# Regulatory Streamlining of the Farm Service Agency's Direct Farm Loan Programs

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URL: https://www.frixlaw.com/law-library/documents/fr%3A04-1891

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** February 9, 2004
- **Citation:** 69 FR 6056

## Text

DEPARTMENT OF AGRICULTURE
Farm Service Agency
7 CFR Parts 761 through 769
RIN 0560-AF60
Regulatory Streamlining of the Farm Service Agency's Direct Farm Loan Programs

AGENCY:

Farm Service Agency, USDA.

ACTION:

Proposed rule.

SUMMARY:

The Farm Service Agency (FSA) proposes to streamline regulations governing the direct Farm Loan Programs. The proposed regulatory action will enable FSA to accomplish the following: Simplify and clarify direct loan regulations; implement the recommendations of the USDA Civil Rights Action Team; meet the objectives of the Paperwork Reduction Act of 1995; meet the goals and objectives of the National Performance Review; and separate FSA's direct Farm Loan Programs regulations from Rural Development mission area loan program regulations.

DATES:

Comments on this rule and on the information collections must be submitted by April 9, 2004 to be assured consideration.

ADDRESSES:

Address comments on, and alternatives to, the proposed rule to: Deputy Administrator for Farm Loan Programs, USDA/FSA/DAFLP/STOP 0520, 1400 Independence Avenue SW., Washington, DC 20250-0520. Comments on the information collection requirements of this proposed rule must be sent to the Office of Management and Budget (OMB) at the address listed in the Paperwork Reduction Act section of this preamble and sent to the Department address listed after the OMB address.

FOR FURTHER INFORMATION CONTACT:

William D. Cobb USDA/FSA/DAFLP/STOP 0520, 1400 Independence Avenue SW., Washington, DC 20250-0520; telephone (202) 720-1059; electronic mail:
bill_cobb@wdc.usda.gov.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This rule has been determined to be significant under Executive Order 12866 and was reviewed by OMB.

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 impose any new requirements on Agency applicants and borrowers. In some cases, existing information collections and regulatory requirements have been reduced as a result of streamlining the loan making and servicing application processes.

Environmental Impact Statement

FSA is completing an Environmental Assessment (EA) in accordance with the provisions of the National Environmental Policy Act of 1969 (NEPA), 42 U.S.C. 4321
et seq.
, the regulations of the Council on Environmental Quality (40 CFR parts 1500-1508) and the FSA regulations for compliance with NEPA, 7 CFR part 799 and part 1940, subpart G. The draft EA will be made available for public comment under a separate notice. The final EA will be completed before this rule is published as final.

Executive Order 13132

The policies contained in this rule do not have a 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.

Executive Order 12988

This rule has been reviewed in accordance with Executive Order 12988, Civil Justice Reform. In accordance with this 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; 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 contained in the Notice to 7 CFR part 3015, subpart V (48 FR 29115, June 24, 1983), the programs within this rule are excluded from the scope of E.O. 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 of $100 million or more in any 1 year. When such a statement is needed for a rule, section 205 of the UMRA requires FSA to prepare a written statement, including a cost benefit assessment, for proposed and final rules with “Federal mandates” that may result in such expenditures 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

Information collection requirements for the direct Farm Loan Programs are currently approved in numerous information collection dockets. Based on the proposed regulations, FSA will reduce the number of information collections by consolidating related collections in a manner that matches the organizational structure of the proposed CFR parts.

In accordance with the Paperwork Burden Act of 1995, FSA intends to request approval of the following information collections.

Title:
General Program Administration.

OMB Control Number:
0560-New.

Type of Request:
New Collection.

Abstract:
7 CFR 761, General Program Administration, establishes requirements within FSA's Farm Loan Programs that are applicable to both making and servicing direct loans. Information collections established by the regulation are necessary to ensure that program applicants and participants meet statutory eligibility requirements, loan funds are used for authorized purposes and the Government's interest in security is adequately protected. Specific information collection requirements include financial information in the form of a balance sheet and cash flow projection used in loan making and servicing decisions; information needed to establish joint bank accounts in which loan funds, proceeds derived from the sale of loan security or insurance proceeds may be deposited; collateral pledges from financial institutions when the balance of a supervised bank account will exceed $100,000; and documentation that

construction plans and specifications comply with state and local building standards. Existing collections applicable to FSA's Farm Loan Programs from OMB Control Numbers 0560-0154, 0575-0042, 0575-0064, and 0575-0158 will be consolidated in this docket. Burden associated with the Rural Development Agencies' information collections will remain under Control Numbers 0575-0042, 0575-0064, and 0575-0158.

Estimate of Burden:
Public reporting for this collection of information is estimated to average 51 minutes per response.

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

Estimated number of respondents:
70,290.

Estimated number of responses per respondent:
2.6.

Estimated total annual burden on respondents:
214,363.

Title:
Direct Loan Making.

OMB Control Number:
0560-New.

Type of Request:
New Collection.

Abstract:
7 CFR 764, Direct Loan Making, establishes the requirements for FSA's direct Farm Ownership, Operating, and Emergency loan programs. Information collections established in the regulation are necessary for the Agency to evaluate the loan applicant's request and determine if eligibility, loan repayment and security requirements can be met. Existing collections pertaining to direct loan making from OMB Control Numbers 0560-0157, 0560-0159, 0560-0162, 0560-0166, 0560-0167, 0560-0178, 0575-0087, 0575-0088, and 0575-0147 will be consolidated in this docket. Burden associated with the Rural Development Agencies' information collections will remain under Control Numbers 0575-0087, 0575-0088, and 0575-0147.

Estimate of Burden:
Public reporting for this collection of information is estimated to average 26 minutes per response.

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

Estimated number of respondents:
128,513.

Estimated number of responses per respondent:
3.38.

Estimated total annual burden on respondents:
177,150.

Title:
Direct Loan Servicing—Regular.

OMB Control Number:
0560-New.

Type of Request:
New Collection.

Abstract:
7 CFR 765, Direct Loan Servicing—Regular, establishes the requirements related to routine servicing actions associated with direct loans. Information collections established in the regulation are necessary for the Agency to monitor and account for loan security, including proceeds derived from the sale of security, and to process a borrower's requests for subordination or partial release of security. Information collections associated with the statutory requirement that borrowers be reviewed for graduation to commercial credit are also established in the regulation. Existing collections pertaining to routine direct loan servicing actions from OMB Control Numbers 0560-0158, 0560-0171, 0575-0075, and 0575-0093 will be consolidated in this docket. Burden associated with the Rural Development Agencies' information collections will remain under Control Numbers 0575-0075, and 0575-0093.

Estimate of Burden:
Public reporting for this collection of information is estimated to average 38 minutes per response.

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

Estimated number of respondents:
58,875.

Estimated number of responses per respondent:
1.

Estimated total annual burden on respondents:
105,547.

Title:
Direct Loan Servicing—Special.

OMB Control Number:
0560-New.

Type of Request:
New Collection.

Abstract:
7 CFR 766, Direct Loan Servicing—Special, establishes the requirements for servicing financially distressed and delinquent direct loan borrowers. The information collections established in the regulation are necessary for the Agency to evaluate a borrower's request for disaster set-a-side, primary loan servicing (including reamortization, rescheduling, deferral, write down and conservation contracts), and homestead protection. Existing collections pertaining to servicing financially distressed and delinquent direct loan borrowers from OMB Control Numbers 0560-0160, 0560-0161, and 0560-0164 will be consolidated in this docket.

Estimate of Burden:
Public reporting for this collection of information is estimated to average 31 minutes per response.

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

Estimated number of respondents:
11,595.

Estimated number of responses per respondent:
2.39.

Estimated total annual burden on respondents:
14,869.

Title:
Inventory Property Management.

OMB Control Number:
0560-New.

Type of Request:
New Collection.

Abstract:
7 CFR 767, Inventory Property Management, establishes the requirements for the management, lease and sale of security property acquired by the Agency. Information collections established in the regulation are necessary for the Agency to determine an applicant's eligibility to lease or purchase inventory property; and to ensure payment of the lease or purchase amount. Existing collections pertaining to the lease and sale of property acquired under FSA's Farm Loan Programs from OMB Control Number 0575-0110 will be incorporated in this docket. Burden associated with the Rural Development Agencies' information collections will remain under Control Number 0575-0110.

Estimate of Burden:
Public reporting for this collection of information is estimated to average 40 minutes per response.

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

Estimated number of respondents:
212.

Estimated number of responses per respondent:
1.

Estimated total annual burden on respondents:
243.

The Agency is soliciting comments on the burden of all of the above regarding: (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 collection 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 William D. Cobb, USDA/FSA/DAFLP/STOP 0520, 1400 Independence Avenue, SW., Washington, DC 20250-0520. Copies of the information collections may be obtained from Mr. Cobb at the above address. All comments will become a matter of public record.

Federal Assistance Programs

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

Government Paperwork Elimination Act (GPEA)

The Agency is committed to compliance with GPEA, which requires Government agencies to provide the public the option of submitting or transacting business electronically to the maximum extent possible.

Discussion of the Proposed Rule

Background

FSA proposes to move the majority of its Farm Loan Programs direct loan making and servicing rules from Chapter XVIII to Chapter VII of the Code of Federal Regulations (CFR). Prior to the Department of Agriculture Reorganization Act of 1994 (1994 Act), Chapter XVIII was assigned to the Farmers Home Administration (FmHA) and Chapter VII was assigned to the Agricultural Stabilization and Conservation Service (ASCS). Under the provisions of the 1994 Act, both FmHA and ASCS were abolished. FmHA's Farm Loan Programs and ASCS's programs were consolidated under the newly created FSA while the remaining FmHA programs were transferred to one of the following Rural Development mission area agencies: Rural Business Cooperative Service, Rural Housing Service, and Rural Utilities Service. Chapter VII of the CFR is now assigned to FSA while Chapter XVIII is shared by FSA and the Rural Development mission area agencies.

The following policies are not addressed in this proposed rule but will be addressed in separate rulemakings:

1. Designation of Disaster Areas—The designation of disaster areas will be moved from subpart A of 7 CFR 1945 to 7 CFR 791.

2. Offset of Federal payments—The policies pertaining to the offset of Federal payments for application to outstanding Farm Loan Programs debts contained in subpart C of 7 CFR 1951 will be consolidated with 7 CFR 792.

3. Environmental Policies—The environmental policies contained in subpart G of 7 CFR 1940 will be consolidated with 7 CFR 799. This proposed rule makes reference to part 799. If part 799 is not amended prior to the rule finalizing this proposed rule, the Agency will continue to use part 1940, subpart G.

4. Debt Settlement Policies—The debt settlement policies contained in subpart B of 7 CFR 1956 will be consolidated with 7 CFR 792. This proposed rule makes reference to part 792. If part 792 is not amended prior to the rule finalizing this proposed rule, the Agency will continue to use part 1956, subpart B.

Consolidation and Reorganization

The Farm Loan Programs direct loan making and servicing rules are currently in numerous parts of Chapter XVIII, making their use difficult to all but the most well-informed user. The Agency proposes to consolidate and reorganize these rules in an orderly and logical manner. Part 761 of Chapter VII is entitled General Program Administration and contains the rules that, in general, apply either to both guaranteed and direct loans, or to both direct loan making and direct loan servicing. Part 762, which contains regulations pertaining to the Guaranteed Loan Program, was published as a final rule on February 12, 1999 (64 FR 7358-7403). Part 763 is reserved for future use. Part 764 is entitled Direct Loan Making and consists of the regulations governing the origination of direct loans. Part 765, Regular Servicing, contains the regulations related to servicing for direct loans. Regulation policies for distressed and delinquent borrowers with direct loans are contained in part 766, Special Servicing. Part 767 is entitled Inventory Property Management and contains regulations pertaining to security property that is abandoned by the borrower or acquired by the Agency. Parts 768 and 769 are reserved for future use. The table shown below illustrates how the existing CFR parts will be consolidated within the proposed parts:

Proposed CFR parts
Existing CFR subparts from which FSA provisions will be consolidated

7 CFR 761—General
7 CFR 1806-A, 1806-B, 1901-A, 1901-F, 1902-A, 1924-A, 1924-B, 1940-Q.

764—Direct Loan Making
7 CFR 1910-A, 1927-B, 1941-A, 1941-B, 1943-A, 1943-B, 1945-D.

765—Direct Loan Servicing—Regular
7 CFR 1925-A, 1950-C, 1951-A, 1951-D, 1951-F, 1951-J, 1962-A, 1965-A.

766—Direct Loan Servicing—Special
7 CFR 1951-L, 1951-S, 1951-T, 1962-A.

767—Inventory Property Management
7 CFR 1955-A, 1955-B, 1955-C.

By reorganizing the loan making and servicing rules in this manner, the general public, including loan applicants and borrowers, and the Agency can more easily find needed information. In addition, this structure helps to eliminate redundancies and, thereby, avoid inconsistencies. The proposed rule references rather than repeats other parts of the chapter, thereby, making it easier to incorporate future policy changes.

Removal of Internal and Administrative Procedures

The existing regulations often describe in detail the Agency's internal and administrative procedures for implementing Farm Loan Programs. This approach not only contributes to a lengthy body of regulations, but also creates a barrier to quickly improving procedures which have no impact on loan applicants and borrowers. The Agency has to use the rulemaking process to modify procedures, thereby, adding time and expense to prepare and implement such changes. In contrast to the current regulations, the proposed rule focuses on Agency policies impacting loan applicants and borrowers. The Agency is moving the administrative procedures to a series of new handbooks which will parallel the topics in this proposed rule and will be issued simultaneously with the final rule.

Streamlining of Program Requirements

While consolidating the loan making and servicing regulation parts, the Agency also is streamlining its Farm Loan Programs policies. With the aid of working groups of both Headquarters and Field staff, the Agency is proposing policy changes consistent with the existing statutory authority. The Agency also proposes to clarify certain regulations that have multiple interpretations, amend others that have led to unintended consequences, and revise policies to reduce burdens on loan applicants and borrowers. In

addition, the proposed rule initiates action toward achieving recommendation number 56 of the USDA Civil Rights Action Team Report dated August 1997, which mandated that agencies “streamline program regulations and application forms to make USDA programs easily accessible to all customers.” The substantive changes are discussed in this preamble by regulation section.

Removal of Obsolete Parts

As a result of the 1994 Act, some of the CFR subparts published by FmHA continue to be used by FSA and one or more of the Rural Development mission area agencies, while others are used exclusively by FSA. When the final rule for this proposed rule is published, FSA will remove the subparts which are used only by FSA. The following subparts will be removed in the final rule: 1910-A, 1924-B, 1941-A, 1941-B, 1943-A, 1943-B, 1951-J, 1951-L, 1951-S, 1951-T, and 1965-A.

National Performance Review Objectives

Under the National Performance Review initiative, Federal agencies were charged with “creating a government that works better and costs less.” Federal agencies were commissioned to focus on results rather than procedures, empower employees, put customers first, and cut red tape. The proposed rule responds to this challenge by eliminating unnecessary procedural or internal requirements, clarifying regulations with multiple interpretations, and adding flexibility to allow employees to address each customer's unique needs.

Farm Security and Rural Investment Act of 2002

The proposed rule contains all the provisions from the Farm Security and Rural Investment Act of 2002 applicable to Farm Loan Programs. Those provisions were published in the proposed rule of April 9, 2003, (68 FR 17316-17320), entitled “2002 Farm Bill Regulations—Loan Eligibility Provisions,” and the final rule of February 18, 2003, (68 FR 7693-7701), entitled “2002 Farm Bill Regulations—General Credit Provisions.”

Part 761—General Program Administration

Abbreviations and Definitions (Section 761.2)

The Agency proposes to move all abbreviations and definitions applicable to Farm Loan Programs to this section. By including all abbreviations and definitions in a single section of the CFR, the Agency will eliminate the need for the general public to search multiple CFR subparts and parts to determine if and where a term is defined. Other CFR parts applicable to Farm Loan Programs will refer the reader to this section for an explanation or definition of an abbreviation or term.

The Agency proposes to replace the term “nonfarm enterprise” with the term “non-eligible enterprise.” Existing direct loan making regulations identify authorized purposes for which loan funds may be used. While the Agency defines the term nonfarm enterprise, the regulations do not clearly state that loan funds may not be used to finance nonfarm enterprises, nor do they identify purposes for which loan funds may not be used. The proposed rule defines the term non-eligible enterprise and clearly states that loan funds may not be used to finance a non-eligible enterprise. In addition, the term non-farm enterprise has resulted in confusion as several of the enterprises listed in the definition are farm or agriculture related, but are simply not an authorized loan purpose. The Agency believes the term non-eligible enterprise more accurately reflects that enterprises identified in the definition may not be financed with Agency loans funds. Furthermore, the Agency proposes to modify the definition by categorizing the examples under the production of exotic or non-farm animals; production of non-farm goods or services; or processing of farm products.

The Agency also proposes to modify the definition of “family farm.” The definition contained in the existing regulation provides broad guidelines for determining if a farming operation is a family farm; however, this has resulted in inconsistencies in applying the definition on a nationwide basis. The proposed definition establishes that the typical year gross income of the operation cannot exceed at the greater of $750,000 in annual sales or the 95 percentile of farms in the state with sales in excess of $10,000, based on the most recently published farm data and survey of farm economic factors published by the National Agricultural Statistics Service, USDA. This calculation will be available in each Agency Office. Consideration of the typical year annual gross farm income of the particular state involved will allow for necessary regional differences in what is considered a “family farm” but is based on objective, quantifiable criteria. The $10,000 gross sales threshold is consistent with treatment of farms with gross sales of less than $10,000 as hobby farms by the Economic Research Service, USDA. The definition also will be clarified to state that daily operational and management decisions must be made and substantial labor must be provided by the applicant or borrower and persons related to the applicant or borrower by blood or marriage. “Related by blood or marriage” will be defined as connected to one another as husband, wife, parent, child, brother, or sister. The current definition of family farm refers to the applicant or borrower and “family members” of the applicant or borrower. The Agency anticipates that these proposed objective criteria will result in consistent, equitable, and sound loan making decisions across states.

In the existing regulations, the Agency utilizes the term “farm or ranch.” While this wording takes regional terminology into consideration, the Agency believes it is unnecessary. In the proposed rule, the Agency uses only the term “farm.” The definition of “farm” clearly includes “farm” or “ranch” as appropriate.

The Agency also proposes to add definitions for the following terms: basic part of an applicant's total farming operation, chattel or real estate essential to the farming operation, crop allotment or quota, debt service margin, essential family household expenses, established farmer, false information, farm income, Farm Programs payments, foreclosed, foreclosure sale, good faith, household contents, joint financing arrangement, production cycle, and working capital.

Planning and Performing Construction and Other Development (§ 761.10)

The proposed regulations would give loan applicants more responsibility and flexibility in planning and completing construction and development projects. For example, applicants would have more freedom in choosing appropriate construction and repair design standards. The existing regulations require applicants to select from design standards that have been adopted by the Agency, including methods described in the FmHA Manual of Acceptable Practices. To ensure that Agency-financed projects have architectural and engineering integrity, the revised regulations would require that the design standard “meet or exceed any applicable local or state laws, ordinances, codes, and regulations, including building, plumbing, mechanical, electrical, water, and waste management” (proposed section 761.10(d)(3)). Moreover, the revised rules would allow the Agency to request additional technical data, tests, or engineering evaluation, or to reject proposals that do not conform with industry-accepted construction practices and standards.

The revised regulations also would increase the applicant's responsibility and flexibility in preparing construction and development plans, while decreasing the Agency's role in this task. For example, currently the Agency must visit the development site with the applicant to identify and agree upon the necessary items of development, as well as the dates by which construction will be started and completed. Under the revised regulations, the applicant would propose the scope and schedule of the development, and the Agency would visit the site while evaluating the proposal. In addition, the Agency would no longer be required to advise the applicant of “publications, plans, planning aids, engineering data, and other technical advice and assistance available though local, state, and Federal agencies, and private individuals and organizations'' (7 CFR 1924.5(f)(2)(v)). While the Agency would continue to be available to advise applicants, the Agency believes that most applicants, as assisted when necessary by engineers, architects, other professionals, and state and local officials, can assemble acceptable development plans. In addition, the Agency would oversee development plans through the review process.

The proposed regulations would eliminate the Agency's responsibility to verify the architectural and engineering proficiency of proposed projects. Under current regulations, the Agency reviews a construction and development plan, drawings, and specifications to determine the technical soundness of proposed developments. In addition, the Agency must offer suggestions to the applicant, when appropriate, on how the drawings and specifications might be altered and assist the applicant in revising the drawings. Under the proposal, the Agency could ensure the soundness of proposals by requiring the applicant to provide written certification by a licensed architect, professional engineer, or other specified professionals that the “final drawings and specifications conform with the applicable development standard.” Thus, the applicant and professionals hired by the applicant would be responsible for the technical soundness of the proposal, not the Agency. The Agency is proposing this policy change because it lacks the engineering and architectural staff and expertise necessary to adequately review the wide variety of construction and development plans financed with Agency funds. This change also will give the applicant greater control over the project schedule. While the need for a professional certification may increase project costs, these costs can be covered as part of the Agency loan for the project.

Under both the existing and proposed regulations, an applicant is responsible for seeking bids and selecting contractors. The proposed rule, however, would limit the Agency's responsibilities in this process. For example, the existing rules allow the Agency to request further negotiations between the applicant and the proposed contractor when the Agency determines that the proposed contractor's price is too high or is otherwise unreasonable. In addition, the Agency may request the applicant to obtain competitive bids if the applicant is unable to negotiate a reasonable price or if the Agency considers the contractor to be unqualified. Furthermore, under the existing rules, the applicant reviews competitive bids with the Agency's assistance and must select the lowest responsible bidder (7 CFR 1924.6(a)(10)(iv)). The Agency is proposing to eliminate its role in contractor selection to give applicants additional discretion and responsibility and will only require the applicant to provide an estimate of the total cash cost for all planned development prior to loan closing. The Agency believes that applicants generally have adequate incentives and information to select qualified and reasonably priced contractors.

The existing regulations require the Agency to inspect developments “as frequently as necessary to assure that construction and land development conforms to the drawings and specifications” (7 CFR 1924.9(b)). At a minimum, the Agency must make final inspections of all projects. In many cases, additional inspections are required at certain stages of construction. Agency inspections would not be mandatory under the proposed regulations. Instead, the Agency would “inspect development work periodically, as appropriate to protect the government's security interest” (proposed Section 761.10(f)(1)). The proposal also would make the applicant responsible for inspecting development work as necessary to protect the applicant's interest. In addition, to protect the Government and applicant's interests, the proposal would require the applicant to obtain all lien waivers before the Agency would issue final payment and would allow the Agency to require a surety bond for construction contracts.

The Agency is proposing to streamline the inspection requirements and increase the responsibility of applicants largely because the Agency staff does not have architectural and engineering expertise. Thus, the Agency cannot assure that projects conform to drawings and specifications or assure the adequacy of actual construction and development work. The Agency would increase the applicant's responsibility to obtain adequate inspections, such as those by State or local code inspectors or inspection services. These professional inspections would protect both the applicant and the Government's interests. Less Agency involvement in the inspection process may help to expedite project completion by giving the applicant more flexibility in scheduling inspections. This regulatory change may increase project costs for some applicants who obtain professional inspections, instead of relying on the Agency's inspections. However, these costs can be covered by the Agency loan for the development project.

Part 762—Guaranteed Farm Loans

The guaranteed loan regulations were published as a final rule on February 12, 1999. In this rule, changes made to part 762 are only those necessary to correct references to CFR parts or subparts that are being revised or replaced, or to remove regulatory text which will now be addressed in part 761.

Part 764—Direct Loan Making

Application Requirements (Section 764.51)

The Agency proposes to reduce the amount of historical documentation required to process loan requests. Currently, the Agency requires 5 years of financial and production documentation, while the traditional commercial lending standard is 3 years. While some additional requirements may be justified because of the additional risk inherent in a direct loan to an applicant who is unable to obtain commercial credit, the Agency does not believe the additional 2 years of data significantly improves the quality of loan making decisions; therefore, a 3-year data requirement is proposed for financial and production documentation.

The proposed rule clarifies that payment of the applicable credit report fee is required from the loan applicant for the application to be considered complete. The Agency is only responsible for obtaining the credit report after the fee has been paid. Existing regulation, published in 7 CFR 1910.4, pertaining to a complete loan application lists the credit report under the heading “FSA Responsibilities for a

Complete Application”; however, regulations published in 7 CFR 1910.51 clearly provide that “a non-refundable fee will be charged to the applicant” for ordering a credit report. This has resulted in confusion in determining the loan applicant's responsibilities regarding a complete application and will be revised accordingly.

The proposed rule also would authorize the Agency to collect additional information from an applicant that the Agency deems necessary to make a decision on the applicant's request. This provision would apply to all loan applicants. The additional information might include divorce or separation decrees, documentation regarding child support payments, or any other information necessary to evaluate the loan request. Business loans, including direct farm loans, require an assessment of each applicant's request, and there are no one-size-fits-all templates. Agency staff feels constrained by the existing regulations since the regulations do not allow the Agency to identify specific information needed for each application. Rather than attempt to identify every possible piece of information that could ever be needed and then require every applicant to provide that information, thereby increasing the burden on all applicants, the Agency proposes to allow specific information to be requested as deemed necessary.

Applicant Eligibility (Section 764.101)

The proposed rule will also set consistent rules for acceptable composition of entity applicants. Under the existing rules, an entity applicant for an emergency loan must meet the same requirements as applicants for other direct loans, except that the applicant may not be an estate or trust, or a corporation, partnership, or joint operation with over 50 percent of the ownership held by an estate, trust, another corporation, another partnership, or another joint operation. The proposed rule would extend this requirement to entity applicants for all direct loans. The Agency does not foresee that this change would have any significant impact on applicants, but it would ease program implementation by applying the same requirements across all direct loan programs.

An eligibility requirement has been added to require that the applicant, and all entity members in the case of an entity applicant, not own real estate subject to a Federal judgment lien. This change is made to comply with 28 U.S.C. 3201(e). This statutory provision, in part, prohibits debtors with Federal judgment liens on their property from receiving any loan made or guaranteed by the United States or receiving funds directly from the Federal Government in any program, except funds to which the debtor is entitled as beneficiary. The prohibition remains until the judgment is paid in full or otherwise satisfied.

General Limitations (Section 764.102)

The proposed rule will add the limitation for all Farm Loan Programs direct loans that the tracts to be farmed must be contiguous or the distance between the tracts will not prevent an efficient farming operation. This is a current loan limitation for farm ownership loans and should be applied consistently across loan programs.

The Agency also proposes to add the clarification that loan funds may not be used to establish or support a non-eligible enterprise, even if the non-eligible enterprise contributes to the farm. The term “non-eligible enterprise” will be substituted for the current term “non-farm enterprise”.

The proposed rule also would specify that loan funds are to be used for farming operations located in the United States, in accordance with the Consolidated Farm and Rural Development Act (Act). Sections 302 and 311 of the Act, in part, limit farm ownership and operating loans, respectively, to farmers “in the United States” who are United States citizens and to farm entities “engaged primarily and directly in farming or ranching in the United States” whose majority interest is held by United States citizens. Section 321 of the Act similarly limits emergency loans, in part, to established farmers who are citizens of the United States and farm entities in which a majority interest is held by United States citizens where the applicants' farm operations “have been substantially affected by a natural disaster in the United States.”

The existing regulations contain eligibility requirements that an applicant be a United States citizen, or lawfully admitted alien and for entity applicants that the operation must “be controlled by farmers or ranchers engaged primarily and directly farming in the United States.” The Agency will add in the proposed rule a limitation that loan funds only be used for farm operations in the United States.

Choice of Security (Section 764.103)

Sometimes an applicant has more assets available than are needed to satisfy the Agency's security requirements. The existing regulations have been construed by some to allow the applicant to choose which assets would secure the Agency's loan. The proposed rule clarifies that the Agency has the authority and responsibility to choose the best security available when there are several options. However, under the proposal, the Agency may honor an applicant's preference that certain assets be taken as security over others provided that the quality and value of the Agency's security position would not be compromised.

Agency Lien on Non-Essential Assets (Section 764.103)

Non-essential assets are those assets that are not essential to the farming operation and do not contribute net income to pay family living expenses. The Agency prefers that an applicant sell non-essential assets and reduce the amount of the loan request. However, there are circumstances when an applicant cannot or will not convert non-essential assets to cash.

Existing regulations require that the Agency take a lien on all non-essential assets with an aggregate value exceeding $5,000 as security only for emergency loans. The proposed rule would extend this requirement to all direct loans for consistency and would change the value of the non-essential assets from an “aggregate value exceeding $5,000” to an individual value for each non-essential asset in excess of $5,000. As under the existing regulations, the lien on non-essential assets would be taken in addition to the lien on assets obtained to meet the adequate or additional security requirements. These changes provide consistency between loan programs and ensure that the Agency does not invest an inordinate amount of time obtaining a lien on assets of minimal value.

Farm Ownership Loan Program (FO) (Subpart D)

The proposed regulations would clarify the benefits of a joint financing arrangement for FO loans. A joint financing agreement is an arrangement between two or more lenders that make separate loans simultaneously to supply the funds required by one applicant. Currently, the regulations describe the joint financing agreement but do not clearly state that a lower interest rate will apply. The proposed rule states that the joint financing agreement allows the Agency to establish a “more favorable interest rate. This interest rate would be at least 4 percent annually.”

Operating Loan Program (OL) (Subpart F)

The OL loan eligibility requirement that the applicant and any persons signing the promissory note may not

close an OL loan in more than seven calendar years will be modified to apply only after December 31, 2002. This change is required by section 255 of the Agricultural Risk Protection Act of 2000, Pub. L. 106-224, enacted on June 20, 2000.

The Agency proposes to clarify its policy regarding the difference between the acceptable use of OL and FO funds. Prior to March 3, 1997, (62 FR 9351-9359) the authorized uses for direct OL funds included “not more than $15,000 in a fiscal year for real estate improvements or repairs.” The current regulation provides, in part, that OL funds may be used for paying costs associated with reorganizing a farm or ranch to improve its profitability; purchasing farm or ranch equipment; paying annual operating expenses; and paying farm, ranch or home needs. Under this language, the Agency permits OL funds to be used for real estate improvements or repairs, but the lack of specific guidelines has resulted in confusion regarding the intent of the regulation.

The proposed rule provides that OL funds can be used for minor repairs and improvements to buildings, provided the costs do not exceed $15,000 per year. More substantial repairs and improvements would have to be made under a FO loan. This policy is consistent with the statutory loan purposes of OL loans in section 312 of the Act.

The Agency proposes to remove the requirement of a nonsupervised bank account for farm or home needs (7 CFR 1941.16) for OL applicants. Prior to the Federal Agriculture Improvement and Reform Act of 1996 (Pub. L. 104-127) (1996 Act), the Act provided that the Agency “shall reserve not more than 10 percent of any loan made under this title or $5,000 of such loan, whichever is less, to be placed in a nonsupervised bank account which may be used at the discretion of the applicant for necessary family living needs * * *.” The 1996 Act amended section 312 of the Act to provide that the Agency “may reserve a portion of any loan * * *.” While the amended language maintained the maximum limit of 10 percent of the loan amount or $5,000, it provides the Agency with some flexibility in implementation. The payment of expenses for family subsistence is an authorized use of loan funds and in many cases, loan funds are provided directly to the applicant to use as specified in the operating plan agreed to by both the applicant and the Agency without the need of a nonsupervised bank account. The proposed rule only requires the use of a supervised bank account when “special supervision is needed.” This is consistent with the Agency's policy of reducing the use of supervised bank accounts. Therefore, the Agency has determined that it is no longer necessary to require the use of a “nonsupervised bank account” in its regulations.

Youth Loan Program (Subpart G)

The Agency proposes to modify the Youth Loan Program regulations in order to make the program easier to use and more accessible. The Youth Loan Program is part of the direct OL and currently has the same regulatory requirements as other OL loans. The Agency proposes to establish a separate subpart for youth loan regulations and streamline the processing of Youth loans.

The Agency makes small loans, up to a maximum of $5,000, to youths (age 10-21) who likely have no credit background, or at least, have less credit history than the typical adult applicant. The risk of loss to the Agency is low due to the small loan balance. Additionally, some of the information that is routinely required to process loans is generally not available. Therefore, under the proposed rule, the Agency may waive certain application requirements that will not be applicable based on the applicant's age. The Agency is soliciting comments on lowering the youth applicant's age limit to 8 years of age to coincide with the age limitation in participating in 4-H clubs. The Agency will evaluate all comments received on this issue and adopt the age limit suggested on most comments.

The proposed rule also would emphasize the Agency's intention that Youth loans support agriculture-related, educational projects. The existing regulations state that the objective of the Youth Loan Program is to provide credit for rural youths to establish and operate modest, income-producing projects in connection with 4-H clubs, FFA, and similar organizations. This provision has been interpreted to allow Youth loans for projects that are not significantly related to agriculture, therefore, a provision on authorized Youth loan users will be added.

The existing definition of “rural youth” limits the Youth Loan Program to a youth who “does not reside in any city or town with a population of more than 10,000 inhabitants.” As part of the Agency's effort to make the Youth Loan Program more accessible, the proposed rule would extend the program to applicants who reside in a rural area, or city or town with a population of 50,000 or fewer people. The Youth Loan Program provides a valuable, educational opportunity for youth to experience farming. By providing supervised loan funds for agriculture-related projects to a larger pool of youth, the Agency hopes to increase the number of motivated, educated farmers in the future.

The existing security requirements are the same for a Youth loan and an OL loan. Under the existing regulations, additional security up to 150 percent of the loan amount is required if it is available. In the case of a term OL loan, the existing regulations require security with a value that will remain relatively constant over time that is equal to 100 percent of the loan amount. Youth loan applicants generally do not have available security beyond what is purchased or produced with loan funds. The proposed rule would require the Youth loan be secured by only the asset being purchased or produced with the loan funds, unless it is impractical to separately identify the asset from the applicant's other assets or the adequate security requirement has not been met. This provision would eliminate the requirement for additional security in the case of youth loans.

Emergency Loan Program (EM) (Subpart H)

The Agency published a final rule to streamline the EM loan program on January 8, 2002, in 67 FR 791-801. This proposed rule adopts the changes addressed in the discussion of the January 8, 2002, rule. Therefore, while the Agency will accept comments regarding the EM loan program, discussion of the changes is not included in this rule.

Loan Decision and Closing (Subpart I)

The Agency proposes to clarify the actions to be taken when an adverse loan decision is overturned on appeal. Loan approval is not automatic after an Agency loan denial is overturned. The Agency must reevaluate the request based on the findings of the appeal hearing officer and take the next step toward processing the loan application. Current regulations do not specify the process that occurs after a loan denial is overturned. To avoid confusion, the proposed rule states that the Agency will consider the following prior to loan approval: (1) Satisfactory review of current financial information and determination of whether changes in the applicant's financial and agricultural conditions will adversely affect the applicant's operation; (2) determination that the applicant will be able to produce a crop in the production cycle for which the loan is requested (specifically for crop production loans);

and (3) determination that the applicant's operating plan, as modified based on the appeal decision, reflects a feasible plan. The Agency expects that this clarification would create a more efficient and consistent decision process for both the Agency and applicants.

The proposed rule states that the Agency will not approve a loan unless the applicant demonstrates an ability to satisfy its total credit needs. For example, an applicant for a FO loan must demonstrate an ability to obtain any additional credit necessary to operate the farm. This proposed change recognizes that the Agency's loan may be only a part of the applicant's financial needs. It would help ensure that the Agency makes loans only to applicants who have viable operations and are not undue credit risks.

Borrower Training (Subpart J)

Under the existing regulations, the Agency must evaluate the need for production and financial management training when considering a request for a loan or primary loan servicing. Additionally, the Agency cannot require applicants “who have previously received a waiver, or who have previously satisfied the training requirements'' to complete training (7 CFR 1924.74(b)(2)). Under the proposed regulations, the Agency is eliminating the requirement to assess the need for training when a borrower requests primary loan servicing. The Agency believes that borrower training, if needed, is most helpful early in the loan process. It is of little or no benefit to a borrower who is already delinquent or in non-monetary default. The Agency, however, would be able to require direct loan applicants who have previously received a waiver or satisfied training requirements to complete training when: (1) The proposed loan is to finance a new enterprise for which the applicant has not had production training or (2) information contained in the loan assessment or obtained from year-end analyses, farm visits, or the borrower's case file indicates that additional production or financial management training is needed. This early detection of the need for additional training will help borrowers become successful and hopefully avoid later delinquencies.

Part 765— Direct Loan Servicing—Regular

Increasing Limited Resource Interest Rates (Subpart B)

Section 1951.25 of 7 CFR 1951 provides “the interest rate may not be changed more often than quarterly.” This limitation is eliminated in this proposed rule. The Agency instead will review borrowers with limited resource rates annually; however, the Agency may process a change in interest rate at any time it becomes aware of a change in the borrower's circumstances. This change will reduce unnecessary administrative burden and provide for annual limited resource rate reviews consistent with the annual process for developing farm operating plans.

Borrower Payments (Subpart D)

The existing regulations are written in a manner that allows inconsistencies in applying payments to the borrower's Agency loans. The proposed rule clarifies that payments will be applied in the following order:

(1) Annual operating loans;

(2) Delinquent FLP installments, paying least-secured loans first;

(3) Non-delinquent FLP installments due in the current operating cycle in order of security priority, paying least-secured loans first; and

(4) Any future FLP installments due.

The Agency believes these changes will assure that regular payments are applied to protect the Agency's security interest and preserve the financial viability of the borrower's operation.

Protective Advances (Section 765.203)

The existing regulations allow the Agency to make protective advances when necessary to protect its interest in security property. The regulations also provide that protective advances will be added to the outstanding principal when a loan is rescheduled or reamortized, except for advances to pay prior or junior liens other than real estate tax liens. This policy reduces the incentive for borrowers to pay costs such as real estate taxes. Under the proposed rule, the Agency would continue to make protective advances when necessary; however, the Agency will consider the payment of protective advances for reasons not beyond the borrower's control when determining eligibility for future loan and servicing requests. One general loan eligibility requirement is that the applicant will honestly endeavor to carry out the conditions of the loan. Another general loan servicing eligibility requirement is that the borrower has acted in good faith in accordance with borrower loan agreements.

Subordination of Chattel Security (Section 765.205)

Existing regulations published in § 1962.30 of 7 CFR 1962 allow for only one subordination to be outstanding “at any one time in connection with the same security.” Under the proposed rule, the Agency will consider a second subordination of chattel security to enable the borrower to obtain crop insurance when (1) the creditor with the first subordination did not provide for the payment of crop insurance and consents in writing to pay insurance premiums from crops or insurance proceeds, and (2) the borrower assigns insurance proceeds to the Agency or names the Agency in the loss payable clause of the policy. In some areas, banks typically do not lend additional money for the borrower to obtain crop insurance. In those cases, a second subordination is needed for the secured debt on an insurance provider. In addition, crop insurance may not yet be available or has not been chosen when the borrower obtains the loan requiring the first subordination of the Agency's chattel security. The proposed change would allow for second subordinations in these cases. The same requirements for initial subordinations also will apply to these second subordinations.

Unapproved Disposition of Chattel Security (Section 765.304)

A borrower cannot dispose of chattel security in a manner that is inconsistent with the borrower's agreement with the Agency. Under current regulations, when an unauthorized disposition occurs, the borrower must make restitution by paying the Agency the market value of the security, or replacing the security with property of equal or greater value. In addition, the borrower may submit information to allow the Agency to consider post-approval of the disposition, provided the funds were used in accordance with Agency regulations. However, the regulation provides that only one post-approval may be granted during the period covered by the agreement. If the borrower fails to make restitution, provide information to allow for post-approval, or commits a second transgression, the Agency may pursue civil or criminal action, or both. The proposed rule continues to allow the borrower to make restitution or submit information for post-approval; however, the requirement establishing a limit of one transgression per period of the agreement has been eliminated. The Agency believes that one warning is adequate. The proposed rule provides that subsequent violations of the agreement and uncured first violations will be considered when determining eligibility for future loan or servicing assistance. One general loan eligibility requirement is that the applicant will honestly endeavor to carry out the conditions of the loan. One general loan

servicing eligibility requirement is that the borrower has acted in good faith in accordance with borrower loan agreements.

Disposing of a Portion of Real Estate Security (Subpart H)

When the borrower proposes to sell, exchange, or otherwise dispose of a portion of real estate security, the existing regulations require that the portion of real estate security to be disposed of be appraised whenever one of several conditions are met. One of these conditions is that the estimated value of the portion of real estate security proposed for disposition exceeds $10,000. The Agency implemented this requirement to ensure that the borrower obtains fair market value for the real estate security, and that in turn, the Agency's security interest is protected. In cases where an appraisal is not required, the Agency estimates the value of the real estate based on current real estate values for the area in which the property is located. The proposed rule would increase the maximum from an estimated value of $10,000 to $25,000, but as with the existing regulations, provide the Agency discretion, when in its best interest, to obtain an appraisal when the estimated value is below this limit. The Agency proposes modifying this requirement because the cost to the Agency of conducting an appraisal for portions of properties with a value of $10,000 to $25,000 often exceeds the benefit of the appraisal. In addition, the proposed rule would require an appraisal of the remaining real estate security only when the Agency believes the value of the remaining real estate is diminished by an amount greater than the market value of the property proposed for disposition. These modifications would reduce the administrative burden associated with handling borrower requests for disposition of real estate security. It would also expedite the Agency approval process for the disposition of real estate security by borrowers. These benefits outweigh any risk to the Agency from not appraising all remaining real estate security.

In addition, the Agency proposes to modify the regulations pertaining to the use of proceeds received from the sale of real estate security. Section 1965.13(e)(4)(iii) of 7 CFR allows the borrower to use up to $10,000 to develop land not owned by the borrower. The Agency has eliminated this option as an authorized use of proceeds in the proposed rule. The Agency does not believe it is prudent to release proceeds from the sale of its loan security to develop land on which it does not have a lien.

Non-Program Loan Terms (Section 765.404)

The Agency proposes to extend the term for Non-Program loans when an ineligible applicant assumes an outstanding debt or purchases inventory property. The existing regulations allow the Agency to schedule repayment over 15 years. The Agency proposes to base the term on the applicant's repayment ability, with maximum term of 25 years. This modification will allow the Agency greater flexibility to resolve delinquent accounts through assumption of the indebtedness and when selling inventory property.

Part 766 Direct Loan Servicing—Special

Notification of the Availability of Loan Servicing (Section 766.101)

Section 331D of the Act establishes requirements regarding when the Agency must notify a borrower of the availability of loan servicing and mandates that the initial notice be “contained in the regulations implementing this title.” The Agency published a proposed rule (53 FR 18392-18523) announcing regulations implementing section 331D on May 23, 1988. An interim rule (53 FR 35639-35798) was published on September 14, 1988. In both rules, the Agency published the initial loan servicing notification, as well as all subsequent notices associated with the loan servicing process. The Agency chose to publish notices beyond those mandated in the Act for several reasons. First, the Agricultural Credit Act of 1987 provided for substantial changes to the Agency's loan servicing policies. Second, at the time the proposed rule was published, a significant portion of the Agency's direct loan borrowers were delinquent or in some other form of loan default. Incorporating the loan servicing notices in the regulation has resulted in the need for the Agency to go through the rulemaking process to make only minor editorial changes in the notices. Therefore, the Agency is proposing to publish only the initial loan servicing notification in its regulations as required by the Act. All other loan servicing notices will be available to the public in any Agency office.

In addition, § 1962.17(a)(2) of 7 CFR requires that a notice of the availability of loan servicing be provided to the borrower when the Agency denies a request for the release of proceeds from the sale of chattel security. This notification is not required under § 331D of the Act. Section 766.101 of the proposed rule, continues the Agency policy of notifying financially distressed and delinquent borrowers of the availability of loan servicing. Therefore, the Agency believes that the additional notification requirement established in § 1962.17 is unnecessary and has removed it.

Financial and Production Records (Section 766.102)

As with loan applicants, the Agency proposes to reduce the burden on borrowers applying for loan servicing by requiring the borrower to submit only 3 years of historical financial and production documentation when applying for loan servicing. Currently, the Agency requires the borrower to submit 5 years of historical financial and production records. The guaranteed loan program regulations require 3 years of financial and production records. To ensure consistency between programs and with industry standards, the Agency is proposing to change the requirement for the direct program to match the guaranteed program requirements, as well as commercial lenders.

Borrower Eligibility for Loan Servicing (Section 766.104)

Section 353 of the Act requires that to be eligible for loan restructuring, the delinquency must be “due to circumstances beyond the control of the borrower, as defined in regulations issued by the Secretary.” The Agency has published the loan servicing eligibility requirements in subpart S of 7 CFR part 1951. Section 1951.909(c)(1) lists specific causes of reductions in income “beyond the control of the borrower.” The Agency believes that the existing regulations do not adequately address all potential circumstances beyond the control of a borrower. Under the proposed rule, the Agency will expand the existing language which addresses “[n]atural disasters, an outbreak of uncontrollable disease, or uncontrollable insect damage,” to include “adverse weather,” thus clarifying that it is not required that the farming operation be located in a county designated or declared a natural disaster. In addition, the Agency will add reduction in income due to “damage or destruction of property essential to the operation” and clarify the list of examples as inexhaustive.

Agency Offer To Restructure a Delinquent Borrower (Section 766.106)

Under existing regulations, when the Agency offers to restructure the loans of a delinquent borrower, the notification

includes the right to appeal the Agency offer. If the borrower does not respond to the Agency's offer, the Agency then provides the borrower with a “Notice of Intent to Accelerate.” This notification also provides the borrower with appeal rights. Under this rule, the Agency proposes to consolidate the borrower's appeal rights. The Agency's offer to restructure will no longer include appeal rights. Instead, if the borrower does not accept the offer or fails to respond within the established timeframe, the Agency will immediately provide a “Notice of Intent to Accelerate” which will provide the borrower the opportunity to appeal either the Agency's offer, notice of intent to accelerate, or both. Consolidation of the appeal rights will allow for more timely processing of a borrower's request for loan servicing and resolution of delinquent accounts.

Deferral Period (Section 766.109)

The existing regulations stipulate that a deferral period will not exceed 5 annual installments, but are unclear on how the length of a deferral is determined. As a result, the Agency has often granted borrowers 5-year deferrals. In the proposed rule, the maximum deferral term would still be 5 years, but the Agency would grant the shortest deferral term that would result in a feasible operating plan without debt writedown. The length of the deferral period affects the interest accrual and the debt payments after deferral. A longer deferral period increases the interest accrual and the post-deferral payments. The shortest deferral period necessary to generate a feasible plan benefits the borrower by minimizing interest accrual.

Appeal of a Conservation Contract Technical Decision (Section 766.110)

Current regulations are ambiguous regarding the appeal of Natural Resources Conservation Service's technical decisions on a Conservation Contract. The proposed rule would clarify how a borrower may appeal the Natural Resources Conservation Service's technical decisions by stating that such appeals will be handled in accordance with 7 CFR part 780.

This section also will be amended to consider only the present market value of the land without any structural improvements in determining the appropriate amount of debt reduction. This change is needed to prevent inflated conservation contract values based on structural improvements that do not have value in promoting conservation, recreation, or wildlife on the property.

Softwood Timber Loan Program

The Agency proposes to eliminate the Softwood Timber Loan Program regulations. The Softwood Timber Loan Program allows a borrower to convert all or a portion of their debt to a Softwood Timber loan. This conversion allows a borrower who is financially distressed or delinquent on an Agency direct loan to defer loan payments and generate income from planting and harvesting softwood timber to make future loan payments. Since the program's inception in 1983, the Agency has processed only 35 Softwood Timber loans. The Agency believes the use of the Softwood Timber program does not justify the costs associated with maintaining the program. The most significant Agency costs associated with the Softwood Timber Loan Program include costs for training Agency staff, monitoring Softwood Timber loans, maintaining automation programs, and publishing Softwood Timber regulations. It should be noted that Softwood Timber production is confined to certain limited areas within the country as a result of the marginal land requirements. Therefore, many borrowers are not eligible for assistance under this program.

Homestead Protection eligibility (Section 766.153)

The Agency proposes to add a property eligibility requirement for homestead protection. Where voluntary conveyance of the property to the Agency would be required to process homestead protection, the Agency proposes to take title to the property only if it can obtain a positive recovery after paying any outstanding liens of other creditors on the property. This is consistent with the Agency's policy to accept voluntary conveyances only if it is in the Government's best financial interest. If homestead protection is not offered prior to foreclosure, the option is still available after the Agency takes title to the property.

Homestead Protection lease (Section 766.155)

The proposed rule will clarify that homestead protection leases will not be less than 3 years and will not exceed 5 years. These limitations on terms are required by § 352(b)(3) of the Act. The current regulation does not specify the minimum lease term.

Accelerated Repayment Agreements

The existing regulations allow the Agency to enter into an accelerated repayment agreement with a borrower when the Agency considers liquidating an account due to the borrower's failure to graduate or to use the security as agreed in the operating plan. This agreement is used in lieu of foreclosure when it is in the Agency's best financial interest and when the borrower can meet the accelerated payment schedule. The proposed rule would eliminate accelerated repayment agreements for borrowers who fail to graduate to other credit when able to do so. The Agency believes the overall impact of this change would be minimal as accelerated repayment agreements are rarely executed. Eliminating accelerated repayment agreements would allow the Agency to treat all borrowers in non-monetary default more consistently. The proposed change would encourage qualified borrowers to graduate promptly and encourage borrowers who are not farming to cure the default or voluntarily liquidate their security.

Unauthorized Assistance (Subpart F)

The Agency proposes to change its procedures regarding the resolution of unauthorized assistance cases where a portion of the loan is unauthorized. Under the current regulations, the Agency splits the loan into two accounts: one loan account for the authorized portion of the loan and a second loan account for the unauthorized portion of the loan. The Agency proposes to eliminate this requirement and by internal procedure keep one loan account to eliminate the burden on Agency staff of creating, tracking, and servicing a second loan account. Under the proposed rule, the Agency will attempt to collect the unauthorized assistance, or that portion which the borrower is able to pay within 90 days. If the borrower is unable to repay the entire amount of unauthorized assistance, the Agency may enter into an accelerated repayment plan with the borrower for such amount if the borrower did not intentionally provide incomplete or false information and such action is in the best financial interest of the Government. The debt under the accelerated repayment plan will be treated as a non-program (NP) loan with NP interest rate and terms as short as feasible, but not exceeding the remaining term of the FLP loan. The Agency will not continue with the borrower at existing rates and terms in any case as to the unauthorized portion of the debt. This change in policy is necessary to cure errors resulting in unauthorized assistance regardless of whether borrower or Agency error is involved. The unauthorized amount may be the result of a statutory or a regulatory violation, but in either case it never should have been given to the borrower. An accelerated repayment

plan will allow those borrowers who did not intentionally provide incomplete or false information to the Agency to pay unauthorized assistance over time. If the borrower is able to repay, but refuses to, the borrower will receive the primary loan servicing notices for those in non-monetary default prior to liquidation.

Part 767—Inventory Property Management

Inventory Property Classification

An interim rule published at 62 FR 44393-44404, on August 21, 1997, implemented provisions of the 1996 Act impacting the management and sale of inventory property. The revised regulation provided one method of sale of inventory property, and, thus, eliminated the need to classify inventory property as suitable or surplus. However, the interim rule did not eliminate usage of the terms “suitable” and “surplus” properties elsewhere in the CFR. The proposed rule would eliminate references to suitable and surplus property as necessary.

Chattel Inventory Property Disposition Methods (Section 767.155)

The current regulations allow the Agency to sell inventory chattel property through a sealed bid or regular sale. The proposed rule would eliminate the use of these sale methods and require sale by public auction. An auction is the most efficient and common venue for selling chattel property.

The current regulations state that “[b]eginning farmers or ranchers obtaining special OL [Operating] loan assistance * * * will receive priority in the purchase of farm equipment held in government inventory during the commitment period” (7 CFR 1955.122(a)). The proposed rule eliminates this preference as the Agency's statutory authority for giving special Operating loan assistance was eliminated by § 616 of the 1996 Act. This change would have a minimal impact on the Agency, beginning farmers, and the general public because of the limited amount of chattels the Agency takes into inventory.

Inventory Property With Important Resources, Special Hazard Areas, and Environmental Risks (Subpart E)

The proposed rule would clarify the Agency's obligations under the National Environmental Policy Act and other Federal environmental laws. The current regulations require the Agency to inspect all inventory property for hazardous waste contamination and report certain underground storage tanks, but they do not specify when the Agency will undertake corrective measures. The proposed rule would clarify when the Agency is responsible for cleaning up hazardous waste contamination and removing or permanently closing underground storage tanks. It would clarify that the Agency would undertake corrective measures when: (1) Any known contamination or underground storage tank leakage presents an immediate threat to the health and safety of neighboring property owners or to potential purchasers of the property; and (2) The Agency is selling the property to a beginning farmer and providing credit assistance through a direct or guaranteed loan. Moreover, the proposed rule also states that the Agency would not undertake corrective action if the property is being sold back to a potentially responsible party. By more clearly defining the Agency's responsibilities, the proposed rule would eliminate questions of liability and reduce the Agency's risk of being responsible for costly cleanups.

List of Subjects

7 CFR Part 761
Administrative practice and procedure, Agriculture, Authority delegations, Credit, Loan programs—Agriculture.

7 CFR Part 762
Agriculture, Credit, Loan programs—Agriculture.

7 CFR Part 764
Agriculture, Agricultural commodities, Credit, Disaster assistance, livestock, Loan programs—Agriculture, Mortgages.

7 CFR Part 765
Agriculture, Agricultural Commodities, Credit, Livestock, Loan programs—Agriculture.

7 CFR Part 766
Agriculture, Agricultural commodities, Credit, Livestock, Loan programs—Agriculture.

7 CFR Part 767
Agriculture, Credit, Government property, Government property management, Indians—Loans, Loan Programs—Agriculture.

Accordingly, it is proposed that 7 CFR chapter VII be amended as follows:

7 CFR Chapter VII

1. Revise part 761 to read as follows:

PART 761—GENERAL PROGRAM ADMINISTRATION

Subpart A—General Provisions

Sec.
761.1
Introduction.
761.2
Abbreviations and definitions.
761.3
Civil rights.
761.4
Conflict of interest.
761.5
Restrictions on lobbying.
761.6
Appeals.
761.7
Appraisals.
761.8
Loan limitations.
761.9
Interest rates for direct loans.
761.10
Planning and performing construction and other development.
761.11-761.50
[Reserved]

Subpart B—Supervised Bank Accounts

761.51
Establishing a supervised bank account.
761.52
Deposits into a supervised bank account.
761.53
Interest bearing accounts.
761.54
Withdrawals from a supervised bank account.
761.55
Closing a supervised bank account.
761.56-761.100
[Reserved]

Subpart C—Supervised Credit

761.101
Applicability of this subpart.
761.102
Borrower recordkeeping, reporting, and supervision.
761.103
Farm assessment.
761.104
Year-end analysis.
761.105-761.200
[Reserved]

Subpart D—Allocation of Farm Loan Programs Funds to State Offices

761.201
Purpose.
761.202
Timing of the allocation of Farm Ownership and Operating loan funds.
761.203
National reserves for Farm Ownership and Operating loans.
761.204
Methods of allocating funds to State Offices.
761.205
Computing the formula allocation.
761.206
Pooling of unobligated funds that have been allocated to State Offices.
761.207
Distribution of Farm Ownership and Operating loan funds by State Offices.
761.208
Target participation rates for socially disadvantaged groups.
761.209
Reservation of Farm Ownership and Operating loan funds for beginning farmers.
761.210
Transfer of funds.
761.211-761.250
[Reserved]

Authority:

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

Subpart A—General Provisions

§ 761.1
Introduction.

(a) Parts 761 through 767 describe the Agency's policies for its Farm Loan Programs. The objective of these programs is to provide supervised credit and management assistance to eligible farmers to become owners or operators, or both, of family-sized farms, to continue such operations when credit is not available elsewhere, or to return to normal farming operations after

sustaining substantial losses as a result of a designated or declared disaster. These regulations apply to loan applicants, borrowers, lenders, holders, Agency personnel, and other parties involved in making, guaranteeing, holding, servicing, or liquidating such loans.

(b) This part describes the Agency's general and administrative policies for its guaranteed and direct Farm Loan Programs. In general, this part addresses issues that affect both guaranteed and direct loan programs, or both direct loan making and direct loan servicing.

§ 761.2
Abbreviations and definitions.
The following abbreviations and definitions are applicable to the Farm Loan Programs policies addressed in parts 761 through 767 unless otherwise noted.

(a)
Abbreviations.

ALP
Approved Lender Program

CLP
Certified Lender Program

DSA
Disaster Set-Aside

EE
Economic Emergency loan

EM
Emergency loan

FLP
Farm Loan Programs of the FSA

FO
Farm Ownership loan

FSA
Farm Service Agency, an Agency of the USDA, including its personnel and any successor Agency.

Lo-Doc
Low-Documentation Operating loan

OGC
Office of the General Counsel of the USDA

OL
Operating loan

PLP
Preferred Lender Program

RHF
Rural Housing loan for farm service buildings

RL
Recreation loan

SAA
Shared Appreciation Agreement

SA
Shared Appreciation loan

SEL
Standard Eligible Lender

ST
Softwood Timber loan

SW
Soil and Water loan

USDA
United States Department of Agriculture

USPAP
Uniform Standards of Professional Appraisal Practice.

(b)
Definitions.

Abandoned security property
is security property that a borrower is not occupying, is not in possession of, or has relinquished control of and has not made arrangements for its care or sale.

Accrued deferred interest
is unpaid interest from past due installments posted to a borrower's loan account.

Act
is the Consolidated Farm and Rural Development Act (7 U.S.C. 1921
et seq.
).

Active borrower
is a borrower who has an outstanding account in the Agency records, which may include an unsatisfied account balance where a voluntary conveyance was accepted without the borrower being released from liability or where liquidation did not satisfy the indebtedness.

Additional security
is property which provides security in excess of the amount of security value equal to the loan amount.

Adequate security
is property which is required to provide security value at least equal to the loan amount.

Adjustment
is a form of settlement that reduces the financial obligation to the Agency, conditioned upon the completion of payment of a specified amount at a future time. An adjustment is not a final settlement until all payments have been made under the agreement.

Administrative appraisal review
is a review of an appraisal to determine if the appraisal:

(1) Meets applicable Agency requirements; and

(2) Is accurate outside the requirements of standard 3 of USPAP.

Agency
is the FSA.

Agreement for the use of proceeds
is an agreement between the borrower and the Agency that reflects how, when, and to whom the borrower will sell, exchange, or consume chattel security and the planned use of any proceeds during a specific production cycle.

Agricultural commodity
is livestock, livestock products, grains, cotton, oilseeds, dry beans, tobacco, peanuts, sugar beets, sugar cane, fruit, vegetable, forage, tree farming, nursery crops, nuts, aquacultural species, and other plant and animal production, as determined by the Agency.

Allonge
is an attachment or an addendum to a promissory note.

Allowable costs
are those costs for replacement or repair that are supported by acceptable documentation, including but not limited to written estimates, invoices, and bills.

Applicant,
as used in part 762 of this title, is the lender requesting the guarantee. Applicant as used in parts 764 through 767 is the individual or entity applying for a direct loan or direct loan servicing. Applicant as used in subpart H of part 764 is the individual or entity (including each member of the entity unless the context states that it does not apply to each member of the entity) operating the farm at the time of the disaster, who is requesting assistance from the Agency. All requirements of individual applicants apply to all members of the entity individually and collectively unless the context clearly requires otherwise.

Approval official
is a field official who has been delegated approval authorities within applicable loan programs.

Aquaculture
is the husbandry of any aquatic organisms (including fish, mollusks, crustaceans or other invertebrates, amphibians, reptiles, or aquatic plants) raised in a controlled or selected environment of which the applicant has exclusive rights to use.

Assignment of guaranteed portion
is a process by which the lender transfers the right to receive payments or income on a 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.

Assignment of indemnity
is the transfer of rights to compensation under an insurance contract.

Assistance
is financial assistance in the form of a direct or guaranteed loan or interest subsidy or servicing action.

Assumption
is the act of agreeing to be legally responsible for another party's indebtedness.

Average farm customer
is a conventional farm borrower who is required to pledge crops, livestock, and other chattel and real estate security for the loan. This term does not include a high-risk farmer with limited security and management ability who is generally charged a higher interest rate by conventional agricultural lenders. Also, this term does not include a low-risk farm customer who obtains financing on a secured or unsecured basis, who is able to pledge as collateral for a loan items such as savings accounts, time deposits, certificates of deposit, stocks and bonds, and life insurance.

Basic part of an applicant's total farming operation
is any single agricultural commodity or livestock production enterprise of an applicant's farming operation which normally generates sufficient income to be considered essential to the success of such farming operation.

Basic security
is all farm machinery, equipment, vehicles, foundation and breeding livestock herds and flocks, including replacements, and real estate that serves as security for a loan made or guaranteed by the Agency.

Beginning farmer
is an individual or entity who:

(1) Meets the loan eligibility requirements for a direct or guaranteed OL or FO loan as applicable;

(2) For OL's, has not operated a farm for more than 10 years. For FO's, including Beginning Farmer Downpayment loans, has operated a farm for more than three years, but not more than 10 years. These requirements apply to all members of an entity;

(3) Will materially and substantially participate in the operation of the farm:

(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, 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. Material and substantial participation requires that the member 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 would be seriously impaired;

(4) Agrees to participate in any loan assessment and borrower training required by Agency regulations;

(5) Except for a direct OL applicant, does not own real farm property or who, directly or through interests in family farm entities owns real farm property, the aggregate acreage of which does not exceed 30 percent of the average farm acreage of the farms 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 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 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 acreage will be determined from the most recent Census of Agriculture;

(6) Demonstrates that the available resources of the applicant and spouse (if any) are not sufficient to enable the applicant to enter or continue farming 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 members are beginning farmers.

Beginning Farmer Downpayment loan
is a type of FO loan made to eligible applicants to finance a portion of a real estate purchase under part 764, subpart E of this chapter.

Borrower (or debtor)
is an individual or entity that has an outstanding obligation to the Agency under any FLP loan, without regard to whether the loan has been accelerated. A borrower includes all parties liable for such obligation owed to the Agency, including collection-only borrowers, except for debtors whose total loans and accounts have been voluntarily or involuntarily foreclosed, sold, or conveyed, or who have been discharged of all such obligations owed to the Agency.

Cancellation
is the final discharge or, and release of liability for, a financial obligation to the Agency on which no settlement amount has been paid.

Cash flow budget
is a projection listing of 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 guaranteed loans under $125,000 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 include the expected outstanding operating credit balance for the end of each month. The latter type is referred to as a “monthly cash flow budget.”

Chattel or real estate essential to the farming operation
is chattel or real estate that would be necessary for the applicant to continue operating the farm after the disaster in a manner similar to the manner in which the farm was operated immediately prior to the disaster, as determined by the Agency.

Chattel security
is property that may consist of, but is not limited to: crops; livestock; aquacultural species; farm equipment; inventory; accounts; contract rights; general intangibles; and supplies that are covered by financing statements and security agreements, chattel mortgages, and other security instruments.

Civil action
is a court proceeding to protect the Agency's financial interests. A civil action does not include bankruptcy and similar proceedings to impound and distribute the bankrupt's assets to creditors and probate or similar proceedings to settle and distribute estates of incompetents or of decedents under a will, or otherwise, and pay claims of creditors.

Closing agent
is the attorney or title insurance company selected by the applicant and approved by the Agency to provide closing services for the proposed loan or servicing action. Unless a title insurance company provides loan closing services, the term “title company” does not include “title insurance company.”

Coastal Barrier Resources Area
is an area of land identified as part of the national Coastal Barrier Resources System under the Coastal Barrier Resources Act of 1980.

Commercial classified account
is an Agency account of such quality that commercial lenders would likely view the loan as a profitable investment.

Compromise
is the settlement of an Agency debt or claim by a lump-sum payment of less than the total amount owed in satisfaction of the debt or claim.

Conditional commitment
is the Agency's commitment to a lender that the material the lender has submitted is approved subject to the completion of all listed conditions and requirements.

Conservation Contract
is a contract under which a borrower agrees to set aside land for conservation, recreation or wildlife purposes in exchange for reduction of a portion of an outstanding Agency debt.

Conservation Contract review team
is comprised by the appropriate offices of FSA, the Natural Resources Conservation Service, U.S. Fish and Wildlife Service, State Fish and Wildlife Agencies, Conservation Districts, National Park Service, Forest Service, State Historic Preservation Officer, State Conservation Agencies, State Environmental Protection Agency, State Natural Resource Agencies, adjacent public landowner, and any other entity that may have an interest and qualifies to be a management authority for a proposed conservation contract.

Consolidation
is the process of combining the outstanding principal and interest balance of two or more loans of the same type made for operating purposes.

Construction
is work such as erecting, repairing, remodeling, relocating, adding to, or salvaging any building or structure, and the installing, repairing, or adding to heating and electrical systems, water systems, sewage disposal systems, walks, steps, and driveways.

Controlled
is when a director or an employee has more than a 50 percent ownership in an entity or, the director or employee, together with relatives of the director or employee, have more than a 50 percent ownership.

Cooperative
is an entity that has farming as its purpose, whose members have agreed to share the profits of the farming enterprise, and is recognized as a farm cooperative by the laws of the

state in which the entity will operate a farm.

Corporation
is a private domestic corporation created and organized under the laws of the state in which it will operate a farm.

Cosigner
is 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 cannot be a member, partner, joint operator, or stockholder of the entity.

County
is a local administrative subdivision of a State or similar political subdivision of the United States.

County average yield
is the historical average yield for an agricultural commodity in a particular political subdivision, as determined or published by a government entity or other recognized source.

Criminal action
is the prosecution by the United States to exact punishment in the form of fines or imprisonment for alleged violation of criminal statutes.

Crop allotment or quota
is a farm's share of an approved national tobacco or peanut allotment or quota.

Current market value buyout
is the termination of a borrower's loan obligations to the Agency in exchange for payment of the current appraised value of the borrower's security property and nonessential assets, less any prior liens and liquidation costs.

Debt forgiveness
is a reduction or termination of a debt under the Act in a manner that results in a loss to the Agency (excluding a consolidation, rescheduling, reamortization, or deferral), through:

(1) Writing down or writing off a debt pursuant to 7 U.S.C. 2001;

(2) Compromising, adjusting, reducing, or charging off a debt or claim pursuant to 7 U.S.C. 1981; or

(3) Paying a loss pursuant to 7 U.S.C. 2005 on a FLP loan guaranteed by the Agency.

Debt reduction through a conservation easement or contract is not considered debt forgiveness for loan making or servicing purposes.

Debt instrument
is a collective term that includes, but is not limited to, promissory notes and assumption agreements.

Debt settlement
is a compromise, adjustment, or cancellation of an Agency debt.

Debt service margin
is the difference between all of the borrower's expected expenditures in a planning period (including farm operating expenses, capital expenses, essential family living expenses, and debt payments) and the borrower's projected funds available to pay all expenses and payments.

Debt writedown
is the reduction in the amount of the borrower's debt to that amount that the Agency determines to be collectible based on an analysis of the security value and the borrower's ability to pay.

Default
is the failure of a borrower to observe any agreement with the Agency, or the lender in the case of a guaranteed loan, as contained in promissory notes, security instruments, and similar or related instruments.

Deferral
is a postponement of the payment of interest or principal, or both.

Delinquent borrower
is a borrower with any portion of a payment to the Agency that is at least 30 days past due.

Direct loan
is a loan funded and serviced by the Agency as the lender.

Disaster
is an event of unusual and adverse weather conditions or other natural phenomena, or quarantine, that has substantially affected producers of agricultural commodities by causing physical property or production losses in a county, or similar political subdivision, that triggered the inclusion of such county or political subdivision in the disaster area as designated by the Agency.

Disaster area
is the county or counties declared or designated as a disaster area for EM loan assistance as a result of disaster related losses. This area includes counties contiguous to those counties declared or designated as disaster areas.

Disaster set-aside
is the deferral of payment of an annual loan installment to the Agency to the end of the loan term in accordance with part 766, subpart B of this chapter.

Disaster yield
is the per-acre yield of an agricultural commodity for the farming operation during the production period when the disaster occurred.

Economic Emergency loan
is a loan that was made or guaranteed to an eligible applicant to allow for continuation of the operation during an economic emergency which was caused by a lack of agricultural credit or an unfavorable relationship between production costs and prices received for agricultural commodities. EE loans are not currently funded, however, such outstanding loans are serviced by the Agency or the lender in the case of a guaranteed EE loan.

Emergency loan
is a loan made to eligible applicants who have incurred substantial financial losses from a disaster.

Entity
is a corporation, partnership, joint operation, cooperative, limited liability company or trust.

Essential family household expenses
are the expenses associated with providing food, clothing, and shelter necessary to maintain the borrower and the immediate family of the borrower.

Essential family living and farm operating expenses:

(1) Essential expenses are those which are basic, crucial or indispensable.

(2) In determining what are essential family living and farm operating expenses for a particular family and farm, the Agency will consider the following:

(i) The individual borrower's operation;

(ii) What is typical for that type of operation in the area; and

(iii) What is an efficient method of production considering the borrower's resources.

(3) Essential family living and farm operating expenses include, but are not limited to essential: household operating expenses; food, including lunches; clothing and personal care; health and medical expenses, including medical insurance; house repair and sanitation; school and church expenses; transportation; hired labor; machinery repair; farm building and fence repair; interest on loans and credit or purchase agreement; rent on equipment, land, and buildings; feed for animals; seed, fertilizer, pesticides, herbicides, spray materials and other necessary farm supplies; livestock expenses, including medical supplies, artificial insemination, and veterinarian bills; machinery hire; fuel and oil; personal property taxes; real estate taxes; water charges; personal, property and crop insurance; auto and truck operating expenses; and utility payments.

Established farmer
is a farmer who is the operator of the farming operation (in the case of a farming operation operated by an entity, its members as a group) who:

(1) Actively participated in the operation and the management, including but not limited to, exercising control over, making decisions regarding, and establishing the direction of, the farming operation at the time of the disaster;

(2) Spends a substantial portion of time in carrying out the farming operation;

(3) Planted the crop, or purchased or produced the livestock on the farming operation;

(4) In the case of an entity, is primarily engaged in farming and has over 50 percent of its gross income from all sources from its farming operation based on the farming operation's projected cash flow for the next crop

year or the next 12-month period, as mutually determined; and

(5) Is not:

(i) An entity with an ownership interest of 50 percent or more held by one or more entities; or

(ii) An integrated livestock, poultry, or fish processor who operates primarily and directly as a commercial business through contracts or business arrangements with farmers, except a grower under contract with an integrator or processor may be considered an established farmer, provided the operation is not managed by an outside full-time manager or management service and such loans shall be based on the applicant's share of the agricultural production as set forth in the contract;

(iii) An operation which employees a full time farm manager.

False information
is information provided by an applicant, borrower or other source to the Agency that the applicant or borrower knows to be incorrect.

Family farm
is a farm that:

(1) Produces agricultural commodities for sale in sufficient quantities so that it is recognized as a farm rather than a rural residence, and in a typical year generates net cash income that improves the family's standard of living;

(2) Generates or will generate in a typical year annual gross farm income which does not exceed the greater of $750,000 or 95 percent of the statistical distribution of the income of farms in the State with gross sales in excess of $10,000 based on the farm data and survey of farm economic factors most recently published by the National Agricultural Statistics Service, USDA, or any successor agency;

(3) Has both physical labor and management provided as follows:

(i) The majority of day-to-day, operational decisions, and all strategic management decisions are made by:

(A) The borrower and persons related to the borrower by blood or marriage, for an individual borrower; or

(B) The members responsible for operating the farm, in the case of an entity.

(ii) A substantial amount of labor to operate the farm is provided by:

(A) The borrower and persons related to the borrower by blood or marriage, for an individual borrower; or

(B) The members responsible for operating the farm, in the case of an entity.

(4) May use full-time hired labor in amounts only to supplement family labor.

(5) May use reasonable amounts of temporary labor for seasonal peak workload periods or intermittently for labor intensive activities.

Family living expenses
are the costs of providing for the needs of family members.

Family members
are 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
is a tract or tracts of land, improvements, and other appurtenances that 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 the term “ranch.” It may also include land and improvements and facilities used in a non-eligible enterprise or the residence which, although physically separate from the farm acreage, is ordinarily treated as part of the farm in the local community.

Farm income
is the proceeds from the sale of agricultural commodities that are normally sold annually during the regular course of business, such as crops, feeder livestock, and other farm products.

Farm Loan Programs
are Agency programs to make, guarantee, and service loans to family farmers authorized under the Act or Agency regulations.

Farm Ownership loan
is a loan made to eligible applicants to purchase, enlarge, or make capital improvements to family farms, or to promote soil and water conservation and protection. It also includes the Beginning Farmer Downpayment loan.

Farm Programs payments
are benefits received under FSA for any commodity, disaster, or cost share programs.

Farmer
is an individual, corporation, partnership, joint operation, cooperative, trust, or limited liability company who is engaged in farming.

Feasible plan
is when an applicant or borrower's cash flow budget indicates that there is sufficient cash inflow to pay all cash outflow each year during the term of the loan. If a loan approval or restructuring action exceeds one production cycle and the planned cash flow budget is atypical due to cash or inventory on hand, new enterprises, carryover debt, atypical planned purchases, important operating changes, or other reasons, a cash flow budget must be prepared that reflects a typical cycle. If the request is for only one cycle, a feasible plan for only one cycle is required for approval.

Financially distressed borrower
is a borrower unable to make payments as planned for the current or next business accounting period or to project a feasible plan of operation for the next business accounting period.

Financially viable operation
is an operation that, 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 assistance. 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 non-farm income;

(3) Provide for replacement of capital items; and

(4) Provide for long-term financial growth.

Fixture
is 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 damaging the item itself.

Floodplains
are lowland and relatively flat areas adjoining inland and coastal waters, including flood-prone areas of offshore islands, including at a minimum, that area subject to a one percent or greater chance of flooding in any given year. The base floodplain shall be used to designate the 100-year floodplain (one percent chance floodplain). The critical floodplain is defined as the 500-year floodplain (0.2 percent chance floodplain).

Foreclosed
is the completed act of selling security either under the power of sale in the security instrument or through court proceedings.

Foreclosure sale
is the act of selling security either under the power of sale in the security instrument or through court proceedings.

Good faith
is the borrower's adherence to all written agreements with the Agency including, but not limited to, loan application, loan agreement, security instruments, operating plans, and agreements for use of proceeds. The Agency considers a borrower to act in good faith, however, when the borrower is unable to adhere to all agreements due to circumstances beyond the borrower's control. Good faith does not include fraud, waste, or conversion.

Graduation
is the payment in full of all direct FLP loans made for operating, real estate, or both purposes by refinancing with other credit sources either with or without an Agency guarantee.

Guaranteed loan
is a loan made and serviced by a lender for which the Agency has entered into a Lender's Agreement and for which the Agency has issued a Loan Guarantee. This term

also includes guaranteed lines of credit except where otherwise indicated.

Hazard insurance
is insurance covering 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 Agency security or that is required by law.

Holder
is a person or organization other than the lender that holds all or a part of the guaranteed portion of an Agency guaranteed loan but has no servicing responsibilities. When the lender assigns a part of the guaranteed loan by executing an assignment form, the assignee becomes a holder.

Homestead protection
is the borrower's right to lease with an option to purchase the principal residence and up to 10 acres of adjoining land which secured an FLP loan.

Homestead protection property
is the principal residence that secured an FLP loan and is subject to homestead protection.

Household contents
are essential household items necessary to maintain viable living quarters. Household contents exclude all luxury items such as jewelry, furs, antiques, paintings, etc.

Inaccurate information
is incorrect information provided by a borrower or other source inadvertently without intent to obtain benefits fraudulently.

Indian reservation
is all land located within the limits of any Indian reservation under the jurisdiction of the United States, notwithstanding the issuance of any patent, and including rights-of-way running through the reservation; trust or restricted land located within the boundaries of a former reservation of a Federally recognized Indian Tribe in the State of Oklahoma; or all Indian allotments the Indian titles to which have not been extinguished if such allotments are subject to the jurisdiction of a Federally recognized Indian Tribe.

In-house expenses
are 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
is the signed agreement between the Agency and the lender containing the terms and conditions under which the Agency will make interest assistance payments to the lender on behalf of the guaranteed loan borrower.

Interest assistance anniversary date
is the 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
is the yearly review process that includes an analysis of the borrower's farming operation and need for continued interest assistance, completion of the needs test, and a request for continuation of interest assistance.

Inventory property
is real estate and chattel property and related rights to which the Federal Government has acquired title.

Joint financing arrangement
is an arrangement in which two or more lenders make separate loans simultaneously to supply the funds required by one applicant.

Joint operation
is an operation run by individuals who have agreed to operate a farm or farms together as an entity, sharing equally or unequally land, labor, equipment, expenses, or income, or some combination of these items. The real and personal property is owned separately or jointly by the individuals.

Leasehold
is a right to use farm property for a specific period of time under conditions provided for in a lease agreement.

Lender
is the organization making and servicing a loan, or advancing and servicing a line of credit, that is guaranteed by the Agency. The lender is also the party requesting a guarantee.

Lender's Agreement
is the appropriate Agency form executed by the Agency and the lender setting forth their loan responsibilities when the Loan Guarantee is issued.

Lien
is 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.

Limited resource interest rate
is an interest rate below the Agency's regular interest rate available to farmers who are unable to develop a feasible plan at regular rates and are requesting:

(1) FO or OL loan assistance under part 764 of this title; or

(2) Primary loan servicing on an FO, OL, or SW loan under part 766 of this title.

Line of Credit Agreement
is a contract between the borrower and the lender that contains certain lender and borrower conditions, limitations, and responsibilities for credit extension and acceptance where loan principal balance may fluctuate throughout the term of the contract.

Liquidation
is the act of selling all security for recovery of amounts owed to the Agency.

Liquidation expenses
are the costs of an appraisal, due diligence evaluation, environmental assessment, outside attorney fees, and other costs incurred as a direct result of liquidating the security for a direct or guaranteed loan. Liquidation expenses do not include internal Agency expenses for a direct loan or in-house expenses for a guaranteed loan.

Livestock
is a member of the animal kingdom, or product thereof, as determined by the Agency.

Loan Agreement
is a contract between the borrower and the lender that contains certain lender and borrower agreements, conditions, limitations, and responsibilities for credit extension and acceptance.

Loan applicant
is the party applying to a lender for a guaranteed loan or to the Agency for a direct loan.

Loan servicing programs
include primary loan servicing programs, conservation contract, current market value buyout, and homestead protection.

Loan transaction
is any loan approval or servicing action.

Loss claim
is 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
is the net amount of loan loss claims paid on guaranteed OL, FO, and SW loans made in the past seven years divided by the total loan amount of all such loans made in the past seven years.

Low-Documentation Operating loan
is an OL loan made to eligible applicants based on reduced documentation.

Majority interest
is more than a 50 percent interest in an entity held by an individual or group of individuals.

Market value
is the amount that an informed and willing buyer would pay an informed and willing, but not forced, seller in a completely voluntary sale.

Mineral right
is an ownership interest in minerals in land, with or without ownership of the surface of the land.

Mortgage
is a legal instrument giving the lender a security interest or lien on real or personal property of any kind. The term “mortgage” also includes the terms “deed of trust” and “security agreement.”

Natural disaster
is unusual and adverse weather conditions or natural phenomena that has substantially affected farmers by causing severe physical or production, or both, losses.

Negligent servicing
is servicing that fails to include those actions that are considered normal industry standards of loan management or comply with the lender's agreement or the guarantee.

Negligent servicing includes failure to act or failure to act in a timely manner consistent with actions of a reasonable lender in loan making, servicing, and collection.

Negotiated sale
is a sale in which there is a bargaining of price or terms, or both.

Net recovery value of security property
is the market value of the security property, assuming that the lender in the case of a guaranteed loan, or the Agency in the case of a direct loan, will acquire the property and sell it for its highest and best use, less the lender's or the Agency's costs of property acquisition, retention, maintenance, and liquidation. The net recovery value of non-essential assets is the appraised market value of the assets less any prior liens and any selling costs which may include such items as taxes due, commissions and advertising costs. However, no deduction is made for maintenance of the property while in inventory.

Non-capitalized interest
is interest on a loan that was not reclassified as principal at the time of restructuring. Between October 10, 1988, and November 27, 1990, the Agency did not capitalize interest that was less than 90 days past due when restructuring a direct loan.

Non-eligible enterprise
is a business that meets the criteria in any one of the following categories:

(1) Production of exotic or non-farm animals. An enterprise which produces animals, birds, or aquatic organisms or their products which are not ordinarily associated with human consumption, fiber, or draft use, or for which a ready market does not exist.

(2) Production or marketing of non-farm goods or services. An enterprise which might be agriculturally related but does not produce or market products from the farm.

(3) Processing or marketing of farm products when the majority of the commodities processed or marketed are not produced by the farm operation.

Non-essential assets
are assets in which the borrower has an ownership interest, that:

(1) Do not contribute to:

(i) Income to pay essential family living expenses, or

(ii) The farming operation; and

(2) Are not exempt from judgment creditors or in a bankruptcy action.

Non-program loan
is a loan made to a borrower who does not meet the eligibility requirements for a program loan.

Normal income security
is all security not considered basic security, including crops, livestock, poultry products, other property covered by Agency liens that is sold in conjunction with the operation of a farm or other business, and Farm Program payments.

Normal production yield
as used in 7 CFR 764 for EM loans, is:

(1) The per acre actual production history of the crops produced by the farming operation used to determine Federal Crop Insurance payments or payment under the Non-Insured Assistance Program for the production year during which the disaster occurred;

(2) The applicant's own production records or the records of production on which FSA farm program payments are made contained in the applicant's farm program file for the previous three years, when the actual production history is not available;

(3) The county average production yield, when the production records outlined in (1) and (2) above are not available.

Note
is written evidence of indebtedness, such as a promissory note, bond, or assumption agreement.

Operating loan
is a loan made to an eligible applicant to assist with the financial costs of operating a farm.

Owner-operator
is the individual or entity that owns the land on which a farm is located and provides the labor, management, and capital to operate the farm. An entity may have to receive authorization from the State in which the farm is located to be the owner-operator of the farm.

Partnership
is 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 partnership will operate a farm. It also must be authorized to own both real and personal property and to incur debt in its own name.

Physical loss
is verifiable damage or destruction with respect to real estate or chattel, excluding annual growing crops.

Potential liquidation value
is the amount of a lender's protective bid at a foreclosure sale. Potential liquidation value is determined by an independent appraiser using comparables from other forced liquidation sales.

Present value
is the present worth of a future stream of payments discounted to the current date.

Presidentially-designated emergency
is a major disaster or emergency designated by the President under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 U.S.C. 5121
et seq.
).

Primary loan servicing programs
include:

(1) Loan consolidation and rescheduling, or reamortization;

(2) Interest rate reduction, including use of the limited resource rate program;

(3) Deferral;

(4) Write-down of the principal or accumulated interest; or

(5) Any combination of the above.

Production cycle
is the time it takes to produce an agricultural commodity from the beginning of the production process until it matures.

Production loss
is verifiable damage or destruction with respect to annual growing crops.

Program loans
include FO, OL, and EM. In addition, for loan servicing purposes the term includes existing loans for the following programs no longer funded: SW, RL, EE, ST, and RHF.

Prospectus
consists of a transmittal letter, a current balance sheet and projected year's budget which is sent to commercial lenders to determine their interest in financing or refinancing specific Agency direct loan applicants and borrowers.

Protective advance
is an advance made by the Agency or a lender to protect or preserve the collateral from loss or deterioration.

Quarantine
is a quarantine imposed by the Secretary under the Plant Protection Act or animal quarantine laws (as defined in section 2509 of the Food, Agriculture, Conservation and Trade Act of 1990).

Reamortization
is the rewriting of rates or terms, or both, of a loan made for real estate purposes.

Reasonable rates and terms
are those commercial rates and terms that other farmers are expected to meet when borrowing from a commercial lender or private source for a similar purpose and similar period of time. The “similar period of time” of available commercial loans will be measured against, but need not be the same as, the remaining or original term of the loan.

Recoverable cost
is a loan cost expense chargeable to either a borrower or property account.

Recreation loan
is a loan that was made to eligible applicants to assist in the conversion of all or a portion of the farm they owned or operated to outdoor income producing recreation enterprises to supplement or supplant farm income. RL's are no longer funded, however, such outstanding loans are serviced by the Agency.

Redemption right
is a Federal or state right to reclaim property for a period of time established by law, by paying the amount paid at the involuntary sale plus accrued interest and costs.

Related by blood or marriage
is being connected to one another as husband, wife, parent, child, brother, or sister.

Relative
is the spouse and anyone having one the following relationships to an applicant or borrower: Parent, son, daughter, sibling, stepparent, stepson, stepdaughter, stepbrother, stepsister, half brother, half sister, uncle, aunt, nephew, niece, grandparent, grandson, granddaughter, or the spouses of the foregoing.

Repossessed property
is security property in the Agency's custody.

Rescheduling
is the rewriting of the rates or terms, or both, of a loan made for operating purposes.

Restructuring
see primary loan servicing programs.

Rural youth
is a person who has

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A04-1891. Public record. Not legal advice.