Post Bankruptcy Loan Servicing Notices

SUMMARY: The Farm Service Agency (FSA) proposes to revise its

regulations regarding servicing accounts when a bankruptcy filing is

dismissed. This change will clarify that a Notice of the Availability

of Loan Service and Debt Settlement Programs for Delinquent Farm

Borrowers will be sent after a borrower is dismissed from bankruptcy if

the borrower was not previously notified and the account was not

accelerated.

DATES: Comments must be received by August 2, 1996 to be assured

consideration.

ADDRESSES: Send comments to Director, Farm Credit Programs Loan

Servicing and Property Management Division, USDA, FSA, P.O. Box 2415,

Ag Box Code 0523, Washington, D.C. 20013-2415. Comments may be hand

delivered to USDA, FSA at 14th and Independence Ave., SW., Room 5449-S,

Washington DC. Supporting documents for the proposed rule, comments on

the proposed rule and internal Agency use documents may be viewed

during normal working hours at the above address with prior

notification.

FOR FURTHER INFORMATION CONTACT: Phillip Elder, Senior Loan Officer,

USDA, FSA, Farm Credit Programs Loan Servicing Division, P.O. Box 2415,

Ag Box Code 0523, Washington, D.C. 20013-2415, telephone (202) 720-

9053.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This rule has been determined to be not significant for the

purposes of Executive Order 12866 and has not been reviewed by OMB.

Executive Order 12372

1. For the reasons set forth in the Notice related to 7 CFR part

3015, subpart V (48 FR 29115, June 24, 1983), Farm Ownership Loans,

Farm Operating Loans, and Emergency Loans are excluded from the scope

of E.O. 12372, which requires intergovernmental consultation with State

and local officials.

2. The Soil and Water Loan Program is subject to and has met the

provisions of E.O.12372.

Programs Affected

These changes affect the following FSA 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 the

issuing agencies that this action is not a major Federal action

significantly affecting the environment, and in accordance with the

National Environmental Policy Act of 1969, Pub. L. 91-190, an

Environmental Impact Statement is not required.

Executive Order 12778

This proposed rule has been reviewed in accordance with E.O. 12778,

Civil Justice Reform. In accordance with this rule: (1) All State and

local laws and regulations that are in conflict with this rule will be

preempted; (2) no retroactive effect will be given to this rule, and

(3) administrative proceedings in accordance with 7 CFR parts 11 and

780 must be exhausted before bringing suit in court challenging action

taken under this rule unless those regulations specifically allow

bringing suit at an earlier time.

Regulatory Flexibility Act

The Farm Service Agency (FSA) certifies that this rule will not

have a significant impact on a substantial number of small entities as

defined under the Regulatory Flexibility Act, Pub. L. 96-534, as

amended (5 U.S.C. 601).

Paperwork Reduction Act

This final rule does not impose any new information or

recordkeeping requirements on the public.

Unfunded Mandates

Title II of the Unfunded Mandate Reform Act of 1995 (UMRA), Public

Law 104-4, establishes requirements for Federal agencies to assess the

effects of their regulatory actions on State, local, and tribal

governments or the private sector. Under section 202 of the UMRA,

agencies generally must prepare a written statement, including a cost

benefit analysis, for proposed and final rules with ``Federal

mandates'' that may result in expenditures to State, local, and tribal

governments, in the aggregate, or to the private sector, of $100

million or more in any 1 year. When such a statement is needed for a

rule, section 205 of the UMRA generally requires agencies to identify

and consider a reasonable number of regulatory alternatives and adopt

the least costly, more cost effective or least burdensome alternative

that achieves the objectives of the rule.

The rule contains no Federal mandates (under the regulatory

provisions of Title II of the UMRA) for State, local, and tribal

governments or the private sector. Thus, today's rule is not subject to

the requirements of sections 202 and 205 of the UMRA.

Discussion of Proposed Rule

These changes involve the farm credit programs (FCP) loans of FSA

formerly administered by the Farmers Home Administration (FmHA) as

Farmer Programs loans. This reorganization was authorized by the

Department of Agriculture Reorganization Act of 1994 (Pub. L. 103-354,

108 Stat. 3178). Current FSA direct FCP loan servicing regulations

require a delinquent account servicing notice pursuant to 7 CFR part

1951, subpart S to be sent to borrowers if their bankruptcy is

dismissed. Currently, in such cases, the Notice of the Availability of

Loan Service Programs and Debt Settlement Programs for Delinquent Farm

Borrowers, is sent depending on the advice of the Office of General

Counsel, even if the borrower

[[Page 37406]]

had already exhausted all servicing rights and the account had been

accelerated prior to the bankruptcy filing. Resending the notice causes

extensive delays in the collection of accounts. The regulations at 7

CFR part 1962, Sec. 1962.47 (d)(2) were promulgated to ensure that all

borrowers who had filed bankruptcy but whose bankruptcy was dismissed

would receive the initial notification of loan servicing options

required by Sec. 331D of the Consolidated Farm and Rural Development

Act. It was never the intent of the regulation to allow renotification

if the borrower's servicing rights had been exhausted and the account

accelerated prior to the bankruptcy filing.

Moreover, the Agency is also revising the regulation to limit the

scope and issuance of the loan servicing notice. When borrowers file

for bankruptcy their attorney will only be notified of the loan

servicing rights that remain. Upon dismissal of a bankruptcy action or

a default in a confirmed bankruptcy reorganization plan, no new

servicing notices will be sent if the borrower or borrower's attorney

has been previously notified of the loan servicing options. Since the

Agency's loan servicing program has been in effect since October 14,

1988, borrowers have had many opportunities to apply for loan

servicing. Congress has limited the amount of debt forgiveness to

$300,000 per borrower, as well as limiting writedowns and buyouts under

Sec. 353 of the Consolidated Farm and Rural Development Act to one per

borrower on loans made after January 6, 1988. See Sec. 1816 of the Food

Agriculture and Trade Act of 1990. In section 648(b) of the Federal

Agriculture Improvement Act of 1996 (1996 Act) Congress imposed the

further limitation that the Agency may not provide debt forgiveness on

a direct loan if the borrower has already received debt forgiveness on

a direct loan. Section 640 (2) of the 1996 Act expanded the definition

of debt forgiveness to include discharging of debt as a result of

bankruptcy. Based on these limitations, it is no longer appropriate for

the Agency to renotify borrowers who have previously received the

notice of loan servicing options. Many of these borrowers will no

longer be eligible for additional loan servicing. Also, by expanding

the definition of debt forgiveness to include discharges in bankruptcy,

Congress has endorsed the view that the borrower has elected remedy in

the filing of a bankruptcy petition.

Additionally, the agency is proposing to remove administrative

processes from the regulations and has reserved certain paragraphs,

leaving only regulatory actions which impact the public in the Federal

Register. This streamlining makes the regulation more concise and

easier to read and understand. The Agency is developing a separate

handbook to address such matters as what forms must be filed and where

to submit loan requests and the Agency's internal operating procedures.

This handbook will not be published in the Federal Register but will be

available to the public upon request at no cost.

For example, in this rule, the Agency is removing the specific

references to Exhibit D (Notice to Borrower's Attorney Regarding Loan

Servicing Options) and Exhibit D-1 (Notice to Borrower Regarding Loan

Service Options) of this subpart, which are attached to the loan

servicing notices and further explain the interrelationship of the loan

servicing programs to the bankruptcy petitions filed under chapters 7,

11, 12 and 13 of the Bankruptcy Code. While the Agency will continue to

use these types of specialized notices, there is no statutory

requirement that these types of notices be sent. Since these matters

involve internal operating procedures, the requirement will be

contained in the Agency's Instructions only, with the regulation

referencing only that a form letter will be sent. Similarly, the Agency

has removed Exhibits D and D-1 from this subpart. Since these documents

are informational cover letters sent with the notices, the Agency is

not required to publish them.

Furthermore, this rule makes minor wording changes, redesignates

some numbered paragraphs and revises references to the Farmers Home

Administration (FmHA) to reference FSA.

List of Subjects in 7 CFR Part 1962

Government property, Livestock, Loan programs--Agriculture,

Personal property--crops, Rural areas.

Accordingly, it is proposed that 7 CFR part 1962 be amended as

follows:

PART 1962--PERSONAL PROPERTY

1. The authority citation for 7 CFR part 1962 is revised to read as

follows:

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

Subpart A--Servicing and Liquidation of Chattel Security

2. Section 1962.47 is revised to read as follows:

Sec. 1962.47 Bankruptcy and insolvency.

(a) [Reserved]

(b) Farm Credit Programs borrowers.

(1) When the local Agency loan servicing official becomes aware

that a Farm Credit Program borrower has filed bankruptcy, the attorney

of the borrower will be notified in writing of the borrower's remaining

servicing options. The attorney of a borrower who is 90 days delinquent

on their chapter 11, chapter 12 or chapter 13 reorganization plan will

also be notified in a similar fashion. When borrowers are under the

jurisdiction of the bankruptcy court and wants to be considered for

loan servicing, they must meet the following conditions:

(i) The borrower must complete and return to the Agency an

Acknowledgement of Notice of Program Availability and any application

forms requested by the Agency within 60 days from the borrower's

attorney's receipt of the notice; and

(ii) The borrower's attorney must request, in writing, servicing on

behalf of the borrower within the 60-day time period. The Agency will

consider this request to be an acknowledgment that the Agency will not

be interfering with any rights or protections under the Bankruptcy Code

and its automatic stay provisions. The Agency's processing of the

application may include consideration of primary and preservation loan

servicing options available under the applicable statutes and

regulations, notification of the Agency's decision on the request and

application for servicing, and holding any mediation, meetings or

appeals requested by the borrower.

(2) If a borrower operating under a confirmed bankruptcy plan

desires to apply for loan servicing and qualifies for servicing under

the Agency's regulations, the borrower may be required to obtain

modification of the bankruptcy reorganization plan.

(3) In chapter 7 cases, the Agency will not provide Primary Loan

Servicing to a borrower discharged in bankruptcy, unless the borrower

reaffirms the entire Agency debt. If the chapter 7 debtor wants to

reaffirm the debt, the Agency will accept the reaffirmation if

permitted by the court. If the Agency debt is reaffirmed, the loan

servicing application will be processed in accordance with subpart S of

part 1951 of this chapter. If the borrower reaffirms the Agency debt in

order to be considered for restructuring but is later denied

restructuring, the borrower may revoke the reaffirmation. No

reaffirmation is necessary for any discharged chapter 7 borrower to be

eligible for Preservation Loan Service Programs in accordance with

subpart S of part 1951 of this chapter.

(c) [Reserved]

[[Page 37407]]

(d) Liquidation.

(1) If a borrower's bankruptcy is dismissed and the account was not

previously accelerated, the borrower will be notified of remaining

Agency servicing options if any. When the bankruptcy is dismissed and

liquidation of an account is necessary, liquidation will be conducted

in accordance with Sec. 1962.40 of this subpart and Sec. 1965.26 of

subpart A of part 1965 of this chapter as appropriate, except that the

Notice of the Availability of Loan Service Programs and Debt Settlement

Programs for Delinquent Farm Borrowers with attachments will only be

sent to the borrower if they were not previously sent to the borrower

or the borrower's attorney.

(2) In chapter 11, 12, or 13 reorganizations, if liquidation is

necessary while the bankruptcy is pending, the borrower's attorney will

be sent a Notice of the Availability of Loan Service and Debt

Settlement Programs for Delinquent Farm Borrowers with attachments if

allowed by the Bankruptcy Code and if not previously sent to the

borrower's attorney.

(3) In chapter 11, 12 or 13 cases, if liquidation is necessary

after the case is closed, the borrower will be sent a Notice of the

Availability of Loan Service and Debt Settlement Programs for

Delinquent Farm Borrowers with attachments if not previously sent to

the borrower's attorney and if not prohibited by the provisions of the

Bankruptcy Code. If an application for servicing is received under this

paragraph, it will be processed in accordance with subpart S of part

1951 of this chapter. If the borrower does not qualify for loan

servicing, the account will be accelerated.

(4) In chapter 7 cases, after discharge loans will be liquidated if

the borrower has not reaffirmed the debt and the property is no longer

part of the estate. Liquidation may proceed prior to discharge if

allowed by the court. Borrowers will be sent a letter and a Notice of

the Availability of Loan Service and Debt Settlement Programs for

Delinquent Farm Borrowers with attachments if the borrower or the

borrower's attorney was not previously so notified. If these notices

were sent previously, the borrower will be sent an acceleration notice.

* * * * *

3. Exhibit D is removed.

4. Exhibit D-1 is removed.

Signed in Washington, DC, on July 8, 1996.

Eugene Moos,

Under Secretary for Farm and Foreign Agricultural Services.

[FR Doc. 96-18251 Filed 7-17-96; 8:45 am]

BILLING CODE 3410-05-P