[Federal Register Volume 63, Number 79 (Friday, April 24, 1998)]
[Rules and Regulations]
[Pages 20295-20299]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-10902]
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Rules and Regulations
Federal Register
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Federal Register / Vol. 63, No. 79 / Friday, April 24, 1998 / Rules
and Regulations
[[Page 20295]]
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DEPARTMENT OF AGRICULTURE
Rural Housing Service
Rural Business--Cooperative Service
Rural Utilities Service
Farm Service Agency
7 CFR Parts 1962, 1965, and 1980
RIN 0560-AE92
Subordination of Direct Loan Basic Security To Secure a
Guaranteed Line of Credit
AGENCIES: Rural Housing Service, Rural Business--Cooperative Service,
Rural Utilities Service, Farm Service Agency, USDA.
ACTION: Final rule.
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SUMMARY: This rule revises Farm Service Agency (FSA) regulations
regarding loan security servicing in two ways that are intended to
increase the use of subordinations to move direct farm loan program
borrowers to the private sector. First, the Agency will allow
subordinations of direct loan basic chattel and real estate security if
necessary to secure a guaranteed operating line of credit. Second, this
rule revises FSA farm loan regulations to allow subordination of Agency
loan security so another lender may refinance a borrower's debt. This
change is needed because recent legislation places restrictions on the
uses of direct loans for refinancing.
EFFECTIVE DATE: The effective date of this rule is May 26, 1998.
FOR FURTHER INFORMATION CONTACT: Phillip Elder, Senior Loan Officer,
United States Department of Agriculture, Farm Service Agency, Farm Loan
Programs Loan Servicing Division, 1400 Independence Avenue, SW, STOP
0523, Washington, D.C. 20250-0523. Telephone (202) 690-4012. Electronic
mail: pelder@wdc.fsa.usda.gov.
SUPPLEMENTARY INFORMATION:
Executive Order 12866
This rule has been reviewed under E.O. 12866 and was determined to
be not significant.
Executive Order 12372
1. For the reasons set forth in the Notice related to 7 CFR part
3015, subpart V (48 FR 29115, June 24, 1983), Farm Ownership Loans,
Farm Operating Loans, and Emergency Loans are excluded from the scope
of E.O. 12372, which requires intergovernmental consultation with state
and local officials.
2. The Soil and Water Loan Program is subject to and has met the
provisions of E.O. 12372.
Federal Assistance Program
These changes affect the following FSA programs as listed in the
Catalog of Federal Domestic Assistance:
10.404--Emergency Loans
10.406--Farm Operating Loans
10.407--Farm Ownership Loans
10.416--Soil and Water Loans
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, Pub. L. 91-190, and 7 CFR part 1940, subpart G, an Environmental
Impact Statement is not required.
Executive Order 12988
This final 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.
Regulatory Flexibility Act
In compliance with the Regulatory Flexibility Act (5 U.S.C. 601-
602), the undersigned has determined and certified by signature of this
document that this rule will not have a significant economic impact on
a substantial number of small entities. This rule does not involve a
new or expanded program and new provisions included in this rule will
not impact a substantial number of small entities to a greater extent
than large entities. Although it is the intent of this rule to move
direct loans to guaranteed loans, participation is voluntary and
requires no action on the part of small entities. Large entities are
subject to these rules to the same extent as small entities. Therefore,
a regulatory flexibility analysis was not performed.
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.
This 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.
Paperwork Reduction Act
The amendments to 7 CFR parts 1962, 1965 and 1980 set forth in this
final rule require no revisions to the information collection
requirements that were previously approved by OMB under the provisions
of 44 U.S.C. chapter 35. A proposed rule containing an estimate of the
burden impact of this rule was published on September 9, 1997 [62 FR
47384, 47385]. No comments on the burden estimate were received.
Discussion of Comments Received
The Agency received comments on the proposed rule (62 FR 47384-
47388) from five parties, including FSA employees, employee
organizations, a commercial bank, and the American Banker's
Association. All comments received were in support of the
[[Page 20296]]
proposed changes and recommended their adoption with a few
clarifications.
Two commenters suggested clarification of the excess security
requirement proposed for Sec. 1980.108(a)(1)(vi)(A) or removal of the
requirement entirely. This comment was seriously considered but not
adopted. The Agency proposed to change its regulations to allow a
combination guaranteed loan and subordination of direct loan security
because lenders in selected areas of the country were reluctant to
provide farmers with a line of credit secured only by planned crop
production, even when the loan was 90 percent guaranteed against loss
by the government. We understand from industry advocates that this
reluctance is due to the large annual fluctuations in crop income
experienced in those areas. Because the risk of loss on these lines of
credit is inordinately large, as evidenced by the policies of the local
lenders, the Agency felt it was necessary to restrict these combination
subordination and guarantees to those direct loan borrowers whose loans
are well secured in order to protect the Government's interest.
However, the Agency has clarified this paragraph to require that the
total unpaid balance of the direct loan be less than or equal to 75
percent of the value of the security for the direct loan, excluding the
value of growing crops and planned production at the time of the
subordination. The Agency also clarified that a lender making the
subject guaranteed loan is responsible for obtaining any appraisals
necessary to document compliance with this provision.
Two commenters also indicated confusion about proposed
Sec. 1962.30(a)(3) and questioned the need for a separate provision for
a subordination to purchase crop insurance. The Agency agrees. Since
Sec. 1962.30(a)(2) allows a subordination for any authorized direct
loan purpose and the payment of crop insurance premiums is an allowable
use of direct operating loan funds, the Agency agrees that paragraph
(a)(3) was redundant and has removed it accordingly.
Another commenter pointed out that proposed Sec. 1965.12 needed to
be clarified as to the allowable uses of Single Family Housing (SFH)
loan funds. Since the proposed rule was drafted, the Rural Housing
Service (RHS) promulgated new program regulations and is no longer
covered by part 1965, subpart A. Since FSA employees are not
responsible for servicing RHS loans, Sec. 1965.12(a)(9) has been
removed. This regulation still allows a subordination to be made for
the purpose of improving a farm residence in some instances under
Sec. 1965.12(a)(1) as an authorized direct loan purpose. FSA will
consider RHS debt with regard to subordinations as it would any other
lien.
The fourth comment received suggested that subordinations of direct
loan basic real estate security to secure a guaranteed line of credit
should be prohibited or very rare. This rule is being issued
specifically to allow subordinations of real estate to secure a
guaranteed loan. Regardless, the limitations included in
Sec. 1980.108(a) will allow subordinations of direct loan basic
security in only those cases where the likelihood of a Government loss
on the direct loan is small.
One commenter requested that the rule be revised to not require
that the Agency loan be secured after the subordination, but rather to
allow a subordination as long as the Agency's position is not damaged.
This comment was not adopted. The condition mentioned by the commenter
was not added as part of the proposed rule. Section 1965.12(a)(9)
provides that the Agency loan must still be adequately secured after
the subordination, or the value of the security will be increased by at
least the amount of advances made under the subordination. Also, this
requirement will not overly restrict the Agency's ability to make
subordinations under the authorities provided in this rule.
Another commenter suggested that the Agency require a formal
application for a subordination. The Agency currently requires
borrowers to submit a ``Request for Subordination, Release or
Consent,'' to be considered for a subordination. Therefore, this
comment was not adopted. However, the Agency agrees with the concerns
of the commenter that subordinations are not sufficiently recorded or
monitored. The Agency is exploring methods to improve its data on
subordinations and expects its internal records system to be revised
soon.
Finally, a commenter suggested that the county committee not be
required to make recommendations regarding subordinations. Proposed
Sec. 1965.12(a)(10) required, ``When the subordination will be used to
acquire land, the FSA county committee has made a favorable
recommendation.'' We agree with the commenter that county committee
concurrence with this loan servicing action is not necessary;
therefore, this provision has been removed.
In addition to these changes, the Agency has made several
administrative changes to the proposed rule. First, the Agency has
determined that in some instances an Agency subordination to allow the
borrower to obtain a loan from the Rural Housing Service or the
Commodity Credit Corporation may be prudent. Accordingly, the Agency
has removed proposed Sec. 1962.30(b)(6) which prohibited subordinations
to other USDA Agencies. The Agency will treat USDA agencies like other
Federal Agencies for subordination purposes.
Second, the Agency has removed proposed Sec. 1965.12(a)(3). This
section conditioned a subordination on it furthering the purpose of the
loan. A subordination is limited to eligible loan purposes; thus, this
provision was redundant. Taken together with the other conditions under
Sec. 1962.30 or 1965.12, any eligible loan purpose would further the
objectives of the loan.
Third, proposed Sec. 1965.12(a)(4) has been removed. The provision
required FSA to obtain as security an assignment of the beneficial
interest of any stock required in connection with a loan. This
requirement was included in previous versions of this regulation
because Farm Credit System (FCS) institutions required that a borrower
purchase stock in the local association. Agency experience indicates
that the assignment is unnecessary. The Farm Credit Administration
(FCA) requires a minimum purchase of $1,000 or 1 percent of the loan
amount. Local associations may require up to 5 percent of the loan
amount, but most associations are requiring only the minimum stock
purchase of $1,000. Consequently, the value of cooperative stock is
negligible and does not impact the Agency's decision to grant a
subordination. Besides, the treatment of the stock has no effect since
it is invariably applied to the FCS loan when it is paid in full.
Proceeds from the liquidation of a beneficial interest in a cooperative
generally have not been applied to an Agency loan as a result of this
requirement.
Fourth, proposed Sec. 1965.12(e) has been added to clarify the
appraisal requirements for a real estate security subordination.
Fifth, paragraphs (b)(6) and (7) and (e) and (f) were added to
section 1962.30 to make the chattel provisions consistent with the real
estate provisions in section 1965.12. Section 1962.20(f) requires a
chattel appraisal if the existing appraisal is more than 2 years old or
inadequate for the FSA official to make a subordination determination
under that section. The 2 year standard is consistent with current
chattel appraisal requirements under Sec. 1941.25. Paragraphs (a)(10)
and (11) were added
[[Page 20297]]
to section 1965.12 to make it consistent with section 1962.30.
Sixth, section 1962.30(b)(2) was clarified and 1965.12(a)(10) was
added to clarify that a subordination is provided to secure a specific
loan to be made and that the loan is to be made as soon as practical
after the subordination is granted. This change will clarify that a
subordination is approved only for a limited period. This limitation is
on the subordination form but is not currently contained in the
regulation.
Seventh, section 1980.108(a)(1)(iii) was revised to delete
subordination provisions now covered by paragraph (a)(1)(v) of that
section. The revision was inadvertently omitted from the proposed rule.
Finally, the Agency has revised proposed Sec. 1980.108(a)(1)(v) to
clarify that the conditions contained in Secs. 1962.30 and 1965.12 as
appropriate apply when the Agency subordinates its security interest in
direct loan security when a guaranteed loan is being made. This change
was made to allow removal of duplicative conditions under the
guaranteed loan provision. Proposed Sec. 1980.108 (a)(1)(vi)(K) has
been removed as unnecessary because the notification requirements of
Secs. 1980.145 and 1980.146 of the same subpart require specific lender
actions when a guaranteed loan becomes delinquent.
List of Subjects
7 CFR Part 1962
Crops, Government property, Livestock, Loan programs--Agriculture,
Rural areas.
7 CFR Part 1965
Real property--Foreclosure, Loan programs--Agriculture, Rural
areas.
7 CFR Part 1980
General--Agriculture, Loan programs--Agriculture, EM.
Accordingly, 7 CFR chapter XVIII is amended as follows:
PART 1962--PERSONAL PROPERTY
1. The authority citation for part 1962 continues to read as
follows:
Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 42 U.S.C. 1480.
Subpart A--Servicing and Liquidation of Chattel Security
2. Section 1962.30 is revised to read as follows:
Sec. 1962.30 Subordination and waiver of liens on chattel security.
(a) Purposes. Subject to the limitations set out in paragraph (b)
of this section, the Agency chattel liens may be subordinated to a lien
of another creditor in either of the following situations:
(1) The prior lien will soon mature or has matured and the prior
lienholder desires to extend or renew the obligation, or the obligation
can be refinanced. The relative lien position of the Agency must be
maintained; and
(2) The subordination will permit another creditor to refinance
other debt or lend for an authorized direct loan purpose.
(b) Conditions. Agency chattel liens may be subordinated to a lien
of another creditor if all of the following conditions are met:
(1) If the lien is on basic chattel security, the amount of
subordination is necessary to provide the lender with the security it
requires to make the loan;
(2) Approval of a subordination is limited to a specific amount and
the loan to be secured by the subordination is closed within a
reasonable time;
(3) Only one subordination to one creditor may be outstanding at
any one time in connection with the same security;
(4) The borrower has not been convicted of planting, cultivating,
growing, producing, harvesting or storing a controlled substance under
Federal or state law. ``Borrower'' for purposes of this provision,
specifically includes an individual or entity borrower and any member
stockholder, partner, or joint operator, of an entity borrower and any
member, stockholder, partner, or joint operator of an entity borrower.
``Controlled substance'' is defined at 21 CFR part 1308. The borrower
will be ineligible for a subordination for the crop year in which the
conviction occurred and the four succeeding crop years. Applicants must
attest on the Agency application form that it and its members, if an
entity, have not been convicted of such a crime;
(5) The loan funds will not be used in such a way that will
contribute to erosion of highly erodible land or conversion of wetlands
for the production of an agricultural commodity according to subpart G
of part 1940 of this chapter;
(6) The borrower can document the ability to repay the total amount
due under the subordination and pay all other debt payments scheduled
for the subject operating cycle; and
(7) The Agency loan is still adequately secured after the
subordination, or the value of the loan security will be increased by
at least the amount of the advances to be made under the terms of the
subordination.
(c) Subordination to make a guaranteed loan. In addition to the
requirements of this section, subordinations on chattel security to
make a guaranteed loan will be approved in accordance with
Sec. 1980.108 of subpart B of part 1980 of this chapter.
(d) Forms. Subordinations will be requested and executed on Agency
forms available in any Agency office or on any other form approved by
the Agency.
(e) Rescheduling of existing Agency debts. The Agency may consent
to rescheduling of an existing Agency debt when a subordination is
granted to the debt of another lender. The rescheduling will be allowed
only when the borrower cannot reasonably be expected to meet all
currently scheduled installments when due and the conditions of subpart
S of part 1951 of this chapter are met.
(f) Appraisal. The Agency will prepare a chattel appraisal report
when the existing appraisal report is more than 2 years old or is
inadequate to make the determination in this section. The Agency may
use an appraisal submitted by the borrower if it is substantially
similar to Form RD 440-21, ``Appraisal of Chattel Property,'' and
prepared by a licensed appraiser.
PART 1965--REAL PROPERTY
3. The authority citation for part 1965 continues to read as
follows:
Authority: 5 U.S.C. 301; 7 U.S.C. 1989 and 42 U.S.C. 1480.
Subpart A--Servicing of Real Estate Security for Farmer Program
Loans and Certain Note-Only Cases
4. Section 1965.12 is revised to read as follows:
Sec. 1965.12 Subordination of an Agency mortgage.
(a) Conditions. A subordination may be granted if all of the
following conditions are met:
(1) The subordination is to refinance debt or for an authorized
direct loan purpose;
(2) The Agency debt cannot be refinanced without a subordination;
(3) The borrower can document the ability to repay the total amount
due under subordination and pay all other debt payments scheduled for
the subject operating cycle;
(4) The loan funds will not be used in such a way that will
contribute to erosion of highly erodible land or conversion of wetlands
for the production of an agricultural commodity according to subpart G
of part 1940 of this chapter;
[[Page 20298]]
(5) Any planned development is performed in a manner directed by
the creditor and agreed to by the Agency and reasonably attains the
objectives of subpart A of part 1924 of this chapter;
(6) Funds to be used to develop or to acquire land will be
deposited in a supervised bank account that is subject to signature by
the Agency and the borrower, or in a similar arrangement, to ensure
that funds will be spent for the planned purposes;
(7) In cases of land purchase or exchange of property, the Agency
will obtain a valid mortgage on the acquired land. Title clearance and
loan closing will be required as for an initial or subsequent FO loan,
as appropriate;
(8) The borrower has not been convicted of planting, cultivating,
growing, producing, harvesting or storing a controlled substance under
Federal or state law. ``Borrower'' for purposes of this provision,
specifically includes an individual or entity borrower and any member
stockholder, partner, or joint operator, of an entity borrower and any
member, stockholder, partner, or joint operator of an entity borrower.
``Controlled substance'' is defined at 21 CFR part 1308. The borrower
will be ineligible for a subordination for the crop year in which the
conviction occurred and the four succeeding crop years. An applicant
must attest on the Agency application form that it and its members, if
an entity, have not been convicted of such a crime;
(9) The Agency loan is still adequately secured after the
subordination, or the value of the loan security will be increased by
at least the amount of the advances to be made under the terms of the
subordination;
(10) The subordination is limited to a specific amount and the loan
to be secured by the subordination is closed within a reasonable time;
and
(11) Only one subordination to one creditor may be outstanding at
any one time in connection with the same security.
(b) Subordination on real estate owned by an entity member.
Notwithstanding the provisions of paragraph (a) of this section, when
the borrower is an entity and the Agency has taken real estate as
additional security on property owned by an entity member, a
subordination for any authorized Farm Loan Programs loan purpose may be
approved when it is needed for the entity member to finance a separate
operation. The subordination, however, may be approved only if it does
not cause the unpaid principal and accrued interest balance of the
Agency loan to exceed the value of the loan security or otherwise
adversely affect the security.
(c) Request for subordination. A borrower must complete an
application provided by the Agency to receive consideration for a
subordination.
(d) Notice of foreclosure. The lienholder requesting the
subordination will agree to give notice of foreclosure as required by
the Agency.
(e) Appraisal. The Agency will prepare a current appraisal report
in accordance with part 1922, subpart E, of this chapter when property
is to be purchased or exchanged, or when the existing appraisal report
is more than 1 year old or is inadequate to make the determination
required in this section. The Agency may use the appraisal report
prepared for another lender if it complies with the requirements of
subpart E of part 1922 of this chapter.
(f) Reamortizing existing Agency debts. The Agency may consent to a
reamortization of an existing Agency debt when a subordination is
granted to the debt of another lender. The reamortization will be
allowed only when the borrower cannot reasonably be expected to meet
all currently scheduled installments when due and the conditions of
subpart S of part 1951 of this chapter are met.
(g) Subordination to make a guaranteed loan. In addition to the
requirements of this section, subordinations of liens on real estate
security to make a guaranteed loan will be approved in accordance with
Sec. 1980.108 of this chapter.
PART 1980--GENERAL
5. The authority citation for part 1980 continues to read as
follows:
Authority: 5 U.S.C. 301; 7 U.S.C. 1989 and 42 U.S.C. 1480
Subpart B--Farmer Programs Loans
6. Section 1980.108 is amended to add paragraphs (a)(1)(v) and
(a)(1)(vi), and to revise paragraphs (a)(1)(iii) and (d) to read as
follows:
Sec. 1980.108 General provisions.
(a) * * *
(1) * * *
(iii) When the Agency and the lender are involved in separate loans
to the same borrower, separate collateral must be clearly identified
for both the Agency's loan and the lender's loan. Different lien
positions on real estate are considered separate collateral.
* * * * *
(v) The Agency may subordinate its security interest on a direct
loan when a guaranteed loan is being made if the requirements of
Sec. 1962.30 or Sec. 1965.12 of this chapter, as appropriate, are met
and only in any the following circumstances:
(A) To permit a guaranteed lender to advance funds and perfect a
security interest in crops, feeder livestock, or livestock products,
(milk, eggs, wool, etc.);
(B) When the lender requesting the guarantee needs the
subordination of the Agency's lien position to maintain its lien
position when servicing or restructuring;
(C) 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
(D) To permit a Contract of Guarantee--Line of Credit to be
advanced for annual operating needs in accordance with
Sec. 1980.175(c)(2).
(vi) The Agency may subordinate its security in a direct loan under
paragraph (a)(1)(v)(D) of this section only when both of the following
additional conditions are met:
(A) The total unpaid balance of the direct loan is less than or
equal to 75 percent of the value of the security for the direct loan,
excluding the value of growing crops or planned production, at the time
of the subordination. This direct loan security value shall be
determined by an appraisal that complies with subpart E of part 1922 of
this chapter. This appraisal will be provided by the lender requesting
the guarantee. The lender may charge the applicant a reasonable fee for
the appraisal.
(B) The applicant cannot obtain sufficient credit through a
conventional guaranteed loan.
* * * * *
(d) Relationship between Agency loans, direct and guaranteed. A
guaranteed FO or OL loan may be made to an insured borrower with the
same type of direct loan provided:
(1) The outstanding combined direct and guaranteed FO or OL
principal balance owed by the loan applicant or owed by anyone who will
sign the note as cosigner may not exceed the authorized guaranteed loan
limit for that type of loan; and
(2) Chattel and real estate collateral must be separate and
identifiable so as to be discernible from the collateral pledged to the
Agency for a direct loan. Different lien positions on real estate are
considered separate and identifiable collateral.
7. Section 1980.175 is amended to add paragraph (h)(3) as follows:
Sec. 1980.175 Operating loans.
* * * * *
[[Page 20299]]
(h) * * *
(3) Subject to the requirements of this section, the Agency may
approve a Contract of Guarantee for a line of credit to be secured by
basic chattel or real estate security in which the Agency has
subordinated its lien position in accordance with Sec. 1980.108.
* * * * *
Signed in Washington, D.C., on April 10, 1998.
August Schumacher, Jr.,
Under Secretary, Farm and Foreign Agricultural Services.
Dated: April 10, 1998.
Jill Long Thompson,
Under Secretary, Rural Development.
[FR Doc. 98-10902 Filed 4-23-98; 8:45 am]
BILLING CODE 3410-05-U
