# Implementation of Preferred Lender Program and Streamlining of Guaranteed Regulations

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A98-25574

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** September 25, 1998
- **Citation:** 63 FR 51458

## Text

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

[[Page 51461]]

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 li

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A98-25574. Public record. Not legal advice.