Revisions to the Direct Emergency Loan Instructions To Implement Administrative Decisions Pertaining to the Applicant Loan Eligibility Calculation, Appraisals, and Crop Insurance

SUMMARY: The Farmers Home Administration (FmHA) proposes to amend its

emergency loan (EM) regulations to revise the applicant eligibility

calculation and appraisal requirements and to require crop insurance.

This action is necessary to ease the EM eligibility requirements, to

expedite EM application processing time, and to reduce losses to

family-size farmers and the Government. The intended effect is to

provide assistance to a greater number of farmers affected by major

disasters in a timely manner.

DATES: Written comments must be submitted on or before February 23,

1994.

ADDRESSES: Submit written comments, in duplicate, to the Office of the

Chief, Regulations Analysis and Control Branch, Farmers Home

Administration, USDA, room 6348, South Agriculture Building, 14th

Street and Independence Avenue SW., Washington, DC 20250. All written

comments made pursuant to this notice will be available for public

inspection during regular working hours at the above address.

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

Farmer Programs Loan Making Division, Farmers Home Administration,

USDA, room 5428, South Building, 14th Street and Independence Avenue

SW., Washington, DC 20250, telephone (202) 720-5114.

SUPPLEMENTARY INFORMATION:

Classification

We are issuing this proposed rule in conformance with Executive

Order 12866, and the Office of Management and Budget (OMB) has

determined that it is a ``significant regulatory action.'' Based on

information compiled by the Department, OMB has determined that this

proposed rule:

(1) Would alter the budgetary impact of entitlements, grants, user

fees, or loan programs or rights and obligations of recipients thereof;

and

(2) Is a significant public policy issue as related to the

direction of the EM loan program.

Intergovernmental Consultation

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), Emergency

Loans are excluded from the scope of Executive Order 12372, which

requires intergovernmental consultation with State and local officials.

Programs Affected

These changes affect the following FmHA program as listed in the

Catalog of Federal Domestic Assistance: 10.404--Emergency 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 the proposed 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 this

regulation 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 number 0575-0090, in accordance with the Paperwork

Reduction Act of 1980 (44 U.S.C. 3507). This proposed rule does not

revise or impose any new information collection or recordkeeping

requirement from those approved by OMB.

Discussion of Proposed Rule

It is the policy of this Department that rules relating to public

property, loans, grants, benefits, or contracts shall be published for

comment notwithstanding the exemption of 5 U.S.C. 553 with respect to

such rules. FmHA is publishing this proposed rule with a 15-day comment

period. This proposed rule relieves the restriction of considering

disaster related assistance or compensation in the EM eligibility

calculation. Furthermore, the Agency has concluded that the need to

provide immediate assistance to farmers who have suffered severe

production and physical losses as a result of natural disasters also

justifies the shortened comment period under 5 U.S.C. 553(d) as

discussed below.

Major agricultural disasters during the 1993 crop year, including

extensive flooding and rainfall in 9 Midwestern States and drought in 3

Southeastern States, will result in a significant increase in demand

for FmHA direct loan assistance. In the 9 flood states alone, over 8

million acres of crops were lost or not planted in 1993. Estimates

indicate that the 1993 floods were the second costliest weather

disaster in the history of the United States. Preliminary estimates are

that as many as 10,000 of the affected farmers may require financial

assistance from FmHA.

The need for a change in the regulations is immediate. Farmers have

concluded 1993 operations, and are consulting with their lenders to

plan for 1994. Farmers who have suffered severe production losses are

in dire need of disaster program assistance to repay creditors and

suppliers annual production loans, open supplier accounts, and

installments due on intermediate and long term debts and to otherwise

repair and continue their farming and ranching operations. FmHA is

receiving loan requests at an increasing rate. The Agency wants to give

the public an opportunity for input on the proposed change but FmHA

needs regulations in place for spring planting, so a reasonable

compromise was the 15-day comment period.

Because of the scope of the situation and the impact on local,

regional, and national economies, the Agency believes that an amendment

to the regulations after a shortened comment period is the only way to

assure that affected farmers receive the assistance they need on a

timely basis to recover from these disasters. Any further delay in the

timing of this amendment will reduce the Agency's ability to meet the

needs of those affected, thus imposing additional hardships on those

who have already suffered substantially from flood or drought, and

jeopardizing individual and community financial recovery from these

disasters. The proposal to require crop insurance on the coming year's

crop as a condition of making EM loans is necessary to protect the

borrower and the Government. The requirement and its exceptions,

however, will not delay the making or reduce the number of EM loans.

The making, supervision, and servicing of farm loans to FmHA

borrowers is governed primarily by the Consolidated Farm and Rural

Development Act (CONACT) (7 U.S.C. 1921 et seq.). In particular, 7

U.S.C. 1970 provides that the Secretary, and through delegation FmHA,

shall extend emergency loans ``to any applicant seeking assistance

based on production losses if the applicant shows that a single

enterprise which constitutes a basic part of the applicant's farming,

ranching, or aquaculture operation has sustained at least a 30 per

centum loss of normal per acre or per animal production,'' or a lesser

per centum as determined by FmHA, as a result of the disaster and other

eligibility criteria are met. Under the statute, FmHA also must make

production loss loans based on 80 per centum, or such greater per

centum as determined by FmHA, of the total actual production loss

sustained by the eligible applicant.

The existing emergency (EM) loan regulations state that all

financial disaster assistance/compensation will be considered in

determining the applicant's eligibility for EM assistance and again in

calculating the maximum amount of loss loan entitlement. Once

eligibility is established, then all single enterprises showing a

production loss are considered in the calculation to determine the

maximum loss loan entitlement.

The Agency has concluded that modifications to the current

provisions are in order. In the 13 years (since 2/13/80) that FmHA has

employed the present calculation for determining eligibility, there

have been numerous instances where producers would have suffered

qualifying losses yet were deemed ineligible for an emergency loss loan

only because the dollar loss was reduced by the amount of disaster

related assistance/compensation so that the 30 percent loss level was

not reached. Based on this experience, it is the Agency's opinion that

the ability of FmHA to carry out the underlying intent of the program--

to provide loans to farmers who have suffered losses due to natural

disasters and who cannot obtain credit from private sources--has been

seriously hindered. For this reason, the Agency has concluded that it

can best serve these farmers, and thereby meet the goals of the

program, by revising its regulations as follows.

The Agency proposes to amend 7 CFR part 1945, subpart D,

Sec. 1945.163, by revising the applicant eligibility calculation to

consider only the dollar loss of a single enterprise based on the

difference in income between the disaster year and the normal year.

Disaster related assistance/compensation would not be considered in the

eligibility calculation. The maximum loss loan entitlement, however,

still would be the sum of production losses to all enterprises less any

disaster related assistance/compensation and costs not incurred. This

change is necessary to respond to the extreme financial stress of many

farmers affected by repetitive natural disasters.

By changing the EM loan eligibility calculation, more applicants

will be permitted to qualify for loan assistance. This revision to the

regulation complies with the Robert T. Stafford Disaster Relief and

Emergency Assistance Act, 42 U.S.C. 5155, prohibiting the duplication

of Federal disaster benefits. The amount of the individual EM loss loan

entitlement will continue to be reduced by the amount of any disaster

related assistance or compensation received or to be received by the

applicant. The Agency considered limited legislative history related to

EM loan legislation (Pub. L. 94-68, August 5, 1975) which suggested

that a person who had Federal crop insurance which covered a portion of

the disaster loss might become ineligible by not meeting the 20 percent

damage test (now 30 percent). The legislative history, however, was

found unpersuasive and insufficient to require the Agency to continue

its practice of considering other disaster benefits at the point of EM

eligibility when not specifically required by statute. The Agency

proposes these changes with the belief that more farmers in need will

be assisted and a prudent loan making program will be preserved within

statutory constraints.

The Agency also proposes to amend Sec. 1945.169 by requiring

applicants to purchase multi-peril crop insurance when receiving EM

loan assistance. CONACT section 321(b) states that an applicant shall

be ineligible for EM loan assistance for crop losses to an annual crop

planted or harvested after December 31, 1986, if crop insurance was

available to the applicant under the Federal Crop Insurance Act.

However, the Disaster Assistance Acts of 1988 and 1989; the Food

Agriculture, Conservation, and Trade Act (FACT Act) of 1990; the Dire

Supplemental Appropriations Act of 1991; and the Supplemental

Appropriations, Transfers and Recessions Act of 1992 waived this crop

insurance requirement for losses to annual crops planted for harvest in

years 1988-1993.

While these statutes waived the eligibility requirement, the

Disaster Assistance Acts of 1988 and 1989 and the 1990 FACT Act

required eligible EM applicants to agree to purchase crop insurance as

a loan condition, subject to certain exceptions. (The loan would be

made on the condition that the borrower obtain crop insurance in the

future, if not already insured.) The Dire Supplemental Appropriations

Act of 1991 and the Supplemental Appropriations, Transfers and

Recessions Act of 1992 did not have this requirement. However, upon

implementing changes required by the 1991 Act, the Agency

administratively required eligible applicants to obtain crop insurance

on their 1992 crop in order to receive an EM loan. This administrative

language was inadvertently omitted when making regulation changes

required by the 1992 Act.

The Agency believes it is prudent for applicants to purchase crop

insurance on the coming year's crop and proposes to once again require

it as an EM loan condition. Currently, FmHA only encourages EM

borrowers to obtain FCIC crop insurance or multi-peril crop insurance,

if available. Most FmHA applicants have limited resources and are

unable to fully recover from major disasters. Purchasing crop insurance

will reduce the applicant's risk of incurring devastating losses, and

will also protect the Government's interest. The Agency, however, has

provided for two exceptions. If crop insurance is not available, the

Agency will not require it. In addition, if the premium cost of the

insurance would prevent the applicant from showing ability to repay the

loan, the Agency will waive the requirement. The Agency wants to

provide assistance to such applicants if they can otherwise project

repayment ability. Thus, the crop insurance requirement will not delay

the making of needed EM loans or limit the number of loans made since

crop insurance is only a loan condition which will be waived in the two

instances noted above.

The Agency also proposes to amend Sec. 1945.175 by revising the

requirement for two complete appraisals when the first appraisal

reflects adequate security for the loan(s). Section 324 (d) of the

CONACT states that farm security, including land, livestock, and

equipment, for EM loans will be valued based on the higher of the value

of the assets on the day before the Governor requests assistance and

the value of the assets one year before such day. While the two values

must be considered, the values need not be based on two complete

appraisals.

The proposed change indicates that when a real estate appraisal to

establish the value on the day before the Governor's EM designation

request reflects adequate security for the loan, the basis for the

second value for one year and one day before the subject request will

be documented in an attachment to the appraisal. When the first

appraisal does not reflect adequate security only the applicable parts

of a second Form FmHA 1922-1, ``Appraisal Report - Farm Tract,''

reflecting the changes between the two dates, will be completed to

establish the value one year and one day before the Governor's request.

In cases where there is a physical loss of real estate and funds will

be used for development, the recommended market value will be as

improved. This is consistent with general appraisal practices and

current Form FmHA 1922-1 which includes a provision for the

contributory value of buildings as improved.

With respect to chattel appraisals, when the value one year and one

day before the Governor's request reflects adequate security, the value

one day before the Governor's request will be established on Form FmHA

1945-15, ``Value Determination Worksheet,'' by a reasonable estimate.

This change will reduce Agency processing time and cost in relation to

Emergency loans.

List of Subjects in 7 CFR Part 1945

Agriculture, Disaster assistance, Loan programs--Agriculture.

Therefore, part 1945, chapter XVIII, title 7, Code of Federal

Regulations, is amended as follows:

PART 1945--EMERGENCY

1. The authority citation for part 1945 continues to read as

follows:

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

2.23; 7 CFR 2.70.

Subpart D--Emergency Loan Policies, Procedures and Authorizations

2. Section 1945.163 is amended by revising paragraph (d) to read as

follows:

Sec. 1945.163 Determining qualifying losses, eligibility for EM

loan(s) and the maximum amount of each.

* * * * *

(d) Compensation for losses. All financial assistance provided

through any disaster relief program and all compensation for disaster

losses received from any source by an EM loan applicant will reduce the

applicant's loss by the amount of such compensation. All such

compensation will be considered in determining the maximum amount of

loss loan entitlement. Disaster related assistance/compensation will

not be considered in the EM eligibility calculation. The amount of any

disaster program benefits received from ASCS, including the Emergency

Feed Assistance Program (EFAP), Emergency Conservation Program (ECP),

and Disaster Program payments will be considered as compensation for

losses (ASCS Deficiency Payments are not to be considered as

compensation).

* * * * *

3. Section 1945.169 is amended by revising paragraph (j) to read as

follows:

Sec. 1945.169 Security.

(j) Crop insurance. All recipients of EM loans must agree, as a

condition of the loan, to obtain multi-peril crop insurance under the

Federal Crop Insurance Act for the coming year's crop. When one of the

conditions of paragraph (j)(1) of this section exists, the approval

official will document in the applicant's file the basis for not

requiring crop insurance.

(1) Applicants will not be required to obtain crop insurance when

any one of the following conditions exists:

(i) Crop insurance is not available for the crop, i.e., there is no

open season and no opportunity to acquire crop insurance.

(ii) The financial projections on which the loan approval is based

indicate that the premium cost of the required insurance would prevent

the applicant from projecting a feasible plan, and thus disqualifying

the applicant for loan assistance.

(2) When crops are the primary source of repayment for EM loans,

FmHA will require an ``Assignment of Indemnity'' on the borrower's crop

insurance policy(ies).

(3) When EM loans are based on physical losses only, crop insurance

will only be required when loan funds will be used for annual

production expenses. In such cases, the same conditions will apply as

stated in paragraph (j)(1) of this section.

(4) When the payment of crop insurance premiums is not required

until after harvest, the premiums may be paid by releasing insured

crop(s) sale proceeds, notwithstanding the limits of Secs. 1962.17 and

1962.29(b) of subpart A of part 1962 of this chapter. If the borrower's

crop losses are sufficient to warrant an indemnity payment, the premium

due will be deducted by the insurance carrier from such payment. The

FmHA County Office will maintain a record on Form FmHA 1905-12,

``Monthly Expirations,'' of the dates which each borrower's crop

insurance premium(s) is due. This is in accordance with FmHA

Instruction 1905-A, a copy of which is available in any FmHA office.

(5) When an applicant purchases the necessary crop insurance as a

condition to receiving an EM loan and, after the EM loan is closed,

allows the policy(ies) to lapse or be cancelled before completion of

the production year, the borrower will become immediately liable for

full repayment of all principal and interest outstanding on any EM loan

made on the condition of obtaining crop insurance. The loan approval

official will insert this requirement in item 41 of Form FmHA 1940-1,

``Request for Obligation of Funds,'' which is signed by the applicant

and the FmHA loan approval official.

* * * * *

4. Section 1945.175 is amended by revising paragraphs (c)(2), and

(c)(4) to read as follows:

Sec. 1945.175 Options, planning and appraisals.

(c) Appraisals.

* * * * *

(2) Real estate appraisals will be completed as provided in subpart

E of part 1922 of this chapter. However, the value of assets that

secure EM loans associated with a disaster having any portion of its

incidence period occurring on or after May 31, 1983, must be based on

the higher of two values, all of which must be part of the file. These

values will show:

(i) The asset value on the day before a State Governor's, Indian

Tribal Council's, or an FmHA State Director's first EM designation

request, which is associated with the naming of one or more counties in

a State as a disaster area where eligible farmers may qualify for EM

loans; or the asset value one year (365 days) and one day before the

designation request.

(ii) Form FmHA 1922-1, will be completed to reflect the recommended

market value (RMV) as of the day before the Governor's request.

(A) When the value one day before the Governor's request reflects

adequate security for the loan(s), the basis for arriving at the second

value, one year and one day before the Governor's request, will be

documented in an attachment to the appraisal.

(B) When the first appraisal does not reflect adequate security

only the applicable Part(s) 2, 3, 5, 6, 7, and 8 of a second Form FmHA

1922-1, will be completed to reflect changes between the two dates, and

establish a value one year and one day before the Governor's request.

(C) In cases where there is a physical loss of real estate and

funds will be used for development, the RMV will be as improved.

(iii) The following types of real estate offered as collateral for

securing EM loans will be appraised at the present market value only:

(A) Farm real estate the applicant/borrower did not own on the date

set forth in paragraph (c)(2)(i) of this section.

(B) Real estate ``not owned'' by the applicant/borrower (for

example, a relative if offering real estate as collateral for the

proposed EM loan).

(C) A single family dwelling located on a nonfarm tract.

(D) Other types of real estate such as apartment houses and

commercial buildings. The County Supervisor will request the assistance

of the State Director in establishing the value of such real estate.

(iv) Sales data utilized in the preparation of the necessary

appraisal(s) should conform to the dates set forth in paragraph

(c)(2)(i) of this section, to ensure a fair market value of the

property is established. In addition, it should be confirmed that said

sales resulted from reasonable sales efforts and that both the buyer

and seller were willing, informed, and knowledgeable parties.

* * * * *

(4) Chattel appraisals will be completed on Form FmHA 1945-15,

``Value Determination Worksheet,'' (EM loans only) when chattels are

taken as security. The property which will serve as security will be

described in sufficient detail so it can be identified. Sources such as

livestock market reports and publications reflecting values of farm

machinery and equipment will be used as appropriate. The value of

assets that secure EM loans associated with a disaster having any

portion of the incidence period occurring on or after May 31, 1983,

must be based on the higher of two values, all of which must be made

part of the file. These values will be based on the time periods

contained in paragraph (c)(2)(i) of this section.

(i) In those cases where the value one year and one day before the

Governor's request reflects adequate security, the appraiser or County

Supervisor will reasonably estimate the value one day before the

Governor's request.

(ii) Chattels owned by the applicant, and nonfarm chattel property

offered as security (such as planes, house trailers, boats, etc.) will

be appraised at the present market value only. Chattels that the

applicant/borrower did not own on the dates set forth in paragraph

(c)(2)(i) of this section will be appraised at the present market value

only.

Dated: February 1, 1994.

Bob J. Nash,

Under Secretary for Small Community and Rural Development.

[FR Doc. 94-2777 Filed 2-7-94; 8:45 am]

BILLING CODE 3410-07-U