Enforcement and Collection of Shared Appreciation Agreements

DEPARTMENT OF AGRICULTURE

Rural Housing Service

Rural Business-Cooperative Service

Rural Utilities Service

Farm Service Agency

7 CFR Parts 1951

RIN 0560-AE61

Enforcement and Collection of Shared Appreciation Agreements

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

Rural Utilities Service, Farm Service Agency, USDA.

ACTION: Final rule.

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

Programs loan servicing regulations to clarify the requirements for

collecting on a Shared Appreciation Agreement (SAA). The intended

effect is to reduce losses to the Government caused by litigation

expenses and delays in account collection.

EFFECTIVE DATE: March 12, 1998.

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

Officer, Farm Loan Programs Loan Servicing Division, Farm Service

Agency (FSA), U.S. Department of Agriculture, STOP 0523, 1400

Independence Ave., SW, Washington, D.C. 20250-0523; Telephone: 202-720-

1649; Facsimile: 202-690-0949; E-mail: [email protected].

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This rule has been determined not significant for the purposes of

E.O. 12866 and has not been reviewed by OMB.

Executive Order 12372

1. For the reasons contained in the final rule related Notice to 7

CFR part 3015, subpart V (48 FR 29115, June 24, 1983), Farm Ownership

Loans, Farm Operating Loans, and Emergency Loans are excluded from the

scope of E.O. 12372, which requires intergovernmental consultation with

State and local officials.

2. The Soil and Water Loan Program is subject to and has met the

provisions of E.O.12372 in accordance with FmHA Instruction 1940-J.

Federal Assistance Program

These changes affect the following FSA programs as listed in the

Catalog of Federal Domestic Assistance:

10.404--Emergency Loans

10.406--Farm Operating Loans

10.407--Farm Ownership Loans

10.416--Soil and Water Loans

Environmental Impact Statement

This document has been reviewed in accordance with 7 CFR part 1940,

subpart G, ``Environmental Program.'' The issuing agencies have

determined that this action does not significantly affect the quality

of human environment, and in accordance with the National Environmental

Policy Act of 1969, Pub L. 91-190, an Environmental Impact Statement is

not required.

Executive Order 12988

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

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

Paperwork Reduction Act of 1995

This final rule does not impose any new information or record

keeping requirements on the public that require clearance by the OMB

under the provisions of 44 U.S.C. chapter 35.

Regulatory Flexibility Act

The issuing agencies certify that this rule will not have a

significant economic impact on a substantial number of small entities

as defined in the Regulatory Flexibility Act, Public Law 96-534, as

amended (5 U.S.C. 601). This rule will not increase or decrease the

action required by small business entities. Amendments included in this

rule also will not impact small entities to a greater extent than large

entities or individual farm borrowers.

Unfunded Mandates Reform Act of 1995

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

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

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

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

year. When such statement is needed for a rule, section 205 of the

UMRA, FSA generally must prepare a written statement, including a cost-

benefit analysis, for proposed and final rules with ``Federal

mandates'' that may result in expenditures to State, local, and tribal

governments, in the aggregate, or to the private sector. When such a

statement is needed for a rule, section 205 of the UMRA generally

requires FSA to identify and consider a reasonable number of regulatory

alternatives and adopt the least costly, more cost effective or least

burdensome alternative that achieves the objectives of the rule.

This rule contains no Federal mandates (under the regulatory

provisions of Title II of the UMRA) for State, local, and tribal

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

the requirements of sections 202 and 205 of the UMRA.

National Performance Review

This rule has been reviewed in accordance with the National

Performance Review.

Discussion of Final Rule

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

formerly administered by the Farmers Home Administration (FmHA) as

Farmer Programs loans.

This rule amends 7 CFR part 1951 subpart S which was published in

its entirety as an interim rule with a request for comments (53 FR

35638-35798, September 14, 1988) to implement the requirements of the

Agricultural Credit Act of 1987. A second interim rule with a request

for

[[Page 6628]]

comments (57 FR 18612, April 30, 1992) was published to implement

amendments made by the Food, Agriculture, Conservation, and Trade Act

of 1990. This rule is being published in response to comments received

on these interim rules and to make minor clarifications. In addition,

the Office of Management and Budget control number assigned for the

approval of information collections is being revised to reflect the

transfer of the public reporting burden from the Farmers Home

Administration to the Farm Service Agency in accordance with the

provisions of the Federal Crop Insurance Reform and Department of

Agriculture Reorganization Act of 1994 (Pub. L. 103-354).

As a condition to, and in consideration of, having a portion of

their debt written down and their loans restructured, a borrower must

execute an SAA. FSA collects a portion of the written off debt from

appreciation of the real estate security when the property is sold, the

loans are paid or the farmer quits farming. Current regulations are

written so as to allow collection on an SAA only after transfer of

title. The present wording has resulted in the interpretation that

property must be foreclosed upon in order to effect a change in title

before SAA can be enforced. This requires filing an additional civil

action after foreclosure to collect proceeds that result from value

appreciation of the security. This results in decreased collections on

SAA's and increased litigation costs. This rule clarifies that

acceleration of the loan triggers acceleration of the SAA.

Comments were received from a State commissioner of agriculture, a

State rural action organization, a legal services organization, and the

National Family Farm Coalition. Two commenters recommended that FSA

clarify that a borrower may pay the amount due under an SAA in

installments and that the debt arising out of this agreement may be

serviced as an Agency loan. This recommendation has been adopted in

this rule. Another commenter suggested that the regulation address how

shared appreciation is to be handled when there is only a partial sale

of the real estate securing the SAA. This recommendation has also been

adopted and the necessary changes are made by this rule. A commenter

also recommended that the SAA contain the amounts of appreciation to be

recaptured and the actions that trigger the agreement. This

recommendation has also been adopted. Another commenter recommended

that the Agency requirement that real estate records be reviewed

biannually be revised to require that records be reviewed after

expiration of the agreement. This suggestion was adopted. The

requirement that records be reviewed after expiration of the agreement

is not included in the final rule since it is an internal Agency policy

directive.

Additionally, FSA is proposing to remove administrative processes

from the regulations leaving only regulatory actions which impact the

public. Also, some paragraphs are reorganized and wording changes are

made to make the regulation more concise and easier to read and

understand. FSA is developing a separate handbook to address internal

operating procedures. This handbook will not be published in the

Federal Register, but will be available to the public upon request.

For example, in this rule, FSA is removing the specific references

to Exhibit D, ``Shared Appreciation Agreement,'' which is being made

into Form FSA 1951-64. FSA will continue to use these types of

specialized forms. However, since these matters involve internal

operating procedures, the form will be contained in FSA's internal

instructions only, with the regulation referencing only that a form

will be executed. Other clarifications are made on how to execute,

service and collect Shared Appreciation Agreements. This change will

clarify that acceleration of the loan triggers acceleration of the SAA.

List of Subjects in 7 CFR Part 1951

Account servicing, Debt restructuring, Credit, Loan programs--

agriculture, Loan programs--housing and community development, Low and

moderate income housing loans--servicing.

For the reasons stated in the preamble, the Farm Service Agency

amends 7 CFR, part 1951 as follows:

PART 1951--SERVICING AND COLLECTIONS

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

follows:

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

Subpart S--Farm Loan Programs Account Servicing Policies

2. Section 1951.901 is amended by adding a new sentence after the

second sentence to read as follows:

Sec. 1951.901 Purpose.

* * * Shared Appreciation Loans (SA) may be reamortized under this

subpart if the borrower also has outstanding Farm Loan Programs loans.

* * *

3. Section 1951.909 is amended by revising paragraphs (e)(2)(viii),

(e)(2)(vii) introductory text, and (e)(2)(viii)(A), (h)(3)(viii), and

(j) to read as follows and by removing paragraphs (k), (l), and (m):

Sec. 1951.909 Processing primary loan service programs requests.

(e) * * *

(2) * * *

(vii) Reamortized installments usually will be scheduled for

repayment within the remaining time period of the note or assumption

agreement being reamortized. If repayment is extended, the new

repayment period plus the period the loan has been in effect may not

exceed the maximum number of years for that type of loan as set forth

below, or the useful life of the security, whichever is less:

(A) FO, SW, RL, EE, and EM loans may not exceed 40 years from the

date of the original note or assumption agreement.

(B) EE loans for real estate purposes, which are secured by

chattels only, may be reamortized over a period not to exceed 20 years

from the date of the original note or assumption agreement.

(C) RHF loans may not exceed 33 years from the date of the original

note or assumption agreement.

(D) SA loans may not exceed 25 years from the date of the original

amortized note.

(viii) The interest rate will be as follows:

(A) The interest rate will be the current interest rate in effect

on the date of reamortization (the date the new note is signed by the

borrower), or the interest rate on the original Promissory Note to be

reamortized, whichever is less. In the case of a limited resource loan,

it will be the limited resource FO or SW loan rate or the original loan

note rate, whichever is less. SA loans will be remortized at the

current nonprogram interest rate in effect on the date of

reamortization or the nonprogram interest rate on the original

amortized note, whichever is less.

* * * * *

(h) * * *

(3) * * *

(viii) Upon payment by the borrower of current market value buyout,

the security instruments will be released for the Farm Loan Programs

loans bought out.

* * * * *

(j) Processing of writedown. The DALR$ computer program will be

used to determine the notes and amount to be written down. The

borrower's account

[[Page 6629]]

will be credited for the amount written down and the loans remaining

after writedown will be rescheduled or reamortized.

(1) A separate note will be signed for each loan being reamortized.

(2) If any loan written down was secured by real estate, the

borrower must enter into a ``Shared Appreciation Agreement.'' This

agreement provides for FSA to collect back all or part of the amount

written down by taking a share in any positive appreciation in the

value of the real property securing the SAA and the remaining debt

after the writedown. The maximum amount of shared appreciation

collected will not exceed the amount written down. If a borrower's FLP

loan was not secured by real estate, the borrower will not be required

to enter into a shared appreciation agreement.

(3) A lien will be taken on assets in accordance with

Sec. 1951.910. The Agency's real estate liens will be maintained even

if the writedown of the borrower's debt results in all real estate

debts to the Agency being written down. The Agency's real estate lien

will not be surbordinated to increase the amount of the prior liens

during the shared appreciation period.

4. Section 1951.914 is amended to read as follows:

Sec. 1951.914 Servicing Shared Appreciation Agreements.

(a) [Reserved]

(b) When shared appreciation is due. Shared appreciation is due at

the end of the term of the Shared Appreciation Agreement, or sooner, if

one of the following events occurs:

(1) The sale or conveyance of any or all the real estate security,

including gift, contract for sale, purchase agreement, or foreclosure.

Transfer to the spouse of the borrower in case of the death of the

borrower will not be treated as a conveyance; until the spouse further

conveys the property;

(2) Repayment of the loans; or the loans are otherwise satisfied;

(3) The borrower or surviving spouse ceases farming operations or

no longer receives farm income, including lease income; or

(4) The notes are accelerated.

(c) Determining the amount of shared appreciation due. (1) The

current market value of the real estate property will be determined

based on a current appraisal. If only a portion of the real estate is

sold, an appraisal will only be done on the real estate being

considered for release. For these cases, an appraisal may be required

to determine the market value of the property at the time the SAA was

signed if such value cannot be obtained through another method.

(2) [Reserved]

(3) Shared appreciation will be due if there is a positive

difference between the market value of the security property at the

time of calculation and the market value of the security property as of

the date of the SAA. The maximum appreciation requested will not be

more than the total amount written down. The amount of shared

appreciation will be:

(i) 75% of any positive appreciation if any one of the events

listed in paragraphs (b)(1) through (4) of this section occur within 4

years or less from the date of the SAA; or

(ii) 50% of any positive appreciation if any one of the events

listed in paragraphs (b)(1) through (4) of this section occurs more

than 4 years from the date of the SAA, or if the term of the SAA

expires.

(4) [Reserved]

(5) When the full amount of the appreciation due under this section

and any remaining FSA debt is paid in full and credited to the account,

the borrower will be released from liability.

(6) Shared appreciation that will become due will be included in

the amount owed to FSA, such as with any debt settlement. Nonamortized

shared appreciation may be assumed and amortized on program or

nonprogram terms based on the transferee's eligibility as contained in

subpart A of part 1965 of this chapter.

(d) [Reserved]

(e) Shared appreciation amortization. Shared appreciation may be

amortized to a nonprogram loan for borrowers who will continue with FSA

on program loans. Shared appreciation will not be amortized if the

amount is due because of acceleration, payment in full or satisfaction

of the debt, or the borrower ceases farming. The amount due may be

amortized as an SA loan under the following conditions:

(1) The borrower must have a feasible plan as defined in

Sec. 1951.906 including the SA loan payment.

(2) The borrower must be unable to pay the shared appreciation, or

obtain the funds elsewhere to pay the shared appreciation.

(3) [Reserved]

(4) [Reserved]

(5) The loan term will be based on the borrower's repayment ability

and the life of the security, not to exceed 25 years.

(6) The interest rate will be the nonprogram real property rate

contained in RD Instruction 440.1 (available in any FSA office.)

(7) A lien will be obtained on any remaining FSA security, or if

there is no security remaining, the best lien obtainable on any other

real estate or chattel property sufficient to secure the SA note, if

available.

(8) The borrower will sign a promissory note for each SA loan

established.

(9) If the borrower has outstanding FLP loans, and becomes

delinquent or financially distressed as defined in Sec. 1951.906, the

SA loan may be considered for reamortization as set forth in

Sec. 1951.909(e).

(f) Priority of collection application. Proceeds from the sale of

security property will first be applied to any prior lienholder's debt,

then to any shared appreciation due, and to the balance of outstanding

FLP loans in accordance with subpart A of this part.

(g) Subordination. Subordination of FSA's lien on property securing

the Shared Appreciation Agreement may be approved and processed in

accordance with subpart A of part 1965 of this chapter provided the

prior lien debt is not increased.

5. Section 1951.950 is amended to revise the OMB control number

``0575-0133'' in the first and last sentences to read ``0560-0161''.

6. Exhibit D is removed and reserved.

Signed in Washington, D.C., on January 26, 1998.

August Schumacher, Jr.,

Under Secretary for Farm and Foreign Agricultural Services.

[FR Doc. 98-3314 Filed 2-9-98; 8:45 am]

BILLING CODE 3410-05-P