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

DEPARTMENT OF AGRICULTURE

Farmers Home Administration

7 CFR Parts 1941, 1943, 1945, and 1951

RIN 0575-AB71

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

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

Requirements

Agency: Farmers Home Administration, USDA.

Action: Proposed rule.

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

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

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

emergency (EM) loan making and servicing regulations to modify

collateral requirements. These amendments concern the amount of

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

in security requirements for loan restructuring. The intended effect is

to reduce the burden on farmers and FmHA personnel in servicing FmHA

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

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

subsequently obtain non-FmHA credit.

DATES: Written comments must be submitted on or before January 31,

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: David R. Smith, Senior Loan Officer,

Farmer Programs Loan Making Division, Farmers Home Administration,

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

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

SUPPLEMENTARY INFORMATION:

Classification

We are issuing this proposed rule in conformance with Executive

Order 12866, and we have determined that it is not a ``significant

regulatory action.'' Based on information compiled by the Department,

we have determined that this proposed rule: (1) Would have an effect on

the economy of less than $100 million; (2) would not adversely affect

in a material way the economy, a sector of the economy, productivity,

competition, jobs, the environment, public health or safety, or State,

local, or tribal governments or communities; (3) would not create a

serious inconsistency or otherwise interfere with an action taken or

planned by another agency; (4) would not alter the budgetary impact of

entitlements, grants, user fees, or loan programs or rights and

obligations of recipients thereof; and (5) would not raise novel legal

or policy issues arising out of legal mandates, the President's

priorities, or principles set forth in Executive Order 12866.

Intergovernmental Consultation

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

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

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

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

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

from the scope of Executive Order 12372, which requires

intergovernmental consultation with State and local officials.

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

Executive Order 12372 and FmHA Instruction 1940-J.

Programs Affected

These changes affect the following FmHA programs as listed in the

Catalog of Federal Domestic Assistance:

10.404--Emergency Loans

10.406--Farm Operating Loans

10.407--Farm Ownership Loans

10.416--Soil and Water Loans

Environmental Impact Statement

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

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

that this action does not constitute a major Federal action

significantly affecting the quality of the human environment, and in

accordance with the National Environmental Policy Act of 1969, Public

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

Civil Justice Reform

This document has been reviewed in accordance with Executive Order

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

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

standards provided in section 2 of the E.O.

Paperwork Reduction Act

The information collection requirements contained in these

regulations have been approved by the Office of Management and Budget

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

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

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

(44 U.S.C. 3507). The 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 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 of taking a lien on

all assets at the time of loan making. 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. Requests will not be limited to emergency

loan applications. 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.

Frequently, other lenders are willing to provide part of the

farmers' credit needs, in combination with some FmHA assistance.

However, the existing FmHA loan security requirements would preclude

many lenders from continuing to provide credit to these farmers. FmHA

does not have the staff or financial resources to cope with this

situation without participation from private sector lenders. The need

for a change in the regulations is immediate. Most farmers are now

concluding 1993 operations, consulting with their lenders, and planning

for 1994. 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.

In 1989, the General Accounting Office (GAO) submitted a report

(GAO/RCED-89-9) to the Senate Committee on Agriculture addressing

FmHA's loan making policies and practices. One of the concerns noted

was FmHA's eroding security position on many loans and the significant

dollar losses being projected (and realized). One of GAO's

recommendations addressed the need for a change in FmHA collateral

requirements. The report recommended additional security be taken when

servicing loans, including obtaining the best security interest

available on all of the borrower's assets. In an effort to reduce loan

losses and protect the public interest, FmHA published a proposed rule

on February 15, 1991, requiring a lien on all assets when loans are

made. A final rule implementing this policy was published on April 30,

1992. On April 30, 1992, the Agency also published an interim rule

requiring a lien on all a borrower's assets when loans are

restructured. This policy had been issued as a proposed rule on October

23, 1991.

The requirement for a lien on all assets at the time a loan is made

was intended to assure that FmHA had a security interest in all of a

borrower's property, reducing the potential for program abuse and loan

losses. However, this policy has proven unwieldy, imposing an excessive

burden on FmHA borrowers and requiring an excessive amount of FmHA

staff time. When FmHA acquires a security interest in property owned by

a borrower, that security must be serviced in accordance with all FmHA

regulations applying to the type of security property involved,

regardless of the purpose of the loan. For example, under existing

regulations, the recipient of an FmHA FO loan must pledge not only real

estate, but all chattel property as well to secure the loan. The

borrower must account to FmHA for all farm products sold, even though

FmHA's primary interest in the sale is for payment of the FO loan

installment coming due, not the disposition of loan security. This

requirement imposes a major burden on borrowers, especially on those

who sell farm products on a frequent basis. Also, FmHA employees must

spend a significant amount of time completing the necessary

documentation for release of its security interest for such sales. This

time is a precious resource that the Agency believes would be better

spent providing advice and counsel to those borrowers under the most

severe hardship who could benefit most from FmHA credit supervision.

One of the exceptions to FmHA's blanket lien requirement is that a

lien will not be taken on chattel security when it will prevent the

applicant from obtaining operating credit from other sources. This

exception does not adequately correct the problems experienced with the

lien on all assets rule. FmHA officials sometimes determine this

exception is not necessary at the time the loan is made. However,

taking a lien can later interfere with a borrower's ability to obtain

credit from other sources, when borrowers have sufficient equity in

assets to qualify for a non-FmHA loan to meet a portion of their credit

needs. The Agency can subordinate or release liens on security property

to facilitate credit from other lenders. However, these actions also

impose a processing burden on borrowers and require staff time.

Further, the Agency has found that some lenders shy away from providing

credit to such borrowers due to the time and paperwork involved, even

though the borrower otherwise meets the lender's loan criteria. The

only recourse for the borrower to meet his or her credit needs is to

request FmHA assistance. Thus, the lien on all assets requirement

forces those borrowers who would otherwise not have a need for FmHA

credit to consume resources which would be more appropriately directed

toward borrowers in greater difficulty. Devoting more attention to

those borrowers who desperately need intensive financial assistance and

the time of FmHA staff should reduce the failure rate of these

borrowers, thereby reducing program costs.

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

requirements less demanding while continuing to protect the

Government's interest. The Agency will continue to make loans provided

the value of the security available is at least equal to the amount of

the loan. This is consistent with the authorizing statute and the

Agency's mission of providing assistance to farmers with limited

financial resources. However, rather than requiring a lien on all a

borrower's additional assets, if any, when making a loan, FmHA

generally will only require a lien on property only to the point that

the value of the security is at least equal to 150 percent of the

amount of the loan. The Agency has determined that security at least

equal to 150 percent of the loan amount will provide adequate assurance

of repayment. Studies have indicated that loan liquidation costs are

about 20 percent of the value of collateral. Additionally, the Agency

has a funding cost as a result of monies borrowed from the Treasury in

accordance with the Federal Credit Reform Act of 1990, which continues

until the loan is paid or written off. This cost is difficult to

estimate because interest rates and liquidation periods vary widely.

However, this cost should be no more than 30 percent of the loan amount

on the average.

Obtaining security at least equal to 150 percent of the loan amount

is a goal. Generally, the Agency will be unable to obtain security

exactly meeting the 150 percent goal. Security in excess of 150 percent

of the loan will only be taken when it is not practicable to separate

the property, i.e., a tract of land, same type of livestock (dairy

cows, brood sows), and when nonessential assets are taken as security

for EM loans, as discussed below.

The first security preference for operating type loans will be

crops/chattels, and for real estate type loans the first priority will

be real estate. Where there are several collateral possibilities for

chattels (cattle, machinery) or real estate (different tracts of land),

the FmHA loan approval official will select the most reasonable choice

to reach the 150 percent collateral goal. If the applicant offers an

acceptable alternative, the loan approval official will accept the

applicant's choice. Because of this change, entity members no longer

need to pledge their assets as collateral. Entity members still will be

personally obligated on the loan note(s). The Agency proposes to amend

7 CFR part 1941, subpart A, Sec. 1941.19; part 1943, subpart A,

Sec. 1943.19; part 1943, subpart B, Sec. 1943.69; and part 1945,

subpart D, Sec. 1945.169 to incorporate these changes. All loan making

regulations are being changed because most applicants affected by

disasters apply for various types of farm loans and the changes are

needed for administrative consistency.

The Agency also proposes to amend 7 CFR part 1943, subpart A,

Sec. 1943.19 to state that chattel property will be taken as security

for real estate loans only in certain situations. For the reasons

discussed earlier with regard to burdensome chattel security servicing

requirements and reduced availability of conventional credit, farm

ownership (FO) loans will not be secured with chattels unless there is

no other real estate available to provide security at least equal to

the loan amount, or unless the chattels are real estate improvements

(fixtures) made with FO funds. Generally, real estate values are more

constant than chattel values and provide adequate loan security.

Chattel security is not desirable on long term real estate loans due to

servicing difficulties and rapid depreciation. Because of the limited

circumstances in which certain chattel security will be taken on real

estate loans, the exception for when title to a livestock or crop

enterprise is held by a contractor or under a share lease agreement is

no longer needed. The exception to taking a lien, therefore, is being

removed from subparts A and B and part 1943. To clarify the existing

policy and to assure that all possibilities are considered when the

available loan security is not at least equal to the loan amount, 7 CFR

part 1943, subpart A, Sec. 1943.19, along with 7 CFR part 1941, subpart

A, Sec. 1941.19; 7 CFR part 1943, subpart B, Sec. 1943.69; and 7 CFR

part 1945, subpart D, Sec. 1945.169, are revised to specifically state

that in situations where the farmer does not or will not have adequate

real estate or chattel property to secure the loan needed, other

property, including real estate owned by a third party, can serve as

security. A pledge of security is preferable to a cosigner. 7 CFR part

1943, subpart A, Sec. 1943.19, 7 CFR part 1943, subpart B,

Sec. 1943.69, and 7 CFR part 1945, subpart D, Sec. 1945.169 will be

revised accordingly. This policy already is stated in existing 7 CFR

part 1941, subpart A, Sec. 1941.19.

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

Sec. 1945.169 to add a provision regarding nonessential assets in EM

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

loan applicants in that they may have significant nonfarm asset

holdings. Prior to April 30, 1992, FmHA had required EM loan applicants

to liquidate nonessential assets prior to loan closing if possible, on

the theory that the applicant's equity in these assets should be used

to reduce Government subsidized credit needs. This policy proved to

impose hardship on farmers already suffering from the affects of a

disaster, with minimal results. In many cases, the assets in question

could not be sold for the estimated value, and thus no equity was

realized. In other cases, the assets were not readily liquidated, and

loan recipients were forced to accept much less than true value, or

unable to liquidate the assets at any price within the necessary

timeframe. As a result of these difficulties, FmHA modified this policy

and amended the regulations to require a lien on, rather than a sale

of, such assets. A lien on all nonessential assets (with no 150% limit)

assures the Agency that the equity will be applied to reducing the

farmer's Federally subsidized credit when nonessential assets are sold.

On this basis, the requirement for a lien on all nonessential assets in

the case of EM loans is continued even though the requirement for a

lien on all farm assets is substantially modified.

Finally, the Agency has amended 7 CFR part 1951, subpart S,

Sec. 1951.910. The requirement that liens will be taken on all assets

when loans are restructured will be continued to protect against

potential loan losses as a result of extended repayment terms. The

Agency proposes to continue this action since a significant amount of

debt has been written off over the years, the Agency continues to have

a large number of financially stressed high-risk borrowers, and to

comply with the GAO report discussed previously in this rule. This

section had previously referred to the loan making regulations to

prescribe the security requirements for loan restructuring. Since the

requirements for loan making will now be different from loan servicing,

it is necessary to insert the guidelines into the debt restructuring

regulations.

List of Subjects

7 CFR part 1941

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

7 CFR part 1943

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

7 CFR part 1945

Agriculture, Disaster assistance, Loan programs--Agriculture.

7 CFR part 1951

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

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

moderate income housing loans--Servicing.

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

proposed to be amended as follows:

PART 1941--OPERATING LOANS

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

follows:

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

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

2. Section 1941.19 is amended by redesignating current paragraphs

(b) through (i) as paragraphs (c) through (j), respectively, revising

paragraph (a), and adding a new introductory paragraph and a new

paragraph (b) to read as follows:

Sec. 1941.19 Security.

Primary security must be available for the loan. If available, the

total amount of security required will be at least equal to 150 percent

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

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

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

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

defined in Sec. 1910.3 (d) of subpart A of part 1910 of this chapter or

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

preferable to a cosigner.

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

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

refinanced with loan funds.

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

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

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

the applicant, up to the point that security for the loan at least

equals 150 percent of the loan amount.

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

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

this section, the approval official will select the most logical and

efficient alternative for obtaining security.

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

to the property to be taken for security, the approval official will

honor the preference so long as the requirements of paragraphs (a) (1)

and (2) of this section are met.

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

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

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

the loan. Different lien positions on real estate are considered

separate and identifiable collateral.

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

interests having mortgageable value, revenues, royalties from mineral

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

parties.

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

necessary.

* * * * *

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

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

follows:

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

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

Authorizations

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

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

paragraphs (a)(2) through (a)(7), respectively, and paragraph (b)(5) as

(b)(4); redesignating current paragraphs (b), (d), (e), and (f), as

paragraphs (d), (e), (f), and (g), respectively; revising the

introductory paragraph, paragraph (a)(1), newly redesignated paragraph

(a)(2), paragraph (c), and adding new paragraph (b) to read as follows:

Sec. 1943.19 Security.

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

security also may be taken as security. The total amount of security

required will be the lesser of 150 percent of the loan amount, or all

real estate owned by the applicant. A loan will be considered

adequately secured when the real estate security for the loan is at

least equal to the loan amount. Security in excess of 150 percent of

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

separate the property, i.e., a tract of land. In unusual cases, the

loan approval official may require a cosigner as defined in

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

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

cosigner.

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

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

security needed to meet the requirements of this section.

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

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

not limited to assignments of leases or leasehold interests having

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

and royalties from mineral rights.

* * * * *

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

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

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

or refinanced with loan funds whenever such property cannot be included

in the real estate lien and the additional security is needed to secure

the loan.

(2) Chattel security will be obtained when there is not enough real

estate security for the loan and the best lien obtainable on all real

estate has been taken.

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

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

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

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

items should be obtained.

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

provided in subpart A of part 1962 of this chapter.

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

may be taken as security when the real estate owned and to be acquired

by the applicant is not adequate to secure the loan.

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

real estate owned and to be acquired by the applicant is not adequate

to secure the loan. Examples of such security include but are not

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

and copyrights, and membership or stock in cooperatives and

associations.

* * * * *

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

Authorizations

5. Section 1943.69 is amended by removing paragraphs (a)(2),

(b)(4), and (c)(1); redesignating current paragraphs (a)(3) through

(a)(8) as paragraphs (a)(2) through (a)(7) respectively; redesignating

current paragraph (b)(5) as paragraph (b)(4); redesignating current

paragraphs (c)(2) through (c)(5) as paragraphs (c)(1) through (c)(4)

respectively; revising the introductory paragraph, paragraph (a)(1),

newly redesignated paragraph (a)(2), paragraph (c) introductory text,

and newly redesignated paragraph (c)(1) to read as follows:

Sec. 1943.69 Security.

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

security also may be taken as security. The total amount of security

required will be the lesser of 150 percent of the loan amount, or all

real estate owned by the applicant. A loan will be considered

adequately secured when the real estate security for the loan is at

least equal to the loan amount. Security in excess of 150 percent of

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

separate the property, i.e., a tract of land. In unusual cases, the

loan approval official may require a cosigner as defined in

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

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

cosigner.

(a) * * * (1) A mortgage will be taken on all real estate

refinanced or improved with SW funds, and by any additional real estate

security needed to meet the requirements of this section.

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

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

not limited to assignments of leases or leasehold interests having

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

and royalties from mineral rights.

* * * * *

(c) Chattel security. Loans will be secured by chattels when there

is not adequate real estate security for the loan.

(1) The loan will be secured by:

(i) A first lien on all property acquired, improved, or refinanced

with loan funds; and

(ii) If the security for the loan is not at least equal to 150

percent of the loan amount, the best lien obtainable will be taken on

other chattel security owned by the applicant, up to the point that

security for the loan equals 150 percent of the loan amount.

* * * * *

PART 1945--EMERGENCY

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

follows:

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

2.23 and 2.70.

Subpart D--Emergency Loan Policies, Procedures and Authorizations

7. Section 1945.169 is amended by redesignating current paragraphs

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

paragraph (a), and adding a new introductory paragraph and paragraphs

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

Sec. 1945.169 Security.

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

security and nonessential assets in accordance with this section. The

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

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

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

(a) Security for operating type purposes. In the case of emergency

loans made for subtitle B (operating) purposes, primary security must

be available for the loan, except as provided for in Sec. 1945.169

(e)(2) of this section. If available, the total amount of security

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

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

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

practicable to separate the property, i.e., same type of livestock

(dairy cows, brood sows). In unusual cases, the loan approval official

may require a cosigner as defined in Sec. 1910.3 (d) of subpart A of

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

A pledge of security is preferable to a cosigner.

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

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

refinanced with loan funds.

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

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

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

the applicant, up to the point that security for the loan at least

equals 150 percent of the loan amount.

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

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

this section, the approval official will select the most logical and

efficient alternative for obtaining security.

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

to the property to be taken for security, the approval official will

honor the preference so long as the requirements of paragraphs

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

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

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

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

the loan. Different lien positions on real estate are considered

separate and identifiable collateral.

(3) Other security.

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

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

adequate to secure the loan.

(ii) Other property that cannot be converted to cash without

jeopardizing the applicant's farm operation or imposing substantial

financial penalty on the applicant may be taken as additional security

when the property owned by the applicant is not adequate to secure the

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

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

and membership or stock in cooperatives and associations.

(b) Security for real estate type purposes. EM loans made for

subtitle A (real estate) purposes will be secured by real estate.

Chattels and/or other security also may be taken as security. The total

amount of security required will be the lesser of 150 percent of the

loan amount, or all real estate owned by the applicant. A loan will be

considered adequately secured when the real estate security for the

loan is at least equal to the loan amount, except as provided for in

Sec. 1945.169(e)(2) of this section. Except as provided in paragraph

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

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

property, i.e., a tract of land. In unusual cases, the loan approval

official may require a cosigner as defined in Sec. 1910.3(d) of subpart

A of part 1910 of this chapter, or a pledge of security from someone

other than the applicant(s). A pledge of security is preferable to a

cosigner.

(1) Real estate security.

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

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

additional real estate security needed to meet the requirements of this

section.

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

interests which have mortgageable value, water rights, easements,

rights of way, mineral rights, and royalties.

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

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

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

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

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

summary forfeiture, or other clauses that may jeopardize the

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

any such undesirable provision is waived, modified, or subordinated

insofar as the Government is concerned.

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

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

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

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

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

R (available in any FmHA office).

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

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

or refinanced with loan funds whenever such property cannot be included

in the real estate lien and the additional security is needed to secure

the loan.

(ii) Chattel security will be obtained when there is not enough

real estate security for the loan.

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

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

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

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

items should be obtained.

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

provided in subpart A of part 1962 of this chapter.

(3) Other security.

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

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

is not adequate to secure the loan.

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

real estate owned and to be acquired by the applicant is not adequate

to secure the loan. Examples of such security include but are not

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

and copyrights, and membership or stock in cooperatives and

associations.

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

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

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

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

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

if an applicant cannot or will not dispose of the assets and use the

proceeds to reduce the FmHA credit needs prior to loan closing. The 150

percent security requirement does not apply to nonessential assets.

* * * * *

PART 1951--SERVICING AND COLLECTIONS

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

follows:

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

Subpart S--Farmer Programs Account Servicing Policies

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

follows:

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

APPLICATIONS.

* * * * *

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

certain assets, essential and nonessential, unencumbered to FmHA as

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

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

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

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

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

are considered separate and identifiable collateral.

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

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

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

accounts receivable, certain cash or special cash collateral accounts,

marketable securities, certificates of ownership of precious metals,

and cash surrender value of life insurance.

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

interests having mortgageable value, revenues, royalties from mineral

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

parties.

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

part 1941 apply.

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

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

essential assets will not be included in the NRV calculation to

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

closing the restructured FmHA loans.

Dated: January 8, 1994.

Bob J. Nash,

Under Secretary for Small Community and Rural Development.

[FR Doc. 94-944 Filed 01-13-94; 8:45 am]

BILLING CODE 3410-07-U