Removal of the Prohibition Against Charging Interest on Interest on FmHA Guaranteed Loans

DEPARTMENT OF AGRICULTURE

Farmers Home Administration

7 CFR Part 1980

RIN 0575-AB70

Removal of the Prohibition Against Charging Interest on Interest

on FmHA Guaranteed Loans

AGENCY: Farmers Home Administration, USDA.

ACTION: Proposed rule.

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

guaranteed farmer programs loan making and servicing regulations to

remove the restriction against lenders charging interest on interest

when restructuring loans. The intended effect is to eliminate barriers

which prevent lenders from restructuring loans of delinquent guaranteed

borrowers.

DATES: Written comments must be submitted on or before April 14, 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 20250-0700. 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: Steven K. Ford, Senior Loan Officer,

Farmer Programs Loan Making Division, Farmers Home Administration,

USDA, South Agriculture Building, room 5424, 14th and Independence

Avenue, SW., Washington, DC. 20250-0700, Telephone (202) 690-0451.

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 guaranteed loan program.

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:

10.406--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 Executive Order.

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 number 0575-0024 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 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 not withstanding 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 prohibiting lenders

from charging interest on interest when restructuring guaranteed Farmer

Programs loans. Due to the flooding in the Midwest and the drought in

the Southeast, several farmers have experienced substantial reduction

in income and will be unable to make their annual payments on

Guaranteed loans. By permitting lenders to capitalize interest when

restructuring these loans, the loans will be more profitable and

lenders will be less resistant to rescheduling or reamortizing these

loans. This will allow the farmers to continue their operation and

avoid liquidation. Therefore, 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).

Lenders participating in the Guaranteed Loan Program have been

reluctant to restructure the loans of delinquent guaranteed borrowers

because of restrictive regulatory requirements. FmHA requires lenders

to set aside the accrued interest portion of loans that are being

restructured. Interest is only accrued on the outstanding principal.

The restriction prohibiting lenders from charging interest on

interest was originally included in the regulations to make the

Guaranteed Program consistent with the Direct loan program. In the

past, FmHA could not capitalize interest that was not more than 90 days

past due. Due to the passage of the Food, Agriculture, Conservation and

Trade Act of 1990 (Pub. L. 101-624), this is no longer a restriction

for Direct loans. The restriction, therefore, is unique to the

Guaranteed program and should be removed.

This practice also is contrary to standard industry practice.

Lenders normally capitalize the outstanding interest portion of the

loan and reschedule or reamortize the payments based on the new

principal amount. FmHA's restriction on capitalizing interest

necessitates a unique treatment for guaranteed loans with additional

bookkeeping efforts. It also reduces the lender's return on the

guaranteed loans.

FmHA proposes to remove the restriction prohibiting lenders from

capitalizing interest on guaranteed loans when restructuring. By

removing this restriction, lenders will no longer be required to

maintain a separate accounting system for the accrued interest when a

delinquent loan is restructured. This separate system is

administratively expensive for lenders to maintain; therefore, lenders

have been reluctant to restructure loans.

By removing this restriction, FmHA will pay an additional amount in

loss claims in cases where the lender has restructured the loan and

capitalized the interest. FmHA estimates that the increase in loss

payments should be limited to 1 percent of the current loss payment

level.

Lenders will also be able to use their standard notes without

modification. Some lenders customarily charge borrowers interest on

delinquent interest as a late payment fee. FmHA requires this clause to

be removed by modifying the note or attaching an allonge. The proposed

change will permit lenders to charge late payment fees that are

customary for their non-guaranteed loans; however, it will not change 7

CFR part 1980, subpart A, Section 1980.22 which prohibits these charges

from being covered by the guarantee. Any other capitalization of

interest when restructuring will be permitted, and will be covered by

the guarantee, providing the interest and other charges do not exceed

those charged to the lenders' non-guaranteed farm customers.

This change will only apply to Farmer Program Guaranteed loans,

since it is intended to respond to farmers' reduction in income and

agricultural lenders reluctance to restructure guaranteed loans without

capitalizing interest. Similar hardships have not been identified in

the Housing or Business and Industry programs.

This revision will also reduce the difference in the profitability

of guaranteed loans compared with the lenders' non-guaranteed loans.

Lenders will be more willing to restructure the loans of delinquent

guaranteed borrowers instead of liquidating the security. While some

borrowers will pay more after their loans are restructured, many more

borrowers will be able to continue farming with restructured loans.

The revision will apply to new loans made as well as existing

guaranteed loans. Forms FmHA 449-34, ``Loan Note Guarantee,'' FmHA

1980-27, ``Contract of Guarantee (Line of Credit),'' and FmHA 1980-38,

``Agreement for Participation in Farmer Programs Guaranteed Loan

Programs of the United States Government,'' executed for previous

loans, contain prohibitions against charging interest on interest.

Since removing this restriction will be to the lenders' benefit, FmHA

proposes to permit lenders to capitalize interest when restructuring

guaranteed loans. Thus, when FmHA concurs with the restructuring plan,

the County Supervisor will provide the lender with an attachment to

these forms modifying the restriction in cases of restructuring within

statutory loan limits, and setting any new principal and guaranteed

amounts. These forms will be amended accordingly for new guaranteed

loans, but an attachment will be needed at restructuring to identify

any new principal and guaranteed amounts which exceed the amounts

listed on the guaranteed loan documents.

The Agency also proposes to eliminate the requirement that

principal payments be made which are at least equal to the amount of

the depreciation of the security. It is unrealistic to expect that a

farmer in need of restructuring could make such a principal payment.

For example, if a loan with a $100,000 outstanding balance, and

$400,000 of security is restructured, the borrower currently must

reduce the principal by $40,000 (assuming the security depreciates at

10 percent per year). This requirement has proven to be a hindrance to

necessary loan restructuring.

The principal reduction requirement was originally adopted along

with the requirement that Guaranteed loans be fully secured to be

restructured. In 1989, FmHA removed the requirement that loans be

secured to receive restructuring. There may be situations where the

loan will not be fully secured; however, the risk to the agency is

minimized by other requirements for restructuring, such as

demonstrating a feasible plan, and restricting the number of years over

which a loan may be rescheduled/reamortized.

List of Subjects in 7 CFR Part 1980

Agriculture, Loan programs--Agriculture, Loan Programs--Business

and Industry--Rural development assistance, Loan programs--Housing and

Community development.

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

proposed to be amended as follows:

PART 1980--GENERAL

1. The authority citation for part 1980 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 and 2.70.

Subpart A--General

2. Section 1980.11 is revised to read as follows:

Sec. 1980.11 Full faith and credit.

The Loan Note Guarantee and Contract of Guarantee constitute

obligations supported by the full faith and credit of the United States

and are incontestable except for fraud or misrepresentation of which

the lender or holder has actual knowledge at the time it becomes such

lender or holder or which lender or holder participates in or condones.

A note which provides for the payment of interest on interest shall not

be guaranteed. Any Loan Note Guarantee, Contract of Guarantee or

Assignment Guarantee Agreement attached to or relating to a note which

provides for payment of interest on interest is void. Except in the

case of Farmer Program loans, a note which provides for the

capitalization of interest as a result of restructuring the loan and

not exceeding statutory loan limits or as a customary late payment fee

may be guaranteed, and any Loan Note Guarantee, Contract of Guarantee

or Assignment Guarantee Agreement attached to or relating to such note

is not void. The guarantee and right to require purchase will be

directly enforceable by holder notwithstanding any fraud or

misrepresentation by the lender or any unenforceability of the Loan

Note Guarantee by the lender. The Loan Note Guarantee or Contract of

Guarantee will be unenforceable by the lender to the extent any loss is

occasioned by violation of usury laws, negligent servicing or failure

to obtain the required security regardless of the time at which FmHA

acquires knowledge of the foregoing. Any losses occasioned will be

unenforceable by the lender to the extent that loan funds are used for

purposes other than those specifically approved by FmHA in its Form

FmHA 1980-15. Negligent servicing is defined as the failure to perform

those services which a reasonably prudent lender would perform in

servicing its own portfolio of loans that are not guaranteed. The term

includes not only the concept of a failure to act but also not acting

in a timely manner or acting in a manner contrary to the manner in

which a reasonably prudent lender would act up to the time of loan

maturity or until a final loss is paid. The Loan Note Guarantee or

Assignment Guarantee Agreement in the hands of a holder shall not cover

interest accruing 90 days after the holder has demanded repurchase by

the lender, nor shall the Loan Note Guarantee or Assignment Guarantee

Agreement in the hands of a holder cover interest accruing 90 days

after the lender or FmHA has requested the holder to surrender the

evidence of debt for repurchase.

3. Section 1980.20 (a) introductory text is revised to read as

follows:

Sec. 1980.20 Loan guarantee limits.

(a) Lenders and applicants will propose the percentage of

guarantee. Lenders and applicants will be advised in writing on Form

FmHA 449-14 by FmHA of any percentage of guarantee less than proposed

by the lender and applicant, and the reasons therefore. (See

Sec. 1980.80 of this subpart regarding appeals.) The maximum percentage

of guarantee (as opposed to the maximum loss covered by the guarantee)

on a Business and Industrial loan is defined in Sec. 1980.420 of

subpart E of this part. The maximum percentage of guarantee for DARBE

guaranteed loans in excess of $2,000,000 will be calculated so that the

guaranteed portion of the principal amount of the loan cannot exceed

$2,000,000. The maximum percentage of guarantee for all other loans

covered by this section will be 90 percent. Also, except in regards to

D&D and DARBE guaranteed loans (see subpart E of this part) or as

modified for Farmer Programs guaranteed loans (see subpart B of this

part), the maximum loss covered by Form FmHA 449-34 or Form FmHA 1980-

27 can never exceed the lesser of:

* * * * *

4. Section 1980.83 (b) is amended by adding two new entries at the

end of the table to read as follows:

Sec. 1980.83 FmHA Forms.

* * * * *

(b) * * *

FmHA

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Form No. Title of form Purpose and code\1\

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1980-84... Modification of New Contract Used to permit capitalization

Relating to Farmer Programs of interest. (2)

Guaranteed Loan/Line of

Credit.

1980-85... Modification of Existing Used to permit capitalization

Contract Relating to Farmer of interest. (2)

Programs Guaranteed Loan/

Line of Credit.

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\1\Code: *** (2) FmHA and lender use, ***

5. Appendix A to Subpart A is revised to read as follows:

Appendix A to Subpart A

USDA-FmHA

Form FmHA 449-34

(Rev. 4-94)

Type of Loan: __________

Loan Note Guarantee

Applicable 7 C.F.R. Part 1980

Subpart

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Borrower

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Lender

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Lender's Address

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State

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County

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Date of Note

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FmHA Loan Identification Number

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Lender's IRS ID Tax Number

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Principal Amount of Loan

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The guaranteed portion of the loan is $__________ which is__________

(__________%) percent of a loan principal. The principal amount of

loan is evidenced by ____________ note(s) includes bonds as

appropriate) described below. The guaranteed portion of each note is

indicated below. This instrument is attached to note __________ in

the face amount of $________ and is number ________ of ________.

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Percent

Lender's identifying of total

No. Face amount face Amount guaranteed

amount

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$ % $

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Total $________ 100% $________

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In consideration of the making of the subject loan by the above

named Lender, the United States of America, acting through the

Farmers Home Administration of the United States Department of

Agriculture (herein called ``FmHA''), pursuant to the Consolidated

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

Emergency Livestock Credit Act of 1974 (7 U.S.C. note preceding 1961

P.L. 93-357 as amended), the Emergency Agriculture, Credit

Adjustment Act of 1978 (7 U.S.C. note preceding 1961 P.L. 93-357 as

amended), the Emergency Agriculture, Credit Adjustment Act of 1978

(7 U.S.C. note preceding 1921, P.L. 95-334, or Title V of the

Housing Act of 1949 (42 U.S.C. 1471 et. seq.) does hereby agree that

in accordance with and subject to the conditions and requirements

herein, it will pay to:

A. Any Holder 100 percent of any loss sustained by such Holder

on the guaranteed portion and on interest due (including any loan

subsidy) on such portion and any capitalized interest on such

portion resulting from the restructuring of a Guaranteed Farmer

Programs loan and not exceeding statutory loan limits.

B. The Lender the lesser of 1. or 2. below:

1. Any loss sustained by such Lender on the guaranteed portion

including:

a. Principal and interest indebtedness as evidenced by said

note(s) or by assumption agreement(s), and

b. Any loan subsidy due and owing, and

c. Principal and interest indebtedness on secured protective

advances for protection and preservation of collateral made with

FmHA's authorization, including but not limited to, advances for

taxes, annual assessments, any ground rents, and hazard or flood

insurance premiums affecting the collateral, or

d. and, Capitalized interest on such portion resulting from the

restructuring of a Guaranteed Farmer Programs loan and not exceeding

statutory loan limits, or

2. The guaranteed principal advanced to or assumed by the

Borrower under said note(s) or assumption agreement(s) and any

interest due (including any loan subsidy) thereon and any

capitalized interest resulting from the restructuring of a

Guaranteed Farmer Programs loan and not exceeding statutory loan

limits.

If FmHA conducts the liquidation of the loan, loss occasioned to

a Lender by accruing interest (including any loan subsidy) after the

date FmHA accepts responsibility for liquidation will not be covered

by this Loan Note Guarantee. If Lender conducts the liquidation of

the loan accruing interest (including any loan subsidy) shall be

covered by this Loan Note Guarantee to date of final settlement when

the Lender conducts the liquidation expeditiously in accordance with

the liquidation plan approved by FmHA.

Definition of Holder

The Holder is the person or organization other than the Lender

who holds all or part of the guaranteed portion of the loan with no

servicing responsibilities. Holders are prohibited from obtaining

any part(s) of the Guaranteed portion of the loan with proceeds from

any obligation, the interest on which is excludable from income,

under Section 103 of the Internal Revenue Code of 1954, as amended

(IRC). When the Lender assigns a part(s) of the guaranteed loan to

an assignee, the assignee becomes a Holder only when Form FmHA 449-

36, ``Assignment Guarantee Agreement,'' is used.

Definition of Lender

The Lender is the person or organization making and servicing

the loan which is guaranteed under the provisions of the applicable

Subpart 7 CFR of Part 1980. The Lender is also the party requesting

a loan guarantee.

Conditions of Guarantee

1. Loan Servicing

Lender will be responsible for servicing the entire loan, and

Lender will remain mortgagee and/or secured party of record not

withstanding the fact that another party may hold a portion of the

loan. When multiple notes are used to evidence a loan, Lender will

structure repayments as provided in the loan agreement. In the case

of Farm Ownership, Soil and Water, or Operating Loans, the Lender

agrees that if liquidation of the account becomes imminent, the

Lender will consider the Borrower for an Interest Rate Buydown under

Exhibit C of Subpart B of 7 CFR, Part 1980, and request a

determination of the Borrower's eligibility by FmHA. The Lender may

not initiate foreclose action on the loan until 60 days after a

determination has been made with respect to the eligibility of the

Borrower to participate in the Interest Rate Buydown Program.

2. Priorities

The entire loan will be secured by the same security with equal

lien priority for the guaranteed and unguaranteed portions of the

loan. The unguaranteed portion of the loan will not be paid first

nor given any preference or priority over the guaranteed portion.

3. Full Faith and Credit

The Loan Note Guarantee constitutes an obligation supported by

the full faith and credit of the United States and is incontestable

except for fraud or misrepresentation of which Lender or any Holder

has actual knowledge at the time it became such Lender or Holder or

which Lender or any Holder participates in or condones. If the note

to which this is attached or relates provides for the payment of

interest on interest, then this Loan Note Guarantee is void.

However, in the case of the Farmer Programs loans, the

capitalization of interest when restructuring loans and the charging

of customary late fees will not void this Loan Note Guarantee. In

addition, the Loan Note Guarantee will be unenforceable by Lender to

the extent any loss is occasioned by the violation of usury laws,

negligent servicing, or failure to obtain the required security

regardless of the time at which FmHA acquires knowledge of the

foregoing. Any losses occasioned will be unenforceable to the extent

that loan funds are used for purposes other than those specifically

approved by FmHA in its Conditional Commitment for Guarantee.

Negligent servicing is defined as the failure to perform those

services which a reasonably prudent lender would perform in

servicing its own portfolio of loans that are not guaranteed. The

term includes not only the concept of a failure to act but also not

acting in a timely manner or acting in a manner contrary to the

manner in which a reasonably prudent lender would act up to the time

of loan maturity or until a final loss is paid.

4. Rights and Liabilities

The guarantee and right to require purchase will be directly

enforceable by Holder notwithstanding any fraud or misrepresentation

by Lender or any unenforceability of this Loan Note Guarantee by

Lender. Nothing contained herein will constitute any waiver by FmHA

of any rights it possesses against the Lender. Lender will be liable

for and will promptly pay to FmFA any payment made by FmHA to Holder

which if such Lender had held the guaranteed portion of the loan,

FmHA would not be required to make.

5. Payments

Lender will receive all payments of principal, or interest, and

any loan subsidy on account of the entire loan and will promptly

remit to Holder(s) its pro rata share thereof determined according

to its respective interest in the loan, less only Lender's servicing

fee.

6. Protective Advances

Protective advances made by Lender pursuant to the regulations

will be guaranteed against a percentage of loss to the same extent

as provided in this Loan Note Guarantee notwithstanding the

guaranteed portion of the loan that is held by another.

7. Repurchase by Lender

The Lender has the option to repurchase the unpaid guaranteed

portion of the loan from the Holder(s) within 30 days of written

demand by the Holder(s) when: (a) the borrower is in default not

less than 60 days on principal or interest due on the loan or (b)

the Lender has failed to remit to the Holder(s) its pro rate share

of any payment made by the borrower or any loan subsidy within 30

days of its receipt thereof. The repurchase by the Lender will be

for an amount equal to the unpaid guaranteed portion of principal

and accured interest (including any loan subsidy) less the Lender's

servicing fee. The Loan Note Guarantee will not cover the note

interest to the Holder on the guaranteed loan(s) accruing after 90

days from the date of the demand letter to the Lender requesting the

repurchase. Holder(s) will concurrently send a copy of demand of

FmHA. The Lender will accept an assignment without recourse from the

Holder(s) upon repurchase. The Lender is encouraged to repurchase

the loan to facilitate the accounting for funds, resolve the

problem, and to permit the borrower to cure the default, where

reasonable. The Lender will notify the Holder(s) and FmHA of its

decision.

8. FmHA Purchase

If Lender does not repurchase as provided by paragraph 7 hereof,

FmHA will purchase from Holder the unpaid principal balance of the

guaranteed portion together with accrued interest (including any

loan subsidy) to date of repurchase less Lender's servicing fee,

within thirty (30) days after written demand to FmHA from Holder.

The Loan Note Guarantee will not cover the note interest to the

Holder on the guaranteed loan(s) accruing after 90 days from the

date of the original demand letter of the Holder to the Lender

requesting the repurchase. Such demand will include a copy of the

written demand made upon the Lender. The Holder(s) or its duly

authorized agent will also include evidence of its right to require

payment from FmHA. Such evidence will consist of either the original

of the Loan Note Guarantee properly endorsed to FmHA or the original

of the Assignment Guarantee Agreement properly assigned to FmHA

without recourse including all rights, title, and interest in the

loan. FmHA will be subrogated to all rights of Holder(s). The

Holder(s) will include in its demand the amount due including unpaid

principal, unpaid interest (including any loan subsidy) to date of

demand and interest (including any loan subsidy) subsequently

accruing from date of demand to proposed payment date. Unless

otherwise agreed to by FmHA, such proposed payment will not be later

than 30 days from the date of demand.

The FmHA will promptly notify the Lender of its receipt of the

Holder(s)'s demand for payment. The Lender will promptly provide the

FmHA with the information necessary for FmHA determination of the

appropriate amount due the Holder(s). Any discrepancy between the

amount claimed by the Holder(s) and the information submitted by the

Lender must be resolved before payment will be approved. FmHA will

notify both parties who must resolve the conflict before payment by

FmHA will be approved. Such conflict will suspend the running of the

30 day payment requirement. Upon receipt of the appropriate

information, FmHA will review the demand and submit it to the State

Director for verification. After reviewing the demand the State

Director will transmit the request to the FmHA Finance Office for

issuance of the appropriate check. Upon issuance, the Finance Office

will notify the office servicing the borrower and State Director and

remit the check(s) to the Holder(s).

9. Lender's Obligation

Lender consents to the purchase by FmHA and agrees to furnish on

request by FmHA a current statement certified by an appropriate

authorized officer of the Lender of the unpaid principal and

interest then owed by Borrowers on the loan and the amount including

any loan subsidy then owed to any Holder(s). Lender agrees that any

purchase by FmHA does not change, alter or modify any of the

Lender's obligations to FmHA arising from said loan or guarantee nor

does it waive any of FmHA's rights against Lender, and that FmHA

will have the right to set-off against Lender all rights inuring to

FmHA as the Holder of this instrument against FmHA's obligation to

Lender under the Loan Note Guarantee.

10. Repurchase by Lender for Servicing

If, in the opinion of the Lender, repurchase of the guaranteed

portion of the loan is necessary to adequately service the loan, the

Holder will sell the portion of the loan to the Lender for an amount

equal to the unpaid principal and interest (including any loan

subsidy) on such portion less Lender's servicing fee. The Loan Note

Guarantee will not cover the note interest to the Holder on the

guaranteed loans accruing after 90 days from the date of the demand

letter of the Lender or FmHA to the Holder(s) requesting the

Holder(s) to tender their guaranteed portion(s).

a. The Lender will not repurchase from the Holder(s) for

arbitrage purposes or other purposes to further its own financial

gain.

b. Any repurchase will only be made after the Lender obtains

FmHA written approval.

c. If the Lender does not repurchase the portion from the

Holder(s), FmHA at its option may purchase such guaranteed portions

for servicing purposes.

11. Custody of Unguaranteed Portion

The Lender may retain, or sell the unguaranteed portion of the

loan only through participation. Participation, as used in this

instrument, means the sale of an interest in the loan wherein the

Lender retains the note, collateral securing the note, and all

responsibility for loan servicing and liquidation.

12. When Guarantee Terminates

This Loan Note Guarantee will terminate automatically (a) Upon

full payment of the guaranteed loan; or (b) upon full payment of any

loss obligation hereunder; or (c) upon written notice from the

Lender to FmHA that the guarantee will terminate 30 days after the

date of notice, provided the Lender holds all of the guaranteed

portion and the Loan Note Guarantee(s) are returned to be cancelled

by FmHA.

13. Settlement

The amount due under this instrument will be determined and paid

as provided in the applicable Subpart of Part 1980 of Title 7 CFR in

effect on the date of this instrument.

14. Loan Subsidy

*In addition to the interest rate of the note attached hereto,

FmHA will pay a loan subsidy of ________ percent per year. Payments

will be made annually.

15. Interest Capitalization

In the case of Farmer Programs loans, the Lender/Holder(s) may

capitalize interest only when the note is restructured. When

delinquent interest is so treated as principal, the new principal

amount may exceed the principal amount of the loan listed herein,

but may not exceed statutory loan limits. The new principal amount

and new guaranteed portion will be identified at restructuring in an

addendum to this Loan Note Guarantee. Such capitalized interest will

be covered by this Loan Note Guarantee. References to ``principal

and interest'' and ``principal advanced'' herein, therefore, shall

include any capitalized interest on the guaranteed portion of the

loan resulting from the restructuring of a Guaranteed Farmer

Programs loan and not exceeding statutory loan limits. The

capitalization of interest via a late payment fee also is

permissible if customary for the lender's non-guaranteed loans. The

late fees, however, will not be covered by the guarantee.

16. Notices

All notices will be initiated through the FmHA ____________ for

____________ (State) with mailing address at the day of this

instrument:

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*If not applicable delete paragraph prior to execution of this

instrument.

UNITED STATES OF AMERICA

Farmers Home Administration

By:--------------------------------------------------------------------

Title:-----------------------------------------------------------------

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(Date)

Assumption Agreement by __________ dated __________, 19 ______

Assumption Agreement by __________ dated __________, 19 ______

6. Appendix C to subpart A is revised to read as follows:

Position 5

Appendix C to Subpart A

USDA-FmHA

Form Approved

OMB NO. 0575-0024

Form FmHA 449-36

(Rev. 4-94)

Assignment Guarantee Agreement

Type of Loan:----------------------------------------------------------

Applicable 7 CFR Part 1980 Subpart-------------------------------------

FmHA Loan Identification Number----------------------------------------

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of---------------------------------------------------------------------

(Lender) has made a loan to--------------------------------------------

in the principal amount of $__________ as evidenced by a note(s)

dated __________. The United States of America, acting through

Farmers Home Administration (FmHA) entered into a Loan Note

Guarantee

(Form FmHA 449-34) with the Lender applicable to such loan to

guarantee the loan not to exceed __________ % of the amount of the

principal advanced and any interest (including any loan subsidy) due

thereon and any capitalized interest, resulting from the

restructuring of a Guaranteed Farmer Programs loan and not exceeding

statutory loan limits, as provided therein.

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(Holder) desires to purchase from Lender __________ % of the

guaranteed portion of such loan. Copies of Borrower's note(s) and

the Loan Note Guarantee are attached hereto as a part hereof.

Now, Therefore, the parties agree:

1. The principal amount of the loan now outstanding is

$__________. Lender hereby assigns to Holder __________ % of the

guaranteed portion of the loan representing $__________ of such loan

now outstanding in accordance with all of the terms and conditions

hereinafter set forth. The Lender and FmHA certify to the Holder

that the Lender has paid and FmHA has received the Guarantee Fee in

exchange for the issuance of the Loan Note Guarantee.

2. Loan Servicing. The Lender will be responsible for servicing

the entire loan and will remain mortgagee and/or secured party of

record. The entire loan will be secured by the same security with

equal lien priority for the guaranteed and unguaranteed portions of

the loan. The Lender will receive all payments on account of

principal of, or interest (including any loan subsidy and any

capitalized interest, resulting from the restructuring of a

Guaranteed Farmer Programs loan and not exceeding statutory loan

limits) on, the entire loan and shall promptly remit to the Holder

its pro rata share thereof determined according to their respective

interests in the loan, less only the Lender's servicing fee.

3. Servicing Fee. Holder agrees that Lender will retain a

servicing fee of __________ percent per annum of the unpaid balance

of the guaranteed portion of the loan assigned hereunder.

4. Purchase by Holder. The guaranteed portion purchased by the

Holder will always be a portion of the loan which is guaranteed. The

Holder will hereby succeed to all rights of the Lender under the

Loan Note Guarantee to the extent of the assigned portion of the

loan. The Lender, however, will remain bound by all obligations

under the Loan Note Guarantee and the program regulations found in

the applicable Subpart of 7 C.F.R. Part 1980 now in effect and

future FmHA program regulations not inconsistent with the provisions

hereof.

5. Full Faith and Credit. The Loan Note Guarantee constitutes an

obligation supported by the full faith and credit of the United

States and is incontestable except for fraud or misrepresentation of

which the Holder has actual knowledge at the time of this

assignment, or which it participates in or condones. A note which

provides for the payment of interest shall not be guaranteed. Any

Assignment Guarantee Agreement attached to or relating to a note

which provides for capitalization of interest is void. Except in the

case of Farmer Programs loans, a note which provides for the payment

of interest on interest as a result of restructuring the loan and

not exceeding statutory loan limits, or as a customary late payment

fee may be guaranteed, and any Assignment Guarantee Agreement

attached to or related to such note is not void.

6. Rights and Liabilities. The guarantee and right to require

purchase will be directly enforceable by Holder not withstanding any

fraud or misrepresentations by Lender or any unenforceability of the

Loan Note Guarantee by Lender. Nothing contained herein shall

constitute any waiver by FmHA of any rights it possesses against the

Lender, and the Lender agrees that Lender will be liable and will

promply reimburse FmHA for any payment made by FmHA to Holder which,

if such Lender had held the guaranteed portion of the loan, FmHA

would not be required to make. The Holder(s) upon written notice to

the Lender may resell the unpaid balance of the guaranteed portion

of the loan assigned hereunder. An endorsement may be added to the

Form FmHA 449-36 to effectuate the transfer.

7. Repurchase by the Lender (Defaults). The Lender has the

option to repurchase the unpaid guaranteed portion of the loan from

the Holder(s) within 30 days of written demand by the Holder(s)

when: (a) the borrower is in default not less than 60 days on

principal or interest due on the loan or (b) the Lender has failed

to remit to the Holder(s) its pro rata share of any payment made by

the borrower or any loan subsidy within 30 days of its receipt

thereof. The repurchase by the Lender will be for an amount equal to

the unpaid guaranteed portion of principal and accrued interest

(including any loan subsidy), less the Lender's servicing fee. The

loan note guarantee will not cover the note interest to the Holder

on the guaranteed loan(s) accruing after 90 days from the date of

the demand letter to the lender requesting the repurchase. Holder(s)

will concurrently send a copy of demand to FmHA. The Lender will

accept an assignment without recourse from the Holder(s) upon

repurchase. The Lender is encouraged to repurchase the loan to

facilitate the accounting for funds, resolve the problem, and to

permit the borrower to cure the default, where reasonable. The

Lender will notify the Holder(s) and FmHA of its decision.

8. Purchase by FmHA. If Lender does not repurchase as provided

by paragraph 7, FmHA will purchase from Holder the unpaid principal

balance of the guaranteed portion together with accrued interest

(including any loan subsidy) to date of repurchase, less Lender's

servicing fee, within 30 days after written demand to FmHA from the

Holder. The Loan Note Guarantee will not cover the note interest to

the Holder on the guaranteed loans accruing after 90 days from the

date of the original demand letter of the holder to the lender

requesting the repurchase. Such demand will include a copy of the

written demand made upon the Lender. The Holder(s) or its duly

authorized agent will also include evidence of its right to require

payment from FmHA. Such evidence will consist of either the original

of the Loan Note Guarantee properly endorsed to FmHA or the original

of the Assignment Guarantee Agreement properly assigned to FmHA

without recourse including all rights, title, and interest in the

loan. FmHA will be subrogated to all rights of Holder(s). The Holder

will include in its demand the amount due including unpaid

principal, unpaid interest (including any loan subsidy) to date of

demand and interest (including any loan subsidy) subsequently

accruing from date of demand to proposed payment date. Unless

otherwise agreed to by FmHA, such proposed payment will not be later

than 30 days from the date of demand.

The FmHA will promptly notify the Lender of its receipt of the

Holder(s)'s demand for payment. The Lender will promptly provide the

FmHA with the information necessary for FmHA's determination of the

appropriate amount due the Holder(s). Any discrepancy between the

amount claimed by the Holder(s) and the information submitted by the

Lender must be resolved before payment will be approved. FmHA will

notify both parties who must resolve the conflict before payment

will be approved. Such a conflict will suspend the running of the 30

day payment requirement. Upon receipt of the appropriate

information, FmHA will review the demand and submit it to the State

Director for verification. After reviewing the demand the State

Director will transmit the request to the FmHA Finance Office for

issuance of the appropriate check. Upon issuance, the Finance Office

will notify the office servicing the borrower and the State Director

and remit the check(s) to the Holder(s).

9. Lender's Obligations. Lender consents to the purchase by FmHA

and agrees to furnish on request by FmHA a current statement

certified by an appropriate authorized officer of the Lender of the

unpaid principal and interest then owed by Borrowers on the loan and

the amount then owed to any Holder(s). Lender agrees that any

purchase by FmHA does not change, alter or modify any of the

Lender's obligations to FmHA arising from said loan or guarantee nor

does it waive any of FmHA's right against Lender, and that FmHA

shall have the right to set-off against Lender all rights inuring to

FmHA as the Holder of this instrument against FmHA's obligation to

Lender under the Loan Note Guarantee.

10. Repurchase by Lender for Servicing. If, in the opinion of

the Lender, repurchase of the assigned portion of the loan is

necessary to adequately service the loan, the Holder will sell the

assigned portion of the loan to the Lender for an amount equal to

the unpaid principal and interest (including any loan subsidy) on

such portion less Lender's servicing fee. The loan note guarantee

will not cover the note interest to the Holder on the guaranteed

loans accruing after 90 days from the date of the demand letter of

the lender or FmHA to the Holder(s) requesting the Holder(s) to

tender their guaranteed portion(s).

a. The Lender will not repurchase from the Holder(s) for

arbitrage purpose or other purposes to further its own financial

gain.

b. Any repurchase will only be made after the Lender obtains

FmHA written approval.

c. If the Lender does not repurchase the portion from the

Holder(s), FmHA at its option may purchase such guaranteed portions

for servicing purposes.

11. Foreclosure. The parties owning the guaranteed portions and

unguaranteed portion of the loan will join in institute foreclosure

action, or in lieu of foreclosure, take a deed of conveyance to such

parties.

12. Reassignment. Holder upon written notice to Lender and FmHA

may reassign the unpaid guaranteed portion of the loan sold

hereunder. Upon such notification, the assignee will succeed to all

rights and obligations of the Holder hereunder.

13. Interest Capitalization. In the case of Farmer Programs

loans, the Lender may capitalize interest only when the note is

restructured. When delinquent interest is so treated as principal,

the new principal amount may exceed the line of credit listed

herein, but may not exceed statutory loan limits. The new principal

amount and new guaranteed portion will be identified at

restructuring in an addendum to this agreement. Such capitalized

interest will be covered by this Assignment Guarantee Agreement.

References to principal and interest herein, therefore, shall

include any capitalized interest on the guaranteed portion of the

loan resulting from the restructuring of a Farmer Programs loan and

not exceeding statutory loan limits. The capitalization of interest

via a late payment fee also is permissible if customary for the

lender's non-guaranteed loans. The late fees, however, will not be

covered by the guarantee.

14. Notices. All notices and actions will be initiated through

the FmHA ____________ for ____________ (state) with mailing address

at the date of this assignment: ____________

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Dated this ____________ day ____________, 19 ______.

Attest:

(Seal)

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Attest:

(Seal)

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Address:---------------------------------------------------------------

Lender:

Address:

By---------------------------------------------------------------------

Title------------------------------------------------------------------

Holder:

Address:

By---------------------------------------------------------------------

Title------------------------------------------------------------------

UNITED STATES OF AMERICA

Farmers Home Administration

By---------------------------------------------------------------------

Title------------------------------------------------------------------

7. Appendix D to Subpart A is revised to read as follows:

Appendix D to Subpart A

USDA-FmHA

Form FmHA 1980-27

(Rev. 4-94)

Contract of Guarantee

(Line of Credit)

----------------------------------------------------------------------

Lender

Lender's IRS Tax No.

Lender's Address

Borrower's Name and Address

Cont/Alt 4

----------------------------------------------------------------------

Type of Loan

{time} OL {time} {time} {time} EL {time} or {time} {time} EE

Cont/Alt 4

Case No.

State

County

Date of Line of Credit Agreement/Note

Line of Credit Ceiling $

The guaranteed portion of this line of credit is ________ % of

the principal balance owed at any one time on advances made within

an approved line of credit by the above-named Lender to the above-

named Borrower.

In consideration of making advance(s) by the Lender within the

line of credit ceiling pursuant to the Line of Credit Agreement, the

United States of America acting through the Farmers Home

Administration of the United States Department of Agriculture

(herein called ``FmHA''), pursuant to the Consolidated Farm and

Rural Development Act (7 U.S.C. 1921 et. seq.), the Emergency

Livestock Credit Act of 1974 (P.L. 93-357), as amended, or the

Emergency Agricultural Credit Adjustment Act of 1978 (P.L. 95-334)

agrees that in accordance with and subject to the conditions and

requirements in this agreement, it will pay to the Lender who holds

the line of agreement(s) (and note(s), if any exist) for said

advance(s) (or assumption agreement) covered by this contract the

lesser of 1. or 2. below:

1. Any loss sustained by such Lender on the guaranteed portion

including:

a. Principal and interest indebtedness as evidenced by said line

of credit agreement(s) (and note(s), if any exist) or by assumption

agreement(s), and any capitalized interest on such portion resulting

from the restructuring of an Operating loan and not exceeding

statutory loan limits, and

b. Principal and interest indebtedness on secured protective

advances for protection and preservation of collateral made with

FmHA's authorization, including but not limited to, advances for

delinquent taxes, annual assessments, and ground rents, and hazard

or flood insurance premiums affecting the collateral; or

2. The guaranteed principal advances to or assumed by the

Borrower under said line of credit agreement(s) (and note(s), if any

exist) or assumption agreement(s), and any interest due thereon,

including any capitalized interest on such portion resulting from

the restructuring of an Operating loan and not exceeding statutory

loan limits. If an Operating Loan Line of Credit is involved,

advances under that line of credit must be made within three years

(five for Certified Lenders) from the date of this Contract.

Advances made after that date will not be covered by this Contract.

If FmHA conducts the liquidation of the line of credit, loss

occasioned to a Lender by accruing interest after the date FmHA

accepts responsibility for liquidation will not be covered by this

Contract of Guarantee. If Lender conducts the liquidation of the

line of credit, accruing interest shall be covered by this Contract

of Guarantee to date of final settlement when the Lender conducts

the liquidation expeditiously in accordance with the liquidation

plan approved by FmHA.

Conditions of Guarantee

1. Line of Credit Servicing

Lender will be responsible for servicing the entire line of

credit, and Lender will remain mortgage and/or secured party of

record. The Lender agrees that, if liquidation of the account

becomes imminent, the Lender, will consider the Borrower of an

Operating Loan Line of Credit for an Interest Rate Buydown under

Exhibit C of Subpart B of 7 CFR, Part 1980, and request a

determination of the Borrower's eligibility by FmHA. The Lender may

not initiate foreclosure action on the line of credit until 60 days

after a determination has been made with respect to the eligibility

of the Borrower to participate in the Interest Rate Buydown Program.

2. Priorities

The entire line of credit will be secured by the same security

with equal lien priority for the guaranteed and unguaranteed

portions of the line of credit. The unguaranteed portion of the line

of credit will not be paid first nor given any preference or

priority over the guaranteed portion.

3. Full Faith and Credit

The Contract of Guarantee constitutes an obligation supported by

the full faith and credit of the United States and is incontestable

except for fraud or misrepresentation of which Lender has actual

knowledge at the time it became such Lender or which Lender

participates in or condones. If the line of credit agreement or note

to which this Contract of Guarantee is attached provides for the

payment of interest on interest, this Contract of Guarantee is void.

However, in the case of Farmer Programs loans, the capitalization of

interest when restructuring loans and through the charging of

customary late fees will not void this Contract of Guarantee.

In addition, the Contract of Guarantee will be unenforceable by

the Lender to the extent any loss is occasioned by the violation of

usury laws negligent servicing, or failure to obtain the required

security regardless of the time at which FmHA acquires knowledge of

the foregoing. Any losses occasioned will be enforceable to the

extent that loan funds are used for purposes other than those

specifically approved by FmHA in its Conditional Commitment for

Guarantee. Negligent servicing is defined as the failure to perform

those services which a reasonably prudent lender would perform in

servicing its own portfolio of loans that are not guaranteed. The

term includes not only the concept of a failure to act but also not

acting in a timely manner or acting in a manner contrary to the

manner in which a reasonably prudent lender would act up to the time

of loan maturity or until a final loss is paid.

4. Protective Advances

Protective advances made by Lender pursuant to the regulations

will be guaranteed against a percentage of loss to the extent as

provided in this Contract of Guarantee.

5. Custody of Unguaranteed Portion

The Lender may retain or sell the unguaranteed portion of the

line of credit only through participation. Participation, as used in

this instrument, means the sale of an interest in the line of credit

in which the Lender retains the line of credit agreement (and note

if one exists) collateral securing the line of credit and all

responsibility for servicing and liquidation of the line of credit.

6. When Guarantee Terminates

This Contract of Guarantee will terminate automatically (a) upon

full payment of the guaranteed line of credit occurring after the

advance period has expired; or (b) upon full payment of any loss

obligation under this Contract, or (c) upon written notice from the

Lender to FmHA that the guarantee will terminate 30 days after the

date of notice, provided the Contract is returned to FmHA to be

cancelled.

7. Settlement

The amount due under this instrument will be determined and paid

as provided in the applicable Subpart of Part 1980 of Title 7 CFR in

effect on the date of this instrument.

8. Interest Capitalization

In the case of Operating loans, the Lender may capitalize

interest only when the note is restructured. When delinquent

interest is so treated as principal, the new principal amount may

exceed the line of credit listed herein, but may not exceed

statutory loan limits. The new principal amount and new guaranteed

portion will be identified at restructuring in an addendum to this

Contract of Guarantee. Such capitalized interest will be covered by

this Contract of Guarantee. References to principal and interest

herein, therefore, shall include any capitalized interest on the

guaranteed portion of the loan resulting from the restructuring of

an Operating loan and not exceeding statutory loan limits. The

capitalization of interest via a late payment fee also is

permissible if customary for the lender's non-guaranteed loans. The

late fees, however, will not be covered by the guarantee.

9. Notices

All notices and actions will be initiated through the FmHA

County Supervisor for ____________ (County) ____________ (State)

with mailing address at the date of this instrument:

----------------------------------------------------------------------

----------------------------------------------------------------------

UNITED STATES OF AMERICA

Farmers Home Administration

By:--------------------------------------------------------------------

Title:-----------------------------------------------------------------

----------------------------------------------------------------------

(Date)

Assumption Agreement by __________ dated __________, 19 ______

Assumption Agreement by __________ dated __________, 19 ______

8. Appendix E to subpart A is revised to read as follows:

Appendix E to Subpart A

Form Approved OMB No. 0575-0079

USDA-FmHA

Form FmHA 1980-38

(Rev. 4-94)

Agreement for Participation in Farmer Programs Guaranteed Loan Programs

of the United States Government

The purpose of this Agreement is to establish the Lender as an

approved participant in the Farmer Programs Guaranteed Loan Programs

of the Farmers Home Administration (FmHA), U.S. Department of

Agriculture. This Agreement provides the terms and conditions for

originating and servicing such loans, including lines of credit.

Participating Lender (``Lender''):-------------------------------------

Tax Identification Number:---------------------------------------------

Business Address:------------------------------------------------------

Telephone Number:------------------------------------------------------

Complete the appropriate section indicating participation/non-

participation in the Certified Lender Program.

Participating in the Certified Lender Program (``CLP'')

Offices Affected by Agreement All {time} As listed below {time}

----------------------------------------------------------------------

----------------------------------------------------------------------

----------------------------------------------------------------------

----------------------------------------------------------------------

States Affected by Agreement

----------------------------------------------------------------------

----------------------------------------------------------------------

----------------------------------------------------------------------

----------------------------------------------------------------------

Not participating in the Certified Lender Program

Offices Affected by Agreement All {time} As listed below {time}

----------------------------------------------------------------------

----------------------------------------------------------------------

----------------------------------------------------------------------

----------------------------------------------------------------------

States Affected by Agreement

----------------------------------------------------------------------

----------------------------------------------------------------------

----------------------------------------------------------------------

----------------------------------------------------------------------

Read this Agreement in its entirety and sign in the space on the

last page. Your signature indicates consent with this Agreement.

Public reporting burden for this collection of information is

estimated to average 1 hour per response, including time for

reviewing instructions, searching existing data sources, gathering

and maintaining the data needed, and completing and reviewing the

collection of information. Send comments regarding this burden

estimate or any other aspect of this collection of information,

including suggestions for reducing this burden, to Department of

Agriculture, Clearance Officer, OIRM, AG Box 7630, Washington, DC

20250; and to the Office of Management and Budget, Paperwork

Reduction Project, (OMB No. 0575-0079), Washington, DC 20503. Please

DO NOT RETURN this form to either of these addresses. Forward to

FmHA only.

Part I--General Requirements

A. Duties and Responsibilities of FmHA (``Agency'')

1. Payment on Claims. FmHA agrees to make payment on its claims in

accordance with the terms of the guarantee and Agency regulations in

7 CFR 1980, Subparts A and B. The maximum loss payment may not

exceed the amount determined in the guarantee, including the

percentage of principal and any accrued interest. The guarantee is

supported by the full faith and credit of the United States and is

incontestable except under the circumstances of fraud or

misrepresentation of which the Lender has actual knowledge at the

execution of the guarantee or which the Lender participates in or

condones. (See 7 CFR 1980.107.)

2. Personnel Available for Consultation. FmHA shall make personnel

available for consultation on interpretations of Agency regulations

and guidelines. The Lender may consult with Agency personnel

regarding unusual underwriting, loan closing, and loan liquidation

questions.

B. General Requirements for the Lender

1. Eligibility to Participate. The Lender must meet the requirements

set forth in 7 CFR 1980.13 and be approved by FmHA to be a

participant in the Farmer Programs Guaranteed Loan Programs.

2. Knowledge of Program Requirements. The Lender is required to

obtain and keep itself informed of all program regulations and

guidelines, including all amendments and revisions. The Lender must

establish and maintain adequate and written internal policies for

loan origination and servicing to meet these requirements. These

policies will be subject to review upon the request by FmHA.

3. Notification. The Lender shall immediately notify FmHA in writing

if the Lender:

Becomes insolvent;

Has filed for any type of bankruptcy protection, has

been forced into involuntary bankruptcy, or has requested an

assignment for the benefit of creditors;

Has taken any action to cease operations, or to

discontinue servicing or liquidating any or all of its portfolio

guaranteed by FmHA;

Has changed its name, location, address, tax

identification number, or corporate structure;

Has been debarred, suspended, or sanctioned in

connection with its participation in any Federal guaranteed program;

or

Has been debarred, suspended, or sanctioned by any

Federal or State licensing or certification authority.

4. Employee Qualifications. The Lender shall maintain a staff that

is well trained and experienced in origination and loan servicing

functions, as necessary, to ensure the capability of performing all

the acts within its authority.

5. Conflict of Interest. The Lender certifies that its officers or

directors, principal stockholders (except stockholders in a Farm

Credit Bank or other Farm Credit System (FCS) institutions with

direct lending authority that have normal stock/share requirements

for participating), or other principal owners do not have, or will

not have, a substantial financial interest in, or business dealings

with, any guaranteed loan borrower. The Lender also certifies that

neither any borrower nor its officers or directors, stockholders, or

other owners have a substantial financial interest in the Lender. If

the borrower is a member of the Board of Directors of a Farm Credit

Bank or other FCS institution with direct lending authority, the

Lender certifies that an FCS institution on the next highest level

will independently process the loan request and will act as the

Lender's agent in servicing the account.

6. Facilities. The Lender shall operate its facilities and branch

offices in a prudent and businesslike manner.

7. Reporting Requirements. The Lender recognizes that FmHA, as

guarantor, has a vital interest in ensuring that all acts performed

by the Lender regarding the subject loans are performed in

compliance with this Agreement and Agency regulations. Information

on the status of guaranteed loans is necessary for this purpose, as

well as to satisfy budget and accounting reporting required by the

Department of the Treasury and the Office of Management and Budget.

The Lender agrees to provide FmHA with all the data required under

Agency regulations and any additional information necessary for FmHA

to monitor the health of its guaranteed loan portfolio, and to

satisfy external reporting requirements.

The Lender also agrees to provide to FmHA, as requested by the

Agency or as required by regulation, copies of audited financial

statements, reports on internal controls, copies of compliance

audits, and such other information that may be required for FmHA to

properly monitor the Lender's performance.

C. Underwriting Requirements

1. Responsibility. The Lender is responsible for originating,

servicing, and collecting all guaranteed Farmer Programs loans in

accordance with Agency regulations.

2. Origination Process

a. General Eligibility. The Lender shall make a preliminary

determination whether loan applicants meet the general eligibility

requirements of the Farmer Programs Guaranteed Loan Programs. FmHA

will make the final determination.

b. Delinquency of Federal Debt. The Lender shall determine

whether the loan applicant is delinquent on any Federal debt. The

Lender shall use credit reports and any other credit history to make

this determination. If the loan applicant is delinquent on a federal

debt, processing of the application may only continue in accordance

with Agency regulations.

c. Appraisals of Collateral. The Lender shall ensure that the

value of any collateral property or property to be purchased is

determined by a qualified appraiser, including a State licensed or

certified appraiser when required by law or regulation.

d. Change in Borrower's Condition. Before FmHA issues a loan

guarantee, the Lender will certify that there has been no adverse

change(s) in the borrower's condition, financial or otherwise,

during the time period from issuance of a Conditional Commitment to

issuance of the guarantee of the loan. This certification by the

Lender must address all adverse changes and be supported by

financial statements of the borrower and its guarantors which are

not more than 90 days old at the time of certification. For use in

this provision alone, the term ``Borrower'' includes any member,

joint operator, partner or stockholder. (See 7 CFR 1980.117.)

e. Limitation on Guarantee. Any note requiring the payment of

interest on interest will only be guaranteed if such payment is the

result of restructuring the note and the new principal amount does

not exceed statutory loan limits. Default charges or late charges of

any kind, and/or interest accrued on interest charges other than

that resulting from restructuring the loan and within statutory loan

limits, will not be covered by the guarantee.

3. Loan Closing

a. Lender's Fee. The Lender will submit the required guarantee

fee with the Guaranteed Loan Closing Report.

b. Lender's Use of Funds. The Lender agrees funds for the

particular loan or line of credit will be used only for the purposes

authorized in 7 CFR 1980, Subparts A and B as set forth in Form FmHA

1980-15.

c. Loan Closing. All loans guaranteed by the Agency shall be

closed by attorneys, escrow companies, escrow departments of lending

institutions, or other person(s) or entities skilled and experienced

in conducting loan closings. The Lender shall:

Ensure that documents, including the mortgage and any

security agreements, chattel mortgages or equivalent documents

relating to it have been properly signed, are valid and contain

terms enforceable by the Lender;

Ensure that all security with appropriate lien

priorities is obtained in accordance with Form FmHA 1980-15, and

Agency regulations;

Ensure that all closing documents required to be

recorded are recorded accurately, in the appropriate offices, and in

a timely and accurate manner;

Ensure that security interests are perfected in

collateral according to applicable regulatory requirements and

procedures;

Ensure that all required hazard insurance is obtained

in accordance with Agency regulations;

Collect all fees and costs due and payable by the

borrower in the course of the loan transaction and disburse payment

directly to the parties for services rendered; and

Ensure that all loan proceeds are used as authorized.

The entire loan will be secured equally with the same security

and the same lien priority for both the guaranteed and unguaranteed

portions of the loan, under the assurance that the unguaranteed

portion of the loan will not be paid first nor given any preference

or priority over the guaranteed portion of the loan.

4. Lender's Sale or Assignment of Guaranteed Loan.

The Lender may retain all of any guaranteed loan. The Lender is

not permitted to sell or participate any amount of the guaranteed or

unguaranteed portion(s) of loan(s) to the applicant or borrower or

members of their immediate families, their officers, directors,

stockholders, other owners, or any parent, subsidiary, or affiliate.

The Lender may market all or part of the guaranteed portion of the

loan or after loan closing only if the loan is not in default as set

forth in the terms of the note. A line of credit may only be

marketed by participation. Refer to 7 CFR 1980.119 for further

guidelines.

D. Servicing Requirements

1. Responsibilities. The Lender will service the entire loan as

mortgagee and/or secured party of record in a reasonable and prudent

manner, notwithstanding the fact that another (Holder) may hold a

portion of the loan. The Lender will obtain compliance with the

covenants and provisions in the note, security instruments, and any

other agreements, and notify FmHA and the borrower of any

violations. Specific responsibilities are described in 7 CFR

1980.130.

2. Negligent Servicing. The guarantee cannot be enforced by the

Lender to the extent a loss results from a violation of usury laws

or negligent servicing regardless of when FmHA discovers such

violation or negligence. Negligent servicing is defined as the

failure to perform services which a reasonably prudent lender would

perform in servicing its own portfolio of loans that are not

guaranteed. The term includes both a failure to act and also not

acting in a timely manner in include actions taken up to the time of

loan maturity or until a final loss is paid. (See 7 CFR 1980.11.)

3. Payments. Payments from the borrower shall be processed upon

receipt according to 7 CFR 1980.119, and may include escrow premiums

for hazard insurance and real estate taxes. The Lender shall

promptly disburse to any Holder(s) their pro rata share thereof

which has been determined according to their respective interests in

the loan, less only the Lender's servicing fee.

4. Collateral

a. Insurance. The Lender shall ensure that adequate insurance is

maintained in accordance with Agency regulations, including the

maintenance of hazard insurance containing a loss payable clause in

favor of the Lender as the mortgagee or secured party.

b. Escrow Accounts. The Lender may establish separate escrow

accounts. All escrow accounts must meet applicable Federal and State

laws and regulations, and must be fully insured by the FDIC.

c. Inspection. The Lender shall inspect the collateral as often

as necessary to properly service the loan and ensure the collateral

is being properly maintained.

d. Taxes. The Lender shall ensure that taxes, assessments, or

ground rents against or affecting collateral are paid.

5. Delinquent Accounts

a. The Lender will notify FmHA using Form FmHA 1980-44,

``Guaranteed Loan Borrower Default Status,'' when a borrower is 30

days past due on a payment or if the borrower has not provided the

required financial statements to the Lender or is otherwise in

default. The Lender will continue to submit Form FmHA 1980-44 every

60 days until the default is resolved, and will notify the Agency

when the default is resolved. A meeting will be arranged by the

Lender with the borrower and FmHA to resolve the problem. Actions

taken by the Lender, with written concurrence of FmHA, may include

but are not limited to, any curative actions contained in Subpart B

or 7 CFR Part 1980 or liquidation.

b. The loan may be reamortized, rescheduled, or written down

only with the agreement of any Holder(s) of the guaranteed portion

of the loan, and only with FmHA's written agreement.

c. The Lender will negotiate in good faith to resolve any

problem in order to allow the borrower to cure a default, where

reasonable. The Lender agrees that if liquidation of the account

becomes imminent, the Lender will consider the borrower for Interest

Assistance under Exhibit D of Subpart B of 7 CFR Part 1980, and

request a determination of the borrower's eligibility by FmHA. The

Lender may not initiate foreclosure action on the loan until 60 days

after eligibility of the borrower to participate in the Interest

Assistance Program has been established.

d. Debt Writedown. (Refer to 7 CFR Part 1980. Subpart B,

1980.125.) The maximum amount of loss payment associated with a

loan/line of credit agreement which has been written down will not

exceed the percent of the guarantee multiplied by the difference

between the outstanding principal and interest balance of the loan

(including any capitalized interest resulting from the restructuring

of the loan and not exceeding statutory loan limits) before the

writedown and the outstanding balance of the loan after the

writedown. The Lender will use Form FmHA 449-30, ``Loan Note

Guarantee Report of Loss,'' to request an estimated loss payment to

receive its pro rata share of any loss sustained. Interest will be

paid to the date of the check on all debt writedown claims.

e. The Lender must participate in any farm credit mediation

program of any State in accordance with the rules of that system and

7 CFR Part 1980, Subpart B, 1980.126.

f. When the borrower has not made payment of principal or

interest due on the loan for 60 days or more or the Lender has

failed to give the Holder(s) its pro rata share of any payment made

by the borrower within 30 days of receipt of the payment, the Holder

may request the lender to repurchase the unpaid guaranteed portion

of the guaranteed loan. If the Lender chooses not to repurchase,

FmHA will purchase the unpaid principal balance. Upon FmHA's

repurchase, the lender will liquidate the account or reimburse FmHA

the amount of the repurchase within 180 days of FmHA's repurchase.

See 7 CFR 1980.119 for further guidance on repurchasing loans from

Holder(s).

6. Default/Liquidation

a. Protective Advances. Protective advances must constitute a

debt of the borrower to the Lender and be secured by the security

instrument(s). FmHA written authorization is required on all

protective advances in excess of $3,000 made by a CLP Lender. For

non-CLP Lenders, the amount is $500. Refer to 7 CFR 1980.136.

b. Additional Loan or Advances. Except as provided for in each

Borrower's loan agreement, the Lender will not make additional

expenditures or new loans without first obtaining the written

approval of FmHA even though such expenditures or loans will not be

guaranteed.

c. Future Recovery. After a loan has been liquidated and a final

loss has been paid by FmHA, any future funds which may be recovered

by the Lender, will be pro-rated between FmHA and the Lender. FmHA

will be paid the amount recovered in proportion to the percentage it

guaranteed for the loan.

d. Transfer and Assumption Cases. Refer to 7 CFR 1980.123. If a

loss occurs upon the completion of a transfer and assumption for

less than the full amount of the debt and transferor debtor

(including Guarantors) is released from personal liability, the

Lender, if it holds the guaranteed portion, may file an estimated

Report of Loss on Form FmHA 449-30, ``Loan Note Guarantee Report of

Loss,'' to recover its pro rata share of the actual loss at that

time. In completing Form FmHA 449-30, the amount of the debt assumed

will be entered as Net Collateral (Recovery). Approved protective

advances and accrued interest thereon made during the arrangement of

transfer and assumption, if not assumed by the transferee, will be

entered in the appropriate space on Form FmHA 449-30.

e. Bankruptcy. The Lender is responsible for protecting the

guaranteed loan debt and all collateral securing the loan in

bankruptcy proceedings. Loss payments on bankruptcy cases will be

processed according to the terms described in 7 CFR 1980.144.

f. Liquidation. If the Lender concludes that liquidation of a

guaranteed loan account is necessary due to default or third party

actions which the borrower cannot or will not cure or eliminate

within a reasonable period of time, a meeting will be arranged by

the Lender with FmHA. All liquidations must receive prior

concurrence by the appropriate FmHA official. Refer to 7 CFR

1980.146 for specific guidance on the procedures for liquidation.

7. Servicer

If the lender contracts for servicing of guaranteed Farmer

Programs loans, the lender is not relieved of responsibility for

proper servicing of the loans.

E. Agency Reviews of Lender's Operations

FmHA shall have the right to conduct reviews, including on-site

reviews, of the Lender's operations and the operations of any agent

of the Lender, for the purpose of verifying compliance with this

Agreement and Agency regulations and guidelines. These reviews may

include, but are not limited to: audits of case files; interviews

with owners, managers, and staff; audits of collateral; and

inspections of the Lender's and/or its agents underwriting,

servicing, and liquidation guidelines. The Lender and/or its agents

shall provide access to all pertinent information to allow the

Agency, or any party authorized by the Agency, to conduct such

reviews.

F. Conformance to Standards

1. Standards. The Lender shall conform to the standards outlined in

this Agreement and Agency regulations for participation in Farmer

Programs Guaranteed Loan Programs. CLP Lenders must maintain

compliance with the criteria set forth in 7 CFR 1980.190. The Agency

shall determine Lender adherence to the standards based on:

Adequacy in meeting requirements for origination,

servicing, and liquidation of loans and lines of credit, including

protection of collateral;

Satisfaction of the reporting requirements of the

Agency;

Success in operating in a sound and prudent

businesslike manner;

Portfolio performance compared to overall performance

of the Farmer Program Guaranteed Loan Programs; and

Results of on-site reviews of the underwriting and/or

servicing performed by the Lender.

2. Determination of Non-Conformance. The Agency shall carefully

consider the circumstances and available facts in determining

whether there is a pattern of Lender non-conformance with applicable

standards. FmHA shall determine the propriety of any decision made

by the Lender based on the facts available at the time the specific

action was taken. It is understood by the Agency and intended by

this Agreement that the Lender has the authority to exercise

reasonable judgment in performing acts within its authority.

However, FmHA reserves the right to question any act performed or

conclusion drawn that is inconsistent with this Agreement or Agency

regulations.

3. Agency Action. If the Lender is determined to be in non-

conformance with any Federal law, State law, Agency regulation or

guideline, or the terms of this Agreement, FmHA reserves the right

to take action in accordance with its laws and regulations.

4. Lender Right of Appeal. FMHA shall provide the Lender an

opportunity to appeal, in accordance with Agency regulations at 7

CFR Part 1980, Subpart A, adverse actions taken by the Agency.

Part II--List of Agency Regulations and Guidelines and Designation of

Lender Authority To Perform Certain Acts

A. List of Agency Regulations

The following is a list of FmHA regulations which, along with

any future amendments consistent with this Agreement, contain the

information necessary for the Lender to be in compliance with Agency

requirements.

1. 7 CFR 1980 Subpart A--General

2. 7 CFR 1980 Subpart B--Farmer Program Loans

B. Authority To Perform Certain Acts

Lenders participating in the CLP may be granted special

authority to certify compliance with certain statutory or regulatory

requirements. 7 CFR 1980.190 describes authorities and

responsibilities for CLP Lenders.

Part III--Duration and Modification

A. Duration and Termination

1. Duration of Agreement. For CLP Lenders, this Agreement is valid

for five years unless terminated by the Lender or FmHA as described

below or revoked according to 7 CFR 1980.190. For non-CLP Lenders,

this Agreement will be valid indefinitely unless terminated by the

Lender or FmHA as described below.

2. Modification of Agreement. This Agreement may be modified or

extended only in writing and by consent of all parties.

3. Termination of FmHA. This Agreement may be terminated by FmHA in

accordance with Agency regulations.

4. Termination by the Lender. This Agreement may be terminated by

the Lender by providing 30 days written notice to FmHA.

5. Effect of Termination on Responsibilities and Liabilities.

Responsibilities or liabilities that existed before the termination

of the Agreement with regard to outstanding guarantees will continue

to exist after termination unless the Agency expressly releases the

Lender from such responsibilities or liabilities in writing. The

Lender shall remain obligated to service and liquidate the

guaranteed loans remaining in the portfolio unless and until FmHA or

the Lender transfers the loans. These requirements concerning loan

management by the Lender and rights of the Agency under this

Agreement shall remain in effect whether the Agreement is terminated

by the Lender or FmHA.

B. Entire Agreement

This Agreement, Parts I through IV inclusive, and any

regulations or guidelines incorporated by reference, shall

constitute the entire Agreement. There are no other agreements,

written or oral, regarding the terms in this Agreement which are or

shall be binding on the parties.

Part IV--Endorsement

The undersigned certifies that they have read and understand the

requirements of this Agreement, and in 7 CFR Part 1980, Subparts A

and B, and agree to the participation requirements and other

provisions of this Agreement.

Notice. Requests for Guarantee and any notices or actions are

expected to be initiated through the following FmHA County Offices:

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Lender: Complete this block of Section IV.

XXI. Lender

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(Name)

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(IRS I.D. Tax No.)

By:

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(Signature)

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(Name Typed or Printed)

Title------------------------------------------------------------------

Date-------------------------------------------------------------------

Attest-----------------------------------------------------------------

This block of Section IV will be completed by FmHA.

The effective date of this Agreement is--------------------------------

The expiration date of this Agreement is-------------------------------

UNITED STATES OF AMERICA

Farmers Home Administration

By:

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(Signature)

Title------------------------------------------------------------------

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(Name Typed or Printed)

Date-------------------------------------------------------------------

Subpart B--Farmer Program Loans

9. Section 1980.124 is amended by removing paragraph (d)(1); by

redesignating paragraphs (d)(2) and (d)(3) as paragraphs (d)(1) and

(d)(2), respectively; and by revising paragraphs (a)(7), (b)(6) and (e)

to read as follows:

Sec. 1980.124 Consolidation, rescheduling, reamortizing and deferral.

(a) * * *

(7) The lender may capitalize the outstanding interest when

restructuring the loan. If Forms FmHA 449-34, 449-35, 449-36, 1980-27,

or 1980-38 previously executed for the guaranteed loan/line of credit

prohibit the capitalization of interest, the County Supervisor will

provide the lender with Form FmHA 1980-85. By executing this form, FmHA

waives the restriction only for capitalization of interest resulting

from restructuring a Farmer Programs loan and not exceeding statutory

loan limits. The form will set out the new principal loan amount

(treating delinquent interest as principal) and the guaranteed portion

of the loan amount. If these forms do not prohibit the capitalization

of interest, the new principal loan and the guaranteed portion, if

greater than the original amounts of the forms, will be identified in

an addendum, Form FmHA 1980-84. The appropriate modification form will

be issued under this paragraph after the appropriate official concurs

with the restructuring. Subsequent servicing of the guaranteed loans

will take into account the new principal and guaranteed amounts.

Capitalized interest authorized under this paragraph will be treated as

part of the principal and interest indebtedness in calculating the

maximum loss amount under Sec. 1980.20 of subpart A of this part.

* * * * *

(b) * * *

(6) There is no limit on the number of times a consolidation or

rescheduling action may take place.

* * * * *

(e) Principal limit. As a result of the capitalization of interest

with restructuring, the rescheduled/reamortized note or line of credit

agreement which exists after a consolidation occurs may increase the

amount of principal which the borrower would have been required to pay

if the rescheduling, reamortization, or consolidation had not been

made. However, in no case will such principal amount ever exceed the

statutory loan limits set out in this subpart.

Dated: March 9, 1994.

Bob J. Nash,

Under Secretary for Small Community and Rural Development.

[FR Doc. 94-7545 Filed 3-29-94; 8:45 am]

BILLING CODE 3410-07-U