Implementation of the Direct and Guaranteed Loan Making Provisions of the Federal Agricultural Improvement Act of 1996

[Federal Register Volume 62, Number 41 (Monday, March 3, 1997)]

[Rules and Regulations]

[Pages 9351-9359]

From the Federal Register Online via the Government Publishing Office [www.gpo.gov]

[FR Doc No: 97-4840]

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Rules and Regulations

Federal Register

________________________________________________________________________

This section of the FEDERAL REGISTER contains regulatory documents

having general applicability and legal effect, most of which are keyed

to and codified in the Code of Federal Regulations, which is published

under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents.

Prices of new books are listed in the first FEDERAL REGISTER issue of each

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Federal Register / Vol. 62, No. 41 / Monday, March 3, 1997 / Rules

and Regulations

[[Page 9351]]

DEPARTMENT OF AGRICULTURE

Farm Service Agency

Rural Housing Service

Rural Business-Cooperative Service

Rural Utilities Service

7 CFR Parts 1910, 1941, 1943, 1945, and 1980

RIN 0560-AE87

Implementation of the Direct and Guaranteed Loan Making

Provisions of the Federal Agricultural Improvement Act of 1996

AGENCY: Farm Service Agency, Rural Housing Service, Rural Business-

Cooperative Service, and Rural Utilities Service, USDA.

ACTION: Interim rule with request for comments.

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SUMMARY: This action is being taken to implement provisions of the

Federal Agriculture Improvement and Reform Act of 1996 (1996 Act),

which affect the making of direct and guaranteed farm credit program

loans of the Farm Service Agency (FSA), formerly administered by the

Farmers Home Administration (FmHA). This action is required by the 1996

Act, provisions of which were effective upon enactment or 90 days after

enactment. The intended effect is to complement provisions of the 1996

Act and improve FSA's direct and guaranteed farm credit loan making

function.

DATES: Effective March 24, 1997. Comments must be submitted by May 2,

1997.

ADDRESSES: Submit written comments to the Director, Farm Credit

Programs Loan Making Division, Farm Service Agency, Stop 0522, Post

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

FOR FURTHER INFORMATION CONTACT:

Steven R. Bazzell, Senior Loan Officer, Farm Service Agency. Telephone:

202-720-3889; facsimile: 202-690-1117; or e-mail:

[email protected]

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This rule was determined significant and was reviewed by the Office

of Management and Budget under Executive Order 12866.

Regulatory Flexibility Act

The Regulatory Flexibility Act is not applicable to this rule since

the Farm Service Agency (FSA) is not required by 5 U.S.C. 553, or any

other provision of law, to publish a notice of proposed rulemaking to

effect these administrative changes. See section 663(d) of the 1966

Act.

The Unfunded Mandate Reform Act of 1995

Title II of the Unfunded Mandate Reform Act of 1995 (UMRA) Pub. L.

104-4, established requirements for Federal agencies to assess the

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

governments and the private sector. Under section 202 of the UMRA, FSA

generally must prepare a written statement, including a cost-benefit

analysis, for the proposed and final rules with ``Federal mandates''

that may result in expenditures to State, local, or 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 FSA 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

objective of the rule.

This rule contains no Federal mandates (under regulatory provisions

of title II of the UMRA) for State, local, and tribal governments or

the private sector. Thus, this rule is not subject to the requirements

of section 202 and 205 of the UMRA.

Environmental Evaluation

This action has no significant impact on the quality of the

environment, and therefore, neither an Environmental Assessment nor an

Environmental Impact Statement is required.

Executive Order 12778

This interim rule has been reviewed under Executive Order 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 the agency

procedures, or those regulations published by the Department of

Agriculture to implement the provisions of the National Appeals

Division as mandated by the Department of Agriculture Reorganization

Act of 1994 (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.

For reasons set forth in the Notice to 7 CFR part 3015, subpart V

(48 FR 29115, June 24, 1983) the programs within this rule are excluded

from the scope of Executive Order 12372, which requires

intergovernmental consultation with State and local officials.

Paperwork Reduction Act

This interim rule does not impose any new information collection or

recordkeeping requirements; however, the provisions of the 1996 Act do

eliminate the need for some information previously collected and result

in a revision to the number of estimated respondents from whom

information will be collected. Therefore, the Agency is revising the

information collection currently approved in support of the Direct Farm

Ownership Loan program regulations under the Office of Management and

Budget (OMB) control number 0560-0157 and the Application for Direct

Loan Assistance under OMB control number 0560-1067. The Agency will

publish a Federal Register notice in the near future requesting

comments for a 60-day period regarding revisions resulting from the

1996 Act; increases or decreases in program activity; and, changes to

the estimated responses per respondent and estimated average hours per

response. OMB emergency clearance has been obtained to allow continued

use of the affected regulations and forms under OMB control number

0560-0173.

Discussion of the Interim Rule

The 1996 Act required certain provisions to be implemented no later

[[Page 9352]]

than 90 days from April 4, 1996, the date of enactment. Section 374 of

the Consolidated Farm and Rural Development Act (CONACT) as added by

section 649 of the 1996 Act, requires streamlined compliance

certifications for applicants and borrowers. Implementation of this

section does not require a regulatory change; instead, the Agency will

revise the loan application to implement section 374. The other

specific changes to the loan making provisions of the FSA farm credit

programs are discussed by loan program as follows:

Operating Loan (OL) Program

Subject to the limitations discussed below in the ``transition

rule,'' the 1996 Act restricts direct OL eligibility to farmers and

ranchers who meet the definition of a beginning farmer or rancher, but

who have operated a farm or ranch for 5 year or less, or who have not

previously received direct OL loans in more than 6 different years, and

who have not had a CONACT debt forgiven through a write down or write

off under section 353 of the CONACT, a compromise, adjustment,

reduction, or charge-off of a debt or claim under section 331 of the

CONACT, payment of a loss on a guaranteed loan under section 357 of the

CONACT, or through the discharge of any portion of a debt as a result

of bankruptcy. This restriction applies to all parties who have

executed a promissory note. The 1996 Act did stipulate that borrowers

who obtained a write-down on a direct or guaranteed loan under section

353 of the CONACT would remain eligible for direct and guaranteed OL

loans to pay farm and ranch annual operating expenses, which includes

family subsistence expenses. A transition rule provides that if on

April 4, 1996, a farmer or rancher had received direct OL loans in 4 or

more previous years, the applicant is eligible for new direct OL loans

for 3 additional years. The 4 or more previous years' OL loans may have

been received in non-consecutive years. The new direct OL loans may

also be made to the applicant in non-consecutive years. The loan

repayment term and the time that a loan is outstanding are not

considerations. In establishing the 5 years of experience, the 1996 Act

specifically states that Rural Youth loans do not qualify as the

operation of a farm or ranch. However, the Agency has never considered

the recipient of a Youth Loan as a farm operator for establishing

experience levels and this provision represents no change in regulatory

procedures. The 1996 Act does specifically state that Youth Loans do

not count against the recipient with regard to the OL eligibility time

limits. A minor clarification has been added to state that Youth Loan

purposes may be broader than regular operating loan purposes. For

direct and guaranteed OL loans, the 1996 Act has changed the definition

of a beginning farmer to eliminate the restriction that applicants may

not own farm or ranch property that is greater than 25 percent of the

median farm size. Direct OL loan purposes have been narrowed to

eliminate non-farm enterprise, recreation, pollution abatement and

control, small business, and solar energy as explicit loan purposes.

The special beginning farmer or rancher operating loan assistance

provisions have been removed because sections 318 and 310F of the

CONACT were repealed by the 1996 Act. In addition, the prior statutory

provision that required the Agency to extend additional direct annual

operating loans to borrowers in default on loans with the Agency has

been effectively eliminated. Debt refinancing under the direct OL loan

program is still an eligible loan purpose but is now restricted under

the 1996 Act, as follows: Applicants are eligible for refinancing with

direct OL funds providing they have had direct or guaranteed OL loans

refinanced 4 times or less, and they meet one of the following two

conditions: (1) The applicant is an existing direct loan borrower who

has suffered a qualifying loss because of a disaster declared by the

President or designated by the Secretary, or (2) is an applicant

refinancing a debt owed to a non-USDA creditor. The direct loan

borrower referred to in (1) above may be indebted for any type of

direct loan under the CONACT. The restriction on the number of times

that OL loans may be refinanced will have little impact since the

Agency very rarely ``refinances'' its own loans, which involves

obtaining a new promissory note and obligating new funds. A lender who

refinances a borrower's direct OL loan with an Agency loan guarantee

will receive a 95-percent guarantee on the total unpaid amount of the

direct loan refinanced. Borrowers participating in Agency's down

payment farm ownership loan program will also receive 95-percent

guarantees on their guaranteed FO or OL loans. The 1996 Act directs the

Agency to use the current definition of war found in 38 U.S.C. section

101(12) to determine eligibility for veteran's preference. This change

makes veterans of the Persian Gulf War eligible for preferential

funding when there is a shortage of funds. Farmers and ranchers must

comply with the catastrophic risk protection insurance (CAT)

requirement by either obtaining at least the CAT coverage level on

economically significant crops, or waiving their eligibility for

emergency crop loss assistance in connection with the uninsured crop.

However, FSA direct emergency (EM) loss loan assistance is not

considered emergency crop loss assistance for the purposes of

implementing this statutory provision. In addition, chattel property

acquired with direct OL loans must be covered by general hazard

insurance at the tax or cost depreciated value of the property,

whichever is less. Real estate serving as primary security must also be

covered by insurance in accordance with 7 CFR part 1806, subpart A. A

transition provision in section 2002 of the Omnibus Consolidated

Rescissions and Appropriations Act of 1996 authorizes making and

guaranteeing OL and EM loans as in effect prior to the date of

enactment of the 1996 Act to a loan applicant less than 90-days

delinquent on that date that had already submitted an application for

the loan.

Farm Ownership (FO) Program

The 1996 Act restricts direct FO eligibility to an applicant who

has at least 3 years experience operating a farm or ranch and who

either (1) meets the Agency's regulatory definition of a beginning

farmer or rancher, or (2) has never received a direct FO loan, or (3)

has not had a direct FO loan outstanding for more than 10 years before

the new direct FO loan would be closed. In establishing the 3 years of

experience, the 1996 Act specifically states that rural Youth loans do

not qualify as the operation of a farm or ranch. However, as with the

direct OL loan program, this is not a departure from previous Agency

regulations on establishing experience levels. The 1996 Act contains a

transition rule for existing borrowers, which allows (1) borrowers who,

on April 4, 1996, the date of enactment of the 1996 Act, had a direct

FO loan outstanding for less than 5 years to receive additional direct

FO loans for 10 more years from April 4, 1996; and (2) 5 additional

years for borrowers who had a direct FO loan outstanding for 5 or more

years on April 4, 1996. The 1996 Act has changed the definition of a

beginning farmer to raise the maximum amount of farm or ranch property

that may be owned from 15 to 25 percent of the median farm size in

which the property is located. However, the Agency will continue to use

the mean rather than the median farm size in this definition since

median farm sizes are unavailable in the Census of Agriculture. The

scope of direct FO loan

[[Page 9353]]

purposes has been reduced by eliminating debt refinancing, pollution

abatement and control, non-farm enterprises, non-fossil energy systems,

and recreation uses and facilities as explicit loan purposes.

Guaranteed FO loan purposes mirror the changes in the direct FO

program, with the exception that refinancing remains as eligible

guaranteed FO loan purpose. In fact, the 1996 Act provides a 95-

percent, as opposed to the normal 90-percent maximum, guarantee of

unpaid principal and interest when the loan purpose is to refinance

direct loan debts owned to the Agency. Hazard insurance is required by

the 1996 Act as a direct FO loan condition. The FO applicant must

provide evidence that hazard insurance has been obtained on any real

estate improvements securing an FO loan. Farmers and ranchers must also

comply with the catastrophic risk protection insurance (CAT)

requirement by either obtaining at least the CAT coverage level on

economically significant crops, or waiving their eligibility for

emergency crop loss assistance in connection with the uninsured crop.

FSA direct emergency (EM) loss loan assistance is not considered

emergency crop loss assistance for the purposes of implementing this

statutory provision. The 1996 Act allows the Agency to provide a four

percent minimum interest rate to direct FO borrowers who obtain at

least 50 percent of their real estate financing needs from a private

creditor, with or without an FSA loan guarantee. The Agency's

regulations establish a minimum of four percent in accordance with the

1996 Act, with the intention that the Agency will adjust the rate

periodically to reflect budgetary constraints and overall demand for

direct FO loan funds. The 1996 Act stipulates that the Agency use the

current definition of war found in 38 U.S.C. section 101(12) to

determine eligibility for veteran's preference. This extends

preferential treatment to veterans of the Persian Gulf war when there

is a shortage of funds. Guaranteed FO loans made to eligible applicants

participating in the Down payment Loan program will have their loans

guaranteed at the rate of 95 percent.

Emergency (EM) Loan Program

Rather than the previous statutory requirement for crop insurance

to have covered crops affected by a disaster as a result of which an EM

loan is sought, hazard insurance now must have covered property on

which a farmer or rancher is seeking an EM physical loss loan. The

minimum level of coverage must have been at the tax or cost depreciated

value, whichever is less. Farmers and ranchers must also comply with

the catastrophic risk protection insurance (CAT) requirement by either

obtaining at least the CAT coverage level on economically significant

crops, or waiving their eligibility for emergency crop loss assistance

in connection with the uninsured crop. FSA direct EM loss loan

assistance is not considered emergency crop loss assistance for the

purposes of implementing this statutory provision. The test for credit

threshold has been reduced from $300,000 to $100,00, which requires

applicants with EM requests of greater than $100,000 to apply at a

minimum of three commercial lenders to ensure that private credit, with

or without an FSA loan guarantee, is unavailable. The maximum level of

EM principal indebtedness has been reduced from $500,000 per qualified

natural disaster to a total outstanding principal indebtedness of

$500,000 per borrower. The financing of non-farm enterprises is no

longer an eligible EM loan purpose. The procedure for appraising an EM

applicant's agricultural assets to establish the security value has

been changed. The Agency was previously required to use the higher of

two market values for collateral valuation purposes. The first

appraisal reflected the market value of the property 1 day before the

State Governor's request to the Secretary for an EM disaster

designation, while the second value reflected the market value 1 year

and 1 day before the State Governor's request to the Secretary. The

Agency will now use the market value 1 day before the first day of the

disaster's incidence period.

List of Subjects

7 CFR Part 1910

Application processing, Loan programs-agriculture.

7 CFR Part 1941 and 1943

Applicant eligibility, Beginning farmers and ranchers, Loan

programs-agriculture.

7 CFR Part 1945

Disaster assistance, Loan programs-agriculture.

7 CFR Part 1980

Beginning farmers and ranchers, Loan guarantees, Loan programs-

agriculture.

For the reasons set forth in the preamble, 7 CFR chapter XVIII is

amended as follows:

PART 1910--GENERAL

1. The authority citation for part 1910 continues to read as

follows:

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

Subpart A--Receiving and Processing Applications

Sec. 1910.1 [Amended]

2. Section 1910.1 is amended by removing the last sentence of

paragraph (a).

Sec. 1910.3 [Amended]

3. Section 1910.3 is amended in paragraph (c) by:

a. Removing the third sentence; and

b. Removing the words ``type entity as set out in FmHA loan making

regulations'' in the ninth sentence.

Sec. 1910.4 [Amended]

4. Section 1910.4 is amended by:

a. Removing paragraph (b)(19);

b. Redesignating paragraphs (b)(20) through (b)(23) as (b)(19)

through (b)(22), respectively; and

c. Removing the words ``and the Acquisition/Leasing of Agency

Acquired Farmland'' from the title and from the first sentence of

paragraph (f).

5. Section 1910.10 is amended by revising paragraph (a)(1) to read

as follows:

Sec. 1910.10 Preference.

(a) * * *

(1) Veteran's preference is given to any person applying for an RH,

FO, SW, or OL loan who has been honorably discharged, including

clemency discharges, or released from the active forces of the U.S.

Army, Navy, Air Force, Marine Corps, or Coast Guard, and who served

during a period of war, as defined in 38 U.S.C. 101(12).

* * * * *

PART 1941--OPERATING LOANS

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

follows:

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

Sec. 1941.4 [Amended]

7. Section 1941.4 is amended by:

a. Adding the words ``Except for OL loan purposes,'' at the

beginning of paragraph (e) in the definition of ``Beginning farmer or

rancher,''

b. Removing the number ``15'' and adding the number ``25'' in its

place in the first sentence of paragraph (e) of the definition of

``Beginning farmer or rancher,''

c. Removing the third sentence from the definition of ``Cosigner;''

d. Removing the words ``and nonfarm'' from the introductory text of

paragraph (d) of the definition of a ``Family farm,''

[[Page 9354]]

e. Removing the second sentence from the definition of a ``Farm;''

f. Removing all of the text before the semi-colon that follows the

word ``debts'' in paragraph (b) of the definition of a ``Feasible

plan;''

g. Removing the third sentence from the definition of a

``Financially viable operation;''

h. Removing the second sentence from the definition of ``Nonfarm

enterprise''; and

i. Removing the definition of a ``Recreation enterprise.''

8. Section 1941.12 is amended by adding new paragraphs (a)(8),

(a)(9), (a)(10), (a)(11), (b)(9), (b)(10), (b)(11), and (b)(12) to read

as follows:

Sec. 1941.12 Eligibility requirements.

* * * * *

(a) * * *

(8) Meet the definition of a beginning farmer or rancher, but have

operated a farm or ranch for 5 years or less, or the applicant, or

anyone who will execute the promissory note, has not had direct OL

loans closed in more than 6 different years prior to the year in which

the new direct OL loan is closed. Youth Loans are not counted as direct

OL loans for the purpose of this paragraph.

(9) Transition rule. An applicant is eligible for new direct OL

loans for 3 additional years if as of April 4, 1996, the applicant, or

anyone who will execute the promissory note, had direct OL loans closed

in 4 or more separate years prior to the year in which the new direct

OL loan is closed. The 4 previous years' direct OL loans, as well as

the 3 additional years of new direct OL loans, may be in non-

consecutive years.

(10) Have not caused the Agency a loss by receiving debt

forgiveness on all or a portion of any direct or guaranteed loan made

under the authority of the Consolidated Farm and Rural Development Act

(CONACT) by debt-write down, write-off, compromise under the provisions

of section 331 of the CONACT, adjustment, reduction, charge-off or

discharge in bankruptcy or through any payment of a guaranteed loss

claim under the same circumstances. Notwithstanding the restrictive

provisions of this paragraph, applicants who received a write-down

under section 353 of the CONACT may receive direct and guaranteed OL

loans to pay annual farm and ranch operating expenses, which includes

family subsistence if the applicant meets all other eligibility

requirements.

(11) Not be delinquent on any direct or guaranteed loan made under

the provisions of the CONACT. Notwithstanding the provisions of this

paragraph, an operating loan may be made or guaranteed under the

provisions of subtitle B of the CONACT as in effect on April 3, 1996,

if the applicant was less than 90-days delinquent on April 4, 1996, and

had submitted an application prior to April 5, 1996.

(b) * * *

(9) Have at least one member of the business entity who meets the

definition of a beginning farmer or rancher, but has operated a farm or

ranch for 5 years or less. Also, the applicant, or anyone who will

execute the promissory note, must not have had direct OL loans closed

in more than 6 different years prior to the year in which the new

direct OL loan is closed. Youth Loans are not counted as direct OL

loans for the purpose of this paragraph.

(10) Transition rule. An applicant is eligible for new direct OL

loans for 3 additional years if as of April 4, 1996, the applicant, or

anyone who will execute the promissory note, had direct OL loans closed

in 4 or more separate years prior to the year in which the new direct

OL is closed. The 4 previous years' OL loans, as well as the 3

additional years of new direct OL loans, may be in non-consecutive

years.

(11) Have not caused the Agency a loss by receiving debt

forgiveness on all or a portion of any direct or guaranteed loan made

under the authority of the Consolidated Farm and Rural Development Act

(CONACT) by debt-write down, write-off, compromise under the provisions

of section 331 of the CONACT, adjustment, reduction, charge-off or

discharge in bankruptcy or through any payment of a guaranteed loss

claim under the same circumstances. Notwithstanding the restrictive

provisions of this paragraph, applicants who received a write-down

under section 353 of the CONACT may receive direct and guaranteed OL

loans to pay annual farm and ranch operating expenses, which includes

family subsistence if the applicant meets all other eligibility

requirements.

(12) Not be delinquent on any direct or guaranteed loan made under

the provisions of the CONACT. Notwithstanding the provisions of this

paragraph, an operating loan may be made or guaranteed under the

provisions of subtitle B of the CONACT as in effect on April 3, 1996,

if the applicant was less than 90-days delinquent on April 4, 1996, and

had submitted an application prior to April 5, 1996.

* * * * *

Secs. 1941.14 and 1941.15 [Removed and Reserved]

9. Sections 1941.14 and 1941.15 are removed and reserved.

10. Section 1941.16 is revised to read as follows:

Sec. 1941.16 Loan purposes.

An applicant who obtained a write-down under direct or guaranteed

loan authorities is restricted to the purposes listed under paragraphs

(c), (g) and (h) of this section. All other eligible applicants may

only request OL funds for any of the following purposes:

(a) Payment of costs associated with reorganizing a farm or ranch

to improve its profitability.

(b) Purchase of livestock, including poultry, and farm or ranch

equipment, including quotas and bases, and cooperative stock for

credit, production, processing or marketing purposes.

(c) Payment of annual operating expenses, examples of which

include, but are not exclusively limited to feed, seed, fertilizer,

pesticides, farm or ranch supplies, cooperative stock, and cash rent.

(d) Payment of costs associated with land and water development for

conservation or use purposes.

(e) Payment of loan closing costs.

(f) Payment of costs associated with complying with Federal or

State-approved standards under the Occupational Safety and Health Act

of 1970 (29 U.S.C. 655 and 667). This purpose is limited to applicants

who demonstrate that compliance with the standards will cause them

substantial economic injury.

(g) Payment of training costs required or recommended by the

Agency.

(h) Payment of farm, ranch, or home needs, including family

subsistence. A portion of the loan is available to the borrower for use

outside of a supervised bank account. This portion is the lesser of:

(1) 10 percent of the OL loan;

(2) $5,000; or

(3) The amount needed to meet the subsistence needs of the family

for a 3-month period.

(i) Refinancing debts if the applicant has had direct or guaranteed

OL loans refinanced (refinanced does not mean restructured) 4 times or

less and one of the following conditions is met:

(1) The need for refinancing was caused by a qualifying disaster

declared by the President or designated by the Secretary; or

(2) The debts to be refinanced are owned to a non-USDA creditor.

Sec. 1941.17 [Amended]

11. Section 1941.17 is amended by removing paragraphs (a) and (f),

and by

[[Page 9355]]

redesignating paragraphs (b) through (e) as (a) through (d),

respectively.

12. Section 1941.32 is revised to read as follows:

Sec. 1941.32 Catastrophic Risk Protection (CAT) insurance requirement.

Applicants must comply with the CAT insurance requirement no later

than loan closing by either:

(1) Obtaining at least the CAT level of coverage, if available, for

each crop of economic significance as defined by the Federal Crop

Insurance Corporation, or,

(2) By waiving eligibility of emergency crop loss assistance in

connection with the uninsured crop. FSA emergency (EM) loss loan

assistance is not considered emergency crop loss assistance for the

purpose of the crop insurance waiver on the uninsured crop.

Subpart B--Closing Loans Secured by Chattels

13. Section 1941.88 is amended by:

a. Removing the introductory text;

b. Removing paragraph (c);

c. Redesignating paragraph (a) and (b) as (b) and (c),

respectively;

d. Amending paragraph (d) by removing all of the text between the

words ``Borrowers'' and ``should'' located in the first sentence; and

e. Adding a new paragraph (a); and revising redesignated paragraph

(c) to read as follows:

Sec. 1941.88 Insurance.

(a) Catastrophic Risk Protection (CAT) insurance requirement.

Applicants must obtain at least the CAT level of crop insurance of

coverage for each crop of economic significance, as defined by the

Federal Crop Insurance Corporation, if such coverage is offered. The

applicant can meet this requirement by either:

(1) Obtaining at least the CAT level of coverage or,

(2) Waiving eligibility for emergency crop loss assistance in

connection with the uninsured crop. EM loss loan assistance is not

considered emergency crop loss assistance for purposes of this waiver.

* * * * *

(c) Chattels and real estate. Chattel property that secures OL

loans must be covered by hazard insurance unless the Agency determines

that coverage is not readily available or the benefit of the coverage

is more than its cost. When insured, chattel property must at least be

covered at its tax or cost depreciated value, whichever is less. Real

property must be covered by general hazard and flood insurance in

accordance with subparts A and B of part 1806 of this chapter.

* * * * *

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

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

follows:

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

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

Authorizations

Sec. 1943.4 [Amended]

15. Section 1943.4 is amended by:

a. Removing ``A beginning farmer'' and adding ``Except for OL loan

purposes, a beginning farmer'' in its place at the beginning of

paragraph (e) of the definition of ``Beginning farmer or rancher;''

b. Removing the number ``15'' and adding the number ``25'' in its

place in the first sentence of paragraph (e) of the definition of

``Beginning farmer or rancher;''

c. Removing the third sentence from the definition of ``Cosigner;''

d. Removing the words ``and nonfarm'' from the introductory text of

paragraph (d) of the definition of a ``Family farm.''

e. Removing the second sentence from the definition of ``Farm.''

f. Removing all the text to the end of the sentence following the

word ``debts'' in paragraph (b) of the definition of a ``Feasible

plan;'' and

g. Removing the second sentence of the definition of ``Nonfarm

enterprise.''

16. Section 1943.12 is amended by:

a. Removing the words ``and operating'' and the parenthetical text

``(1 year's complete production and marketing cycle within the last 5

years)'' from paragraph (a)(3);

b. Removing the words ``and operating'' and the parenthetical text

``(1 year's complete production and marketing cycle within the last 5

years)'' from paragraph (b)(4)(ii); and

c. Adding new paragraphs (a)(8), (a)(9), (a)(10), (a)(11), (b)(8),

(b)(9), (b)(10) and (b)(11) to read as follows:

Sec. 1943.12 Farm ownership loan eligibility requirements.

* * * * *

(a) * * *

(8) Have operated a farm or ranch for at least 3 years and satisfy

at least one of the following conditions:

(i) Meet the definition of a beginning farmer or rancher.

(ii) The applicant, or anyone who will execute the promissory note,

has not had direct FO loans outstanding for more than a total of 10

years prior to the date that the new FO loan is closed.

(iii) Have never received a direct FO loan.

(9) Transition rule. This applies to applicants with direct FO

loans outstanding on April 4, 1996.

(i) If the applicant, or anyone who executed the promissory note,

had direct FO loans outstanding for less than 5 years, the applicant is

eligible for new direct FO loans through April 4, 2006.

(ii) If the applicant, or anyone who executed the promissory note,

had direct FO loans outstanding for 5 years or more, those parties are

eligible for new direct FO loans through April 4, 2001.

(10) Have not caused the Agency a loss by receiving debt

forgiveness on all or a portion of any direct or guaranteed loan made

under the authority of the Consolidated Farm and Rural Development Act

(CONACT) by debt-write down, write-off, compromise provisions of

section 331 of the CONACT, adjustment, reduction, charge-off or

discharge in bankruptcy or through any payment of a guaranteed loss

claim under the same circumstances.

(11) Not be delinquent on any direct or guaranteed loan made under

the provisions of the CONACT.

(b) * * *

(8) Have one or more members, constituting a majority interest in

the business entity, who have operated a farm or ranch for at least 3

years and who satisfy one of the following conditions:

(i) Meet the definition of a beginning farmer or rancher.

(ii) The applicant, or anyone who will execute the promissory note,

has not had direct FO loans outstanding for more than a total of 10

years prior to the date that the new FO loan is closed.

(iii) Have never received a direct FO loan.

(9) Transition rule. This applies to business entity applicants

with direct FO loans outstanding on April 4, 1996.

(i) If the applicant, or anyone who executed the promissory note,

had direct FO loans outstanding for less than 5 years, the applicant is

eligible for new direct FO loans through April 4, 2006.

(ii) If the applicant, or anyone who executed the promissory note,

had direct FO loans outstanding for 5 years or more, those parties are

eligible for new direct FO loans through April 4, 2001.

(10) Have not caused the Agency a loss by receiving debt

forgiveness on all or a portion of any direct or guaranteed loan made

under the authority of the Consolidated Farm and Rural Development Act

(CONACT) by debt-write down, write-off, compromise provisions of

section 331 of the CONACT, adjustment, reduction, charge-off or

discharge in bankruptcy or through any payment of a guaranteed loss

claim under the same circumstances.

[[Page 9356]]

(11) Not be delinquent on any direct or guaranteed loan made under

the provisions of the CONACT.

* * * * *

17-18. Section 1943.16 is revised to read as follows:

Sec. 1943.16 Loan purposes.

Loan funds may only be used to:

(a) Acquire or enlarge a farm or ranch. Examples of items that the

Agency may authorize the use of FO funds for include, but are not

limited to, the purchase of easements, the applicant's portion of land

being subdivided, purchase of cooperative stock, appraisal and survey

fees, and participation in special FO loan programs of this subpart.

Down payments are authorized as a loan purpose subject to the

following:

(1) A deed is obtained and the transaction is properly documented

by debt and security instruments.

(2) Any prior liens meet the FO security requirements for the

Agency's junior lien position.

(3) For contract purchases, purchase contracts must properly

obligate the buyer and seller to fulfill the terms of the contract,

provide the buyer with possession, control and beneficial use of the

property, and entitle the buyer to marketable title upon fulfillment of

the contract terms. The deed must be held in trust by a bonded agent

until transferred to the buyer. Upon buyer's default, the seller must

give the Agency written notice of the default and a reasonable

opportunity to cure the default. Any sums advanced by the Agency must

be repaid by the borrower.

(b) Make capital improvements. Examples of items that the Agency

may authorize the use of FO funds for include, but are not limited to,

the construction, purchase and improvement of farm dwellings, service

buildings, and facilities that can be made fixtures to the real estate.

(c) Promote soil and water conservation and protection. Examples

include the correction of well-defined, hazardous environmental

conditions, and the construction or installation of tiles, terraces,

and waterways.

(d) Pay closing costs.

Sec. 1943.17 [Amended]

19. Section 1943.17 is amended by removing paragraphs (a)(4) and

(a)(5).

20. Section 1943.18 is amended by revising paragraph (b)(2) and

adding a new paragraph (c) to read as follows:

Sec. 1943.18 Rates and terms.

* * * * *

(b) * * *

(2) The farm business plan shows that installments at the higher

rate, along with other debts, cannot be paid during the period of the

plan.

* * * * *

(c) Interest rate with joint financing. When the applicant obtains

financing from a private lender equivalent to 50 percent or more of the

total funds needed, the interest rate on the direct FO loan will be

fixed at a rate determined by the Agency Administrator but at not less

than 4 percent for the term of the loan. The current rate is available

in FSA offices.

Sec. 1943.19 [Amended]

21. Section 1943.19 is amended by:

a. Removing the word ``refinanced'' from the first sentence in

paragraphs (a)(1) and (d)(3); and

b. Removing the words ``or refinanced'' from the first sentence in

paragraph (b)(1).

Sec. 1943.23 [Amended]

22. Section 1943.23 is amended by:

a. Removing the words ``or nonfarm enterprise'' from the first

sentence of paragraph (g)(1); and

b. Removing paragraphs (g)(3) and (g)(4).

23. Section 1943.24 is amended by:

a. Removing the words ``nonfarm enterprise facility or'' from the

third sentence of paragraph (a);

b. Removing the words ``, including any nonfarm enterprise,'' from

the first sentence in paragraph (b)(1);

c. Removing paragraph (b)(1)(iv);

d. Removing the words ``and any nonfarm enterprise'' from the first

sentence of paragraph (c);

e. Removing paragraph (d)(3) and (d)(4);

f. Redesignating paragraph (d)(2) as (d)(3);

g. Removing paragraph (f);

h. Redesignating paragraphs (g) through (k) as (f) through (j),

respectively; and

i. Revising paragraph (d)(1) and adding a new paragraph (d)(2) to

read as follows:

Sec. 1943.24 Special requirements.

* * * * *

(d) * * *

(1) Insurance must be obtained on any property acquired with, or

serving as primary security on an FO loan in accordance with subpart A

of part 1806 of this chapter.

(2) Applicants must comply with the catastrophic risk protection

insurance (CAT) requirement by either:

(i) Obtaining at least the available CAT level of coverage for each

crop of economic significance, as defined by the Federal Crop Insurance

Corporation, or

(ii) Waiving eligibility for emergency crop loss assistance in

connection with the uninsured crop. FSA emergency (EM) loss loan

assistance is not considered emergency crop loss assistance for the

purpose of the crop insurance waiver on the uninsured crop.

* * * * *

24. Section 1943.25 is amended by revising paragraph (b) to read as

follows:

Sec. 1943.25 Options planning and appraisals.

* * * * *

(b) Farm business plans will be completed as provided in subpart B

of part 1924.

* * * * *

25. Section 1943.54 is amended by removing the third sentence from

the definition of ``Cosigner.''

PART 1945--EMERGENCY

26. The authority citation for part 1945 continues to read as

follows:

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

Sec. 1945.154 [Amended]

27. Section 1945.154 is amended by removing the third sentence from

the definition of ``Cosigner,'' and by removing the second sentence

from the definition of a ``Nonfarm enterprise.''

Sec. 1945.156 [Amended]

28. Section 1945.156 is amended by removing ``$300,000'' from

paragraphs (b)(2)(i) introductory text and (b)(2)(ii) introductory text

and adding ``$100,000'' in its place.

29. Section 1945.162 is amended by:

a. Redesignating paragraphs (a) through (m) as paragraphs (b)

through (n), respectively; and

b. Adding a new paragraph (a) to read as follows:

Sec. 1945.162 Eligibility requirements.

* * * * *

(a) Debt forgiveness. EM applicants are ineligible if they have

caused the Agency a loss by receiving debt forgiveness on all or a

portion of any direct or guaranteed loan made under the authority of

the Consolidated Farm and Rural Development Act (CONACT) by debt-write

down, write-off, compromise provisions of section 331 of the CONACT,

adjustment, reduction, charge-off or discharge in bankruptcy or through

any payment of a guaranteed loss claim under the same circumstances.

Further, the EM applicant must not be delinquent on any direct or

guaranteed loan made under the provisions of the CONACT.

* * * * *

30. Section 1945.163 is amended by revising paragraph (e) to read

as follows:

[[Page 9357]]

Sec. 1945.163 Determining qualifying losses, eligibility for EM

loan(s) and the maximum amount of each.

* * * * *

(e) EM loan limit. The loan will be limited to the amount necessary

to restore the farm to its pre-disaster condition; however, this amount

cannot exceed the lesser of the sum of the maximum production loss

(paragraph (a)(2)(x) of this section) and the maximum physical loss

(paragraph (b) of this section) or $500,000 total outstanding EM debt

per borrower. The maximum principal amount of total EM debt that any

one individual, business entity, or individual member of a business

entity may have outstanding is $500,000.

* * * * *

Sec. 1945.166 [Amended]

31. Section 1945.166 is amended by:

a. Removing the comma after the word ``family'' in the first

sentence of paragraph (a)(1) and adding the word ``and'' in its place;

b. Removing the comma after the word ``farm'' in the first sentence

of paragraph (a)(1) and adding the word ``credit'' in its place;

c. Removing the phrase ``and non-farm enterprise credit, whichever

is the lesser'' in the first sentence of paragraph(a)(1);

d. Removing the entire second sentence of paragraph (a)(1);

e. Removing the paragraph (b)(5); and

f. Removing paragraph (c)(3) and redesignating paragraph (c)(4) as

(c)(3).

32. Section 1945.167 is amended by:

a. Revising the section heading;

b. Removing paragraphs (a) and (i);

c. Redesignating the remaining paragraphs as (c) through (j),

respectively and;

d. Adding new paragraphs (a) and (b) to read as follows:

Sec. 1945.167 Insurance, loan limitations and special provisions.

(a) EM loan funds cannot be used for physical loss purposes unless

that physical property lost was covered by general hazard insurance at

the time that the damage caused by the natural disaster occurred. The

level of coverage in effect at the time of the disaster must have been

the tax or cost depreciated value, whichever is less. Chattel property

must also have been covered at the tax or cost depreciated value,

whichever is less, when such insurance was readily available.

(b) Applicants must comply with the CAT insurance requirement no

later than loan closing by either:

(1) Obtaining at least the CAT level of coverage, if available, for

each crop of economic significance as defined by the Federal Crop

Insurance Corporation, or,

(2) By waiving eligibility for emergency crop loss assistance in

connection with the uninsured crop. FSA EM loan assistance is not

considered emergency crop loss assistance for the purpose of the crop

insurance waiver on the uninsured crop.

* * * * *

33. Section 1945.169 is amended by revising paragraph (1) to read

as follows:

Sec. 1945.169 Security.

* * * * *

(1) Crop insurance. If crop insurance is obtained, an assignment of

indemnity is required. When payment of the insurance premium is not

required until after harvest, crops may be released to make the

payment. If a loss claim is paid to the borrower, the premium will be

first deducted by the insurance carrier before making security

releases.

* * * * *

34. Section 1945.175 is amended by:

a. removing paragraph (c)(3);

b. redesignating paragraph (c)(4) as paragraph (c)(3); and

c. revising paragraph (c)(2) and (c)(3) to read as follows:

Sec. 1945.175 Options, planning and appraisals.

* * * * *

(c) * * *

(2) The appraised value of assets securing EM loans is established

as of the day before the beginning of the incidence period of the

qualifying disaster.

(3) Chattel appraisals will be completed on Form FmHA 1945-15,

``Value Determination Worksheet (EM loans only),'' when chattels are

taken as security. The property which will serve as security will be

described in sufficient detail so it can be identified. Sources such as

livestock market reports and publications reflecting values of farm

machinery and equipment will be used as appropriate. Chattels owned by

the applicant, and nonfarm chattel property offered as security (such

as planes, house trailers, boats, etc.) will be appraised at the

present market value only. Chattels that the applicant/borrowers did

not own on the dates set forth in paragraphs (c)(2) (i) and (ii) of

this section will be appraised at the present market value only.

* * * * *

PART 1980--GENERAL

35. The authority citation for part 1980 continues to read as

follows:

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

Subpart A--General

Sec. 1980.20 [Amended]

36. Section 1980.20 is amended in the introductory text of

paragraph (a) by adding ``The Farm Service Agency loan guarantee limit

is 90 percent unless otherwise stated in subpart B of this part.''

after the fourth sentence.

37. Section 1980.106 is amended in paragraph (b) by:

a. Adding the words ``Except for OL loans,'' to the beginning of

paragraph (5) of the definition of a ``Beginning farmer or rancher;''

b. Removing the number ``15'' and adding the number ``25'' in its

place in the first sentence of paragraph (5) of the definition of a

``Beginning farmer or rancher;''

c. Removing the third sentence from the definition of ``Cosigner;''

d. Removing the second sentence of the definition of ``Nonfarm

enterprise;'' and

e. Revising the definition of ``Veteran'' to read as follows:

Sec. 1980.106 Abbreviations and definitions.

* * * * *

(b) * * *

Veteran. One who has been honorably discharged, including clemency

discharges, or release from the active forces of the U.S. Army, Navy,

Air Force, Marine Corps, or Coast Guard, and who served during a period

of war, as defined in 38 U.S.C. 101(12).

38. Section 1980.108 is amended by revising paragraph (a)(3)(ii) to

read as follows:

Sec. 1980.108 General provisions.

(a) * * *

(3) * * *

(ii) Applicants must either:

(1) Obtain at least the CAT level of crop insurance coverage, if

available, for each crop of economic significance, as defined by the

Federal Crop Insurance Corporation, or,

(2) Waive eligibility for emergency crop loss assistance in

connection with the uninsured crop. FSA EM loss loan assistance is not

considered emergency crop loss assistance for purposes of this waiver.

* * * * *

39. Section 1980.119 is amended by revising paragraph (d) to read

as follows:

Sec. 1980.119 Lender's sale or assignment of guaranteed loan.

* * * * *

(d) Retention of unguaranteed portion of loan. Lenders must retain

at least 10 percent of the loan from the unguaranteed portion, except

that when the loan guarantee exceeds 90 percent,

[[Page 9358]]

the lender must retain the total unguaranteed portion of the loan.

* * * * *

40. Section 1980.174 is added to read as follows:

Sec. 1980.174 Percentage of guarantee.

(a) A 95-percent loan guarantee will be provided in the following

situations:

(1) When the sole loan purpose of a guaranteed OL or FO loan is to

refinance a direct FSA farm credit program loan.

(2) When the purpose of an FO loan guarantee is to participate in

the down payment loan program.

(3) When a guaranteed OL is made to a farmer or rancher who is

participating in the down payment loan program. The guaranteed OL must

be made during the period that a borrower has a direct FO loan

outstanding for acquiring a farm or ranch.

(4) When a guaranteed OL or FO loan is requested for multiple

purposes and only a portion of the loan is used to refinance a direct

FSA farm credit program loan, in which case a weighted percentage of

guarantee is provided.

(b) Guarantees issued to CLP lenders are never at a guarantee rate

of less than 80 percent.

41-43. Section 1980.175 is amended by:

a. Revising introductory text of paragraph (b);

b. Removing paragraph (d)(7);

c. Redesignating paragraphs (d)(2) through (d)(6) as (d)(3) through

(d)(7), respectively;

d. Revising paragraphs (c)(1), (c)(2) and (d)(1); and adding a new

paragraph (d)(2); and

e. Removing all the words between ``Borrowers'' and ``should'' in

the first sentence of paragraph (i)(3); to read as follows:

Sec. 1980.175 Operating loans.

* * * * *

(b) The applicant, and anyone who will execute the promissory note,

has not caused the Agency a loss by receiving debt forgiveness on all

or a portion of any direct or guranteed loan made under the authority

of the Consolidated Farm and Rural Development Act (CONACT) by debt

write-down, write-off, compromise under the provisions of section 331

of the CONACT, adjustment, reduction, charge-off or discharge in

bankruptcy or through any payment of a guaranteed loss claim under the

same circumstances. Notwithstanding the restrictive provisions of this

paragraph, applicants who received a write-down under section 353 of

the CONACT may receive direct and guaranteed OL loans to pay annual

farm and ranch operating expenses, which includes family subsistence if

the applicant meets all other eligibility requirements. Further, the

applicant, and anyone who will execute the promissory note, cannot be

delinquent on any direct or guaranteed loan made under the provisions

of the CONACT. Notwithstanding the provisions of this paragraph, an

operating loan may be made or guaranteed under the provisions of

subtitle B of the CONACT as in effect on April 3, 1996, if the

applicant was less than 90-days delinquent on April 4, 1996, and had

submitted an application prior to April 5, 1996.

* * * * *

(c) Loan purposes--(1) Loan note guarantee. Loan funds may only be

used for the following purposes:

(i) Payment of costs associated with reorganizing a farm or ranch

to improve its profitability.

(ii) Purchase of livestock, including poultry, and farm or ranch

equipment, including quotas and bases, and cooperative stock for

credit, production, processing or marketing purposes.

(iii) Payment of annual farm or ranch operating expenses, examples

of which include feed, seed, fertilizer, pesticides, farm or ranch

supplies, cash rent, family subsistence, and other farm and ranch

needs.

(iv) Payment of costs associated with land and water development

for conservation or use purposes.

(v) Refinancing indebtedness incurred for any authorized OL loan

purpose, when the lender and loan applicant can demonstrate the need to

refinance.

(vi) Payment of loan closing costs.

(vii) Payment of costs associated with complying with Federal or

State-approved standards under the Occupational Safety and Health Act

of 1970 (29 U.S.C. 655 and 29 U.S.C. 667). This purpose is limited to

applicants who demonstrate that compliance with the standards will

cause them substantial economic injury.

(viii) Payment of training costs required or recommended by the

approval official.

(2) Contract of guarantee--line of credit. Lines of credit may be

advanced for the following purposes:

(i) Payment of annual operating expenses, family subsistence, and

purchase of feeder animals.

(ii) Payment of current annual operating debts advanced by other

creditors. Under no circumstances can carry-over operating debts be

refinanced.

(d) Loan limitations. (1) No applicant or any individual who

executes a promissory note may receive an additional guaranteed OL if a

combination of guaranteed or direct OL loans were received (closed) in

more than 15 previous years. Transition rule: If a borrower was

indebted for a direct or guaranteed OL loan on October 28, 1992, and

had any combination of direct or guaranteed OL loans closed in 10 or

more prior calendar years, eligibility to receive new guaranteed OL

loans is extended for 5 additional years from October 28, 1992, and the

years need not run consecutively. However, in the case of a line of

credit, each year in which an advance is made after October 28, 1992,

counts toward the 5 additional years.

(2) Real estate improvements and repairs can be made only when the

loan applicant owns the property, or the loan applicant has a lease

that either ensures use of the improvement or repair over its useful

life or provides fair compensation for the unused economic life.

* * * * *

Sec. 1980.176 [Removed and Reserved]

44. Section 1980.176 is removed and reserved.

45. Section 1980.180 is amended by removing paragraphs (d)(4) and

(d)(5); and by revising paragraph (c) to read as follows:

Sec. 1980.180 Farm ownership loans.

* * * * *.

(c) Loans are authorized only to:

(1) Acquire or enlarge a farm or ranch. Examples of items that the

Agency may authorize the use of FO funds for include, but are not

limited to, providing down payments, purchasing easements or the loan

applicant's portion of land being subdivided, and participating in

special FO loan programs of this subpart. In the case of a contract

purchase, purchase contracts must properly obligate the buyer and

seller to fulfill the terms of the contract, provide the buyer with

possession, control and beneficial use of the property, and entitle the

buyer to marketable title upon fulfillment of the contract terms. The

deed must be held in trust by a bonded agent until transferred to the

buyer. Upon buyer's default, seller must give the Agency written notice

of the default and a reasonable opportunity to cure the default. Any

sums advanced by the Agency must be repaid by the borrower.

(2) Make capital improvements provided the loan applicant owns the

farm, 0r has either a lease to ensure use of the improvement over its

useful life or that compensation will be received for any remaining

economic life. Examples of items that the Agency may

[[Page 9359]]

authorize the use of FO funds for include, but are not limited to, the

construction, purchase, and improvement of farm dwellings, service

buildings and facilities that can be made fixtures to the real estate.

(3) Promote soil and water conservation and protection. Examples

include the correction of well-defined, hazardous environmental

conditions, and the construction or installation of tiles, terraces and

waterways.

(4) Pay closing costs, including but not limited to purchasing

stock in a cooperative, and appraisal and survey fees.

(5) Refinancing indebtedness incurred for authorized loan purposes,

provided the lender and loan applicant demonstrate the need to

refinance the debt.

* * * * *

Signed at Washington, D.C., on February 19, 1997.

Dallas R. Smith,

Acting Under Secretary for Farm and Foreign Agricultural Services.

Jill Long Thompson,

Under Secretary for Rural Development.

[FR Doc. 97-4840 Filed 2-28-97; 8:45 am]

BILLING CODE 3410-05-M