Revisions to the Direct Operating (OL), Farm Ownership (FO), Soil and Water (SW) and Emergency (EM) Loan Regulations To Modify Collateral Requirements

DEPARTMENT OF AGRICULTURE

Farmers Home Administration

7 CFR Parts 1941, 1943, 1945, and 1951

RIN 0575-AB71

Revisions to the Direct Operating (OL), Farm Ownership (FO), Soil

and Water (SW) and Emergency (EM) Loan Regulations To Modify Collateral

Requirements

AGENCY: Farmers Home Administration, USDA.

ACTION: Final rule.

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SUMMARY: The Farmers Home Administration (FmHA) amends its direct

operating (OL), farm ownership (FO), soil and water (SW) and emergency

(EM) loan making and servicing regulations to modify collateral

requirements. These amendments concern the amount of collateral

required when an FmHA loan is made. There will be no change in security

requirements for loan restructuring. The intended effect is to reduce

the burden on farmers and FmHA personnel in servicing FmHA loan

collateral and to avoid encumbering all of a farmer's collateral,

thereby making it less difficult for farmers who receive FmHA loans to

subsequently obtain non-FmHA credit.

EFFECTIVE DATE: May 18, 1994.

FOR FURTHER INFORMATION CONTACT: David R. Smith, Senior Loan Officer,

Farmer Programs Loan Making Division, Farmers Home Administration,

USDA, South Agriculture Building, room 5430, 14th and Independence

Avenue, SW., Washington, DC 20250-0700, Telephone (202) 720-5114.

SUPPLEMENTARY INFORMATION:

Classification

This rule has been determined to be not significant for purposes of

Executive Order 12866 and therefore has not been reviewed by OMB.

Intergovernmental Consultation

1. For the reasons set forth in the final rule related to Notice 7

CFR part 3015, subpart V (48 FR 29115, June 24, 1983) and FmHA

Instruction 1940-J, ``Intergovernmental Review of Farmers Home

Administration Programs and Activities'' (December 23, 1983), Farm

Ownership Loans, Farm Operating Loans, and Emergency Loans are excluded

from the scope of Executive Order 12372, which requires

intergovernmental consultation with State and local officials.

2. The Soil and Water Loan Program is subject to the provisions of

Executive Order 12372 and FmHA Instruction 1940-J.

Programs Affected

These changes affect the following FmHA programs as listed in the

Catalog of Federal Domestic Assistance:

10.404--Emergency Loans,

10.406--Farm Operating Loans,

10.407--Farm Ownership Loans,

10.416--Soil and Water Loans.

Environmental Impact Statement

This document has been reviewed in accordance with 7 CFR part 1940,

subpart G, ``Environmental Program.'' It is the determination of FmHA

that this action does not constitute a major Federal action

significantly affecting the quality of the human environment, and in

accordance with the National Environmental Policy Act of 1969, Public

Law 91-190, an Environmental Impact Statement is not required.

Civil Justice Reform

This document has been reviewed in accordance with Executive Order

(E.O.) 12778. It is the determination of FmHA that this action does not

unduly burden the Federal Court System in that it meets all applicable

standards provided in section 2 of the E.O.

Paperwork Reduction Act

The information collection requirements contained in these

regulations have been approved by the Office of Management and Budget

(OMB) under the provisions of 44 U.S.C. chapter 35 and have been

assigned OMB control numbers 0575-0141, 0575-0085, 0575-0083, 0575-0090

and 0575-0133 in accordance with the Paperwork Reduction Act of 1980

(44 U.S.C. 3507). This final rule does not revise or impose any new

information collection or recordkeeping requirement from those approved

by OMB.

Background

The Agency published a proposed rule in the Federal Register (59 FR

2307-12) on January 14, 1994, which provided for a 15-day comment

period ending on January 31, 1994.

The proposed rule proposed that, rather than requiring a lien on

all assets, FmHA would only require a lien on available property to the

point that the value of the security would be at least equal to 150

percent of the amount of the loan(s). The loan at least would have to

be ``adequately'' secured with security value equalling 100 percent of

the loan amount.

Discussion of Comments

In response to the proposed rule, 24 individual comments were

received from 11 respondents. All the comments were received from FmHA

employees.

Seven respondents commented that requiring security at least equal

to 150 percent of the loan amount would require more appraisals, which

would add to the cost of and delay loan processing. Four of these

respondents commented that the number of appeals would increase, due to

differences of opinion as to the collateral values and items to be

taken as security. The Agency agrees and has taken this into

consideration in the final rule. To implement the 150 percent

requirement, OL, FO, SW, and EM regulations have been amended to state

that the value of property taken as security will be documented in the

case file. These values will be established based on the appraisal

requirements of each program which have not been amended. Therefore, no

additional appraisals will be required as a result of this rule. If the

applicant disagrees with the FmHA valuation of real estate, the

applicant may, at his/her expense, provide an appraisal which meets

FmHA regulatory requirements. Acceptance of the applicant's appraisal

will minimize appeals.

Two respondents commented that the proposed rule was confusing

relative to the lien position on chattel security and in view of its

complexity would be difficult to explain to applicants. The Agency

agrees and has taken this into consideration in clarifying the final

rule. A first lien is required on all property acquired, produced or

refinanced with loan funds. The best lien obtainable will be taken on

other security to meet the primary security and/or the ``at least'' 150

percent security requirement.

One respondent stated that the emergency loan regulation was not

clear with respect to the lien position on chattel security when

extended repayment terms (7 years) are offered to the borrower. The

respondent assumed a first lien was required when 7-year terms are

used. The Agency feels that the existing regulation provides adequate

guidance when extended repayment terms are offered with chattel

security. Loans may be scheduled for longer repayment periods if the

needs of the applicant justify a longer term, and the loan(s) can be

secured for the longer term. A first lien, however, is not required in

such a situation, except on property purchased, produced, or refinanced

with loan funds.

Three respondents commented that only like security should be

required for the type of loan being made. Operating loans would be

secured by crops and chattels, and real estate loans by real estate.

Five respondents commented that loans should be adequately secured as

determined by the loan approval official. The Agency has not adopted

these comments in the final rule. Available like security will be used

if it provides primary security for the loan or additional security up

to 150 percent of the loan amount. However, when adequate security is

not available for the type of loan being made, the Agency will require

the loan approval official to take other types of security to at least

adequately secure the loan.

Two respondents commented that for OL loans, it appears that if the

applicant does not have adequate chattels to bring the equity position

up to at least 150 percent, a loan would not be made to the applicant.

The Agency has clarified that a lien will be taken on other chattels,

``if available,'' to provide additional security up to 150 percent of

the loan amount.

Two respondents commented as to how a security value will be

established for crops, suggesting it be based on the farm financial

standard, the normal value if being sold by the owner, or the amount of

the insurance coverage. This comment has not been adopted. The Agency

instead has determined that the security value of the crop will be

equal to 100 percent of the amount loaned for annual operating and

family living expenses, as reflected on Form FmHA 431-2, ``Farm and

Home Plan,'' or other acceptable plan of operation. This will allow

FmHA to continue, as it has done historically, to approve a loan to a

borrower when there is no other loan security and a feasible plan of

operation can be developed.

Two respondents commented that the ``lien on all assets'' policy

should remain in place. One comment indicated that this policy would be

less difficult to administer than the 150 percent requirement. The

second comment indicated that the ``lien on all assets'' benefits

outweigh the negative aspects outlined in the proposed rule text. The

policy provides FmHA with more control over the finances of the

operation. The Agency does not agree with the ``lien on all assets''

policy for the reasons stated in the proposed rule. The Agency believes

that the clarifications made on appraisals simplify implementation of

this rule.

One respondent commented that with respect to real estate loans, if

the real estate provides 100 percent security to loan ratio, the State

Director should have the authority to waive the 150 percent security

requirement. This comment has not been adopted. For reasons discussed

in the proposed rule, the Agency generally supports attaining a 150

percent security to loan ratio. For real estate loans, the lesser of

150 percent or all real estate owned by the applicant will be taken as

security. A loan will be considered adequately secured when the real

estate security for the loan is at least equal to the loan amount. If

additional real estate is available up to 150 percent, however, it will

be taken as security. Security in excess of 150 percent will only be

taken when it is not practical to separate the property.

One respondent commented that FmHA Instruction 1962-A should be

revised to allow FmHA to release its chattel lien when the remaining

debt is for real estate purposes and is adequately secured by real

estate. The Agency believes the existing regulation

(Sec. 1962.17(c)(5)) adequately addresses the release of chattel liens

when the remaining security adequately secures the loan.

One respondent commented that the requirement to take a lien on all

assets when loans are restructured under FmHA Instruction 1951-S is too

restrictive, and recommended taking a lien on all assets when

additional security is needed or when loans are written down or

deferred. The respondent's concern was that not all borrowers that

require rescheduling or reamortization are in poor financial condition

or have undersecured loans. While the Agency concurs to some degree

with these comments, when a borrower receives government-subsidized

assistance and needs loan restructuring to continue the farming

operation, all assets should be offered as security in view of

potential loss risks and the borrower's generally highly leveraged

financial position. The Agency does not plan to revise the loan

servicing security requirements.

Discussion of Final Rule

The intent of this final rule is to make the loan security

requirements less demanding while continuing to protect the

Government's interest. If available, the total amount of security

required will be at least equal to 150 percent of the amount of the

loan. The Agency will continue to make loans provided the value of the

security available is at least equal to the amount of the loan. This is

consistent with the authorizing statute and the Agency's mission of

providing assistance to farmers with limited financial resources. Thus

the Agency is adopting the proposed rule as final with the changes as

discussed above. In addition, the following amendments are made to the

policy proposed.

The Agency also amends 7 CFR part 1941, subpart A, Sec. 1941.19, 7

CFR part 1943, subpart A, Sec. 1943.19, along with 7 CFR part 1943,

subpart B, Sec. 1943.69; and 7 CFR part 1945, subpart D, Sec. 1945.169

to state that a lien will not be taken on the applicant's personal

residence and appurtenances when the residence is located on a separate

parcel and the farm real estate provides primary security (adequate

security) for the loan. The Agency does not feel that the borrower's

off-farm residence generally should be encumbered in conjunction with

FmHA farmer programs loan assistance unless absolutely necessary. It is

intended, however, that the residence be included as security when loan

funds are to purchase or provide major repairs or improvements to the

dwelling, or when there is insufficient equity in other real property

to provide primary security for the loan. 7 CFR part 1943, subpart A,

Sec. 1943.24 has been amended for consistency with this new policy.

The Agency also amends 7 CFR part 1945, subpart D, Sec. 1945.169 to

state emergency loans made for subtitle A (real estate purposes) will

be secured by a lien on real estate and additional security as needed.

A provision also has been added regarding nonessential assets in EM

loan situations. In many cases, EM loan applicants are not typical FmHA

loan applicants in that they may have significant nonfarm asset

holdings. Therefore, in the case of EM loans a lien will be taken on

all nonessential assets with an aggregate value over $5,000 if an

applicant cannot or will not dispose of the assets and use the proceeds

to reduce the FmHA credit needs prior to loan closing. When the

nonessential asset value does not exceed $5,000, the County Supervisor

will estimate and document such value in the case file but not attempt

to place a lien on the assets. The $5,000 floor has been added because

the benefit of taking liens on lesser amounts is outweighed by the

administrative costs.

Section 1941.25(a) of subpart A of part 1941 of this chapter has

been revised to remove for clarity the provision requiring that a real

estate appraisal be done when the loan is being made to refinance real

estate secured debt. Under the revised regulation, real estate is only

taken as security if the chattel security value is less than a 150

percent of the loan. If the real estate is primary security it is

already covered by Sec. 1941.25(a) and will be appraised. If it is

additional security, its value only will be estimated and documented in

the case file.

List of Subjects

7 CFR Part 1941

Crops, Livestock, Loan programs--Agriculture, Rural areas, Youth.

7 CFR Part 1943

Credit, Loan programs--Agriculture, Recreation, Water resources.

7 CFR Part 1945

Agriculture, Disaster assistance, Loan programs--Agriculture.

7 CFR Part 1951

Account servicing, Debt restructuring, Credit, Loan programs--

Agriculture, Loan programs--Housing and community development, Low and

moderate income housing loans--Servicing.

Therefore, chapter XVIII, title 7, Code of Federal Regulations is

amended as follows:

PART 1941--OPERATING LOANS

1. The authority citation for part 1941 continues to read as

follows:

Authority: 7 U.S.C. 1989; 5 U.S.C. 301; 7 CFR 2.23 and 2.70.

Subpart A--Operating Loan Policies, Procedures, and Authorizations

2. Section 1941.19 is amended by redesignating current paragraphs

(b)(4) through (b)(6) as paragraphs (b)(5) through (b)(7),

respectively, and redesignating current paragraphs (b) through (i) as

paragraphs (c) through (j), respectively; revising paragraph (a),

revising the word ``insured'' to read ``direct'' in newly redesignated

paragraph (f)(1); and adding a new introductory paragraph and new

paragraphs (b) and (c)(4) to read as follows:

Sec. 1941.19 Security.

Primary security must be available for the loan. Any additional

security available up to and including 150 percent of the loan amount

also will be taken. Security in excess of 150 percent of the loan

amount will only be taken when it is not practical to separate the

property, i.e., same type of livestock (dairy cows, brood sows). In

cases when a loan is being made in conjunction with a servicing action,

the security requirements as stated in subpart S of part 1951 of this

chapter will prevail. In unusual cases, the loan approval official may

require a cosigner in accordance with Sec. 1910.3 (d) of subpart A of

part 1910 of this chapter or a pledge of security from a third party. A

pledge of security is preferable to a cosigner.

(a) Chattels.

(1) The loan must be secured by a first lien on all property or

products acquired, produced, or refinanced with loan funds.

(2) If the security for the loan under paragraph (a)(1) of this

section is not at least equal to 150 percent of the loan amount, the

best lien obtainable will be taken on other chattel security owned by

the applicant, if available, up to the point that security for the loan

at least equals 150 percent of the loan amount.

(i) When there are several alternatives available (cattle,

machinery), any one of which will meet the security requirements of

this section, the approval official generally has the discretion to

select the best alternative for obtaining security.

(ii) When alternatives exist and the applicant has a preference as

to the property to be taken for security, however, the approval

official will honor the preference so long as the requirements of

paragraphs (a)(1) and (2) of this section are met.

(3) To comply with the 150 percent requirement, security values

will be established as follows:

(i) For the purposes of loan making only, the security value of the

crop and/or livestock production is presumed to be 100 percent of the

amount loaned for annual operating and family living expenses listed on

Form FmHA 431-2, ``Farm and Home Plan,'' or other acceptable plan of

operation.

(ii) The specific livestock and/or equipment to be taken as

security, along with the value of the security, will be documented in

the case file. This information will be obtained from values

established in accordance with Sec. 1941.25 of this subpart.

(b) Real estate. The loan approval official will require a lien on

all or part of the applicant's real estate as security when chattel

security alone is not at least equal to 150 percent of the amount of

the loan. Different lien positions on real estate are considered

separate and identifiable collateral. Real estate taken as security,

along with its value established in accordance with Sec. 1941.25 of

this subpart, will be documented in the case file. If the applicant

disagrees with the values established, FmHA will accept an appraisal

from the applicant, obtained at the applicant's expense, if the

appraisal meets all FmHA requirements.

(1) Security may also include assignments of leases or leasehold

interests having mortgageable value, revenues, royalties from mineral

rights, patents and copyrights, and pledges of security by third

parties.

(2) Advice on obtaining security will be received from OGC when

necessary.

(c) * * *

(4) A lien will not be taken on the applicant's personal residence

and appurtenances, when the residence is located on a separate parcel

and the farm tract(s) being used for collateral, in addition to any

crops or chattels, meet the security requirement of at least equal to

150 percent of the loan.

* * * * *

3. Section 1941.25 is amended by revising paragraph (a)(4) to read

as follows:

Sec. 1941.25 Appraisals.

(a) * * *

(4) A real estate appraisal is required when real estate is taken

as primary security, as defined in Sec. 1941.4 of this subpart.

* * * * *

PART 1943--FARM OWNERSHIP, SOIL AND WATER AND RECREATION

4. The authority citation for part 1943 continues to read as

follows:

Authority: 7 U.S.C. 1989; 5 U.S.C. 301; 7 CFR 2.23 and 2.70.

Subpart A--Direct Farm Ownership Loan Policies, Procedures and

Authorizations

Sec. 1943.17 [Amended]

5. Section 1943.17 is amended by revising the reference ``subpart

LL of part 2000 of this chapter'' to read ``FmHA Instruction 2000-LL''

in paragraph (b).

6. Section 1943.19 is amended by removing paragraphs (a)(2) and

(b)(4), redesignating current paragraphs (a)(3) through (a)(8) as

paragraphs (a)(2) through (a)(7), respectively, paragraph (b)(3) as

(b)(4), and paragraphs (b), (d), (e), and (f), as paragraphs (d), (e),

(f), and (g), respectively; revising the introductory paragraph,

paragraph (a)(1), newly redesignated paragraph (a)(2) and paragraph

(c); revising the word ``insured'' to read ``direct'' in newly

redesignated paragraph (f)(1); revising the reference ``paragraph (e)''

to read ``paragraph (f)'' and the word ``insured'' to read ``direct''

in newly redesignated paragraph (g); and adding new paragraphs (b) and

(d)(3) to read as follows:

Sec. 1943.19 Security.

Each FO loan will be secured by real estate. Chattels and/or other

security will only be taken as security as set forth in paragraphs (b)

and (c) of this section. The total amount of security required will be

the lesser of either 150 percent of the loan amount, or all real estate

owned by the applicant. A loan will be considered adequately secured

when the real estate security for the loan is at least equal to the

loan amount. Security in excess of 150 percent of the loan amount will

only be taken when it is not practical to separate the property, i.e.,

a tract of land. All security taken, along with the value of the

security, will be documented in the case file. This information will be

obtained from values established in accordance with Sec. 1943.25 of

this subpart. If the applicant disagrees with the real estate values

established, FmHA will accept an appraisal from the applicant, obtained

at the applicant's expense, if the appraisal meets all FmHA

requirements. In cases when a loan is being made in conjunction with a

servicing action, the security requirements as stated in subpart S of

part 1951 of this chapter will prevail. In unusual cases, the loan

approval official may require a cosigner in accordance with

Sec. 1910.3(d) of subpart A of part 1910 of this chapter or a pledge of

security from a third party. A pledge of security is preferable to a

cosigner.

(a) * * *

(1) A mortgage will be taken on all real estate acquired,

refinanced, or improved with FO funds, and by any additional real

estate security needed to meet the requirements of this section.

(2) Security will also include items which are considered part of

the farm and ordinarily pass with the title to the farm such as, but

not limited to, assignments of leases or leasehold interests having

mortgageable value, water rights, easements, rights-of-way, revenues,

and royalties from mineral rights.

* * * * *

(b) Chattel security. Ordinarily, FO loans will not be secured by

chattels. However, loans will be secured by chattels as follows:

(1) A first lien will be taken on equipment or fixtures purchased

or refinanced with loan funds whenever such property cannot be included

in the real estate lien and the best lien obtainable on all real estate

does not provide primary security for the loan.

(2) Chattel security will be obtained when the best lien obtainable

on all real estate does not provide primary security for the loan.

(3) The same collateral may be used to secure two or more loans

made, direct or guaranteed, to the same borrower. Therefore, junior

liens on chattels may be taken when there is enough equity in the

property. However, when possible, a first lien on selected chattel

items should be obtained.

(4) Chattel security liens will be obtained and kept effective, as

provided in subpart A of part 1962 of this chapter.

(c) Other security. (1) A pledge of real estate by a third party

may be taken as security when the best lien obtainable on all real

estate does not provide primary security for the loan.

(2) Other property may be taken as security when the best lien

obtainable on all real estate does not provide primary security for the

loan. Examples of such security include but are not limited to cash

surrender value of life insurance, securities, patents and copyrights,

and membership or stock in cooperatives and associations.

(d) * * *

(3) A lien will not be taken on the applicant's personal residence

and appurtenances, when the residence is located on a separate parcel

and the farm tract being financed, refinanced, improved, or otherwise

used for collateral provides primary security for the loan(s).

* * * * *

Sec. 1943.24 [Amended]

7. Section 1943.24 is amended by removing the last sentence in

paragraph (b)(1)(i).

Sec. 1943.38 [Amended]

8. Section 1943.38 is amended by revising the reference

``Sec. 1943.19 (a)(7)'' to read ``Sec. 1943.19 (a)(6)'' in paragraph

(a).

Subpart B--Direct Soil and Water Loan Policies, Procedures and

Authorizations

9. Section 1943.69 is amended by removing paragraphs (a)(2) and

(b)(4); redesignating current paragraphs (a)(3) through (a)(8) as

paragraphs (a)(2) through (a)(7), respectively, and paragraph (b)(3) as

paragraph (b)(4); revising the introductory paragraph, paragraph

(a)(1), newly redesignated paragraph (a)(2), and paragraphs (c)

introductory text, (c)(1) and (c)(2); and adding a new paragraph (b)(3)

to read as follows:

Sec. 1943.69 Security.

Each SW loan will be secured by real estate, chattels, leaseholds,

or a combination of these. Chattels and/or leaseholds, however, will

only be taken as security as set forth in paragraphs (c) and (d) of

this section. The total amount of security required will be the lesser

of either 150 percent of the loan amount, or all real estate owned by

the applicant. A loan will be considered adequately secured when the

real estate security for the loan is at least equal to the loan amount.

Security in excess of 150 percent of the loan amount will only be taken

when it is not practical to separate the property, i.e., a tract of

land. The specific items of security, along with the value of the

security, will be documented in the case file. This information will be

obtained from values established in accordance with Sec. 1943.75 of

this subpart. If the applicant disagrees with the values established,

FmHA will accept an appraisal from the applicant, obtained at the

applicant's expense, if the appraisal meets all FmHA requirements. In

cases, when a loan is being made in conjunction with a servicing

action, the security requirements as stated in subpart S of part 1951

of this chapter will prevail. In unusual cases, the loan approval

official may require a cosigner in accordance with Sec. 1910.3 (d) of

subpart A of part 1910 of this chapter or a pledge of security from a

third party. A pledge of security is preferable to a cosigner.

(a) * * *

(1) A mortgage will be taken on all real estate refinanced or

improved with SW funds, and by any additional real estate security

needed to meet the requirements of this section.

(2) Security will also include items which are considered part of

the farm and ordinarily pass with the title to the farm such as, but

not limited to, assignments of leases or leasehold interests having

mortgageable value, water rights, easements, rights-of-way, revenues,

and royalties from mineral rights.

* * * * *

(b) * * *

(3) A lien will not be taken on the applicant's personal residence

and appurtenances, when the residence is located on a separate parcel

and the farm tract being financed, refinanced, improved, or otherwise

used for collateral provides primary security for the loan(s).

* * * * *

(c) Chattel security. Ordinarily, SW loans will not be secured by

chattels. However, loans will be secured by chattels as follows:

(1) A first lien will be taken on equipment or fixtures bought with

loan funds whenever such property cannot be included in the real estate

lien and the best lien obtainable on all real estate will be taken and

does not provide primary security for the loan.

(2) Chattel security will be obtained when real estate will not

provide primary security for the loan and the best lien obtainable has

been taken on all real estate.

* * * * *

Sec. 1943.88 [Amended]

10. Section 1943.88 is amended by revising the reference

``Sec. 1943.69(a)(7)'' to read ``Sec. 1943.69(a)(6)'' in paragraph (a).

PART 1945--EMERGENCY

11. The authority citation for part 1945 is revised to read as

follows:

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

2.23 and 2.70.

Subpart D--Emergency Loan Policies, Procedures and Authorizations

12. Section 1945.169 is amended by redesignating current paragraphs

(b)(3) through (b)(7) as (b)(4) through (b)(8), respectively, and

paragraphs (b) through (n) as (d) through (p), respectively; revising

the reference ``Sec. 1910.3 (e)'' to read ``Sec. 1910.3 (d)'' in newly

redesignated paragraph (e)(1); revising the reference ``paragraph (d)''

to read ``paragraph (f)'' in newly redesignated paragraph (f)(3);

revising the reference ``paragraph (f)(2)'' to read ``paragraph

(h)(2)'' in newly redesignated paragraph (h)(3); revising the reference

``paragraphs (f)(1), (2), and (3)'' to read ``paragraphs (h)(1), (2),

and (3)'' in newly redesignated paragraph (h)(4); revising the

reference ``paragraph (j)(1)'' to read ``paragraph (l)(1)'' in newly

redesignated paragraph (l) introductory text; revising the reference

``paragraph (j)(1)'' to read ``paragraph (l)(1)'' in newly redesignated

paragraph (l)(3); revising the reference ``paragraph (b)(1) of the

financing statement'' to read ``paragraph 1. (b) of Form FmHA 440-25,

``Financing Statement'''' in newly redesignated paragraph (p)(2);

revising paragraph (a); and adding a new introductory paragraph and new

paragraphs (b), (c), and (d)(3) to read as follows:

Sec. 1945.169 Security.

Each EM loan will be secured by chattels, real estate, and/or other

security and nonessential assets in accordance with this section. The

same collateral may be used to secure two or more loans made, direct or

guaranteed, to the same borrower. Thus, a junior lien on property

serving as collateral for a guaranteed loan(s) is acceptable. In cases

when a loan is being made in conjunction with a servicing action, the

security requirements as stated in subpart S of part 1951 of this

chapter will prevail.

(a) Security for operating type purposes. Primary security must be

available for the loan, except as provided for in paragraph (g) of this

section. Any additional security available up to and including 150

percent of the loan amount also will be taken. Except as provided in

paragraph (c) of this section, security in excess of 150 percent of the

loan amount will only be taken when it is not practical to separate the

property, i.e., same type of livestock (dairy cows, brood sows). In

unusual cases, the loan approval official may require a cosigner in

accordance with Sec. 1910.3 (d) of subpart A of part 1910 of this

chapter, or a pledge of security from a third party. A pledge of

security is preferable to a cosigner.

(1) Chattels. The loan must be secured by:

(i) A first lien on all property or products acquired, produced, or

refinanced with loan funds;

(ii) If the security for the loan under paragraph (a)(1)(i) of this

section is not at least equal to 150 percent of the loan amount, the

best lien obtainable will be taken on other chattel security owned by

the applicant, if available, up to the point that security for the loan

at least equals 150 percent of the loan amount.

(A) When there are several alternatives available (cattle,

machinery), any one of which will meet the security requirements of

this section, the approval official generally has the discretion to

select the best alternative for obtaining security.

(B) When alternatives exist and the applicant has a preference as

to the property to be taken for security, however, the approval

official will honor the preference so long as the requirements of

paragraphs (a)(1)(i) and (ii) of this section are met.

(iii) To comply with the 150 percent requirement, security values

will be established as follows:

(A) Annual production. For the purposes of loan making only, the

security value of the crop and/or livestock production is presumed to

be 100 percent of the amount loaned for annual operating and family

living expenses listed on Form FmHA 431-2, ``Farm and Home Plan,'' or

other acceptable plan of operation.

(B) The specific livestock and/or equipment to be taken as

security, along with the value of the security, will be documented in

the case file. This information will be obtained from values

established in accordance with Sec. 1945.175 (c) of this subpart.

(2) Real estate. The loan approval official will require a lien on

all or part of the applicant's real estate as security when chattel

security alone is not at least equal to 150 percent of the amount of

the loan. A lien, however, will not be taken on the applicant's

personal residence and appurtenances, when the residence is located on

a separate parcel and the farm tract(s) being used for collateral, in

addition to any crops or chattels, meet the security requirement of at

least equal to 150 percent of the loan. Different lien positions on

real estate are considered separate and identifiable collateral. Real

estate taken as security, along with its value established in

accordance with Sec. 1945.175 (c) of this subpart, will be documented

in the case file. If the applicant disagrees with the values

established, FmHA will accept an appraisal from the applicant, obtained

at the applicant's expense, if the appraisal meets all FmHA

requirements.

(3) Other security.

(i) A pledge of real estate or chattels by a third party will be

taken as security when the property owned by the applicant does not

provide primary security.

(ii) Other available property that cannot be converted to cash

without jeopardizing the applicant's farm operation or imposing

substantial financial penalty on the applicant will be taken as

security when the property owned by the applicant does not provide

primary security. Examples of such security include, but are not

limited to, cash surrender value of life insurance, securities, patents

and copyrights, and membership or stock in cooperatives and

associations.

(b) Security for real estate type purposes. Primary security must

be available for the loan, except as provided for in paragraph (g) of

this section. EM loans made for subtitle A (real estate) purposes will

be secured by real estate. Chattels and/or other security will only be

taken as security as set forth in paragraphs (b)(2), (b)(3), and (c) of

this section. The total amount of security required will be the lesser

of either 150 percent of the loan amount, or all real estate owned by

the applicant. A loan will be considered adequately secured when the

real estate security for the loan is at least equal to the loan amount.

Except as provided in paragraph (c) of this section, security in excess

of 150 percent of the loan amount will only be taken when it is not

practical to separate the property, i.e., a tract of land. All security

taken, along with the value of security, will be documented in the case

file. This information will be obtained from values established in

accordance with Sec. 1945.175 (c) of this subpart. If the applicant

disagrees with the real estate values established, FmHA will accept an

appraisal from the applicant, obtained at the applicant's expense, if

the appraisal meets all FmHA requirements. In unusual cases, the loan

approval official may require a cosigner in accordance with Sec. 1910.3

(d) of subpart A of part 1910 of this chapter, or a pledge of security

from someone other than the applicant(s). A pledge of security is

preferable to a cosigner.

(1) Real estate security.

(i) A mortgage will be taken on all real estate repaired or

rehabilitated, refinanced, or improved with EM funds, and by any

additional real estate security needed to meet the requirements of this

section.

(ii) Security will also include assignments of leases or leasehold

interests which have mortgageable value, water rights, easements,

rights of way, mineral rights, and royalties.

(iii) A first lien is required on real estate, when available.

Loans may be secured by a junior lien on real estate provided:

(A) Prior lien instruments do not contain provisions for future

advances (except for taxes, insurance, and other costs needed to

protect the security, or reasonable foreclosure costs), cancellation,

summary forfeiture, or other clauses that may jeopardize the

Government's interest or the applicant's ability to pay the loan unless

any such undesirable provision is waived, modified, or subordinated

insofar as the Government is concerned.

(B) Agreements are obtained from prior lienholders to give notice

of foreclosure to FmHA whenever State law or other arrangements do not

require such a notice. Any agreements needed will be obtained as

provided in subpart B of part 1927 of this chapter, except as modified

by the ``Memorandum of Understanding-FCA-FmHA,'' FmHA Instruction 2000-

R (available in any FmHA office)

(2) Chattel security. Loans will be secured by chattels as follows:

(i) A first lien will be taken on equipment or fixtures purchased

or refinanced with loan funds whenever such property cannot be included

in the real estate lien and the best lien obtainable on all real estate

does not provide primary security for the loan.

(ii) Chattel security will be obtained when the best lien

obtainable on all real estate does not provide primary security for the

loan.

(iii) The same collateral may be used to secure two or more loans

made, direct or guaranteed, to the same borrower. Therefore, junior

liens on chattels may be taken when there is enough equity in the

property. However, when possible, a first lien on selected chattel

items should be obtained.

(iv) Chattel security liens will be obtained and kept effective, as

provided in subpart A of part 1962 of this chapter.

(3) Other security.

(i) A pledge of real estate by a third party may be taken as

security when the real estate owned and to be acquired by the applicant

does not provide primary security for the loan.

(ii) Other property may be taken as security when the real estate

owned and to be acquired by the applicant does not provide primary

security. Examples of such security include but are not limited to cash

surrender value of life insurance, securities, patents and copyrights,

and membership or stock in cooperatives and associations.

(c) Nonessential assets. Nonessential assets are assets which the

applicant has an ownership interest in that do not contribute a net

income to pay family living expenses or to maintain a sound farming

operation (see Sec. 1962.17 of subpart A of part 1962 of this chapter

for further guidance). A lien will be taken on all nonessential assets,

with an aggregate value exceeding $5,000, if an applicant cannot or

will not dispose of the assets and use the proceeds to reduce the FmHA

credit needs prior to loan closing. When the value does not exceed

$5,000, the County Supervisor will estimate and document such value in

the case file, but will not take a lien on the assets. The 150 percent

security requirement does not apply to nonessential assets.

(d) * * *

(3) A lien will not be taken on the applicant's personal residence

and appurtenances, when the residence is located on a separate parcel

and the farm tract being financed, refinanced, improved, or otherwise

used for collateral provides primary security for the loan(s).

* * * * *

Sec. 1945.175 [Amended]

13. Section 1945.175 is amended by revising the reference

``Sec. 1945.169 (n)(1)'' to read ``Sec. 1945.169 (p)(1)'' in paragraph

(c)(1)(iii).

PART 1951--SERVICING AND COLLECTIONS

14. The authority citation for part 1951 continues to read as

follows:

Authority: 42 U.S.C. 1480; 5 U.S.C. 301; 7 CFR 2.23; 7 CFR 2.70.

Subpart S--Farmer Programs Account Servicing Policies

15. Section 1951.910 is amended by revising paragraph (b) to read

as follows:

Sec. 1951.910 Consideration of borrower's other assets for New

Applications.

* * * * *

(b) Lien on certain assets. Delinquent borrowers must pledge

certain assets, essential and nonessential, unencumbered to FmHA as

security at the time FmHA loans are restructured, as follows:

(1) The best lien obtainable will be taken on all assets owned by

the borrower. When the borrower is an entity, the best lien obtainable

will be taken on all assets owned by the entity, and all assets owned

by all members of the entity. Different lien positions on real estate

are considered separate and identifiable collateral.

(2) Security will include, but is not limited to, the following:

land, buildings, structures, fixtures, machinery, equipment, livestock,

livestock products, growing crops, stored crops, inventory, supplies,

accounts receivable, certain cash or special cash collateral accounts,

marketable securities, certificates of ownership of precious metals,

and cash surrender value of life insurance.

(3) Security will also include assignments of leases or leasehold

interests having mortgageable value, revenues, royalties from mineral

rights, patents and copyrights, and pledges of security by third

parties.

(4) The exceptions set forth in Sec. 1941.19(c) of subpart A of

part 1941 apply.

(5) These assets will be considered as additional security for the

loans as well as any shared appreciation agreement. The value of the

essential assets will not be included in the NRV calculation to

determine restructuring. The FmHA lien will be taken only at the time

of closing the restructured FmHA loans.

Dated: May 10, 1994.

Bob J. Nash,

Under Secretary for Small Community and Rural Development.--

[FR Doc. 94-12092 Filed 5-17-94; 8:45 am]

BILLING CODE 3410-07-U