Implementation of Preferred Lender Program and Streamlining of Guaranteed Regulations

SUMMARY: This rule proposes to amend the regulations governing the Farm

Service Agency Guaranteed Farm Loan Programs. It proposes to clarify

and simplify the procedures to apply for, make, and service an FSA

Guaranteed Loan. This rule also proposes to establish the Preferred

Lender Program.

DATES: Comments on this proposed rule, or comments on alternatives to

this proposal, must be received on or before October 26, 1998 to be

given full consideration.

ADDRESSES: Submit written comments to the Farm Service Agency, U.S.

Department of Agriculture, Farm Loan Programs Loan Making Division,

Attention: Director, Room 5438-S, 1400 Independence Avenue, SW, STOP

0522, Washington, DC 20250-0522. All written comments received in

connection with this rule will be available for public inspection 8:15

am-4:45 pm, except holidays, at 1400 Independence Avenue, SW,

Washington, DC 20250-0522.

Comments on the information collection requirements of this

proposed rule must be sent to the Office of Management and Budget (OMB)

or the Department at the address listed in the Paperwork Reduction Act

section of this preamble.

FOR FURTHER INFORMATION CONTACT: Steven K. Ford, Senior Loan Officer,

Farm Service Agency; telephone: 202-720-3889; Facsimile: 202-690-1117;

E-mail: [email protected]

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.

This rule substantially streamlines FSA's forms and procedures

implementing the Guaranteed Loan Program. By making FSA's Guaranteed

Loan Program more consistent with standard practices used within the

lending industry, lenders will be more willing to use the program. This

will increase the availability of commercial credit for family size

farmers.

FSA currently guarantees repayment on approximately 65,000 farm

loans to 40,000 farmers. Each year, FSA receives 15,000 request for new

loans. By reducing the application burden on lenders, and making FSA

rules more consistent with industry practices, we expect lenders will

increase requests for loan guarantees by 25%, or an additional $395

million. This means an additional 3000 farmers will be able to receive

commercial credit. These farmers would otherwise have gone without

credit or required assistance through FSA's Direct loan programs.

The Agency is requesting comments regarding the accuracy of the

projected benefits described above as well as any actual benefits

experienced by farmers or lenders affected by these program changes.

Regulatory Flexibility Act

The Agency certifies that this rule will not have a significant

economic 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). An insignificant number of guaranteed loan borrowers and no

lenders are small entities. This rule does not impact the small

entities to a greater extent than large entities.

Environmental Impact Statement

It is the determination of the issuing agency that this action is

not a major Federal action significantly affecting the environment.

Therefore, in accordance with the National Environmental Policy Act of

1969, Pub. L. 91-190, and 7 CFR part 1940, subpart G, an Environmental

Impact Statement is not required.

Executive Order 12988

This proposed rule has been reviewed in accordance with E.O. 12988,

Civil Justice Reform. In accordance with this rule: (1) All State and

local laws and regulations that are in conflict with this rule will be

preempted; (2) no retroactive effect will be given to this rule: and

(3) administrative proceedings in accordance with 7 CFR parts 11 and

780 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 and activities within this

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

requires intergovernmental consultation with State and local officials.

Unfunded Mandates

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

Law 104-4, requires Federal agencies to assess the effects of their

regulatory actions on state, local, and tribal governments or the

private sector. Agencies generally must prepare a written statement,

including a cost benefit analysis, for proposed and final rules with

``Federal mandates'' that may result in expenditures of $100 million or

more in any 1 year for State, local, or tribal governments, in the

aggregate, or to the private sector. UMRA generally requires agencies

to consider alternatives and adopt the more cost effective or least

burdensome alternative that achieves the objectives of the rule.

The rule contains no Federal mandates, as defined under 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 UMRA.

Paperwork Reduction Act

The amendments to 7 CFR part 1980 contained in this proposed rule

make several revisions to the information collection requirements that

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

chapter 35. Comments regarding the following issues should be sent to

the Desk Officer for Agriculture, Office of Information and Regulatory

Affairs, Office of Management and Budget, Washington, D.C. 20503 and to

Steve Ford, Senior Loan Officer, USDA, FSA, Farm Loan Programs Loan

Making Division, Farm Service Agency, USDA, 1400 Independence Avenue,

SW, STOP 0522, Washington, D.C. 20013-0522: (a) whether the collection

of information is necessary for the proper performance of the functions

of the agency, including whether the information will have practical

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

the validity of the methodology and assumptions used; (c) ways to

enhance the quality, utility and clarity of the information to be

collected; (d) ways to minimize the burden of the collection of

information on those who are to respond, including through the use of

[[Page 51459]]

appropriate automated, electronic, mechanical, or other technological

collection techniques or other forms of information technology.

Comments regarding paperwork burden will be summarized and included in

the request for OMB approval of the information collection. All

comments will also become a matter of public record.

Good cause is shown for a comment period of less than 60 days

because of the need to accelerate the availability of assistance under

this program. Numerous natural disasters throughout the country have

reduced farm production and income which has resulted in deteriorating

financial conditions for numerous producers. As a result of those

deteriorating financial conditions, we anticipate an increased demand

for guaranteed farm loans. The proposed streamlined regulations will

enable the Agency to serve the needs of the financially stressed

farmers and their lenders more quickly and efficiently; therefore it is

justified to implement the proposed guaranteed farm loan changes as

soon as possible.

Title: 7 CFR 1980, subpart B, Farmer Program Loans.

OMB Control Number: 0560-0155.

Expiration Date of Approval: March 31, 1998.

Type of Request: Request for Comments.

Abstract: The information collected under OMB Control Number 0560-

0155, as identified above, is needed in order for FSA to effectively

administer its guaranteed farm loan programs. The information is

collected by the FSA loan official in consultation with participating

commercial lenders. The basic objective of the guaranteed loan program

is to provide credit to applicants who are unable to obtain credit from

lending institutions without a guarantee. The reporting requirements

imposed on the public by the regulations set out in 7 CFR part 1980,

subpart B, are necessary to administer the guaranteed loan program in

accordance with statutory requirements of the Consolidated Farm and

Rural Development Act and are consistent with commonly performed

lending practices. Collection of information after loans are made is

necessary to protect the Government's financial interest.

This proposed rule will reduce information requirements which are

imposed on the public. Savings will be reflected in (1) reduced loan

origination and servicing requirements under the new Preferred Lender

program, (2) reduced application requirements for loans under $50,000,

(3) reduced historical financial and production history requirements

for all lenders, (4) more flexible appraisal requirements, and (5)

simplified borrower default procedures. However, increased information

requirements are necessary with new regulatory authorities. Additional

financial information will be required when a lender is requesting a

partial release, subordination, or a release from liability. This

information was not needed previously because the authority to grant

these actions did not exist in regulation.

Estimate of Burden: Public reporting burden for the collection of

information in this regulation is estimated to average .71 hours per

response.

Respondents: Commercial Banks, Farm Credit System, farmers and

ranchers.

Estimated Number of Respondents: 5500 lenders, 15,000 loan

applicants.

Estimated Number of Responses per Respondent: 52.26 per lender, 1

per loan applicant.

Estimated Total Annual Burden on Respondents: 212,218.75.

Discussion of the Proposed Rule

General Changes

The regulations governing the FSA guaranteed farm loan programs are

being totally revised in the following manner. First, the requirements

in subpart A, of part 1980, which contains general provisions for farm

loan guarantees, community program guarantees and business and industry

loan guarantees, applicable to Guaranteed Farm Program Loans, will be

incorporated into subpart B, and subpart A will no longer be applicable

to farm loan guarantees.

Second, Subpart B is being rewritten and reorganized into a more

logical structure. Under current regulations, many topics are addressed

in different locations. For example, loan collateral requirements are

contained in sections 1980.108, 1980.175, 1980.180, and 1980.185.

Current and proposed sections of this subpart do not correspond

directly since it is being rewritten entirely and program rules are

being revised throughout. Thus, the Agency has not prepared a side by

side comparison of current and planned provisions. If a comparison is

desired, current regulations are available by inquiring at the address

above.

Third, clarity, readability and structure is being improved, and

policies are being explained or simplified. The Agency has identified

several provisions as vague and confusing over the years through

inquiries from lenders and Agency field personnel. Provisions have been

added where the regulation is currently silent and to clarify those

requirements that frequently cause confusion. However, the requirements

for interest assistance are not being revised in this proposed rule.

The interim rule published at 56 FR 8258-8272 (February 28, 1991) will

be finalized in a separate final rule, and Exhibit D to subpart B of

1980 will be removed from the Federal Register.

Finally, specific references to use of FSA County Committees in the

guaranteed farm loan program regulations are being eliminated. Current

plans are to not have these committees involved in the guaranteed farm

loan program. Should that policy change, however, the definition of

``Agency'' is broad enough to include these committees too. Proposed

substantive changes to program rules are discussed below by subject

matter.

Conflict of Interest

Lender reporting requirements for actual or potential conflicts of

interest as currently covered by the lender's agreement are clarified.

The Agency defines what it considers an actual or potential conflict of

interest to be reported, based on the degree of relationship or

association between the lender, applicant, or FSA employees. The Agency

hopes to reduce lender confusion by clarifying what is considered a

reportable relationship. When the Agency determines that potential

conflicts of interest exist, the regulation provides lenders

flexibility to develop safeguards to control potential conflicts of

interest. This was felt to be less onerous of a burden than prohibiting

all loans where a potential conflict of interest exists. The new

section also restricts directors and employees of lenders and FSA

employees from deliberations, decisions, and actions that impact loans

where they have a personal interest. This restriction is also applied

to defined relatives, associates and entities of the restricted

individuals. This section was developed to clarify and enhance existing

restrictions and enhance consistency of application. The section

attempts to be minimally restrictive while assuring that high levels of

objectivity are maintained in dealing with loans to directors or

employees and their relatives and business associates.

Certified Lender Program

An interim rule was published on June 24, 1994, [58 FR 34302-34342]

to implement a Certified Lender Program (CLP) for Guaranteed Operating

loans (OL) as required by Sec. 339(c) of the Consolidated Farm and

Rural Development Act (Act). This Act did not

[[Page 51460]]

include Farm Ownership (FO) or Soil and Water (SW) loans in the CLP nor

did it address the relationship between the Approved Lender Program

(ALP) and the CLP. The primary benefits to being a CLP were (1) the

ability to certify to, rather than provide, supporting documentation

for loan requests, (2) reduced application requirements, (3) faster

Agency response times, and (4) streamlined line of credit procedures.

The CLP was established largely due to problems with the ALP. The

ALP provided lenders with a less burdensome application, but did not

establish a strict set of criteria for eligibility as the CLP does.

This caused several Agency offices to over-scrutinize the ALP

applications, resulting in excessive paperwork and unacceptably lengthy

processing times. We propose to expand the CLP under the general rule

making authority of Sec. 339(a) of the Act to include FO loans. The

Agency supports expansion to cover SW loans, but has removed all

references to guaranteed SW loans because the Agency has not received

appropriations for SW loans since 1994 and does not anticipate future

appropriations for these guaranteed loans. Almost all lenders active in

the guaranteed loan program make and service both OL and FO loans. If

the Agency trusts the lender to properly make an OL loan, it is

difficult to justify imposing additional requirements on the lender for

an FO loan. The risk for the Agency is not increased by incorporating

FO loans into the CLP. The performance of CLP lenders has been good.

Losses on Guaranteed OL loans made by Standard Eligible lenders has

averaged 1.47 percent, while losses in the CLP averaged only .78

percent. The decision processes are very similar for OL and FO loans.

Requiring a separate application process and additional documentation

for FO loans from CLP lenders reduces lender acceptability of the

guaranteed loan program.

The criteria for lenders to gain and retain CLP status also are

clarified in the proposed rule. Only one change to the criteria for

having status revoked is being proposed with this rule--failure to

repurchase a loan that was sold on the secondary market upon request

from the holder. A vibrant secondary market for FSA guarantees is

integral to the continued growth and effectiveness of our program. In

order to protect the integrity of the secondary market for FSA

guaranteed loans, the Agency has adhered to a policy of universal

buyback from holders upon default, when the original lender refuses to

do so. Unfortunately, this Agency policy has resulted in some lenders

using the secondary market as a means to avert risk rather than as a

liquidity or earnings tool as intended. The Agency has little recourse

for inadequate handling of a loan when a lender refuses to repurchase

from holders. Also, the borrower is denied the benefit of loan

servicing actions unless the guaranteed portion is not held by the

Government. Therefore, the Agency proposes that a Certified or

Preferred lender repurchase a defaulted loan or a loan that needs

servicing from a holder in order to maintain that status.

Approved Lender Program

Since the CLP provides FSA's best lenders with additional authority

and less paperwork, there is no longer a need for the less effective

ALP, and we propose to eliminate the program. The Agency cannot

reasonably offer lenders enough different combinations of benefits,

such as faster approval time, reduced application requirements, and

increased authorities to differentiate between four levels of lender

status (standard eligible, approved, certified, and preferred). The

application process will be less confusing and burdensome to the

lenders and Agency employees with fewer levels of lender status.

Therefore, the Agency will no longer enter into new ALP agreements and

expiring agreements will not be renewed. ALP lenders may continue to

participate in the program as Standard Eligible Lenders or qualify for

CLP or Preferred Lender Program (PLP) status.

Certified and Preferred Lender Programs

Section 339(d) of the Act requires the Agency to implement a

Preferred Lender Program (PLP). The statutory provision also requires

the Agency to automatically approve loans not acted upon within 14 days

of receipt of an application from a Preferred lender. Provisions of

that section also require CLP loans to be acted upon by the Agency

within 14 days; however, the Agency is not penalized for failure to act

within that time period. Additional statutory provisions related to

being a Preferred Lender include an 80 percent guarantee, permitting

the lender to make all decisions concerning credit worthiness, the

closing, monitoring, collection and liquidation of loans and to provide

appropriate certifications that the borrower is in compliance with all

requirements of law and regulation. In contrast, statutory provisions

for the CLP permit Certified Lenders to make certifications regarding

creditworthiness, repayment ability, and adequacy of collateral, but do

not give the lender the authority to make all decisions on these issues

or the closing, collection and liquidation of guaranteed loans.

The PLP lender will be given the maximum authority possible. The

Agency cannot, however, give the lender authority to approve FSA

guaranteed loans without prior Agency review. Section 339(c)(5) of the

Act maintains the Agency's responsibility to certify eligibility,

review financial information, and otherwise assess an application.

Therefore, approval authority must remain with the Agency.

Because of the automatic approval provisions, the requirements to

become a PLP lender will be more strict, but will follow closely with

the CLP criteria and cover experience with, and knowledge of the

program and performance measured through losses and quality of

applications and servicing. Section 339(d) of the Act requires PLP

lenders to establish knowledge of, experience under, and demonstrate

proficiency in the CLP program before obtaining PLP status. The Agency

proposes for PLP lenders to have made a minimum of 20 CLP loans and

have a loss rate of not more than 3 percent. This compares with 10

guaranteed loans and no more than a 7 percent loss rate to hold CLP

status. This PLP loss rate is established at a level that will permit

the Agency to grant PLP status to one percent of its approximately 2500

lenders that make guaranteed farm loans each year.

The approval of CLP status has been based primarily on these

objective quantity and loss rate criteria with minimal reliance on loan

origination and servicing performance. CLP criteria will be

strengthened in this proposed rule to require the lender to have

submitted substantially complete and correct applications and serviced

guaranteed loans according to Agency regulations.

For PLP, in addition to the objective quantity and loss rate

criteria, even stronger performance criteria are proposed for loan

origination and servicing quality. Through Agency review of previous

applications and lender file reviews, the Agency must determine that

there have been no major errors and no recurring minor errors in the

loan applications submitted as a CLP lender. Major errors are those

which could directly affect the soundness of a loan. In addition, PLP

lenders must have a history of using the guaranteed program for new

loans, instead of refinancing the lender's existing debts. While the

Agency does not want to restrict lenders from using the program for

authorized purposes, we are concerned about lenders using the

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program excessively to reduce their existing exposure. This may also

reflect lender capability to assess loan quality.

The main difference between PLP lenders and other lenders will be

the Agency's approval of the lender's credit management system when PLP

status is granted. In the past, the Agency has required its Approved

and Certified lenders to process and service loans and maintain their

files according to the same set of Agency regulations. PLP lenders,

however, will be allowed to propose to the Agency how they intend to

process and service loans. The Agency will review and approve these

proposals to assure that the lender is utilizing prudent lending

practices and is protecting the Government's interests. Loan

documentation, underwriting rules and processes, and servicing

procedures will differ between PLP lenders. Since these are the

industry's elite lenders, the Agency is allowing them this additional

flexibility.

The items to be submitted to the Agency with the loan application

will be substantially simplified for PLP lenders. The PLP lender's

credit management system will outline what procedures that lender will

follow to originate guaranteed loans. A guarantee request may consist

of a one page FSA loan application form and a complete loan narrative.

The narrative, outlining the 5 ``C's'' of credit; character, capacity,

collateral, capital, and conditions, must provide the necessary

information to permit FSA to adequately assess the application. The PLP

is certifying that the loan was processed as proposed in their

application for PLP status. In addition, the PLP lender will receive an

automatic approval of the guarantee if no response is given within 14

calendar days, as required by the Act. This approval will be contingent

on the availability of funds, as are all Agency approvals now.

In the case of servicing activities, a similar policy is proposed.

PLP lenders will service the account in accordance with their agreement

with the Agency at the time of PLP certification. CLP lenders are given

reduced paperwork burdens and greater authority in the following areas:

CLP lenders only perform annual analyses if needed based on the

financial strength of the borrower, and only a narrative analysis need

be submitted to the Agency. They are not required to notify the Agency

upon completion of construction, repair, or land development. The

Agency also will consider CLP and PLP lenders' request for

subordination, partial release, or transfer and assumption within 14

(versus 30 for standard eligible lenders) calendar days from the

receipt of a complete request. CLP lenders must obtain Agency prior

written approval of restructuring only in the case of writedown. For

other restructuring actions, the CLP lender need only provide

certification of regulatory compliance, a narrative and copies of any

calculations.

All of the changes to a lender's loan servicing authorities made by

this rule are intended to be retroactive, unless otherwise noted in the

rule. After the effective date of this rule, servicing authority will

be based on the lender's status and the requirements of this rule

without regard for the date the loan was closed. That is to say that a

lender's authority to conduct servicing activities, obtain Agency

concurrence, or provide the Agency documentation and reports on a

particular loan at a given time, is based on the lender's status when

they desire to take the action and not based on the lender's status at

the time the loan was closed. When a lender is awarded Preferred

status, they must certify that they have serviced the loans in their

portfolio as required by the applicable regulations, servicing

agreements, and loan agreements. If a status is revoked, future actions

on a loan will be as required for standard eligible lenders, although

the loan may have been closed while Preferred status was in effect.

Lender Eligibility

The Agency is considering allowing certain non-traditional

financial entities to be eligible to make FSA guaranteed loans.

Currently, a lender must be regulated by a State or Federal government

body, such as the State banking commissioner, the Federal Reserve, or

the Office of Thrift Supervision. We also guarantee loans made by

Government Sponsored Enterprises, like the Farm Credit System and state

agencies, such as the Vermont Economic Development Authority. This

requirement was initially broad enough to permit most major

agricultural lending organizations to participate in the Guaranteed

loan program. Recently, however, certain nontraditional lenders, such

as machinery manufacturers, agricultural supply firms, and others have

acquired a significant share of the agricultural credit market. To

assist us in considering this proposal, we are specifically asking for

comments regarding the reasons for or against such action and any

limitations the Agency should include.

The Agency will also add a requirement that lenders agree to

provide credit information to consumer and commercial credit reporting

agencies, as appropriate. This requirement is mandated by the Debt

Collection Improvement Act of 1996 (31 U.S.C. 3711).

Year 2000 Compliance

The Agency is considering adding a requirement that lenders have

computer systems which are Year 2000 compliant. This requirement is

needed because of the potential risk to the Agency from lenders

servicing Guaranteed loans using inadequate computer systems. The

Agency is requesting comments on the impact of such a requirement.

Loan Application Forms and Regulations

The Agency plans to further shorten its guaranteed application form

and reduce application requirements to minimize burden on all lenders

applying for guarantees and their borrowers. Several requirements have

been eliminated such as the need for the lender to submit copies of all

leases and contracts, and the requirement to submit detailed legal

documentation on all entity borrowers. In addition to requirements for

individuals, entity borrowers will only be required to submit a list of

members with personal balance sheets. Corporate charters, joint

operation agreements, articles of incorporation, etc, will no longer be

required. The Agency believes lending standards are sufficiently

established to permit the lender to review the customary documents and

determine their effect on the soundness of a loan. It is the lender's

responsibility to ensure the loan applicant has authority to operate in

their state and they have the security interest in the items of

collateral they propose.

The amount of historical documentation will be reduced to conform

closer to industry standards. Currently, the Agency requires 5 years of

financial and production documentation, while most commercial

agricultural lenders use 3 years of financial records and many do not

rely on production records at all. While some additional requirements

are necessary because of the additional risk inherent in a loan

requiring a guarantee, the additional material that has been requested

does not significantly improve the quality of the loan officers'

decisions. This is indicated by strong loan portfolio performance of

experienced private industry lenders who do not use the additional

information. This rule proposes that lenders with CLP or PLP status

will not be required to obtain specific documentation on an applicant's

production history. CLP and PLP lenders are certifying that the cash

flow

[[Page 51462]]

budget in the application is based on the loan applicant's history.

Since these are proven lenders, the Agency will not dictate whether

this is to be based on production records, income statements, or a

combination of the two. The Agency also proposes to reduce the

requirement for financial records from 5 to 3 years to reflect industry

standards.

The Agency feels that the documentation requirements needed to

support the loan decision generally should be left to the lender's

judgment and prudent credit administration practices. However, for

lenders that are less active in the guaranteed program, those without

CLP or PLP status, the Agency needs more documentation to complete an

adequate analysis. Reduction of the documentation requirements should

increase participation in the guaranteed program, reduce demand for

more costly direct loans, and provide funding to areas currently under

served. Therefore, we choose to retain the requirement for obtaining

both production and financial records, but reduce the amount required

to 3 years.

The Agency also plans to further reduce the application

requirements for small loans as directed by 333A(g) of the Act. When

implementing this change for loans under $50,000, the Agency did not

reduce the amount of documentation the lender must obtain, it only

reduced the documentation the lender must submit to the Agency. It is

not reasonable for the Agency to require the lender to put the same

time and effort into a $25,000 loan as a $400,000 loan. Lenders find it

more difficult to justify their processing costs for the income

received on small loans, therefore, they avoid small loans and leave

the smaller farmers under served. The Agency proposes to reduce the

verification and historical documentation requirements on these small

loans. However, the lender would be required to perform at least the

same level of documentation and review as they do on their non-

guaranteed loans under $50,000, and complete an application form with a

cash flow budget and balance sheet. Supporting financial and production

history and verifications would not be required unless the lender

obtains this for their non-guaranteed loans. This reduced documentation

requirement will increase the availability of credit to small farmers.

Should the lender begin to experience increased loss claims, we have

included a provision to permit the Agency to require full financial and

production documentation and verification at its discretion to make

eligibility and approval decisions.

Packager Requirements

Many parts of the country are served by management consultants,

record keeping firms, and similar companies that actively promote the

guaranteed loan program. These firms or individuals are often hired by

producers and lenders to provide assistance on debt and financial

management and assemble or ``package'' FSA guaranteed loan

applications. The Agency is concerned about loan packagers charging

excessive fees to prepare guaranteed loan applications. Therefore, it

proposes to restrict loan processing or packaging fees to those charged

non-guaranteed customers for similar transactions. The Agency has had a

long-standing limitation on fees charged by lenders, but has had no

similar requirement for fees charged by independent loan packagers. The

Agency recognizes the benefits loan packagers provide and knows that

most are reasonably priced. We also recognize the variation in costs in

different parts of the country due to appraisal requirements and

competition among packagers. However, with the simplified forms,

reduced application requirements, and software packages available,

lenders should be able to process guaranteed applications in the same

manner that they do other agricultural loans. Also, Agency personnel

are able to assist lenders and loan applicants in completing

applications through the Market Placement Program at no charge.

Environmental Requirements

Various environmental requirements have been clarified to better

define Agency and lender responsibilities and update program

regulations to reflect statutory and regulatory changes regarding

floodplains. Pursuant to the National Flood Insurance Reform Act of

1994 and implementing regulations, 60 FR 35286--35289 (July 6, 1995),

the Agency is requiring the lender to use the standard flood hazard

determination form to decide whether improved real estate or mobile

home security is located in a floodplain. The Agency, not the lender,

is responsible for compliance with the National Environmental Policy

Act and must diligently seek the information it needs to comply. The

lender has the responsibility to properly monitor a loan applicant's

operation as it relates to environmental laws. A guarantee remains

valid only so long as the lender acts prudently. The lender must

provide Agency officials with any information on the loan applicant's

operation that may impact compliance with environmental and other laws.

The final determination on National Environmental Policy Act issues are

required to be made by the Agency.

A provision will be added concerning lender requirements in

relation to hazardous substances. Lenders must perform ``due

diligence'' in evaluating any real estate security for contamination

from the release of hazardous substances, petroleum products, or other

environmental hazards and determining the effect of such contamination

on the security value of the property. This change is necessary to

assure accurate valuation of security for guaranteed loans. Hazardous

waste contamination may substantially lower the value of any real

estate security and may be hidden or overlooked. Evidence of due

diligence must be shown by the most current version of the American

Society of Testing and Materials (ASTM) Transaction Screen

Questionnaire, supplemented as necessary by the ASTM Phase I

Environmental Site Assessments form, or similar documentation. Lenders

will maintain due diligence documentation in the applicant or borrower

loan file and provide the Agency with copies upon request.

Loan Limits

No changes are proposed by this rule to the existing statutory

limits of $300,000 for the Guaranteed FO program and $400,000 for the

Guaranteed OL program--$700,000 combined.

Collateral

The Agency plans to consolidate and add flexibility to its

collateral regulations. Over the years, additional collateral

requirements were adopted for certain loans to address specific

situations. This has culminated in a very confusing, and often

conflicting regulation. We plan to reduce these detailed constraints to

a clearer, more flexible set of requirements. The type of security for

each loan has been clarified to permit any collateral as long as the

life and depreciation rate of the collateral will not cause the loan to

be undersecured. The amount of collateral required and basic

restrictions that protect the government's interest will not be

reduced. In fact, the more flexible guidance may lead to more secure

loans as lenders use collateral which is appropriate for the situation

without being constrained by regulatory requirements. The Agency

anticipates that the proposed change will result in increased

participation in the guaranteed program and decreased

[[Page 51463]]

demand on FSA's more costly direct loan program.

The Agency also will have authority to grant an exception to any of

the security requirements if the repayment of the loan will not be

impaired and the proposed action is in the Government's best interest.

This will permit quality guaranteed loans to be made without

jeopardizing the Government's interest.

The Agency has removed the requirement that all nonessential real

estate assets be liquidated to receive a Guaranteed FO loan. This

requirement was unnecessary and often put the lender and government in

a difficult position of defining which assets were nonessential. The

borrower will still be required to pledge the assets as collateral for

the loan, and the assets will be considered when evaluating the ability

to obtain credit without a guarantee.

Appraisals

The Agency proposes to permit approval of loans subject to the

lenders obtaining an acceptable appraisal. In many areas of the

country, appraisals are expensive and loan applicants are reluctant to

incur this expense without some indication that the other factors of

the loan proposal are acceptable. The lender and Agency would continue

to be protected by the approval condition specifying the security

required and minimum appraised value.

Also, the Agency proposes to bring its appraisal standards more in

line with the private lending industry. FSA will raise its threshold to

require a State Certified General Appraiser on real estate transactions

from $100,000 to $250,000. Loans under $250,000 must have an appraisal

using all three conventional approaches to value, and the appraiser

must be acceptable to the agency. This change will permit the lenders

greater use of their normal practices.

Lender's Forms

The Agency proposes to clarify its restriction against notes that

contain a ``payment on demand'' clause. The lender's promissory note

must still set forth a schedule of payments; however, the lender does

not need to modify the ``boiler plate'' language commonly used in the

industry.

Use of Line of Credit Funds

This rule proposes to revise the use of guaranteed line of credit

funds in two areas. First, the Agency proposes to allow lenders to

advance funds from a line of credit for a borrower to make term debt

payments on capital items. This change is being made as a result of

input from participating lenders who have indicated that current

restrictions on this practice are contrary to normal industry practice.

Many farm borrowers have automobile loans and debts with manufacturers'

credit arms with payment schedules that often do not conform to the

farm operation's cash flow cycle. Lenders have indicated that they

would like to have the option of making such regularly occurring

payments with lines of credit, instead of having to release crop

proceeds, or refinance the loan with a guaranteed loan note. Such

purpose is permissible under Sec. 312(b) of the Act as an essential

operating expense or other farm, ranch or home need. This change will

be applicable to future lines of credit, as well as those outstanding

as of the effective date of this rule, with regard to subsequent years'

advances.

Second, this rule specifies that total advances on a line of credit

cannot exceed the total projected credit needs indicated on the plan.

This requirement is implicit in current regulations through use of the

``total credit needs'' column on plans that must be submitted with a

request for guarantee. However, there is some confusion regarding this

requirement, and some lenders continue to readvance on lines of credit

in excess of the planned expenses with no reasonable prospects of

repayment. This leaves the Agency vulnerable to unnecessary loss claim

payments. This requirement will apply to all current and future lines

of credit upon publication of this rule in final.

Loan Underwriting Criteria

For many years, the Agency has relied solely on the projected cash

flow to determine whether a loan applicant has the financial strength

to qualify for a loan, with the single determining factor being the

ability to develop what the Agency has defined as a positive cash flow.

The Agency is concerned that the single, typical year's projection does

not adequately analyze a loan applicant's financial position,

considering solvency, liquidity, and profitability. In many cases the

Agency does observe and evaluate these items, but does not use them

directly in the approval process. The Agency believes more

comprehensive guidelines incorporating a loan applicant's balance sheet

and past income statement measures should be incorporated into the

approval process. Comments are requested regarding the Agency adopting

more comprehensive underwriting criteria, the Agency's definition of

positive cash flow, and the potential for use of credit screens.

Discussion of Loan Servicing Regulation Changes

Delinquent Account Servicing

In order to reduce the reporting burden on lenders and the review

burden on Agency personnel, this rule proposes a simplified procedure

for lenders to follow when a guaranteed borrower defaults on their

loan. The lender must meet with a borrower within 30 days after default

and determine a course of action to correct the delinquency within 90

days. The lender must inform FSA of their plans and may consult FSA

officials for regulatory interpretations and ideas. However, since the

Agency is not directly involved with servicing the loan, it is no

longer mandatory for FSA officials to be involved in initial

discussions following default. Also, a separate written summary of the

default meeting is not required and may be provided on the regular

default report due within 45 days of the default and every 60 days

thereafter. Agency personnel will still be available to lenders for

advice on complicated cases, procedural matters or regulatory guidance.

This change will apply to all loans after it becomes effective.

Also, the Agency is removing the requirement that the delinquency

be beyond the borrower's control because the requirement is viewed as

superfluous. The Agency can find no example of a case when it would

benefit a borrower to not make an installment as agreed when they have

the capability to do so. Nonetheless, the lender in such a case would

have the option of not requesting Agency concurrence with a

restructuring action, should they feel that the borrower has exhibited

a lack of good faith and the loan should be liquidated instead.

Agency Repurchase of Loans

The Agency recognizes the importance of the secondary market as a

source of capital for rural credit. In this rule, we attempt to make

several modifications to current policies and procedures that are

intended to improve the working relationship between secondary market

participants, lenders, and the Agency.

First, for all loans guaranteed after publication of this rule in

final, the Agency will require a lender to repurchase the guaranteed

portion of the loan unless they are physically or financially unable to

complete repurchase. If a lender does not repurchase, or refuses to

repurchase when they were able to, the lender's future involvement in

the Agency's guaranteed loan program may be

[[Page 51464]]

jeopardized. Furthermore, the Agency plans to apply this requirement

retroactively as a condition for maintenance of Preferred or Certified

Lender status. Both for loans currently sold on the secondary market

and those sold after this rule is final, status will be revoked if the

lender does not repurchase a loan when requested.

Second, the Agency plans to provide a method for the Government to

continue as holder of a loan when it has purchased the guaranteed

portion from a secondary market holder and reimbursement from the

lender is not practical. Currently, after the Agency repurchases a

guaranteed loan from a secondary market holder, the lender generally

must liquidate the loan to compensate the Agency for the repurchase. In

some cases, the borrower may pay the loan current or file for

bankruptcy protection while the repurchase is being processed. Thus,

liquidation becomes inappropriate. Regardless, under current provisions

the lender is required to purchase the loan back from the Agency. Under

the proposed change, the Agency will be able to allow lenders to

continue to receive payments on a repurchased guaranteed loan held by

the Government and forward those payments to FSA, as long as the

account remains current or in compliance with an approved bankruptcy

plan. This change will allow the Agency to keep the loan performing,

keep the affected farmers in business, and avoid the losses associated

with legal action to recover the repurchase expense.

Third, in conjunction with this change, the Agency proposes to

allow the lender to purchase the guaranteed portion from the Agency

without recourse at the Agency's discretion.

Bankruptcy Fees

The Agency intends to allow the guarantee to cover a lender's

reasonable legal fees in bankruptcy. Legal fees, when a borrower files

under Chapter 7 of the bankruptcy code, will be deducted from the

proceeds of the liquidation of the collateral after discharge. Lender

attorney fees incurred when a borrower files under Chapter 11, 12, and

13 will be paid in the same percentage as the guarantee.

Currently, regulations do not authorize the Agency to pay

attorney's fees in reorganization bankruptcies. Legal fees in

reorganizations were considered ``normal'' servicing costs similar to

farm visits, filing fees, documentation, and overhead and are the

lender's responsibility. However, program lenders have suggested that

the nature of a guarantee should be to protect the lender against any

additional expenses or loss that occurs when a borrower defaults, which

includes the filing under Chapter 11, 12, or 13 of the bankruptcy code.

The Agency agrees. Lenders should be very actively involved in the

bankruptcy legal proceedings to assure that collateral is protected,

plans are realistic, and actions taken are not adverse to the interests

of the borrower or the Government under the guaranteed loan.

Currently, the Agency allows legal fees necessary to repossess or

foreclose collateral to be deducted as liquidation costs from

collateral proceeds whether the liquidation is forcible, voluntary, or

as the result of liquidation under Chapter 7 of the bankruptcy code.

Reimbursement of most of the attorney fees by the Agency will provide

incentive for lenders to closely monitor all cases that are in

bankruptcy. Still, the Agency will not guarantee legal fees in any

bankruptcy action if those fees are frivolous, unreasonable or

exorbitant. Furthermore, the Agency will not include as part of any

loss payment a lender's legal fees resulting from a lender liability

suit or similar action.

Appraisal Expenses

Currently, the lender and FSA share equally in the cost of

appraisals obtained for liquidation purposes. The Agency is proposing

to allow appraisal fees to be deducted from liquidation proceeds in the

case of liquidation and allow the cost of appraisals for bankruptcies

to be included on the bankruptcy loss claim as applicable. Lenders will

still be required to bear the cost of appraisals necessary in

connection with normal servicing, such as releases, reamortization or

writedown.

This change is being proposed for a number of reasons. First, this

will reduce the burden on lenders by no longer requiring that a special

form be completed to obtain reimbursement of the Government's share of

the appraisal expense. Second, this will make payment of the fee for an

appraisal consistent with Agency regulations governing payment of other

expenses associated with liquidation. Finally, this change will

encourage lenders to obtain an appraisal to document that the amount

being obtained in the liquidation represents market value.

Partial Releases

This rule proposes to clarify provisions for partial releases of

guaranteed loan collateral. Current regulations allow lenders to

release security only when full market value is received or when

replacement or substitute collateral is obtained. The Agency feels that

this proposed change is justified for a number of reasons. First, the

Agency has begun to receive more frequent requests for concurrence with

releases of security without consideration and many of these requests

are reasonable. For example, FSA regularly receives requests for

concurrence to the release of an acre or so of land from real estate

security for the borrower's child to construct a dwelling. Second, many

guaranteed loans are over 10 years old and may be secured by items that

have served their useful life and are now valueless. These items could

be released without damaging the lender's security position. Third, the

rise in farm asset values and income may have reduced the risk of loss

on a guaranteed loan substantially. The lack of release provisions

often prevents guaranteed lenders from doing ``business as usual'' and

may place them at a competitive disadvantage. Without these provisions,

the release request may be affected only by refinancing with a new

loan, or through an action that would place the guarantee at risk.

In order to protect the interest of the Government, this proposal

will allow releases only in farming operations where there is

substantial equity (loan to value ratio of .75 or less) or in which

approval would not increase the Government's exposure on its guarantee.

Also, releases are intended to be for reasonable purposes, and

generally releases of income-generating assets will be prohibited. For

example, a partial release of productive cropland, with no

consideration, simply because the borrower would like to have the

property free of a mortgage or deed of trust would not be a valid

request, regardless of whether the borrower's cash flow and security

exceeded the requirements contained in this proposal. Also, while it is

expected that a partial release of a residence may be necessary in

conjunction with release of liability of a divorced spouse, it is not

intended that these provisions be used to allow a member of the farm

family to be given acreage, equipment, mineral rights, and other

business assets without paying consideration.

Subordinations

The Agency also plans to provide authority to approve a lender's

request to subordinate a guaranteed loan in certain situations. This

proposal is being made for similar reasons as discussed above for

partial releases. This authority will be limited to subordinations

requested by a guaranteed lender to facilitate outside financing for

lower-

[[Page 51465]]

risk guaranteed borrowers who have the opportunity to refinance higher

interest debt or otherwise improve their situation. The rule proposes

to allow subordinations when the Agency determines that a subordination

will reduce the risk of loss to the Government. It is anticipated that

such subordinations will be seldom and only approved at the National

office level of the Agency.

Rescheduling Lines of Credit

The Agency intends to clearly state that when a line of credit loan

is rescheduled, subsequent advances on the line of credit are not

authorized. This will eliminate the partial rescheduling and advancing

of line of credit loans. Current regulations are silent on this issue.

Many lenders reschedule unpaid portions of lines of credit over a

period of years but continue to make advances against the portion of

the line of credit that was previously paid. This practice often

results in the borrower not having adequate funding under the original

line of credit, increased financial stress on the operation, and

ultimately a loss claim. The line of credit should not take on a dual

role of providing short-term and intermediate term credit. This

proposal provides that rescheduled lines of credit will still not be

allowed to be sold to secondary market purchasers, despite multi-year

terms.

Shared Appreciation Agreements

The Agency also proposes to clarify policy and procedures for

handling Shared Appreciation Agreements (SAA) that expire or are

triggered. Current regulations allow the recapture amount to be

rescheduled or reamortized if the borrower is unable to pay the

recapture amount at the expiration date of the agreement. This rule

proposes that upon recapture at any time, the lender may pay the Agency

its pro rata share of the recapture due in a lump sum and pursue

collection of the recapture from the borrower, or forward the Agency

its pro-rata share of each payment. If the lender reamortizes the

recapture debt, such debt will be covered by the guarantee only if the

lender pays the Agency its pro rata share of the recapture amount

first. This proposed policy will reduce the burden on lenders by making

the treatment of recapture more flexible and encourage lenders to

accept installment payments on recapture amounts instead of liquidating

the account.

Release of Liability

The Agency plans to establish specific criteria under which lenders

may release guaranteed borrowers from personal liability. This proposal

is being made as a result of the advancing age of a portion of the

Agency's guaranteed loan portfolio and the Agency's experiences with

the silence of current regulations. Lack of clear provisions with

regard to releasing obligors in cases of divorce, bankruptcy,

liquidation or withdrawal from the operation has resulted in a lack of

flexibility that reduces lender satisfaction with the program. In many

instances of divorce, a spouse will convey all interest in the farming

operation to the remaining spouse. Often this creates a need for a new

guaranteed loan, use of scarce loan funds, and the payment of a

guarantee fee, when a release of liability would have been a sound and

reasonable alternative.

Approval of release of liability will be based on the strength of

the remaining party, determined by criteria proposed in this rule. The

withdrawing party will not have to document total lack of assets and

income from which to collect, if the remaining party meets the

established criteria. However, some restriction will apply. First,

releases are not to be extended to dissolution of the farming

operation. This is because guaranteed loans are to be made to eligible

family farmers. When a party is quitting the operation and the

remaining party does not plan to continue the farming operation, the

objectives of the program are not met. Second, restrictions are

proposed on releases of entity principals when the withdrawal of that

principal may result in the legal dissolution of the entity to which

the loans were made. The more appropriate action in those cases would

be a transfer of the security to, and assumption of the debt by, the

new entity or remaining party.

Consolidations of Loans

The Agency proposes to restrict the consolidation of loans made

prior to October 1, 1991, to only those made before that date.

Likewise, loans made on or after October 1, 1991, may only be

consolidated with loans made on or after that date. This is due to

restrictions placed on loan subsidies as a result of the Federal Credit

Reform Act of 1990 and appropriation laws. The Agency has no budgetary

authority to provide Interest Assistance for servicing purposes for

those loans made after October 1, 1991, which do not have Interest

Assistance obligated when the loan is made. Therefore, if loans made

without Interest Assistance are consolidated with those loans that are

eligible for Interest Assistance, the older loan loses Interest

Assistance eligibility. Office of Management and Budget rules governing

the Agency's loan subsidies dictate that when consolidation takes place

the most recent loan made is the budgetary cost factor used to

determine funding priorities for that loan. This action is proposed in

order to reduce the likelihood of the lender and borrower inadvertently

losing the Interest Assistance option. The Agency would appreciate any

public comments concerning whether the benefits of a consolidation

would outweigh those of interest assistance eligibility.

Final Loss Claims

Currently, the Agency accepts final loss claims on the ultimate

disposition of the real property only if the Agency approves the

request and documentation is provided that this method results in cost

savings to the Government. The Agency proposes to allow the lender to

request a final payment based on receiving full appraised value at the

time they receive title to the real property, or based on final

disposition after deducting the expenses associated with the receipt,

maintenance and sale of the property. This gives the lender flexibility

and encourages proper maintenance of the inventory property. The Agency

will reduce the final loss claim for any loss caused by the lender's

negligent servicing of the account.

Electronic Funds Transfer (EFT)

The liquidation section of this proposed rule will be revised to

address recent legislation of EFT payments. The Federal Financial

Management Act of 1994, as amended, (31 U.S.C. 3332) generally requires

Federal agencies to make payments to recipients by EFT. The statute

further provides that recipients designate one or more financial

institutions or other authorized agents to which any Agency payments

will be made and provide the Agency information as necessary for them

to receive EFT payments through each institution or agent designated.

Lenders may be recipients of EFT payments under this proposed rule;

therefore, they must designate the institutions or agents and provide

other necessary information to carry out EFT payment.

Balloon Payments With Restructuring

The Agency proposes to prohibit reamortization of loans with a

balloon payment. Current regulations are silent where reamortization is

concerned. Since Agency servicing regulations allow for Interest

Assistance, a deferral, or a writedown of the loan, the arguments often

stated for balloon payments have little relevance to

[[Page 51466]]

guaranteed loans. Reamortizing with a balloon payment schedule becomes

self-defeating by requiring additional servicing at a definite point in

the future. The Agency has found that balloon payments are often used

when a guaranteed borrower's cash flow is insufficient to make an

amortized principal and interest payment over normal or allowable terms

for reamortization of the loan. However, even when a borrower suffers a

setback that requires reamortization, future cash flow should still be

sufficient to cover interest accrual and a meaningful principal

reduction in the loan. If that level of cash flow is not achieved,

other servicing options that may be more beneficial, such as a deferral

or writedown, must be considered. Further, balloon payments are often a

means for lenders to impose a restricted term on those borrowers deemed

higher risk. This may result in the denial of servicing options and

possibly liquidation or the need for refinancing with another lender

when the balloon becomes due. To simplify the procedure and provide for

the development of meaningful plans of operation that protect both the

borrower and the Government, the Agency will prohibit restructuring

plans from including balloon payments.

Interest Assistance and Writedowns

This rule will prohibit Interest Assistance when a guaranteed loan

is being written down. Guaranteed write downs are based upon the

present value of the future projected income available for payment on

the loan. If Interest Assistance is approved on a loan at the time of

the writedown, the calculations will result in a reduced writedown,

based on the interest subsidy being provided in future years. However,

Interest Assistance is awarded on an annual basis and its future

availability is in question. Moreover, although the writedown loss

payment may be reduced through the use of Interest Assistance, this

initial loss claim savings is offset by the processing and payment of a

subsidy over a possible multiple-year term. Again, the requirements for

interest assistance are not being revised in this proposed rule. The

interim rule published at 56 FR 8258-8272 (February 28, 1991) will be

finalized in a separate final rule, and Exhibit D to subpart B of 1980

will be removed from the Federal Register.

Feasible Plan versus Positive Cash Flow

The Agency proposes to provide a regulatory distinction between

actions requiring a debt service margin and those that do not. Ideally,

a guaranteed loan borrower would continually have sufficient resources

to meet all of their obligations, plus have an excess that would allow

for economic setbacks and replenishment of depleted assets or

replacement of capital items. Current regulations define positive cash

flow as having a Term Debt and Capital Lease Coverage Ratio (TDCLCR) of

1.10, meaning the borrower has a .10 or 10 percent cushion after

meeting all obligations. Strict interpretation of this provision may

result in liquidation of a borrower who can demonstrate the ability to

make a restructured payment. However, the Agency did not intend to

require that borrowers requiring guaranteed loan servicing have an

excess margin. Therefore, this rule defines a feasible plan as a TDCLCR

of 1.00 and establishes this as the minimum requirement for loan

servicing actions. However, the Agency recommends loans be restructured

to allow for a 10 percent cushion. The Agency is requesting comments on

this recommendation. A feasible plan will also be the minimum required

for renewed advances on a line of credit, renewal of Interest

Assistance and calculation of present value. This requirement will

allow restructuring of all loans that have repayment ability. Current

regulations are not clear as to what margin is required for

restructuring or writing down, however, the Agency believes that to

require a margin for restructuring was never the intent of the program

and would require lenders to put numerous potentially successful

borrowers out of business and increase government loss payments on

loans.

List of Subjects in 7 CFR Part 1980

Agriculture, Loan programs--Agriculture.

Accordingly, it is proposed that 7 CFR chapter XVIII be amended as

follows:

PART 1980--GENERAL

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

follows:

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

Subpart A--General

2. Revise Sec. 1980.1 to read as follows:

Sec. 1980.1 Purpose.

This subpart contains the general regulations and prescribed forms

which are applicable to Community Programs Guaranteed Loans under

subpart I of this part.

3. Amend Sec. 1980.6 as follows:

a. Remove in paragraph (a) the definitions of ``Conditional

Commitment (Farmer Programs) (Form FmHA or its successor agency under

Public Law 103-354 1980-15),'' ``Contract of Guarantee (Line of Credit)

(Form FmHA or its successor agency under Public Law 103-354 1980-27),''

''Guaranteed line of credit,'' ``Insured loans,'' and ``Line of credit

agreement'';

b. Remove in paragraph (a), in the definition of ``Guaranteed

loan,'' the phrase ``or Form FmHA 1980-38,'';

c. Remove in paragraph (b), the abbreviations ``ASCS,'' ``CLP,''

``EM,'' ``FO,'' ``OL,'' ``OL-Y,'' ``RL,'' and ``SW''; and

d. In paragraph (a), remove the definition of ``Lender's Agreement

(Forms FmHA or its successor agency under Public Law 103-354 449-35 or

1980-38)'' and add a new definition to read as follows:

Sec. 1980.6 Definitions and abbreviations.

(a) * * *

Lender's Agreement (Form RD 449-35). The signed agreement between

Rural Development and the lender setting forth the lender's loan

responsibilities when the Loan Note Guarantee is issued.

* * * * *

Sec. 1980.11 [Amended]

4. Amend Sec. 1980.11 as follows:

a. In the first sentence, remove the phrase ``and Contract of

Guarantee'' and revise the word ``constitute'' to read ``constitutes'';

b. In the second sentence, remove the phrase ``,Contract of

Guarantee'';

c. In the fifth sentence, remove the phrase ``or Contract of

Guarantee''; and

d. Remove the third and sixth sentences.

5. Amend Sec. 1980.13 as follows:

a. In the introductory text to paragraph (b), remove the fourth

sentence; and

b. Revise paragraph (b)(4) to read as follows:

Sec. 1980.13 Eligible lenders.

* * * * *

(b) * * *

(4) Conflict of interest. The Agency shall determine whether such

ownership or business dealings are sufficient to likely result in a

conflict of interest. All lenders will, for each proposed loan, inform

the Agency in writing and furnish such additional evidence as the

Agency requested as to whether and the extent for those loans covered

by Form RD 449-35, the lender or its principal officers (including

immediate family) or the borrower or its principals or officers

(including immediate family) hold any stock or

[[Page 51467]]

other evidence of ownership in the other.

* * * * *

6. Amend the fourth sentence of the introductory paragraph of Sec.

1980.20(a) to read as follows:

Sec. 1980.20 Loan Guarantee Limits.

(a) * * * Also, the maximum loss covered by Form FmHA 449-34

(available in any Agency office) can never exceed the lesser of:

* * * * *

7. Revise Sec. 1980.21 to read as follows:

Sec. 1980.21 Guarantee fee.

The fee will be the applicable rate multiplied by the principal

loan amount multiplied by the percent of guarantee, paid one time only

at the time the Loan Note Guarantee is issued.

(a) The fee will be paid to the Agency by the lender and is

nonreturnable. The lender may pass on the fee to the borrower.

(b) Guarantee fee rates are specified in exhibit K of Rural

Development Instruction 440.1 (available in any Rural Development

Office).

8. Amend Sec. 1980.22 as follows:

a. In the introductory text of paragraph (b) and in paragraph

(b)(3), remove the phrase ``or Contract of Guarantee''; and

b. Revise paragraph (a) to read as follows:

Sec. 1980.22 Charges and fees by lender.

(a) Routine charges and fees. The lender may establish the charges

and fees for the loan, provided they are the same as those charged

other applicants for similar types of transactions. ``Similar types of

transactions'' means those transactions involving the same type of loan

requested for which a non-guaranteed loan applicant would be assessed

charges and fees.

* * * * *

Sec. 1980.46 [Removed and reserved]

9. Sec. 1980.46 is removed and reserved.

Sec. 1980.60 [Amended]

10. Amend Sec. 1980.60 as follows:

a. In the heading, remove the phrase ``or Contract of Guarantee'';

b. In the introductory text of paragraph (a) in the second

sentence, remove the phrase ``For all other loans, Form FmHA or its

successor agency under Public Law 103-354'' and in its place add

``Form'' and remove the first sentence;

c. In paragraph (a)(1), remove the phrases ``or line of credit''

and ``or Conditional Commitment for Contract of Guarantee'';

d. In paragraphs (a)(6) and (a)(7), remove the phrases ``or line of

credit'';

e. In paragraph (a)(9), remove the phrase ``joint operation, (for

Farmer Program loans only),'';

f. In paragraphs (a)(10) and (a)(11), remove the phrases ``or

Conditional Commitment for Contract of Guarantee'';

g. In paragraph (a)(12), remove the second sentence;

h. In paragraph (b), remove the phrase ``or Contract of

Guarantee''; and

i. In paragraph (c), remove the phrase at the end ``or Form FmHA or

its successor agency under Public Law 103-354 1980-38''.

Sec. 1980.61 [Amended]

11. Amend Sec. 1980.61 as follows:

a. In the heading, remove the phrase ``, Contract of Guarantee'';

b. In the first sentence of paragraph (a)(1), remove the phrase

``Except for Farmer Programs loans, the'' and add in its place ``The'';

c. Remove paragraph (a)(2) in its entirety and redesignate

paragraph (a)(3) as paragraph (a)(2), respectively;

d. In newly redesignated paragraph (a)(2), remove the phrase ``or

Contract of Guarantee;''

e. In paragraph (b)(1) remove the phrase ``or Form FmHA or its

successor agency under Public Law 103-354 1980-38'';

f. In paragraphs (b)(3) and (4), remove the phrases ``or

Sec. 1980.119 of subpart B of this part'';

g. Remove paragraph (c) and redesignate paragraphs (d) through (h)

as paragraphs (c) through (g), respectively;

h. In newly redesignated paragraph (c), remove the last sentence;

i. In newly redesignated paragraph (d), remove the phrase ``or

Contract of Guarantee'' from the first sentence;

j. In newly redesignated paragraph (f), remove the phrase ``or

Contract of Guarantee''

k. In newly redesignated paragraph (g), remove the phrases ``or

Form FmHA or its successor agency under Public Law 103-354 1980-38''

and ``the Contract of Guarantee,'' from the last sentence.

Sec. 1980.62 [Amended]

12. Amend Sec. 1980.62 as follows:

a. In the first and third sentences, remove the phrase ``or

Sec. 1980.119 of subpart B of this part''; and

b. Remove the last sentence.

Sec. 1980.63 [Amended]

13. Amend Sec. 1980.63(a) to remove the phrase ``or I.D.6. of Form

FmHA or its successor agency under Public Law 103-354 1980-38''.

Sec. 1980.64 [Amended]

14. Amend Sec. 1980.64 as follows:

a. In paragraph (a), remove the phrase ``or paragraph I.D.6. of

Form FmHA or its successor agency under Public Law 103-354 1980-38'';

and

b. In paragraph (b), remove the two occurrences of the phrase ``or

line of credit.''

Sec. 1980.65 [Amended]

15. Amend Sec. 1980.65 to remove the phrase ``, or for Farmer

Programs Loans, Sec. 1980.136 of subpart B of this part''.

Sec. 1980.66 [Amended]

16. Amend Sec. 1980.66 to remove the phrase ``, or paragraph

I.D.6.(b) of Form FmHA or its successor agency under Public Law 103-354

1980-38''.

Sec. 1980.67 [Amended]

17. Amend Sec. 1980.67 as follows:

a. In paragraph (a), remove the first sentence; and

b. In paragraph (b), remove the phrase ``or line of credit''.

Sec. 1980.68 [Amended]

18. Amend Sec. 1980.68 as follows:

a. In the heading, remove the phrase ``or Contract of Guarantee'';

b. In the first sentence, remove the phrase ``or Contract(s) of

Guarantee'';

c. In the second sentence in the parentheticals, remove the phrase

``, or paragraph 6 of Form FmHA or its successor agency under Public

Law 103-354 1980-27'';

d. In the third sentence, remove the phrases ``or line(s) of

credit,'' ``or Contract(s) of Guarantee,'' and ``or Form FmHA or its

successor agency under Public Law 103-354 1980-27''; and

e. Remove the last two sentences.

Sec. 1980.83 [Amended]

19. Amend Sec. 1980.83 to remove the second sentence.

Sec. 1980.84 [Amended]

20. Amend Sec. 1980.84 as follows:

a. Remove the phrases ``Contract of Guarantee'' and ``or Contract

of Guarantee'' from the first sentence of paragraph (b)(1)(iv);

b. Remove the phrase ``Contract of Guarantee'' from paragraph

(b)(1)(v); and

c. Remove the phrase ``or Sec. 1980.119 of subpart B of this part''

from the first and fourth sentences in paragraph (b)(4).

Appendices D-L to Subpart A [Removed]

21. Amend part 1980, subpart A to remove Appendices D through L.

22. In subpart B, Sec. 1980.101 is revised to read as follows:

Sec. 1980.101 Introduction.

(a) Scope. This subpart contains regulations governing Operating

Loans

[[Page 51468]]

and Farm Ownership loans guaranteed by the Farm Service Agency. This

subpart applies to lenders, holders, borrowers, Agency personnel, and

other parties involved in making, guaranteeing, holding, servicing, or

liquidating such loans.

(b) Policy. The Agency issues guarantees on loans made to qualified

loan applicants without regard to race, color, religion, sex, national

origin, marital status, age, or physical or mental handicap, provided

the loan applicant can enter into a legal and binding contract, or

whether all or part of the applicant's income derives from any public

assistance program or whether the applicant, in good faith, exercises

any rights under the Consumer Protection Act.

(c) Lender list and classification.

(1) The Agency maintains a current list of lenders who express a

desire to participate in the guaranteed loan program. This list is made

available to farmers upon request.

(2) Lenders who participate in the Agency guaranteed loan program

will be classified into one of the following categories:

(i) Standard Eligible Lender under Sec. 1980.105,

(ii) Certified Lender, or

(iii) Preferred Lender under Sec. 1980.106.

(d) Type of Guarantee. There are two types of guarantees issued

under the Farm Loan Programs Guaranteed Loan Program:

(1) Loan Note Guarantee. A Loan Note Guarantee is used for a loan

of fixed amount and term.

(2) Contract of Guarantee. A Contract of Guarantee is only

available for Operating Loan lines of credit. The Contract of Guarantee

has a fixed term, but no fixed amount. The principal amount outstanding

at any time, however, may not exceed the line of credit ceiling

contained in the contract.

(e) Termination of Loan Note Guarantee or Contract of Guarantee.

The Loan Note or Contract of Guarantee will automatically terminate as

follows:

(1) Upon full payment of the guaranteed loan. A zero balance within

the period authorized for advances on a line of credit will not

terminate the contract of guarantee;

(2) Upon payment of a final loss claim; or

(3) Upon written notice from the lender to the Agency that a

guarantee is no longer desired provided the lender holds all of the

guaranteed portion of the loan. The Loan Note or Contract of Guarantee

will be returned to the Agency office for cancellation within 30 days

of the date of the notice by the lender.

23. Sections 1980.102 through 1980.105 are added to read as

follows:

Sec. 1980.102 Abbreviations and definitions.

(a) Abbreviations:

CLP--Certified Lender Program

CONACT--Consolidated Farm and Rural Development Act (7 U.S.C. 1921 et

seq.)

EPA--Environmental Protection Agency

EIS--Environmental Impact Statement

EM--Emergency loans

FO--Farm Ownership loans

FSA--Farm Service Agency

OL--Operating loans

PLP--Preferred Lender Program

SW--Soil and Water

USDA--United States Department of Agriculture

(b) Definitions:

Additional security. Collateral in excess of that needed to fully

secure the loan.

Agency. The Farm Service Agency, including its employees and state

and area committee members, and any successor agency.

Allonge. An attachment or an addendum to a note.

Applicant. For guaranteed loans, the lender requesting a guarantee

is the applicant. The party applying to the lender for a loan will be

considered the loan applicant.

Aquaculture. The husbandry of aquatic organisms in a controlled or

selected environment. An aquatic organism is any fish, amphibian,

reptile, or aquatic plant. An aquaculture operation is considered to be

farm only if it is conducted on the grounds which the loan applicant

owns, leases, or has an exclusive right to use. An exclusive right to

use must be evidenced by a permit issued to the loan applicant and the

permit must specifically identify the waters available to be used by

the loan applicant only.

Assignment of guaranteed portion. A process by which the lender

transfers the right to receive payments or income on the guaranteed

loan to another party, usually in return for payment in the amount of

the loan's guaranteed principal. The lender retains the unguaranteed

portion in its portfolio and receives a fee from the purchaser or

assignee to service the loan, and receive and remit payments according

to a written assignment agreement. This assignment can be reassigned or

sold multiple times.

Average farm customers. Those conventional farm borrowers who are

required to pledge their crops, livestock, and other chattel and real

estate security for the loan. This does not include those high-risk

farmers with limited security and management ability who are generally

charged a higher interest rate by conventional agricultural lenders.

Also, this does not include those low-risk farm customers who obtain

financing on a secured or unsecured basis, who have as collateral

items, such as savings accounts, time deposits, certificates of

deposit, stocks and bonds, and life insurance, which they are able to

pledge for the loan.

Beginning farmer or rancher. A beginning farmer or rancher is an

individual or entity who:

(1) Meets the loan eligibility requirements for OL or FO loan

assistance, as applicable, in accordance with this subpart;

(2) Has not operated a farm or ranch, or who has operated a farm or

ranch for not more than 10 years. This requirement applies to all

members of an entity;

(3) Will materially and substantially participate in the operation

of the farm or ranch:

(i) In the case of a loan made to an individual, individually or

with the immediate family, material and substantial participation

requires that the individual provide substantial day-to-day labor and

management of the farm or ranch, consistent with the practices in the

county or State where the farm is located.

(ii) In the case of a loan made to an entity, all members must

materially and substantially participate in the operation of the farm

or ranch. Material and substantial participation requires that the

individual provide some amount of the management, or labor and

management necessary for day-to-day activities, such that if the

individual did not provide these inputs, operation of the farm or ranch

would be seriously impaired;

(4) Agrees to participate in any loan assessment, borrower

training, and financial management programs required by Agency

regulations;

(5) Does not own real farm or ranch property or who, directly or

through interests in family farm entities owns real farm or ranch

property, the aggregate acreage of which does not exceed 25 percent of

the average farm or ranch acreage of the farms or ranches in the county

where the property is located. If the farm is located in more than one

county, the average farm acreage of the county where the loan

applicant's residence is located will be used in the calculation. If

the loan applicant's residence is not located on the farm or if the

loan applicant is an entity, the average farm acreage of the

[[Page 51469]]

county where the major portion of the farm is located will be used. The

average county farm or ranch acreage will be determined from the most

recent Census of Agriculture developed by the U.S. Department of

Commerce, Bureau of the Census or USDA;

(6) Demonstrates that the available resources of the loan applicant

and spouse (if any) are not sufficient to enable the loan applicant to

enter or continue farming or ranching on a viable scale; and

(7) In the case of an entity:

(i) All the members are related by blood or marriage; and

(ii) All the stockholders in a corporation are beginning farmers or

ranchers.

Borrower. An individual or entity which has outstanding obligations

to the lender under any Agency loan program. A borrower includes all

parties liable for Agency debt, including collection-only borrowers,

except those whose total loan and accounts have been voluntarily or

involuntarily foreclosed or liquidated, or who have been discharged of

all Agency debt.

Collateral. Property pledged as security for a loan to ensure

repayment of an obligation.

Conditional Commitment. The Agency's commitment to the lender that

the material it has submitted is approved subject to the completion of

all conditions and requirements contained therein.

Consolidation. The combination of outstanding principal and

interest balance of two or more OL loans.

Controlled. When a director or employee has more than a 50 percent

ownership in the entity or, the director or employee, together with

relatives of the director or employee, have more than a 50 percent

ownership.

Cooperative. An entity which has farming as its purpose and whose

members have agreed to share the profits of the farming enterprise. The

entity must be recognized as a farm cooperative by the laws of the

State in which the entity will operate a farm.

Cosigner. A party who joins in the execution of a promissory note

to assure its repayment. The cosigner becomes jointly and severally

liable to comply with the terms of the note. In the case of an entity

loan applicant, the cosigner cannot be a member, partner, joint

operator, or stockholder of the entity.

Debt writedown. To reduce the amount of the borrower's debt to that

amount that is determined to be collectible based on an analysis of the

security value and the borrower's ability to pay.

Deferral. A postponement of the payment of interest or principal or

both.Principal may be deferred in whole or in part.

Direct loan. A loan made to a borrower and serviced by the Agency

as lender.

Entity. Cooperatives, corporations, partnerships, or joint

operations.

Family farm. A farm which:

(1) Produces agricultural commodities for sale in sufficient

quantities so that it is recognized in the community as a farm rather

than a rural residence;

(2) Provides enough agricultural income by itself, including rented

land, or together with any other dependable income to enable the

borrower to:

(i) Pay necessary family living and operating expenses;

(ii) Maintain essential chattel and real property; and

(iii) Pay debts;

(3) Is managed by:

(i) The borrower when a loan is made to an individual; or,

(ii) The members, stockholders, partners, or joint operators

responsible for operating the farm when a loan is made to an entity;

(4) Has a substantial amount of the labor requirement for the farm

and nonfarm enterprise provided by:

(i) The borrower and the borrower's immediate family for a loan

made to an individual; or

(ii) The members, stockholders, partners, or joint operators

responsible for operating the farm, along with the families of these

individuals, for a loan made to an entity; and

(5) May use a reasonable amount of full-time hired labor and

seasonal labor during peak load periods.

Farm. A tract or tracts of land, improvements, and other

appurtenances which are used or will be used in the production of

crops, livestock, or aquaculture products for sale in sufficient

quantities so that the property is recognized as a farm rather than a

rural residence. The term ``farm'' also includes any such land and

improvements and facilities used in a nonfarm enterprise. It may also

include the residence which, although physically separate from the farm

acreage, is ordinarily treated as part of the farm in the local

community.

Feasible plan. A plan for loan servicing purposes which shows the

elements of ``positive cash flow'' except that the minimum acceptable

``Term Debt and Capital Lease Coverage Ratio'' is 1.0 rather than 1.1

required for ``positive cash flow.'' However, it is strongly

recommended that any servicing action provide for a Term Debt and

Capital Lease Coverage Ratio of 1.1.

Financially viable operation. A financially viable operation is one

which, with Agency assistance, is projected to improve its financial

condition over a period of time to the point that the operator can

obtain commercial credit without further Agency direct or guaranteed

assistance. A borrower that will meet the Agency classification of

``commercial,'' as defined in Agency Instruction 2006-W, available in

any Agency office, will be considered to be financially viable. Such an

operation must generate sufficient income to:

(1) Meet annual operating expenses and debt payments as they become

due;

(2) Meet basic family living expenses to the extent they are not

met by dependable nonfarm income;

(3) Provide for replacement of capital items; and

(4) Provide for long-term financial growth.

Fish. Any aquatic, gilled animal commonly known as ``fish'' as well

as mollusks, or crustaceans (or other invertebrates) produced under

controlled conditions (that is, feeding, tending, harvesting, and such

other activities as are necessary to properly raise and market the

products) in ponds, lakes, streams, or similar holding areas.

Fixture. Generally a chattel item attached to real estate in such a

way that it cannot be removed without defacing or dismantling the

structure, or substantially damaging the structure itself.

Graduation. The Agency's determination that a borrower on a direct

loan, is financially stable enough to refinance that loan with a

commercial lender with or without a guarantee.

Guaranteed loan. A loan made and serviced by a lender for which the

Agency has entered into a Lenders Agreement and for which the Agency

has issued a Loan Note Guarantee. This term also includes lines of

credit except where otherwise indicated.

Hazard insurance. Includes fire, windstorm, lightning, hail,

explosion, riot, civil commotion, aircraft, vehicles, smoke, builder's

risk, public liability, property damage, flood or mudslide, workers

compensation, or any similar insurance that is available and needed to

protect the security, or that is required by law.

Holder. The person or organization other than the lender who holds

all or a part of the guaranteed portion of an Agency guaranteed loan

but who has no servicing responsibilities. When the lender assigns a

part of the guaranteed loan to an assignee, the assignee becomes a

holder when an Assignment form is executed.

[[Page 51470]]

In-house expenses. Expenses associated with credit management and

loan servicing. In-house expenses include, but are not limited to:

employee salaries, staff lawyers, travel, supplies, and overhead.

Joint operation. Individuals that have agreed to operate a farm or

farms together as a business unit. The real and personal property is

owned separately or jointly by the individuals. For example, husband

and wife who apply for a loan together will be considered a joint

operation. Joint operations include limited liability companies having

more than one member.

Land development. Items such as terracing, clearing, leveling,

fencing, drainage and irrigation systems, ponds, forestation, permanent

pastures, perennial hay crops, basic soil amendments, and other items

of land improvements which conserve or permanently enhance

productivity.

Lender. The organization making and servicing the loan or advancing

and servicing the line of credit which is guaranteed under the

provisions of Agency regulations. The lender is also the party

requesting a guarantee.

Lender's Agreement. The appropriate Agency form executed by the

Agency and the lender setting forth the general loan responsibilities

of the lender and agency when the Loan Note Guarantee or Contract of

Guarantee is issued.

Lien. A legally enforceable hold or claim on the property of

another obtained as security for the repayment of indebtedness or an

encumbrance on property to enforce payment of an obligation.

Liquidation expenses. The cost of an appraisal, environmental

assessment, outside attorney fees and other costs incurred as a direct

result of liquidating the security for the guaranteed loan. Liquidation

fees do not include in-house expenses.

Loan or Line of Credit Agreement. A document which contains certain

lender and borrower agreements, conditions, limitations, and

responsibilities in a process of credit extension and acceptance in a

loan format where loan principal balance may fluctuate throughout the

term of the document.

Loan Applicant. The party applying to a lender for a guaranteed

loan or line of credit.

Loss Claim. A request made to the Agency by a lender to receive a

reimbursement based on a percentage of the lender's loss on a loan

covered by an Agency guarantee.

Majority interest. Any individual or a combination of individuals

owning more than a 50 percent interest in a cooperative, corporation,

joint operation, or partnership.

Market value. The amount which an informed and willing buyer would

pay an informed and willing but not forced seller in a completely

voluntary sale.

Mortgage. An instrument giving the lender a security interest or

lien on real or personal property of any kind.

Negligent servicing. The failure to perform those services which

would be considered normal industry standards of loan management or

failure to comply with any servicing requirement of this subpart. The

term includes the concept of a failure to act or failure to act timely

consistent with actions of a reasonable lender in loan making,

servicing, and collection.

Net recovery value. The estimated future value of security property

that has been taken into inventory, exposed to prevailing market

conditions and sold based on the properties highest and best use at the

time of the sale less the Government's costs of liquidation, property

maintenance, and disposition.

Nonessential asset. Assets in which the borrower has an ownership

interest that do not contribute an income to pay essential family

living expenses or maintain a sound farming operation, and are not

exempt from judgment creditors.

Participation. A loan arrangement where a primary or lead lender is

typically the lender of record but the loan funds may be provided by

one or more other lenders due to loan size or other factors. Typically,

participating lenders share in the interest income or profit on the

loan based on the relative amount of the loan funds provided after

deducting the servicing fees of the primary or lead lender.

Partnership. Any entity consisting of two or more individuals who

have agreed to operate a farm as one business unit. The entity must be

recognized as a partnership by the laws of the State in which the

entity will operate and must be authorized to own both real estate and

personal property and to incur debts in its own name.

Positive cash flow. The ability of a borrower's operation to

demonstrate: a Term Debt and Capital Lease Coverage Ratio of at least

1.1; and a Capital Replacement and Term Debt Repayment Margin equal to

or greater than any planned capital asset purchases not financed. The

Term Debt and Capital Lease Coverage Ratio and the Capital Replacement

and Term Debt Repayment Margin are calculated in the following manner:

(1) Add projected net farm operating income, projected annual

nonfarm income, projected capital depreciation and amortization

expenses, scheduled annual interest on term debt, and scheduled annual

interest on capital leases.

(i) Net farm operating income is the gross income generated by a

farming operation annually, minus all yearly operating expenses

(including withdrawals from entities for living expenses), operating

loan interest, interest on term debt and capital lease payments, and

depreciation and amortization expenses. Net farm operating income does

not include off-farm income and social security taxes, carryover debt

and delinquent interest.

(ii) Depreciation and amortization expenses are an annual

allocation of the cost or other basic value of tangible capital assets,

less salvage value, over the estimated life of the unit (which may be a

group of assets), in a systematic and rational manner.

(iii) Capital leases are agreements under which the lessee

effectively acquires ownership of the asset being leased. A lease is a

capital lease if it meets any one of the following criteria:

(A) The lease transfers ownership of the property to the lessee at

the end of the lease term.

(B) The lessee has the right to purchase the property for

significantly less than its market value at the end of the lease.

(C) The term of the lease is at least 75 percent of the estimated

economic life of the leased property.

(D) The present value of the minimum lease payments equals or

exceeds 90 percent of the fair market value of the leased property.

(2) Subtract from this sum projected annual income and social

security tax payments, including any delinquent taxes, and family

living expenses. The difference is the Balance Available for Term Debt

Repayment.

(i) Family living expenses are any withdrawals from income to

provide for needs of family members.

(ii) Family members are considered to be the immediate members of

the family residing in the same household with the individual borrower,

or, in the case of an entity, with the operator.

(3) Divide the Balance Available for Term Debt Repayment by the sum

of the annual scheduled principal and interest payments on term debt,

plus the annual scheduled principal and interest payments on capital

leases, excluding delinquent installments. The quotient is the Term

Debt and Capital Lease Coverage Ratio.

(4) Add the Balance Available for Term Debt Repayment to any cash

carryover from the preceding year.

[[Page 51471]]

(5) Subtract from this sum the amount of the Total Annual Scheduled

Term Debt and Capital Lease Payments, and any debt carried over from

the previous year. The difference is the Capital Replacement and Term

Debt Repayment Margin.

Potential liquidation value. The amount of the lender's protective

bid at the foreclosure sale. Potential liquidation value is determined

by an independent appraiser using comparables from other forced

liquidation sales.

Present value. The present worth of a future stream of payments

discounted to the current date.

Primary security. The minimum amount of collateral needed to fully

secure a proposed loan.

Principals of borrowers. Includes owners, officers, directors,

entities and others directly involved in the operation and management

of a business.

Protective advances. Advances made by a lender to protect or

preserve the collateral itself from loss or deterioration. Protective

advances include but are not limited to:

(1) Payment of delinquent taxes,

(2) Annual assessments,

(3) Ground rents,

(4) Hazard or flood insurance premiums against or affecting the

collateral,

(5) Harvesting costs,

(6) Other expenses needed for emergency measures to protect the

collateral.

Reamortization. To rearrange the rates or terms, or both, of a loan

made for real estate purposes.

Related by blood or marriage. Individuals who are connected to one

another as husband, wife, parent, child, brother, or sister.

Relative. An individual or spouse and anyone having the following

relationship to either: parent, son, daughter, sibling, stepparent,

stepson, stepdaughter, stepbrother, stepsister, half brother, half

sister, uncle, aunt, nephew, niece, grandparent, granddaughter,

grandson, and the spouses of the foregoing.

Rescheduling. To rewrite the rates and terms of a single note or

line of credit Agreement which acknowledges indebtedness for a loan

made for operating purposes.

Restructuring. Changing terms of a debt through either a

consolidation, rescheduling, reamortization, deferral, or writedown or

a combination thereof.

Sale of guaranteed portion. See Assignment of guaranteed portion.

Security. Property of any kind subject to a real or personal

property lien. Any reference to ``collateral'' or ``security property''

shall be considered a reference to the term ``security.''

Shared Appreciation Agreement. This agreement requires the borrower

to repay the lender all or a portion of the debt written down in

conjunction with a Debt Writedown when the agreement is triggered or

expires and there is an increase in value of the real estate that

secured the loans.

State. The major political subdivision of the United States and the

organization of program delivery for the Agency.

Subsequent loans. Any loans processed by the Agency after an

initial loan has been made to the same borrower.

Transfer and assumption. The conveyance by a debtor to an assuming

party of the assets, collateral, and liabilities of the loan in return

for the assuming party's binding promise to pay the debt outstanding.

United States. The United States itself, each of the several

States, the Commonwealth of Puerto Rico, the Virgin Islands of the

United States, Guam, American Samoa, and the Commonwealth of the

Northern Mariana Islands.

Veteran. Any person who served in the active military, naval, or

air service during the Spanish-American War, the Mexican border period,

World War I, World War II, the Korean conflict, the Vietnam era, the

Persian Gulf War, or the period beginning on the date of any future

declaration of war by the Congress and ending on the date prescribed by

Presidential proclamation or concurrent resolution of the Congress.

Sec. 1980.103 Full faith and credit.

(a) Fraud and misrepresentation. The Loan Note Guarantee and

Contract of Guarantee constitute obligations supported by the full

faith and credit of the United States. The Agency may contest the

guarantee only in cases of fraud or misrepresentation by a lender or

holder, in which:

(1) The lender or holder had actual knowledge of the fraud or

misrepresentation at the time it became the lender or holder, or

(2) The lender or holder participated in or condoned the fraud or

misrepresentation.

(b) Lender violations. The Loan Note Guarantee or Contract of

Guarantee cannot be enforced by the lender, regardless of when the

Agency discovers the violation, to the extent that the loss is a result

of:

(1) Violation of usury laws;

(2) Negligent servicing;

(3) Failure to obtain the required security; or,

(4) Failure to use loan funds for purposes specifically approved by

the Agency.

(c) Enforcement by holder. The guarantee and right to require

purchase will be directly enforceable by the holder even if:

(1) The Loan Note Guarantee or Contract of Guarantee is contestable

based on the lender's fraud or misrepresentation; or

(2) The Loan Note Guarantee is unenforceable by the lender based on

a lender violation.

Sec. 1980.104 Appeals.

(a) The loan applicant or borrower and lender must generally

jointly execute the written request for review of an alleged adverse

decision made by Agency. However, in cases where the Agency has denied

or reduced the amount of the final loss payment, the decision may be

appealed by the lender only.

(b) A decision made by the lender adverse to the borrower is not a

decision by the Agency, whether or not concurred in by the Agency, and

may not be appealed.

(c) Appeals will be handled in accordance with parts 11 and 780 of

this title.

Sec. 1980.105 Eligibility and substitution of lenders.

(a) General. To participate in FSA Guaranteed Farm Loan Programs, a

lender must meet the eligibility criteria in this section. The Standard

Eligible Lender must demonstrate eligibility for each guarantee request

submitted and provide such evidence as the Agency may request.

(b) Standard Eligible Lender eligibility criteria.

(1) A lender must have the capability to adequately make and

service the loan for which a guarantee is requested;

(2) A lender must be subject to credit examination and supervision

by an acceptable State or Federal regulatory agency;

(3) A lender must be in good standing with all applicable State or

Federal regulatory agencies;

(4) The lender must maintain an office near enough to the

collateral's location so it can properly and efficiently discharge its

loan making and loan servicing responsibilities or use agents,

correspondents, branches, or other institutions or persons to provide

expertise to assist in carrying out its responsibilities. The lender

must be a local lender unless it:

(i) normally makes loans in the region or geographic location in

which the loan applicant's operation being financed is located, or

[[Page 51472]]

(ii) demonstrates specific expertise in making and servicing loans

for the proposed operation.

(5) The lender must not be debarred or suspended from participation

in a Government contract or delinquent on a Government debt.

(c) Substitution of Lenders. A new eligible lender may be

substituted for the original lender under the following conditions:

(1) The Agency approves of the substitution in writing;

(2) The new lender agrees in writing to assume all servicing and

other responsibilities of the original lender and to acquire the

unguaranteed portion of the loan; and

(3) The substituted lender agrees to notify any holder of the

substitution.

(d) Lender Name or Ownership Changes.

(1) When a lender undergoes an ownership change or otherwise begins

doing business under a new name, the lender will notify the Agency.

(2) The lender's CLP or PLP status is subject to reconsideration

when ownership changes.

(3) The new lender will execute a new Lender's Agreement.

24. Section 1980.106 is revised to read as follows:

Sec. 1980.106 Preferred and Certified Lender Programs.

(a) General. (1) Lenders who desire PLP or CLP status must prepare

a written request addressing:

(i) The States in which they desire to receive PLP or CLP status;

and

(ii) Each item of the eligibility criteria for PLP or CLP in this

section, as appropriate.

(2) The lender may include any additional supporting evidence or

other information the lender believes would be helpful to the Agency in

making its determination.

(3) The lender must send its request to the Agency State office for

the State in which the lender's headquarters is located.

(4) The lender will provide any additional information needed to

process a PLP or CLP request, upon Agency request.

(5) The term ``loss rate'' as used in this section equals the net

amount of guaranteed OL, FO, and SW loss claims paid on loans made in

the past 7 years divided by the total loan amount of the OL, FO, and SW

loans made in the past 7 years.

(b) CLP Criteria. The lender must meet the following requirements

to obtain CLP status:

(1) Qualify as a standard eligible lender under Sec. 1980.105;

(2) Have a lender loss rate not in excess of the maximum CLP Loss

Rate established by the Agency and available in any Agency office.

(3) Have proven an ability to process and service Agency guaranteed

loans by showing that the lender:

(i) Submitted substantially complete and correct guaranteed loan

applications; and

(ii) Serviced all guaranteed loans according to Agency regulations;

(4) Have closed a minimum of 10 Agency guaranteed loans or lines of

credit;

(5) Have closed a total of five Agency guaranteed loans or lines of

credit, not including readvances on lines of credit, within the past 2

years;

(6) Maintain an acceptable level of financial soundness as

determined by a bank rating service or comparable rater acceptable to

the Agency.

(7) Designate a qualified person or persons to process and service

Agency guaranteed loans for each of the lender offices which will

process CLP loans. To be qualified, the person must meet the following

conditions:

(i) Have attended Agency sponsored training in the past 12 months

or will attend training in the next 12 months; and

(ii) Agree to attend Agency sponsored training each year;

(8) Use forms acceptable to the Agency for processing, analyzing,

securing, and servicing Agency guaranteed loans and lines of credit;

(9) Submit copies of financial statements, cash flow plans,

budgets, loan agreements, analysis sheets, collateral control sheets,

security agreements and other forms to be used for farm loan processing

and servicing;

(10) Agree to provide credit information to consumer or commercial

reporting agencies, as appropriate.

(c) PLP Criteria. The lender must meet the following requirements

to obtain PLP status:

(1) Meet the CLP eligibility criteria under this section.

(2) Have a satisfactory credit management system based on the

following:

(i) the lender's written credit policies and underwriting

standards;

(ii) loan documentation requirements;

(iii) exceptions to policies;

(iv) analysis of new loan requests;

(v) credit file management;

(vi) loan funds and collateral management system;

(vii) portfolio management;

(viii) loan reviews;

(ix) internal credit review process;

(x) loan monitoring system; and

(xi) the board of director's responsibilities.

(3) Have made at least 20 PLP, CLP, or ALP loans, or a combination

of these type loans, within the past 5 years.

(4) Have a lender loss rate not in excess of the rate for PLP

lenders established by the Agency and available in any Agency office.

(5) Show a consistent practice of submitting applications for

guaranteed loans detailed with accurate information that supports a

sound loan proposal.

(6) Show a consistent practice of processing Agency guaranteed

loans without any major or reoccurring minor deficiencies. A major

deficiency is one that directly affects the soundness of the loan. A

minor deficiency violates Agency procedure, but does not affect the

soundness of a loan.

(7) Have a history of using the guaranteed program for new loans,

instead of refinancing the lender's existing debts.

(8) Demonstrate a consistent, above average ability to service

guaranteed loans based on the following:

(i) Borrower supervision and assistance;

(ii) Timely and effective servicing; and

(iii) Communication with the Agency.

(9) Designate a person or persons, approved by the Agency, to

process and service PLP loans for the Agency.

(d) CLP and PLP approval.

(1) If a lender applying for CLP or PLP status has recently been

involved in a merger or acquisition, all loans and losses attributed to

both lenders will be considered in the eligibility calculations.

(2) The Agency will determine which branches of the lender have the

necessary experience and ability to participate in the CLP or PLP

program.

(3) Lenders who meet the criteria will be granted CLP or PLP status

for a period of 5 years.

(4) PLP status will be conditioned on the lender carrying out its

credit management system as proposed in its request for PLP status and

any additional loan making or servicing requirements agreed to and

documented in an attachment to the Lender's Agreement.

(e) Monitoring CLP and PLP lenders. CLP and PLP lenders will

provide information and access to records upon Agency request to permit

the Agency to monitor the lender for compliance with Agency

regulations.

(f) Renewal of CLP or PLP status.

(1) PLP or CLP status will expire 5 years from the date the

Lender's Agreement is executed, unless a new Lender's Agreement is

executed.

(2) Renewal of PLP or CLP status is not automatic. A lender must

submit a

[[Page 51473]]

written request for renewal of a Lender's Agreement with PLP or CLP

status which includes information:

(i) Updating the material submitted for the initial application;

and,

(ii) Addressing any new criteria established by the Agency since

the initial application.

(3) PLP or CLP status will be renewed if the applicable eligibility

criteria under this section are met, and no due cause exists for

denying renewal under paragraph (g) of this section.

(g) Revocation of PLP or CLP Status.

(1) The Agency may revoke the lender's PLP or CLP status at any

time during the 5 year term for due cause.

(2) Any of the following instances constitute due cause for

revoking or not renewing PLP or CLP status:

(i) Violation of the terms of the Lender's Agreement;

(ii) Failure to maintain PLP or CLP eligibility criteria;

(iii) Knowingly submitting false or misleading information to the

Agency;

(iv) Basing a request on information known to be false;

(v) Multiple deficiencies in processing or servicing Agency

Guaranteed Farm Loan Programs loans in accordance with this subpart;

(vi) Failure to correct cited deficiencies in loan documents upon

notification by the Agency;

(vii) Failure to submit status reports in a timely manner;

(viii) Failure to use forms, or follow credit management systems

(for PLP lenders) accepted by the Agency; or

(ix) Failure to repurchase the guaranteed portion of a loan sold on

the secondary market upon written request by the holder.

(3) A lender which has lost PLP or CLP status must be reconsidered

for eligibility to continue as a Standard Eligible Lender (for former

PLP and CLP lenders), or as a CLP lender (for former PLP lenders only)

in submitting loan guarantee requests. They may reapply for CLP or PLP

status when the problem causing them to lose their status has been

resolved.

Sec. 1980.107 through 1980.109 [Removed and reserved]

25. Sections 1980.107 through 1980.109 are removed and reserved.

26. Section 1980.110 is revised to read as follows:

Sec. 1980.110 Loan Application.

(a) Loans for $50,000 or less. (1) A complete application for loans

of $50,000 or less must, at least, consist of:

(i) the application form;

(ii) loan narrative;

(iii) balance sheet;

(iv) cash flow budget;

(v) credit report; and,

(vi) a plan for servicing the loan.

(2) In addition to the minimum requirements, the lender will

perform at least the same level of evaluation and documentation for a

guaranteed loan that the lender typically performs for non-guaranteed

loans of a similar type and amount.

(b) Loans for over $50,000. A complete application for loans over

$50,000 will consist of the items required in paragraph (a) of this

section plus the following:

(1) verification of income;

(2) verification of debts over $1,000;

(3) 3 years financial history;

(4) 3 years of production history for Standard Eligible Lenders

only;

(5) A proposed loan agreement; and

(6) If construction or development is planned, a copy of the plans,

specifications, and development schedule.

(c) Applications from PLP lenders. Notwithstanding paragraphs (a)

and (b) of this section, a complete application for PLP lenders will

consist of at least:

(1) An application form;

(2) A loan narrative; and

(3) Any other items agreed to during the approval of the PLP

lender's status.

(d) Submitting applications.

(1) All lenders must compile and maintain in their files a complete

application for each guaranteed loan.

(2) The Agency will notify CLP lenders which items to submit to the

Agency.

(3) PLP lenders will submit applications in accordance with their

agreement with the Agency for PLP status.

(4) CLP and PLP lenders must certify that the required items are in

its files.

(5) Also, the Agency may request additional information from any

lender or review their loan file as needed to make eligibility and

approval decisions.

(e) Incomplete applications. If the lender does not provide the

information needed to complete its application by the deadline

established in an Agency notice to the lender, the application will be

considered withdrawn by the lender.

(f) Conflict of interest. (1) When a lender applies for a

guaranteed loan, the lender will inform the Agency in writing of any

actual or potential conflicts of interest.

(2) Actual or potential conflicts of interest include:

(i) The lender or its officers, directors, principal stockholders

(except stockholders in a Farm Credit System institution that have

stock requirements to obtain a loan), or other principal owners have a

substantial financial interest in the loan applicant or borrower.

(ii) The loan applicant or borrower, a relative of the loan

applicant or borrower, anyone residing in the household of the loan

applicant or borrower, any officer, director, stockholder or other

owner of the loan applicant or borrower holds any stock or other

evidence of ownership in the lender.

(iii) The loan applicant or borrower, a relative of the loan

applicant or borrower, or anyone residing in the household of the loan

applicant or borrower is an Agency employee.

(iv) The officers, directors, principal stockholders (except

stockholders in a Farm Credit System institution that have stock

requirements to obtain a loan), or other principal owners of the lender

have substantial business dealings (other than in the normal course of

business) with the loan applicant or borrower.

(v) The lender or its officers, directors, principal stockholders,

or other principal owners have substantial business dealings with an

Agency employee.

(3) The lender must furnish additional information to the Agency

upon request.

(4) The Agency will not approve the application until the lender

develops acceptable safeguards to control any actual or potential

conflicts of interest.

Sec. 1980.113 through 1980.119 [Removed and reserved]

27. Sections 1980.113 through 1980.119 are removed and reserved.

28. Sections 1980.120 through 1980.121 are added to read as

follows:

Sec. 1980.120 Loan applicant eligibility.

Loan applicants must meet all of the following requirements to be

eligible for a Guaranteed Operating loan or a Guaranteed Farm Ownership

loan:

(a) The loan applicant, and anyone who will execute the promissory

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

all or a portion of any direct or guaranteed loan made under the

authority of the CONACT by debt write-down, write-off, compromise under

the provisions of section 331 of the CONACT, adjustment, reduction,

charge-off, or discharge in bankruptcy or through any payment of a

guaranteed loss claim under the same circumstances. Notwithstanding the

preceding sentence, applicants who receive a write-down under section

353 of the CONACT may receive direct and guaranteed OL loans to pay

annual farm and ranch operating expenses, which includes family

subsistence, if the applicant meets all other requirements for the

loan.

[[Page 51474]]

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

note, is not delinquent on any Federal debt, other than a debt under

the Internal Revenue Code of 1996.

(c) The loan applicant, and anyone who will execute the promissory

note, have no outstanding recorded judgments obtained by the United

States in a Federal court. Such judgments do not include those filed by

the United States Tax Courts.

(d) Citizenship. (1) The loan applicant is a citizen of the United

States or an alien lawfully admitted to the United States for permanent

residence under the Immigration and Nationalization Act. Indefinite

parolees are not eligible. For an entity applicant, all members of an

entity must meet the citizenship test.

(2) Aliens must provide the appropriate Immigration and

Naturalization Service forms to document their permanent residency.

(e) The loan applicant must possess the legal capacity to incur the

obligations of the loan.

(f) The individual loan applicant, or members of the entity

applicant, must have sufficient applicable educational, on-the-job

training, or farming experience in managing and operating a farm or

ranch which indicates the managerial ability necessary to assure

reasonable prospects of success in the proposed plan of operation. This

education, training, or experience must have occurred within the past 5

years and the experience must have covered an entire production cycle.

(g) Credit History. (1) The individual or entity loan applicant and

all entity members must have acceptable credit history demonstrated by

debt repayment.

(2) A history of failures to repay past debts as they came due when

the ability to repay was within their control will demonstrate

unacceptable credit history.

(3) Unacceptable credit history will not include:

(i) Isolated instances of late payments which do not represent a

pattern and were clearly beyond their control; or,

(ii) Lack of credit history.

(h) Test for Credit. (1) The loan applicant is unable to obtain

sufficient credit elsewhere without a guarantee to finance actual needs

at reasonable rates and terms.

(2) The potential for sale of any significant nonessential assets

will be considered when evaluating the availability of other credit.

(3) Ownership interests in property and income received by an

individual or entity loan applicant, or any entity members as

individuals also will be considered when evaluating the availability of

other credit to the loan applicant.

(i) Operating Loans. (1) For Operating Loans, the individual or

entity loan applicant must be an operator of not larger than a family

farm after the loan is closed.

(2) In the case of an entity borrower:

(i) The entity must be authorized to operate, and own if the entity

is also an owner, a farm in the state or states in which the farm is

located; and

(ii) If the entity members holding a majority interest are related

by marriage or blood, at least one member of the entity also must

operate the family farm; or,

(iii) If the entity members holding a majority interest are not

related by marriage or blood, the entity members must also operate the

family farm.

(j) Farm Ownership Loans. (1) For Farm Ownership Loans, the

individual or entity loan applicant must be the operator and owner of

not larger than a family farm after the loan is closed.

(2) In the case of an entity borrower:

(i) The entity must be authorized to own and operate a farm in the

state or states in which the farm is located; and

(ii) If the entity members holding a majority interest are related

by marriage or blood, at least one member of the entity also must own

and operate the family farm; or,

(iii) If the entity members holding a majority interest are not

related by marriage or blood, the entity members must also own and

operate the family farm.

(k) For entity loan applicants. Entity loan applicants also must

meet the following eligibility criteria:

(1) Each entity member's ownership interest may not exceed the

family farm definition limits;

(2) The collective ownership interest of all entity members may

exceed the family farm definition limits only if the following

conditions are met:

(i) All of the entity members are related by blood or marriage;

(ii) All of the members are or will be operators of the entity;

and,

(iii) The majority interest holders of the entity must meet the

requirements of paragraphs (d), (f), (g), and (i) through (j) of this

section;

(3) The entity must be controlled by farmers or ranchers engaged

primarily and directly in farming or ranching in the United States

after the loan is made; and

(4) The entity members are individuals and not entities.

(l) Neither the applicant nor any entity member has been convicted

of planting, cultivating, growing, producing, harvesting, or storing a

controlled substance under Federal or state law within the last five

crop years. ``Controlled substance'' is defined at 21 CFR part 1308.

Applicants must attest on the Agency application form that it and its

members, if an entity, have not been convicted of such a crime within

the relevant period.

(m) The loan applicant must execute an Agency agreement to meet any

training requirements in accordance with Sec. 1980.150.

Sec. 1980.121 Loan purposes.

(a) Operating Loan purposes.

(1) Loan note guarantee. Loan funds disbursed under a loan note

guarantee may only be used for the following purposes:

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

to improve its profitability.

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

equipment or fixtures, quotas and bases, and cooperative stock for

credit, production, processing or marketing purposes.

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

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

supplies, repairs and improvements which are to be expensed, cash rent

and family subsistence.

(iv) Payment of scheduled principal and interest payments on term

debt.

(v) Other farm and ranch needs.

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

for conservation or use purposes.

(vii) Refinancing indebtedness incurred for any authorized OL loan

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

refinance.

(viii) Payment of loan closing costs.

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

State-approved standards under the Occupational Safety and Health Act

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

applicants who demonstrate that compliance with the standards will

cause them substantial economic injury.

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

Agency.

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

advanced only for the following purposes:

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

purchase of feeder animals.

(ii) Payment of current annual operating debts advanced for the

current operating cycle. Under no circumstances can carry-over

operating debts from a previous operating cycle be refinanced.

[[Page 51475]]

(iii) Purchase of routine capital assets, such as replacement of

livestock, that will be repaid within the operating cycle.

(iv) Payment of scheduled, non-delinquent, term debt payments.

(v) Purchase of cooperative stock for credit, production,

processing or marketing purposes.

(vi) Payment of loan closing costs.

(b) Farm Ownership loan purposes. Guaranteed FO loans are

authorized only to:

(1) Acquire or enlarge a farm or ranch. Examples include, but are

not limited to, providing down payments, purchasing easements for the

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

the Beginning Farmer Downpayment Farm Ownership program under part

1943, subpart A, of this chapter.

(2) Make capital improvements. Examples include, but are not

limited to, the construction, purchase, and improvement of farm

dwellings, service buildings and facilities that can be made fixtures

to the real estate. Capital improvements to leased land may be financed

subject to the limitations in Sec. 1980.122.

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

include the correction of hazardous environmental conditions, and the

construction or installation of tiles, terraces and waterways.

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

stock in a cooperative, and appraisal and survey fees.

(5) Refinancing indebtedness incurred for authorized loan purposes,

provided the lender and loan applicant demonstrate the need to

refinance the debt.

(c) Highly Erodible Land or Wetlands Conservation.

(1) Loans may not be made for any purpose which contributes to

excessive erosion of highly erodible land or to the conversion of

wetlands to produce an agricultural commodity.

(2) A decision by the Agency to reject an application for this

reason is appealable. However, an appeal questioning either the

presence of a wetland, converted wetland, or highly erodible land on a

particular property must be filed directly with the USDA agency making

the determination in accordance with its appeal procedures.

(d) Loans may not be used to satisfy judgment debts filed in the

United States Federal courts. However, Internal Revenue Service

judgment liens may be paid with loan funds.

29. Sections 1980.122 through 1980.126 are revised to read as

follows:

Sec. 1980.122 Loan Limitations.

(a) OL limitations. (1) The total outstanding combined OL direct

and guaranteed principal balance owed by the loan applicant or anyone

who will sign the note must not exceed $400,000 at loan closing.

(2) The total dollar amount of line of credit advances and income

releases cannot exceed the total estimated expenses, less interest

expense, as indicated on the borrower's plan, unless the plan is

revised and continues to reflect a feasible plan.

(3) Term Limitations. (i) General. No guaranteed OL loan shall be

made to any loan applicant after the 15th year that a loan applicant,

or any individual signing the promissory note, received direct or

guaranteed OL loans.

(ii) Transition rule. If a borrower was indebted for a direct or

guaranteed OL loan on October 28, 1992, and had any combination of

direct or guaranteed OL loans closed in 10 or more prior calendar

years, eligibility to receive new guaranteed OL loans is extended for 5

additional years from October 28, 1992, and the years need not run

consecutively. However, in the case of a line of credit, each year in

which an advance is made after October 28, 1992, counts toward the 5

additional years. Once determined eligible, a loan or line of credit

may be approved for any authorized term.

(b) FO limitations. (1) The total outstanding combined FO and SW

direct and guaranteed principal balance owed by the loan applicant or

anyone who will sign the note must not exceed $300,000 at loan closing.

(2) Leased Land. When FO funds are used for improvements to leased

land the terms of the lease must provide reasonable assurance that the

loan applicant will have use of the improvement over its useful life,

or provides compensation for any unexhausted value of the improvement

if the lease is terminated.

(c) Tax-exempt transactions. The Agency will not guarantee any loan

or line of credit made with the proceeds of any obligation the interest

on which is excludable from income under Section 103 of the Internal

Revenue Code of 1954, as amended. Funds generated through the issuance

of tax-exempt obligations may not be used to purchase the guaranteed

portion of any Agency guaranteed loan or line of credit nor may an

Agency guaranteed loan or line of credit serve as collateral for a tax-

exempt issue.

Sec. 1980.123 Insurance and farm inspection requirements.

(a) Insurance. (1) Lenders are responsible for ensuring that

borrowers maintain adequate property, public liability, and crop

insurance coverage to protect the lender and Government's interests.

(2) By loan closing, loan applicants must either:

(i) Obtain at least the catastrophic risk protection (CAT) level of

crop insurance coverage, if available, for each crop of economic

significance, as defined by part 402 of this title, or

(ii) Waive eligibility for emergency crop loss assistance in

connection with the uninsured crop. EM loss loan assistance under part

1945, subpart D, of this chapter is not considered emergency crop loss

assistance for purposes of this waiver.

(3) Loan applicants must purchase flood insurance if buildings are

or will be located in a special flood or mudslide hazard area and if

flood insurance is available.

(4) Insurance, including crop insurance, also must be obtained as

required by the lender or the Agency based on the strengths and

weaknesses of the loan.

(b) Farm inspections. Before submitting an application the lender

must make an inspection of the farm to assess the suitability of the

farm and to determine any development that is needed to make it a

suitable farm.

Sec. 1980.124 Interest rates, terms, charges, and fees.

(a) Interest rates. (1) Fixed or variable. The interest rate on a

guaranteed loan or line of credit may be fixed or variable as agreed

upon by the borrower and the lender.

The lender may charge different rates on the guaranteed and the

non-guaranteed portions of the note. The guaranteed portion may be

fixed while the unguaranteed portion may be variable, or vice versa. If

both portions are variable, different bases may be used.

(2) Variable rate. If a variable rate is used, it must be tied to a

rate specifically agreed to by the lender and borrower in the loan

instruments. Variable rates may change according to the normal

practices of the lender for its average farm customers, but the

frequency of change must be specified in the loan or line of credit

instrument.

(3) Ceiling. Neither the interest rate on the guaranteed portion

nor the unguaranteed portion may exceed the rate the lender charges its

average farm customer. At the request of the Agency, the lender must

provide evidence of the

[[Page 51476]]

rate charged the average farm customer. This evidence may consist of

average yield data, or documented administrative differential rate

schedule formulas used by the lender.

(4) Interest charges. Interest must be charged only on the actual

amount of funds advanced and for the actual time the funds are

outstanding. Interest on protective advances made by the lender to

protect the security may be charged at the rate specified in the

security instruments.

(5) Interest assistance program. The lender and borrower may

collectively obtain a temporary reduction in the interest rate through

the Interest Assistance program in accordance with Exhibit D of this

subpart.

(b) OL terms. (1) Loan funds or advances on a line of credit used

to pay annual operating expenses will be repaid when the income from

the year's operation is received, except when the borrower is

establishing a new enterprise, developing a farm, purchasing feed while

feed crops are being established, or recovering from disaster or

economic reverses.

(2) The final maturity date for each loan cannot exceed 7 years

from the date of the promissory note or line of credit agreement.

Advances for purposes other than for annual operating expenses will be

scheduled for repayment over the minimum period necessary considering

the loan applicant's ability to repay and the useful life of the

security, but not in excess of 7 years.

(3) Balloon installments under Loan Note Guarantee.

(i) Extended repayment schedules may include equal, unequal, or

balloon installments if needed to establish a new enterprise, develop a

farm, or recover from a disaster or an economical reversal.

(ii) Loans with balloon installments must have adequate collateral

at the time the balloon installment comes due. Crops, livestock, or

livestock products produced are not sufficient collateral for securing

such a loan.

(iii) The borrower must likely be able to refinance the remaining

debt at the time the balloon payment comes due based on the expected

financial condition of the operation, the depreciated value of the

collateral, and the principal balance on the loan.

(4) All advances on a line of credit must be made within 5 years

from the date of the Contract of Guarantee.

(c) FO terms. Each loan must be scheduled for repayment over a

period not to exceed 40 years from the date of the note or a shorter

period as may be necessary to assure that the loan will be adequately

secured, taking into account the probable depreciation of the security.

(d) Charges and Fees.

(1) Routine charges and fees. The lender may charge the loan

applicant and borrower fees for the loan provided they are no greater

than those charged to nonguaranteed customers for similar transactions.

The lender may not charge, or cause to be charged, any processing or

packaging fees not charged to nonguaranteed customers for similar

transactions. Similar transactions are those involving the same type of

loan requested (for example, operating loans or farm real estate

loans).

(2) Late payment charges. Late payment charges (including default

interest charges) are not covered by the guarantee. These charges may

not be added to the principal and interest due under any guaranteed

note or line of credit. However, late payment charges may be made

outside of the guarantee if they are routinely made by the lender in

similar types of loan transactions.

(3) Lenders may not charge a loan origination and servicing fee

greater than 1 percent of the loan amount for the life of the loan when

a guaranteed loan is made in conjunction with a down payment FO loan

for beginning farmers under part 1943, subpart A, of this chapter.

Sec. 1980.125 Financial Feasibility.

(a) General. (1) Notwithstanding any other provision of this

section, PLP lenders will follow their internal procedures on financial

feasibility as agreed to by the Agency during their PLP certification.

(2) The loan applicant's proposed operation must project a positive

cash flow as determined by the Agency.

(3) For standard eligible lenders, the projected income and

expenses of the borrower and operation used to determine positive cash

flow must be based on the loan applicant's proven record of production

and financial management.

(4) For CLP lenders, the projected income and expenses of the

borrower and operation will be based on the loan applicant's financial

history and proven record of financial management.

(5) The plan of operation analyzed to determine positive cash flow

must represent the predicted cash flow of the operating cycle.

(6) Lenders must use price forecasts that are reasonable and

defensible. Sources must be documented by the lender and acceptable to

the Agency.

(7) When positive cash flow depends on income from other sources in

addition to income from owned land, the income must be dependable and

likely to continue.

(8) The lender will analyze business ventures other than the farm

operation to determine their soundness and contribution to the

operation. Guaranteed loan funds will not be used to finance a nonfarm

enterprise. Nonfarm enterprises include, but are not limited to:

raising earthworms, exotic birds, tropical fish, dogs, or horses for

nonfarm purposes; welding shops; roadside stands; boarding horses; and

riding stables.

(9) When the loan applicant has or will have a farm operating plan

developed in conjunction with a proposed or existing Agency direct

loan, the two plans must be consistent.

(b) Estimating production. (1) Standard eligible lenders must use

the best sources of information available for estimating production in

accordance with this subsection when developing operating plans.

(2) Deviations from historical performance may be acceptable, if

specific to changes in operation and adequately justified and

acceptable to the Agency.

(3) For existing farmers, actual production for the past 3 years

will be utilized.

(4) For those farmers without a proven history, a combination of

any actual history and any other reliable source of information that

are agreeable with the lender, the loan applicant, and the Agency will

be used.

(5) When the production of a growing commodity can be estimated, it

must be considered when projecting yields.

(6) When the loan applicant's production history has been so

severely affected by a declared disaster that an accurate projection

cannot be made, the following applies:

(i) County average yields are used for the disaster year if the

loan applicant's disaster year yields are less that the county average

yields. If county average yields are not available, State average

yields are used. Adjustments can be made providing there is factual

evidence to demonstrate that the yield used in the farm plan is the

most probable to be realized.

(ii) To calculate a historical yield, the crop year with the lowest

actual or county average yield may be excluded, provided the loan

applicant's yields were affected by disasters at least 2 of the past 5

years.

(c) Refinancing. Loan guarantee requests for refinancing must

ensure that a reasonable chance for success still exists. The lender

must demonstrate that problems with the loan applicant's operation have

been identified can be

[[Page 51477]]

corrected and the operation returned to a sound financial basis.

Sec. 1980.126 Security requirements.

(a) General. (1) The lender is responsible for ensuring that proper

and adequate security is obtained and maintained to fully secure the

loan, protect the interest of the lender and the Agency, and assure

repayment of the loan or line of credit.

(2) The lender will obtain a lien on additional security when

necessary to protect the Government's interest.

(b) Guaranteed and unguaranteed portions. (1) All security must

secure the entire loan or line of credit. The lender may not take

separate security to secure only that portion of the loan or line of

credit not covered by the guarantee.

(2) The lender may not require compensating balances or

certificates of deposit as means of eliminating the lender's exposure

on the unguaranteed portion of the loan or line of credit. However,

compensating balances or certificates of deposit as otherwise used in

the ordinary course of business are allowed.

(c) Identifiable security. The guaranteed loan must be secured by

identifiable collateral. To be identifiable, the lender must be able to

distinguish the collateral item and adequately describe it in the

security instrument.

(d) Type of security. (1) Typically, annual operating loans will be

secured by crops and livestock, loans to be repaid within 2 to 7 years

by breeding livestock and equipment, and loans repaid over greater than

7 years by real estate. However, guaranteed loans may be secured by any

property provided the term of the loan and expected life of the

property will not cause the loan to be undersecured.

(2) For loans with terms greater than 7 years, a lien must be taken

on real estate.

(3) Loans can be secured by a mortgage on leasehold properties if

the lease has a negotiable value and is mortgageable.

(4) The lender or Agency may require additional personal or

corporate guarantees, or both, to adequately secure the loan. These

guarantees are separate from, and in addition to, the personal

obligations arising from members of an entity signing the note as

individuals.

(e) Lien position. All guaranteed loans will be secured by the best

lien obtainable provided:

(1) When the loan is made for refinancing purposes, the guaranteed

loan must hold a security position no lower than on the existing loan.

(2) Any chattel-secured guaranteed loan must have a higher lien

priority (including purchase money interest) than an unguaranteed loan

secured by the same chattels and held by the same lender. Also,

guaranteed loan installments will be paid before unguaranteed loans

held by the same lender.

(3) Junior lien positions are acceptable only if the equity

position is strong. Junior liens on livestock, crops, or livestock

products will not be relied upon for security unless the lender is

involved in multiple guaranteed loans to the same borrower, and also

has first lien on the collateral.

(4) Any loan of $10,000 or less may be secured by the best lien

obtainable on real estate without title clearance or legal services

normally required, provided the lender believes from a search of the

county records that the loan applicant can give a mortgage on the farm.

This exception to title clearance will not apply when land is to be

purchased.

(5) When taking a junior lien, prior lien instruments may not

contain future advance clauses (except for taxes, insurance, or other

reasonable costs to protect security), or cancellation, summary

forfeiture, or other clauses that jeopardize the Government's or the

lender's interest or the borrower's ability to pay the guaranteed loan,

unless any such undesirable provisions are limited, modified, waived or

subordinated insofar as the Government and the lender are concerned.

(f) Multiple owners. If security has multiple owners, all owners

must pledge security for the loan.

(g) Nonessential assets. A lien will be taken on all significant

nonessential assets.

(h) The Agency has the authority to grant an exception to any of

the requirements involving security, if the proposed change is in the

best interest of the Government and the collectability of the loan will

not be impaired.

30. Sections 1980.127 through 1980.128 are added to read as

follows:

Sec. 1980.127 Appraisal requirements.

(a) General.

(1) The Agency may require a lender to obtain an appraisal based on

the type of security, loan size, and whether it is primary or

additional security.

(2) Except for authorized liquidation expenses, the lender is

responsible for all appraisal costs, which may be passed on to the

borrower, or a transferee in the case of a transfer and assumption.

(b) Exception. Notwithstanding other provisions of this section, an

appraisal is not required in the following cases:

(1) For any additional security.

(2) For loans of $50,000 or less if a strong equity position exists

as determined by the Agency.

(c) Chattel appraisals. (1) A current appraisal (not more than 12

months old) of primary chattel security generally is required on all

loans. An appraisal for loans or lines of credit for annual production

purposes that are secured by crops is only required when a loan note or

line of credit guarantee is requested late in the current production

year and actual yields can be reasonably estimated.

(2) The appraised value of chattel property will be based on public

sales of the same, or similar, property in the market area. In the

absence of such public sales, reputable publications reflecting market

values may be used.

(3) Appraisal reports may be on the Agency's Appraisal of Chattel

Property form or on any other appraisal form containing at least the

same information.

(4) Chattel appraisals will be performed by appraisers who possess

sufficient experience or training to establish market (not retail)

values as determined by the Agency.

(d) Real estate appraisals.

(1) A current real estate appraisal is required when real estate

will be primary security. Agency officials may accept an existing

appraisal only if the appraisal was properly completed within the past

12 months, or older if updated by a qualified appraiser, and there have

been no significant changes in the market or on the subject real

estate.

(2) Appraiser qualifications. (i) On loan transactions of $250,000

or less, the lender must demonstrate to the Agency's satisfaction that

the appraiser possesses sufficient experience or training to estimate

market values.

(ii) On loan transactions greater than $250,000, which includes

principal plus accrued interest through the closing date, the appraisal

must be completed by a state certified general appraiser. A loan

transaction is defined as any loan approval or servicing action.

(3) Appraisal reports. Real estate appraisal reports must be

completed in accordance with the Uniform Standards of Professional

Appraisal Practice. Appraisals may be either a complete or limited

appraisal provided in a self-contained or summary format. Restricted

reports are not acceptable.

Sec. 1980.128 Environmental and special laws

(a) Environmental requirements. The requirements found in part

1940, subpart G, of this chapter must be met for guaranteed operating

and farm

[[Page 51478]]

ownership loans. CLP and PLP lenders may certify that they have

documentation in their file to demonstrate compliance with paragraph

(c) of this section. Standard eligible lenders must submit evidence

supporting compliance with this section.

(b) Determination. The Agency determination of whether an

environmental problem exists will be based on:

(1) The information supplied with the application;

(2) The Agency's personal knowledge of the operation;

(3) Environmental resources available to the Agency including, but

not limited to, documents, third parties, and governmental agencies;

(4) A visit to the farm operation when the available information is

insufficient to make a determination;

(5) Other information supplied by the lender or loan applicant upon

Agency request.

(c) Special requirements. Lenders will assist in the environmental

review process by providing environmental information. In all cases,

the lender must retain documentation of their investigation in the

applicant or borrower's case file.

(1) Floodplains. A determination must be made as to whether there

are any structures located within a 100 year floodplain as defined by

Federal Emergency Management Agency floodplain maps, Natural Resources

Conservation Service data, or other appropriate documentation.

Floodplain determinations will be documented by using the Standard

Flood HazardDetermination Form.

(2) Water quality standards. The lender will consult with the

Agency for guidance on activities which require consultation with State

regulatory agencies, special permitting or waste management plans. The

lender will also assist in securing any applicable permits or plans.

(3) Historical or archeological sites. The lender will consult with

the Agency for guidance on which situations will need further review in

accordance with the National Historical Preservation Act and part 1940,

subpart G, and part 1901, subpart F, of this chapter. The lender will

examine the security property to determine if there are any structures

or archeological sites which are listed or may be eligible for listing

in the National Register of Historic Places.

(4) Wetlands and highly erodible land. The loan applicant must

certify they will not violate the Food Security Act provisions relating

to Highly Erodible Land and Wetland Conservation.

(5) Hazardous substances. All lenders are required to ensure that

due diligence is performed in conjunction with a request for guarantee

involving real estate. Due diligence is the process of evaluating real

estate in the context of a real estate transaction to determine the

presence of contamination from release of hazardous substances,

petroleum products, or other environmental hazards and determining what

effect, if any, the contamination has on the security value of the

property. The Agency will accept as evidence of due diligence the most

current version of the American Society of Testing Materials (ASTM)

Transaction Screen Questionnaire available from 1916 Race Street,

Philadelphia, Pennsylvania 19103, or similar documentation,

supplemented as necessary by the ASTM Phase I Environmental Site

Assessments form.

(d) Equal opportunity and nondiscrimination.

(1) With respect to any aspect of a credit transaction, the lender

will not discriminate against any applicant on the basis of race,

color, religion, national origin, age, sex, marital status, or physical

or mental handicap, provided the applicant can execute a legal

contract. Nor will the lender discriminate on the basis of whether all

or a part of the applicant's income derives from any public assistance

program, or whether the applicant in good faith, exercises any rights

under the Consumer Protection Act.

(2) Where the guaranteed loan involves construction, contractor or

subcontractor must file all compliance reports, equal opportunity and

nondiscrimination forms, and otherwise comply with all regulations

prescribed by the Secretary of Labor pursuant to Executive Orders 11246

and 11375.

(e) Other Federal, State and local requirements. Lenders are

required to coordinate with all appropriate Federal, State, and local

agencies and comply with special laws and regulations applicable to the

loan proposal.

31. Sections 1980.129 and 1980.130 are revised to read as follows:

Sec. 1980.129 Percent of guarantee and maximum loss.

(a) General. The percent of guarantee will not exceed 90 percent as

determined by the Agency based on the credit risk to the lender and the

Agency both before and after the transaction.

(b) Exceptions. The guarantee will be issued at 95 percent in any

of the following circumstances:

(1) The sole purpose of a guaranteed FO or OL loan is to refinance

an Agency direct farm loan. When only a portion of the loan is used to

refinance a direct Agency farm credit program loan, a weighted

percentage of a guarantee will be provided;

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

the down payment loan program; or

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

participating in the Agency's down payment loan program. The guaranteed

OL must be made during the period that a borrower has the down payment

loan outstanding.

(c) PLP guarantees. All guarantees issued to PLP lenders ineligible

for 95 percent guarantees under this section will be guaranteed at 80

percent.

(d) CLP Guarantees. All guarantees issued to CLP lenders will not

be less than 80 percent.

(e) Maximum loss. The maximum amount the Agency will pay the lender

under the Loan Note Guarantee or Contract of Guarantee will be any loss

sustained by such lender on the guaranteed portion including:

(1) Principal and interest indebtedness as evidenced by the note or

by assumption agreement;

(2) Any loan subsidy due and owing;

(3) Principal and interest indebtedness on secured protective

advances for protection and preservation of collateral made in

accordance with this subpart; and

(4) Principal and interest indebtedness on recapture debt pursuant

to a Shared Appreciation agreement provided the lender has paid the

Agency its pro rata share of the recapture amount due.

Sec. 1980.130 Loan approval and issuing the guarantee.

(a) Processing timeframes.

(1) Standard Eligible Lenders. Complete applications from Standard

Eligible Lenders will be approved or rejected, and the lender

notified in writing, no later than 30 calendar days after receipt.

(2) CLP and PLP lenders.

(i) Complete applications from CLP or PLP lenders will be approved

or rejected not later than 14 calendar days after receipt.

(ii) For PLP lenders, if this time frame is not met, the proposed

guaranteed loan will automatically be approved, subject to funding, and

receive an 80 percent guarantee.

(b) Funding preference. Loans are approved subject to the

availability of funding. When it appears that there are not adequate

funds to meet the needs of all approved loan applicants, applications

that have been approved will be placed on a preference list

[[Page 51479]]

according to the date of receipt of a complete application. If approved

applications have been received on the same day, the following will be

given priority:

(1) An application from a veteran

(2) An application from an Agency direct loan borrower

(3) An application from a loan applicant who:

(i) Has a dependent family, or

(ii) Is an owner of livestock and farm implements necessary to

successfully carry out farming operations, or

(iii) Is able to make down payments.

(iv) Any other approved application.

(c) Conditional Commitment.

(1) The lender must meet all of the conditions specified in the

conditional commitment to secure final Agency approval of the

guarantee.

(2) The lender, after reviewing the conditions listed on the

Conditional Commitment, will complete, execute, and return the form to

the Agency. If the conditions are not acceptable to the lender, the

Agency may agree to alternatives or inform the lender and the loan

applicant of their appeal rights.

(d) Lender requirements prior to issuing the guarantee.

(1) Lender certification. The lender will certify as to the

following on the appropriate Agency form:

(i) No major changes have been made in the lender's loan or line of

credit conditions and requirements since the issuance of the

Conditional Commitment (except those approved in the interim by the

Agency in writing);

(ii) Required hazard, flood, or Federal crop insurance, worker's

compensation, and personal life insurance (when required) are in

effect;

(iii) Truth in lending requirements have been met;

(iv) All equal employment opportunity and nondiscrimination

requirements have been or will be met at the appropriate time;

(v) The loan or line of credit has been properly closed, and the

required security instruments have been obtained, or will be obtained,

on any acquired property that cannot be recovered initially under State

law;

(vi) The borrower has a marketable title to the collateral owned by

the borrower, subject to the instrument securing the loan or line of

credit to be guaranteed and subject to any other exceptions approved in

writing by the Agency. When required, an assignment on all USDA crop

and livestock program payment has been obtained;

(vii) When required, personal, joint operation, partnership, or

corporate guarantees have been obtained;

(viii) Liens have been perfected and priorities are consistent with

requirements of the Conditional Commitment;

(ix) Loan proceeds have been, or will be disbursed for purposes and

in amounts consistent with the Conditional Commitment and as specified

on the loan application. In line of credit cases, if any advances have

occurred, advances have been disbursed for purposes and in amounts

consistent with the Conditional Commitment and Line of Credit

Agreements;

(x) There has been no material adverse changes in the borrower's

condition, financial or otherwise, during the period of time from the

Agency's issuance of the Conditional Commitment to issuance of the

guarantee; and

(xi) All other requirements specified in the Conditional Commitment

have been met.

(2) Inspections. The lender must notify the Agency of any scheduled

inspections during construction and after the guarantee has been

issued. The Agency may attend these field inspections. Any inspections

or review performed by the Agency, including those with the lender, are

for the benefit of the Agency only. Agency inspections do not relieve

any other parties of their inspection responsibilities, nor can these

parties rely on Agency inspections in any manner.

(3) Execution of Lender's Agreement. The lender must execute the

Agency's lender's agreement and deliver it to the Agency.

(4) Closing report and guarantee fees. (i) The lender must complete

a Closing Report and return it to the Agency along with any guarantee

fees.

(ii) Guarantee fees are 1 percent and are calculated as follows:

Initial Fee = Loan Amount x % Guaranteed x .01. The nonrefundable

fee is paid to the Agency by the lender. The fee may be passed on to

the borrower and included in loan funds.

(iii) The following guaranteed loan transactions are not charged a

fee:

(A) Loans involving interest assistance;

(B) Loans where a majority of the funds are used to refinance an

Agency direct loan; and

(C) Loans to beginning farmers or ranchers involved in the direct

beginning farmer downpayment program.

(e) Promissory notes, line of credit agreements, mortgages, and

security agreements. The lender will use its own promissory notes, line

of credit agreements, real estate mortgages (including deeds of trust

and similar instruments), and security agreements (including chattel

mortgages in Louisiana and Puerto Rico), provided:

(1) The forms are consistent and meet Agency requirements;

(2) Documents comply with state law and regulation;

(3) The principal and interest repayment schedules are stated

clearly in the notes and consistent with the conditional commitment;

(4) Promissory notes are signed as follows:

(i) For individuals, only one person signs the note as a borrower.

If a cosigner is needed, the cosigner also signs the note.

(ii) For entities, the note is executed by the member who is

authorized to sign for the entity, and by all members of the entity as

individuals. Individual liability can be waived by the Agency for

members holding less than 10 percent ownership in the entity if the

collectability of the loan will not be impaired; and

(5) When the loan purpose is to refinance or restructure the

lender's own debt, the lender may continue to use the existing debt

instrument and attach an allonge that modifies the terms of the

original note.

(f) Replacement of Loan Note Guarantee, Contract of Guarantee, or

Assignment Guarantee Agreement. If the guarantee or assignment

guarantee agreements are lost, stolen, destroyed, mutilated, or

defaced, except where the evidence of debt was or is a bearer

instrument, the Agency will issue a replacement to the lender or holder

upon receipt of acceptable documentation including a certificate of

loss and an indemnity bond.

Sec. 1980.131 [Removed and reserved]

32. Section 1980.131 is removed and reserved.

Sec. 1980.136 [Removed and reserved]

33. Section 1980.136 is removed and reserved.

Sec. 1980.139 [Removed and reserved]

34. Section 1980.139 is removed and reserved.

35. Sections 1980.140 through 1980.143 are added to read as

follows:

Sec. 1980.140 General servicing responsibilities.

(a) General. (1) Lenders are responsible for servicing the entire

loan in a reasonable and prudent manner, protecting and accounting for

the collateral, and remaining the mortgagee r secured party of record.

(2) The lender cannot enforce the guarantee to the extent that a

loss results from a violation of usury laws or negligent servicing.

[[Page 51480]]

(b) Borrower supervision. The lender's responsibilities regarding

borrower supervision include, but are not limited to the following:

(1) Ensuring loan funds are not used for an unauthorized purpose.

(2) Ensuring borrower compliance with the covenants and provisions

provided in the note, loan agreement, security instruments, any other

agreements, and this subpart. Any violations which indicate non-

compliance on the part of the borrower, must be reported, in writing,

to both the Agency and the borrower.

(3) Ensure the borrower is in compliance with all laws and

ordinances applicable to the loan, the collateral, and the operations

of the farm.

(4) Receive all payments of principal and interest on the loan as

they fall due and promptly disburse to any holder its pro-rata share

according to the amount of interest the holder has in the loan, less

only the lender's servicing fee.

(5) Perform an annual analysis of the borrower's financial

condition to determine the borrower's progress. The annual analysis

will include:

(i) For loans secured by real estate only, the analysis for

standard eligible lenders must include a Statement of Financial

Condition. CLP lenders will determine the need for the annual analysis

based on the financial strength of the borrower and document the file

accordingly. PLP lenders will perform a borrower analysis in accordance

with the requirements established when the Lender's Agreement was

signed.

(ii) For loans secured by chattels, all lenders will review the

borrower's progress regarding liquidity, solvency, profitability,

repayment capacity and financial and production efficiency, including a

comparison of actual to planned income and expenses for the past year.

(iii) An account for the whereabouts or disposition of all

collateral.

(iv) A discussion of any observations about the farm business with

the borrower.

(v) Verification that the borrower and any party liable for the

loan is not released from liability for all or any part of the loan,

except in accordance with Agency regulations.

(c) Monitoring of development. The lender's responsibilities

regarding the construction, repairs, or other development include, but

are not limited to:

(1) Determining that all construction is completed as proposed in

the loan application;

(2) Making periodic inspections during construction to ensure that

any development is properly completed within a reasonable period of

time; and

(3) Verification that the security is free of any mechanic's,

materialmen's, or other liens which would affect the priority of the

lender's lien which the lender agreed would be taken on the security.

Sec. 1980.141 Reporting requirements.

Lenders are responsible for providing the local Agency credit

officer with all of the following information on the loan and the

borrower:

(a) When a loan becomes 30 days past due, all lenders will submit

the appropriate Agency form showing guaranteed loan borrower default

status. The form will be resubmitted every 60 days until the default is

resolved;.

(b) All lenders will provide the appropriate Agency guaranteed loan

status r

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