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

DEPARTMENT OF AGRICULTURE

Farm Service Agency

7 CFR Parts 718, 761, 762, 763, 764, 765, 766, 767, 768, and 769

Commodity Credit Corporation

7 CFR Part 1405

RIN 0560-AF60

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

AGENCY:

Farm Service Agency, USDA.

ACTION:

Final rule.

SUMMARY:

This rule streamlines the Farm Service Agency's (FSA) regulations governing its direct Farm Loan Programs. The final rule simplifies and clarifies FSA's direct loan regulations; implements the recommendations of the USDA Civil Rights Action Team; meets the objectives of the Paperwork Reduction Act of 1995; and separates FSA's direct Farm Loan Programs regulations from the Rural Development mission area's loan program regulations.

DATES:

Effective Date:

December 31, 2007.

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:

Discussion of the Final Rule

On February 9, 2004, the agency published a proposed rule (69 FR 6056-6121) to streamline regulations governing its direct Farm Loan Programs (FLP). The comment period closed on April 9, 2004. The agency received several comments requesting the comment period to be reopened. The agency reopened the comment period until May 4, 2004 (69 FR 20834). In response to the proposed rule the agency received 1,583 comments from 593 individuals and organizations, including 181 banks or banking organizations, 168 individuals, 81 FSA employees, 71 Farm Credit Administration offices or employees, 42 agricultural organizations, 18 state agencies or officials, 13 Farm Bureaus, five State representatives, three Federal agencies, two FSA County Committee members, one tribal association, one university and one loan packager. In addition, six comment letters signed by multiple Members of the United States Congress were received.

Seven comments addressed the agency's decision to move the administrative provisions of program delivery from the Code of Federal Regulations (CFR) to a series of agency handbooks. Three comments opposed the agency's decision while four comments supported it. In accordance with the Administrative Procedures Act, both the proposed and the final rules provide the substantive requirements applicable to the public requesting assistance or benefits from FSA, not internal agency procedures and processes. The agency will issue its internal guidance in handbooks simultaneously with the final rule, since internal guidance only describes the operating procedures of the agency and does not impact services provided to applicants and borrowers. Further, the agency is working on making all its handbooks available on the internet so that any interested party may view, download, and print agency handbooks as appropriate. Therefore, these comments were not adopted.

Four comments were received requesting the agency reopen the comment period. As noted above, the agency reopened and extended the comment period from April 9, 2004, to May 4, 2004, and published a

Federal Register

notice to that effect on April 19, 2004.

Eleven comments provided general comments not related to any specific part, section, or policy of the proposed rule. Therefore, the agency did not take any action regarding these comments.

The following provides a summary of the comments received and the agency's response by CFR part.

Part 761—General Program Administration

The following discussion addresses the comments received on Part 761.

Section 761.2 Abbreviations and Definitions

Three comments were received on the “active borrower” and “borrower” definitions. Two comments stated the definitions as written are very similar, and therefore, the definition of “active borrower” should be removed from the CFR. The other comment stated the term “active borrower” is not used in the proposed rule. The agency agrees with the comments and has removed the definition.

One comment was received on the “agreement for the use of proceeds” definition. The comment stated the agreement for the use of proceeds has not benefited borrowers or the agency since its inception. Further, the comment stated if the comment is not adopted, the agency should initiate a study on how the agreement for the use of proceeds has benefited the agency's borrowers. Section 335(f) of the Consolidated Farm and Rural Development Act (Act) (7 U.S.C. 1985(f)) requires the agency to release normal income security proceeds to borrowers for essential family living and farm operating expenses until the loan is accelerated. Further, Section 335(f)(6) of the Act provides if a borrower is required to plan or report how proceeds from the sale of security will be used, the agency must notify the borrower of (a) the reporting requirement; (b) the right to release proceeds; and (c) how to request such funds. The agency implemented the Act's requirement with the agreement for the use of proceeds that provides a means for reaching a consensus with a borrower regarding the use of proceeds from the sale of security property when the farm operating plan is developed. In addition, the agency delegates the authority to release proceeds to borrowers according to an established agreement for the use of proceeds to agency officials who do not have loan approval authority. Further, the agency utilizes the agreement for the use of proceeds to account for the agency's security. Moreover, the agency continuously evaluates forms utilized in administering its programs for effectiveness. Therefore, based on this comment as well as the comments received on § 765.302, the agency may conduct further analysis to determine if changes are warranted. Lastly, the agency did not propose to make changes to the agreement for the use of proceeds; therefore, the agency will not take any action on this comment at this time.

One comment stated the term “agribusiness” is not defined in the proposed rule. The agency does not use the term in the CFR; therefore, it does not need to include a definition for “agribusiness.”

Two comments were received on the “agricultural commodity” definition. One comment stated the agency must define “agriculture” in general to clarify and distinguish that agriculture does not solely consist of commodities and large-scale operations. The definition as written, the comment stated, will make many Indian farm operators ineligible for loans. The other comment stated that the narrow definition of “agricultural commodity” adversely impacts the definition of “basic part of the applicant's total farming operation” and urged that the definition of “agricultural commodity” be broadened to include a

specific list of agricultural products. The agency believes the definition is reasonably broad and provides the agency discretion in determining what constitutes an agricultural commodity. The agency does not use this term in the regulations to suggest that agriculture consists only of commodities and large-scale operations. Furthermore, the definitions of both “agricultural commodity” and “basic part of an applicant's total farming operation” included in the proposed rule are identical to existing definitions established in the agency's emergency loan regulations by a final rule (67 FR 791-801) published on January 8, 2002, after considering public comments. Based on reviews of assistance provided since the implementation of that final rule, the agency believes both definitions have resulted in the achievement of the program's mission and the agency is not aware of any adverse impact on the public. Therefore, neither comment is adopted.

Two comments were received on the “applicant” definition. One comment stated the definition is not clear if husband and wife applicants are considered as a joint operation. Further, the comment objected to husband and wife applicants being considered joint operations. The agency has not revised the definition based on this comment, but, the agency has revised the applicant eligibility requirements under § 764.51, as discussed under that section heading. The other comment stated the agency should eliminate the definition and use “lender applicant” in the guaranteed loan program. The agency clarified the definition of “applicant” to be applicable to both direct and guaranteed loan programs. The agency believes using the terms “lender applicant” and “lender” in the guaranteed loan program, however, would be confusing, therefore, the comment is not adopted. Further, to avoid confusion, the agency removed the definition “loan applicant” in the final rule. Therefore, the comment is not adopted.

One comment was received on the “approval official” definition. The comment stated the definition as written is confusing, because it contains the term “field official” which is not defined. The agency agrees with the comment, and removed the definition and replaced the term in the text with the word “Agency.”

One comment was received on the “aquaculture” definition. The comment stated the agency should work with Tribes in the Northwestern, Northeastern and Midwestern United States to ensure the definition covers aquaculture on Tribal reservations. The agency believes the definition as written is broad enough to cover aquaculture operations in every part of the country. Further, the agency evaluates each operation on its merits. Therefore, the comment is not adopted.

Three comments were received on the “average farm customer” definition. Two comments supported the definition as written. One comment stated the definition as proposed eliminates Indian producers with niche markets who farm traditionally and practice sustainable agriculture. The agency does not foresee that Indian producers will be impacted by the definition since producers eligible to receive guaranteed loans will remain eligible. Therefore, the comment is not adopted.

One comment was received on the “basic part of an applicant's total farming operation” definition. The comment stated the definition as written is narrowly based on the definition of “agricultural commodity” without a definition of agriculture. Section 329 of the Act (7 U.S.C. 1970), in part, provides the agency may make emergency loans to applicants based on production losses if the applicant shows that a single enterprise that is a “basic part of the applicant's farming, ranching, or aquaculture operation” has suffered at least a 30 percent loss of normal per acre or per animal production. The definition clarifies the agency's implementation of the Act's provisions and as discussed in the agency's response to comments on the definition of “agricultural commodity,” the agency does not believe either definition as written, has an adverse impact on an applicant's eligibility. Therefore, the comment is not adopted.

Five comments were received on the “beginning farmer” definition. Three comments stated that the definition precludes applicants with less than 3 years of experience from meeting the conditions of the beginning farmer definition. Further, the comments stated an applicant with less than 3 years of experience is eligible for a direct farm ownership loan, but is not eligible for a beginning farmer downpayment farm ownership loan. The agency agrees with the comments and has revised the definition accordingly. One comment stated the agency should revise the definition to remove the word “direct” in describing “OL applicant” from subparagraph (5). The subparagraph is not applicable to direct or guaranteed operating loans (OL) under the statutory definition, therefore, the agency agrees and has revised the definition accordingly. Further, the comment stated the agency should use the median acreage, as provided in Section 343(a)(11)(F) (7 U.S.C. 1991(a)(11)(F)) of the Act, to determine if an applicant is a beginning farmer. Section 343(a)(11)(F) of the Act was enacted under the provisions of the Agricultural Credit Improvement Act of 1992. As addressed in the preamble of the agency's 1993 final rule (58 FR 48275) published on September 15, 1993, implementing the regulatory definition of “beginning farmer,” while the statute referred to “the median acreage of farm * * * as reported in the most recent census of agriculture,” the agency utilized the term “average acreage” in its regulations as the census of agriculture did not capture “median acreage” at that time. The National Agricultural Statistics Service now publishes both the median and average farm size by county. Analysis of the data reveals that the median acreage is typically lower than the average acreage. Adoption of the comment may result in some applicants, who meet the existing requirements of the definition, not being considered a “beginning farmer.” However, the comment is correct in that both the existing and proposed regulations do not match the statute. Therefore, the comment is adopted and the definition has been revised accordingly.

One comment stated the agency should remove the requirement that all members of an entity must materially and substantially participate in the operation. Section 343(a)(11) (7 U.S.C. 1991(a(11)) of the Act defines the term “qualified beginning farmer or rancher” and provides that for loans made to entities, the entity members must materially and substantially participate in the operation of the farm. The definition was based on the Act's provision, therefore, the comment cannot be adopted.

Three comments were received on the “borrower” definition. One comment stated the definition does not seem to be applicable to the guaranteed loan program. The agency agrees with the comment and has revised the definition accordingly. Another comment stated the agency should revise the definition to exclude cosigners since cosigners merely sign the promissory note to assure repayment of the loan and are not program borrowers as defined in the agency's regulations. The agency does not agree with the comment because a cosigner has the same liability for the debt as any other borrower who signed the promissory note. Therefore, the comment is not adopted. The last comment stated the agency should clarify the definition to provide if the borrower's name should match the

operator's name utilized by Farm Programs in their internal agency systems. The agency believes the definition as written is clear; signature requirements are a separate issue. Further, as stated in § 761.2, the definitions included in this part are applicable to FLP only. Therefore, the comment is not adopted.

One comment was received on the “cash flow budget” definition. The comment stated that commercial lenders have adopted the practice of not including advances or principal repayments on lines of credit in the cash flow, since they are considered cash flow neutral. The comment stated the agency should revise the definition to match commercial lenders' standards. The agency agrees with the comment and has revised the definition accordingly.

One comment was received on the “chattel security” definition. The comment stated the agency should clarify the definition to state that chattel is non-real estate property. The agency obtains a security interest using mortgages, deeds of trust, financing statements and security agreements. The agency believes the comment is proposing to delineate between chattels and real estate which cannot be done uniformly in all cases, especially for loans for which security is growing crops and fixtures. Further, the agency believes the definition as written is reasonably clear. Therefore, the comment is not adopted.

One comment stated the term “commercial classified account” is not used in the rule, while the terms “immediate family” and “immediate family member” even though they are used, are not defined. The agency agrees and, in the final rule, the agency has removed the term “commercial classified account” and replaced the terms “immediate family” and “immediate family member” with the defined “family member” term.

Two comments were received on the “conservation contract review team” definition. Both comments stated the agency should remove the adjacent public landowners from the definition. The comments did not provide any reason for removing public landowners from the conservation contract review team. The agency has utilized the definition, as published in the proposed rule, since September 14, 1988, and has not encountered any difficulties or concerns. Further, the agency believes public landowners may have concerns or relevant information regarding the potential easement that may affect the agency's decision. Therefore, the comments are not adopted.

One comment was received on the “cosigner” definition. The comment stated the agency should revise the definition to state that cosigners are not eligible to receive loan servicing. The agency agrees that cosigners do not have independent rights to receive loan servicing, but may submit a joint application for servicing with all other liable parties. Therefore, the definition is revised accordingly.

One comment was received on the “current market value buyout” definition. The comment stated the agency should revise the definition to remove liquidation costs as the definition conflicts with the explanation of current market value buyout included in Appendix B of 7 CFR part 766. The agency agrees with the comment and has revised the definition as the provisions of Appendix B are identical to existing regulations published in subpart S of 7 CFR part 1951. Furthermore, the Agency did not address a revision to the existing regulations in the preamble of the proposed rule.

One comment was received on the “debt forgiveness” definition. The comment stated the agency should include in the definition the Act's provision, found in Section 343(a)(12)(B)(ii), which provides that “any write-down provided as part of a resolution of a discrimination complaint against the Secretary” is not considered debt forgiveness. The agency agrees with the comment and has revised the definition. The agency also has clarified the definition to state that the term does not include prior debt forgiveness that is repaid in full and debt reduction in exchange for a conservation contract.

One comment was received on the “debt service margin” definition. The comment stated the proposed calculation would take a borrower off of limited resource rates if the borrower has atypical or one-time high inventories or cash. Therefore, the comment stated the agency should use the term debt and capital lease coverage ratio, which is the industry standard to calculate the debt service margin. The agency uses a typical plan to calculate the debt service margin and does not consider atypical high inventories or cash when running the Debt and Loan Restructuring System (DALR$) for primary loan servicing. Further, the definition of “feasible plan” provides that the farm operating plan will not be based on atypical or one-time high inventories, or cash on hand. Therefore, the comment is not adopted.

Six comments were received on the “delinquent borrower” definition. All comments stated the definition contained in the proposed rule did not match the definition in the agency's final rule published on February 4, 2004 (69 FR 5264-5267). The agency agrees with the comments, and has revised the definition accordingly.

Three comments were received on the “entity” definition. One comment stated that the term “trust,” as used in the definition, must be more clearly defined “so that it includes trusts established in treaties” making tribal farms eligible for assistance. Two comments stated that it was not clear in the proposed rule how less than traditional entity structures would be handled. Act section 302(a) (7 U.S.C. 1922(a)) for farm ownership loans, section 311(a) (7 U.S.C. 1941(a)) for operating loans, and section 321(a) (7 U.S.C. 1961(a)) for emergency loans specifically provide the types of entities eligible to receive loans; entity applicants must fit within at least one of the types listed. The agency does not believe the definition, as written, limits the type of trust, or other organization listed, that are considered an entity under the Act's provisions. However, entity applicants must meet the statutory eligibility requirement of being the owner-operator or tenant-operator of a family farm, as well as all other applicable eligibility and loan making requirements. The agency believes the definition, as written, will not result in the adverse impacts suggested in the comments; therefore, the comments are not adopted.

Two comments were received on the “essential family household expenses” definition. One comment stated that the definition, along with the definition of “essential family living and farm operating expenses,” makes the rule unclear. The agency believes the “essential family household expenses” and the “essential family living and farm operating expenses” definitions are similar, and has therefore, removed the definition of “essential family household expenses” in the final rule as unnecessary and replaced the term throughout the CFR. The other comment stated the agency should revise the text “the borrower and the immediate family of the borrower” to read “the borrower, spouse, and immediate family members” since the agency defined the term “family member.” Since the agency removed the definition of “essential family household expenses,” the agency revised the definition of “family living expenses” to include expenses for the borrower's spouse and immediate family members.

Two comments were received on the “essential family living and farm operating expenses” definition. One comment stated that the agency should

revise the definition to provide that the agency will consider the expenses typical for the local community, instead of expenses typical for that type of operation in the area. Further, the comment stated the agency should remove the provision that the agency will consider what constitutes an efficient method of production for the borrower's resources because it is ambiguous. The agency believes using the term “local community” will make the definition unclear when applied to a rural area. Further, the agency believes the provision, as written, furthers the agency's mission of providing supervised credit and allowing the agency and the applicant to adjust to the needs of the operation. Therefore, this part of the comment is not adopted. The comment also stated the agency should include in the definition nursing care of immediate family members not living in the same household. The agency has revised the definition of “family living expenses” to include the costs of providing for the needs of family members and those for whom the borrower has a financial obligation, such as alimony, child support, or nursing care of an elderly parent. The agency agrees that nursing care of immediate family members is a family living expense, but the agency believes it is not always an essential family living expense. Therefore, this part of the comment is not adopted. Lastly, the comment stated the agency should remove the reference to church expenses from the definition and replace it with religious expenses. The other comment stated the agency should revise the definition to remove the reference to “church.” The agency agrees with the comments and has revised the definition accordingly.

Eight comments were received on the “established farmer” definition. Two comments stated the agency should remove the subparagraph describing entity eligibility from the definition because it limits the use of different legal structures for families attempting to transfer the farm to a new generation. The term “established farmer” is used only in subpart H of 7 CFR part 764 which addresses requirements specific to emergency loans in accordance with section 321 of the Act (7 U.S.C. 1961). The authorized uses for emergency loan funds include the repair or replacement of essential property damaged or destroyed as a result of a disaster; however, emergency loan funds would not be used to finance the transfer of a farm to a new generation. The agency does not agree that the provision of the definition adversely impacts inter-generational transfers and therefore, the comments are not adopted.

Similar concerns regarding the impact of entity eligibility requirements were received in response to regulations at § 764.101. As described in the agency's response to those comments, the agency revised the entity eligibility requirements contained in that section, and as a result made conforming changes to the definition of “established farmer” by revising the provision that an established farmer is not “an entity with an ownership interest of 50 percent or more held by one or more entities'' to require that an entity cannot be “an entity whose members are themselves entities.”

One comment stated that the “established farmer” definition should be revised to recognize that Tribal farms have sovereign rights that allow for complex land issues, which often require the use of a full time farm manager. As discussed in the response to comments for the definition of entity, the agency does not believe the regulations, as written, impose any additional limitations on a particular type of entity. However, agency assistance is only available to entity operations that are family farms and, therefore, must have a majority of the day-to-day operational and strategic management decisions made by the members operating the farm, as well as meet all other requirements established within the definition of family farm. Therefore, this portion of the comment is not adopted. Further, the comment stated that the “established farmer” definition requirement that 50 percent or more of the ownership in the entity cannot be held by another entity will exclude Tribal farms. As discussed in the response to comments received on the general eligibility requirements for loan making (§ 764.101), the agency has revised the eligibility requirements regarding entities to provide that an entity applicant cannot be composed of members that are themselves entities. Therefore, appropriate conforming changes have been made in the CFR, and this portion of the comment is not adopted.

Two comments stated the requirement in the “established farmer” definition that the entity is primarily engaged in farming and has over 50 percent of its gross income from all sources from farming, is detrimental to small or beginning farmers who rely on non-farm income to meet operating and family living expenses. This requirement is supported by the “family farm” requirement that the farm produce “agricultural commodities for sale in sufficient quantities to be recognized as a farm rather than a rural residence.” Furthermore, the 50 percent gross income requirement is included in existing regulations published in 7 CFR 764.2 and the agency is not aware of any adverse impacts on the public; therefore, the comments are not adopted. One comment stated it is not clear what the term “such loans” refers to in subparagraph (5)(ii) of the definition. The agency agrees with the comment and has revised the definition to refer to “Agency loans.” Two comments suggested that the word “employees” in the last sentence of the definition be replaced with the word “employs.” The agency agrees with the comments and has revised the definition accordingly.

Two comments were received on the “false information” definition. One comment stated the agency should revise the definition to include information the applicant or borrower should have known to be false, because it is difficult for the agency to prove the information the applicant or borrower submitted to the agency was false. While the agency agrees with the comment, the agency believes it is even more difficult to prove the applicant or borrower should have known information submitted to the agency was false. Therefore, the comment is not adopted. The other comment stated the agency should revise the definition to include information the applicant or borrower chose to withhold from the agency. The term is used only in subpart F of 7 CFR part 766 for the submission of false information. Since the proposal concerns information not submitted to the agency, and therefore not relied on, the comment is not adopted. Practically, however, in such cases the information submitted to the agency may be false in light of conflicting information not submitted and would, therefore, be covered by the definition.

Five hundred sixty-four comments were received on the “family farm” definition. Of the comments received, 12 supported the definition as proposed while 552 comments opposed it. The proposed definition would establish that the typical year gross income of the operation could not exceed the greater of $750,000 in annual sales, or the 95th percentile 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 published by the National Agricultural Statistics Service. The opposing comments stated the proposed definition would make a large number of family farms ineligible for direct and guaranteed agency loans. One hundred seventy comments

recommended the gross income limit be increased from $750,000 to $1,000,000, $1,500,000, or $2,500,000. Seventy-four comments opposed the use of any gross income limit. Fifty-two comments stated that the use of annual sales to determine eligibility was arbitrary. Thirty-one comments stated the proposed definition would exclude high value crop producing farms. Seventy comments stated the agency provided little justification in the proposed rule for using a gross farm income cap. Fourteen comments stated the agency does not have a statutory basis for changing the family farm definition. Thirteen comments opposed using a gross income limit that was not indexed to inflation. Therefore, because of the overwhelming opposition to the proposed requirement, the agency will not include a gross annual income in its family farm definition. However, as noted in the discussion of the proposed rule published on February 9, 2004, the broad guidelines contained within the existing definition have resulted in inconsistencies in applying the definition on a nationwide basis. The agency believes that the “family farm” definition in this final rule will minimize inconsistencies regarding management and labor requirements. Based upon comments received, the Office of Management and Budget recommends the agency seek public input as part of a further analysis regarding the inclusion of an appropriate nation-wide income limitation, which may necessitate future action. It is important to note that the definition of a “family farm” as stated in this final rule only applies to farm loan program eligibility requirements.

Further, the proposed “family farm” definition included the provision that the majority of the day-to-day operational and management decisions are made by the applicant and persons related to the applicant by blood or marriage. One hundred sixteen comments were received on the “related by blood or marriage” definition. All comments stated the definition as written excludes certain relationships, including, but not limited to, cousins, uncles, aunts, and grandparents and that as a result, partnerships or entities comprised of these individuals would not be considered a family farm. The agency agrees with the comments and revised the definition to include the relationships except cousins. In addition, in response to the concerns expressed, the agency revised the definition of “relative” to include cousin in the covered relationships. Furthermore, the agency revised the “family farm” definition to provide that the day-to-day operational and management decisions be made by the applicant and persons related to the applicant by blood or marriage or a relative of the applicant.

One comment expressed concern regarding the provision in the “family farm” definition that the farm “in a typical year generates net cash income that improves the family's standard of living” as the term “typical year” is not defined in the rule. The agency agrees that the provision is subject to different interpretations and could adversely impact applicants that have been subject to recent disasters. Therefore, the agency removed the provision from the definition.

One comment was received on the “family living expenses” definition. The comment stated the agency should remove the definition because the CFR already includes the “essential family living and farm operating expenses” definition. The agency believes the terms are not synonymous as all family living expenses are not considered essential. Further, the terms are utilized under different circumstances in the loan making and servicing process when the distinction is necessary. Therefore, the comment is not adopted.

One comment was received on the “family member” definition. The comment stated the agency should revise the definition to provide family members include the immediate members of the family for whom the borrower has a financial obligation, e.g., child support payments, alimony, nursing care for an elderly parent. The agency revised the definition of “family living expenses” to include the expenses provided in the comment, for family members who are the borrower's responsibility, as revising that definition is more appropriate.

One comment was received on the “farmer” definition. The comment stated the agency should revise the definition to provide that farmer is an individual or entity who is a family farmer. The agency believes the definition as written is adequate as not every farmer in the United States is a family farmer. Therefore, the comment is not adopted.

Two comments were received on the “feasible plan” definition. One comment stated the agency should revise the definition to state “feasible plan is when the cash flow budget shows total income equals or exceeds total cash outflow.” The agency does not agree with the comment to limit the evaluation of feasibility to include only “total income” as there may be other non-income sources of cash inflows, such as cash on hand, that impact the borrower's repayment ability. Therefore, the comment is not adopted. The other comment stated the agency should clarify the definition to provide that the margin after debt service and ending cash, depending on the loan requested, determine if the operation projects a feasible plan. The agency agrees that the feasibility for an annual operating loan should be evaluated differently than for a term loan. However, “margin after debt service” and “ending cash” are terms that apply to the Farm Business Plan, a software application utilized by the agency to determine feasibility for direct loan making and servicing requests. “Feasible plan” is a term applicable to regulations for both the direct and guaranteed loan programs. While the term “ending cash” refers to the applicant or borrower having “sufficient cash inflow to pay all cash outflow” and the term “margin after debt service” applies to consideration of a typical plan when the “loan approval or servicing action exceeds one production cycle,” the agency believes the definition, as written, adequately describes the requirements for both the direct and guaranteed loan programs. Therefore, the comment is not adopted.

One comment was received on the “financially distressed borrower” definition. The comment stated the definition should include borrowers who do not have a 110 percent debt service margin to match the DALR$ software program. The agency disagrees. The agency notifies financially distressed borrowers of the availability of loan servicing programs as provided under § 766.101. The agency does not consider a borrower who can develop a feasible plan, which does not require a margin, with less than 10 percent margin to be financially distressed. However, a borrower who is not delinquent, but cannot develop a feasible plan for the current or next production cycle, is considered financially distressed and in need of loan servicing. Further, § 766.105(b)(1) provides the agency will attempt to achieve a 110 percent of debt service margin; however, under § 766.105(b)(3) the agency only requires the borrower “be able to develop a feasible plan with at least 100 percent of debt service margin” to be considered for loan servicing programs. If the agency revises the definition as provided in the comment, the agency would have to re-notify all borrowers restructured with a debt service margin of less than 110 percent immediately after the restructuring is complete. Therefore, the comment is not adopted. However, the

agency did revise the definition by removing the text, “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” as the term “business accounting period” is not defined. The removed text was replaced by the text, “unable to develop a feasible plan for the current or next production cycle” as the term “production cycle” is defined in the rule, and is more easily understood.

Six comments were received on the “financially viable operation” definition. One comment recommended the words “basic family living expenses” in the definition be revised to read “essential family living expenses.” One comment stated the agency should revise the definition to provide the operation must generate sufficient income to meet essential family living expenses to the extent they are not met by dependable non-farm income. The agency agrees with the comments and has revised the definition accordingly. In addition, the agency clarified the definition further to provide that it is applicable only under § 764.252, which provides the conditions applicants have to meet to request a waiver of the operating loan term limit. Four comments stated the definition requires the operation to generate sufficient income to provide for replacement of capital items and long-term financial growth, and that such an operation should qualify for commercial credit, with no agency assistance. Therefore, the comments stated the agency should either remove the definition or make it identical to the “feasible plan” definition. In addition, one of the comments stated the definition seems to provide that non-farm income can only be used to meet family living expenses, but that non-farm income is used to make debt payments, replace capital items and supplement working capital. Section 311(c)(4)(B) of the Act (7 U.S.C. 1941(c)(4)(B)) requires the applicant to have a financially viable operation for the agency to consider granting a one-time 2-year waiver of operating loan limits. The agency believes the definition as revised to refer to essential family living expenses should allow flexibility to small operations while meeting the statutory requirements; therefore, the comments are not adopted.

One comment was received on the “foreclosed” definition. The comment stated the agency should revise the definition to provide “foreclosed” is the completed act of selling real estate security under the power of sale in the security instrument or through judicial proceedings. The agency agrees with the comment and has revised the definition to refer to judicial proceedings.

One similar comment was received on the “foreclosure sale” definition. The comment stated the agency should revise the definition to provide “foreclosure sale” is the act of selling real estate security. The agency believes the definition as written is adequate since the agency can also foreclose on loans secured by chattels. Therefore, the comment is not adopted.

Two comments were received on the “good faith” definition. One comment supported the definition as written. Further, it stated it is not necessary for the agency to consult the Office of General Counsel to determine findings of fraud, waste or conversion. The other comment stated the agency should retain the requirement for a written Office of General Counsel opinion that has been a regulatory requirement since September of 1988, as such determinations have “grave consequences for the rights and interest of FLP borrowers * * *” The agency recognizes the seriousness of allegations of fraud, waste, and conversion and therefore has revised the definition to include the requirement that an opinion be obtained form the Office of the General Counsel. Further, the comment stated the “good faith” definition should allow for inadvertent departures from the agreements with the agency because good faith deals with the borrower's state of mind at the time the violation of the agreement occurs. The agency does not believe its staff can make determinations regarding a borrower's state of mind. The text, “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” adequately addresses this concern; therefore, the comment is not adopted. In addition, the comment stated the statutory requirement that a borrower who disposed of security and used proceeds for essential household and operating expenses prior to October 14, 1988, is not considered to lack good faith is not included in the definition. While the agency agrees with the comment, the agency does not believe a borrower will be determined to lack good faith based on events that occurred more than 15 years prior to a current loan or servicing application. However, as an added precaution, the agency handbook will provide guidance on dealing with applicants and borrowers who disposed of security and used proceeds for essential family living and farm operating expenses prior to October 14, 1988. Therefore, the comment is not adopted.

Lastly, the agency made an administrative revision to the “good faith” definition by clarifying that good faith requires an applicant or borrower to provide “current, complete, and truthful information when applying for assistance and in all past dealings with the Agency.” This text supports the acknowledgment currently included on each loan or servicing application.

One comment was received on the “graduation” definition. The comment stated the agency should revise the definition as the payment in full of one or more direct FLP loans. The agency believes the payment in full of one or more loans of the same type, when the borrower has several outstanding loans, cannot be considered as graduation because the borrower is still depending on the agency to obtain necessary credit for the operation. As agency loans are a temporary source of credit for borrowers, for the agency to measure its borrowers' success, borrowers have to obtain their credit needs from another source with or without an agency guarantee. Therefore, the comment is not adopted.

One comment was received on the “homestead protection” definition. The comment stated the agency should clarify that homestead protection applies to direct loan borrowers only. The agency agrees with the comment and has revised the definition accordingly.

One comment was received on the “homestead protection property” definition. The comment stated the agency should revise the definition to clarify that homestead protection property secured direct loans only. The agency agrees with the comment and has revised the definition accordingly.

One comment was received on the “household contents” definition. The comment stated the agency should remove the second sentence of the proposed definition with exclusions for luxury items. The agency believes the definition as written is reasonable. The term is used in Parts 764 and 766 in relation to disaster-related damages and taking additional security refers to needed, not luxury household items. Therefore, the comment is not adopted.

One comment was received on the “inaccurate information” definition. The comment stated the agency should revise the definition to include information provided by an applicant without the intent of fraudulently obtaining benefits. The agency agrees with the comment and has revised the definition to refer to applicants, borrowers, lenders, and other sources.

Two comments were received on the “inventory property” definition. One comment stated the definition as written includes all Federal property, such as Federal buildings and public land. Further, the comment stated the agency should clarify the definition to include real estate property held by guaranteed lenders after liquidation of guaranteed loans. The other comment stated the agency should revise the definition as real estate and chattel property to which the United States has acquired ownership rights. In response to the comments, the agency has clarified that the term covers such property that formerly secured an FLP loan and to which the Government has acquired title. The definition would not cover former security property held by the guaranteed lender.

One comment was received on the “joint operation” definition. The comment stated the agency should remove the definition. Section 343(a)(7) of the Act (7 U.S.C. 1991(a)(7)) defines the term “joint operation” and this type of entity is specifically listed as an eligible entity for farm loans. The proposed rule was based on the Act's provision; therefore, the comment cannot be adopted.

One comment was received on the “lien” definition. The comment stated the agency should revise the definition as a legally enforceable claim against real or chattel property. The agency agrees with the comment and has revised the definition to refer to real or chattel property.

One comment was received on the “line of credit agreement” definition. The comment stated the agency should revise the definition as a contract between the lender and the borrower that contains certain lender and borrower conditions, limitations, and responsibilities for revolving or non-revolving credit. The agency's current guaranteed regulations and handbook have contained the definition as published in the proposed rule since February 12, 1999, without causing adverse impacts on the program. The agency believes the less technical definition is reasonable and easily understood. Therefore, the comment is not adopted.

One comment was received on the “loss rate” definition. The comment stated the agency should revise the definition as the net amount of loan loss claims paid on loans made in the previous 7 years divided by the total loan amount guaranteed during the same period. The agency's current guaranteed regulations and handbook have contained the definition as published in the proposed rule since February 12, 1999, without causing adverse impacts on the program. Therefore, the comment is not adopted. The agency did however make an administrative revision to the definition to replace the text “guaranteed OL, Farm Ownership (FO), and Soil and Water (SW) loans” with the text “FSA guaranteed loans” as the agency has not made guaranteed SW loans in the last 7 years.

One comment was received on the “mortgage” definition. The comment stated the agency should revise the definition as a security instrument. The agency defines the term “mortgage” to clarify that it is synonymous with the term “deed of trust” in those States that use a deed of trust to obtain a lien on real estate. Further, the agency has added the definition for the term “security instrument” to describe any document that provides the agency with a security interest in real or personal property. Therefore, the comment is not adopted.

One comment was received on the “net recovery value of security property” definition. The comment stated the agency should include a separate definition for the term “net recovery value of non-essential assets” instead of including it in the definition of “net recovery value of security property.” The agency agrees with the comment. Therefore, the agency defined the term “net recovery value of non-essential assets” and revised the “net recovery value of security property” definition accordingly.

Seventeen comments were received on the “non-eligible enterprise” definition. Four comments supported the agency's proposed definition as written. One comment stated the agency should remove the definition and provide the eligible enterprises under the applicable loan purpose sections. The agency believes enumerating all the eligible enterprises will make the applicable loan purpose sections voluminous. Further, by not enumerating the eligible enterprises in the rule the agency eliminates the possibility of inadvertently omitting an eligible enterprise. Therefore, the comment is not adopted.

Another comment stated the “non-eligible enterprise” definition as written could be confusing to the public. The agency believes that by defining the term and providing in the CFR text that loan funds may not be used to finance a non-eligible enterprise, it eliminates confusion. Therefore, the comment is not adopted. One comment, while it supported the definition, stated the agency should provide that an economically viable transportation situation does not exist for the non-eligible enterprise's products. The agency believes that it is not the expenses associated with the enterprise that makes the enterprise ineligible for agency loans, it is the products the enterprise produces. Further, when considering any enterprise, the agency includes transportation expenses when it determines the operation's feasibility, since transportation costs can vary greatly from locality to locality. It is not the agency's intent to allow financing of non-eligible enterprises in one area and not in other areas based on transportation costs. Therefore, the comment is not adopted.

Five comments opposed the “non-eligible enterprise” definition as proposed because it eliminates tropical fish farming, the equine industry, llamas, alpacas, and ratites from being eligible for agency loans. The agency has a long-standing policy not to finance the production of animals kept solely for pleasure or companionship. This policy will continue. Therefore, the comments are not adopted. Two comments stated it is not clear if the definition includes products bought and further grown, and then resold, or otherwise having value added to the products. “Non-eligible enterprise” would not include common farming operations that buy chickens, piglets, seedling, etc., and resell them when fully grown; it would include operations that purchase ripened fruit and resell it as jam, for example. No change is being made in relation to the comments. Further, the comments stated it is not clear if the requirement that the “majority of the commodities processed or marketed” by the enterprise is based on dollar sales or the number of items. The agency believes the requirement as written is applicable only to the number of items processed or sold. Therefore, the comments are not adopted.

Another comment stated the “non-eligible enterprise” definition adds another tier of inquiry in determining if a particular enterprise is eligible for agency loans. Further, the comment stated the definition provides enterprises that produce exotic or non-farm animals are not eligible for loans, however, the terms “exotic” and “non-farm animals” are not defined. In response to the comment, the agency revised the definition to clarify what the agency considers exotic or non-farm animal; however, the term is still needed. The Federal Agriculture Improvement and Reform Act of 1996 (Public Law 104-127), removed financing of non-farm enterprises as an authorized use of loan funds. The agency needs to specify the type of

enterprises that will not be financed to avoid confusion and inconsistent application of this restriction. Further, financing enterprises producing animals or products for which there is not an established market is inconsistent with prudent lending objectives.

Another comment stated the agency must allow Tribal input to determine what tribal agricultural enterprises consist of, and set guidelines to recognize traditional tribal markets. Further, the comment stated the production of leeches, vermiculture and aquaculture must not be included in the non-eligible enterprise definition. The agency believes the definition as revised, along with the definitions of agricultural commodity and aquaculture, adequately identify the enterprises eligible for receiving loans. Further, the agency evaluates each individual operation requesting assistance on its own merits. Therefore, the comment is not adopted.

One comment was received on the “non-essential assets” definition. The comment stated the agency should revise the definition to include assets that may contribute a small amount of income to the farming operation but are clearly non-essential for the operation to function. The agency believes the definition as written is adequate, especially when read in the context of the CFR text. Therefore, the comment is not adopted.

One comment was received on the “non-program loan” definition. The comment stated the definition as written is too narrow and the agency should continue to use the definition found in current § 1951.451. The agency agrees with the comment and has revised CFR accordingly.

One comment was received on the “normal production yield” definition. The comment stated the definition as written is confusing and that the current definition, found in § 764.2, provides the priority for the types of records the agency will use. The proposed definition made no substantive changes from current § 764.2. Some clarifying language has been added in response to the comment.

One comment was received on the “note” definition. The comment stated the agency should remove the definition, as the term “note” is included in the “debt instrument” definition. The agency believes the term “debt instrument” does not adequately describe the instruments the agency uses to evidence debt and therefore, the agency removed it in the final rule. However, the agency added the term “promissory note” which is used in several sections of the CFR to replace the term “note,” and further added the term “assumption agreement” for clarity since it is distinguished from the term “promissory note” in the text.

The agency revised the definition of “Operating loan” to include a youth loan as provided in § 764.1(b).

One comment was received on the “owner-operator” definition. The comment stated the definition should be revised to read “* * *is the individual or entity that owns the farm and provides the labor, management, and capital to operate the farm. An entity must have one or more members operating the farm.” The terms “owner-operator” and “tenant-operator” are used in the general eligibility requirements established in 7 CFR 764.101, as well as the additional eligibility requirements established for specific loan types in the applicable subparts. While the proposed rule included a definition of the term “owner-operator,” the terms “tenant-operator” and “operator” were not defined. The agency believes the key term that should be defined is “operator,” and has, therefore, removed the definition of “owner-operator” in the final rule and has added “operator.” The agency defined the term “operator” to include both an “owner-operator” or “tenant-operator” as applicable under each loan program. The agency does not believe that a definition of either of these terms is necessary as they are self explanatory. Further, the agency believes that the new definition of “operator” uses the abbreviated text suggested by the comment; therefore, this portion of the comment is adopted. However, the agency did not adopt the portion of the comment suggesting the inclusion of the text “An entity must have one or more members operating the farm” as this requirement is adequately addressed in the revisions made to the eligibility requirement established in 7 CFR 764.101(k) requiring the applicant be the operator of a family farm.

One comment was received on the “partnership” definition. The comment stated the agency's requirement that partnerships must be formally organized is out of date and unnecessary. The agency believes the definition as written does not require a formal partnership agreement, but instead it provides the agency will comply with State requirements pertaining to partnerships. Therefore, the agency does not believe a change to the definition is necessary.

One comment was received on the “protective advance” definition. The comment stated since the definition will be applicable to the guaranteed loan program also, the agency should continue to use the definition found in current § 762.102(b). The agency believes the definition as written in the proposed rule is adequate to cover both the direct and guaranteed loan programs. Further, under §§ 765.203 and 762.149, respectively, the agency specifies the conditions for making protective advances for the direct and guaranteed loan programs. Therefore, the comment is not adopted.

One hundred sixteen comments were received on the “related by blood or marriage” definition. As noted in the agency's response to comments received on the definition of “family farm,” all comments stated the definition as written excludes certain relationships, including, but not limited to, cousins, uncles, aunts, and grandparents. The agency agreed and revised the definition accordingly.

One comment was received on the “relative” definition. The comment recommended the word “of” be inserted between the words “one” and “the.” The agency agrees and has revised the definition accordingly. In addition, as discussed in the agency's response to comments received on the definition of “family farm,” the definition of “relative” was revised to include the term “cousin.”

Two comments were received on the “restructuring” definition. Both comments stated the definition as written does not cover the guaranteed loan programs. The agency agrees with the comments and has revised the CFR accordingly to adopt the definition from current § 762.102.

Three comments were received on the “rural youth” definition. Two comments supported the definition as written and opposed lowering the age limit for youth loans from the proposed 10 years to 8 years of age. One comment, while it supported the definition, stated the population limit should not exceed 20,000 inhabitants. The agency disagrees. The agency believes rural youth residing in areas of up to 50,000 inhabitants can benefit from the youth loan program and that the age minimum should remain at 10 years of age.

Seven comments were received on the “socially disadvantaged applicant” definition. Six comments stated that applicants who are spouses are penalized under the definition when the wife is the operator and owns 50 percent of the farming operation, because they do not meet the majority ownership interest test. The agency agrees there are circumstances where a spouse's ability to own the majority interest in property is prohibited by State laws governing spousal rights. Therefore, the agency revised the

definition to allow married couples to be considered socially disadvantaged when the socially disadvantaged spouse owns 50 percent of the farming operation and makes most of the management decisions, contributes a significant amount of labor and is generally recognized as the operator of the farm. Such construction of the term as used in section 355 of the Act is reasonable under these circumstances.

Another comment stated the requirement for entities that the socially disadvantaged member must have a majority ownership interest in the operation to receive targeted funds reduces access to targeted funds by eligible socially disadvantaged applicants. The Act's section 302(a) for farm ownership loans, section 311(a) for operating loans, and 321(a) for emergency loans provide the eligibility requirements for loans to entities. The statutory eligibility requirements apply to members holding a majority interest in the entity. The proposed rule is consistent with the Act's provisions in focusing on the majority interest holder. The agency is taking a more lenient approach only in the case of spouses as discussed above. Therefore, the comment is not adopted.

One comment was received on the “socially disadvantaged group” definition. The comment stated the socially disadvantaged groups are not specified in the proposed rule. The agency agrees with the comment and has revised the definition to include the groups currently listed in § 1943.4.

One comment was received on the “trust” definition. The comment stated the agency should revise the definition to reflect that Tribes, as sovereign nations, have the ability to create and enforce laws to regulate businesses conducted within their boundaries. The requirement that a trust is recognized by the state in which it conducts business is the same as the requirement applicable to all other entities. Agency regulations cannot address every Tribe's unique situation; therefore, state offices may develop guidance according to applicable state and tribal laws in consultation with the Regional Office of General Counsel. The agency believes the definition as written is adequate; therefore, the comment is not adopted.

One comment was received on the “United States” definition. The comment stated the definition as written excludes the Republic of Palau, the Federated States of Micronesia, and the Republic of the Marshall Islands. Further, the comment stated the Free Association Treaty provides that the agency may enter into loan agreements with citizens of the countries mentioned above. The agency agrees with the comment and has revised the definition accordingly.

One comment was received on the “working capital” definition. The comment stated the agency should revise the definition for clarity to provide “* * * including, but not limited to, paying for feed, seed * * *” The agency agrees and has revised the definition accordingly.

Four comments were received on the “youth loan” definition. Three comments stated youth loans should not be restricted to agricultural projects only. One comment stated that changing the youth loan purposes to include financing agriculturally-related projects only will have a devastating effect on Tribal youth. As stated in the discussion of comments received under § 764.301, the agency believes that youth loan funds should be used for modest, income producing, agriculture-related projects. Therefore, the comments are not adopted.

Section 761.6 Appeals

Five comments were received on the appeals provisions. Three comments stated the agency should clarify the provision that an adverse decision involving a guaranteed loan may be appealed by either the lender or the applicant or borrower. One comment stated the agency should revise § 761.6 as well as § 762.104 to provide a guaranteed applicant or borrower may appeal an adverse agency decision without the lender appealing. Requests for appeal are handled in accordance with 7 CFR parts 11 and 780; therefore, the agency removed the provisions regarding who may request an appeal from § 761.6 and revised § 762.104 to remove the joint appeal requirement. One comment stated that while § 761.6 provides appeals will be handled according to 7 CFR parts 11 and 780, § 766.110 provides appeals of NRCS' technical determinations on conservation contracts will be handled according to 7 CFR part 614. The comment stated the rule as written is not clear. The agency agrees with the comment and has revised § 766.110 to refer to 7 CFR parts 11 and 780.

Section 761.8 Loan Limitations

Thirty-two comments were received on the direct loan limits. One comment stated that the agency should work with Congress to increase the direct loan limit and include an inflation percentage increase as provided for guaranteed loans under section 313(b) of the Act (7 U.S.C. 1943(b)). The agency believes that the impact of any legislative change to increase the direct loan limits must be carefully analyzed as funds provided for direct farm ownership and operating loans are usually exhausted early in the fiscal year, and the Office of Management and Budget (OMB), along with the President play a role in the appropriations process. Therefore, the agency is limiting this rule to revising its regulations within its current statutory authority. However, the Administration's 2007 Farm Bill proposal recommends that the loan limit for the direct loans be increased. The Agency will make the appropriate regulatory changes in the future, in the event the Administration's proposal is adopted.

All other comments on this section stated that the direct loan limit of $200,000 is not adequate to cover the credit needs of socially disadvantaged and limited resource applicants because they are denied commercial loans more often. The proposed rule was based on Section 313(a)(1), limits for direct loans, therefore, the comments cannot be adopted.

Section 761.9 Interest Rates for Direct Loans

One comment was received on the interest rate charged limited resource borrowers. The comment stated the agency should reduce the limited resource interest rate to three percent from five percent. Section 316(a)(2) of the Act (7 U.S.C. 1946(a)(2)) sets the limited resource interest rate minimum at five percent; therefore, the comment cannot be adopted.

Section 761.10 Planning and Performing Construction and Other Development

Five comments were received on the planning and performing construction and other development provisions. Two comments supported the agency's proposal to make the applicant or borrower responsible for ensuring compliance with local construction standards. One comment stated the agency should require the applicant to provide the plans and specifications prior to the agency's loan approval and inspect the planned development at least once. The agency believes the rule as written is adequate as it requires the applicant to provide the plans and specifications to the agency. The applicant or borrower must inspect development work, as needed, to protect their financial interest and provide written certification to the agency that the development conforms to the plans and good construction practices, applicable laws, ordinances, codes and regulations. Under § 761.10(e)(4), the

agency inspections of the planned construction and development do not create or imply any duty or obligation of the agency to the applicant or borrower. The agency inspects the planned construction and development solely to protect its financial interest. The agency's inspection process is internal policy and will be addressed in the appropriate agency handbook. Therefore, the comment is not adopted.

Another comment stated the agency should not require the same process for insurance proceeds less than $5,000 as it requires for direct loan funds, because the process is not cost-effective. In accordance with 7 CFR 764.108, all security except growing crops must be covered by hazard insurance, and the agency must be listed as the beneficiary of a mortgage loss payable clause. Further, 7 CFR 765.152 provides that “cash proceeds of insurance claims received on Agency collateral, if not being used to repair or replace security items” will be considered an “extra payment.” Therefore, the agency believes it is essential that the provisions of 7 CFR 761.10 be adhered to, regardless of the amount of insurance proceeds. To do otherwise would expose the agency to potential losses as its security may deteriorate in value. Therefore, the comment is not adopted.

One comment stated the provision that requires applicants not to incur any debts for material, labor or other expenditures prior to loan closing is unduly burdensome to applicants who may be able to begin the project while waiting on loan funds. The comment further stated applicants are informed at the beginning of the loan process that agency funds may not be available to close the loan, and as such, applicants are aware that they are responsible for any pre-loan development work. It is important to highlight that the applicant shall not be reimbursed for expenditures incurred prior to loan closing. Further, agency assistance is only available to applicants unable to obtain the needed credit from another source. Therefore, it is unlikely that an applicant would have personal funds available or be able to incur debts to initiate development prior to agency funds becoming available. Therefore, the comment is not adopted.

Section 761.51 Establishing a Supervised Bank Account

Six comments were received on establishing a supervised bank account. One comment stated the agency should clarify whether or not an applicant has to consent to the establishment of a supervised bank account. The agency agrees with the comment and has revised the section to state that the account will be used to assist borrowers with limited financial skills only when the borrower agrees. Three comments stated it is not clear when the agency will use the supervised bank accounts. The agency agrees with the comments and has revised the section to list the conditions under which the agency will use supervised bank accounts. In addition, one of these comments stated the requirement the agency provide applicants $5,000 or 10 percent of the loan funds for family living and operating expenses in a non-supervised bank account was not included in the CFR. One comment supported the agency's decision not to include the provision of providing $5,000 or 10 percent of loan funds in a non-supervised bank account. As stated in the proposed rule, Section 312 of the Act provides that the agency “may reserve a portion of the loan * * *” but it is not required. The payment of family living and operating expenses is an authorized use of loan funds, and the agency provides loan funds directly to the applicant to use as specified in the farm operating plan. Therefore, supervised bank accounts for such use are not needed and no change has been made based on these comments. One comment stated the agency should add a section to explain the agency's policies regarding disbursement of funds from a supervised bank account, use of electronic funds transfer instead of supervised bank accounts, and the necessity of supervised bank accounts. The agency believes the disbursement of funds from a supervised bank account is already adequately addressed in § 761.54. Section 764.402 requires the agency to use electronic funds transfer when feasible, so supervised bank accounts are not expected to be routinely used. Therefore, these parts of the comment are not adopted. Lastly, as stated above, the agency has added language in § 761.51 on when supervised bank accounts are necessary.

Section 761.52 Deposits Into a Supervised Bank Account

One comment was received on the deposits into a supervised bank account provisions. The comment stated it is not clear if a check made jointly payable to the agency and the borrower can be deposited in a supervised bank account. The agency believes the CFR as written is clear as it only excludes checks made solely to the agency or the Federal Government, or if it lists the Treasury of the United States as joint payee. The jointly payable check to the agency and borrower could be deposited in the supervised bank account. Therefore, the comment is not adopted.

Section 761.54 Withdrawals From a Supervised Bank Account

Two comments were received on the withdrawals from a supervised bank account provisions. Both comments stated the agency should clarify the CFR to provide the borrower's account must be accelerated before the agency can withdraw funds from a supervised bank account without the borrower's signature. The proposed, as well as the final rule provide the conditions under which the agency will withdraw funds from the supervised bank account without the borrower's signature. It has been the agency's policy to withdraw funds from the supervised bank account when it is in the agency and the borrower's financial interests. The borrower's account need not be accelerated; the agency may withdraw such funds at any time to apply to the account or protect its lien as necessary. The agency believes the limited withdrawals by the agency are reasonable. Therefore, the comments are not adopted.

Section 761.55 Closing a Supervised Bank Account

One comment was received on closing supervised bank accounts. The comment stated the agency should clarify the CFR to provide the borrower's account must be accelerated before the agency can close the supervised bank account. The proposed, as well as the final rule, provide the conditions under which the agency will close the supervised bank account. The supervised bank account can be closed when it is no longer needed; the borrower's account need not be accelerated. The agency believes the CFR as written is reasonable. Therefore, the comment is not adopted.

Even though no comments were received on the provision, the agency increased, from $100 to $1,000, the amount of loan funds remaining in the supervised bank account that can be released to the borrower to use for authorized loan purposes, at the time the account is closed. This action is in the best interest of both the borrower and the agency, as accounts with small loan balances remaining will not be maintained. The agency, however, did not extend this provision to youth loans.

Section 761.104 Developing the Farm Operating Plan (As Numbered in Final Rule)

One comment stated the agency must include in the final rule the provisions of current § 1924.56 that address the

development of farm and home plans used for loan making and servicing actions. Further, the comment stated the agency did not address the farm and home plan utilized by the agency. The agency inadvertently omitted the provisions addressing the development of farm operating plans, and has incorporated them in the final rule. The farm and home plan has not been incorporated, however. As provided in the proposed rule, the agency is removing all internal and administrative provisions, which include identification of specific forms, from its regulations. While specific form numbers are not included in the CFR, both the proposed and final rules address the information collection requirements. The agency no longer uses FSA 431-2 and therefore, it did not include any references to, nor did it discuss the use of, the farm and home plan form in the proposed rule. The agency has developed new forms to replace the farm and home plan, however, the agency accepts any format that provides the information required.

Section 761.105 Year-End Analysis (§ 761.104 in the Proposed Rule)

One comment was received on the year-end analysis provisions. The comment stated the agency should require a year-end analysis for borrowers who have received disaster set-aside. The agency utilizes disaster set-aside to resolve borrowers' temporary financial set-backs due to a natural disaster. Further, the agency requires that borrowers who receive disaster set-aside be able to develop a feasible plan for the next production cycle and provide the appropriate documentation to support it. Since the agency will obtain the documentation needed during the disaster set-aside determination, it does not believe an annual year-end analysis is required. Therefore, the comment is not adopted.

Section 761.208 Target Participation Rates for Socially Disadvantaged Groups

Two comments were received on the target participation rates for socially disadvantaged groups. Both comments questioned why the agency sets the target participation rates for Farm Ownership (FO) loans based on the total rural population in the State that are members of socially disadvantaged groups but the target participation rates for farm Operating loans (OL) are based on the total number of farmers in the State that are members of socially disadvantaged groups. In addition, one comment suggested that to achieve equality, all participation rates should be based on the number of farmers in a State that are members of a socially disadvantaged group. Section 355 of the Act (7 U.S.C. 2003) establishes these different calculations for FO (subtitle A) and OL (subtitle B) target participation rates. Therefore, the comments cannot be adopted.

Section 761.210 Transfer of Funds

Section 346(b)(4) of the Act (7 U.S.C. 1994) provides that beginning on September 1 of each FY, Emergency loan (EM) funds, not resulting from supplemental appropriations, may be used to fund the credit sale of real estate security in the agency's inventory. In the last several FY's, the agency has received insufficient initial appropriations to fund EM loan requests and has relied on supplemental appropriations to meet the demand. Further, the agency does not anticipate future appropriations actions to reverse this trend. Moreover, the agency has not taken a large number of real estate properties in inventory in the last several years. Lastly, other sections of the Act mandate that real estate in the agency's inventory be sold to beginning farmers. Therefore, the agency has not utilized this authority and is removing § 761.210(b) in the final rule.

Part 764—Direct Loan Making

The following discussion addresses the comments received on part 764.

One comment stated the provision from current § 1910.3 that provides persons wishing to apply for loans will be encouraged to do so and that agency staff will explain available programs to applicants and assist applicants as needed in completing farm operating plans, should be included in the final rule. Further, the comment stated the agency should include the provision from current § 1943.11 that states the agency will provide socially disadvantaged applicants with technical assistance necessary when applying for farm ownership loans or other assistance to acquire inventory farmland. The agency believes, through outreach efforts, it provides explanation of available programs and invites persons wishing to apply for loans to do so. Further, agency personnel, as well as Extension agents, assist all applicants who request it, in completing agency forms and farm operating plans. It is the agency's mission to provide any necessary assistance, including technical assistance, to all applicants and borrowers. It is not necessary to publish the agency's mission or internal practices in the CFR. Therefore, the first part of the comment is not adopted. Section 623 of the Agricultural Credit Act of 1987 (7 U.S.C. 1985 note), stated the agency should inform socially disadvantaged applicants of the possibility of acquiring inventory farmland and provide technical assistance to such applicants, while section 335(c) of the Act (7 U.S.C. 1985 (c)) mandates the agency to offer to sell its inventory property to beginning farmers. The agency advertises available inventory property, provides priority to all beginning farmers to buy the property, and assists applicants in completing forms and information necessary to acquire real estate in the agency's inventory, as required by the Act.

Section 764.51 Loan Application

One comment stated that it is not clear if the agency is maintaining the requirement currently contained in 7 CFR 1910.3(c) that provides “For farmer program loans, there will only be one applicant. If a husband and wife insist on applying as co-applicants for a farmer program loan and the farming operation is a sole proprietorship, they will be considered a joint operation and they both will have to meet the eligibility requirements applicable to the joint operation.” This comment, as well as one other comment, stated the Internal Revenue Service allows married couples operating a farm to file a joint tax return and does not mandate they be considered a joint operation; therefore, the agency should not treat them as joint operations either. The agency's longstanding policy of considering spouses applying jointly as a joint operation when a formal type of entity does not exist is based on amendments to sections 302 and 311 of the Act. Many of the general loan making requirements established at 7 CFR 764.101 are based on the provisions of sections 302 and 311 of the Act, which specifically provide “To be eligible for such loans, applicants who are individuals, or in the case of cooperatives, corporations partnerships, joint operations, trusts, and limited liability companies, individuals holding a majority interest in such entity, must * * *.” Based on this text, each member of an entity applying for assistance may not be required to meet all eligibility requirements, whereas applicants applying as an individual must meet all the eligibility requirements. Changing the agency's current policy to allow spouses applying jointly to be considered an individual applicant, rather than as an entity applicant in the form of a joint operation, would require that each spouse meet all eligibility requirements. The agency believes such a change would result in a more restrictive application of eligibility requirements for spouses applying

jointly and could result in an increased number of these applicants being determined ineligible. Therefore, while the comments are not adopted, the agency did revise § 764.51 to clarify its policy that “Two or more applicants applying jointly will be considered an entity applicant.” In addition, the agency revised its application form to clarify its policy, and for applicants applying as a joint operation, the application form will serve as the entity agreement required as part of a complete application under 7 CFR 764.51(a)(2)(iv), unless State law requires otherwise.

One comment stated the agency should not require that a husband and wife who apply for a loan together be treated as a joint operation. The comment pointed out that almost all married individuals file taxes as a married couple, not a joint operation. The agency agrees that applicants should apply in the form of business organization that is most consistent with the actual operating and financial structure of the farm business. However, the Act does not permit the agency to make loans to multiple individuals as one applicant. In situations where more than one individual is applying for the same loan, the applicant will be treated as an entity. The agency acknowledges that this requirement may be confusing and burdensome for married couples in particular, since many of them will file income tax returns and conduct other business affairs as a married couple. To ease this burden, the agency revised this section to recognize the existence of a marriage as sufficient documentation of a joint operation and its structure. Information beyond that required of an individual applicant will be required only when necessary to evaluate specific financial situations or contracts such as prenuptial agreements, which are unique to the marriage, and pertinent to the evaluation of the loan request.

Twenty-two comments were received on the requirement for applicants to provide 3 years of production and financial records (§ 764.51(a)(4) and (5), renumbered to § 764.51(b)(4) and (5)). Eight comments supported the agency's proposal as written. Seven comments, while they supported the agency's proposal, suggested the agency retain the ability to request additional years of records, if needed, to evaluate properly the applicant's operation. The comments stated there are circumstances beyond the applicant's control, such as adverse weather, prolonged drought, and disease, which would require the agency to have additional records at its disposal to accurately evaluate the applicant's operation. Three comments, while they agreed with the proposal, stated using only 3 years of records may not reflect the farming operation's true capabilities. One comment opposed the agency's proposal and further stated the CFR does not provide that for years an applicant suffered a disaster, State or County records may be substituted for the applicant's records. The agency believes the provision as written is adequate. The agency requirements match those of commercial lenders and at the same time reduce the burden imposed on the public. In developing an accurate farm operating plan, § 761.104 excludes the production year with the lowest actual or county average yield if the applicant's yields were affected by disasters during at least 2 of the 3 years. Therefore, no changes need to be made to the records requirement, and the comments are not adopted.

Two other comments stated the agency should require applicants submit 3 years of Federal tax returns to match commercial lenders' requirements as well as the agency's loan servicing requirements. In addition, one of the comments stated that by providing copies of Federal tax returns, the agency will be able to verify other information submitted by the applicant and will reduce the paperwork burden the agency imposes. Further, the comment stated errors on the applicants' part will be eliminated since applicants will no longer have to copy information from their tax returns to the agency forms. The agency agrees with the comments and has revised the section to require 3 years of farm financial records, including Federal tax returns, unless the applicant has been farming for less than 3 years.

One comment stated the records requirements under § 764.355(c)(3) should be revised to match the requirements under § 764.51(b) (renumbered from § 764.51(a)). The agency believes that the requirements should remain as proposed. Section 764.355(c) is applicable only to emergency loan applicants, who lack security because of a disaster. Section 324(d)(2) of the Act (7 U.S.C. 1964(d)(2)) provides that the agency may not deny an emergency loan because the applicant lacks a particular amount of security; however, the agency is authorized to make the loan provided the applicant has the ability to repay the loan. For the agency to determine if an applicant who lacks security has the ability to repay the loan, the agency needs access to additional records, beyond what is required in § 764.51(b) (renumbered from § 764.51(a)), to assess the applicant's income generated by the farming operation. Therefore, the comment is not adopted.

One comment supported the agency's clarification that the payment of the credit report fee is the applicant's responsibility as part of a complete application (§ 764.51(b)(11), renumbered from § 764.51(a)(11)). No comments were received opposing this clarification; therefore, no change was made to this paragraph.

Three comments were received on the verification of an applicant's debts requirement (§ 764.51(b)(12), renumbered from § 764.51(a)(12)). All comments stated it is not cost-effective for the agency to verify debts under $1,000 (two comments), or $500 (one comment). The agency handbook implementing the CFR will provide additional guidance regarding alternatives available to verify an applicant's debts. Therefore, the comments are not adopted.

Two comments were received on the “additional information deemed necessary by the agency” provision (§ 764.51(b)(13), renumbered from § 764.51(a)(13)). One comment stated the CFR should provide that the agency requires the additional information to better evaluate the feasibility of the operation and identify any possible security issues. The other comment stated the agency should identify general categories of information that may be required to evaluate an applicant's operation instead of including a general statement that the agency may request additional information deemed necessary. The agency believes the provision as written is adequate, as adoption of the comments may limit the reasons additional information could be requested. As stated in the preamble of the proposed rule, because every farming operation is unique, different information is required from each applicant for the agency to assess properly its risk. The agency handbook implementing the CFR will provide examples of additional information that may be requested. Therefore, the comments were not adopted.

Three comments were received on the Low-Documentation Operating loan (Lo-Doc) requirements § 764.51(c), renumbered from § 764.51(b)). All comments stated that certain information under § 764.51(a) (§ 764.51(b) in final rule) should be required for Lo-Doc applicants. Two of the comments stated the applicant should provide documentation that other credit is not available; the other comment stated the applicant should provide the legal description of the farm

property owned or to be acquired, when applicable. Section 764.51(b)(4) (§ 764.51(c)(4) in final rule) states the agency may require a Lo-Doc applicant to provide any other information listed in § 764.51(a) (§ 764.51(b) in final rule), as needed to make a loan determination in a particular case. In addition, the agency handbook implementing the CFR will provide further guidance on when additional information may be needed. Therefore, the comments are not adopted.

Nine comments were received on the youth loan application requirements (§ 764.51(d) renumbered from § 764.51(c)). One comment supported the agency's decision to implement an abbreviated application process for youth loans. Five comments stated that since verification of non-farm income is not a requirement for Lo-Doc applicants, it should not be required from youth loan applicants either. In addition, one of the comments stated that since the youth loan project is expected to generate sufficient income to repay the loan, the agency does not need to obtain non-farm income information. Further, two of the comments stated the agency official should have discretion to determine if verification of non-farm income is needed for youth loan applicants. The agency agrees with the comments and has revised the CFR to remove the requirement for verification of non-farm income for youth loan applicants. The flexibility to require additional information as needed remains.

Two comments stated the requirement found in § 764.51(a)(13) (§ 764.51(b)(13) in final rule) pertaining to the agency's ability to request additional information, as needed, to evaluate an applicant's eligibility and plan of operation should also be applicable to youth applicants. In addition, the comments stated that, for applicants less than 18 years old, the agency should require written permission from a parent or guardian, and require documentation from the project advisor for all youth loan applicants. Under § 764.51(c)(3) (§ 764.51(d)(3) in final rule), the agency can request any information deemed necessary to evaluate a youth loan applicant's operation. Further, under § 764.302(f), the agency requires the parent or guardian's written permission, so it is not necessary to specifically list it under the general requirements for all youth loans. Therefore, the comments are not adopted.

One comment stated that Indian youths have not purchased on credit by the time they are 18 years old. Therefore, the comment stated if the agency determines that additional information is needed, or the youth may be able to obtain other credit, then the agency should process the application as a guaranteed loan, as well as inquire with other sources of credit before involving a youth already intimidated by the process. The agency believes the youth loan requirements, as written, are adequate. In most states, individuals reach the age of majority at 18, therefore, youth loan applicants who have reached the age of 18, are required to submit the credit report fee and verification of debts, if any. Additionally, § 764.302(a) provides the eligibility requirements youth loan applicants must meet as mandated by Section 311(b)(1) of the Act (7 U.S.C. 1941 (b)(1)) and includes the “no credit elsewhere” requirement. There is no guaranteed loan program specifically for youths. Therefore, the comment is not adopted.

Lastly, the agency added the provision requiring applicants to provide a current financial statement as part of a complete application. This is a longstanding requirement that existed under the loan making and loan servicing regulations. The agency's application form contained the financial statement; however, due to agency's paperwork reduction efforts, the financial statement part was removed from the application form.

Section 764.52 Processing an Incomplete Application

Two comments were received on the provisions for processing an incomplete application. Both comments stated the CFR provides that the information requested by the agency must be received within 10 calendar days from the day the agency sent the second incomplete application notification to the applicant. However, the notice the agency uses provides applicants must submit the information requested or contact the agency within 10 days. The comments stated the CFR and the agency notice should be consistent. The agency agrees with the comments and has revised its notice accordingly.

Section 764.53 Processing the Complete Application

One comment was received on the processing the complete application provisions. The comment stated the agency must include in the CFR the requirement found in Section 333A(a)(1) of the Act which states the agency shall approve or disapprove an application and notify the applicant no later than 60 days after a complete application has been received. In addition, the comment stated the reasons for the disapproval must be included in the notification, as provided in Section 333A(a)(3) of the Act. The agency agrees with the comment and has revised the section to add that the agency will notify the applicant of the decision reached and the reasons for any disapproval.

Section 764.54 Preferences When There Is Limited Funding (Renumbered in the Final Rule)

One comment was received on the preferences when there is limited funding. The comment stated the agency should consider funding applications based on the date the application was determined to be complete, regardless of whether there is a shortage of funds. Section 764.53 provides the order in which the agency processes loan applications and states the agency considers applications in the order received, based on the date the application is determined to be complete. The agency cannot consider a loan application until all the information required is received. Section 764.54 provides the preference order in funding complete and approved loan applications. The agency funds applications based on the date the application was received, whether complete or incomplete, because that date provides an easily identifiable benchmark that can be consistently applied. Therefore, the comment is not adopted.

Section 764.101 General Eligibility Requirements

One comment on the general eligibility requirements suggested that the requirements of sections 302 and 311 of the Act (7 U.S.C. 1922 and 1941) for Farm Ownership and Operating loans, which allow the agency to make loans to entities engaged primarily and directly in farming in the United States, be added. The agency agrees and has revised §§ 764.152(c) and 764.252(d) to incorporate the requirement. In addition, a similar provision is contained in section 321 of the Act for emergency loans. Therefore, the agency revised § 764.352(c) (§ 764.352(a)(4) in the proposed rule) accordingly.

Two comments were received on the no prior drug convictions provisions under § 764.101(a). One comment stated that, unless the agency commences background checks on applicants, the requirement should be removed from the CFR. Section 1764 of the Food Security Act of 1985 (21 U.S.C. 889) provides, in part, that an applicant for certain Federal loans or benefits cannot have been convicted under Federal or State law of planting, cultivating, growing, producing, harvesting or

storing a controlled substance within the previous 5 crop years. The agency has complied with this provision since it was incorporated into the law. Applicants are required to self-certify, on the agency's application form, that they have not been convicted of controlled substance violations. If it is later determined the applicant provided false or inaccurate information on the application form, the agency can deny further benefits and take other appropriate action. Lastly, the proposed rule was based on the Food Security Act's requirements; therefore, the comment cannot be adopted.

The other comment stated the agency should add in the CFR the requirement that applicants have not been convicted of possession or distribution of a controlled substance. Section 862 of 21 U.S.C. provides, in part, that applicants may be made ineligible for Federal benefits by court order as a result of a conviction for the distribution of controlled substances or any offense involving the possession of a controlled substance. Ineligibility is not automatic. As stated above, applicants self-certify that they have not been convicted of controlled substance violations. Further, both provisions are applicable to multiple agency programs and are already addressed, in part, in 7 CFR 718.6. The agency has modified 7 CFR part 718 to clarify the impact of the statutory provisions on FLP. The comment, therefore, is not adopted.

Five comments were received on the credit history provisions of the general eligibility requirements (§ 764.101(d)). One comment, while it agreed with the clause that unacceptable credit history is history of failures to repay past debts when the ability to repay was within the applicant's control, stated the agency should incorporate an objective measurement of the criteria to protect the agency and avoid the appearance of disparate treatment. The proposed rule reiterated the agency's established policy. In addition, the agency finds it impossible to anticipate every credit history scenario that may be encountered. An inflexible and absolute standard, such as a minimum credit score, would remove the agency's ability to consider the reasons for an applicant's prior credit problems. Therefore, the comment is not adopted.

Another comment stated the agency should include in the final rule the circumstances currently found in § 1910.5(c) that the agency does not automatically consider unacceptable credit history. The agency agrees with the comment and has revised the CFR for clarity. One comment supported the removal of the requirement that the Office of the General Counsel be involved when the agency believes applicants have not dealt with the agency in good faith. The agency addressed this issue under the “good faith” definition discussion.

Two comments stated the agency should remove the requirement that an applicant will make a sincere effort to repay the loan and will devote the effort required to carry out the terms and conditions of the loan. The agency agrees, as it will be difficult to assess the efforts the applicant will make. However, the agency believes the objective requirement that the applicant will carry out the terms and conditions of the loan should remain in the CFR. Therefore, that part of the comment is not adopted.

Six comments were received on the not delinquent on Federal debt provisions of the general eligibility requirements (§ 764.101(f)). Two comments stated the agency should include a definition of Federal debt in the CFR for clarification purposes. The agency agrees that a clarification is needed to determine if an applicant or borrower is in delinquent status of a Federal debt for purposes of automatic ineligibility under 31 U.S.C. 3720B. However, the Department of Treasury has responsibility to publishing standards determining delinquent status on a Federal debt, under this Debt Collection Improvement Act provision. Therefore, the agency simply has incorporated a reference to the applicable Department of Treasury regulation (31 CFR 285.13) in its CFR. Further, the agency handbook will clarify application of this provision in the consideration of loan applications.

Three comments stated the Federal debt rule as written is more restrictive than it needs to be because the term “delinquent borrower” is defined under § 761.2(b) as a borrower with any portion of a payment to the agency that is at least 30 days past due. As addressed above on § 761.2(b), the agency revised the “delinquent borrower” definition to match the definition included in the final rule published on February 4, 2004. Further, as stated above, the Department of Treasury's regulations provide when the borrower's Federal debt is in “delinquent status” for purposes of loan eligibility only. This rule incorporates the Department of Treasury's statutory and regulatory requirements applicable to Federal agencies. Therefore, the comments are not adopted.

One comment stated the agency should extend the prohibition to emergency loans as well to ensure consistency between loan programs. Section 3720B of the Debt Collection Improvement Act of 1996 (DCIA) generally provides that, except for emergency loans, borrowers who are in delinquent status on any non-tax Federal debt are not eligible to obtain any Federal financial assistance. The proposed rule was based on the DCIA; therefore, the comment cannot be adopted.

Three comments were received on the managerial ability provisions of proposed § 764.101(h) (§ 764.101(i) in final rule). One comment stated the applicant's managerial experience should be in an operation similar to the one the applicant proposes, as there are vast differences between types of operations. The agency believes it is not possible to differentiate between skills required by various enterprises to draw the distinction the comment suggested. In addition, the agency can require an applicant to take borrower training in areas the agency considers the applicant to lack adequate experience. Therefore, the comment is not adopted.

One comment disagreed with the provision that the applicant's managerial experience must have been obtained within the last 5 years. The agency believes recent training or experience is important for an applicant to have a reasonable prospect for success, as farming is a rapidly changing business and experience acquired more than 5 years ago may no longer be relevant. Therefore, the comment is not adopted.

One comment stated the agency should add examples of documentation necessary to demonstrate the applicant's managerial ability and clarify whether managerial ability covers production only or all aspects of the operation. The agency has provided extensive internal administrative guidance on acceptable documentation to demonstrate managerial ability, and believes examples of acceptable documentation are more appropriate for inclusion in the agency handbook, available on the agency's website. Further, the agency does not want to limit applicants to a specific form of acceptable documentation and cannot provide an exhaustive list of acceptable documentation to demonstrate managerial ability in the CFR. The agency considers managerial ability to cover both production and financial management because both are required to ensure the applicant has reasonable prospects for loan repayment. Therefore, the comment is not adopted.

Twenty-three comments were received on the general eligibility requirements for loans to entity applicants (§ 764.101(k), renamed and

renumbered to § 764.101(l)). Fifteen comments stated that the general eligibility requirements for entity applicants are unduly restrictive, complicated, and may prevent the transfer of farms to beginning farmers. Two comments stated that the requirement that all entity members must be involved in the operation is restrictive and does not take into consideration age and health issues. The comments stated the agency should require that only the members of the entity holding the majority interest be involved in the farming operation. One comment stated the requirement is too restrictive especially in cases where one family member becomes physically unable to assist in the farming operation but the other members are not able to buy out the physically unable member's share and suggested the agency only require members holding a majority interest be involved in the operation of the farm. The agency agrees and has revised the CFR accordingly.

Two comments stated that the requirement for entity members involved in other farming operations, that the other operations must not be larger than a family farm, is too restrictive because it does not take into consideration that entity members may have an interest in cooperatives to ensure a market for the farming operation's crop. Further, the comments stated it would be difficult for the agency to obtain income information on the other entities in which the member is a participant, unless the agency revises the requirements applicable to individuals to require all entity members provide income information for any other farming operation in which they are participating. The agency agrees with the comments and has revised the CFR accordingly to clarify requirements for majority interest holders, members' collective interests, and entity interests.

One comment stated it is not clear if each farming operation must generate less than the maximum gross income threshold, as proposed in the family farm definition, or if the member's combined share in all entities they are participating in must be under the threshold, or the combined gross income of all the farms must be under the threshold. Further, the comment stated the CFR appears to prohibit financing an applicant entity that has an ownership interest in another entity such as a finishing cooperative. As stated above, the agency is not adopting the proposed gross income requirement of the family farm definition. Further, the agency revised § 764.101(j) (§ 764.101(k) in final rule) in response to comments received on proposed § 764.101(j) and (k) (§ 764.101(k) in final rule). Therefore, the agency believes the comments are no longer applicable.

Two comments stated the family farm requirements for entities as stated in § 764.101(j) (renamed and renumbered to § 764.101(k) in final rule) do not match the eligibility requirements for EM loans at § 764.352. Both comments stated the agency should make § 764.101(j) and § 764.352 consistent. As stated above, the agency revised § 764.101(j) and (k) extensively. In the final rule, § 764.101(k) provides the operator requirements for entities applicable to all loan types, except that paragraph (k)(3) on collective interests does not apply to EM loans. The statutory basis for this paragraph is found in sections 302 and 311 of the Act, but not in section 321 for EM loans. Section 764.352(j) provides EM loan eligibility requirements if the entity composition changes between the time the disaster occurred and the time the loan is closed. One EM loan eligibility requirement applicable to entities is that the entity members operated the farm at the time of the disaster. This requirement and other § 764.352 requirements are based on section 321 of the Act (7 U.S.C. 1961) and do not apply to any other loan type; therefore, the comments are not adopted.

Twenty-nine comments were received on the entity eligibility requirements under the general requirements provisions (§ 764.101(j) and (k)). Five comments supported the provisions as written. Twenty-two comments opposed the provisions and stated the provisions as written are difficult to understand and follow. The agency agrees with the comments and has clarified the paragraph and further revised § 764.352 for consistency. Two comments recommended that the family farm and entity composition requirements under the general requirements provisions be eliminated, as the requirements would have a negative impact on the transition plans for some farm families. The agency believes the revisions discussed above will address these comments and that elimination of the requirements is not necessary. Furthermore, the regulations as revised mirror existing regulatory requirements for guaranteed loans, as well as direct farm ownership and operating loans. The final rule, as written, eliminates inconsistencies in existing regulations governing emergency loans.

Section 764.102 General Limitations

One comment was received on the general limitations requirement that loan funds must be used by farms located in the United States (§ 764.102(b)(2) renumbered to § 764.102(c) in final rule). The comment agrees that funds should not be used to obtain or improve land not in the United States, but does not agree with making applicants with farms split by the United States and Canadian border that have been in operation or existence for years ineligible for loans. Sections 302(a) and 311(a) of the Act (7 U.S.C. 1922 and 1941) for farm ownership and operating loans, respectively, provide that loans may be made to applicants in the United States. The proposed rule was based on the Act's provisions; therefore, the comment cannot be adopted.

Three comments were received on the highly erodible land and wetlands conversion provision (§ 764.102(b)(3) renumbered to § 764.102(d) in final rule). All comments stated the agency should include the prohibition found in section 363 of the Act (7 U.S.C. 2006e), which provides loan funds may not be used to drain, dredge, fill, level or otherwise manipulate a wetland, or in any activity that will impair or reduce the flow, circulation, or reach of water, except for an activity related to the maintenance of a previously converted wetland. In addition, one of the comments stated the words “to produce an agricultural commodity” should be removed. The agency agrees with the comments, and has revised this section and § 765.205(b)(10) accordingly. Further, a definition of “highly erodible land” has been added to § 761.2.

Eleven comments were received on the noncontiguous tracts provision (§ 764.102(b)(5)). Three of the comments supported the provision while eight comments either opposed it in its entirety or stated reasons the agency cannot realistically apply this specific provision nation-wide. The agency considered the comments opposing the provision and concluded that it is not possible to clarify the proposed limitation in the CFR sufficiently, without making it overly burdensome on the agency and applicants. Furthermore, the agency concluded that there is not a policy concern associated with operating non-contiguous tracts. The changing structure of agriculture and increased urban uses of farmland in many localities require some operators to farm widely-dispersed tracts in order to assemble an economically viable operation. The concern addressed by the proposed requirement is actually that of financial impact. Any increased costs and financial inefficiencies resulting from operating non-contiguous tracts are most appropriately addressed through the business planning process and the

loan feasibility analysis, however, rather than being a separate limitation. Therefore, the agency agrees with the comments and has removed the paragraph.

Section 764.103 General Security Requirements

Twenty comments were received on the general security requirements provisions. One comment was in favor of requiring a lien on non-essential assets for all loans except beginning farmer downpayment and youth loans. The comment stated that by adopting this provision, the agency will eliminate confusion on what liens have to be obtained for what type loans. One comment stated the agency should apply the lien on non-essential assets requirement to beginning farmer downpayment loans, as these loans should not be made to borrowers with a significant accumulation of non-essential assets. One comment stated all agency direct loans, including beginning farmer downpayment and youth loans should have the same security requirements and that such loans are often the most poorly collateralized. The agency believes the downpayment requirement and the short repayment term for beginning farmer downpayment loans result in a better collateral position than most agency loans. Due to the statutorily-mandated 10 percent downpayment requirement, beginning farmers do not normally have significant non-essential assets. The time spent in monitoring non-essential assets is better spent in providing guidance and oversight to beginning farmer borrowers. Therefore, the suggested changes are not adopted.

One comment stated the agency should clarify that it is the agency's choice of what constitutes “best security available” when there are several options and that this determination is appealable. The comment suggested the agency make the loan and obtain the best security available to protect the taxpayer and the agency's financial interests. The agency disagrees. The security requirements in part 764 adequately describe the required and preferred items of security. In the rare cases where there are security options and the agency provides financing based on the best security available, no appealable adverse decision results. Applicants, however, can request National Appeals Division (NAD) review of the agency's determination of appealability of any issue. Therefore, the comment is not adopted.

One comment stated the agency should consider, in addition to value, the lien position when choosing between available security. The agency's handbook will provide guidance to agency officials in considering lien position when choosing between available security. Therefore, the comment is not adopted.

One comment suggested the agency obtain a lien on all titled assets the applicant owns, and provided examples of non-titled assets on which the agency should obtain a security interest. Two comments stated the agency should replace the 150 percent additional security requirement with a lien on all farm real estate for farm ownership loans and a lien on all chattel property for operating loans. In addition, one of the comments stated the agency should take a blanket lien appropriate for the type of loan. The agency believes these proposals are overly restrictive and do not provide the agency or applicants sufficient flexibility. Further, a blanket requirement for liens on all titled property would be overly burdensome on the agency to administer and could prevent qualified applicants from receiving credit or from obtaining part of their credit needs from other sources. Therefore, the comments are not adopted.

One comment stated the agency should have discretion in obtaining more than 150 percent of security, if available, and if the agency's lien will not prevent the applicant from obtaining other credit. The agency has determined that the existing 150 percent loan to value ratio is adequate. Most agency applicants rely on other creditors for part of their credit needs. A greater security requirement could weaken the applicant's ability to obtain credit from other sources and would increase administrative burden on agency staff unnecessarily. Therefore, the comment is not adopted.

One comment stated the non-essential asset value should be increased from $5,000 to $15,000 because taking a lien on an asset valued at $5,000 is a burden for the agency to track and adds no value to the agency loans. The agency believes that taking a lien on non-essential assets of $5,000 is worthwhile. The average direct operating loan is between $45,000 and $50,000. Assets that may provide a secondary source of loan repayment of 10 percent or more of the loan amount are considered significant, and the agency will continue to require liens on such assets to reduce potential losses. Therefore, the comment is not adopted.

One comment stated the agency should make liquidation of non-essential assets a loan approval condition as an applicant unable to obtain other credit may realize a greater financial benefit from the liquidation of an asset than from retaining it. The agency believes making liquidation of non-essential assets a mandatory loan condition would potentially create additional financial obligations for applicants due to tax consequences. In addition, the applicant may not be able to sell the non-essential assets timely, and therefore, the applicant's access to loan funds may be delayed for a considerable amount of time and have a negative impact on the farming operation. Therefore, the comment is not adopted.

One comment stated adequate security should have a “market value of at least 100 percent of the loan amount” instead of “security value equal to 100 percent of the loan amount”. The agency defines both “market value” and “security value”. The difference between the two is that the definition of “market value” does not include reduction for any prior liens. Therefore, the agency believes the provision as written is correct, and the comment is not adopted.

One comment stated the agency should add in the adequate security provision that a guarantee from a Government or quasi-governmental organization in the case of the Pacific Basin where lands are held in communal, rather than fee simple, and where the U.S. Department of Justice lacks jurisdiction will be acceptable. The agency believes the provision as written, which allows the pledge of security from a third party, permits the agency to accept the quasi-governmental guarantees. Therefore, the agency believes no change is necessary.

One comment stated the agency should replace the 150 percent security requirement with a lien on all assets used in or essential to the farming operation. The comment stated if the comment is not adopted, the agency should allow its officials discretionary authority to waive the agency's lien on crops if the 150 percent requirement is met and the agency is not providing annual operating credit to produce the crops. Another comment stated agency officials should have discretionary authority to waive a lien on crops if the 150 percent security requirement is met and the agency is not providing annual operating credit to produce the crops. As stated above, the agency believes that obtaining a lien on all the applicant's assets may prevent the applicant from obtaining needed credit from other sources. Further, if the 150 percent requirement is met by other security and the agency does not provide funds for crop production, the agency does not obtain a lien on the crops under the

final rule. Therefore, the comments are not adopted.

One comment stated the agency, with applicant input, should make the final decision on taking a lien on the applicant's non-essential assets. The agency retains the discretion to administratively allow for applicant input; however, the agency needs to make the final decision as to the acceptability of loan collateral to protect its financial interest. Therefore, the comment is not adopted.

Two comments stated it is not clear when the agency will take a lien on each non-essential asset that has a value in excess of $5,000. Both comments stated there are circumstances under which the agency may not be able to obtain a lien if the CFR text is interpreted literally. The agency agrees with the comments and has revised the CFR to require a lien on such assets when each or the aggregate value of like assets (such as stocks) has a value in excess of $5,000.

Section 764.104 General Real Estate Security Requirements

Three comments were received on the general real estate security requirements provisions. One comment stated the provision that the applicant must agree not to increase an existing prior lien without the written consent of the agency should be removed because the agency increases its debt by capitalizing interest, so other lenders should not be held to a higher standard. It is agency policy to accept junior lien positions as adequate collateral while other lenders, generally, do not. The prohibition on increasing a prior lien holder's debt without agency consent is critical to limiting the agency's loss and assuring that loan objectives are met. Therefore, the comment is not adopted.

One comment stated the agency should not take leaseholds as security, because when the agency has taken leaseholds as security it has suffered inordinate losses and that very few other lenders engage in the practice. While the agency agrees that leaseholds may decline in value during the term of the loan, it has determined leaseholds serve as security for only a small percentage of its portfolio. Therefore, the comment is not adopted.

One comment objected to the provision on Tribal lands held in trust. The comment stated the agency should use the current provision in § 764.8(j) that provides the agency will take Indian trust lands as security. Further, the comment stated if the applicant is required to request title reports from the Bureau of Indian Affairs (BIA), it should be stated in the CFR. Current § 764.8(j) incorporates BIA title status reports and approval requirements from § 1943.19(a)(7). The agency agrees with the latter part of the comment and has revised the CFR to require the applicant to request BIA to furnish title status reports and BIA provides them and approves the lien.

Section 764.105 General Chattel Security Requirements

Three comments were received on the general chattel security requirements provisions. All comments stated the provision is too broad and requested the agency clarify if the same chattel security can be pledged for a direct and a guaranteed loan at the same time. The agency believes the provision is adequate as written, and it allows the agency flexibility needed to best meet the needs of applicants. The same chattel security could be pledged for a direct and a guaranteed loan. Therefore, the comments are not adopted.

Section 764.106 Exceptions to Security Requirements

Nine comments were received on the exceptions to security requirements provisions. Three comments stated the agency should take a lien on a non-farm residence only when other security property does not provide a security value equal to 100 percent of the loan amount. The comments stated that a lien on the non-farm residence may leave a family homeless if the farming operation is not successful. In addition, the comments stated the lien on the non-farm residence would make it difficult for applicants to take advantage of low housing interest rates and further impede their financial progress. One comment stated the agency is inconsistent in its security requirements because the agency will not obtain a lien on the non-farm residence but will obtain a lien on crops and chattels to meet the 150 percent security requirement for long-term loans. The comment stated crops and chattels are typically considered short or intermediate term assets for loan underwriting purposes. In addition, the comment stated the agency's regulatory limits on security do not seem to be consistent with the Debt Collection Improvement Act (DCIA). Therefore, the comment stated the agency should remove § 764.106(d). The agency disagrees. The DCIA does not dictate appropriate types of loan security but provides collection remedies upon delinquency. The proposed rule continued the agency's existing policy in protecting its financial interest as well as not imposing overly burdensome conditions on applicants. The requirement, as published, provides for some collateral margin, when available, to mitigate the agency's risk. The agency does not want to encumber the applicant's home unnecessarily for the reasons raised, but if the applicant becomes delinquent and loan servicing under 7 CFR part 766 is required to bring the account current, the agency will take a lien on the non-farm residence at that time if it has not already. Therefore, the comments are not adopted.

One comment stated the agency should use, in place of § 764.106(d)(2), the language from existing 7 CFR 1941.19(c) because it provides safeguards for applicants' non-farm residence. The agency believes proposed § 764.106(d)(2) provides the same safeguards as 7 CFR 1941.19(c); therefore, the comment is not adopted.

Three comments stated the agency should clarify the exception applicable to special collateral accounts the applicant uses for the farming operation. Two of the comments stated the provision as proposed, can include almost any asset of the applicant. The agency agrees with the comments and has revised § 764.106(e) to refer to working capital accounts the applicant uses for the farming operation.

One comment stated the agency should add the following to the security exception provision: “when the U.S. Department of Justice has no jurisdiction or has advised the agency that they will not litigate civil cases in areas lacking a Federal District Court.” The agency believes the existing provision under § 764.106(c), which states the agency will not take as security property on which it cannot obtain a valid lien adequately addresses this concern. Therefore, the comment is not adopted.

Section 764.107 General Appraisal Requirements for Real Estate and Chattel

Four comments were received on the general appraisal requirements for real estate and chattel provisions. All comments stated the security value of livestock and crop production should remain 100 percent of the amount loaned for annual operating and family living expenses instead of 100 percent of the projected annual income generated from livestock and crop production. The agency agrees that the loan amount is a known value, while the projected annual income from livestock and crops is an estimate, which may be overstated. Use of the projected annual income may significantly overstate the security value of the anticipated production and result

in additional risk and higher loan losses to the agency in the event the operation fails. The agency agrees with the comments and has revised the CFR accordingly.

Section 764.108 General Insurance Requirements

Six comments were received on the general insurance requirements provisions. One comment stated the term “economically feasible” under § 764.108(b) is not clear. In addition, the comment stated chattel security need only be covered by hazard insurance if it is available, and the cost of the insurance does not exceed its benefit. The agency agrees with the comment and has revised the CFR text accordingly.

Three comments stated § 764.108(d) and (e) seem to conflict since subparagraph (d) requires crop insurance unless the applicant signs a waiver for emergency crop loss assistance and subparagraph (e) requires crop insurance must be obtained for crops providing adequate security. The agency has revised the CFR to clarify that these are separate requirements. The catastrophic risk protection level of crop insurance is a minimum requirement under 7 U.S.C. 1508 (b)(7) and section 371 of the Act. Insurance for adequate security is an additional administrative requirement.

One comment stated the proposed rule did not provide guidance on the type of insurance required, amount of insurance or insurance waiver conditions. In addition, the comment stated it is not clear if including the crop insurance premium does not result in a feasible plan, would the decision to deny a loan be upheld if a feasible plan can be developed without crop insurance. As stated above, the agency has revised the insurance requirements for clarification and elimination of conflicts. Therefore, this part of the comment is not adopted. The agency considers crop insurance premiums to be essential farm operating expenses and the applicant can utilize operating loan funds to pay the premiums. Further, the agency requires the applicant to obtain crop insurance for growing crops used to provide adequate security for the agency loan. There is no economic feasibility condition. Therefore, no change has been made in response to the latter part of the comment.

One comment stated there is a conflict between the requirements for FLP loans and Farm Program disaster benefits regarding insurance. The comment stated that for FLP loans an applicant must either have crop insurance or sign a crop insurance waiver, but to receive Farm Program benefits after a disaster, an applicant must either have crop insurance or not have insurance. The agency believes the CFR as written provides clear guidance on the insurance requirements applicable to FLP loans under the applicable statutes noted above. Therefore, the comment is not adopted.

Section 764.151 Farm Ownership Loan Uses

One comment stated the agency should extend the provision of refinancing a temporary bridge loan, made by a commercial lender for the acquisition of a farm, to loans made under a private contract for deed. The comment stated contracts for deed are a major source of funds for beginning farmers and the restriction does not benefit the agency. Section 303(a)(1)(E) of the Act provides that farm ownership loan funds can be used to refinance temporary bridge loans made by commercial or cooperative lenders to farmers to acquire a farm in certain instances. In addition, section 310F of the Act authorizes the Secretary to establish a pilot program to provide guarantees of loans made by private sellers on a contract land-sale basis to qualified beginning farmers. The agency implemented Section 310F in a Notice of Funds Availability published in the

Federal Register

on September 4, 2003 (68 FR 52557-52562). The proposed rule was based on the Act's provisions, which do not authorize refinancing contracts for deed on a permanent basis; therefore, the comment cannot be adopted.

Section 764.152 Eligibility Requirements (Farm Ownership Loans)

Three comments were received on the prior debt forgiveness provisions (§§ 764.152(b) and 764.252(b)). One comment stated the agency should revise § 764.152(b) to include all the debt forgiveness conditions found under § 764.252(b) to make the requirements for farm ownership and farm operating applicants the same. One comment stated that applicants that have caused losses to the agency through debt forgiveness should not be eligible for loans. The comment stated the agency receives limited funding each year and it should direct it to applicants who have not received debt forgiveness. In addition, the comment stated the agency's reputation and integrity is harmed from the policy of allowing any applicants who received previous debt forgiveness to be eligible for loans. The third comment objected to the provision that applicants that have received debt forgiveness due to a Presidentially-designated emergency are still eligible for operating loans. The comment stated that the determination if the debt forgiveness was due to a Presidentially-designated emergency would be very subjective and ripe for appeals. The agency disagrees. Section 373(b)(1)(A) of the Act provides that borrowers that have received debt forgiveness on a direct or guaranteed loan, generally are no longer eligible for farm ownership or operating loans. In addition, section 373 (b)(2) of the Act provides limited exceptions under which an annual operating loan may be made to borrowers that received debt forgiveness. The proposed rule was based on the Act's provisions; therefore, the comments cannot be adopted.

Two comments stated changes to Federal and State laws on property ownership have made the agency's owner-operator requirement a barrier for some applicants. The comments stated if owners of the real estate are the same persons who own the entity operating the real estate, the agency should consider the owner-operator requirement to be met. The agency understands that the entity ownership requirement may be a barrier in some cases; however, the agency's application of the owner-operator requirement to entity applicants is consistent with section 302 of the Act. The agency does not choose to make a policy change at this time.

In the proposed rule, the agency inadvertently incorporated the definition of “participated in the business operation of a farm” under § 764.152(d). The agency received nine comments requesting the definition be moved to § 761.2(b) and § 764.152 should only provide FO loan eligibility requirements. The agency agrees with the comments and has revised the CFR accordingly.

Four comments were received on acceptable documentation of an applicant's participation in the business operations of a farm (§ 764.152(d)). One comment stated the agency should either publish guidelines in the CFR on what it considers acceptable documentation or develop a form for applicants to provide documentation. One comment stated the agency should publish in the CFR acceptable documentation required for applicants to establish participation in the business operation of a farm. The comment stated the agency requires applicants to provide tax returns, with no alternative form, to verify the applicant's participation in the business operation of a farm. In addition, the comment stated the agency should develop a

standard form for applicants to complete when applicants claim participation in the business operation of a farm by virtue of being raised on a farm. The agency believes the rule as written provides the flexibility needed for applicants to document their participation in the business operation of a farm. Typically, documents include tax returns, FSA records, or W-2's. In addition, because of the different skills acquired through participation in diverse agricultural enterprises by the applicant, it will be difficult for the agency to develop a standard form to cover all potential farming participations that may occur throughout the country. Applicants can address their participation in the business operations of a farm when documenting their farming experience. Moreover, in the agency's experience, applicants have not had difficulty in meeting the requirement as is included in current § 1943.12(a)(6). Therefore, the comments are not adopted.

One comment stated the example of participation by the applicant having been raised on a farm should be removed, as it may have occurred more than 50 years ago. The agency believes it is unlikely the situation the comment stated will occur, because as stated under the general eligibility requirement provisions, the applicant must possess managerial ability by farming experience obtained within the last 5 years. Therefore, the comment is not adopted.

One comment stated the eligibility requirements should require timely experience relevant to the proposed operation to insure a greater success rate for applicants as they will have recent experience in the ever-changing agricultural technology and practices. In addition, the comment stated the requirement the applicant must have participated in the business operation of a farm in 3 out of the last 10 years currently in effect is often misunderstood by applicants, who believe they are eligible for farm ownership loans if they farmed 8, 9, and 10 years ago. The agency believes the farm ownership requirements as written are clear and accurately reflect the statutory requirements in section 302 of the Act. As stated previously, the agency does not differentiate between the skills required to operate various types of farms. The agency cannot make the farming experience timeframe any different than specified in section 302(b)(1) of the Act and does not choose to make the requirements overly burdensome to beginning farmers. Therefore, the comment is not adopted.

One comment was received on the provision that an applicant for a farm ownership loan must not have received a farm ownership loan. The comment stated the provision as written implies that an applicant is only eligible for one farm ownership loan. The agency disagrees. The proposed language sets out alternatives. The agency, however, has clarified that an applicant must “satisfy at least one of the following conditions”, and lists the alternative requirements from section 302 of the Act. Generally, the applicant may have received a prior farm ownership loan, but such loan may not have been outstanding for more than a total of 10 years prior to the new closing date.

Two comments were received on the requirement that an applicant for a farm ownership loan had been the operator of a farm. One comment stated that changing the requirement is contrary to wise supervised credit and will be a disservice to young individuals since, under the new rule they will be eligible for loans without the necessary ability to make wise financial decisions, as evidenced by filing Schedule F with their Federal tax returns. The other comment stated that the 3-year requirement for owning, managing or operating a farm should not just be stated as “a year's complete production and marketing cycle.” Section 302(b)(1) of the Act provides that eligible applicants for farm ownership loans are farmers who have participated in the business operations of a farm for not less than 3 years. The proposed rule was based on the Act's provisions; therefore, the comments cannot be adopted.

The agency inadvertently omitted in the proposed rule the current requirement that the entity must be authorized to own and operate a farm in the state in which the farm is located. Therefore, the agency is adding the requirement in the final rule at § 764.152(c).

Lastly, the agency revised § 764.152(e) in the final rule because the transition rule established under section 302(b)(2) of the Act (7 U.S.C. 1922) is no longer applicable.

Section 764.154 Rates and Terms (Farm Ownership Loans)

Three comments were received on the rates and terms provision pertaining to the joint financing agreements. One comment supported the joint financing agreement provision stating that the lower interest rate offered through the joint financing agreements benefits beginning farmers. Two comments stated the agency should extend it to all loan types. Section 307(a)(3)(D) of the Act (7 U.S.C. 1927(a)(3)(D)) provides the minimum interest rate for a direct farm ownership loan made as part of a joint financing arrangement. The Act does not specifically authorize joint financing agreements with different interest rates for any other type loans. The proposed rule was based on the Act's provisions; therefore, the comments cannot be adopted.

Section 764.203 Limitations (Beginning Farmer Downpayment Loan)

Three comments were received on the limitations provisions under the beginning farmer downpayment loan. One comment stated the Agency should work with Congress to raise the limit from $250,000 to $500,000. The agency believes the impact of any legislative change to increase the beginning farmer downpayment loan limit must be carefully analyzed as the Office of Management and Budget (OMB), along with the President play a role in the appropriations process. Therefore, the agency is limiting this rule to revising its regulations within its current statutory authority. However, the Administration's 2007 Farm Bill proposal recommends that the loan limit for the direct loans be increased. The Agency will make the appropriate regulatory changes in the future, in the event the Administration's proposal is adopted. Two comments stated that this limit is too low for their areas since buying adequate acreage to operate a farm efficiently far exceeds the limit. Section 310E(c)(2) of the Act (7 U.S.C. 1935(c)(2)) provides the maximum beginning farmer downpayment loan limit. The proposed rule was based on the Act's current provision; therefore, the comments cannot be adopted. However, as provided above, the agency will make the appropriate regulatory changes should the Administration's proposal to increase the direct loan limits be adopted.

Section 764.251 Operating Loan Uses

Fifteen comments were received on the operating loan uses. One comment stated the operating loan uses should be clarified to indicate whether income taxes can be paid for the current or prior year and personal residence or personal car payments can be made with operating loan funds. The operating loan uses as written provide for the payment of family living and farm operating expenses. The term “family living expenses,” as defined in § 761.2(b), includes “the cost of providing for the needs of family members.” The agency believes that income taxes, personal residence and personal car payments are considered a “cost of providing for the needs of

family members” and can, therefore, be paid using operating loan funds. The agency believes no additional revisions to the operating loan uses are necessary since it would be impossible to develop an all-inclusive list of family living expenses.

Three comments supported the provision that up to $15,000 of operating loan funds may be used for real estate repairs or improvements. Eleven comments either wanted to raise the limit of operating loan funds to $20,000 (1 comment), $25,000 (1 comment), $30,000 (2 comments), $50,000 (3 comments), or did not want to impose a limit as long as the farming operation's cash flow will sustain the amount used for a 7 year term without balloon payments (3 comments). Further, one of the comments stated the direct loan program should match the guaranteed loan program, as there is no limit on the amount of guaranteed operating loan funds that can be used for real estate repairs. In response, the agency revised the CFR to provide that direct operating loan funds can be used to pay costs for minor real estate repairs or improvements, provided the loan can be repaid within 7 years. The agency agrees that the direct loan provision should be consistent with the guaranteed loan provision.

Lastly, the agency inadvertently omitted the current provision that the applicant may not use Lo-Doc loan funds for refinancing debt. Therefore, the agency added the provision under § 764.251(j)(1).

Section 764.252 Eligibility Requirements (Operating Loans)

Nine comments were received on the eligibility requirements for operating loans. One comment stated the agency should change “CONACT” to “Act” and remove the definition of “debt forgiveness” found in § 764.252(b). In addition, the comment stated the applicant should be eligible for loans by paying the amount of the debt forgiveness the applicant received. The agency agrees. The agency changed the references from “CONACT” to “Act” throughout the final rule, wherever they occurred, and revised the definition of “debt forgiveness” in § 761.2 to provide that the term does not include prior debt forgiveness that is repaid in its entirety.

One comment stated the one-time debt forgiveness exception due to a Presidentially-declared disaster is also available to applicants farming in contiguous counties. The agency agrees with the comment and has revised the CFR accordingly. This change is allowed by section 373(b) of the Act (7 U.S.C. 2008h(b)) and is consistent with the agency's policy of providing EM loans in these contiguous counties.

Seven comments were received requesting the agency clarify that applicants who had reached the statutory limits were no longer eligible for OL. In the preamble of the proposed rule, the agency provided “The OL loan eligibility requirement that the applicant and any persons signing the promissory note may not close an OL loan in more than 7 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, Public Law 106-224, enacted on June 20, 2002.” However, the agency removed the appropriate regulatory text since the agency's authority to make operating loans to applicants that had reached the statutory term limits expired on December 31, 2002. As acknowledged in the preamble, the agency attempted to incorporate all the regulatory and statutory revisions required since calendar year 1999. It was due to agency oversight the above text was included in the proposed rule even though the regulatory text was removed. Therefore, the agency will take no further action on these comments.

One comment stated the agency should revise § 764.252(d) (§ 764.252(e) in the final rule) to provide that beginning farmers are eligible for direct operating loans for 10 years as provided under section 311 of the Act. The agency agrees that beginning farmers are not subject to the 7-year limitation under that statutory provision and has revised the CFR accordingly.

Five comments were received on the one time waiver for operating loan term limits under the eligibility requirements provisions. One comment disagreed with the continuous waivers of the operating loan term limits enacted by Congress. The comment stated the term limits either need to be removed completely or implemented fully as required by section 311(c) of the Act. Two comments supported the removal of the term limits and stated eligibility for loans should be based on the applicant's credit worthiness instead of on the number of years an applicant has obtained loans. Both comments, as well as an additional comment, stated that if the term limits remain in effect, the agency should use the term “financially viable operation” instead of “feasible plan” in § 764.252(f)(1) (§ 764.252(e)(4)(i) in final rule). Sections 311(c)(1) and (4) of the Act (7 U.S.C. 1941 (c)(1) and (4)) provide the term limits and waiver provisions for operating loans. Paragraph (c)(4)(B)(i) specifically allows a borrower to receive a one time waiver of 2 years, if “the borrower has a viable farm...operation.” The agency has interpreted the “financially viable operation” to mean an operation that will improve over time so that agency assistance is no longer needed. The term “feasible plan” indicates the operation will generate inflows to cover outflows but it is not necessarily reflective of a borrower's ability to graduate to commercial credit or to provide for replacement of capital items and long-term growth. The proposed rule was based on the Act's provisions; therefore, the comments cannot be adopted.

One comment stated section 311(c)(4)(A) of the Act (7 U.S.C. 1941(c)(4)(A)) provides the Secretary shall waive the operating loan term limits for farmers whose farm and security instruments are subject to the jurisdiction of an Indian tribe if the Secretary determines that commercial credit is not generally available; therefore, the comment stated § 764.252(g) (renumbered to § 764.252(e)(2)) needs to reflect the statutory requirement. The agency agrees with the comment and has revised § 764.252(e) accordingly.

In the proposed rule, the agency inadvertently stated that applicants “may request a one-time waiver of OL term limits * * *” However, the agency's current policy is to automatically consider a waiver for applicants who have reached the OL term limits and does not require a formal waiver request. Therefore, the agency revised § 764.252(e)(4) to provide that “On a case-by-casis basis, [the applicant] may be granted a one-time waiver of OL term limits * * *”

Lastly, the agency believes the Act's provisions regarding waiver of the operating term limit were not clearly stated in the proposed rule for entity applicants. Section 311 of the Act, which addresses eligibility requirements for operating loans, including both the term limit and the one-time waiver, specifically provides “To be eligible for such loans, applicants who are individuals, or, in the case of cooperatives, corporations, partnerships, joint operations, trusts, and limited liability companies, individuals holding a majority interest in such entity, must * * *” Proposed § 764.252(f)(2) provided that one condition for obtaining a waiver is the applicant “Applied for commercial credit from at least two lenders.” As proposed, the rule could be interpreted to imply that the applicant and all members of the entity must “be unable to obtain commercial credit” when the

Act clearly provides the requirement applies only to the entity applicant and entity members holding a majority interest. Therefore, the Agency clarified the waiver requirements in the final rule by revising § 764.252(e)(4)(ii) to read the applicant “And in the case of an entity, the members holding the majority interest, applied for commercial credit from at least two lenders and were unable to obtain a commercial loan, including an Agency-guaranteed loan.”

Section 764.254 Rates and Terms (Operating Loans)

Three comments were received on the rates and terms provisions for operating loans. One comment stated that balloon installments should be authorized specifically for direct operating loans as they are for guaranteed operating loans. One comment stated the rule establishes a 7-year maximum term for operating loans; however, the current agency regulations permit unequal and balloon installments. In addition, the comment stated it is not clear if unequal and balloon installments will be allowed under the new rule. The last comment stated the agency should incorporate the conditions currently in regulations under which the agency will allow longer annual operating loan repayment terms. The agency agrees with the comments and has added § 764.254(b)(2)(i) and (ii) to continue existing policies in these areas.

Section 764.255 Security Requirements (Operating Loans)

Two comments were received on the operating loan security provisions. Both comments stated the agency omitted the requirement to obtain a first lien on all property or products acquired or produced with loan funds and the requirement to keep the same lien position when refinancing secured debts. The comments are correct, in part, as the proposed rule simply required a lien, rather than a “first lien” as provided in existing regulations at 7 CFR 1941.19(a)(1). However, existing regulations require “a first lien on all property or products acquired, produced, or refinanced with loan funds,” not just “property or products produced and acquired.” The agency does believe, however, that the comments have merit, as it may not be possible for an applicant to ensure the agency can obtain a higher lien position than the creditor being refinanced. Therefore, the agency is adopting the comments as recommended and has revised the CFR accordingly.

Section 764.301 Youth Loan Uses

Twenty comments were received on the youth loan uses. Four comments supported the provisions as proposed. Four comments stated the agency should continue making youth loans under the same provisions currently utilized. Eleven comments opposed the agency's proposal and stated that since the project advisors are involved in agriculture, the youth loan project will be agriculture-related. In addition, some of the comments stated that even if the project advisor is not involved in agriculture, youth loans provide practical business skills and educational experience. Further, two of the comments stated youth loan funds should also be used for community projects and help children “stay out of trouble” after school. One comment stated it is not clear if the youth loan project should meet all of the following: be a modest, income-producing, agriculture-related, educational project. The agency disagrees. As stated in the preamble of the proposed rule, the Youth Loan Program's objective is to provide credit to rural youths to establish and operate modest, income-producing projects in connection with 4-H clubs, FFA, and similar organizations. However, through the years, the objectives of the Youth Loan Program have been interpreted inconsistently to allow loan funds to be used for projects not related to agriculture. The agency's proposal was intended to clarify that section 311(b)(1) of the Act (7 U.S.C. 1941(b)(1)) specifically waives only the managerial ability and borrower training requirements applicable to operating loans. The statute does not waive the loan purposes authorized in section 312 (a) of the Act; therefore, projects should be agriculture-related. Therefore, the comments are not adopted.

Section 764.302 Eligibility Requirements (Youth Loans)

Fifty comments were received on the eligibility requirements for youth loans. In the preamble of the proposed rule, the agency solicited comments on lowering the youth applicant's age limit to 8 years to coincide with the age limitation to participate in 4-H clubs (proposed § 764.302(b)). The agency received 35 comments. Twenty-three comments opposed lowering the youth applicant's age limit, while seven comments supported it. Three comments stated the agency should not change the youth applicant age limit. Two comments stated the agency should not lower the age limit but instead should increase it from 10 years of age to 12 or 14. In addition, one of the comments stated the loan limit for youth applicants younger than 14 years old should be $1,000 instead of $5,000. The agency considered all comments received and determined that lowering the age for youth loan applicants will not enhance applicants' chances of becoming successful farmers. Therefore, the agency is not lowering the youth loan applicants' age limit.

Twelve comments were received on the provision that youth loan applicants reside in a rural area, city, or town with a population of 50,000 or fewer people (proposed § 764.302(c)). Four comments supported the agency's proposal as written. Two comments stated the provision is unnecessarily restrictive and will prevent minority children living in urban areas, whose parents own or operate farms outside of the urban area, from participating in this valuable program. One comment stated youth loans should be available to youths residing in towns with populations of less than 10,000. One comment supported increasing the population's limit to 20,000 because cities with larger populations are not considered rural areas. In addition, the comment stated that by increasing the population limit, demand for youth loans will increase and fewer funds will be available to make operating loans to farmers. One comment opposed increasing the population to 50,000 inhabitants for youth loans. One comment stated the limitation should be removed. One comment stated there is no need to impose additional population restrictions since youth loan funds will be used for agriculturally related projects only. One comment stated that by increasing the population limit to 50,000 or fewer inhabitants and restricting the use of youth loan funds to agricultural projects only, the agency is not making the Youth Loan Program more accessible than it currently is. These opposing comments do not consistently support a specific alternative to the proposed Youth Loan Program provisions. The agency believes that the Youth Loan Program, as proposed, will provide valuable educational opportunities for youths to experience farming. Therefore, no changes have been made in response to these comments.

One comment stated the agency should remove the home economics teacher as an acceptable project advisor since the agency proposed to finance only agriculture-related projects through the youth loan program. The agency agrees with the comment and has revised the CFR accordingly.

One comment stated the agency should include a definition for a youth loan project. The comment stated that sometimes the project advisor provides a written statement that the project under consideration is educational, agriculture-related and beneficial to the applicant; however, the project advisor does not monitor the applicant's progress with the project. The comment stated, if the applicant has difficulties, the project advisor is not available to provide advice as required or needed. The project advisor mainly helps the youth loan applicant develop the project. The agency cannot predict in advance the advisor's willingness to provide assistance at a future date and has no available means to exercise any authority over the advisor. However, the agency provides assistance to youth loan borrowers experiencing difficulties. The agency believes a definition for a youth loan project is not needed since § 764.301 provides the types of projects for which a youth loan may be made; therefore, the comment is not adopted.

One comment stated the word “supervised” should be replaced by the word “mentored” in proposed § 764.302(d). The agency believes the term used in the CFR and the term provided in the comment are largely the same, so the change would not make a meaningful difference. Therefore, the comment is not adopted.

The agency inadvertently omitted in the proposed rule the eligibility requirement that a youth loan applicant not have caused the Agency a loss by receiving debt forgiveness currently established in 7 CFR 1941.12(a)(8). The agency, therefore, has incorporated the provision in the final rule by adding new § 764.302(b) and redesignating proposed § 764.302 paragraphs (b) through (e) as paragraphs (c) through (f).

Section 764.305 Security Requirements (Youth Loans)

Nine comments were received on the youth loan security requirements provisions. One comment supported the agency's proposal not to continue the 150 percent security requirement for youth loans. One comment stated the agency should require a cosigner for youth loans. One comment stated if the agency will not continue the 150 percent security requirement, the agency should require a cosigner for youth loans like the Department of Education for student loans. Six comments stated the security requirements for youth loans should remain the same as for operating loans. The agency believes youth loan applicants have minimal assets beyond those acquired with loan funds. In addition, the agency has a limited loss exposure for youth loans because of the $5,000 loan limit; therefore, the additional security requirements for operating loans would impose a disproportional administrative burden on the agency. Further, DCIA provisions provide more effective and less costly collection tools than disposition of collateral when the loan amount is small. Lastly, youth loans are made to finance income producing, agriculture-related projects unlike student loans for which repayment of principal is generally deferred until a date in the future. Therefore, the agency does not believe a cosigner is necessary when the cash flow projection reflects a feasible plan. However, the agency may still require a cosigner for youth loans when the agency determines there is not adequate cash flow for the proposed loan otherwise. Therefore, the comments are not adopted.

Section 764.351 Emergency Loan Uses

Two comments stated it is not clear if an agency direct loan can be refinanced with chattel physical loss loan funds or production loss loan funds. Proposed § 764.351 contains the conditions for refinancing debts, including agency debt. The agency did not propose to make policy changes to the existing emergency loan regulation. Therefore, the comments are not adopted.

Three comments stated the agency should clarify in the final rule that only essential property will be repaired or replaced with emergency loan funds. The agency agrees with the comments and has revised the CFR accordingly.

One comment stated the agency should revise § 764.351(a)(2)(v) to provide for “essential farm operating and family living expenses” instead of “essential household expenses.” The agency agrees with the comm

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