Handling Payments From the Farm Service Agency (FSA) to Delinquent FSA Farm Loan Program Borrowers

DEPARTMENT OF AGRICULTURE

Rural Housing Service

Rural Business-Cooperative Service

Rural Utilities Service

Farm Service Agency

CFR Part 1951

RIN 0560-AE93

Handling Payments From the Farm Service Agency (FSA) to

Delinquent FSA Farm Loan Program Borrowers

AGENCIES: Rural Housing Service, Rural Business-Cooperative Service,

Rural Utilities Service, Farm Service Agency, USDA.

ACTION: Interim final rule with request for comments.

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SUMMARY: The issuing USDA agencies are revising their regulations for

the use of administrative offset to collect delinquent debts due under

programs formerly administered by the Farmers Home Administration

(FmHA). This action will eliminate the provisions currently contained

in the regulation and provide that the Rural Housing Service, Rural

Business-Cooperative Service, Rural Utilities Service and Farm Service

Agency, Farm Loan Programs (the Agencies) will instead adhere to the

requirements in the existing United States Department of Agriculture

administrative offset regulations. This rule eliminates the requirement

that a borrower's account be accelerated prior to offset of payments

from a Federal agency to delinquent borrowers. This rule will improve

collection procedures through an increase in the use of administrative

offset to collect delinquent debts owed the Federal government.

However, the changes primarily affect Farm Loan Program borrowers of

the FSA. The Agencies Internal Revenue Service (IRS) and Federal salary

offset regulations are not revised by this rule.

DATES: The effective date of this interim final rule is August 1, 1997.

Comments on the interim final rule, or comments on alternatives to this

rule, or the revision and extension of the information collection

requirements must be received on or before September 30, 1997.

ADDRESSES: Send comments on the interim final rule to: Director, Farm

Loan Programs Loan Servicing and Property Management Division, USDA/

FSA/LSPMD/STOP 0523, 1400 Independence Avenue, SW, Washington, D.C.

20250-0523. All written comments received in connection with this rule

will be available for public inspection during regular working hours at

the above address.

FOR FURTHER INFORMATION CONTACT: Jerry P. Wishall, Senior Loan Officer,

Farm Loan Programs Loan Servicing Division, USDA/FSA/LSPMD/STOP 0523,

1400 Independence Avenue, SW, Washington, D.C. 20250-0523, telephone

(202) 720-1651, facsimile (202) 690-0949 or (202) 720-7686, e-mail:

[email protected]

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This rule has been reviewed under Executive Order 12866, has been

determined to be a significant regulatory action, and has been reviewed

by the Office of Management and Budget.

Executive Order 12372

The programs to which this Executive Order may apply are listed in

the Catalog of Federal Domestic Assistance under the following:

10.404 Emergency Loans

10.405 Farm Labor Housing Loans and Grants

10.406 Farm Operating Loans

10.407 Farm Ownership Loans

10.410 Very Low to Moderate Income Housing Loans

10.411 Rural Housing Site Loans and Self-Help Housing Land

Development Loans

10.415 Rural Rental Housing Loans

10.416 Soil and Water Loans

10.417 Very Low-Income Housing Repair Loans and Grants

10.420 Rural Self-Help Housing Technical Assistance

10.421 Indian Tribes and Tribal Corporation Loans

10.427 Rural Rental Assistance Payments

10.433 Rural Housing Preservation Grants

10.435 Certified Mediation Program

Programs listed under the numbers 10.405, 10.411, 10.415, 10.416,

10.420, 10.427, and 10.433 are subject to and have complied with the

provisions of Executive Order 12372. (See the notices related to 7 CFR

3015, subpart V, at 48 FR 29112, June 24, 1983; 49 FR 22675, May 31,

1984; 50 FR 14088, April 10, 1985.)

Environmental Impact Statement

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 has not been prepared.

Executive Order 12988

This rule has been reviewed in accordance with Executive Order

12988, 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, as applicable, 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). No actions are being taken under this rule that

would favor large entities over small entities. According to the 1992

Census of Agriculture, 1.9 million farmers or over 99 percent of all

farms in the United States are small entities as defined by the Small

Business Administration (SBA). Under the SBA definition, few if any

large entities are operators of family-sized farms who would be

eligible for FSA credit. This rule is expected to result in the offset

of payments from an average of approximately 4,000 borrowers per year

which is less than 1 percent of 1.9 million farmers. Also, this rule

requires small entities to do no more than large entities to

participate in the affected programs. Therefore, a Regulatory

Flexibility Analysis has not been prepared.

Paperwork Reduction Act

The amendments to 7 CFR part 1951 contained in this rule involve a

change in existing information collection requirements that were

previously approved by OMB under the provisions of 44 U.S.C. chapter 35

and assigned OMB control number 0575-0119. Emergency clearance for

revision and extension of the information collection has been approved.

In the proposed rule published on August 30, 1996, FSA provided notice

of its intent to request approval of the information collection under a

new OMB control number in order to accommodate the separation of

programs resulting from the reorganization of USDA. FSA however

continues to share 7 CFR 1951-C with Rural Development and therefore is

now providing notice of the intent to request approval of the revision

and extension of information collected under OMB control number 0575-

0119.

OMB Control Number 0575-0119.

Title: Offset of Federal Payments to USDA Agency Borrowers.

[[Page 41795]]

Type of Request: Revision and extension of Currently Approved

Information Collection.

Abstract: 7 CFR part 1951, subpart C, requires that a borrower's

account be accelerated and the borrower's appeal rights be exhausted

before offsetting any payments to be received by the borrower. The

Department of Agriculture Reorganization Act combined the farm loan

program functions of FmHA and the former Agricultural Stabilization and

Conservation Service (ASCS), into the Farm Service Agency (FSA). This

results in FSA making payments generated from participation in the

former ASCS programs to the same farmer or rancher that is delinquent

on his debts to the Agency. Acceleration of a borrower's account is one

of the last steps FSA takes before liquidating the account. This

process may take years while the borrower continues to receive payments

from FSA.

This rule removes the existing administrative offset regulation

which was used by the Agencies when they were a part of the former

Farmers Home Administration (FmHA). The Department of Agriculture has a

existing administrative offset regulation at 7 CFR subpart 3, subpart B

and the administrative offset regulation of the former FmHA in 7 CFR

part 1951, subpart C is redundant. The Department of Agriculture

regulation complies with the requirements of 31 U.S.C. 3716, as amended

by the Debt Collection Improvement of 1996, ch. 10 of Pub. L. 104-134

(April 26, 1996).

One intended effect of using the existing Department of Agriculture

administrative offset procedure is that the Department procedure does

not contain the restrictive provision of the former FmHA offset

regulation which requires the account to have been accelerated prior to

using administrative offset. There is no statutory basis for delaying

offset until after a loan has been accelerated and the Department

administrative offset procedure will permit offset to be utilized for

debts which are past due. The information collection requirements for

this type of internal agency offset will decrease, due to the

development of a shortened notification letter, streamlining of the

offset process, and the reduction of the number of notices and number

of meetings offered. However, the easing of the offset procedures will

greatly increase the number of FSA borrowers that receive notices and

accounts that are offset. For example as of March 30, 1996, 1,588 FSA

borrowers were accelerated, whereas 27,180 borrowers were past due.

Estimate of Burden: Public reporting burden for this information

collection is expected to average .6 hours per response.

Respondents: Program borrowers that are over 30 days past due.

Estimated Number of Respondents: 9,350.

Estimated Number of Responses per Respondent: .6.

Estimated Total Annual Burden on Respondents: 5,493 hours.

The subject regulation is published for public review and comment.

Additional copies of the interim final rule or copies of the referenced

forms may be obtained from Barbara Williams, Regulations and Paperwork

Management Branch, Support Services Division at (202) 720-9734.

Comments are invited on: (a) Whether the proposed collection of

information is necessary for the proper performance of the functions of

the Agency, including whether the information will have practical

utility; (b) the accuracy of the Agency's estimate of the burden of the

proposed collection of information, including the validity of the

methodology and assumptions used; (c) ways to enhance the quality,

utility, and clarity of the information to be collected; and (d) ways

to minimize the burden of the collection of information on those who

are to respond, including through the use of appropriate automated,

electronic, mechanical or other technological collection techniques or

other forms of information technology.

All responses to this notice will be summarized, included in the

request for OMB approval, and will become a matter of public record.

Comments should be submitted to the Desk Officer for Agriculture,

Office of Information and Regulatory Affairs, Office of Management and

Budget, Washington, D.C. 20503, and to Barbara Williams, Regulations

and Paperwork Management Branch, Support Services Division, U.S.

Department of Agriculture, Rural Housing Service, STOP 0743, 1400

Independence Avenue, SW., Washington, D.C. 20250-0743. A comment to OMB

is best assured of having its full effect if OMB receives it within 30

days of publication of this rule.

Unfunded Mandates

Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub.

L. 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 must prepare a written statement, including a cost benefit

assessment, before promulgating a notice of proposed rule making that

includes any 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 affective 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 the Interim Final Rule

This rule involves the credit programs formerly administered by

FmHA. The Department of Agriculture Reorganization Act of 1994, Pub. L.

103-354, abolished FmHA on October 20, 1994, and its functions were

transferred to the Agencies.

FSA is taking this action for several reasons. Most importantly,

this change is being made to increase the tools available to the Agency

to collect delinquent debts to the government. Administrative offset is

currently under-utilized because Agency administrative offset

regulations require that a borrower's promissory notes be accelerated

before offset can be used to collect the debt. This restricts the

Agency s ability to collect from producers that have defaulted on a

debt to the Agency by delaying the offset of FSA program payments such

as those derived from the Conservation Reserve Program (CRP) or

Production Flexibility Contracts (PFC). Due to the procedures required

for FSA to accelerate notes, an account may have been in default for

many months while the borrower continues to receive income from the

Agency. For example, FSA records indicate that in the Agency's fiscal

years 1994 and 1995, 711 CRP contract payments totaling over $5.5

million were made to seriously delinquent borrowers that were not

subject to offset. It is fiscally irresponsible for a Federal agency to

continue making substantial contract payments to someone who is

seriously delinquent on his or her government debts.

Also, the Agency must make this change because Congress has amended

the Federal Claims Collection Act (31 U.S.C. 3716) through passage of

the Debt

[[Page 41796]]

Collection Improvement Act of 1996 (DCIA) (Chapter 10 of Pub. L. 104-

134, April 26, 1996). This Act requires Federal agencies to attempt

administrative offset before making Federal payments to someone that

has defaulted on a government debt. Under the current constraints of 7

CFR part 1951, subpart C, FSA cannot consider offsets and must continue

to make payments to a defaulted borrower in violation of DCIA until the

account is accelerated.

The Agency is making this change by removing the existing

administrative offset regulation used by the Agencies when they were a

part of FmHA. The Department of Agriculture has an existing

administrative offset regulation at 7 CFR part 3, subpart B that

satisfies the administrative offset needs of the Agencies and is

consistent with the requirements of DCIA. This subpart contains

provisions that are very similar to the administrative offset

regulation of the former FmHA contained in 7 CFR part 1951, subpart C,

except it does not require a borrower's account to have been

accelerated. Adoption of the Departmental Regulations and removal of

Agency regulations will also assist in the Agency s efforts to

streamline regulations and reduce FSA paperwork by removing several

pages of unnecessary regulations from Chapter XVIII of the CFR. This

amendment also makes the administrative offset process for FSA Farm

Loan Programs more consistent with the collection procedures of the

remainder of FSA.

Discussion of Comments Received

This interim rule implements the changes proposed in a rule

published on August 30, 1996, (61 FR 45907) with a comment period

ending September 16, 1996. Comments were received from 72 parties prior

to expiration of the comment period. Nine comments were received after

the deadline and were not considered. However, their comments and

recommendations were very similar to others received and are probably

addressed in this discussion. Comments were received from several

groups representing the government, the farming community and the

agricultural lending community. Comments were received from two United

States Senators, two United States Representatives, 21 banks, two State

banking organizations, the National Farmers Union, an FSA State office,

a rural electric cooperative, six family farmer advocacy organizations,

a State department of agriculture, eight State rural rehabilitation

corporations and two State development authorities. Several commenters

praised the Agency's efforts to collect from delinquent borrowers;

however, every commenting party expressed concerns about possible

negative impacts of the rule and requested that this rule not go

forward as planned.

The respondents comments are addressed as follows in an order based

on volume of responses received. Comments of a similar topic were

grouped, paraphrased and addressed as one. General comments received

regarding constitutionality, ethics, fairness and the general mission

of the Agency's loan programs were not specifically addressed, but may

be addressed in context.

Extend the Comment Period

The Agency received 44 requests for an extension of the 15-day

comment period on the proposed rule. That was the only comment from 32

respondents, and 28 of these were identical form letters. The requested

extensions ranged from 60 days to 6 months. Many of the commenters

noted that the comment period on the proposed rule was shortened in an

attempt to offset the September AMTA checks and that is now impossible.

In conjunction with a request for a comment period extension, many of

these parties also requested Congressional hearings, public meetings

and other means to conduct a broader study of the potential impacts of

this regulation change. In response to these comments, the Agency has

decided to implement this change through publication of an interim

final rule and request for additional comments. This method will allow

further opportunity for public comment while allowing FSA to begin

administrative offset of program payments due to be paid to delinquent

borrowers in 1997.

Adverse Effect on Agriculture Lending Community and Restriction of

Credit

Many comments were received from private lenders and banking

organizations expressing concern about the potential negative impact of

this rule. These commenters indicated that this rule will result in a

restriction on loans to farmers for the production of crops because

many of these loans are dependent upon FSA program payments for

repayment. The respondents suggest that a lender will deny credit to a

farm borrower due to inadequate cash flow as a result of not being able

to include FSA program payments in their annual cash flow projections.

Several commenters also stated that bank rating agencies, such as the

Federal Deposit Insurance Corporation (FDIC) or the Office of the

Comptroller of the Currency (OCC) would rate as adverse any loans that

were dependent upon program payments for repayment. Similarly, several

respondents commented that this rule may make it difficult for a

borrower to pay irrigation accounts, credit accounts at farm supply

dealers, and other debts. Commenters requested that the Agency honor an

assignment or abide by Uniform Commercial Code (UCC) lien priorities on

payments, regardless of the status of the borrower's government loan.

Respondents suggested if the Agency proceeds with this change, FSA

should inform creditors and suppliers of the status of an FSA

borrower's loans.

As stated earlier, the intention of this rule is to increase the

use of administrative offset to pay Federal debt. The Agency does not

expect the availability of credit in rural areas to decrease as a

result. Generally, credit decisions are based on an analysis of the

total quality of an applicant's business, including the status of their

government loans. A prospective borrower's cash flow projections for

the upcoming production cycle are typically based on proven performance

capabilities and includes all income, expenses and debt payments. Since

this projection would include planned receipts from FSA program

payments and payments on FSA loans, a positive projection will likely

result in loan approval. If repayment is dependent on FSA program

payments, it may result in the denial of an annual operating loan to a

producer who is delinquent on his or her FSA farm credit loan if

administrative offset is a certainty. If a borrower is delinquent on

his or her loan with the Government, to the extent that offset may be

made, the availability of credit from commercial sources is doubtful in

any event.

FSA is in the process of amending its credit reporting procedures

to conform more closely to those in the commercial and consumer lending

community by reporting delinquent farm loan program borrowers to credit

reporting bureaus in accordance with the requirements of DCIA. This

will reduce the likelihood of a lender extending credit without

knowledge of the status of a borrower's FSA loan. In the case of a

borrower who is current on their FSA loan, this rule is not likely to

affect their ability to obtain credit. As far as lender regulatory

agencies are concerned, they are likely to view an annual production

loan that was approved by a lender without a complete business

projection as a potential problem loan and request appropriate

corrective action, regardless of the potential for administrative

offset. As one commenter indicated, OCC bases their standards on the

borrower's ability

[[Page 41797]]

to pay and this includes all income and all debt payments. Also, the

Agency's guaranteed loan program, which guarantees a lender against up

to 90 percent of any loss of principal and interest, may be used by

lenders to reduce their risk. This program requires a positive cash

flow considering all income sources and debt payments. As stated by

several commenters, FSA typically requires lenders to take an

assignment of farm program payments; but we expect few if any loans to

be approved with FSA income enhancement program payments as the sole

planned source of repayment. If the borrower becomes delinquent on the

borrower's direct loans and this payment is offset, it may be necessary

to service the guaranteed loan under one or more of the authorities

contained in 7 CFR part 1980, subpart B.

With regard to assignments, lien position, and bankruptcy this rule

changes little. Administrative offset has been available and utilized

for many years and a lien or assignment has had no effect when a debtor

owes money to a Federal agency. As stated earlier, this rule will

increase the use of administrative offset and lenders will have to

factor this into their loan making decisions. Nevertheless, when the

Agency assigns the FSA program payments that are to be paid to a

borrower that is current on his or her farm loan program loan at the

time of the assignment, the Agency expects the large majority of these

assignments to be honored. If default occurs, the Agency will do what

it can to assist the borrower in maintaining a viable operation, while

taking the necessary actions to protect the government's interests.

However, there is no assurance that administrative offset would not be

used. In the case of bankruptcy, FSA and all creditor collection

actions cease and the court will determine the uses of income,

distribution of security and disposition of debt.

Aside from reporting to credit bureaus, FSA will not automatically

inform another lender that a borrower has become delinquent on a loan

as requested by commenters. This notification would be inconsistent

with the requirements of the Privacy Act. However, as a result of farm

visits and other normal servicing of the loan, it is likely that a

lender that has extended operating credit will likely be aware of

repayment problems that may result from a decline in production and the

related risk of administrative offset. A natural disaster or unforeseen

drop in sales would require a joint effort from all creditors and

possibly the use of other FSA loan servicing authorities to correct the

delinquency and maintain the operation. If the borrower becomes

delinquent but can work out an agreement with the Agency to make the

payment, any assignment that was provided will be honored.

Furthermore, under the DCIA, a person is precluded from obtaining

any Federal financial assistance in the form of a loan (other than a

disaster loan), loan insurance, or a loan guarantee, while that person

is delinquent on a Federal debt, unless the head of the Agency waives

this prohibition. Therefore, the commenters' recommendations were not

adopted. If the Agency finds that the increased use of administrative

offset results in difficulty for agricultural producers to obtain

loans, FSA will consider taking actions to rectify any such problems.

Several commenters addressed the Agency's plans to issue internal

instructions for field office use in connection with this interim final

rule. The respondents indicated that the proposed rule was vague

regarding FSA's intentions to administratively allow waiver of the

offset. These instructions are to provide a consistent definition of

delinquency and timing of notification, a guide letter containing the

requirements of 7 CFR 3.25, and the national policy regarding the

documentation necessary to fulfill the requirements for a written

repayment agreement under 7 CFR 3.28. This is intended to ensure that

policies and paperwork requirements are uniformly applied nationwide.

These instructions will be available from local FSA offices upon

request.

Violation of the Agriculture Credit Act of 1987 (7 U.S.C. 1985)

Several commenters stated that this rule would violate the

Agricultural Credit Act of 1987 (Ag Credit Act) as amended by the Food,

Agriculture, Conservation, and Trade Act of 1990 and the Federal

Agricultural Improvement and Reform Act of 1996 (1996 Act). This Act

provides that ``the Secretary shall release from the normal income

security provided for such loan an amount sufficient to pay for the

essential household and farm operating expenses of the borrower, until

such time as the Secretary accelerates such loan.'' The Agency has

promulgated regulations at 7 CFR 1962.17 to implement this requirement.

Administrative offset and releases for essential expenses are

separate issues and the requirements of 7 CFR 1962.17 are not affected

by this change. FSA program payments will be administratively offset

prior to acceleration of the loan. However, offset is not the exercise

of collection from security. Offset is the administrative collection of

a debt due from funds due under another Government program. FSA may not

have a security interest in that payment or may have or may not have a

first security interest therein. FSA payments are not subject to

attachment, garnishment or lien interest until paid. Offset intercepts

these payments before they are made. The amounts obtained are not

normal income security and under DCIA may not be payable at all.

In another comment a respondent noted that the Agency has notified

many delinquent borrowers by sending exhibit A of 7 CFR part 1951,

subpart S that they would not be subject to administrative offset until

their account is accelerated. Therefore, they suggested that offsets

could not be employed to collect from these borrowers. This comment was

not adopted by the Agency. Notification to the borrower that offset

will not be used prior to acceleration does not create a binding

obligation by FSA to waive the offset forever. The Agency has

determined that the notification procedures under 7 CFR part 3, subpart

B, will provide the borrower with adequate notice of the intent to

offset and will specifically terminate the previous advice. The

language informing delinquent borrowers that FSA may offset only after

acceleration has been removed from the notices.

Several respondents stated that if the Agency had agreed to release

program payments on Form FmHA 1962-1, Agreement for the Use of

Proceeds/Release of Chattel Security, the Agency cannot alter this

agreement. In addition to the fact that these funds are not security

(as set out above), the Agency has authority to revise this agreement.

Form FmHA 1962-1 is based on the upcoming year's projections contained

on a Form FmHA 431-2, Farm and Home Plan, (farm plan) that was

completed by the borrower in accordance with 7 CFR part 1924, subpart

B. If the actual proceeds from the sale of chattel security are

substantially different from the plan, then the Form FmHA 1962-1 may be

revised. This form is revised whenever significant changes occur during

the year that will affect a borrower's repayment ability. If the

borrower and Agency cannot reach an agreement on revisions to the farm

plan, the borrower may appeal. If the borrower refuses to execute Form

FmHA 1962-1 as developed by the Agency after an appeal, the account

will be serviced under 7 CFR 1962.18. If the borrower

[[Page 41798]]

does not appeal, the planned releases documented on the revised Form

FmHA 1962-1 are binding.

Effect of National Appeals Division

Several commenters indicated that the proposed rule violated the

National Appeals Division (NAD) provisions of the Department of

Agriculture Reorganization Act of 1994 (1994 Act). Appeals of Agency

decisions to collect by offset will be heard and decided by NAD in

accordance with the offset regulations in 7 CFR part 3, subpart B, and

NAD regulations at 7 CFR part 11.

Effect of Federal Court Ruling

Several respondents commented that this rule violated the Federal

court ruling against USDA in the case of Coleman v. Block (562 F. Supp.

1353 (D.N.D. 1983); 580 F. Supp. 192 (D.N.D. 1983); 580 F. Supp. 194

(D.N.D. 1984)). This ruling requires FSA to give farmers sufficient due

process notification prior to taking forced collection actions.

Similarly, several commenters felt that the proposed rule was

unconstitutional because it deprived borrowers of their constitutional

rights of due process. The Agency agrees with the commenters that

notification is required before administrative offset. We disagree that

this rule violates due process provisions since under this regulation

all borrowers will receive notice of, and an opportunity to, challenge

the impending offset. The due process considerations required under

Coleman and the Ag Credit Act are contained in 7 CFR part 1951, subpart

S. The Coleman decision did not involve the Agency's administrative

offset regulations and the acceleration requirement contained in 7 CFR

1951.103 was not added as a result of the subject litigation or the

subsequent Ag Credit Act. In addition, 7 CFR part 3, subpart B contains

certain due process requirements that must be followed before offset

may be initiated. Regardless, the DCIA applies to all Federal loan

programs and contains no exceptions for the loans of the former FmHA.

This Act supersedes current regulations and any requirement that is

legally inconsistent is rendered obsolete.

The Departmental Regulation at 7 CFR part 3, subpart B, contains

similar protections for the borrower as the regulation that is being

deleted, except for the acceleration requirement. The feasibility of an

offset must be determined on a case by case basis; the practicality of

the offset must be determined; borrowers must be given 30 days notice

prior to offset; a borrower has 20 days to request a meeting after

receiving notice; the borrower may request a review of the offset by an

Agency official, the borrower may review the Agency's records; and the

borrower may reach a payment agreement with the Agency in lieu of the

offset.

At least six respondents commented that the Agency should attempt

to correct a delinquency under 7 CFR part 1951, subpart S, prior to

administrative offset. This comment is related to that of others who

suggested that the Agency more clearly define past due and not send the

notice of intent to collect by administrative offset until the borrower

is at least 90 days or up to 180 days past due. Notification

requirements for administrative offset are separate from those of debt

restructuring. When the necessary procedure has been completed,

administrative offset will be taken regardless of the status of any

request for servicing under the provisions of 7 CFR part 1951, subpart

S.

The comment that requested that borrowers be allowed to become at

least 90 days or up to 180 days past due before offsetting a payment

was considered. Due to the notification requirements discussed above,

and the statute, the application of these procedures will correspond to

the request for at least a 90 day delay. Notice of offset may not occur

until notice under Sec. 331D of the Consolidated Farm and Rural

Development Act has been provided. The Agency's administrative

requirements will provide for the Notice of Intent to Collect By

Administrative Offset simultaneously with or subsequent to the notice

required by Sec. 331D. Due to most FSA loan payments being due annually

from January to May, if the recommendation that the Agency not begin

offset procedures until the borrower is 180 days past due were adopted,

any FSA program payments made through at least June of every year would

not be subject to offset on newly delinquent accounts. Therefore, this

recommendation was not adopted in this rule.

Other miscellaneous comments were received that could be

paraphrased as general opposition to the proposal. At least four

commenters suggested that this change is not required to expedite

administrative offset. They indicated that the Agency's loan servicing

and appeal regulations have required time frames for actions that, if

properly followed, would result in account acceleration much earlier

than the months or years cited in the proposed rule. The Agency agrees

that employee oversight may result in cases of extended loan servicing.

However, even if every time frame contained in regulations is precisely

followed, it may result in acceleration taking long enough to allow a

seriously delinquent borrower to obtain several payments before offset

could be put into place. The Agency did not adopt this comment.

Immediate implementation of the rule is needed to comply with the

requirements of 31 U.S.C. 3716 as amended by the Debt Collection

Improvement Act of 1996, ch. 10 of Pub. L. 104-134 (April 26, 1996).

The changes are needed because as pointed out by a recent OIG

Management Alert over $65 million was paid out to delinquent farm

borrowers in 1995 and 1996. Of the $30.5 million paid to the 4,015

delinquent borrowers in calendar year 1996, $22 million were AMTA (also

known as PFC) payments and $5.5 million were CRP payments. The Agency

could collect several million dollars on delinquent farm loans if this

request is approved and the new regulation is in place prior to these

payments being made provided the rule is implemented immediately. The

next round of FSA payments to farmers will occur in September 1997,

therefore it is critical that this rule be published immediately.

List of Subjects in 7 CFR Part 1951

Accounting, Accounting servicing, Credit, Disaster assistance, Loan

programs--Agriculture, Low and moderate income housing.

Accordingly, part 1951 of Chapter XVIII of Title 7 of the Code of

Federal Regulations is amended as follows:

PART 1951--SERVICING AND COLLECTIONS

1. The authority citation for part 1951 is revised to read as

follows:

Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 31 U.S.C. 3716; and 42

U.S.C. 1480.

2. Section 1951.101 is revised to read as follows:

Sec. 1951.101 General.

The Federal Claims Collection Act of 1966 as amended by the Debt

Collection Act of 1982, the Deficit Reduction Act of 1984, and the Debt

Collection Amendments Act of 1996 provides for the use of

administrative, salary, and Internal Revenue Service (IRS) offsets by

government agencies, including the Farm Service Agency (FSA), Rural

Housing Service (RHS), Rural Utility Service (RUS) for its water and

waste programs, and Rural Business-Cooperative Service (RBS), herein

referred to collectively as ``USDA Agency,'' to collect delinquent

debts.

[[Page 41799]]

Any money that is or may become payable from the United States to a

individual or entity indebted to a USDA Agency or other individual or

entity indebted to a USDA Agency may be subject to offset for the

collection of a debt owed to a USDA Agency. In addition, money may be

collected from the debtor's retirement payments for delinquent amounts

owed to the USDA Agency if the debtor is an employee or retiree of a

Federal agency, the U.S. Postal Service, the Postal Rate Commission, or

a member of the U.S. Armed Forces or the Reserve. Amounts collected

will be processed as regular payments and credited to the borrower's

account. USDA Agencies will process requests by other Federal agencies

for offset in accordance with Sec. 1951.102 of this subpart. This

subpart does not apply to direct single family housing loans.

3. Section 1951.102 is revised to read as follows:

Sec. 1951.102 Administrative offset.

Action to effect administrative offset to recover delinquent claims

may be taken in accordance with the procedures in 7 CFR part 3, subpart

B.

Secs. 1951.103-1951.105 [Removed and Reserved]

4. Sections 1951.103 through 1951.105 are removed and reserved.

5. Section 1951.111 is amended in introductory text paragraph (a)

and (a)(2) by changing the words ``FmHA or its successor agency under

Public Law 103-354'' to read ``USDA Agency''; by revising the phrase

``FmHA or its successor agency under Public Law 103-354's'' in

paragraph (a)(1) to read ``USDA Agency''; by amending paragraph (b)(1)

by adding the words ``State Executive Directors;'' after the words

``State Directors;'' and by revising the introductory text to read as

follows:

Sec. 1951.111 Salary offset.

Salary offset may be used to collect debts arising from delinquent

USDA Agency loans and other debts which arise through such activities

as theft, embezzlement, fraud, salary overpayments, under withholding

of amounts payable for life and health insurance, and any amount owed

by former employees from loss of federal funds through negligence and

other matters. Salary offset may also be used by other Federal agencies

to collect delinquencies or debts owed to them by employees of the USDA

Agency, excluding County Committee members. Administrative offset,

rather than salary offset, will be used to collect money from federal

employee retirement benefits. Salary offset will not be initiated until

after other servicing options available to the borrower have been

utilized. In addition, for Farm Loan Programs loans, salary offset will

not be instituted if the federal salary has been considered on the Farm

and Home Plan, and it was determined the funds were to be used for

another purpose other than payment on the USDA Agency loan. When salary

offset is used, payment for the debt will be deducted from the

employee's pay and sent directly to the creditor agency. Not more than

15 percent of the employee's disposable pay can be offset per pay

period, unless the employee agrees to a larger amount. The debt does

not have to be reduced to judgment or be undisputed, and the payment

does not have to be covered by a security instrument. This section

describes the procedures which must be followed before the USDA Agency

can ask a Federal agency to offset any amount. Decisions made under

this section are subject to the appeal procedures of 7 CFR part 11.

* * * * *

Signed in Washington, D.C., on July 25, 1997.

Dated: July 25, 1997.

James W. Schroeder,

Acting Under Secretary for Farm and Foreign Agricultural Services.

Jill Long Thompson,

Under Secretary for Rural Development.

[FR Doc. 97-20395 Filed 7-31-97; 8:45 am]

BILLING CODE 3410-05-P