanding debt. The lender will provide the
Agency copies of any agreements executed to carry out the servicing
action.
(8) The lender must execute a modification of the guarantee
provided by the Agency to designate the party that assumed the
guaranteed debt, the amount of debt at the time of the assumption
(including interest that being capitalized), and the new loan terms, if
applicable.
(9) The lender must give any holder notice of the transfer. If the
rate and terms are changed, written concurrence from the holder is
required.
(10) The Agency will agree to releasing the transferor or any
guarantor from liability only if the requirements of Sec. 762.146(c)
are met.
Sec. 762.143 Servicing distressed accounts.
(a) A borrower is in default when 30 days past due on a payment or
in violation of provisions of the loan documents.
(b) In the event of a borrower default, SEL and CLP lenders will:
(1) Report to the Agency in accordance with Sec. 762.141.
(2) Determine whether it will repurchase the guaranteed portion
from the holder in accordance with Sec. 762.144, if the guaranteed
portion of the loan was sold on the secondary market.
(3) Arrange a meeting with the borrower within 15 days of default
(45 days after payment due date for monetary defaults) to identify the
nature of the delinquency and develop a course of action that will
eliminate the delinquency and correct the underlying problems. Non-
monetary defaults will be handled in accordance with the lender's note,
loan agreements and any other applicable loan documents.
(i) The lender and borrower will prepare a current balance sheet
and cash flow projection in preparation for the meeting. If the
borrower refuses to cooperate, the lender will compile the best
financial information available.
(ii) The lender or the borrower may request the attendance of an
Agency credit officer. If requested, the Agency credit officer will
assist in developing solutions to the borrower's financial problems.
(iii) The lender will summarize the meeting and proposed solutions
on the Agency form for guaranteed loan
[[Page 7393]]
borrower default status completed after the meeting. The lender will
indicate the results on this form for the lender's consideration of the
borrower for interest assistance in conjunction with rescheduling under
Sec. 762.145(b).
(iv) The lender must decide whether to restructure or liquidate the
account within 90 days of default, unless the lender can document
circumstances that justify an extension by the Agency.
(v) The lender may not initiate foreclosure action on the loan
until 60 days after eligibility of the borrower to participate in the
interest assistance programs has been determined by the Agency. If the
lender or the borrower does not wish to consider servicing options
under this section, this should be documented, and liquidation under
Sec. 762.149 should begin.
(vi) If a borrower is current on a loan, but will be unable to make
a payment, a restructuring proposal may be submitted in accordance with
Sec. 762.145 prior to the payment coming due.
(c) PLP lenders will service defaulted loans according to their
lender's agreement.
Sec. 762.144 Repurchase of guaranteed portion from a secondary market
holder.
(a) Request for repurchase. The holder may request the lender to
repurchase the unpaid guaranteed portion of the loan when:
(1) The borrower has not made a payment of principal and interest
due on the loan for at least 60 days; or
(2) The lender has failed to remit to the holder its pro-rata share
of any payment made by the borrower within 30 days of receipt of a
payment.
(b) Repurchase by the lender.
(1) When a lender is requested to repurchase a loan from the
holder, the lender must consider the request according to the servicing
actions that are necessary on the loan. In order to facilitate
servicing and simplified accounting of loan transactions, lenders are
encouraged to repurchase the loan upon the holder's request.
(2) The repurchase by the lender will be for an amount equal to the
portion of the loan held by the holder plus accrued interest.
(3) The guarantee will not cover separate servicing fees that the
lender accrues after the repurchase.
(c) Repurchase by the Agency.
(1) If the lender does not repurchase the loan, the holder must
inform the Agency in writing that demand was made on the lender and the
lender refused. Following the lender's refusal, the holder may continue
as holder of the guaranteed portion of the loan or request that the
Agency purchase the guaranteed portion. Within 30 days after written
demand to the Agency from the holder with required attachments, the
Agency will forward to the holder payment of the unpaid principal
balance, with accrued interest to the date of repurchase. If the holder
does not desire repurchase or purchase of a defaulted loan, the lender
must forward the holder its pro-rata share of payments, liquidation
proceeds and Agency loss payments.
(2) With its demand on the Agency, the holder must include:
(i) A copy of the written demand made upon the lender.
(ii) Originals of the guarantee and note properly endorsed to the
Agency, or the original of the assignment of guarantee.
(iii) A copy of any written response to the demand of the holder by
the lender.
(iv) An account to which the Agency can forward the purchase amount
via electronic funds transfer.
(3) The amount due the holder from the Agency includes unpaid
principal, unpaid interest to the date of demand, and interest which
has accrued from the date of demand to the proposed payment date.
(i) Upon request by the Agency, the lender must furnish upon Agency
request a current statement, certified by a bank officer, of the unpaid
principal and interest owed by the borrower and the amount due the
holder.
(ii) Any discrepancy between the amount claimed by the holder and
the information submitted by the lender must be resolved by the lender
and the holder before payment will be approved by the Agency. The
Agency will not participate in resolution of any such discrepancy. When
there is a discrepancy, the 30 day Agency payment requirement to the
holder will be suspended until the discrepancy is resolved.
(iii) In the case of a request for Agency purchase, the government
will only pay interest that accrues for up to 90 days from the date of
the demand letter to the lender requesting the repurchase. However, if
the lender requested repurchase from the Agency within 60 days of the
request to the holder and for any reason not attributable to the holder
and the lender, the Agency cannot make payment within 30 days of the
holder's demand to the Agency, the holder will be entitled to interest
to the date of the payment.
(4) At the time of purchase by the Agency, the original assignment
of guarantee will be assigned by the holder to the Agency without
recourse, including all rights, title, and interest in the loan.
(5) Purchase by the Agency does not change, alter, or modify any of
the lender's obligations to the Agency specified in the lender's
agreement or guarantee; nor does the purchase waive any of the Agency's
rights against the lender.
(6) The Agency succeeds to all rights of the holder under the
Guarantee including the right of set-off against the lender.
(7) Within 180 days of the Agency's purchase, the lender will
reimburse the Agency the amount of repurchase, with accrued interest,
through one of the following ways:
(i) By liquidating the loan security and paying the Agency its pro-
rata share of liquidation proceeds; or
(ii) Paying the Agency the full amount the Agency paid to the
holder plus any accrued interest.
(8) The lender will be liable for the purchase amount and any
expenses incurred by the Agency to maintain the loan in its portfolio
or liquidate the security. While the Agency holds the guaranteed
portion of the loan, the lender will transmit to the Agency any payment
received from the borrower, including the pro-rata share of liquidation
or other proceeds.
(9) If the borrower files for reorganization under the provisions
of the bankruptcy code or pays the account current while the purchase
by the Government is being processed, the Agency may hold the loan as
long it determines this action to be in the Agency's interest. If the
lender is not proceeding expeditiously to collect the loan or
reimbursement is not waived under this paragraph, the Agency will
demand payment by the lender and collect the purchase amount through
administrative offset of any claims due the lender.
(10) The Agency may sell a purchased guaranteed loan on a non-
recourse basis if it determines that selling the portion of the loan
that it holds is in the Government's best interest. A non-recourse
purchase from the Agency requires a written request to the Agency from
the party that wishes to purchase it, and written concurrence from the
lender;
(d) Repurchase for servicing.
(1) If, due to loan default or imminent loan restructuring, the
lender determines that repurchase is necessary to adequately service
the loan, the lender may repurchase the guaranteed portion of the loan
from the holder, with the written approval of the Agency.
(2) The lender will not repurchase from the holder for arbitrage
purposes. With its request for Agency concurrence, the lender will
notify the
[[Page 7394]]
Agency of its plans to resell the guaranteed portion following
servicing.
(3) The holder will sell the guaranteed portion of the loan to the
lender for an amount agreed to between the lender and holder.
Sec. 762.145 Restructuring guaranteed loans.
(a) General.
(1) To restructure guaranteed loans standard eligible lenders must:
(i) Obtain prior written approval of the Agency for all
restructuring actions; and,
(ii) Provide the items in paragraph (b) and (e) of this section to
the Agency for approval.
(2) If the standard eligible lender's proposal for servicing is not
agreed to by the Agency, the Agency approval official will notify the
lender in writing within 14 days of the lender's request.
(3) To restructure guaranteed loans CLP lenders must:
(i) Obtain prior written approval of the Agency only for debt write
down under this section.
(ii) Submit all calculations required in paragraph (e) of this
section for debt writedown.
(iii) For restructuring other than write down, provide FSA with a
certification that each requirement of this section has been met, a
narrative outlining the circumstances surrounding the need for
restructuring, and copies of any applicable calculations.
(4) PLP lenders will restructure loans in accordance with their
lender's agreement.
(5) All lenders will submit copies of any restructured notes or
lines of credit to the Agency.
(b) Requirements. For any restructuring action, the following
conditions apply:
(1) The borrower meets the eligibility criteria of Sec. 762.120,
except the provisions regarding prior debt forgiveness and delinquency
on a federal debt do not apply.
(2) The borrower's ability to make the amended payment is
documented by the following:
(i) A feasible plan (see Sec. 762.102(b)). If interest assistance
is required to achieve a feasible plan, the items required by
Sec. 762.150(d) must be submitted with a restructuring request.
Feasible plan is defined in Sec. 762.102(b).
(ii) Current financial statements from all liable parties.
(iii) Verification of nonfarm income.
(iv) Verification of all debts of $1,000 or more.
(v) Applicable credit reports.
(vi) Financial history (and production history for standard
eligible lenders) for the past 3 years to support the cash flow
projections.
(3) A final loss claim may be reduced, adjusted, or rejected as a
result of negligent servicing after the concurrence with a
restructuring action under this section.
(4) Balloon payments are prohibited; however, the loan can be
restructured with unequal installments, provided that, in addition to a
feasible plan for the upcoming operating cycle, a feasible plan can be
reasonably projected after the installments increase. Feasible plan is
defined in Sec. 762.102(b).
(5) If a borrower is current on a loan, but will be unable to make
a payment, a restructuring proposal may be submitted prior to the
payment coming due.
(6) The lender may capitalize the outstanding interest when
restructuring the loan as follows:
(i) As a result of the capitalization of interest, a rescheduled
promissory note may increase the amount of principal which the borrower
is required to pay. However, in no case will such principal amount
exceed the statutory loan limits contained in Sec. 762.122.
(ii) When accrued interest causes the loan amount to exceed the
statutory loan limits, rescheduling may be approved without
capitalization of the amount that exceeds the limit. Noncapitalized
interest may be scheduled for repayment over the term of the
rescheduled note.
(iii) Only interest that has accrued at the rate indicated on the
borrower's original promissory notes may be capitalized. Late payment
fees or default interest penalties that have accrued due to the
borrower's failure to make payments as agreed are not covered under the
guarantee and may not be capitalized.
(iv) The Agency will provide the lender with a modification of
guarantee form to identify the new loan principal and the guaranteed
portion if greater than the original loan amounts, and to waive the
restriction on capitalization of interest, if applicable, to the
existing guarantee documents. The modification form will be attached to
the original guarantee as an addendum.
(v) Approved capitalized interest will be treated as part of the
principal and interest that accrues thereon, in the event that a loss
should occur.
(7) The lender's security position will not be adversely affected
because of the restructuring. New security instruments may be taken if
needed, but a loan does not have to be fully secured in order to be
restructured.
(8) Any holder agrees in writing to any changes in the original
loan terms, including the approval of interest assistance. If the
holder does not agree, the lender must repurchase the loan from the
holder for any loan restructuring to occur.
(9) After a guaranteed loan is restructured, the lender must
provide the Agency with a copy of the restructured promissory note.
(c) Rescheduling. The following conditions apply when a guaranteed
loan is rescheduled or reamortized:
(1) Payments will be rescheduled within the following terms:
(i) FO and existing SW may be amortized over the remaining term of
the note or rescheduled with an uneven payment schedule. The maturity
date cannot exceed 40 years from the date of the original note.
(ii) OL notes must be rescheduled over a period not to exceed 15
years from the date of the rescheduling. An OL line of credit may be
rescheduled over a period not to exceed 7 years from the date of the
rescheduling or 10 years from the date of the original note, whichever
is less. Advances cannot be made against a line of credit loan that has
had any portion of the loan rescheduled.
(2) The interest rate for a rescheduled loan is the negotiated rate
agreed upon by the lender and the borrower at the time of the action,
subject to the loan limitations for each type of loan.
(3) A new note is not necessary when rescheduling occurs. However,
if a new note is not taken, the existing note or line of credit
agreement must be modified by attaching an allonge or other legally
effective amendment, evidencing the revised repayment schedule and any
interest rate change. If a new note is taken, the new note must
reference the old note and state that the indebtedness evidenced by the
old note or line of credit agreement is not satisfied. The original
note or line of credit agreement must be retained.
(d) Deferrals. The following conditions apply to deferrals:
(1) Payments may be deferred up to 5 years, but the loan may not be
extended beyond the final due date of the note.
(2) The principal portion of the payment may be deferred either in
whole or in part.
(3) Interest may be deferred only in part. Payment of a reasonable
portion of accruing interest as indicated by the borrower's cash flow
projections is required for multi-year deferrals.
(4) There must be a reasonable prospect that the borrower will be
able to resume full payments at the end of the deferral period.
(e) Debt writedown. The following conditions apply to debt
writedown:
(1) A lender may only write down a delinquent guaranteed loan or
line of
[[Page 7395]]
credit in an amount sufficient to permit the borrower to develop a
feasible plan as defined in Sec. 762.102(b).
(2) The lender will request other creditors to negotiate their
debts before a writedown is considered.
(3) The borrower cannot develop a feasible plan after consideration
is given to rescheduling and deferral under this section.
(4) The present value of the loan to be written down, based on the
interest rate of the rescheduled loan, will be equal to or exceed the
net recovery value of the loan collateral.
(5) The loan will be restructured with regular payments at terms no
shorter than 5 years for a line of credit and OL note and no shorter
than 20 years for FO, unless required to be shorter by
Sec. 762.145(c)(1)(i) and (ii).
(6) No further advances may be made on a line of credit that is
written down.
(7) Loans may not be written down with interest assistance. If a
borrower's loan presently on interest assistance requires a writedown,
the writedown will be considered without interest assistance. If
approved, the existing interest assistance agreement will be canceled.
(8) The writedown is based on writing down the shorter-term loans
first.
(9) When a lender requests approval of a writedown for a borrower
with multiple loans, the security for all of the loans will be cross-
collateralized and continue to serve as security for the loan that is
written down. If a borrower has multiple loans and one loan is written
off entirely through debt writedown, the security for that loan will
not be released and will remain as security for the other written down
debt. Additional security instruments will be taken if required to
cross-collateralize security and maintain lien priority.
(10) The writedown will be evidenced by an allonge or amendment to
the existing note or line of credit reflecting the writedown.
(11) The borrower executes an Agency shared appreciation agreement
for loans which are written down and secured by real estate.
(i) The lender will attach the original agreement to the
restructured loan document.
(ii) The lender will provide the Agency a copy of the executed
agreement, and
(iii) Security instruments must ensure future collection of any
appreciation under the agreement.
(12) The lender will prepare and submit the following to the
Agency:
(i) A current appraisal of all security in accordance with
Sec. 762.127.
(ii) A completed report of loss on the appropriate Agency form for
the proposed writedown loss claim.
(iii) Detailed writedown calculations as follows:
(A) Calculate the present value.
(B) Determine the net recovery value.
(C) If the net recovery value exceeds the present value, writedown
is unavailable; liquidation becomes the next servicing consideration.
If the present value equals or exceeds the net recovery value, the debt
may be written down to the present value.
(iv) The lender will make any adjustment in the calculations as
requested by the Agency.
Sec. 762.146 Other servicing procedures.
(a) Additional loans and advances.
(1) Notwithstanding any provision of this section, the PLP lender
may make additional loans or advances in accordance with the lender's
agreement with the Agency.
(2) SEL and CLP lenders must not make additional loans or advances
without prior written approval of the Agency, except as provided in the
borrower's loan or line of credit agreement.
(3) In cases of a guaranteed line of credit, lenders may make an
emergency advance when a line of credit has reached its ceiling. The
emergency advance will be made as an advance under the line and not as
a separate note. The lender's loan documents must contain sufficient
language to provide that any emergency advance will constitute a debt
of the borrower to the lender and be secured by the security
instrument. The following conditions apply:
(i) The loan funds to be advanced are for authorized operating loan
purposes;
(ii) The financial benefit to the lender and the Government from
the advance will exceed the amount of the advance; and
(iii) The loss of crops or livestock is imminent unless the advance
is made.
(4) Protective advance requirements are found in Sec. 762.149.
(b) Release of liability upon withdrawal. An individual who is
obligated on a guaranteed loan may be released from liability by a
lender, with the written consent of the Agency, provided the following
conditions have been met:
(1) The individual to be released has withdrawn from the farming or
ranching operation;
(2) A divorce decree or final property settlement does not hold the
withdrawing party responsible for the loan payments;
(3) The withdrawing party's interest in the security is conveyed to
the individual or entity with whom the loan will be continued;
(4) The ratio of the amount of debt to the value of the remaining
security is less than or equal to .75, or the withdrawing party has no
income or assets from which collection can be made; and
(5) Withdrawal of the individual does not result in legal
dissolution of the entity to which the loans are made. Individually
liable members of a general or limited partnership may not be released
from liability.
(6) The remaining liable party projects a feasible plan (see
Sec. 762.102(b)).
(c) Release of liability after liquidation. After a final loss
claim has been paid on the borrower's account, the lender may release
the borrower or guarantor from liability if;
(1) The Agency agrees to the release in writing;
(2) The lender documents its consideration of the following factors
concerning the borrower or guarantors:
(i) The likelihood that the borrower or guarantor will have a
sufficient level of income in the reasonably near future to contribute
to a meaningful reduction of the debt;
(ii) The prospect that the borrower or guarantor will inherit
assets in the near term that may be attached by the Agency for payment
of a significant portion of the debt;
(iii) Whether collateral has been properly accounted for, and
whether liability should be retained in order to take action against
the borrower or a third party for conversion of security;
(iv) The availability of other income or assets which are not
security;
(v) The possibility that assets have been concealed or improperly
transferred;
(vi) The effect of other guarantors on the loan; and
(vii) Cash consideration or other collateral in exchange for the
release of liability.
(3) The lender will use its own release of liability documents.
(d) Interest rate changes.
(1) The lender may change the interest rate on a performing
(nondelinquent) loan only with the borrower's consent.
(2) If the loan has been sold on the secondary market, the lender
must repurchase the loan or obtain the holder's written consent.
(3) To change a fixed rate of interest to a variable rate of
interest or vice versa, the lender and the borrower must execute a
legally effective allonge or amendment to the existing note.
(4) If a new note is taken, it will be attached to and refer to the
original note.
[[Page 7396]]
(5) The lender will inform the Agency of the rate change.
(e) Consolidation. Two or more Agency guaranteed loans may be
consolidated, subject to the following conditions:
(1) The borrower must project a feasible plan after the
consolidation. See Sec. 762.102(b) for definition of feasible plan.
(2) Only OL may be consolidated.
(3) Existing lines of credit may only be consolidated with a new
line of credit if the final maturity date and conditions for advances
of the new line of credit are made the same as the existing line of
credit.
(4) Guaranteed OL may not be consolidated with a line of credit,
even if the line of credit has been rescheduled.
(5) Guaranteed loans made prior to October 1, 1991, cannot be
consolidated with those loans made on or after October 1, 1991.
(6) OL secured by real estate or with an outstanding interest
assistance agreement or shared appreciation agreement cannot be
consolidated.
(7) A new note or line of credit agreement will be taken. The new
note or line of credit agreement must describe the note or line of
credit agreement being consolidated and must state that the
indebtedness evidenced by the note or line of credit agreement is not
satisfied. The original note or line of credit agreement must be
retained.
(8) The interest rate for a consolidated OL loan is the negotiated
rate agreed upon by the lender and the borrower at the time of the
action, subject to the loan limitations for each type of loan.
(9) A modification of guarantee will be executed. The modification
will indicate the consolidated loan amount, new terms, and percentage
of guarantee, and will be attached to the originals of the guarantees
being consolidated. If loans with a different guarantee percentage are
consolidated, the new guarantee will be at the lowest percentage of
guarantee being consolidated.
(10) Any holders must consent to the consolidation, or the
guaranteed portion must be repurchased by the lender.
Sec. 762.147 Servicing shared appreciation agreements.
(a) Lender responsibilities. The lender is responsible for:
(1) Monitoring the borrower's compliance with the shared
appreciation agreement;
(2) Notifying the borrower of the amount of recapture due; and,
(3) Beginning October 1, 1999, a notice of the agreement's
provisions not later than 12 months before the end of the agreement;
and
(4) Reimbursing the Agency for its pro-rata share of recapture due.
(b) Recapture.
(1) Recapture of any appreciation of real estate security will take
place at the end of the term of the agreement, or sooner if the
following occurs:
(i) On the conveyance of the real estate security (or a portion
thereof) by the borrower.
(A) If only a portion of the real estate is conveyed, recapture
will only be triggered against the portion conveyed. Partial releases
will be handled in accordance with Sec. 762.141(b).
(B) Transfer of title to the spouse of the borrower on the death of
such borrower will not be treated as a conveyance under the agreement.
(ii) On repayment of the loan; or
(iii) If the borrower ceases farming.
(2) Calculating recapture.
(i) The amount of recapture will be based on the difference between
the value of the security at the time recapture is triggered and the
value of the security at the time of writedown, as shown on the shared
appreciation agreement.
(ii) Security values will be determined through appraisals obtained
by the lender and meeting the requirements of Sec. 762.127.
(iii) All appraisal fees will be paid by the lender.
(iv) The amount of recapture will not exceed the amount of
writedown shown on the shared appreciation agreement.
(v) If recapture is triggered within 4 years of the date of the
shared appreciation agreement, the lender shall recapture 75 percent of
any positive appreciation in the market value of the property securing
the loan or line of credit agreement.
(vi) If recapture is triggered after 4 years from the date of the
shared appreciation agreement, the lender shall recapture 50 percent of
any positive appreciation in the market value of the property securing
the loan or line of credit agreement.
(3) Servicing recapture debt.
(i) If recapture is triggered under the shared appreciation
agreement and the borrower is unable to pay the recapture in a lump
sum, the lender may:
(A) Reschedule the recapture debt with the consent of the Agency,
provided the lender can document the borrower's ability to make
amortized payments on the recapture debt, plus pay all other
obligations. In such case, the recapture debt will not be covered by
the guarantee;
(B) Pay the Agency its pro rata share of the recapture due. In such
case, the recapture debt of the borrower will be covered by the
guarantee; or
(C) Service the account in accordance with Sec. 762.149.
(ii) If recapture is triggered, and the borrower is able but
unwilling to pay the recapture in a lump sum, the lender will service
the account in accordance with Sec. 762.149.
(4) Paying the Agency. Any shared appreciation recaptured by the
lender will be shared on a pro-rata basis between the lender and the
Agency.
Sec. 762.148 Bankruptcy.
(a) Lender responsibilities. The lender must protect the guaranteed
loan debt and all collateral securing the loan in bankruptcy
proceedings. The lender's responsibilities include, but are not limited
to:
(1) Filing a proof of claim where required and all the necessary
papers and pleadings;
(2) Attending, and where necessary, participating in meetings of
the creditors and court proceedings;
(3) Protecting the collateral securing the guaranteed loan and
resisting any adverse changes that may be made to the collateral;
(4) Seeking a dismissal of the bankruptcy proceeding when the
operation as proposed by the borrower to the bankruptcy court is not
feasible;
(5) When permitted by the bankruptcy code, requesting a
modification of any plan of reorganization if it appears additional
recoveries are likely.
(6) Monitor confirmed plans under chapters 11, 12 and 13 of the
bankruptcy code to determine borrower compliance. If the borrower fails
to comply, the lender will seek a dismissal of the reorganization plan;
and
(7) Keeping the Agency regularly informed in writing on all aspects
of the proceedings.
(i) The lender will submit a default status report when the
borrower defaults and every 60 days until the default is resolved or a
final loss claim is paid.
(ii) The default status report will be used to inform the Agency of
the bankruptcy filing, the reorganization plan confirmation date and
effective date, when the reorganization plan is complete, and when the
borrower is not in compliance with the reorganization plan.
(b) Bankruptcy expenses.
(1) Reorganization.
(i) Expenses, such as legal fees and the cost of appraisals
incurred by the lender as a direct result of the borrower's chapter 11,
12, or 13 reorganization, are covered under the guarantee, provided
they are reasonable, customary, and provide a demonstrated
[[Page 7397]]
economic benefit to the lender and the Agency.
(ii) Lender's in-house expenses, which are those expenses which
would normally be incurred for administration of the loan, including
in-house lawyers, are not covered by the guarantee.
(2) Liquidation expenses in bankruptcy.
(i) Reasonable and customary liquidation expenses may be deducted
from the proceeds of the collateral in liquidation bankruptcy cases.
(ii) In-house expenses are not considered customary liquidation
expenses, may not be deducted from collateral proceeds, and are not
covered by the guarantee.
(c) Estimated loss claims in reorganization.
(1) At confirmation. The lender may submit an estimated loss claim
upon confirmation of the reorganization plan in accordance with the
following:
(i) The estimated loss payment will cover the guaranteed percentage
of the principal and accrued interest written off, plus any allowable
costs incurred as of the effective date of the plan.
(ii) The lender will submit supporting documentation for the loss
claim, and any additional information requested by the Agency,
including justification for the legal fees included on the claim.
(iii) The estimated loss payment may be revised as consistent with
a court-approved reorganization plan.
(iv) Protective advances made and approved in accordance with
Sec. 762.149 may be included in an estimated loss claim associated with
a reorganization, if:
(A) They were incurred in connection with the initiation of
liquidation action prior to bankruptcy filing; or
(B) The advance is required to provide repairs, insurance, etc. to
protect the collateral as a result of delays in the case, or failure of
the borrower to maintain the security.
(2) Interest only losses. The lender may submit an estimated loss
claim for interest only after confirmation of the reorganization plan
in accordance with the following:
(i) The loss claims may cover interest losses sustained as a result
of a court-ordered, permanent interest rate reduction.
(ii) The loss claims will be processed annually on the anniversary
date of the effective date of the reorganization plan.
(iii) If the borrower performs under the terms of the
reorganization plan, annual interest reduction loss claims will be
submitted on or near the same date, beyond the period of the
reorganization plan.
(3) Actual loss.
(i) Once the reorganization plan is complete, the lender will
provide the Agency with documentation of the actual loss sustained.
(ii) If the actual loss sustained is greater than the prior
estimated loss payment, the lender may submit a revised estimated loss
claim to obtain payment of the additional amount owed by the Agency
under the guarantee.
(iii) If the actual loss is less than the prior estimated loss, the
lender will reimburse the Agency for the overpayment plus interest at
the note rate from the date of the payment of the estimated loss.
(4) Payment to holder. In reorganization bankruptcy, if a holder
makes demand upon the Agency, the Agency will pay the holder interest
to the plan's effective date. Accruing interest thereafter will be
based upon the provisions of the reorganization plan.
(d) Liquidation under the bankruptcy code.
(1) Upon receipt of notification that a borrower has filed for
protection under Chapter 7 of the bankruptcy code, or a liquidation
plan under chapter 11, the lender must proceed according to the
liquidation procedures of this part.
(2) If the property is abandoned by the trustee, the lender will
conduct the liquidation according to Sec. 762.149.
(3) Proceeds received from partial sale of collateral during
bankruptcy may be used by the lender to pay reasonable costs, such as
freight, labor and sales commissions, associated with the partial sale.
Reasonable use of proceeds for this purpose must be documented with the
final loss claim in accordance with Sec. 762.149(a)(vi).
Sec. 762.149 Liquidation.
(a) Mediation. When it has been determined that default cannot be
cured through any of the servicing options available, or if the lender
does not wish to utilize any of the authorities provided in this part,
the lender must:
(1) Participate in mediation according to the rules and regulations
of any State which has a mandatory farmer-creditor mediation program;
(2) Consider private mediation services in those States which do
not have a mandatory farmer-creditor mediation program; and
(3) Not agree to any proposals to rewrite the terms of a guaranteed
loan which do not comply with this part. Any agreements reached as a
result of mediation involving defaults and or loan restructuring must
have written concurrence from the Agency before they are implemented.
(b) Liquidation plan. If a default cannot be cured after
considering servicing options and mediation, the lender will proceed
with liquidation of the collateral in accordance with the following:
(1) Within 30 days of the decision to liquidate, standard eligible
and CLP lenders will submit a written liquidation plan to the Agency
which includes:
(i) Current balance sheets from all liable parties or, if the
parties are not cooperative, the best information available, or in
liquidation bankruptcies, a copy of the bankruptcy schedules or
discharge notice;
(ii) A proposed method of maximizing the collection of debt which
includes specific plans to collect any remaining loan balances on the
guaranteed loan after loan collateral has been liquidated, including
possibilities for judgment;
(A) If the borrower has converted loan security, the lender will
determine whether litigation is cost effective. The lender must
address, in the liquidation plan, whether civil or criminal action will
be pursued. If the lender does not pursue the recovery, the reason must
be documented when an estimated loss claim is submitted.
(B) Any proposal to release the borrower from liability will be
addressed in the liquidation plan in accordance with
Sec. 762.146(c)(2);
(iii) An independent appraisal report on all collateral securing
the loan that meets the requirements of Sec. 762.127 and a calculation
of the net recovery value of the security as defined in Sec. 762.102.
The appraisal requirement may be waived by the Agency in the following
cases:
(A) The bankruptcy trustee is handling the liquidation and the
lender has submitted the trustee's determination of value;
(B) The lender's proposed method of liquidation rarely results in
receipt of less than market value for livestock and used equipment; or
(C) A purchase offer has already been received for more than the
debt;
(iv) An estimate of time necessary to complete the liquidation;
(v) An estimated loss claim if the liquidation period is expected
to exceed 90 days.
(vi) An estimate of reasonable liquidation expenses; and
(vii) An estimate of any protective advances.
(2) PLP lenders will submit a liquidation plan as required by their
lender's agreement.
(c) Agency approval of the liquidation plan.
(1) CLP lender's or standard eligible lender's liquidation plan,
and any
[[Page 7398]]
revisions of the plan, must be approved by the Agency.
(2) If, within 20 calendar days of the Agency's receipt of the
liquidation plan, the Agency fails to approve it or fails to request
that the lender make revisions, the lender may assume the plan is
approved. The lender may then proceed to begin liquidation actions at
its discretion as long as it has been at least 60 days since the
borrower's eligibility for interest assistance was considered.
(3) At its option, the Agency may liquidate the guaranteed loan as
follows:
(i) Upon Agency request, the lender will transfer to the Agency all
rights and interests necessary to allow the Agency to liquidate the
loan. The Agency will not pay the lender for any loss until after the
collateral is liquidated and the final loss is determined; and
(ii) If the Agency conducts the liquidation, interest accrual will
cease on the date the Agency notifies the lender in writing that it
assumes responsibility for the liquidation.
(d) Estimated loss claims. An estimated loss claim will be
submitted by the lender with the liquidation plan if the liquidation is
expected to exceed 90 days. The estimated loss will be based on the
following:
(1) The Agency will pay the lender the guaranteed percentage of the
total outstanding debt, less the net recovery value of the remaining
security, less any unaccounted for security; and
(2) The lender will discontinue interest accrual on the defaulted
loan at the time the estimated loss claim is paid by the Agency. If the
lender estimates that there will be no loss after considering the costs
of liquidation, interest accrual will cease 90 days after the decision
to liquidate or an estimated loss of zero will be submitted.
(e) Protective advances.
(1) Prior written authorization from the Agency is required for all
protective advances in excess of $5,000 for CLP lenders and $3,000 for
standard eligible lenders. The dollar amount of protective advances
allowed for PLP lenders will be specified when PLP status is awarded by
the Agency or as contained in the lender's agreement.
(2) The lender may claim recovery for the guaranteed portion of any
loss of monies advanced as protective advances as allowed in this part,
plus interest that accrues on the protective advances.
(3) Payment for protective advances is made by the Agency when the
final loss claim is approved, except in bankruptcy actions.
(4) Protective advances are used only when the borrower is in
liquidation, liquidation is imminent, or when the lender has taken
title to real property in a liquidation action.
(5) Legal fees are not a protective advance.
(6) Protective advances may only be made when the lender can
demonstrate the advance is in the best interest of the lender and the
Agency.
(7) Protective advances must constitute a debt of the borrower to
the lender and be secured by the security instrument.
(8) Protective advances must not be made in lieu of additional
loans.
(f) Unapproved loans or advances. The amount of any payments made
by the borrower on unapproved loans or advances outside of the
guarantee will be deducted from any loss claim submitted by the lender
on the guaranteed loan, if that loan or advance was paid prior to, and
to the detriment of, the guaranteed loan.
(g) Acceleration.
(1) If the borrower is not in bankruptcy, the lender shall send the
borrower notice that the loan is in default and the entire debt has
been determined due and payable immediately after other servicing
options have been exhausted.
(2) The loan cannot be accelerated until after the borrower has
been considered for interest assistance and the conclusion of mandatory
mediation in accordance with Sec. 762.149.
(3) The lender will submit a copy of the acceleration notice or
other document to the Agency.
(h) Foreclosure.
(1) The lender is responsible for determining the necessary parties
to any foreclosure action, or who should be named on a deed of
conveyance taken in lieu of foreclosure.
(2) When the property is liquidated, the lender will apply the net
proceeds to the guaranteed loan debt.
(3) When it is necessary to enter a bid at a foreclosure sale, the
lender may bid the amount that it determines is reasonable to protect
its and the Agency's interest. At a minimum, the lender will bid the
lesser of the net recovery value or the unpaid guaranteed loan balance.
(i) Final loss claims.
(1) Lenders may submit a final loss claim when the security has
been liquidated and all proceeds have been received and applied to the
account.
(2) If a lender acquires title to property either through voluntary
conveyance or foreclosure proceeding, the lender will submit a final
loss claim after disposing of the property. The lender may pay
reasonable maintenance expenses to protect the value of the property
while it is owned by the lender. These may be paid as protective
advances or deducted as liquidation expenses from the sales proceeds
when the lender disposes of the property. The lender must obtain Agency
written concurrence before incurring maintenance expenses which exceed
the amounts allowed in Sec. 762.149(e)(1).
(3) The lender will make its records available to the Agency for
the Agency's audit of the propriety of any loss payment.
(4) All lenders will submit the following documents with a final
loss claim:
(i) An accounting of the use of loan funds;
(ii) An accounting of the disposition of loan security and its
proceeds;
(iii) A copy of the loan ledger indicating loan advances, interest
rate changes, protective advances, and application of payments, rental
proceeds, and security proceeds, including a running outstanding
balance total; and
(iv) Documentation, as requested by the Agency, concerning the
lender's compliance with the requirements of this part.
(5) The Agency will notify the lender of any discrepancies in the
final loss claim or, approve or reject the claim within 40 days.
(6) The Agency will reduce a final loss claim based on its
calculation of the dollar amount of loss caused by the lender's
negligent servicing of the account. Loss claims may be reduced or
rejected as a result of the following:
(i) A loss claim may be reduced by the amount caused by the
lender's failure to secure property after a default, and will be
reduced by the amount of interest that accrues when the lender fails to
contact the borrower or takes no action to cure the default, once it
occurs. Losses incurred as a result of interest accrual during
excessive delays in collection, as determined by the Agency, will not
be paid.
(ii) Unauthorized release of security proceeds, failure to verify
ownership or possession of security to be purchased, or failure to
inspect collateral as often required so as to ensure its maintenance.
(7) Losses will not be reduced for the following:
(i) Servicing deficiencies that did not contribute materially to
the dollar amount of the loss.
(ii) Unaccounted security, as long as the lender's efforts to
locate and recover the missing collateral was equal to that which would
have been expended in the case of an unguaranteed loan in the lender's
portfolio.
[[Page 7399]]
(8) Default interest, late charges, and loan servicing fees are not
payable under the loss claim.
(9) The final loss will be the remaining outstanding balance after
application of the estimated loss payment and the application of
proceeds from the liquidation of the security.
(10) If the final loss is less than the estimated loss, the lender
will reimburse the Agency for the overpayment, plus interest at the
note rate from the date of the estimated loss payment.
(11) The lender will return the original guarantee marked paid
after receipt of a final loss claim.
(j) Future Recovery. The lender will remit any recoveries made on
the account after the Agency's payment of a final loss claim to the
Agency in proportion to the percentage of guarantee, in accordance with
the lender's agreement, until the account is paid in full or otherwise
satisfied.
(k) Overpayments. The lender will repay any final loss overpayment
determined by the Agency upon request.
(l) Electronic funds transfer. The lender will designate one or
more financial institutions to which any Agency payments will be made
via electronic funds transfer.
Sec. 762.150 Interest assistance program.
(a) Requests for interest assistance.
(1) To apply for interest assistance in conjunction with a new
request for guarantee, the lender will submit the following:
(i) A completed cash flow projection and interest assistance needs
analysis portion of the application form. Interest assistance can be
applied to each loan, only to one loan or any distribution the lender
selects; however, interest assistance is only available on as many
loans as necessary to achieve a positive cash flow.
(ii) For loans with unequal payments, a proposed debt repayment
schedule which shows principal and interest payments for the subject
loan, in each year of the loan.
(2) To request interest assistance on an existing guaranteed loan,
the lender must submit to the Agency the following:
(i) A completed cash flow projection and interest assistance needs
analysis portion of the application form. Interest assistance can be
applied to each loan, only to one loan or any distribution the lender
selects as required to achieve a feasible plan.
(ii) For loans with unequal payments, a proposed debt repayment
schedule which shows scheduled payments for the subject loan in each of
the remaining years of the loan.
(iii) Cash flow budgets and supporting justification to document
that the request meets the requirements outlined in paragraph (b) of
this section. This will include a typical cash flow if the projected
cash flow budget is atypical.
(3) Requests for interest assistance on lines of credit or loans
made for annual operating purposes must be accompanied by a projected
monthly cash flow budget.
(b) Requirements.
(1) The typical term of scheduled loan repayment will not be
reduced solely for the purpose of maximizing eligibility for interest
assistance. To be eligible for interest assistance, a loan must be
scheduled over the maximum terms typically used by lenders for similar
type loans within the limits set by Sec. 762.124 of this part. At a
minimum, loans will be scheduled for repayment over the terms listed
below, but for OL not to exceed the life of the security:
(i) An OL for the purpose of providing annual operating and living
expenses will be scheduled for repayment when the income is scheduled
to be received from the sale of the crops, livestock, and livestock
products which will serve as security for the loan.
(ii) OL for purposes other than annual operating and living
expenses (i.e. equipment, livestock, refinancing of existing debt) will
be scheduled over 7 years from the effective date of the proposed
interest assistance agreement.
(iii) FO and SW secured by real estate will be scheduled for 20
years from the closing date of the original note covered by the
guarantee.
(2) The lender must document that positive cash flow, as defined in
Sec. 762.102(b), is not possible without reducing the interest rate on
the borrower's loan and with the debt restructured over the term of
repayment cited above.
(3) The lender must determine whether the borrower, including
members of an entity, owns any significant assets which do not
contribute directly to essential family living or farm operations. The
lender must determine the market value of these assets and prepare a
cash flow budget based on the assumption that the value of these assets
will be used for debt reduction. If a positive cash flow can then be
achieved, the borrower is not eligible for interest assistance. All
interest assistance calculations will be based on the cash-flow budget
which assumes that the assets will be sold.
(4) A borrower's new guaranteed loan is eligible for interest
assistance if all the following conditions are met:
(i) The applicant needs interest assistance in order to achieve a
positive cash flow as defined in Sec. 762.102(b).
(ii) If significant changes in the borrower's cash flow budget are
anticipated after the initial 12 months, then the typical cash flow
budget must demonstrate that the borrower will still have a feasible
plan, as defined in Sec. 762.102(b), following the anticipated changes,
with or without interest assistance.
(iii) If a positive cash flow cannot be achieved, even with other
creditors voluntarily adjusting their debts and with the interest
assistance, the interest assistance request will not be approved.
(5) An existing guaranteed loan is eligible for interest assistance
if the borrower needs interest assistance to achieve a feasible plan as
defined in Sec. 762.102(b), and the borrower meets the eligibility
criteria of Sec. 762.120, except the provision regarding prior debt
forgiveness. If a feasible plan cannot be achieved, even with other
creditors voluntarily adjusting their debts and with the interest
assistance, the interest assistance request will not be approved. If a
borrower has multiple loans, interest assistance may be provided on one
or each loan, as available, to the extent necessary to achieve a
feasible plan.
(6) The term of the interest assistance agreement under this
section shall not exceed 10 years from the date of the first interest
assistance agreement signed by the loan applicant, including entity
members, or the outstanding term of the loan, as limited by this
section, whichever is less.
(7) The lender may charge a fixed or variable interest rate. The
type of rate must be the same as the type of rate in the underlying
note or line of credit agreement. The lender will reduce the interest
rate charged the borrower's account by at least the amount of interest
assistance.
(8) The borrower must be an operator of not larger than a family
size farm.
(c) Interest assistance closing.
(1) Initial guaranteed loans will be closed in accordance with
Sec. 762.130.
(2) The lender will then prepare and deliver to the Agency a
closing report for each initial and existing guaranteed loan which has
been granted interest assistance.
(3) When all requirements have been met, the lender and the Agency
will execute an interest assistance agreement.
(d) Interest assistance claims and payments.
(1) The interest assistance claim will be prepared by the lender.
The following conditions apply to the claims process:
[[Page 7400]]
(i) No claim period can exceed 12 months. The initial and final
claim periods may be less than 12 months. In such claims, the 4 percent
payment will be prorated over the number of months in the claim period.
The period for all other claims must be 12 months.
(ii) To permit the borrower to prepare for the upcoming year, a
claim should be filed within 60 days of each anniversary date. Claims
not filed within 1 year of the anniversary date will not be paid and
the amount due the lender is permanently forfeited.
(iii) If a claim is submitted without an interest assistance review
in accordance with Sec. 762.102, when it is required, the claim will
not be processed until the review is submitted by the lender.
(iv) Upon full payment of the note or line of credit, the lender
will immediately prepare the request for interest assistance payment
and submit it to the Agency.
(v) Interest assistance payments shall cease upon the assumption
and transfer of the loan if the transferee was not liable for the debt
on the effective date of the interest assistance agreement. The lender
shall request payment through the date of the transfer or assumption.
The claim must be submitted within 1 year or it will be denied and the
payment permanently forfeited.
(vi) All claims will be supported by detailed calculations of
average daily principal balances during the claim period.
(vii) The Agency will review the claim and the supporting
documentation. If the information and the supporting documentation is
not complete and correct, the reviewing official will notify the lender
in writing, of the actions needed to correct the request.
(viii) If there is a substitution of lender, a claim for the first
lender's interest assistance, through the effective date of the
substitution, will be submitted by the first lender and processed at
the time of the substitution.
(ix) Interest assistance claims shall be submitted concurrently
with the submission of estimated loss claims where interest accrual
ceases, or final loss claims that are not preceded by an estimated loss
claim.
(2) [Reserved]
(e) Request for continuation of interest assistance.
(1) For all interest assistance agreements exceeding 12 months, the
lender will perform an analysis of the applicant's farming operation
and need for continued interest assistance. The following information
will be submitted to the Agency:
(i) A summary of the operation's actual financial performance in
the previous year, including a detailed income and expense statement.
(ii) A narrative description of the causes of any major differences
between the previous year's projections and actual performance.
(iii) A current balance sheet.
(iv) A cash flow budget for the period being planned. A monthly
cash flow budget is required for all lines of credit and operating
loans made for annual operating purposes. All other loans may include
either an annual or monthly cash flow budget.
(v) A copy of the interest assistance needs analysis portion of the
application form which has been completed based on the planned period's
cash flow budget.
(2) The loan will be eligible for continuation of interest
assistance if a feasible plan, including interest assistance, can be
projected for the plan period. If the evaluation indicates that the
borrower needs a level of interest assistance greater than 4 percent to
project a feasible plan, then the Agency will deny the continuation of
interest assistance. interest assistance will be reduced to zero during
that review period. See Sec. 762.102(b) for the definition of feasible
plan.
(3) The documentation listed above will be provided to the Agency
concurrently with the lender's submission of its request for interest
assistance payment. This information will be provided to the Agency
within 60 days after the review date specified on the interest
assistance agreement.
(4) A request for continuation of interest assistance will be
completed for 12 month periods, effective on the anniversary date.
(5) The initial review may be submitted in conjunction with any
claim within the initial 12 month period. The anniversary date and
length of the review period will be stated on the interest assistance
agreement. Any request for interest assistance adjustment submitted
effective any time other than the review date will be denied, except
for those cases where it is necessary to service the loan with
rescheduling, reamortization, deferral or writedown.
(6) If the review is not completed and submitted to the Agency
within 1 year of the review date, no claim will be paid for that
period.
(f) Notification of Adverse Action. The lender will be notified in
writing of all Agency decisions in which a request for interest
assistance, a request for continuation of interest assistance or
lender's claim for interest assistance are denied. The notification
letter will provide specific reasons for the decision and appeals will
be handled in accordance with parts 11 and 780 of this title.
(g) Servicing of loans covered by an interest assistance agreement.
(1) Loans covered by interest assistance agreements cannot be
consolidated.
(2) The loan will be transferred with the interest assistance
agreement only in cases where the transferee was liable for the debt at
the time interest assistance was granted. Under no other circumstances
will the interest assistance be transferred. If interest assistance is
necessary for the transferee to achieve a positive cash flow, the
lender may request such assistance, which may be approved if interest
assistance funds are available and the applicant is eligible. The
maximum length of the agreement will be 10 years from the date of the
first agreement covering a loan for which the transferee was liable. If
interest assistance is necessary for a positive cash flow and funds are
not available, the request for assumption of the Agency guaranteed debt
will be denied.
(3) When consideration is given to using a debt writedown to
service a delinquent account, the subsidy level will be recalculated
prior to any writedown. If a feasible plan can be obtained using
interest assistance and funds are available, then the interest
assistance will be authorized and no writedown will be approved. If a
feasible plan cannot be achieved using 4 percent interest assistance,
all further calculations for determining debt writedown eligibility and
amounts to be written down will be based on the borrower receiving no
interest assistance. If debt writedown is approved, the interest
assistance claim for the previous review period will be processed in
conjunction with the writedown loss claim. The interest assistance
agreement will not be canceled and the anniversary date can remain the
same or be re-established under the same guidelines that it was
originally established. If the lender determines through its annual
analysis that interest assistance is necessary for a feasible plan, a
request to reinstate the subsidy in a subsequent review period may be
submitted in accordance with paragraph (e) of this section.
(4) In the event of rescheduling or deferral of loans with interest
assistance, interest assistance will remain available for that loan
under the terms of the existing interest assistance agreement.
Additional years of interest assistance and/or increases in the
[[Page 7401]]
restructured loan amount will require additional funding. If the
additional interest assistance is needed in order to produce a feasible
plan throughout the life of the rescheduled loan and funds are not
available for the additional interest assistance, then the rescheduling
will not be approved by the Agency. In no case will the subsidy be
extended more than 10 years from the effective date of the first
interest assistance agreement signed by the loan applicant or by anyone
who signed the note or line of credit agreement. Rescheduling or
deferral will only be processed in conjunction with a claim, effective
on the claim date or anniversary date. A review will be completed, in
accordance with paragraph (e)(1) of this section. The anniversary date
can remain the same or be re-established under the same guidelines that
it was originally established.
(5) In cases where the interest on a loan covered by an interest
assistance agreement is reduced by court order in a reorganization plan
under the bankruptcy code, interest assistance agreement will be
terminated effective on the date of the court ordered interest
reduction. The lender will file a claim due through the effective date
of the court ordered interest reduction. Guaranteed loans which have
had their interest reduced by bankruptcy court order are not eligible
to receive interest assistance.
(6) For Loan Guarantees held by holders, Agency purchase of the
guaranteed portion of a loan will stop interest assistance payments on
that portion. Interest assistance payments will cease upon termination
of the Loan Guarantee, upon reaching the expiration date contained in
the agreement or upon cancellation by the Agency.
(7) When a borrower defaults on a loan, interest assistance may be
considered in conjunction with a rescheduling action in accordance with
Sec. 762.145(b). After the meeting required by Sec. 762.143(b)(3) and
consideration of actions to correct the delinquency, the lender will
notify the Agency of the results of the meeting. If the restructuring
proposal includes interest assistance, the lender will provide the
items required by paragraph (d) of this section in addition to those
items required by Sec. 762.145. Liquidation must not be initiated,
except in accordance with Sec. 762.145(b)(3)(v).
(h) Cancellation of interest assistance agreement. The interest
assistance agreement is incontestable except for fraud or
misrepresentation, of which the lender and borrower have actual
knowledge at the time that the interest assistance agreement is
executed, or which the lender or borrower participates in or condones.
(i) Adjustment of assistance level between review dates. After the
initial or renewal request for interest assistance is processed, no
adjustments can be made until the next review or adjustment date except
when necessary to service the loan with a rescheduling or deferral.
(j) Excessive interest assistance. Upon written notice to the
lender, borrower and any holder, the Agency may amend or cancel the
interest assistance agreement and collect from the lender any amount of
interest Assistance granted which resulted from incomplete or
inaccurate information, an error in computation, or any other reason
which resulted in payment that the lender was not entitled to receive.
(k) The Deputy Administrator for Farm Loan Programs has the
authority to grant an exception to any requirement involving interest
Assistance if it is in the best interest of the Government.
Secs. 762.151-762.159 [Reserved].
Sec. 762.160 Sale, assignment and participation.
(a) The following general requirements apply to selling, assigning
or participating guaranteed loans.
(1) Subject to Agency concurrence, the lender may sell, assign or
participate all or part of the guaranteed portion of the loan to one or
more holders at or after loan closing, only if the loan is not in
default. However, a line of credit can be participated, but not sold or
assigned.
(2) The Agency may refuse to execute the Assignment of Guarantee
and prohibit the sale in case of the following:
(i) The Agency purchased and is holder of a loan that was sold by
the lender that is requesting the assignment.
(ii) The lender has not complied with the reimbursement
requirements of Sec. 762.146(c)(7), except when the 180 day
reimbursement or liquidation requirement has been waived by the Agency.
(3) The lender will provide the Agency with copies of all
appropriate forms used in the sale or assignment.
(4) The guaranteed portion of the loan may not be sold or assigned
by the lender until the loan has been fully disbursed to the borrower,
except a line of credit may be participated prior to being fully
advanced.
(5) The lender is not permitted to sell, assign or participate any
amount of the guaranteed or unguaranteed portion of loan to the loan
applicant or borrower, or members of their immediate families, their
officers, directors, stockholders, other owners, or any parent,
subsidiary, or affiliate.
(6) Upon the lender's sale or assignment of the guaranteed portion
of the loan, or participation of the line of credit, the lender will
remain bound to all obligations indicated in the Guarantee, lender's
agreement, the Agency program regulations, and to future program
regulations not inconsistent with the provisions of the Lenders
agreement. The lender retains all rights under the security instruments
for the protection of the lender and the United States.
(b) The following will occur upon the lender's sale or assignment
of the guaranteed portion of the loan:
(1) The holder will succeed to all rights of the Guarantee
pertaining to the portion of the loan purchased.
(2) The lender will send the holder the borrower's executed note
attached to the Guarantee.
(3) The holder, upon written notice to the lender and the Agency,
may assign the unpaid guaranteed portion of the loan. The holder must
sell the guaranteed portion back to the original lender if requested
for servicing or liquidation of the account.
(4) The guarantee or assignment of guarantee in the holder's
possession does not cover:
(i) Interest accruing 90 days after the holder has demanded
repurchase by the lender, except as provided in the assignment of
guarantee and Sec. 762.144(c)(3)(iii).
(ii) Interest accruing 90 days after the lender or the Agency has
requested the holder to surrender evidence of debt repurchase, if the
holder has not previously demanded repurchase.
(c) In a participation, the lender sells an interest in a loan but
retains the note, the collateral securing the note, and all
responsibility for loan servicing and liquidation. The guarantee does
not encompass the participant.
(1) The lender must retain at least 10 percent of the total
guaranteed loan amount from the unguaranteed portion of the loan in its
portfolio, except when the loan guarantee exceeds 90 percent, the
lender must retain the total unguaranteed portion.
(2) Participation with a lender by any entity does not make that
entity a holder or a lender as defined in this part.
(d) Negotiations concerning premiums, fees, and additional payments
for loans are to take place between the holder and the lender. The
Agency will participate in such negotiations only as a provider of
information.
[[Page 7402]]
7 CFR Chapter XVIII
PART 1980--GENERAL
2. The authority citation for part 1980 continues to read as
follows:
Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 42 U.S.C. 1480.
Subpart A--General
3. Revise Sec. 1980.1 to read as follows:
Sec. 1980.1 Purpose.
This subpart contains the general regulations and prescribed forms
which are applicable to Community Programs Guaranteed Loans under
subpart I of this part.
4. Amend Sec. 1980.6 as follows:
a. Remove in paragraph (a) the definitions of ``Conditional
Commitment (Farmer Programs) (Form FmHA or its successor agency under
Pub.L.103-354 1980-15),'' ``Contract of Guarantee (Line of Credit)(Form
FmHA or its successor agency under Pub.L. 103-354 1980-27),''
``Guaranteed line of credit,'' and ``Line of credit agreement'';
b. Remove in paragraph (a), in the definition of ``Guaranteed
loan,'' the phrase ``or Form FmHA 1980-38,'';
c. Remove in paragraph (b), the abbreviations ``ASCS,'' ``CLP,''
``EM,'' ``FO,'' ``OL,'' ``OL-Y,'' ``RL,'' and ``SW''; and
d. In paragraph (a), remove the definition of ``Lender's Agreement
(Forms FmHA or its successor agency under Pub.L. 103-354 449-35 or
1980-38)'' and add a new definition to read as follows:
Sec. 1980.6 Definitions and abbreviations.
(a) * * *
Lender's Agreement (Form RD 449-35). The signed agreement between
Rural Development and the lender setting forth the lender's loan
responsibilities when the Loan Note Guarantee is issued.
* * * * *
Sec. 1980.11 [Amended]
5. Amend Sec. 1980.11 as follows:
a. In the first sentence, remove the phrase ``and Contract of
Guarantee'' and revise the word ``constitute'' to read ``constitutes'';
b. In the second sentence, remove the phrase ``, Contract of
Guarantee'';
c. In the fifth sentence, remove the phrase ``or Contract of
Guarantee''; and
d. Remove the third and sixth sentences.
6. Amend Sec. 1980.13 as follows:
a. In the introductory text to paragraph (b), remove the fourth
sentence; and
b. Revise the introductory text of paragraph (b)(4) to read as
follows:
Sec. 1980.13 Eligible lenders.
* * * * *
(b) * * *
(4) Conflict of interest. The Agency shall determine whether such
ownership or business dealings are sufficient to result in a conflict
of interest or an apparent conflict of interest. All lenders will, for
each proposed loan, inform the Agency in writing and furnish such
additional evidence as the Agency requests as to whether and the extent
for those loans covered by Form RD 449-35, the lender or its principals
or officers (including immediate family) or the borrower or its
principals or officers (including immediate family) hold any stock or
other evidence of ownership in the other.
* * * * *
7. Revise the last sentence of the introductory text of
Sec. 1980.20(a) to read as follows:
Sec. 1980.20 Loan guarantee limits.
(a) * * * Also, the maximum loss covered by Form RD 449-34
(available in any Agency office) can never exceed the lesser of:
* * * * *
8. Revise Sec. 1980.21 to read as follows:
Sec. 1980.21 Guarantee fee.
The fee will be the applicable rate multiplied by the principal
loan amount multiplied by the percent of guarantee, paid one time only
at the time the Loan Note Guarantee is issued.
(a) The fee will be paid to the Agency by the lender and is
nonreturnable. The lender may pass on the fee to the borrower.
(b) Guarantee fee rates are specified in exhibit K of RD
Instruction 440.1 (available in any Rural Development Office).
9. Amend Sec. 1980.22 as follows:
a. In the introductory text of paragraph (b) and in paragraph
(b)(3), remove the phrase ``or Contract of Guarantee''; and
b. Revise paragraph (a) to read as follows:
Sec. 1980.22 Charges and fees by lender.
(a) Routine charges and fees. The lender may establish the charges
and fees for the loan, provided they are the same as those charged
other applicants for similar types of transactions. ``Similar types of
transactions'' means those transactions involving the same type of loan
requested for which a non-guaranteed loan applicant would be assessed
charges and fees.
* * * * *
Sec. 1980.46 [Removed and reserved]
10. Sec. 1980.46 is removed and reserved.
Sec. 1980.60 [Amended]
11. Amend Sec. 1980.60 as follows:
a. In the heading, remove the phrase ``or Contract of Guarantee'';
b. In the introductory text of paragraph (a), in the second
sentence, remove the phrase ``For all other loans, Form FmHA or its
successor agency under Public Law 103-354'' to read and in its place
add ``Form'',
c. In paragraph (a)(1), remove the phrases ``or line of credit''
and ``or Conditional Commitment for Contract of Guarantee'' and revise
the phrase ``FmHA or its successor agency under Public Law 103-354'' to
read ``the Agency'';
d. In paragraphs (a)(6) and (a)(7), remove the phrases ``or line of
credit'';
e. In paragraph (a)(9), remove the phrase ``joint operation, (for
Farmer Program loans only),'';
f. In paragraphs (a)(10) and (a)(11), remove the phrases ``or
Conditional Commitment for Contract of Guarantee'';
g. In paragraph (a)(12), remove the second sentence;
h. In paragraph (b), remove the phrase ``or Contract of
Guarantee''; and
i. In paragraph (c), remove the phrase ``or Form FmHA or its
successor agency under Public Law 103-354 1980-38'' at the end.
Sec. 1980.61 [Amended]
12. Amend Sec. 1980.61 as follows:
a. In the heading, remove the phrase ``Contract of Guarantee'';
b. In the first sentence of paragraph (a)(1), remove the phrase
``Except for Farmer Programs loans, the'' and add in its place ``The'';
c. Remove paragraph (a)(2) and redesignate paragraph (a)(3) as
paragraph (a)(2);
d. In newly redesignated paragraph (a)(2), remove the phrase ``or
Contract of Guarantee;''
e. In paragraph (b)(1) remove the phrase ``or Form FmHA or its
successor agency under Public Law 103-354 1980-38'';
f. In paragraphs (b)(3) and (4), remove the phrases ``or
Sec. 1980.119 of subpart B of this part,'';
g. Remove paragraph (c) and redesignate paragraphs (d) through (h)
as paragraphs (c) through (g), respectively;
h. In newly redesignated paragraph (c), remove the last sentence;
i. In newly redesignated paragraph (d), remove the phrase ``or
Contract of Guarantee'' from the first sentence;
[[Page 7403]]
j. In newly redesignated paragraph (f), remove the phrase ``or
Contract of Guarantee''
k. In newly redesignated paragraph (g), remove the phrases ``or
Form FmHA or its successor agency under Public Law 103-354 1980-38''
and ``the Contract of Guarantee,'' from the last sentence.
Sec. 1980.62 [Amended]
13. Amend Sec. 1980.62 as follows:
a. In the first and third sentences, remove the phrase ``or
Sec. 1980.119 of subpart B of this part''; and
b. Remove the last sentence.
Sec. 1980.63 [Amended]
14. Amend Sec. 1980.63(a) to remove the phrase ``or I.D.6. of Form
FmHA or its successor agency under Public Law 103-354 1980-38''.
Sec. 1980.64 [Amended]
15. Amend Sec. 1980.64 as follows:
a. In paragraph (a), remove the phrase ``or paragraph I.D.6. of
Form FmHA or its successor agency under Public Law 103-354 1980-38'';
and
b. In paragraph (b), remove the phrase ``or line of credit''
wherever it occurs in the first sentence.
Sec. 1980.65 [Amended]
16. Amend Sec. 1980.65 to remove the phrase ``, or for Farmer
Programs Loans, Sec. 1980.136 of subpart B of this part''.
Sec. 1980.66 [Amended]
17. Amend Sec. 1980.66 to remove the phrase ``, or paragraph
I.D.6.(b) of Form FmHA or its successor agency under Public Law 103-354
1980-38''.
Sec. 1980.67 [Amended]
18. Amend Sec. 1980.67 as follows:
a. In paragraph (a), remove the first sentence; and
b. In paragraph (b), remove the phrase ``or line of credit''.
Sec. 1980.68 [Amended]
19. Amend Sec. 1980.68 as follows:
a. In the heading, remove the phrase ``or Contract of Guarantee'';
b. In the first sentence, remove the phrase ``or Contract(s) of
Guarantee'';
c. In the second sentence in the parentheticals, remove the phrase
``, or paragraph 6 of Form FmHA or its successor agency under Public
Law 103-354 1980-27'';
d. In the third sentence, remove the phrases ``or line(s) of
credit,'' ``or Contract(s) of Guarantee,'' and ``or Form FmHA or its
successor agency under Public Law 103-354 1980-27''; and
e. Remove the last two sentences.
Sec. 1980.83 [Amended]
20. Amend Sec. 1980.83 (a) to remove the second sentence.
Sec. 1980.84 [Amended]
21. Amend Sec. 1980.84 as follows:
a. In the heading, remove the phrase ``or line of credit'';
b. Remove the phrases ``Contract of Guarantee'' and ``or Contract
of Guarantee'' from the first sentence of paragraph (b)(1)(iv);
b. Remove the phrase ``Contract of Guarantee'' from paragraph
(b)(1)(v); and
c. Remove the phrase ``or Sec. 1980.119 of subpart B of this part''
from the first and fourth sentences in paragraph (b)(4).
Appendices D-L to Subpart A [Removed]
22. Amend part 1980, subpart A by removing Appendices D through L.
Subpart B [Removed and reserved]
23. Subpart B (Secs. 1980.101-1980.200 and Exhibits A through G) is
removed and reserved.
Signed in Washington, D.C., on January 19, 1999.
James W. Schroeder,
Acting Under Secretary for Farm and Foreign Agricultural Services.
Jill Long-Thompson,
Under Secretary for Rural Development.
[FR Doc. 99-3256 Filed 2-8-99; 4:57 pm]
BILLING CODE 3410-05-P
