Future Recovery of Losses Paid on Liquidated Guaranteed Loans

DEPARTMENT OF AGRICULTURE

Rural Housing Service

Rural Business-Cooperative Service

Rural Utilities Service

Farm Service Agency

7 CFR Part 1980

RIN 0575-AB29

Future Recovery of Losses Paid on Liquidated Guaranteed Loans

AGENCY: Farm Service Agency, USDA.

ACTION: Final rule.

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SUMMARY: The Agency is amending its guaranteed farm credit program

regulations to establish new policies and procedures on the release of

guaranteed loan borrowers and cosigners from liability. This action

will define guaranteed lenders' release authorities and standardize

procedures for reporting post loss claim collection results to the

Agency. The intended effect is to maximize collections from unsatisfied

guaranteed accounts and to minimize the financial loss to the

Government.

EFFECTIVE DATE: September 20, 1996.

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

Farm Service Agency (FSA), Farm Credit Programs Loan Servicing

Division, U.S. Department of Agriculture, P.O. Box 2415, Ag Box Code

0523, Washington, D.C. 20013-2415, or at (202) 720-9053.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This rule has been reviewed under E.O. 12866 and has been

determined to be a significant regulatory action.

Executive Order 12372

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, 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 and FmHA Instruction 1940-J.

Federal Assistance Program

These changes affect the following FSA 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 the

issuing agencies 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,

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

Executive Order 12778

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

Civil

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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.

Paperwork Reduction Act

In accordance with the Paperwork Reduction Act of 1995 (Pub. L.

104-13), a notice and request for comments (61 FR 11183, March 19,

1996) was published announcing the Agency's request for an addendum to

an approved information collection for the farm credit programs

guaranteed loan regulations required by the amendments to 7 CFR part

1980 set forth in this rule. No comments were received. The existing

information collection requirements were previously approved by OMB

under the provisions of 44 U.S.C. 35 and assigned OMB control number

0575-0079, which was later renumbered 0560-0155. A revised information

collection submission will be submitted to OMB for their approval.

Unfunded Mandates

This 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 Final Rule

This final rule establishes standardized procedures for following

up with lenders for future collections on loans that resulted in a loss

to the Government. These policy changes will strengthen Agency

regulations on monitoring loan accounts and will maximize recoveries on

liquidated accounts. The proposed rule was published on May 5, 1994,

(59 FR 23173-74) with a comment period ending July 5, 1994.

This change is being made in response to recommendations from the

USDA, Office of Inspector General (OIG). OIG found that the Farmers

Home Administration (FmHA) had no procedures to monitor subsequent

recoveries by lenders from defaulted guaranteed loan borrowers (OIG

Audit Number 04099-118-Te, June 11, 1987). The audit recommendations

involved guaranteed farmer programs loans of FmHA. The FmHA Farmer

Programs loans are now administered as Farm Credit Programs by FSA. The

other guaranteed loan programs of FmHA are now administered by various

agencies. Water and Waste disposal facility loans are administered by

the Rural Utilities Service (RUS), Housing and Community Programs loans

are administered by the Rural Housing Service (RHS) and Business and

Industrial loans and Nonprofit National Corporations loans are

administered by the Rural Business-Cooperative Service (RBS). This

reorganization was authorized by the Federal Crop Insurance Reform and

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

The proposed rule contained changes to 7 CFR part 1980 subpart A, in

addition to subpart B. Since USDA has been reorganized, the rule has

been revised to delete the proposed changes to subpart A. FSA, RUS,

RHS, and RBS are jointly issuing this rule due to joint ownership of

chapter XVIII, title 7, Code of Federal Regulations, although FSA will

be affected only. RUS, RHS, and RBS are in the process of revising the

regulations for their respective agencies.

Five comment letters were received by the close of business on July

5, 1994. Comments were received from several groups representing the

farming and lending community, including a State Commissioner of

Agriculture, FSA employees, the American Bankers Association and the

Farm Credit Council.

One commenter suggested that the reporting requirements would place

additional burdens upon the County Office and that the FSA St. Louis

KCMO Finance Office (formerly FmHA National Finance Office) has the

capability to generate these reports. However, the County Office is

currently required to follow up with lenders for a 5-year period. This

regulation simply provides a specific method of reporting. Requiring

the County Supervisor to perform the follow-up contact assures that a

response will be provided and direct contact is assured. This commenter

also stated that the regulation should address what happens after the

3-year period of follow-up with the lender is completed. Consequently,

the Agency has clarified the rule. Also, the Agency plans to use

internal Administrative directives and instructions to address

additional issues concerning actions after the 3-year follow-up is

complete.

One commenter was concerned about the additional reporting burden

that this rule will place on lenders. However, the regulation simply

provides for a standardized method of reporting; information lenders

are already responsible for gathering. Lenders are currently required

to monitor liquidated guaranteed loan accounts for a 5-year period.

This regulation simply provides a format for reporting their findings,

where none existed previously. The internal use forms are not

published, but are available for public viewing by contacting the FSA

Management Services Division, Information Management Branch, PO Box

2415, Washington, D.C. 20013-2415.

A commenter suggested that ``Adequate Compensation/Consideration''

in the proposed rule be removed and replaced with a reference to FmHA

Instruction 1956-B, ``Debt Settlement--Farmer Programs and Housing.''

This same commenter stated that the Agency would save a considerable

amount of cost and time if the borrower was encouraged to apply for

debt settlement at the time the loss claim is submitted. FmHA

Instruction 1956-B applies to debts owed the Federal Government for

certain USDA loan programs. However, under a Loan Note Guarantee or

Contract of Guarantee, the debt is owed to the lender and guaranteed

debts are settled by the lender. FSA as guarantor only reviews

information provided by the lender to determine whether or not a

release request will be concurred with. FSA, in its role as loan

guarantor, does not work directly with the borrower. After a loss claim

is paid, the Government does not become a creditor of the farmer or

rancher. If the debt is not released, the lender has the responsibility

to follow up with the borrower after a loss claim is paid and remit the

correct percentage back to the Government in accordance with their

guarantee. Success with recoveries after liquidation and findings of

OIG audits discourage a simultaneous loss claim payment, settlement and

release. Therefore, this suggestion was not adopted.

Another commenter noted that the proposed rule stated in part ``A

lender may, with FmHA's concurrence, release a borrower and/or cosigner

from liability only when adequate compensation/consideration is

received.'' This commenter recommended that this statement be changed

to the following: ``A lender may, with FSA's concurrence, release a

borrower or cosigner from liability only when adequate compensation is

received or it is mutually agreed that there is very little probability

of recovery from the borrower or cosigner.'' We have adopted this

comment in the final rule. This same commenter stated that the intended

effect of the proposed rule is a positive move to minimize losses

incurred by

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FSA and ensure lenders continue collection efforts on those loans in

which the borrower has not been released from liability.

Another interested party commented that the annual audit rules are

an expense and a burden to them. This respondent indicated a desire for

removal of all loss claim follow-up requirements from guaranteed loan

regulations. The Agency has determined that current requirements will

be reduced by this rule and the requirements of this rule are justified

by the benefits of program participation.

As discussed above, administrative procedures in the proposed rule

will be included in internal Agency instructions. Also, as part of this

final rule, the agencies are removing some administrative provisions

from the Federal Register and are changing references from ``FmHA or

its successor agency under Public Law 103-354'' to ``the Agency.''

Other minor wording changes are also being made.

List of Subjects in 7 CFR Part 1980

Administrative practice and procedures, Agriculture, Business and

Industry, Community Facilities, credit, Loan programs--Agriculture,

Loan Programs--Business and industry, Loan programs--Housing and

community development, low and moderate income housing, reporting and

recordkeeping requirements, rural areas.

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

amended as follows:

PART 1980--GENERAL

1. The authority citation for part 1980 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 B--Farmer Programs Loans

2. Section 1980.146 is amended by:

a. removing the words ``FmHA or its successor agency under Public

Law 103-354'' wherever it appears in paragraphs (e)(2)(iv)(B) and

(e)(4) and adding the words ``the Agency'' in its place;

b. removing the words ``FmHA or its successor agency under Public

Law 103-354'' in the title, second sentence, and the last place it

appears in the last sentence of paragraph (e)(5) and adding the words

``the Agency'' in its place;

c. removing the words ``Form FmHA or its successor agency under

Public Law 103-354'' in the first place it appears in the last sentence

of paragraph (e)(5) and adding the words ``Form FmHA'' in its place;

d. removing the words ``FmHA or its successor agency under Public

Law 103-354'' wherever it appears in paragraphs (e)(7) and (e)(8) and

adding the words ``the Agency'' in its place; and

e. revising paragraphs (e)(2)(iv)(A) and (e)(3) to read as follows:

Sec. 1980.146 Liquidation.

* * * * *

(e) * * *

(2) * * *

(iv) * * *

(A) If the loss is greater than the estimated loss, the Agency will

pay the additional amount owed to the lender.

(B) * * *

(3) Future Recovery. The lender will remit any future recoveries to

the Agency in proportion to the percentage of guarantee in accordance

with the Lender's Agreement until the account is paid in full or

otherwise satisfied. A lender may, with Agency concurrence, release a

borrower or cosigner from liability when adequate compensation is

received or it is mutually agreed that there is very little probability

of future recovery from the borrower or cosigner.

* * * * *

Sec. 1980.174 [Removed and Reserved.]

3. In part 1980 Sec. 1980.147 is removed and reserved.

Signed in Washington, DC, on August 12, 1996.

Eugene Moos,

Under Secretary for Farm and Foreign Agricultural Services.

[FR Doc. 96-21236 Filed 8-20-96; 8:45 am]

BILLING CODE 3410-05-P