# Implementation of the Delinquent Account Servicing Provisions of the Federal Agriculture Improvement and Reform Act of 1996

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## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** March 5, 1997
- **Citation:** 62 FR 10118

## Text

SUMMARY: The following changes implement provisions of the Federal
Agriculture Improvement and Reform Act of 1996 (1996 Act) that affect
the Farm Loan Programs of the Farm Service Agency (FSA), formerly
administered by the Farmers Home Administration (FmHA). The provisions
of this rule affect the direct and guaranteed farm ownership (FO),
operating loan (OL) programs, and the direct emergency (EM) loan
program. Implementation of these provisions will result in the
streamlining and shortening of the loan servicing process and result in
reduced losses to the Government.

DATES: Effective: March 14, 1997. Comments must be submitted by May 13,
1997.

ADDRESSES: Submit written comments to Director, Farm Service Agency,
United States Department of Agriculture, Farm Loan Programs Loan
Servicing and Property Management Division, Ag Code 0523, Post Office
Box 2415, Washington, DC 20013.

FOR FURTHER INFORMATION CONTACT: Kimberly R. Laris, Senior Loan
Officer, Farm Service Agency, U.S. Department of Agriculture, Room
5449-S, Washington, DC 20250-0523; Telephone: 202-720-1659; Facsimile:
202-690-0949.

SUPPLEMENTARY INFORMATION

Executive Order 12866

This rule has been determined to be significant and was reviewed by
the Office of Management and Budget under Executive Order 12866.

Regulatory Flexibility Act

The Farm Service Agency certifies that this rule will not have a
significant impact on a substantial number of small entities as defined
in the Regulatory Flexibility Act, Pub. L. 96-534, as amended (5 U.S.C.
601).

Environmental Impact Statement

This document has been reviewed in accordance with 7 CFR part 1940,
subpart G, ``Environmental Program.'' The issuing agencies have
determined that this action does not significantly affect the quality
of human environment, and in accordance with the National Environmental
Policy Act of 1969, Pub. L. 91-190, an Environmental Impact Statement
is not required.

Executive Order 12778

This 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; (3)
administrative proceedings in accordance with 7 CFR parts 11 and 780
must be exhausted before bringing suit in court challenging action
taken under this rule unless those regulations specifically allow
bringing suit at an earlier time.

Executive Order 12372

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.

The Unfunded Mandate Reform Act of 1995

Title II of the Unfunded Mandate 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 and the private sector of $100 million or more in any one
year. When such a statement is needed for a rule, section 205 of the
UMRA, FSA generally must prepare a written statement, including a cost-
benefit analysis, for proposed and final rules with ``Federal
mandates'' that may result in expenditures to state, local, or tribal
governments, in the aggregate, or to the private sector. 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 objectives 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 sections 202 and 205 of the UMRA.

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 will revise the
information collection currently approved in support of its regulations
pertaining to Farm Loan Programs account servicing policies under the
Office of Management and Budget (OMB) control number 0560-0161 and debt
settlement regulations under OMB control number 0575-0118. 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 numbers
0560-0172 and 0560-0173.

Federal Assistance Programs

10.404--Emergency Loans
10.406--Farm Operating Loans
10.407--Farm Ownership Loans
10.416--Soil and Water Loans.

Discussion of the Interim Rule

Enacted on April 4, 1996, the Federal Agriculture Improvement and
Reform Act (1996 Act) changed the qualifications for loan servicing
benefits for borrowers with farm loans from FSA, formerly FmHA. The
specific changes to FSA Farm Loan Programs are as follows:

Leaseback/Buyback Program

The 1996 Act terminated the Leaseback/Buyback program effective
April 4, 1996. Borrowers, former owners and their spouses, children, or
former operators no longer have any priority right to purchase FSA
inventory property or to lease such property with an option to
purchase. This action will remove the regulations for this program. A
transition rule provides that borrowers who had submitted a complete
application for leaseback/buyback before the date of enactment

[[Page 10119]]

may still be considered for the program. The regulations governing
leaseback/buyback for these applications can be found in the previous
CFR volume containing revisions as of January 1, 1996 and the Agency's
procedures, (available in any county office.)

Homestead Protection

The application period for this program was changed by the 1996 Act
from 90 to 30 days after notification of the former owner of FSA
inventory property. The Agency is now required to advise the owner of
program availability on or before the date that it acquires the
property, instead of within 30 days of acquisition as was required by 7
CFR 1951.911(b)(2)(iii).

Primary Loan Servicing

The 1996 Act requires notification of loan servicing programs to
borrowers who are 90 days past due on their FLP loan payment (or 60
days delinquent, since accounts are not considered delinquent until
they are 30 days past due). Formerly, these packets were sent when
borrowers were 180 days delinquent (210 days past due). Application
requirements have been modified to eliminate some forms and clarify
that borrowers do not need to provide information that is already in
their case files and still current, as determined by the approval
official. Borrowers who request servicing before they become delinquent
are required to pay at least a portion of the interest due on the
account as a condition of rescheduling or reamortization. In making
restructuring decisions, FSA will assume that the borrower needs up to
110 percent of the amount indicated for payment of farm operating
expenses, debt service obligations, and family living expenses, instead
of the 105 percent required before the 1996 Act. Failure to achieve
this 110 percent margin will not make a borrower ineligible for loan
servicing, but in no case will the account be restructured with a cash
flow of less than 100 percent. Borrowers who qualify for debt
writedown, but whose accounts could be restructured without writedown
at a margin of less than 110 percent, will be allowed to choose between
the two options: (1) Restructuring with writedown, or (2) restructuring
without writedown at a margin of less than 110 percent. Since section
645 of the 1996 Act, which establishes the 110 percent cash flow, is
not mandatory, FSA is offering borrowers the option to forego
writedown. Thus, they would avoid the statutory debt forgiveness
limitation explained below. Borrowers who choose writedown (with a
higher cash flow margin than restructuring without writedown) will not
be able to receive any additional debt forgiveness from FSA.

Debt Forgiveness

Under the 1996 Act, borrowers can receive only one reduction or
termination of a direct FLP loan in a manner that results in a loss to
the Government. Those who have received debt forgiveness on a direct
loan at any time in the past are no longer eligible for such relief on
another loan. Pursuant to section 640(2) of the 1996 Act, debt
forgiveness is defined as writing down or writing off a direct loan,
debt settling a direct loan, paying a loss claim on a loan guarantee
pursuant to section 357 of the Consolidated Farm and Rural Development
Act (Con Act) and discharging a debt as a result of bankruptcy.

Buyout of Debt

The loan servicing option of buying out a debt at its net recovery
value was changed by the Act to buyout at current market value. The
requirement for a recapture agreement, under which the Agency could
recover a portion of its loss if the property is sold within 10 years,
was eliminated.

Conservation Contracts

Based on section 642 of the 1996 Act, the Agency has revised
Exhibit H of this subpart to change the conservation easement program
to a conservation contract program. Since section 642(1) of the 1996
Act removed the requirement that the program restrict the usage of the
property for not less than 50 years, FSA has exercised its discretion
to provide a graduated reduction in the amount of debt written off,
based on the time period that usage is restricted. Borrowers who agree
to a 50-year contract will receive the maximum amount of debt
writedown. Borrowers who agree to a 30-year contract will receive 60
percent of the maximum writedown. Borrowers who agree to a 10-year
contract will receive 20 percent of the maximum writedown.

Graduation

When reviewing accounts for possible graduation from direct FLP
credit, the Agency is authorized by the Act to submit a borrower
prospectus to potential commercial lenders without the borrower's
approval. Borrowers must be notified that such information has been
provided. If an approved lender agrees to provide credit to that
borrower in accordance with the terms of the prospectus, that borrower
is ineligible for Farm Ownership or Farm Operating direct loan credit.

Annual Reviews and Eligibility

Under section 635 of the 1996 Act, the County Committee must
certify annually that a review has been made of each borrower's
operation and of continued eligibility for Agency assistance. This is
an internal agency requirement and therefore regulations governing this
requirement are not published in the CFR.

Electronic Filing of Financing Statements

Pursuant to section 662 of the 1996 Act, all lenders are authorized
to file financing statements electronically in states having Uniform
Commercial Code (UCC) laws allowing that practice.

Appeals

The Agency has removed from this regulation the requirement that
the borrower be notified of appeal rights in numerous instances where
it previously appeared following authorization for an adverse decision.
A guide to the mediation, appeals and review processes has been added
as section 1951.904.

Miscellaneous

Some material which was obsoleted, outdated, or repetitive has been
omitted. Some references to other sections of the CFR have been revised
for conformity purposes.

List of Subjects

7 CFR Part 1951

Account servicing, Accounting, Debt restructuring, Foreclosure,
Government acquired property, Credit, Loan programs--agriculture, Loan
programs--housing and community development, Low and moderate income
housing loans--servicing, Mortgages, Rural areas, Sale of government
acquired property, Surplus government property.

7 CFR Part 1956

Accounting, Loan programs--agriculture, Rural areas.

7 CFR Part 1962

Crops, Government property, Livestock, Loan programs--agriculture,
Rural areas.

7 CFR Part 1965

Foreclosure, Loan programs--agriculture, Rural areas.

Accordingly, chapter XVIII, title 7, Code of Federal Regulations is
amended as follows:

[[Page 10120]]

PART 1951--SERVICING AND COLLECTIONS

1. The authority citation for part 1951 continues to read as
follows:

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

Subpart F--Analyzing Credit Needs and Graduation of Borrowers

2. Section 1951.262 is amended by revising paragraphs (f)(1) and
(f) (2) to read as follows:

Sec. 1951.262 Farm Loan Programs--graduation of borrowers.

* * * * *
(f) * * *
(1) The Agency will distribute a borrower's prospectus to local
lenders for possible refinancing. The borrower's permission is not
required, however, the borrower must be notified of this action.
(2) The borrower is responsible for any application fees. The
borrower has 30 days from the date the borrower is notified of lender
interest in refinancing to make application, if required by the lender,
and refinance the FLP loan. For good cause, the borrower may be granted
a reasonable amount of additional time by the Agency.

Subpart J--Management and Collection of Nonprogram (NP) Loans

Sec. 1951.454 [Amended]

3. Section 1951.454 is amended by revising the words ``chapter;
except that a borrower does have appeal rights if the decision involves
the denial of NP loan assistance under the Leaseback/Buyback and
Homestead Protection provisions of subpart S of this Part 1951'' to
read ``chapter or parts 11 and 780 of this title.''

Sec. 1951.455 [Amended]

4. Section 1951.455 is amended by:
a. In paragraph (a) by removing ``Leaseback/Buyback and'' in the
second sentence; by revising the words ``Leaseback/Buyback and
Homestead Protection programs,'' to read ``Homestead Protection
program'' in the fourth sentence; by removing the words ``FmHA or its
successor agency under Public Law 103-354'' in the fifth sentence; by
revising the words ``FmHA or its successor agency under Public Law 103-
354'' to read ``the Agency'' in the sixth sentence;
b. In paragraph (b) by removing the first sentence; by revising the
words ``FmHA or its successor agency under Public Law 103-354'' to read
``FLP'' in the second sentence; by removing the words ``FmHA or its
successor agency under Public Law 103-354'' in the fourth sentence; by
revising the words ``FmHA or its successor agency under Public Law 103-
354'' and ``FP'' to read ``FLP'' in the fifth sentence;
c. In paragraph (c) by revising the words ``FmHA or its successor
agency under Public Law 103-354 office'' to read ``agency office'' and
the words ``FmHA or its successor agency under Public Law 103-354
credit'' to read ``FLP credit'' in the first sentence;
d. In paragraph (e) by revising the words ``FmHA or its successor
agency under Public Law 103-354 office'' to read ``agency office'' in
the first sentence and removing the words ``FmHA or its successor
agency under Public Law 103-354'' in the fourth sentence;
e. In paragraph (f) by removing the first and third sentence;
f. In paragraph (g) by revising the words ``FmHA or its successor
agency under Public Law 103-354'' to read ``FLP'' in the introductory
text; by removing paragraphs (g) (1) and (4); by revising the words
``FmHA or its successor agency under Public Law 103-354 may'' to read
``the agency may'' and the words ``FmHA or its successor agency under
Public Law 103-354 retains'' to read ``the agency retains'' in the
second sentence of paragraph (g)(2); and by redesignating paragraphs
(g) (2), (3) and (5) as (g) (1) through (3);
g. In paragraph (h) by revising the word ``FP'' to read ``FLP'';
h. In paragraph (i) by removing the first sentence;
i. In paragraph (j) by revising the words ``an FmHA or its
successor agency under Public Law 103-354'' to read ``a''.
5. Section 1951.457 is amended by revising paragraph (a) to read as
follows:

Sec. 1951.457 Payments.

(a) Receiving payments. Borrowers will mail or bring their payments
to the county office. Borrowers will be responsible for any fees
associated with converting cash payments to money orders. If the fee is
not paid, it will be deducted from the payment.
* * * * *
6. Section 1951.458 is revised to read as follows:

Sec. 1951.458 Servicing real estate taxes.

Refer to subpart A of part 1925 of this chapter for servicing real
estate taxes.

Subpart S--Farmer Program Account Servicing Policies

7. Section 1951.901 is revised to read as follows:

Sec. 1951.901 Purpose.

This subpart describes the policies and procedures that the agency
will use in servicing most Farm Loan Program (FLP) loans. The loans
include Operating Loan (OL), Farm Ownership Loan (FO), Soil and Water
Loan (SW), Softwood Timber Production Loan (ST), Emergency Loan (EM),
Economic Emergency Loan (EE), Economic Opportunity Loan (EO),
Recreation Loan (RL), and Rural Housing Loan for farm service buildings
(RHF) accounts. Cases involving unauthorized assistance will be
serviced as described in subpart L of this part. When it has been
determined that all the conditions outlined in Sec. 1951.558(b) of
subpart L of this part have been met, the loan will be treated as an
authorized loan and may be serviced under this subpart. Cases involving
graduation of borrowers to other sources of credit will be serviced as
described in subpart F of this part. This subpart does not apply to FLP
Non-Program (NP) loans. Examples of Primary Loan Servicing actions are:
consolidation, rescheduling and/or reamortization, deferral of
principal and interest payments, reclassifying to ST loans, reducing
interest rate on the loan, writedown of debt and conservation contract,
or a combination of these actions. Preservation loan servicing is the
Homestead Protection program. Any processing or servicing activity
conducted pursuant to this subpart involving authorized assistance to
agency employees, members of their families, known close relatives, or
business or close personal associates, is subject to the provisions of
subpart D of part 1900 of this chapter. Applicants for this assistance
are required to identify any known relationship or association with an
agency employee.
8. Section 1951.902 is revised to read as follows:

Sec. 1951.902 General.

Supervision and Servicing. It is a primary objective of the Agency
to provide supervised credit to borrowers in financial, production or
other difficulty in a manner that will assure the maximum opportunity
for their recovery and, at the same time, get the best recovery for the
Government. Supervision and servicing are continuing processes that
begin the day a farmer comes into the office. Providing supervised
credit has two objectives:
(a) To help farmers set goals, work on problem areas and work
toward graduation to commercial credit;
(b) To recover the maximum possible amount for the Government.
9. Section 1951.903 is revised to read as follows:

[[Page 10121]]

Sec. 1951.903 Authorities and responsibilities.

(a) Responsibilities. Servicing officials will make full use of the
National automated tracked system to track and manage the FLP primary
and preservation loan servicing and debt settlement programs.
(b) Authorities. All loan servicing decisions except as set forth
in this section will be made by the servicing official except the
approval of writedown and buyout of a borrower's debt. Also, all
applications for debt settlement of FLP loans must be recommended by
the County Committee (except where the debt has been discharged through
bankruptcy), approved by the State Executive Director or the
Administrator (depending upon the amount of debt to be settled), and
processed in accordance with the provisions of subpart B of part 1956
of this chapter. Servicing officials are authorized to accept a buyout
payment when the borrower(s) pays the current market value of the
security set forth in Sec. 1951.909 of this Instruction. Only State
Executive Directors are authorized to approve writedown and buyout in
accordance with Sec. 1951.909 of this part and release a divorced
spouse from liability on the debt in accordance with Sec. 1951.909(a)
of this part.
10. Section 1951.904 is added to read as follows:

Sec. 1951.904 Mediation, reviews and appeals.

(a) Participant rights. (1) For loan servicing under this subpart,
mediation or a voluntary meeting of creditors will be offered if the
DALR$ calculations indicate that a feasible plan of operation cannot be
developed considering all primary loan service programs, Softwood
Timber, and Conservation Contracts. In states with a USDA Certified
Mediation Program, mediation will be offered. In all other states, a
voluntary meeting of creditors will be offered.
(2) Any negotiation of an Agency appraisal must be completed prior
to the meeting of creditors or mediation.
(3) If the borrower does not request mediation or a voluntary
meeting of creditors as offered in Exhibit E of this subpart within 45
days, the servicing official will issue the appropriate ``Notice of
Intent to Accelerate or to Continue Acceleration and Notice of
Borrowers' Rights.''
(4) Whenever the servicing official makes a decision that will
adversely affect a participant, the participant will be informed that
the decision can be reviewed in accordance with 7 CFR part 780 and
indicate whether it can be appealed to the USDA National Appeals
Division (NAD) according to regulations set forth in 7 CFR part 11.
Nonprogram (NP) participants are not entitled to appeal rights.
(b) Non-appealable decisions. The following types of decisions are
not appealable:
(1) Decisions made by parties outside the agency, even when those
decisions are used as a basis for the agency's decisions.
(2) Decisions that do not meet the eligibility requirements of 7
CFR part 11.
(3) Interest rates as set forth in Agency procedures, except
appeals alleging application of the incorrect interest rate.
(4) Refusal to request or grant an administrative waiver permitted
by program regulations.
(5) Denials of assistance due to lack of funds.
(6) In cases where the adverse decision is based on both appealable
and non-appealable actions, the adverse action is not appealable.
(7) Determinations previously made by the Agency that have been
appealed, and a NAD decision adverse to the participant has been
entered; or upon which the time frame for appeal has expired with no
appeal being requested.
(c) Next-level review. Any adverse decision, whether appealable or
non-appealable, may be reviewed in accordance with 7 CFR part 780.
(d) NAD review. (1) A participant may request that NAD review the
Agency's determination that the decision may not be appealed.
(2) A participant may request that NAD review any decision that is
appealable.
(3) NAD will review the participant's request in accordance with 7
CFR part 11.
(e) Agency actions pending outcome of appeal. Assistance will not
be discontinued pending the outcome of an appeal of any adverse action.
Releases for essential family living and farm operating expenses will
not be terminated until the account has been accelerated.
(f) Time limits. Time limits for action under this subpart will be
tolled during the pendency of an appeal, but not during the pendency of
a request that NAD determine that a matter is or is not appealable.
11. Section 1951.906 is revised to read as follows:

Sec. 1951.906 Definitions.

As used in this subpart, the following definitions apply:
Borrower. An individual or entity which has outstanding obligations
to the agency under any Farm Loan Programs (FLP) loan, without regard
to whether the loan has been accelerated. This does not include any
such debtor whose total loans and accounts have been foreclosed or
liquidated, voluntarily or otherwise. Collection-only borrowers are
considered borrowers. Borrower also includes any other party liable for
the FLP debt. Nonprogram (NP) borrowers are not considered borrowers
for the purposes of this subpart.
CONACT or CONACT property. Property which secured a loan made or
insured under the Consolidated Farm and Rural Development Act. Within
this part, it shall also be construed to cover property which secured
other FLP loans.
Conservation contract. A contract under which a borrower agrees to
set aside land for conservation, recreation or wildlife purposes in
exchange for cancellation of a portion of an outstanding FLP debt.
Relief obtained in this manner is not considered debt forgiveness as
defined in this section.
Consolidation. The combining and rescheduling of the rates and
terms of two or more notes of the same type of OL or EO loans, EE
operating-type loans or EM loans. EM actual loss loans will not be
consolidated.
Current market value buyout. Termination of a borrower's loan
obligations to the agency in exchange for payment of the current
appraised value of the security property, less any prior liens.
Debt forgiveness. For the purposes of loan servicing, debt
forgiveness is defined as a reduction or termination of a direct FLP
loan in a manner that results in a loss to the Agency. Included, but
not limited to, are losses from a writedown or writeoff under this
subpart, subpart J of this part, subpart B of part 1956 of this
chapter, after discharge under the bankruptcy code, and associated with
release of liability. Debt cancellation through conservation contracts
is not considered debt forgiveness under this subpart.
Debt settlement. The settlement of debts owed the United States for
FLP loans. The types of debt settlement programs are: compromise,
adjustment, cancellation and chargeoff.These programs are administered
in accordance with subpart B of part 1956 of this chapter. Any action
through debt settlement which results in a loss to the Agency will be
considered debt forgiveness.
Deferral. An approved delay in making regularly scheduled payments,
including softwood timber (ST) loans. Deferral is not considered debt
forgiveness.

[[Page 10122]]

Delinquent borrower. A borrower who has failed to make all or part
of a payment which is due for 30 or more calendar days after the due
date.
Entity. A corporation, partnership, joint operation, or
cooperative.
Farm Loan Programs (FLP) loans. This refers to Farm Ownership (FO),
Soil and Water (SW), Recreation (RL), Economic Opportunity (EO),
Operating (OL), Emergency (EM), Economic Emergency (EE), Softwood
Timber (ST) loans, and Rural Housing loans for farm service buildings
(RHF).
Farm plan. Form FmHA 431-2, ``Farm and Home Plan,'' or other plans
or documents acceptable to the agency that will accurately reflect the
production and financial management of the farming operation for one
production cycle. The agency will not require the use of consolidated
financial statements.
Feasible plan. A feasible plan must be based upon the applicant or
borrower's actual records that show the farming operation's actual
income, production and expenses. These records will include income tax
returns and supporting documents (hereafter called income tax records).
The records must be for the most recent five-year period or, if the
borrower has been farming less than five years, for the period which
the borrower has farmed. For borrowers who have been farming for less
than five years, other available records will be used in the order
listed in section Sec. 1924.57(d)(1) of subpart B of part 1924 of this
chapter to complete a five-year history. Future production yields will
be based on an average of the most recent past five years' actual
production yields. Borrowers with yields affected by disasters in at
least two of the five most recent years may exclude the crop year with
the lowest actual yield. In addition, in accordance with section
Sec. 1924.57(d)(1) of subpart B of part 1924 of this chapter, if the
applicant's remaining disaster years' yields are less than the County
average yield, and the borrower's yields were affected by the disaster,
County average yields will be used for those years. If County average
yields are not available, State average yields will be used. These
records will be used along with realistic anticipated prices, including
any planned FLP loan payments, to determine that the income from the
farming operation, and any reliable off-farm income, will provide the
income necessary for an applicant or borrower to at least be able to:
(1) Pay all operating expenses and taxes which are due during the
projected farm business accounting period.
(2) Meet scheduled payments on all debts.
(3) Meet up to 110 percent, but not less than 100 percent, of the
amount indicated for payment of farm operating expenses, debt servicing
obligations and family living expenses. The Agency will assume that a
borrower needs this margin to meet all obligations and continue
farming. However, this will not prohibit a borrower from receiving debt
restructuring because the farm and home plan shows less than such a
margin. In no case will a borrower with a cash flow of less than 100
percent receive restructuring.
(d) Provide living expenses for the family members of an individual
borrower or a wage for the farm operator in the case of a cooperative,
corporation, partnership, or joint operation borrower, which is in
accordance with the essential family needs. Family members include the
individual borrower or farm operator in the case of an entity, and the
immediate members of the family which reside in the same household.
Financially distressed. A financially distressed borrower is one
who will not be able to make payments as planned for the current or
next business accounting period. Borrowers will also be considered as
in financial distress if it is determined that they will not be able to
project a feasible plan of operation for the next business accounting
period.
Foreclosed. The completed act of selling security either under the
``power of sale'' in the security instrument or through court
proceedings.
Good faith. An eligibility requirement for Primary Loan Servicing
and Current Market Value Buyout. Borrowers are considered to have acted
in ``good faith'' if they have demonstrated ``honesty'' and
``sincerity'' in complying with the requirements of Form 1962-1,
``Agreement for the Use of Proceeds/Release of Chattel Security,'' and
any other written agreements made with the agency, as documented in the
case file. In addition, the agency must substantiate any allegations of
fraud, waste, or conversion with a written legal opinion from the
Office of the General Counsel (OGC) when such allegations are used to
deny a servicing request. A borrower will not be considered to lack
``good faith'' if the sole basis for such a determination was the
disposition of normal income security (Sec. 1962.4 of subpart A of part
1962 of this chapter) prior to October 14, 1988, without the Agency's
consent and the borrower demonstrates that the proceeds were used to
pay essential family living and farm operating expenses that could have
been approved according to Sec. 1962.17 of subpart A of part 1962 of
this chapter.
Homestead Protection. The right of a former owner to apply to
lease, with an option to purchase the Homestead Protection property,
not to exceed 10 acres.
Homestead Protection property. This refers to the principal
residence which secured a FLP loan.
Indian Reservation. Indian reservation means all land located
within the limits of any Indian reservation under the jurisdiction of
the United States, notwithstanding the issuance of any patent, and
including rights-of-way running through the reservation; trust or
restricted land located within the boundaries of a former reservation
of a Federally recognized Indian tribe in the State of Oklahoma; or all
Indian allotments the Indian titles to which have not been extinguished
if such allotments are subject to the jurisdiction of a Federally
recognized Indian Tribe.
Limited Resource Program. A reduction of interest rates for
operating loans (OL), farm ownership loans (FO) and soil and water
loans (SW).
Liquidated. The completed act of voluntarily selling security to
end the obligation for the debt, or involuntarily as the result of a
completed civil suit against a borrower to recover collateral against
the debt. The filing of a claim in a bankruptcy action is not a
complete liquidation of the borrower's accounts. Collection-only
accounts are not considered liquidated.
Loan service program. A Primary Loan Servicing program or a
Preservation Loan Servicing program (Homestead Protection) for FLP loan
borrowers.
New application. An application submitted on or after November 28,
1990, for loan servicing programs. This does not include an application
reconsidered after an appeal or revision of an application submitted
before November 28, 1990.
Nonessential assets. Nonessential assets are those in which the
borrower has an ownership interest, that:
(1) do not contribute a net income to pay essential family living
expenses or to maintain a sound farming operation (see 1962.17 of
subpart A of part 1962 of this chapter); and
(2) are not exempt from judgment creditors or in a bankruptcy
action. Each State Executive Director, with the guidance of the Office
of the General Counsel, will issue a State Supplement to establish
guidelines on items that are exempt from judgment creditors and are
exempt under bankruptcy law in accordance with statute.
Nonprogram (NP) loan. An NP loan results when a loan is made to an
ineligible applicant or transferee in connection with a loan assumption
and sale of inventory properties at ineligible

[[Page 10123]]

terms. Borrowers originally determined eligible by the agency and found
to be ineligible after the loan was made due to an agency error are not
considered to have nonprogram loans.
Preservation loan service program. See Homestead Protection.
Primary loan service program. Primary loan service program means:
(1) loan consolidation, rescheduling, or reamortization;
(2) interest rate reduction, including use of the limited resource
program;
(3) loan restructuring, including deferral, or writing down of the
principal or accumulated interest; or
(4) any combination of the above.
Reamortization. Reamortization is rearranging the installment
payments of a real estate loan, and may include changing the interest
rate and terms of a loan made for Subtitle A purposes.
Rescheduling. Rescheduling is rewriting the rates and/or terms of
OL, SL, EO loans, EE operating-type loans or EM loans made for Subtitle
B purposes.
Writedown. For purposes of this subpart, writedown is reducing a
borrower's debt to an amount that will result in a feasible plan of
operation.
12. In Sec. 1951.907, paragraphs (c), (d) and (e) are revised to
read as follows and paragraph (f) is removed:

Sec. 1951.907 Notice of loan service programs.

* * * * *
(c) Notification of borrowers 90 days past due on payments. FLP
borrowers who are at least 90 days past due (60 days delinquent) will
be sent Exhibit A of this subpart with attachments 1 and 2 by certified
mail, return receipt requested. If the borrower submits an incomplete
application, see paragraph (e) of this section for procedures on
requesting additional information. Delinquent borrowers who have also
violated their loan agreements with the agency will be handled in
accordance with Sec. 1951.907(e). In addition to the requirements set
forth above, servicing officials will provide Attachments 1 and 2 of
Exhibit A of this subpart to these borrowers, as set forth below:
(1) At the time an application is made for participation in an FLP
loan service program, unless such application is the result of the
notice provided to the borrower in accordance with this section,
(2) On written request of any FLP borrower, whether delinquent or
not, prior to the sending of a packet under paragraph (c) of this
section, and
(3) If a borrower has not previously received exhibit A and
attachments 1 and 2 of this subpart, such exhibit and attachments will
be provided before the earliest of:
(i) Initiating any liquidation action,
(ii) Accepting a voluntary conveyance of security, or the borrower
requesting permission to sell security,
(iii) Accelerating payments on the loan,
(iv) Repossessing the borrower's property,
(v) Foreclosing on property, or
(vi) Taking any other collection action.
(d) Notification of borrowers in non-monetary default; delinquent
borrowers also in non monetary default, or when a junior or senior
lienholder is foreclosing. FLP borrowers who are in non-monetary
default will be sent attachments 1, 3, and 4 of exhibit A of this
subpart by certified mail, return receipt requested. If a case is in
the hands of the Department of Justice or in litigation, no loan
servicing action will be taken without Department of Justice or OGC
concurrence (see 1962.49 of this chapter). Any servicing request will
be processed as indicated in Sec. 1951.909. The account will not be
liquidated until the borrower has the opportunity to appeal any adverse
decision. After any final appeal decision that does not result in a
resolution of the loan defaults, the account will be accelerated.
(e) Request for primary and preservation loan service programs.(1)
To request consideration for Primary and Preservation Loan Service
programs, borrowers who are sent exhibit A, with attachments 1 and 2 or
attachments 1, 3, and 4 must complete and return attachment 2 or
attachment 4, as appropriate, to the local county office within 60 days
after receiving those documents, with the forms required by this
paragraph for a completed application.
(2) If borrowers are sent attachments 3 and 4 and do not request
servicing within 60 days, the agency will proceed with liquidation in
accordance with Sec. 1955.15 of this chapter.
(3) If borrowers are sent exhibit A and attachments 1 and 2 of this
subpart and do not submit a completed application within the 60-day
time period, the servicing official will send attachments 9 and 10, or
9-A and 10-A of exhibit A of this subpart, as applicable. These
attachments will not be sent to borrowers who are being serviced in
accordance with Sec. 1951.908. For borrowers receiving attachments 9
and 10 or 9-A and 10-A, the agency will proceed with liquidation in
accordance with Sec. 1955.15 of this chapter.
(4) If a borrower has moved and left a forwarding address, the
certified mail will be forwarded. If no forwarding address is given,
the mail will be returned to the county office. The servicing official
will immediately send the documents from the certified mail package to
the borrower's last known address, first class mail. The borrower's
response date for a completed application will begin on the date of
receipt of the certified mail or 3 days following the date of first
class mailing, whichever is earlier.
(5) An application for loan service programs must include the
following forms (available in any agency office), and data, unless the
information is already in the borrower's case file and still current,
as determined by the approval official:
(i) Attachment 2 or 4 of exhibit A to this subpart, response form
to apply for loan servicing.
(ii) Form 410-1, ``Application for FmHA Services,'' including a
current (within 90 days) financial statement of all individuals and
entities personally liable for the FLP debt.
(iii) Form 431-2, ``Farm and Home Plan,'' or any other form or
submission acceptable to the agency that sets forth a plan of operation
and the necessary information. Commodity prices supplied by the agency
will be used to complete the forms.
(iv) Form 440-32, ``Request for Statement of Debts and
Collateral.''
(v) Form RD 1910-5, ``Request for Verification of Employment.''
(vi) Form AD-1026, ``Highly Erodible Land Conservation (HELC) and
Wetland Conservation (WC) Certification,'' if the one on file with the
agency does not reflect all the land owned and leased by the borrower.
(vii) Form SCS CPA-26, ``Highly Erodible Land and Wetland
Determination,'' if not previously on file with the agency for the farm
operation. This form is included as part of the application after being
completed by NRCS. (This form is available at NRCS local offices.)
(viii) If the applicant wants to be considered for a conservation
contract, a map or copy of an aerial photo of the farm, on which the
applicant must show that portion of the farm and approximate acres to
be considered in a request for debt restructuring provided for in the
conservation contract program.
(ix) The most recent five years' income tax returns and supporting
documents, unless the borrower has been farming for less than five
years. In such case, income tax returns and supporting documents for
the tax years that the borrower farmed.
(x) If the borrower is applying for debt settlement, Form RD1956-1,

[[Page 10124]]

``Application for Settlement of Indebtedness.''
(6) The borrower will be provided with copies of these forms when
Exhibit A is sent, and may request copies of regulations and the forms
manual inserts (FMI) in writing within 30 days of receipt of the loan
servicing notice. If these latter items are not provided within 10 days
of such a request, the borrower's time for submission of a complete
application will be increased by the period of delay in excess of 10
days caused by the Agency.
(7) Not more than one 60-day period will be provided to a borrower
to respond to the notice of loan service programs except in accordance
with Sec. 1951.908. Subsequent notices as provided for in this section
will not be issued until the first notice is resolved.
13. Section 1951.908 is revised to read as follows:

Sec. 1951.908 Servicing financially distressed current borrowers.

A borrower who is financially distressed, but is not yet delinquent
on FLP payments, may request servicing at any time.
(a) Notification. If a current plan of operation demonstrates that
the borrower is or will be financially distressed, as defined in
Sec. 1951.906, or if the borrower otherwise requests servicing, the
servicing official will provide attachments 1 and 2 of exhibit A of
this subpart.
(b) Eligibility. To be considered for servicing in accordance with
this section, the borrower must submit to the county office within 60
days Attachment 2 of exhibit A of this subpart and a complete
application in accordance with the requirements of Sec. 1951.907(e).
(1) The eligibility requirements of Sec. 1951.909(c) (1) and (2)
apply to servicing under this section.
(2) Eligible financially distressed borrowers who are current on
their FLP loan payments may be considered for the Primary Loan Service
programs described in Secs. 1951.909(e) (1), (2) and (3).
(3) Financially distressed borrowers who are not delinquent are not
eligible for writedown of debt or buyout as described in 1951.909.
(c) Processing the application. The servicing official must process
a completed application and notify the borrower of the decision.
(1) Current borrowers will be considered only for the Primary Loan
Servicing programs described in Secs. 1951.909 (e) (1), (2), and (3).
The servicing official must use the Debt and Loan Restructuring System
(DALR$) program, in accordance with exhibit J-1 of this subpart, to
determine if a feasible plan can be developed as defined in
Sec. 1951.906.
(2) If a feasible plan can be developed, the borrower will be sent
exhibit B of this subpart with attachment 1 and the printout of the
DALR$ calculations as notification of the favorable decision. The
borrower must accept the offer within 45 days of its receipt by
returning attachment 1 to exhibit B of this subpart or the offer will
expire. If the borrower accepts, loan restructuring will be processed
in accordance with Secs. 1951.909 (e) (1), (2), or (3), as applicable.
(3) If a feasible plan cannot be developed, the borrower will be
informed of the reasons for the adverse decision. The DALR$ printout
will be attached.
(4) Current borrowers who have received notices under this section
and who do not apply for primary loan servicing, or who refuse an offer
to restructure their debt, and later become 90 days past due on the FLP
loan payment, will be sent notices as described in Sec. 1951.907.
(5) Borrowers whose accounts are not delinquent may receive
rescheduling, reamortization, consolidation, or deferral under this
subpart only after they have paid at least a portion of the interest
due on their FLP debt. The portion due will be based on the applicant's
ability to pay, as determined by thoroughly analyzing the farm
operation, including any off-farm income. The payment must be made on
or before the date that restructuring is closed. Borrowers in non-
monetary default, but not delinquent on their FLP debt, must cure the
non-monetary default before they may be considered for servicing under
this paragraph.
14. Section 1951.909 is revised to read as follows:

Sec. 1951.909 Processing primary loan service programs requests.

(a) Servicing official responsibilities. (1) After receipt of
attachment 2 or 4 and a completed application in accordance with
Sec. 1951.907(e), the servicing official will consider all primary
service programs options in this subpart. That official must use the
Debt and Loan Restructuring System (DALR$) computer program, in
accordance with exhibit J-1 of this subpart for borrowers who submit a
new application, to attempt to find the combination of loan service
programs that will result in a feasible plan. Borrowers who request
loan servicing and who have disposed of all the FLP loan security,
including Collection-Only borrowers, will be processed in accordance
with part 1956, subpart B, of this chapter. If the application includes
a request for the Conservation Contract program, as indicated by the
submission of the information required in Sec. 1951.907(e)(5)(viii),
the servicing official will determine whether the borrower is eligible,
based on criteria as set forth in exhibit H of this subpart. If the
borrower is eligible, the servicing official will make an estimate of
the information needed to permit the DALR$ program to make the
calculations of feasibility of the Conservation Contract. The
assumptions used to establish the estimates will be based on the
servicing official's knowledge of the farmland values, the borrower's
repayment ability, and the proposed contract acreage. When the DALR$
calculations for restructuring are completed, the borrower will be
notified as set forth in paragraph (h) of this section.
(2) When jointly liable individual borrowers have been divorced and
one has withdrawn from the operation, the State Executive Director will
consider, upon the recommendation of the servicing official, the
release of liability for the individual who has withdrawn if the
following conditions are met.
(i) A divorce decree or property settlement document held the
withdrawing party not responsible for the loan payments;
(ii) The withdrawing party's interest in the security is conveyed
to the borrower with whom the loan will be continued;
(iii) The person withdrawing does not have any repayment ability
for the loan, and does not own any nonessential assets, as defined in
Sec. 1951.906;
(iv) The individual withdrawing has never received debt forgiveness
on another direct loan; and.
(v) The withdrawing party provides a copy of the divorce decree and
property settlement, evidence of conveyance, a current financial
statement, verification of income and debts, and Form 431-2 or Form RD-
1944-3 as applicable.
(3) If a completed application includes a request for a waiver from
the training required by paragraph (c)(5) of this section, the County
Committee will, prior to any offer of Primary Loan Servicing, evaluate
the borrower's knowledge and ability in production and financial
management and determine the need for additional training as set out in
Sec. 1924.74 of this chapter.
(b) Adverse determination. (1) If the approval official determines
that the borrower is not eligible for any of the Primary Loan Service
programs or

[[Page 10125]]

restructuring is not feasible because of debt held by other lenders,
the borrower will be advised of mediation or meeting of creditors as
provided in paragraph (h)(3) of this section. If mediation or the
meeting of creditors does not result in a feasible plan, the borrower
will be sent attachments 5 and 6, or 5-A and 6-A, of exhibit A of this
subpart, as applicable.
(2) Borrowers who do not buy out their debt at its current market
value, or who indicate in writing that they do not wish to buy out,
will automatically be considered for debt settlement if they submitted
an ``Application For Debt Settlement.'' Any appeal of a primary loan
servicing denial will be completed before the servicing official begins
any further processing of a Debt Settlement or Homestead Protection
request. If the adverse decision on restructuring is upheld on appeal,
the borrower will be considered for these options. The servicing
official will complete the processing of the borrower's application for
Debt Settlement in accordance with part 1956 of this chapter. Homestead
Protection will be processed in accordance with Sec. 1951.911. No
acceleration or foreclosure will occur until the appeal process has
been completed for servicing or debt settlement requests timely
submitted under this subpart.
(3) Applicants may request a negotiated appraisal in accordance
with paragraph (i) of this section if they object to the agency's
appraisal. Negotiation of the appraisal, if requested by the borrower,
will take place before mediation or a voluntary meeting of creditors.
(c) Eligibility. Applicants will be eligible for Primary Loan
Service programs if the servicing official has determined that they
meet all of the following requirements:
(1) The delinquency or financial distress does exist and is due to
circumstances beyond the control of the borrower, due to a reduction in
income which reduces cash flow to a point where outflows exceed
inflows, only as follows:
(i) The reduction in essential income from a non-farm job due to
unemployment or underemployment of the borrower-operator or spouse is
caused by circumstances beyond their control;
(ii) Illness, injury, or death of an individual borrower,
stockholder, member or partner who operates the farm;
(iii) Natural disasters, an outbreak of uncontrollable disease, or
uncontrollable insect damage which caused severe loss of agricultural
production that reduced repayment ability so that scheduled payments
cannot be made; or
(iv) Economic factors that are widespread and not limited to an
individual case, such as high interest rates or low market prices for
agricultural commodities as compared to production costs, that reduce
repayment ability so that the scheduled payments cannot be made.
(2) The borrower has acted in good faith.
(3) Borrowers who do not meet the eligibility requirements of this
section will be notified of the adverse decision by sending attachments
5 and 6, or 5-A and 6-A, of exhibit A of this subpart, as appropriate.
(4) Borrowers with sufficient nonessential assets to bring the FLP
loan account current are not eligible for assistance under this subpart
and will be processed in accordance with Sec. 1951.910 of this subpart.
(5) The borrower must agree to meet the training requirements of
Sec. 1924.74 of this chapter unless a waiver is granted in accordance
with that section. The training requirement applies to all primary loan
servicing programs.
(d) Feasibility determinations. The servicing official must
determine:
(1) That the borrower will be able to develop a feasible plan.
(2) If restructured, the loan will result in a net recovery to the
Government that will be equal to or greater than the net recovery value
from involuntary liquidation or foreclosure as calculated in accordance
with paragraph (f) of this section. A comparison with net recovery to
the Government, however, will not be made when establishing
conservation contracts under exhibit H of this subpart.
(e) Primary loan service programs. Any FLP borrower may request
Primary Loan Servicing Programs described in this subpart at any time
prior to becoming 90 days past due. However, borrowers must show that
they are not able to pay their debt as scheduled before the agency will
approve Primary Loan Servicing Programs. The agency will consider the
borrower's other assets in accordance with Sec. 1951.910 of this
subpart. Rescheduling, reamortization, consolidation, or deferral may
be utilized for any eligible borrower. Existing deferrals will be
cancelled at the same time additional primary loan servicing is
received. The loan will be entered into DALR$ as if the deferral were
already cancelled. If DALR$ shows that a borrower can develop a
feasible plan without a writedown at a lower cash flow margin than with
a writedown, that borrower will be provided the opportunity to choose
between restructuring with or without a writedown.
(1) Consolidation and rescheduling of OL and EO loans, EE
operating-type loans and EM loans made for subtitle B purposes
including EM loss loans. This subsection explains how to consolidate
and/or reschedule existing loans, providing the borrower agrees to such
actions. When the servicing official determines that consolidation and/
or rescheduling will assist in the orderly collection of the loan, the
servicing official should take such action provided all of the
following conditions exist:
(i) The borrower meets the eligibility requirements in paragraph
(c) of this section;
(ii) Such action is not taken to circumvent the FLP graduation
requirements;
(iii) The borrower's account is not being serviced by the OGC or
the U.S. Attorney and there are no plans to have the account serviced
by either of these offices in the near future;
(iv) Loans may be rescheduled or reamortized, as appropriate, to
bring the account current or to keep the account from becoming
delinquent. A sufficient number of notes including all delinquent notes
will be rescheduled to permit the development of a feasible plan of
operation;
(v) The borrower will comply with the highly Erodible Land and
Wetland Conservation provisions of exhibit M of subpart G of part 1940
of this chapter, if applicable;
(vi) Loans secured by real estate will not be consolidated and/or
rescheduled, until the servicing official reviews the Government's real
estate lien priority and value of security and decides that such an
action will be in the best interest of the Government and the borrower.
If there are any liens which were not in existence at the time the note
was signed, the servicing official will ask the OGC for an opinion as
to what lien position the Government will have if a new note is taken
unless a State supplement authorizing this action has been issued on
this subject;
(vii) Only loans of the same type will be consolidated;
(viii) EM actual loss loans will not be consolidated;
(ix) Loans serviced under subpart L of this part will not be
consolidated with another loan;
(x) Loans that have been deferred under this section will not be
consolidated and/or rescheduled during the deferral period;
(xi) Terms of consolidated and/or rescheduled loans are as follows:

[[Page 10126]]

(A) Consolidated and/or rescheduled loans will be repaid according
to the borrower's repayment ability, but will not exceed 15 years from
the date of the consolidation and/or rescheduling action, except:
(B) Repayment of loans solely for recreation and/or nonfarm
enterprise purposes may not exceed seven years from the date of the
consolidation and/or rescheduling action (the date the new note is
signed).
(C) Repayment of EE loans may not exceed 15 years from the date of
rescheduling.
(xii) Interest rates of consolidated and/or rescheduled loans will
be as follows:
(A) The interest rate for consolidated and/or rescheduled loans
will be the lesser of the current interest rate for that type of loan
or the lowest original loan note rate on any of the original notes
being consolidated and/or rescheduled. In the case of an OL-limited
resource loan, it will be the lesser of the current limited resource OL
loan rate or the original note rate. The interest rate for loans
rescheduled but not consolidated will be the lesser of the current
interest rate for that type of loan or the original loan note rate.
(B) At the time of the consolidation and/or rescheduling action, OL
loans that were not assigned a limited resource rate when the loan was
received, may be assigned a limited resource rate if:
(1) The borrower meets the requirements for the limited resource
interest rate, and
(2) A feasible plan cannot be developed at regular interest rates
and maximum terms permitted in this section.
(xiii) The original (old) note(s) will be marked ``Rescheduled''
and stapled to the new rescheduled promissory note and will be filed in
the operation file. Copy(ies) for the borrower's(s') case file should
be marked and stapled the same and filed in position 2 of the case
file. If a transfer is involved, assumption agreement(s) will be marked
and stapled with the note(s) and copies filed as indicated above. If
part of a note is written down, the written down note will be marked
``Rescheduled with Debt Write Down,'' and will be filed in the
operation file.
(xiv) For applications received before November 28, 1990, the
amount of outstanding accrued interest more than 90 days overdue and
any outstanding protective advances, as defined in Sec. 1965.11(b) of
subpart A of part 1965 of this chapter, made on the loan will be added
to the principal at the time of consolidation and/or rescheduling (the
date the new note is signed by the borrower). Protective advances are
not authorized for the payment of prior or junior liens except real
estate tax liens. See section II E of exhibit J of this subpart for an
explanation of how to schedule payment of interest not more than 90
days overdue; and
(xv) For new applications, the amount of outstanding accrued
interest and any outstanding protective advances, as defined in
Sec. 1965.11(b) subpart A of part 1965 of this chapter, made on the
loan will be added to the principal at the time of consolidation and/or
rescheduling (the date the new note is signed by the borrower) in
accordance with the provisions of exhibit J-1 of this subpart.
Protective advances are not authorized for the payment of prior or
junior liens except real estate tax liens.
(2) Reamortization of FO, SW, RL, RHF, EE, or EM loans made for
real estate purposes. When the servicing official determines that a
reamortization action will assist in the orderly collection of the
loan, the servicing official should take such action, provided:
(i) The borrower meets the eligibility requirements of 1951.909(c)
of this subpart;
(ii) Such action is not taken to circumvent the FLP graduation
requirements;
(iii) The borrower's account is not being serviced by the OGC or
the U.S. Attorney, and there are no plans to have the account serviced
by either of these offices in the foreseeable future;
(iv) A feasible plan for the borrower cannot be developed with the
existing repayment schedule. A sufficient number of notes, including
all delinquent notes, will be reamortized to permit the development of
a feasible plan of operation;
(v) The borrower will comply with the Highly Erodible Land and
Wetland Conservation requirements of exhibit M of subpart G of part
1940 of this chapter, if applicable;
(vi) Loans that have been deferred in this supbart will not be
reamortized during the deferral period unless the deferral is
cancelled;
(vii) Terms of repayment of reamortized loans are as follows:
(A) Reamortized installments usually will be scheduled for
repayment within the remaining time period of the note or assumption
agreement being reamortized. If repayment terms are extended, the new
repayment period may not exceed 40 years from the date of the original
note or assumption agreement or the useful life of the security,
whichever is less. EE loans for real estate purposes, which are secured
by chattels only, may be reamortized over a period not to exceed 20
years from the date of the original note or assumption agreement, or
the useful life of the security, whichever is less. RHF loans may not
exceed 33 years from the date of the original note or assumption
agreement.
(B) The Agency's lien priority may be affected if the final due
date of the original loan is extended. A State supplement will be
issued to provide instructions on the effect that a change in the final
due date has on security instruments and the actions necessary to
retain the Government's lien priority. The State supplement will also
include instructions for releasing the original security instrument
when a new one is obtained.
(viii) Interest:
(A) The interest rate will be the current interest rate in effect
on the date of reamortization (the date the new note is signed by the
borrower), or the interest rate on the original Promissory Note to be
reamortized, whichever is less. In the case of a limited resource loan,
it will be the limited resource FO or SW loan rate or the original loan
note rate, whichever is less.
(B) At the time of the reamortization, an FO or SW loan that was
not assigned a limited resource rate when the loan was received, may be
changed to a limited resource interest rate if:
(1) The borrower meets the requirements for a limited resource
interest rate,
(2) A feasible plan cannot be developed at regular interest rates
and at the maximum terms permitted in this section, and
(3) For SW loans, the loans funds were used for soil and water
conservation and protection purposes as set forth in Sec. 1943.66
(a)(1) through (a)(5) of subpart B of part 1943 of this chapter.
(C) For applications received before November 28, 1990, the amount
of accrued interest more than 90 days overdue and any protective
advances, as defined in Sec. 1965.11(b) of subpart A of part 1965 of
this chapter, charged to the borrower's account, will be added to the
principal at the time of the reamortization action (the date the new
note is signed by the borrower). Protective advances are not authorized
for the payment of prior or junior liens except real estate tax liens.
If there are no deferred installments, the first installment payment
under the reamortization will be at least equal to the interest amount
which will accrue on the new principal between the date the Form 1940-
17 is processed and the next installment due date. See section II

[[Page 10127]]

E of exhibit J of this subpart for an explanation of how to schedule
payments of interest not more than 90 days overdue. For new
applications, the amount of outstanding accrued interest and any
outstanding protective advances made on the loan will be added to the
principal at the time of reamortization (the date the new note is
signed by the borrower) in accordance with the provisions of exhibit J-
1 of this subpart.
(ix) The original (old) note(s) will be marked ``Reamortized'' and
will be stapled to the new promissory note and filed in the operational
file. Copies for the borrower(s) case file should be marked and stapled
the same and filed in position 2 of the case file. If a transfer is
involved, assumption agreement(s) will be marked and stapled with the
note(s) and copies filed as indicated above. If a part of a note is
written down, the written down note will be marked ``Reamortized with
Debt Writedown'' and will be filed as indicated above in this
paragraph.
(3) Deferral of existing OL, FO, SW, RL, EM, EO, RHF, and EE
loans.--(i) Loan deferrals. Deferrals will be considered only after it
has been determined that consolidation, rescheduling, and
reamortization, in accordance with this subpart, will not provide a
feasible plan.
(ii) Conditions. In order to be considered for a deferral, the
borrower must meet both of the following conditions:
(A) The need for the deferral must be temporary. To be temporary
means that the borrowers will be able to show to the satisfaction of
the servicing official that they will be able to resume payment on the
debt by the end of the deferral period, or the new payments, as
established by using consolidation, rescheduling, or reamortization can
be resumed at the end of the deferral period; and
(B) Continuation of loan payments as presently scheduled without
change, will unduly impair the borrower's standard of living. An unduly
impaired standard of living is a condition whereby the borrower, due to
circumstances beyond the borrower's control, is unable to pay essential
family living expenses (partnerships, joint operators, corporations,
and cooperatives do not have family living expenses), pay normal farm
operating expenses, including reasonable and customary hired labor and/
or salary paid to the operator(s) of a partnership, a joint operation,
a corporation, or a cooperative, maintain essential chattels and real
estate, and meet the scheduled payments of all debts.
(iii) Approval offical determinations. The approval official must:
(A) Determine that the borrower meets the eligibility requirements
of Sec. 1951.909(c) of this subpart;
(B) Determine that a deferral of payments is necessary and
appropriately document the conditions causing the need for deferral;
(C) If a borrower owns 50 acres or more of marginal land as defined
in exhibit G of this subpart and a feasible plan cannot be developed
after consideration of a deferral, the servicing official will inform
the borrower about the Softwood Timber (ST) loan program authorized by
exhibit G of this subpart by sending Attachment 1 of exhibit G of this
subpart by certified mail, return receipt requested, within 5 days
after the adverse deferral determination. If the borrower requests the
servicing official to determine that an ST loan may allow the borrower
to continue to farm, within 15 days of the borrower's receipt of
attachment 1, the servicing official will determine if the borrower is
eligible, based on criteria as set forth in exhibit G of this subpart.
If the borrower is eligible the servicing official will help the
borrower to develop a plan to determine if a feasible operation can be
developed utilizing this program. The discussion will be documented in
the borrower's case file.
(iv) Loan deferral considerations. The servicing official will
assist the borrower in completing a typical-year plan. If there is no
typical year, the servicing official will assist the borrower with
completing a plan of operation for each year of the deferral. The plans
must be considered in DALR$.
(A) A sufficient number of loans must be considered for deferral to
permit the borrower to have a feasible plan.
(B) A deferral plan may include a reorganization of the farming
operation, including the use of new enterprises, to overcome existing
financial, economic or other limitations of the operation. If the
proposed restructuring requires capital expenditures, a subordination
or additional loan will be considered. Deferral of additional loan
installments beyond those needed to allow the borrower to develop a
feasible plan will not be used to create additional cash reserve for
capital purchases. Such purchases are not considered operating
expenses.
(C) A typical year during the deferral period is a year which most
closely represents the borrower's average operation for the entire
deferral period. There may be no typical year for farming or ranching
operations undergoing a major reorganization. If there is no typical
year, then it will be necessary to develop a plan of operation for each
year of the deferral. The plans must be considered in DALR$ to
determine if each plan is feasible.
(D) The deferral of loan installments is not intended to create a
high net cash reserve where revenue substantially exceeds expenses. If
the deferral of a complete note would cause a high net cash reserve
during the entire deferral period, a full deferral should not be
granted. In such a case, a partial deferral should be considered to
obtain a feasible plan of operation. The same approach should be used
for situations in which there is no typical year and debt payments must
vary throughout the deferral period.
(E) The borrower must have feasible plans of operation to support
any deferral request. Plans of operation in conjunction with loan
deferrals must be realistic and supported by the borrower's actual
records.
(v) Additional and subsequent deferrals. If, during the period of
the initial deferral, the borrower is unable to make the scheduled
payments, the borrower may again request primary loan service actions.
When considering primary servicing actions, existing deferred notes
must be entered into DALR$ as if they had not been deferred. If it is
necessary to defer additional loans to develop a feasible plan, such
action will be taken if the deferral will result in a greater net
recovery to the Government than debt writedown. Borrowers may obtain
subsequent deferrals after the deferral period provided the conditions
of this subsection are met.
(vi) Term and interest rate. A deferral period will not exceed five
(5) annual installments. Deferral interest rates will be determined as
specified in paragraphs (e)(1)(xii) and (e)(2)(viii) of this section.
(A) All loans being deferred will be consolidated, rescheduled or
reamortized, as applicable. The promissory note rescheduled,
reamortized or consolidated for the deferral will show ``zero'' as the
installments due during the period of the deferral if the whole note is
deferred and will not be changed during the deferral period unless the
conditions of paragraph (e)(3)(v) of this section are met. The
servicing official will determine the amount of interest that will
accrue during the deferred period. This interest will be repaid in
equal amortized installments during the term of the loan remaining
after the deferral period. The calculated installments will be added to
the remaining installments for the remaining principal balance and

[[Page 10128]]

inserted on the promissory note as a scheduled installment for the
remaining period of the loan. The Finance Office will apply the
payments made on the note in accordance with subpart A of this part.
For applications received before November 28, 1990, the amount of
outstanding accrued interest more than 90 days overdue and any
outstanding protective advances, as described in Sec. 1965.11(b) of
subpart A of part 1965 of this chapter, made on the loan will be added
to the principal at the time of the deferral (the date the new note is
signed by the borrower). Protective advances are not authorized for the
payment of prior or junior liens except real estate taxes. See section
II E of exhibit J of this subpart for an explanation of how to schedule
payment of interest not over 90 days overdue. For new applications, the
amount of outstanding accrued interest and any outstanding protective
advances made on the loan will be added to the principal at the time of
deferral (the date the new note is signed by the borrower).
(B) The field office will process the deferral via the Automated
Discrepancy Processing System (ADPS).
(C) If a deferral is approved, the borrower's name and the date of
approval will be recorded and maintained in accordance with subpart A
of part 1905 of this chapter. The Finance Office will provide the
county office with a quarterly status report for each borrower who has
received a deferral.
(D) Six months prior to the end of the deferral period the
servicing official will notify the borrower in writing of the
expiration of the deferral and the amount and date of the borrower's
first upcoming installment of the debt.
(E) A deferral will be cancelled if the loan is later restructured
in accordance with this subpart. The cancellation will be processed via
ADPS.
(vii) Increase in repayment ability. At the time the servicing
official makes the analysis required by Sec. 1924.60 of subpart B of
part 1924 of this chapter, the servicing official will determine
whether the borrower has had an increase in income and repayment
ability. If an income increase is substantial enough to enable the
borrower to graduate, the case will be handled in accordance with
subpart F of this part. If an increase would enable the borrower to
make some payments during the deferral period, the servicing official
will, in writing, ask the borrower to sign a Form 440-9,
``Supplementary Payment Agreement,'' within 30 days of the date of the
written request. The borrower will be provided appeal rights. When
doing the analysis to determine whether there is a substantial increase
in income and repayment ability, the servicing official will determine
whether this increase exists by comparing it to the original plan
developed in the deferral application and also to plans developed for
the current operating year to determine that the excess income is not
needed for essential living and operating expenses or scheduled debt
payment. Refusal to sign Form 440-9 will be considered a non-monetary
default and will be handled as set forth in Sec. 1951.907(e) of this
subpart. If the borrower signs Form 440-9 and later does not honor the
terms and conditions of the repayment agreement, the borrower's account
will be handled as set forth in Sec. 1951.907 of this subpart.
(4) Writedown. The following conditions shall be met in order for a
borrower to receive writedown of FLP debts:
(i) No other Primary Loan Service programs, including deferral, nor
any combination thereof, will produce a feasible plan that will permit
the borrower to continue the operation. However, if DALR$ shows that a
borrower can develop a feasible plan without a writedown at a lower
cash flow margin than with a writedown, then the borrower will be
provided the opportunity to choose between restructuring with or
without a writedown;
(ii) The borrower must never have received debt forgiveness on
another direct loan at any time;
(iii) The amount written off may not exceed $300,000.
(iv) A feasible plan must be developed that will result in a
present value of loans to be repaid to the Government which is equal to
or more than a net recovery from an involuntary liquidation or
foreclosure;
(v) The borrower must comply with the Highly Erodible Land and
Wetland Conservation requirements of exibibit M of subpart G of part
1940 of this chapter, if applicable;
(vi) The borrower must agree to a Shared Appreciation Agreement if
the loan is secured by real estate;
(vii) Loans written down with the Primary Loan Servicing programs
will be rescheduled, reamortized, or deferred in accordance with
paragraph (e) of this section; and
(viii) Borrower must agree to a lien on certain assets as provided
in 1951.910 of this subpart, including nonessential assets, where the
net recovery value of these assets was not paid to the Agency. (The
Agency's lien will be taken only at the time of closing the
restructured loans); and
(ix) Debt reduction received through conservation easements or
contracts will not be counted toward the limitations in paragraphs
(e)(4) (ii) and (iii) of this section.
(f) Determining value of net recovery from involuntary liquidation.
After receipt of a complete application for Primary and Preservation
Loan Service programs, the servicing official will make the
calculations required in this section and notify the borrower of the
result. For New Applications, nonessential assets will be considered in
accordance with Sec. 1951.910(a) of this subpart.
(1) The servicing official will use the computer program, DALR$, to
determine the net recovery to the Government equivalent to involuntary
liquidation of the collateral securing the FLP debt in accordance with
Exhibit J or J-1 of this subpart, ``Debt and Loan Restructuring
System,'' as applicable, and will follow the guidance provided by State
supplements and Exhibit I of this subpart, ``Guidelines for Determining
Adjustments for Net Recovery Value of Collateral.'' The servicing
official will determine the current market value of the collateral in
the borrower's possession including tangible property in existence and
of record in accordance with subpart E of part 1922 of this chapter for
real estate property, and on Form 440-21, ``Appraisal of Chattel
Property.'' The servicing official also will determine the current
market value of any bank accounts, stocks and bonds, certificates of
deposit and the like pledged to and/or in the possession of the Agency.
Collateral may include real estate, chattels, tangible property and
property such as bank accounts, stocks and bonds, certificates of
deposit, and the like. Chattels include machinery, equipment,
livestock, growing crops, and crops in storage. Tangible property may
include accounts receivable (including Government payments),
inventories, supplies, feed, etc. From the current market value of the
collateral in the borrower's possession, or pledged to and/or in the
possession of the Agency (in the case of bank accounts, stock and
bonds, certificates of deposit, and the like), the following
adjustments will be made:
(i) Subtract the amount which would be required to pay prior liens
on the collateral;
(ii) Subtract taxes and assessments, depreciation, management
costs, and interest cost to the Government based on the 90-day Treasury
Bills (published in a National Office issuance). Taxes

[[Page 10129]]

and assessments, depreciation, management costs, as well as interest
costs will be calculated on the current market value of the property
for the average inventory holding period. The holding period for
suitable inventory farm property will be established by each State as
of July 1 each year using Report Code 597. The months that the suitable
property is under lease will not be included in determining the average
holding period for purposes of this subpart;
(iii) Adjust the current market value for estimated increases or
decreases in value of the property for the holding period specified in
paragraph (f)(1)(ii) of this section;
(iv) Subtract resale expenses, such as repairs, commissions, and
advertising;
(v) Other administrative and attorney's expenses;
(vi) Add income which will be received after acquisition; and
(vii) For a borrower who submits a ``new application'' as defined
in Sec. 1951.906 of this subpart, add the value of any collateral that
is not in the borrower's possession and that has not been approved on
the Form 1962-1 or released in writing by the Agency, minus the value
of any prior lienholder's interest. Collateral not in possession of the
borrower is defined as any property specified in any agency security
instruments for such borrower's FLP debt that the borrower has disposed
of and that the Agency has not approved or released in writing. The
value of normal income security not in possession of the borrower will
not be added to the NRV if it could be post-approved for release in
accordance with Sec. 1962.17 of subpart A of part 1962. The value of
any collateral that is not in the possession of the borrower will be
determined by the servicing official based upon the best information
available about the value of the collateral on or about the time of its
disposition. In determining the value of such property, the Agency will
use such sources as the publications Hotline (Farm Equipment Guide) and
Official Guide (Tractor and Farm Equipment), sale prices at local
public auctions, public livestock sale barn prices, comparable real
estate sales, etc. Agency appraisal forms will be used to record the
value of the missing collateral and the basis for the valuation.
(2) The State Executive Director will determine costs of
involuntary liquidation of collateral for farm loans by analyzing the
costs of involuntary liquidation within the geographic areas of their
jurisdiction. The State Executive Director also will issue a State
supplement of estimated costs and average holding time to be used as
guidelines by servicing officials in making calculations of net
recovery value under this subsection. Such cost analyses will be
carried out in July of each year. The State Executive Director will
consult with State Executive Directors of adjoining States, other
lenders, real estate agents, auctioneers, and others in the community
to gather and analyze the information specified in this subpart.
(g) Determining net recovery value resulting from primary
servicing. The value of the restructured debt will be based on the
present value of payments the borrower would make to the Agency using
any combination of primary loan service programs that will provide a
feasible plan. Present value is a calculation concept which assigns a
lower current value to dollars received in later years than to dollars
received at the present time. Servicing officials will use a discount
rate based on 90-day Treasury Bills as of the date the borrower files
the application for restructuring. The National Office will publish the
90-day Treasury Bill rate in a National Office issuance.
(h) Notification requirements. In those instances where the
applicable notice is sent certified mail, and the certified mail is not
accepted by the borrower, the servicing official will immediately send
the documents from the certified mail package to the borrower's last
known address, first class mail. The appropriate response time will
commence 3 days following the date of mailing.
(1) Offer. If the calculations show that the value of the
restructured debt is greater than or equal to the NRV as determined in
paragraph (f) of this section, the servicing official will forward to
the State Executive Director the borrower's Farm and Home Plan and the
original printout of the DALR$ calculations. The servicing official
will certify that the borrower meets all requirements for debt
restructuring with the writedown amount specified on the printout. The
State Executive Director's authorization to the servicing official to
proceed with the writedown will be evidenced by the State Executive
Director's signature affixed to the original copy of the DALR$ printout
returned to the servicing official. Within 60 days after receiving a
complete application, the servicing official will notify the borrower
of the results of the calculations by sending Exhibit F of this
subpart, certified mail, return receipt requested, and offer to
restructure the debt. A printout of the DALR$ calculations will be
attached to Exhibit F of this subpart.
(i) Exhibit F of this subpart will inform the borrower(s) of the
Agency's offer to restructure the debt, the right to request a copy of
the agency's appraisal, and other options which may include payment of
nonessential assets and negotiation of the appraisal. If the borrower
accepts the offer within 45 days following any appeal, the servicing
official will restructure the debt within 45 days after receipt of the
written notice of the borrower's acceptance.
(ii) If the borrower does not respond to exhibit F within 45 days,
or declines the Agency's offer to restructure the debt without
requesting an appeal or negotiation, the servicing official will send
attachments 9 and 10, or 9-A and 10-A of exhibit A of this subpart, as
applicable. If the borrower requests an appeal and the Agency is
upheld, attachments 9-A and 10-A will not be sent until the borrower is
given the opportunity to accept the original offer within 45 days
following the final appeal decision. These borrowers will not have an
additional opportunity to appeal the offer in attachments 9-A and 10-A.
If attachment 10 or 10-A is not returned within 30 days of the
borrower's receipt of the attachments, the account will be accelerated
or foreclosed in accordance with Sec. 1955.15 of subpart A of part 1955
of this chapter.
(iii) If the borrower submitted a new application and requests a
negotiated appraisal within 30 days of receiving exhibit F, the
negotiation of the appraisal will be completed in accordance with
paragraph (i) of this section.
(A) After completing a negotiation of the appraisal, if the debt
can be restructured, the servicing official will send exhibit F to the
borrower making the new offer in accordance with paragraph (h)(1)(i) of
this section.
(B) If the negotiated appraisal changes the DALR$ calculations so
that the debt cannot be restructured, the borrower will be sent exhibit
E, ``Notification of Adverse Decision for Primary Loan Servicing,
Mediation or Meeting of Creditors and Other Options,'' in accordance
with paragraph (h)(3) of this section. The appraisal cannot be
negotiated again and is not subject to appeal.
(2) Conservation contracts. If the borrower returned attachment 2
or 4 to Exhibit A of this subpart within 60 days, requesting a
conservation contract by submitting a map or aerial photo showing the
portion of the farm and approximate acres to be considered in the
request, the servicing official will proceed with processing the
request for debt relief as set forth in Exhibit H of this subpart.
Borrowers who did not

[[Page 10130]]

previously ask for this option can make a request for the contract at
this time by submitting a map or copy of an aerial photo indicating
that portion of the farm and appropriate acres to be considered.
Borrowers must submit the photo within 30 days of receiving Exhibit E
of this subpart.
(3) Mediation/voluntary meeting of creditors. If the DALR$
calculations indicate a feasible plan of operation cannot be developed
considering all Primary Loan Service Programs, Softwood Timber, or
Conservation Contracts, the servicing official will take the following
actions within 15 days from the date of the determination that the
borrower's debt cannot be restructured as requested:
(i) Exhibit E, ``Notification of Adverse Decision for Primary Loan
Servicing, Mediation or Meeting of Creditors and Other Options,'' of
this subpart will be sent to the borrower in all cases by certified
mail, return receipt requested. A printout of the DALR$ calculations
will be attached to exhibit E of this subpart.
(A) When the borrower is in a State with a USDA Certified Mediation
Program, paragraph I in exhibit E will be used. Paragraph I tells the
borrower that the Agency is requesting mediation with the borrower's
creditors in an effort to obtain debt adjustment which would permit the
development of a feasible plan of operation. If the borrower submitted
a new application, the borrower must respond to exhibit E of this
subpart if the borrower wants to negotiate the Agency's appraisal in
accordance with paragraph (i) of this section. The borrower may request
a copy of the Agency's appraisal. The Agency must participate in USDA
Certified Mediation Programs whether or not the borrower responds to
exhibit E of this subpart. Any negotiation of the appraisal must be
completed prior to any mediation.
(B) In States without a certified mediation program, exhibit E of
this subpart will be sent by certified mail, return receipt requested,
to inform the borrower about the applicable options which may include a
request for a copy of the Agency's appraisal, a meeting of creditors,
payment of nonessential assets, negotiation of the appraisal and a
request for an independent appraisal. Paragraph I of exhibit E of this
subpart will be deleted. The purpose of the voluntary meeting of
creditors is to develop a feasible plan. Paragraph II of exhibit E of
this subpart, therefore, will be used to offer a voluntary meeting of
creditors when the borrower has undersecured creditors who hold a
substantial part of the borrower's total debt. A ``substantial part of
the borrower's total debt'' means that the debt of the undersecured
creditors is large enough so that if it were written down to zero, a
feasible plan could be developed considering all primary servicing
options. The servicing official will document such determination in the
case file, and the servicing official will not offer to carry out a
voluntary meeting of creditors when the undersecured debt is not a
substantial part of the borrower's total debt. Such borrower will be
informed later of additional rights, including appeal rights, when the
Agency sends attachments 5 and 6, or attachments 5-A and 6-A, of
exhibit A of this subpart. Any appeal may challenge the Agency's
determination not to offer a voluntary meeting of creditors because the
undersecured debt is not a substantial part of the borrower's total
debt.
(C) Any negotiation of the Agency's appraisal must be completed
prior to the meeting of creditors or mediation. If the borrower does
not request any of the options offered in exhibit E of this subpart
within 45 days, the servicing official will send attachments 5 and 6,
or 5-A and 6-A of exhibit A of this subpart, as applicable, certified
mail, return receipt requested.
(ii) If mediation or the voluntary meeting of creditors is held but
is not successful, the borrower will be sent attachments 5 and 6, or 5-
A and 6-A, of exhibit A of this subpart, as applicable, certified mail,
return receipt requested, within 15 days of the unsuccessful mediation
or meeting. The DALR$ computer printout will be attached to attachment
5 or 5-A of exhibit A of this subpart.
(4) Buyout of loans. The following notification and processing
provisions also apply to buyout as offered in Attachments 5 and 5-A of
Exhibit A of this subpart. After July 3, 1996, buyout will be at the
Current Market Value (CMV) of the security.
(i) Eligible borrowers will have 90 days after the receipt of the
notification of ineligibility for Primary Loan Service programs to buy
out their loans at Current Market Value, or the balance of their unpaid
FLP debt, whichever is lower.
(ii) The present value of the restructured loan must be less than
the net recovery value to receive buyout.
(iii) The Agency will not provide direct or guaranteed credit for a
buyout.
(iv) The borrower must never have received debt forgiveness on
another direct loan. (Applies if any debt will be written off.)
(v) The amount written off may not exceed $300,000.
(vi) The borrower must have acted in good faith.
(vii) Debt reduction received through conservation easements or
contracts will not be counted toward the limitations in paragraphs
(h)(4) (iv) and (v) of this section.
(viii) The mortgage or deed of trust will be released in accordance
with paragraph (k) of this section.
(ix) The State Executive Director must approve the buyout prior to
offering buyout to the borrower if the Agency will be writing off any
debt.
(i) Administrative appeals and negotiation of appraisals.--(1)
Appeals. The time limit to pay the current market value of the
security, as set out in paragraph (h)(4) of this section, will start on
the day the borrower receives the final appeal or review decision
upholding the initial decision. The borrower will have conclusively
presumed to have received that decision within 3 days of mailing.
(2) Appeal process. (i) If the administrative appeal process
results in a determination that the borrower is eligible for Primary
Loan Servicing, the servicing official will process the request
pursuant to Sec. 1951.909 of this subpart. The information used will be
that which the appeal officer used in making the decision on the
appeal, unless stated otherwise in the final appeal decision letter. In
cases of debt restructure resulting from appeals, the interest rate
will be the lesser of the current rate or the original note rate on the
date of the closing of the transaction. If implementation of the appeal
decision would cause writedown or writeoff of more than $300,000
because of interest accrued after the adverse decision, the servicing
official will process the action so as to complete the transaction.
(ii) If the administrative appeal process results in a
determination that the borrower is ineligible for Primary Loan
Servicing, the servicing official will send Exhibit K and Attachment 1
of this subpart and continue processing any application for debt
settlement that may have been submitted in accordance with subpart B of
part 1956 of this chapter. If the borrower does not return Attachment 1
of Exhibit K within 15 days of the date that it is sent, the servicing
official will continue to process the application for Preservation Loan
Servicing and any debt settlement. The account will not be accelerated
or foreclosure will not continue until the borrower has the opportunity
to appeal any denial of the Preservation Loan Servicing and any Debt
Settlement request. If the borrower returns Attachment 1 of Exhibit K
within 15

[[Page 10131]]

days of its mailing, the account will be accelerated.
(3) Appraisal appeals. (i) Borrowers appealing the current market
appraisal completed by the Agency may obtain an appraisal by an
independent appraiser selected from a list of at least three names
provided by the servicing official. A borrower who submitted a new
application may appeal the Agency's appraisal, if it has not previously
been negotiated under paragraph (i)(4) of this section, and the denial
of other issues of Primary Loan Service programs in which the
appraisal, as part of the NRV calculation, is relevant. The cost of the
independent appraisal must be paid by the borrower. The borrower will,
upon request, have access to the case file and receive a copy of the
Agency's appraisal. The independent appraiser must be a State certified
general appraiser.
(ii) The appraisal report must conform to subpart E of part 1922 of
this chapter for real estate and Form 440-21 for chattels.
(iii) If either the servicing official or the borrower discovers
any mathematical or property description errors in the appraisal prior
to or at the time of the review and comparison, necessary corrections
may be made if both parties agree. The party discovering the error must
contact the other for a meeting to approve the corrections.
(iv) If the Agency's appraisal and the borrower's independent
appraisal vary in value by five percent or less, the borrower will
select the appraisal to be used for servicing under this subpart.
(4) Negotiation of appraisals. A borrower who submits a new
application may request to negotiate the appraisal one time only.
Negotiation of appraisals is offered in Exhibits E and F of this
subpart, as discussed in paragraph (h) of this section. All appraisals
used in the negotiations must reflect the value of the property as of
the same time frame as the Agency's initial appraisal. Errors will be
handled in accordance with paragraph (i)(3)(iii) of this section.
(i) The borrower can request the list of independent appraisers
from the servicing official on Attachment 2 of Exhibits E and F of this
subpart. The borrower must provide the servicing official with a copy
of his or her independent appraisal within 30 days of requesting
negotiation. The borrower must pay for this independent appraisal. The
borrower's independent appraiser and appraisal report must meet the
qualifications described in paragraph (i)(3)(ii) of this section, but
the independent appraiser need not be on the Agency's list of qualified
appraisers. If the Agency's appraisal and the borrower's independent
appraisal vary in value by five percent or less, the borrower will
select the appraisal to be used for servicing under this subpart. No
further negotiation will occur.
(ii) If the two appraisals differ by more than five percent, the
servicing official will give the borrower a list of qualified,
independent appraisers. The borrower will select one appraiser from the
Agency's list to conduct a third appraisal. The appraiser cannot have
conducted either the Agency's or the borrower's independent appraisal,
and must meet the qualifications set out in paragraph (i)(3) of this
section. The borrower, the appraiser and the servicing official will
complete and sign the Appraisal Agreement (Attachment 3 of Exhibit F of
this subpart). The appraiser will be sent a copy of the appraisal
standards, subpart E of part 1922 of this chapter, for real estate and
Form 440-21 for chattels. The borrower will submit to the servicing
official the original or a copy of the third appraisal and its
attachments and the appraiser's bill. The Agency will pay 50 percent of
the cost. The borrower is responsible for paying the appraiser directly
the remaining 50 percent of the cost.
(iii) Following the completion of the third appraisal, the three
appraisals will be compared by the servicing official, who will average
the two that are the closest in value. The average of the two closest
in value will become the final appraised value. Errors will be handled
in accordance with paragraph (i)(3)(iii) of this section.
(j) Processing of writedown. Borrowers who are eligible for Primary
Loan Service Programs with writedown will have their loans rescheduled
or reamortized in accordance with this subpart. All loan servicing
actions approved in connection with the writedown must take place
simultaneously. The borrower and servicing official will complete
exhibit D to this subpart, ``Shared Appreciation Agreement.'' Exhibit D
provides for recapture as specified in 1951.914 of this subpart of a
portion of any appreciation in the value of the real property securing
the debt remaining after the writedown. The DALR$ computer program will
be used to determine the notes to be written down.
(1) A separate Form 1940-17, ``Promissory Note,'' will be used for
each note or assumption agreement being reamortized.
(2) A Form 1940-17 will be completed, signed, and distributed as
provided in the FMI.
(3) The loan servicing action date of approval is also the date
that will be inserted on the rescheduled or reamortized Form 1940-17 in
accordance with the provisions in the ADPS manual when establishing an
equity record.
(4) A Form 1940-17 may be processed provided the County Office has
possession of the original note being reamortized. If the County Office
does not have possession of the original note, the servicing official
will ask the Finance Office to return the original note so that it is
in the County Office before Form 1940-17 is processed.
(5) The field office will process the reamortization or
consolidation via the Automated Discrepancy Processing System (ADPS) in
accordance with Form 1940-17, and complete exhibit D of this subpart.
(6) The original (old) note(s) will be marked ``Rescheduled or
Reamortized with Writedown of Debt'' and stapled to the new rescheduled
or reamortized promissory note(s) and will be filed in the promissory
note file in the operation file. Copies for the borrower(s) case file
should be marked and stapled the same and filed in position 2 of the
case file. If a transfer is involved, assumption agreement(s) will be
marked and stapled with the note(s) and copies will be filed as
indicated above.
(7) A lien will be taken on assets in accordance with Sec. 1951.910
of this subpart.
(k) Real estate liens. The Agency's real estate liens will be
maintained even if the writedown of the borrower's real estate debt
results in all real estate debts to the Agency being written down. The
Agency's real estate lien will not be subordinated to increase the
amount of the prior liens during the shared appreciation period. Shared
appreciation agreements will be serviced in accordance with
Sec. 1951.914 of this subpart. Upon payment by the borrower of current
market value in a buyout, the original mortgage or deed of trust will
be released on real estate for the FLP loans bought out. The notes will
be marked ``Satisfied at Current Market Value'' and returned to the
debtor or the debtor's legal representative. Existing net recovery
buyout recapture agreements will be serviced in accordance with
Sec. 1951.913 of this subpart.
(l) Non-real estate liens. If a borrower's FLP loan(s) were not
secured by real estate, there will be no recapture and the borrower
will not be required to enter into a recapture agreement. Upon payment
by the borrower of the current market value in a buyout, the original
security instruments will be released on

[[Page 10132]]

chattel security for the FLP loans bought out. These notes will be
marked ``Satisfied at Current Market Value'' and returned to the debtor
or the debtor's legal representative.
(m) Notes. Notes evidencing real estate debts written down in full
or written off as a result of Primary Servicing will be returned to the
debtor at the end of any recapture period. If there is no recapture
period, the notes will be returned when the County Office verifies that
the transaction has been recorded in the Finance Office. For a market
value buyout, the original and copies of the notes will be marked
``Satisfied by Approved Current Market Value Buyout.'' For writedown in
full, the original and copies of the notes will be marked ``Satisfied
by Approved Debt Writedown.'' If a note is only partially written-down,
it will be returned to the debtor when paid in full. The original and
copies of such notes will be marked ``Satisfied by Approved Partial
Writedown.'' Original chattel security notes will be marked ``Satisfied
at Current Market Value'' and released to the debtor upon payment of
their current market value in a buyout.
15. Section 1951.910 is revised to read as follows:

Sec. 1951.910 Consideration of borrower's other assets for new
applications.

If a delinquent borrower has other assets that are not serving as
collateral for the FLP debt, the servicing official will determine
whether these assets are nonessential, as defined in Sec. 1951.906 of
this subpart.
(a) Nonessential assets. The net recovery value (NRV) of
nonessential assets must be considered when the borrower's application
is processed for loan servicing in accordance with this subpart. The
Agency will not write down or write off any debt or portion of a debt
that could be paid by liquidation of nonessential assets, or by payment
of the loan value of the assets that could be received from non-Agency
sources. The loan value of the assets will be considered as the same as
the NRV of the assets.
(1) Determining the value of nonessential assets. The NRV of the
nonessential assets is the market value less any prior liens and any
selling costs which may include such items as taxes due, commissions
and advertising costs. The determination of NRV of nonessential assets
does not include a deduction for carrying the property in inventory.
The market value of the nonessential assets must be estimated by a
current appraisal in accordance with subpart E of part 1922 of this
chapter for real estate property, and on Form 440-21, ``Appraisal of
Chattel Property,'' for chattels. Borrowers who disagree with the
Agency's appraisal may request a negotiated appraisal or appeal in
accordance with Sec. 1951.909(i) of this subpart.
(2) Eligibility. If the NRV of the nonessential assets is
sufficient to bring the delinquent FLP account current, the borrower is
not eligible for primary loan servicing including buyout in accordance
with this subpart. The borrower, instead, will be sent attachments 5-A
and 6-A of exhibit A of this subpart. The servicing official will
indicate the values of both the NRV of nonessential assets and the FLP
security on attachment 5-A. The borrower's nonessential assets and
their NRVs also will be listed on attachment 5-A. The borrower will
have 90 days to bring the FLP account current from the date of the
receipt of attachments 5-A and 6-A. If the borrower does not pay
current within this time period, the account will be accelerated after
all appeal rights have been exhausted. If the NRV of the nonessential
assets is not sufficient to bring the FLP account current, then the
nonessential assets will be considered as set out in paragraph (a)(3)
of this section.
(3) Inclusion in NRV. If the NRV of the nonessential assets is not
sufficient to bring the FLP account current, then the servicing
official will add the NRV of these assets to the NRV of the FLP
collateral according to Sec. 1951.909(f) of this subpart. The servicing
official will encourage, but not require the borrower to liquidate
those nonessential assets and apply the proceeds to his/her outstanding
debts. If the borrower liquidates the nonessential assets, or obtains a
loan against the equity in such assets, and pays the Agency the NRV of
the nonessential assets within 45 days of receiving exhibit E or F of
this subpart, as appropriate, the payment will be subtracted from the
FLP debt and then the servicing official will recalculate the debt
restructuring without considering the NRV of the nonessential assets.
If the borrower does not sell these assets, the servicing official will
include their NRV in calculating the debt restructuring and take a lien
on the assets at the time of closing the restructured loan.
(b) Lien on certain assets. Delinquent borrowers must pledge
certain assets, essential and nonessential, unencumbered to the Agency
as security at the time FLP loans are restructured, as follows:
(1) The best lien obtainable will be taken on all assets owned by
the borrower. When the borrower is an entity, the best lien obtainable
will be taken on all assets owned by the entity, and all assets owned
by all members of the entity. Different lien positions on real estate
are considered separate and identifiable collateral.
(2) Security will include, but is not limited to, the following:
land, buildings, structures, fixtures, machinery, equipment, livestock,
livestock products, growing crops, stored crops, inventory, supplies,
accounts receivable, certain cash or special cash collateral accounts,
marketable securities, certificates of ownership of precious metals,
and cash surrender value of life insurance.
(3) Security will also include assignments of leases or leasehold
interests having mortgageable value, revenues, royalties from mineral
rights, patents and copyrights, and pledges of security by third
parties.
(4) The exceptions set forth in Sec. 1941.19(c) of subpart A of
part 1941 of this chapter apply.
(5) These assets will be considered as additional security for the
loans as well as any shared appreciation agreement. The value of the
essential assets will not be included in the NRV calculation to
determine restructuring. The Agency's lien will be taken only at the
time of closing the restructured FLP loans.
16. Section 1951.911 is revised to read as follows:

Sec. 1951.911 Homestead protection.

(a) General. If the Agency has only chattel property as security,
preservation servicing will not be offered. Borrowers who submitted a
complete application prior to April 4, 1996 will be considered for
leaseback/buyback in accordance with the previous CFR volume containing
revisions as of January 1, 1996 and Agency procedures, (available in
any county office.) Inventory property which is located within the
boundaries of an Indian reservation of a Federally recognized Indian
Tribe and the previous owner is a member of the Indian Tribe that has
jurisdiction over that reservation should be handled in accordance with
Sec. 1955.66(d) of subpart A of part 1955 of this chapter.
(b) Homestead protection. Borrowers and former borrowers who had or
have an FLP loan secured by the real property containing the dwelling
owned by them and used as their principal residence may apply for
homestead protection before or after the Agency acquires the property.
Real property that is in inventory as of the effective date of the
statute or is acquired in the future will be considered for homestead
protection as set forth in this subpart.

[[Page 10133]]

(1) Purpose. The purpose of the Homestead Protection Program is to
permit borrowers or former borrowers to retain their dwellings through
a lease or purchase. Such lease or purchase could permit these
individuals to have a home and providing an opportunity to continue to
farm.
(2) Notification and processing. If a feasible plan for
restructuring debt cannot be developed using Primary Loan Service
programs, the borrower will be advised by the use of Exhibit K with
Attachment 1 of this subpart that the Agency will continue with the
processing of Preservation Service programs, if applicable. A borrower
who desires homstead protection must request it in accordance with
Sec. 1951.907. A borrower who meets the eligibility requirements of
paragraph (b)(3) of this section will be permitted to retain possession
of the homestead, in accordance with paragraph (b)(2)(ii) of this
section, before title is acquired or under a lease with an option to
purchase after title is acquired.
(i) Determining homestead protection property. (A) The homestead
protection property will include the borrower's principal residence and
not more than 10 acres of adjoining land that is used to maintain the
borrower's family and a reasonable number of farm service buildings
located on land adjoining the residence which are useful to the
occupants of the dwelling.
(B) The servicing official will review the proposed homestead
protection property. If the servicing official does not agree with the
proposed shape or size of the property, an alternate configuration will
be negotiated with the borrower.
(C) If the borrower and the servicing official cannot agree on the
proposed shape and size of the property, the servicing official will
make the determination.
(D) When the size and shape of the property is agreed upon and the
borrower has been found eligible, the servicing official will request a
licensed surveyor to survey the property, have a legal description
prepared, and mark the property lines with permanent type markers.
(E) Appraisals will be completed in accordance with paragraphs
(b)(6) and (b)(7)(ii)(B) of this section.
(ii) Processing homestead protection before the Agency acquires
title. (A) A borrower will be considered for homestead protection when
it is determined that the Primary Loan Service programs cannot resolve
the delinquency. To process an application, the borrower must indicate
the buildings and land to be included in the request for homestead
protection. If determined eligible for homestead protection, the
borrower and the servicing official will enter into a Homestead
Protection Program Agreement (Exhibit L of this subpart) to lease the
property if and when the Agency acquires title. A copy of Form 1955-20,
``Lease of Real Property,'' will be attached to the agreement as an
exhibit.
(B) Concurrently with the execution of the preacquisition Homestead
Protection Program Agreement, the borrower will deliver a completed
Form RD 1955-1 to the Agency. The Agreement is subject to the
provisions of subpart A of part 1955 of this chapter. If the Agency
acquires title during the processing of a preacquisition Homestead
Protection Agreement, processing of the agreement will be terminated
and the owner will be given homestead protection rights pursuant to
paragraph (b)(2)(iii) of this section.
(C) The Agency's obligation to lease the dwelling to the borrower
will be contingent on the Agency's prior compliance with all State and
local laws, ordinances and regulations governing the subdivision of
land. If the Agency cannot satisfy the conditions within 2 years from
the date of the agreement, the agreement (and the Agency's obligation
to lease with option to purchase) will terminate. If an agreement has
been entered into, but title to the property has not been conveyed to
the Agency (or acquisition has been determined not to be in its
financial interest), the Agency will continue with acceleration and
foreclosure of the property. It is not the intent of the 2-year term of
the agreement to limit the Agency's ability to foreclose on the
property, provided that all the terms have been met except that title
has not been conveyed.
(iii) Application for homestead protection when the Agency acquires
title. When the Agency acquires title to the farm property, the
borrower will be sent Exhibit M of this subpart, by certified mail,
return receipt requested, no later than the date of acquisition. The
borrower must request homestead protection by notifying the servicing
official in writing not later than 30 days after the date of
acquisition and must provide the information set forth in
Sec. 1951.907(e) of this subpart and indicate the buildings and land to
be included in the request.
(iv) Lease with option. A lease with an option to purchase will be
entered into with an eligible borrower on Form 1955-20 after the Agency
acquires title to the property. Form 1955-20 will be completed in
accordance with Sec. 1951.911 (b)(8) of this subpart.
(3) Eligibility. The servicing official will make the determination
on eligibility. To qualify for homestead protection, the borrower must
meet the following requirements:
(i) An applicant must be an individual who is or was personally
liable for the Farm Loan Programs (FLP) loan that was secured in part
by the Homestead Protection property, or, if a non-borrower pledged the
property to secure the FLP loan, the owner of the property. In either
case, the applicant must be or have been the owner of the Homestead
Protection property. A member of an entity who is or was personally
liable for a loan that is or was secured by the Homestead protection
property is considered an owner for homestead protection purposes, so
long as either the member of the entity or the entity itself held fee
title to the property.
(ii) When more than one member of an entity was personally liable
for an FLP loan, each such member who possessed and occupied a separate
dwelling as his or her principal residence, on property that is or was
security for the loan may apply separately for homestead protection of
their individual dwellings;
(iii) The applicant and any spouse must have received, from the
farming or ranching operations, gross farm income reasonably
commensurate with the size and location of the farm and reasonably
commensurate with local agricultural conditions (including natural and
economic conditions) in at least 2 calendar years during the 6-year
period preceding the calendar year in which the application is made.
Farms used for comparison purposes must be of similar size, type of
operation and locality. For the purposes of Secs. 1951.911(b)(3) (iii)
and (iv) of this subpart, income from farming or ranching operations
will include rent paid by a lessee of agricultural land during any
period in which the borrower, due to circumstances beyond his or her
control, such as economic, natural disaster or health problems, was
unable to actively farm that property. The borrower's records will be
used in determining whether the gross farm income was reasonably
commensurate with the farm size and location and local agricultural
conditions. When applying for homestead protection, the borrower will
give the servicing official at least 2 calendar years of records of
planned and actual gross farm income for the 6-year period preceding
the calendar year in which the application is made. If such records do
not exist, they may be developed by the applicant

[[Page 10134]]

and servicing official from information relating to yields, expenses
and prices found in the borrower's county office case file, agency
records, or other reliable sources;
(iv) The applicant and any spouse must have received, from the
farming or ranching operations, at least 60 percent of their gross
annual income in at least 2 of the 6 calendar years preceding the
calendar year in which the application is made;
(v) The applicant must have continuously occupied the homestead
protection property during the 6-year period preceding the calendar
year in which the application is made, unless it was necessary to leave
for a period of time not to exceed 12 months during the 6-year period
due to circumstances beyond the borrower's control, such as illness,
employment, or conditions that made the dwelling uninhabitable; and
(vi) The applicant must have sufficient income to make rental
payments for the term of the lease and the ability to maintain the
property in good condition, and must agree to all the terms and
conditions set forth in paragraph (b)(7) of this section and in Form
1955-20.
(4) Transfer of homestead protection. An applicant's right to
request homestead protection and rights under the Agreement or lease
entered into pursuant to this section are not transferable or
assignable by the applicant or by operation of law, except that, in the
case of death or incompetency of the applicant, such rights and
agreements shall be transferable to the spouse upon agreement to comply
with the terms and conditions of the lease.
(5) Property requirements. (i) The proposed homestead protection
property tract must meet all requirements for the division into a
separate legal lot as required by State and local laws. All
environmental considerations required under subpart G of part 1940 of
this chapter will be complied with.
(ii) Costs for a survey, legal description or other service needed
to establish, appraise, define or describe the homestead protection
property as a separate tract, will be paid for by the Agency. No
repairs or improvements will be paid for by the Agency except as
provided for in Sec. 1955.64 (a) of subpart A of part 1955 of this
chapter.
(iii) If necessary, the Agency will grant or retain for the benefit
of adjoining property reasonable easements for ingress, egress,
utilities, water rights, etc.
(6) Appraisal. The current market value of the homestead protection
property shall be determined by an independent appraisal made within 6
months from the date of the borrower's application for homestead
protection. The applicant will select an independent real estate
appraiser from a list of appraisers approved by the servicing official.
The cost of such an appraisal will be handled in accordance with
paragraph (b)(5)(ii) of this section.
(7) Terms of the lease and exercising the option. (i) All leases
will have an option to purchase. Any reference to a lease for homestead
protection purposes will mean a lease with an option to purchase. The
lease will be offered with an option to purchase on Form 1955-20 and
will be for a period of not more than 5 years as requested by the
applicant. A lease of less than 5 years may be extended, but not beyond
5 years from the date of the beginning of the term of the original
lease.
(A) The amount of the rent will be based upon equivalent rents
charged for similar residential properties in the area in which the
dwelling is located.
(B) Lease payments will be retained by the Government.
(C) Failure to make lease payments as scheduled or to maintain the
property in good condition shall constitute cause for the termination
of all rights of the lessee to possession and occupancy of the dwelling
and property under this section. If a lease default is not cured within
30 days of notice, the servicing official will notify the lessee in
writing of the termination of the lease and option.
(D) Any interference by the lessee with the Government's efforts to
lease or sell the remainder of farm inventory property shall constitute
cause for the termination of all rights of the lessee to possession and
occupancy of the dwelling and property including the right to exercise
the option to purchase.
(ii) Exercising the option to purchase.
(A) The lessee may exercise the option in writing at any time prior
to the expiration of the lease by delivering to the servicing official
a signed, written statement notifying the Agency that the lessee is
exercising the option to purchase the property. Failure to exercise the
option within the lease period will end the lessee's rights under the
option to purchase.
(B) When the lessee exercises the option to purchase the property,
the purchase price will be the current market value of the property.
That value will be determined by an appraisal in accordance with
paragraph (b)(6) of this section providing the appraisal is not more
than 1 year old. If the appraisal is more th

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A97-5115. Public record. Not legal advice.