01-101. Implementation of Low-Documentation Direct Operating Loan (Lo-Doc) Regulations

AGENCIES:

Farm Service Agency, Rural Business-Cooperative Service, Rural Housing Service and Rural Utilities Service, USDA.

ACTION:

Interim rule with request for comments.

SUMMARY:

This rule amends the regulations governing the Farm Service Agency's direct operating loan (OL) program by simplifying the application process for certain farmers requesting assistance of $50,000 or less and for certain recurring OL applicants. By making FSA's direct OL program application process more consistent with standard industry practices, loan processing will be more efficient and less time consuming. This will decrease the time-frame for family-size farmers to receive their credit, thereby allowing them to conduct their farming operations in a more timely manner.

DATES:

Effective January 9, 2001. Comments on this rule and the information collections must be received on or before March 12, 2001 to be given full consideration.

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 a.m.-4:45 p.m., Eastern Standard Time, except holidays, at 1400 Independence Avenue, SW, Washington, DC 20250-0522.

FOR FURTHER INFORMATION CONTACT:

Michael Hinton, Branch Chief, Farm Service Agency; telephone: [phone]; Facsimile: 202-690-1117; E-mail: Mike—[e-mail].

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.

Regulatory Flexibility Act

This rule will not have a significant economic impact on a substantial number of small entities as defined in the Regulatory Flexibility Act, Public Law 96-534, as amended (5 U.S.C. 601) and does not impact small entities to a greater extent than large entities. Large entities are subject to these rules to the same extent as small entities. Therefore, a regulatory flexibility analysis was not performed.

Environmental Impact Statement

It is the determination of the issuing agency that this action is not a major Federal action significantly affecting the environment. Therefore, in accordance with the National Environmental Policy Act of 1969, Public Law 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 this rule: (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; and (3) administrative proceedings in accordance with 7 CFR parts 11 and 780 must be exhausted before bringing suit in court challenging action taken under this rule unless those regulations specifically allow bringing suit at an earlier time.

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), Public Law 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 analysis, 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 under 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.

Executive Order 13132

The policies contained in this rule do not have any substantial direct effect on States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. Nor does this rule impose substantial direct compliance costs on State and local governments. Therefore, consultation with the States is not required.

Paperwork Reduction Act

This interim rule does not impose any new information collection or recordkeeping requirements; however, the provisions of the rule do eliminate the need for some information previously collected and result in a revision to the number of estimated respondents from whom information will be collected. Therefore, the Agency is revising the information collection currently approved in support of the Direct Operating Loan program under the Office of Management and Budget (OMB) control number 0560-0178. OMB emergency clearance has been obtained to allow continued use of the affected regulations and forms under OMB control number 0560-0178.

SUPPLEMENTARY INFORMATION:

Title: Receiving and Processing Applications.

OMB Control Number: 0560-0178.

Expiration Date of Approval: April 30, 2000.

Type of Request: Revision and Extension of Currently Approved Information Collection.

Abstract: The information collected under OMB Control Number 0560-0178 is used in processing applications for direct FLP loans. Specifically, the Agency uses the information in making eligibility and financial feasibility determinations for direct operating, farm ownership, and emergency loans, as authorized under the Consolidated Farm and Rural Development Act. The specific information collected is business and entity supporting documentation on organizational structure and financial information, documentation of farm experience and training, verification that the applicant is unable to obtain credit elsewhere, historical financial and production records, and copies of any lease agreements or legal descriptions of real estate they own. The Lo-Doc application process will decrease collections required from applicants requesting operating loans of $50,000 or less, or recurring annual operating loans. Lo-Doc will decrease the burden on both FSA employees and customers. Specifically, for Lo-Doc application processing only the entity supporting documentation information from this collection may be required.

Estimate of Burden: Public reporting burden for this collection of information is estimated to average 1.7 hours per response.

Respondents: Individuals or households, businesses or other for profit, and farms.

Estimated Number of Respondents: 34,970.

Estimated Number of Responses: 73,708.

Estimated Total Annual Burden on Respondents: 119,412.

Comments are sought on these requirements including: (a) Whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility, (b) the accuracy of the agency's estimate of burden including the validity of the methodology and assumptions used; (c) ways to enhance the quality, utility and clarity of the information to be collected; (d) ways to minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collections techniques or other forms of information technology.

These comments should be sent to the Desk Officer for Agriculture, Office of Information and Regulatory Affairs, Office of Management and Budget, Washington, DC 20503 and to Michael Hinton, USDA, FSA, Farm Loan Programs, Loan Making Division, 1400 Independence Avenue, SW, STOP 0522, Washington DC 20250-0522. Comments regarding paperwork burden will be summarized and included in the request for OMB approval of the information collection. All comments will also become a matter of public record.

Discussion of the Interim Rule

Stress in the farm economy has significantly increased demand for FSA farm loans. The Agency must take steps to focus resources on larger, more complex cases that pose the highest risk to the government. The changes in documentation requirements will reduce the time for loan officials to review application information and make the necessary determinations. Decreasing the time required for FSA employees to reach both eligibility and feasibility determinations on lower risk loans increases the time available to concentrate on larger, higher risk loan applicants.

In fiscal year 1999, FSA made more than 16,000 direct OL's to farmers for a total of nearly $800 million. According to recent studies of FSA offices nationwide, the average FSA OL applicant expends 14.05 hours to complete the application to be submitted to FSA. Once this complete application is submitted to FSA another 39.55 hours is expended by FSA employees to reach both eligibility and feasibility determinations on each OL application.

Approximately 10,500, or 65 percent, of these applications are for loans of $50,000 or less. This group of applicants represents only 26 percent of the total direct OL dollars loaned in fiscal year 1999 and only 20 percent of the total FSA direct OL delinquency in dollars. These figures reflect the substantially lower risk involved with FSA direct OL's under $50,000 as compared to those FSA loans above this amount. The Lo-Doc loan regulations will primarily affect this group of FSA current and potential customers.

Reducing the application burden on both potential FSA customers and FSA employees will result in more timely assistance, so applicants will receive their FSA operating funds earlier in the production year. The most critical time period for farming operations nationwide is from pre-planting through planting seasons. This is also the peak demand period for operating capital in many types of farming operations. Without this proposed reduction in the application process many farmers would receive assistance so late in the year their production would be adversely affected, or they would otherwise go without credit for an extended period of time. For two years the farm economy has been in a continuing state of crisis due to excess supplies, weak foreign markets, and regional weather disasters. With the current financial difficulties facing agriculture, it is imperative that producers receive operating credit early in the spring season. Historical records reflect that the Agency approves the majority of OL's in the months of March and April. In order to meet the needs of farmers, the Agency is publishing this rule as an interim rule effective on date of publication. A delayed effective date, or publication of a proposed rule would adversely impact farmers as Lo-Doc OL's would not be available for the current operating season. Farmers eligible for FSA farm loans are unable to obtain credit elsewhere at reasonable rates and terms. Therefore, the Lo-Doc program needs to be effective upon publication. FSA, however, will accept comments for a 60 day comment period after publication to determine if the program should be subsequently modified.

General Changes

FSA is revising its direct OL program regulations to reduce the application requirements for certain operating loan requests of $50,000 or less and for certain annual OL requests from recurring applicants.

Under current regulations, the application requirements are the same for all OL requests regardless of the amount of the loan or whether it is an initial or subsequent loan for the applicant. For example, an applicant requesting an OL of $5,000 is required to submit the same amount of information as an applicant requesting a $200,000 OL. An FSA customer who has received several OL loans is required to submit the same information as a new applicant requesting an initial OL. This excess paperwork is time-consuming for both the farmer and the FSA employee, who could be helping less experienced farmers whose loans pose a higher risk to the Government. Less experienced farmers normally need more personal attention to make financial progress and be successful in graduating to commercial credit.

Loan applicants and Agency field personnel have identified several application requirements that are repetitive or do not significantly contribute to the Agency's ability to make a credit decision, such as always requiring verifications of employment and verifying the same debt in numerous ways. The Agency is amending its regulation to eliminate requirements that are repetitive or do not contribute significantly to a sound credit decision in light of the financial risk involved.

In addition, application requirements and loan purpose requirements are being amended as follows:

Application Requirements

Certain loan applicants submitting requests for operating loans of $50,000 or less will only be required to submit the following: a signed and dated FSA 410-1, “Request for Direct Loan Assistance,” a check or money order for credit report and lien filing fees, a Farm and Home Plan for the next operating cycle, acreage and lease information, and conservation compliance information. Additionally, applicants which are entities will be required to submit a list of owners, personal financial statements from the owners, and copies of the entities legal documents.

The FSA 440-32,“Statement of Debts and Collateral” form will no longer be required because several weeks often pass before creditors return them to FSA, thereby increasing the time required for determination of feasibility. Most of the information supplied by creditors on this form can be obtained by FSA from credit reports. The required use of the verification of employment form will also be eliminated. Employment, salary, and wage information is quickly and easily verified by credit reports, current payroll statements or IRS Forms W-2.

Certain recurring applicants requesting annual OL assistance will be required to submit a signed and dated FSA 410-1, a check or money order for credit report and lien filing fees, a Farm and Home Plan for the next operating cycle, and any information that has changed from the previous loan application, including acreage and lease information, and conservation compliance documentation.

For all applicants who apply under the Lo-Doc process, the Agency reserves the right to request additional information that would be required of a loan applicant under the normal process. The Agency will not require information beyond Lo-Doc requirements as a matter of course, but will request supporting documentation when information submitted deviates from local norms, conflicts with other available information, or otherwise creates the need for further documentation.

Qualification Requirements

Lo-Doc applicants requesting a loan of $50,000 or less must meet current eligibility requirements for FSA direct OL's listed in section 1941.12. In addition, the applicant must be current on all loan payments to FSA and all other creditors, must not have received primary loan servicing or disaster set-aside on any FSA debt within the past 5 years, and must owe FSA less than $100,000, including the new loan. These additional requirements are necessary to sufficiently lower the risk from an FSA credit standpoint to make a sound credit decision based on the reduced documentation.

Lo-Doc applicants requesting a recurring annual OL assistance must meet all current eligibility requirements for FSA direct operating loans as listed in § 1941.12 and, must have at least 2 years of annual OL history with FSA where the loans were timely repaid, be current on payments to all other creditors, and have not received primary loan servicing or disaster set-aside on any FSA debt within the past 5 years.

Applicants who cannot meet the criteria for these new application procedures may receive a regular OL provided they meet the current requirements in § 1941.12.

Loan Purposes

Lo-Doc OL's for $50,000 or less can be used for any authorized operating expense allowed in § 1941.16, except paragraph (i) for refinancing debts. This limitation is necessary because the need for refinancing is an indication of financial stress and, thus, a greater credit risk than other OL loan purposes. The Agency must perform additional analysis on those cases to help borrowers become successful and better understand the risk associated with each request.

Lo-Doc OL's issued to recurring applicants requesting annual OL assistance can only be used for any authorized annual operating expense allowed in paragraphs (c) and (h) of § 1941.16. Because these applicants have demonstrated that they are good operators who have repaid their annual operating loans, the Agency is reducing the paperwork requirements for them to obtain subsequent annual operating credit. Also, if they want operating credit for purposes other than annual operating they may qualify for the Lo-Doc OL under $50,000 loan purposes. For applicants that do not qualify under either of the Lo-Doc programs, the Agency feels that there is sufficient risk to warrant the Agency's continued collection of the same application materials currently required.

List of Subjects

7 CFR Part 1910

• Agriculture
• Credit
• Loan programs-housing and community development
• Low and moderate income housing
• Sex discrimination

7 CFR Part 1941

• Agriculture
• Crops
• Livestock
• Loan programs-rural areas
• Youth

Accordingly, 7 CFR chapter XVIII is amended as follows:

PART 1910—GENERAL

1. The authority citation for part 1910 continues to read as follows:

Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 42 U.S.C. 1480.

Subpart A—Receiving and Processing Applications

2. Amend § 1910.1 to add a new paragraph (f) to read as follows:

§ 1910.1

General.

* * * * *

(f) As used in this subpart, the abbreviation “Lo-Doc” means Low-Documentation and the abbreviation “OL” means Operating Loan.

3. Amend § 1910.4 as follows:

a. Revise the third sentence from the end of paragraph (b);

b. Redesignate paragraphs (c) through (k) as paragraphs (d) through (l); and

c. Add a new paragraph (c).

The addition and the revision read as follows:

§ 1910.4

Processing Applications.

* * * * *

(b) * * * A complete Farm Loan Programs application requires fulfillment of both the applicant and FSA responsibilities, except as provided in paragraph (c) of this section. ***

(c) Low-Documentation (Lo-Doc) Operating Loans:

(1) To qualify for loan processing under Lo-Doc provisions, an applicant must:

(i) Be current on all payments to all creditors including FSA (if an FSA borrower);

(ii) Have not received primary loan servicing or disaster set-aside on any FSA debt within the past 5 years; and

(iii) Meet one of the following criteria:

(A) The loan requested is $50,000 or less and the total outstanding FSA operating loan debt at the time of loan closing will be less than $100,000; or

(B) The loan is requested to pay annual operating expenses and the applicant is an existing FSA borrower who has received and repaid as scheduled, at least two previous annual operating loans from the agency.

(2) A complete Lo-Doc OL application will consist of the items listed in paragraphs (b)(1), (b)(2), (b)(9), (b)(10), and (b)(16) of this section. The Agency may require a Lo-Doc applicant to submit any other information listed under paragraph (b) of this section as needed to make a determination on the loan application.

* * * * *

PART 1941—OPERATING LOANS

4. The authority citation for part 1941 continues to read as follows:

Authority: 5 U.S.C. 301 and 7 U.S.C. 1989.

Subpart A—Operating Loan Policies, Procedures, and Authorizations.

5. Revise the introductory paragraph of § 1941.16 to read as follows:

§ 1941.16

Loan purposes.

An applicant who obtained a write-down under direct or guaranteed loan authorities is restricted to the purposes listed under paragraphs (c), (g), and (h) of this section. An applicant who qualifies for a Low-Documentation operating loan under § 1910.4(c)(1)(iii)(A) of subpart A of part 1910 may use loan funds for all authorized loan purposes except paragraph (i) of this section. An applicant who qualifies for a Lo-Doc loan under § 1910.4(c)(1)(iii)(B) 7 CFR may only use the loan funds for purposes listed under paragraphs (c) and (h) of this section. All other eligible applicants may request OL funds for any of the following purposes:

* * * * *

Signed in Washington, D.C., on December 21, 2000.

August Schumacher,

Under Secretary for Farm and Foreign Agricultural Services.