Post Bankruptcy Loan Servicing Notices

DEPARTMENT OF AGRICULTURE

Rural Housing Service

Rural Business-Cooperative Service

Rural Utilities Service

Farm Service Agency

7 CFR Part 1962

RIN 0560-AE62

Post Bankruptcy Loan Servicing Notices

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

Rural Utilities Service, and Farm Service Agency, USDA.

ACTION: Final rule.

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SUMMARY: The Farm Service Agency (FSA) is amending its regulations

regarding servicing accounts when a bankruptcy filing is dismissed.

This change will clarify when a Notice of the Availability of Loan

Service and Debt Settlement Programs for Delinquent Farm Borrowers will

be sent to a borrower who is in or has been dismissed from bankruptcy.

The intended effect of this rule is to improve the efficiency of the

Agency's servicing of delinquent borrowers who have filed bankruptcy

petitions.

EFFECTIVE DATE: May 29, 1998.

FOR FURTHER INFORMATION CONTACT: Kimberly R. Laris, Senior Loan

Officer, Farm Service Agency, U.S. Department of Agriculture, Room

5441-S, 1400 Independence Age., SW, Washington, D.C. 20250-0523;

Telephone: 202-720-1659, e-mail: [email protected].

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This rule has been determined to be not significant for purposes of

Executive Order 12866 and, therefore, has not been reviewed by the

Office of Management and Budget.

Regulatory Flexibility Act

New provisions included in this rule will not have a significant

economic impact on a substantial number of small entities. It will not

impact small entities to a greater extent than large entities, except

to the extent that large entities may not be eligible for loan

assistance to begin with, since they would be considered larger than a

family-sized farm. Thus large entities may not be borrowers who have

filed bankruptcy petitions, and therefore, subject to these rules. To

the extent that large entities qualify for Farm Loan Program loan

assistance and file bankruptcy petitions, large entities are subject to

these rules to the same extent as small entities. Therefore, this rule

is determined to be exempt from the requirements of the Regulatory

Flexibility Act (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 12988

This final rule has been reviewed under Executive Order 12988,

Civil Justice Reform. All State and local laws and regulations that are

in conflict with this rule will be preempted. No retroactive effect

will be given to this rule. 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.

Federal Assistance Programs Affected

10.404--Emergency Loans

10.406--Farm Operating Loans

10.407--Farm Ownership Loans

Executive Order 12372

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

(48 FR 29115, June 24, 1983), Farm Operating Loans and Emergency Loans

are excluded from the scope of Executive Order 12372, which requires

intergovernmental consultation with State and local officials. However,

the Soil and Water Loan and Farm Ownership Loan Programs are subject to

the provisions of Executive Order 12372. The Agency has conducted the

intergovernmental consultation requirements in accordance with RD

Instruction 1940-J. (See the Notice related to 7 CFR 3015, subpart V,

at 48 FR 29112, June 24, 1983; 49 FR 22675, May 31, 1984; 50 FR 14088,

April 10, 1985.)

The Unfunded Mandates Reform Act of 1995

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

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

effects of their regulatory actions on State, local and tribal

governments and the private sector of $100 million or more in any 1

year. Under section 202 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 of $100 million or more in any 1 year. When such a

statement is needed for a rule, section 202 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.

Discussion

These changes involve the Farm Loan Programs (FLP) loans of FSA

formerly administered by the Farmers Home Administration (FmHA). The

Farmer Programs loans reassignment of this program to FSA was

authorized by the Department of Agriculture Reorganization Act of 1994

(Pub. L. 103-354, 108 Stat.3178).

Current FSA direct FLP loan servicing regulations require that a

``Notice of the Availability of Loan Service Programs and Debt

Settlement Programs for Delinquent Farm Borrowers,'' be sent to

[[Page 29340]]

borrowers if their bankruptcy is dismissed. A delinquent account

servicing notice, pursuant to 7 CFR part 1951, subpart S, may be sent

in such cases, even if the borrower had already exhausted all servicing

rights and the account had been accelerated prior to the bankruptcy

filing. Repeating the notice may cause extensive delays in the

collection of accounts and substantially wastes the money and time of

the Agency by requiring a procedure which has already been completed.

To ensure that borrowers who had filed bankruptcy but whose bankruptcy

was dismissed would receive the initial notification of loan servicing

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

Development Act, the regulations at 7 CFR 1962.47(d)(2) were rigidly

written and construed. However, they were not intended to require

renotification if the borrower's servicing rights had been exhausted

prior to the bankruptcy filing.

In certain situations, the Agency is limiting the issuance of a new

loan servicing summary notice authorized under Sec. 331D of the

Consolidated Farm and Rural Development Act (Act). Provided the account

has not been accelerated, the attorney for the borrower and the

borrower will be notified only of the loan servicing options that

remain when the bankruptcy is filed. That notification will also occur

upon dismissal of a bankruptcy action without confirmation of a

bankruptcy plan, and upon default in a confirmed bankruptcy plan if the

bankruptcy has been dismissed or closed and the borrower has not

substantially completed the confirmed plan. No additional primary loan

servicing action will be given upon discharge under chapter 7 of the

Bankruptcy Code.

The Agency's present loan servicing program has been in effect

since October 14, 1988, and borrowers have had many opportunities to

apply for loan servicing. Section 1816 of the Food, Agriculture,

Conservation, and Trade Act of 1990 limited the amount of debt the

Agency could forgive to $300,000 per borrower, and limited writedowns

and buyouts under Sec. 353 of the Consolidated Farm and Rural

Development Act (Con Act) to one per borrower on loans made after

January 6, 1988.

Section 648(b) of the Federal Agriculture Improvement and Reform

Act of 1996 (1996 Act) added Sec. 373 to the Con Act in which Congress

imposed the further limitation that the Agency may not provide debt

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

forgiveness on another direct loan. Section 640(2) of the 1996 Act

added a definition of debt forgiveness as Sec. 343(a)(12) of the Con

Act that includes discharging of debt as a result of bankruptcy. Based

on these limitations, it is no longer appropriate for the Agency to

renotify all borrowers who have previously exhausted loan servicing

options and have been unable to correct their delinquency or service

their debt. Many of these borrowers will no longer be eligible for

additional loan servicing.

A proposed rule was published on July 18, 1996, (61 FR 37405-07)

with a comment period ending August 2, 1996. Comments were received

from only one party, an organization representing family farmers. Their

comments were divided into four parts. First, it was recommended that

the rule be clarified by requiring that notices be sent also to the

borrower at his or her address to ensure proper notification when a

bankrupt borrower is not represented by an attorney. Since this

recommendation may help to ensure proper notification, it was adopted.

Second, the commenter felt that the requirement in the proposed

rule that to be considered for servicing, a bankrupt borrower and his

or her attorney must both request loan servicing in writing was overly

burdensome. The Agency agrees with the commenter and has amended the

rule accordingly by requiring either the bankrupt borrower or his or

her attorney to submit a request for servicing.

Third, the commenter noted that the rule could be interpreted to

preclude sending loan servicing notices to a bankrupt borrower who

becomes delinquent on an approved plan of reorganization, even if the

borrower has performed under the plan, if the borrower has received

notices in the past. In response, the paragraph noted by the commenter

was amended to require the following: (1) if the borrower has not

exhausted servicing rights, the notice explaining FSA's Farm Loan

Programs will be sent to a borrower whose bankruptcy is dismissed

before one full payment is made under the plan, unless the borrower's

account is under the jurisdiction of the bankruptcy court or has been

referred to the Department of Justice; and (2) a new loan servicing

summary notice will be sent to a borrower who has a plan confirmed by

the court if the borrower substantially complies with the bankruptcy

plan, but later defaults on the plan, and the bankruptcy is dismissed,

provided the lack of compliance is for reasons beyond the borrower's

control and the account has not been accelerated.

As was the case under the predecessor rule, in the situation

described in item (2) of the preceding paragraph, no new loan servicing

summary notices will be sent if the Agency is advised that sending the

notices is inconsistent with the provisions of the confirmed bankruptcy

plan or the Bankruptcy Code. Also, no notices will be sent if the case

is within the jurisdiction of the bankruptcy court or has been referred

to the Department of Justice. This exception is provided to correct

situations where there are jurisdictional conflicts between those

delegated to finally decide the matter. The Agency wished to conform to

jurisdictional principles that establish the superior authority of a

bankruptcy court and the Department of Justice. Of course, any borrower

who has satisfactorily completed the confirmed plan will be treated the

same as any other rehabilitated borrower for the purpose of loan

servicing.

The Agency believes that these changes to the proposed rule conform

to the spirit of the commenter's objections because they provide that

most delinquent borrowers, except as explained above, who have

substantially complied with their bankruptcy plans will receive an

additional opportunity to apply for loan servicing within the

parameters provided by Congress. This policy is justified because the

obligations of these borrowers to the Agency have been modified by a

confirmed bankruptcy plan (for borrowers filing under chapter 11 of the

Bankruptcy Code) or by a completed bankruptcy plan (for borrowers

filing under chapters 12 and 13 of the Bankruptcy Code), and they have

substantially complied with this obligation.

While Lee v. Yuetter, 917 F.2d 1104 (8th Cir.1990), upheld the

Agency's regulation providing that discharged chapter 7 borrowers did

not have outstanding obligations to the Agency and were not borrowers

for primary loan servicing purposes, this holding is limited to

borrowers discharged under chapter 7 of the Bankruptcy Code. See Lee v.

Yeutter, 106 B.R. 588, 592 (D. Minn., 1989), which contrasted borrowers

discharged under chapter 7 of the Bankruptcy Code who have no debt to

the Agency that could be further restructured with those borrowers who

filed under the reorganization chapters of the Bankruptcy Code who have

obligations to the Agency under their confirmed bankruptcy plans which

are capable of being restructured. Accordingly, the Agency has always

considered borrowers discharged under confirmed reorganization

bankruptcy

[[Page 29341]]

plans to still be ``borrowers.'' While discharged reorganization

borrowers who have completed a confirmed plan, like other borrowers who

have received previous debt forgiveness from the Agency on another

loan, cannot receive additional debt forgiveness, as defined by

Sec. 343(a)(12) of the Con Act, they may be eligible for other

servicing options provided by FSA regulations.

The commenter also was disturbed by the Agency's removal of

internal agency processes from its published regulations and placing

these items in a handbook which would be available to the public upon

request at no cost. The commenter expressed concerns that the Agency's

streamlining efforts may undercut the rulemaking process and

substantive requirements upon which public comment should be solicited

will be left out of the Federal Register. The commenter offered the

example of the former Agricultural Stabilization and Conservation

Service allegedly maintaining handbook provisions that conflicted with

published regulations, and using the handbook instead of regulations to

implement substantive provisions. As an alternative, the commenter

suggests that the Agency narrowly define the content of the handbook so

that it would include only those items which are clearly internal

operating procedures.

The commenter's concerns are understandable. However, Agency

regulations, as they are currently written, contain an excessive amount

of specific internal policy. In accordance with a Governmentwide

mandate of the National Performance Review, the Agency must remove

internal administrative processes from the regulations. In addition, 5

U.S.C. 551 does not require the publication of internal administrative

processes not affecting the general public. Reform of FSA regulations

will ultimately obsolete the regulations of the defunct FmHA, reduce

the burden associated with making policy changes, improve the

readability of regulations and reduce the volume of extraneous

published material.

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

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

Servicing Options) of this subpart, that is sent with the loan

servicing notices to explain the interrelationship of the loan

servicing programs to the bankruptcy petitions filed under chapters 7,

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

to use this type of specialized notice, there is no statutory

requirement that this type of notice be sent. Since these matters

involve internal operating procedures, the requirement will be

contained in the Agency's handbook only, with the regulations

referencing only that a notice will be sent. Similarly, the Agency has

removed Exhibit D from this subpart. Since this document is an

informational cover letter sent with the notices, the Agency is not

required to publish it.

The commenter suggested that the FSA handbooks be available to the

general public through the FSA Web Page. Currently, the FSA Web Page is

limited to general information on the Agency's programs; however, the

Agency does plan to provide FSA handbooks through a Web Page as soon as

resources are available. The procedures used by the USDA, Rural

Development agencies, which include many procedures of the former FmHA,

are available on the World Wide Web at http://www.rdinit.usda.gov/

regs/. This includes procedures that are shared by FSA Farm Loan

Programs and the Rural Development agencies, including the one affected

by this final rule, RD Instruction 1962-A.

Good cause is shown to make this rule immediately effective upon

publication in the Federal Register and without the 30-day period

required by 5 U.S.C. 551. This rule substantially improves the

efficiency of the Agency's servicing of delinquent borrowers who have

filed bankruptcy petitions by revising the requirement that additional

loan servicing notices be sent whenever a bankruptcy is dismissed.

Also, the Agency will notify borrowers within the jurisdiction of the

bankruptcy court of remaining servicing rights rather than beginning

the lengthy servicing process anew whenever a bankruptcy is filed,

regardless of whether the account has been previously accelerated or

the Agency has previously sent servicing notices. Expediting

liquidation when servicing rights have been exhausted serves the public

interest. Therefore, good cause is shown to make this final rule

effective immediately.

List of Subjects in 7 CFR Part 1962

Crops, Government property, Livestock, Loan programs--agriculture,

Rural areas.

Accordingly, chapter XVIII, title 7, Code of Federal Regulations,

is amended as follows:

PART 1962--PERSONAL PROPERTY

1. The authority citation for part 1962 continues to read as

follows:

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

Subpart A--Servicing and Liquidation of Chattel Security

2. Section 1962.47 is revised to read as follows:

Sec. 1962.47 Bankruptcy and insolvency.

(a) Borrower files bankruptcy. When the Agency becomes aware that a

Farm Loan Programs borrower has filed for protection under Title 11 of

the United States Code (bankruptcy), the borrower and the borrower's

attorney, if any, will be notified in writing of the borrower's

remaining servicing options.

(1) If the borrower wishes to apply for servicing options

remaining, the borrower, or the borrower's attorney on behalf of the

borrower, must sign and return the appropriate response form, or

similar written request for servicing, and any forms or information as

requested by the Agency, within 60 days from the date the borrower or

the borrower's attorney received the notification, or the time

remaining from a previous notification that was suspended when the

borrower filed bankruptcy, whichever is greater.

(2) The Agency will consider a request for servicing options to be

an acknowledgment that the Agency will not be interfering with any

rights or protections under the Bankruptcy Code and its automatic stay

provisions.

(3) The Agency's processing of any request for servicing may

include consideration of primary and preservation loan servicing

options, notification of the Agency's decision on the request or

application for servicing, mediation, and holding of any meetings or

appeals requested by the borrower.

(4) If court approval is required for the borrower to exercise

these servicing rights, it will be the borrower or the borrower's

attorney's responsibility to obtain that approval.

(5) If a plan is confirmed before servicing and any appeal is

completed under 7 CFR part 11, the Agency will complete the servicing

or appeals process and may consent to a post-confirmation modification

of the plan if it is consistent with the Bankruptcy Code and 7 CFR part

1951, subpart S, as appropriate.

(6) In chapter 7 cases, the Agency will not provide primary loan

servicing to a borrower discharged in bankruptcy unless the borrower

reaffirms the entire Agency debt. If the chapter 7 debtor obtains the

permission of the court and reaffirms the debt, the loan servicing

application will be processed in accordance with 7 CFR part 1951,

subpart S. If the borrower reaffirms the Agency debt in order to be

considered for restructuring but is later denied

[[Page 29342]]

restructuring, the borrower may revoke the reaffirmation subject to the

provisions of the Bankruptcy Code. No reaffirmation is necessary for

any discharged chapter 7 borrower to be eligible for preservation loan

servicing in accordance with 7 CFR part 1951, subpart S.

(b) Borrower defaults on plan or bankruptcy is dismissed--(1) 90

days past due on a reorganization plan while still under court

jurisdiction.

(i) If allowed by the Bankruptcy Code or court, the borrower and

the borrower's attorney, if any, will be notified of any remaining

servicing options under 7 CFR part 1951, subpart S, that were not

exhausted prior to filing bankruptcy or during the bankruptcy

proceedings according to paragraph (a) of this section.

(ii) No notices will be sent if the account was previously

accelerated, such action is inconsistent with the provisions of the

confirmed bankruptcy plan or the Bankruptcy Code, or the case has been

referred to the Department of Justice.

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

desires to apply for loan servicing and qualifies for servicing under 7

CFR part 1951, subpart S, the borrower must also comply with Bankruptcy

Code rules and requirements concerning modification of the plan.

(2) Bankruptcy is dismissed without a confirmed plan. If the

borrower's bankruptcy is dismissed without a confirmed plan, and the

borrower is in default on Farm Loan Programs loans, the borrower's

account will be liquidated after all remaining servicing options under

7 CFR part 1951, subpart S are exhausted. The borrower will be notified

of any servicing options remaining according to 7 CFR part 1951,

subpart S. Notwithstanding the previous sentence, no notices will be

sent if the account was previously accelerated, the Agency is advised

that such an act is inconsistent with the confirmed bankruptcy plan or

the Bankruptcy Code, or the account has been referred to the Department

of Justice.

(3) Bankruptcy is dismissed after a confirmed reorganization plan.

If a bankruptcy is dismissed after a reorganization plan was confirmed,

the account will be serviced as follows:

(i) If the borrower has substantially complied with the plan, but

later defaults for reasons beyond the borrower's control, (see 7 CFR

1951.909(c)), the borrower will be notified of loan servicing in

accordance with 7 CFR 1951.907. No notices will be sent if the account

was previously accelerated; such action is inconsistent with the

provisions of the confirmed bankruptcy plan or the Bankruptcy Code; or

the case has been referred to the Department of Justice.

(ii) If the borrower failed to make one full payment under the

plan, or did not comply with the plan for reasons not beyond the

borrower's control, the borrower will be serviced according to

paragraph (b)(2) of this section.

(c) Servicing of bankruptcy loans after the case is closed. In

chapter 11, 12, or 13 cases after the case is closed and the discharge

order is issued by the court, if the borrower becomes delinquent after

performing as agreed under the plan, the borrower will be sent a notice

explaining the loan servicing options available under 7 CFR part 1951,

subpart S. The borrower's attorney of record will be sent a courtesy

copy if the bankruptcy has not been closed for at least 2 years. No

notices will be sent if the account has been accelerated, such act is

inconsistent with the provisions of a confirmed bankruptcy plan or

other provisions of the Bankruptcy Code, or the account has been

referred to the Department of Justice.

(d) Liquidation. The account will be liquidated after obtaining any

necessary relief, if required, from the automatic stay. In chapter 7

cases after discharge, the account can be liquidated if the debt has

not been reaffirmed and the property is no longer part of the estate.

Liquidation can proceed prior to discharge if allowed by the court.

(1) If the borrower or borrower's attorney was not previously

notified of any remaining servicing options available under 7 CFR part

1951, subpart S before or during the course of the bankruptcy

proceedings, the borrower and the borrower's attorney will be sent the

notices referenced in paragraph (c) of this section prior to

liquidating any security property.

(2) If the borrower or the borrower's attorney had been previously

notified of loan servicing options remaining, the account will be

liquidated.

3. Exhibit D of subpart A is removed and reserved.

Signed in Washington, D.C., on March 21, 1998.

August Schumacher, Jr.,

Under Secretary for Farm and Foreign Agricultural Services.

Signed in Washington, D.C., on April 6, 1998.

Jill Long Thompson,

Under Secretary for Rural Development.

[FR Doc. 98-14007 Filed 5-28-98; 8:45 am]

BILLING CODE 3410-05-P