Implementation of Preferred Lender Program and Streamlining of Guaranteed Loan Regulations

SUMMARY: This action amends the regulations governing the Farm Service

Agency's (FSA) guaranteed farm loan programs. It clarifies, simplifies,

and streamlines the procedures to apply for, make, and service FSA

guaranteed loans. This action also establishes the Preferred Lender

Program.

This action also provides for an Interest Assistance Program to

replace the former interest rate buydown program (IRBD). The intended

effect of this rule is to clarify and simplify the rules, and to

finalize the interim rule which implemented the provisions of the

Omnibus Budget Reconciliation Act of 1990. As contained in the final

rule, FSA grants interest assistance at a 4 percent subsidy rate in all

situations that qualify for interest assistance. FSA is requesting

comments on alternative methods of determining the amount of subsidy

paid, including granting interest assistance at incremental rates based

upon the borrower's needs.

FSA is also incorporating changes mandated by Agriculture, Rural

Development, Food and Drug Administration and Related Agencies

Appropriations Act, 1999, (1999 Act), signed on October 21, 1998.

DATES: This regulation is effective on February 12, 1999. Comments on

the alternative interest assistance subsidy rate calculation must be

received on or before April 13, 1999.

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, Washington, DC time, except holidays, at 1400 Independence

Avenue, SW, Washington, DC 20250-0522.

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 procedures implementing

the guaranteed loan program. By making FSA's guaranteed loan program

more consistent with standard practices used within the lending

industry, use by lenders will be simplified and they 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 requests 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 percent, or an

additional $395 million. This means an additional 3,000 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.

Regulatory Flexibility Act

The Agency certifies that this rule will not have a significant

economic effect on a substantial number of small entities and therefore

is not required to perform a Regulatory Flexibility Analysis as

required by 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 FSA 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 rule has been reviewed in accordance with E.O. 12988, Civil

Justice Reform. In accordance with that Executive Order: (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

except that Agency servicing under this rule will apply to loans

guaranteed prior to the effective date of the rule; and (3)

administrative proceedings in accordance with 7 CFR parts 11 and 780

must be exhausted before requesting judicial review.

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), Pub.L.

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 assessment, 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 by 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 parts 762 and 1980 contained in this final

rule require no revisions to the information collection requirements

that were previously approved by OMB under control number 0560-0155. A

proposed rule containing an estimate of the burden impact of this rule

was published on September 25, 1998 [63 FR 51458--51488]. No comments

regarding

[[Page 7359]]

the burden estimates were received. Comments received relating to forms

and the information collected are addressed in the discussion below.

Federal Assistance Program

These changes affect the following FSA programs as listed in the

Catalog of Federal Domestic Assistance:

10.406--Farm Operating Loans

10.407--Farm Ownership Loans

Change in CFR Parts

FSA is moving its regulations governing the guaranteed farm loan

program from 7 CFR part 1980, subparts A and B to 7 CFR part 762. This

will better organize FSA regulations and incorporate farm loan program

regulations with other FSA programs.

Discussion of the Final Rule

In response to the proposed rule published September 25, 1998, 231

respondents from 35 States and the District of Columbia commented. Most

of the comments involved a number of different sections of the proposed

rule. Comments were received from Agency employees, farm interest

groups, lenders, lender and employee associations, individuals, and

Members of Congress. The comments received on the proposed rule were

overwhelmingly in support of most of the changes proposed by the

Agency.

This regulation provides the features, requirements, and

restrictions of the program. However, internal Agency procedures and

processes were excluded. The Agency will issue a handbook and update

its lender manual. These documents will, within the framework of these

published regulations, more thoroughly describe processes for the

Agency and lenders, identify and discuss the completion of specific

Agency forms, and otherwise provide more detail than is in the Federal

Register.

There were many comments concerning problems with program delivery.

Issues included Agency employees not following or knowing regulations,

slow processing, inconsistency between offices, lack of staff, and need

for training. These issues will be handled internally by the Agency and

are not addressed in this document.

The 1999 Act contains several revisions to the statute governing

the Agency`s farm loan programs. Statutory changes that impact

guaranteed loan limits and borrower training requirements are discussed

below in response to comments received on the proposed rule.

The 1999 Act also eased the debt forgiveness restrictions which

were mandated by the Federal Agriculture Improvement and Reform Act of

1996 (1996 Act). Previously, any FSA borrower receiving debt

forgiveness would be ineligible for additional FSA credit. The 1999 Act

provides that a borrower may have received debt forgiveness on three

occasions prior to or on April 4, 1998, and still be determined

eligible for guaranteed credit. Borrowers receiving debt forgiveness on

more than three occasions, or any debt forgiveness after April 4, 1996,

will be ineligible for FSA guaranteed loans.

The 1996 Act provided an additional exception to the debt

forgiveness provision. A borrower who received debt write down, as

compared with other types of debt forgiveness, previously could receive

an annual operating loan. The 1999 Act expanded this exception to

include borrowers who are current on confirmed bankruptcy

reorganization plans. These changes have been incorporated into the

final regulation at Sec. 762.120.

Appraisals

One hundred and nine comments were received concerning raising the

threshold for requiring a certified general appraiser from $100,000 to

$250,000. Nine comments objected to the change, 94 supported it, and

six requested clarification or modifications. Those supporting the

change cited reduced costs, shortened application process and

compliance with their regulatory requirements as reasons. The concern,

expressed by all of those opposed to the change, is that relaxing the

policy will adversely affect the quality of the appraisals. Most of the

commenters objecting to the change stated that many of the appraisals

currently received from certified general appraisers are not correct

and do not adhere to Uniform Standards of Professional Appraisal

Practice (USPAP). Another concern was that less qualified licensed

appraisers (previously used for transactions up to $100,000) were more

experienced with residential rather than agricultural appraising and

not qualified to perform the more complicated appraisals of agriculture

property.

On transactions of $250,000 or less, the proposed rule provided

that the Agency would determine if the appraiser possessed adequate

experience and training to estimate the value of the type property in

question. It also required appraisals to be completed in accordance

with USPAP. The Agency desires to comply with industry standards, and

with the controls in place, is convinced that relaxing the policy will

not adversely affect appraisal quality. Therefore, the Agency has

decided to leave the threshold at $250,000, as in the proposed rule

with minor editorial changes in Sec. 762.127(d)(3) to clarify that the

entire appraisal process, not just the report, will be completed in

accordance with USPAP. The Agency has requested and the Office of

Management of Budget (OMB) has granted an exception from OMB circular

A-129 for this purpose.

Three comments requested additional clarification of what is an

acceptable appraiser. The proposed rule stated that the lender must

demonstrate to the Agency's satisfaction that the appraiser possesses

sufficient experience or training to estimate values. As proposed, the

lender could provide any documentation considered appropriate to

demonstrate this expertise. The level of expertise could vary by region

and complexity of agriculture. The Agency did not want to dictate and

limit what could be used to demonstrate appraiser competency. However,

a revision has been made to Sec. 762.127(d)(2)(i) to require the

appraisal expertise to be in appraising agricultural property.

Additional guidance consistent with this standard will be placed in the

agency handbook and lender manual.

Several comments noted an inconsistency between the proposed rule

and the preamble. The preamble incorrectly stated that the appraiser

must use all three approaches to value, while the regulation required

that appraisal reports comply with USPAP standards. The final rule at

Sec. 762.127(d)(3) should eliminate any confusion concerning this

matter. It states that real estate appraisals must be completed in

accordance with USPAP.

Two respondents suggested we permit only the original appraiser to

update an appraisal. One of the comments went on to say USPAP requires

that the original appraiser be involved in an update. These suggestions

were not adopted because the Agency believes that the requirement that

appraisals be performed in accordance with USPAP adequately covers the

respondents' concern. The agency handbook and lender manual will

include clarification and guidance of the standard published in this

final rule.

Two comments objected to approving a loan subject to an adequate

appraisal. Eighty-five respondents supported this change. A concern

appears to be that the lender may ignore the conditions of approval and

close the loan without adequate security. The Agency would then refuse

to issue the guarantee. The

[[Page 7360]]

Agency has determined that the benefits of a simplified application

process outweigh the minimal risk to the lender that the Agency would

so act and will not adopt this suggestion.

Another comment suggested an estimate of value be included with the

application. This will be included on the application form.

One respondent suggested the regulation include the specific items

needed in a chattel appraisal. The regulation states that lenders may

use the Agency's form or any other form containing at least the same

information. The Agency feels this adequately identifies the

information required for a valid appraisal.

Two comments were received suggesting outside chattel appraisers be

required for refinancing bank debt. Another comment suggested bank loan

officers not be permitted to perform real estate appraisals over

$100,000. Since the regulation permits the Agency to determine if the

appraiser possesses adequate experience or training, the Agency feels

safeguards are adequate to assure valid appraisals by lenders.

Therefore, these suggestions are not being adopted.

Packager Requirements

Ninety-seven comments were opposed to the proposal to restrict

lender use of loan packagers. Many of the comments preferred to address

excessive fees by simplifying the paperwork requirements and making

packaging services unnecessary. Six comments suggested varying levels

of restrictions or clarification such as limiting the fee to a certain

percentage of the loan, prohibiting packager use entirely, or

clarification of how any limitations would be enforced. Although the

Agency feels that the proposed rule change reduced paperwork

requirements, it agrees that packagers do provide a valuable service to

some farmers and any arbitrary limitations would not be warranted.

Therefore, the use of packagers will not be prohibited or restricted in

the final rule.

Loan Limits

Twenty-eight comments were received indicating the maximum

guarantee loan limits of $300,000 for Farm Ownership (FO) loans and

$400,000 for Operating loans (OL) were too low. Numerous suggestions to

raise or modify the limits were provided. Loan limits are established

by statute and the Agency has no authority to raise them. However, the

1999 Act did modify the loan limits and provided for a maximum of

$700,000 total guaranteed FO and OL indebtedness. This will permit an

applicant to receive a total of $700,000 guaranteed OL and FO loans.

The $200,000 Direct FO and OL limitations remain in place. The result

is that in some situations, the borrowing limit may be $900,000. The

revised limitation was incorporated into Sec. 762.122.

One comment was received concerning the need to conform approval

authorities with other FSA regulations. This suggestion will be

implemented administratively.

Loan Restrictions

One comment suggested that lenders be permitted to advance funds to

purchase cooperative membership stock outside the guarantee. There is

nothing in existing or proposed regulations that would prevent a lender

from financing stock purchases with unguaranteed funds. Therefore, no

change to the regulation is needed.

One comment was received concerning joint ventures, suggesting a

relaxing of the requirement that members of an entity must operate the

farm. The proposal is that the applicant only need take an active role

in management. The Agency is unable to adopt this suggestion as

Secs. 302 and 311 of the CONACT requires that the members holding a

majority interest in the entity must operate the farm. However, the

Agency has clarified the regulation to say only the members holding a

majority interest must operate the farm. See Sec. 762.120(e) and (f).

One respondent suggested limiting the size of the farm dwelling to

be financed with a guarantee. Such a restriction would be arbitrary and

contrary to the Agency's policy of reducing regulatory limitations. The

Agency is not directly supervising the loan, does not wish to become

actively involved in the loan applicant's management decisions and is

not in a position to dictate the maximum size of a dwelling. The lender

is required to place limits on borrower expenditures to prevent the

buildup of excessive debt, with the resulting inability to repay the

loan. The suggestion was not adopted.

One comment stated that the guaranteed program is designed for row

crop loans and does not fully address the needs of livestock producers.

No specific examples were provided. The Agency does not agree with this

comment because livestock issues are specifically discussed throughout

the regulation.

This same individual objected to the lender certification

requirements. Since the Agency is unable to identify the specific

objectionable requirements the commentor is referring to, the Agency is

unable to address this comment.

One comment was received requesting that ``bridge'' loans made by

the lender while waiting for a final decision from the Agency can be

included under the guarantee, once it is approved. This practice,

although not prohibited by regulation, is strongly discouraged. There

could be a question of the need for a guarantee if the lender was

willing to close the loan without one. However, if the lender is

willing to assume the risk of making a bridge loan prior to any Agency

decision to guarantee the permanent loan, the final rule does not

prohibit including such debt under the guarantee. This will be further

discussed in the agency handbook and lender manual.

One comment suggested that the lender should certify at loan

closing that no material adverse change has occurred in the operation

since the request for guarantee was submitted. The existing regulation

requires this certification to reveal changes since the conditional

commitment was issued. The Agency agrees with this suggestion and

adopted it in the final rule.

Five comments suggested removing the prohibition of additional

guaranteed OLs after a borrower has received loans for 15 years. This

requirement is statutory and cannot be eliminated without legislative

action.

One comment suggested the Agency treat a husband and wife applicant

as an individual, rather than a joint operation. The Agency agrees that

this can be burdensome for some lenders. However the Agency desires to

maintain continuity with its direct loan programs and will reevaluate

this issue as the direct loan program regulations are revised.

One respondent suggested that veterans preference for funding be

expanded. The Agency feels the current policy, which was not changed in

this rule, is appropriate.

Conflict of Interest

One comment indicated that the conflict of interest changes will

permit a loan to be made where a conflict of interest exists. This is

not correct. The lender is required to provide information concerning

ownership or business relationships, and the Agency will determine if

these relationships are sufficiently likely to result in a conflict.

The Agency revised Sec. 762.110(f) to say relationships, rather than

conflicts will be reported to the Agency.

Another respondent suggested specifying a penalty for the lender if

a relationship is not reported, but is later identified. A specific

penalty is not

[[Page 7361]]

being adopted for not reporting conflicts. Such situations are case

specific and depending on the severity of the situation, such a

violation will be handled with regulations already in place. Additional

guidance will be provided in the agency handbook and lender manual.

Interest Assistance

There were seven comments requesting an extension of interest

assistance beyond the 7 or 10 years, making the argument that the

limits are arbitrary and will result in failure. While the Agency

sympathizes with the plight of individuals in need of a subsidy which

is expiring, the Agency's mission is one of temporary assistance to

farm families. In addition, the interest assistance program is the most

expensive of the Agency's guaranteed farm loan programs and limits must

be placed to control costs. This recommendation was not adopted.

One respondent requested that interest assistance be available for

existing guaranteed loans. The Agency agrees that this would be ideal,

and this is currently not prohibited by regulation. However, the

interest assistance program is very expensive and funding for paying a

subsidy on existing loans is not available. Including this option for

all guaranteed loans would result in a dramatic increase in costs for

the entire guarantee program or reduce the number of applicants that

could receive credit. Therefore, the Agency will not adopt this

recommendation.

Additional public comments received concerning the interest

assistance program interim rule are discussed below.

Preferred and Certified Lender Programs

The Agency received 131 comments concerning various aspects of the

preferred lender program (PLP) and certified lender programs (CLP).

Comments from almost all of the respondents supported the introduction

of PLP and the minor modifications made to the existing CLP.

The proposed rule provided that lenders could request either PLP or

CLP status. One comment suggested that lenders be permitted to operate

under both the CLP and PLP if they desired. For administrative

simplification and clarity, it is desirable for each lender to operate

under only one status. PLP lenders will be able to receive 95 percent

guarantees when refinancing Agency direct farm loans or when the

borrower will be participating in the Agency's down payment loan

program. The Agency did not adopt the suggestion to allow lenders to

request both PLP and CLP status.

The proposed rule provided that the Agency will determine which

branches of the lender have the necessary experience and ability to

participate in CLP or PLP. Comments from 82 respondents suggested that

it would be more expedient if the applying institution designate those

branches it wishes to be considered for certification, followed by

Agency approval or disapproval. The Agency intended this in the

proposed rule. The proposed rule provided that lenders desiring PLP or

CLP status address, in their request, the State in which they desire

status. One comment suggested that applicants specify the county or

parish in which they desire status, to assure consistency with the

requirement that an office be located near enough to the collateral's

location to efficiently discharge loan making and servicing

responsibilities. In response to these comments the Agency has included

a provision in Sec. 762.106(a)(1)(i) that lenders requesting PLP or CLP

status indicate the branch offices they want considered for status.

The proposed rule provided that lenders desiring PLP or CLP status

must send their request to the Agency State office for the State in

which the lender's headquarters are located. One comment suggested that

the lender send the request to the Agency state office for each State

in which the lender intends to make guaranteed loans. This suggested

change was based upon the fact that banking laws, security

requirements, and other lending procedures vary from one State to

another and each Agency State office is independently responsible for

maintaining credit quality and consistency within the State. The Agency

recognizes the administrative need to coordinate among various Agency

State offices; however, the Agency believes it would be unnecessarily

burdensome to require a lender to apply for status at several Agency

offices. The administrative details of coordinating requests that cover

several States will be addressed in the agency handbook and lender

manual. The Agency did not adopt the suggested change.

Three comments suggested the Agency centralize the processing of

CLP and PLP loan making and servicing activities, pointing out that

centralization would promote uniformity. The proposed and final rule

purposely does not specify where the Agency will process guarantee

applications. This will allow the Agency administrative flexibility to

configure operations in the most effective manner.

One comment expressed concern about the ``10 loan [sic] in 2 year

requirement'' under the CLP. The proposed rule continued existing

Agency policy at 7 CFR Sec. 1980.190(b)(1)(vii) and required, for CLP

eligibility, that a lender have closed a minimum of ten Agency

guaranteed loans or lines of credit and have closed a total of five

Agency loans in the past 2 years. The Agency developed these

requirements to assure that CLP lenders have a reasonable amount of

experience with the guaranteed program. The Agency believes that these

requirements are reasonable and will not change them.

The proposed rule provided that, to be eligible for PLP status, a

lender must have made at least 20 PLP, CLP, or approved lender program

(ALP) loans, or a combination of these type loans within the past 5

years. The ALP is another level of lender status and is being

discontinued with this rule. This requirement was established at a

level designed to permit the Agency to grant PLP status to one percent

of the 2,500 lenders that make guaranteed farm loans each year.

Clarification or reconsideration of this requirement was requested by

98 respondents. Several respondents expressed concern that criteria

that limited the program to only 25 lenders was too restrictive. Most

commenters suggested that the Agency clarify that 20 individual loans,

as opposed to 20 borrowers, be the criteria. Comments from two

respondents suggested that the 20 should refer to borrowers. Another

respondent suggested that either all guaranteed loans or just PLP and

CLP loans be considered, suggesting that ALP doesn't show any better

quality than a loan from a standard lender. Other comments suggested

that all guaranteed loans be considered. Three respondents suggested

that the number of loans be eliminated as an eligibility criteria or

alternate criteria be considered. One respondent suggested that

agricultural banks (as defined by either the Federal Reserve or FDIC)

be PLP lenders based on the lenders call report data. The respondent

pointed out that call report data is the proven result of the quality

of the lender's credit management system. The Agency considered the

various comments and determined that criteria that restrict PLP status

to one percent of the 2,500 lenders that make guaranteed farm loans

each year is too restrictive. The Agency also agrees that all FSA

guaranteed loans that a lender has made should be considered.

The Agency wants to establish the PLP eligibility criteria at a

level where the lenders have demonstrated adequate

[[Page 7362]]

recent experience with the guaranteed program while not being too

restrictive. The Agency modified Sec. 762.106(c)(3) to provide that the

lender will have made a minimum number of guaranteed loans within the

previous 3 years as set out in a separate published notice. As the

Agency and lenders become accustomed to these PLP process, the volume

requirements may be changed. These changes will be established in a

Federal Register notice.

One comment requested clarification of the rating service

acceptable to the Agency for determining an acceptable level of

financial soundness for Farm Credit System institutions. Instead of

defining a particular rating or rating service, the Agency has

determined a more appropriate requirement is that the lender not be

under any regulatory enforcement action based upon financial condition.

The Agency's National office will work with the financial institution

regulators to assure that lenders holding CLP or PLP status are

financially sound. Section 762.106(b)(6) has been modified to include

this requirement.

The Agency received 82 comments requesting clarification or

parameters as to what elements comprise a satisfactory credit

management system. The comments pointed out that more specific criteria

that the lender must address would help promote uniformity and assure

that objective criteria are considered when the Agency evaluates the

lender's credit management systems. The respondents suggested that the

Agency use a methodology similar to that contained in bank and thrift

regulators manuals. The Agency does not want to unnecessarily limit a

PLP lender in the methods used to administer their credit transactions,

therefore the Agency has not added additional specificity or regulatory

requirements for a satisfactory credit management system. However, the

Agency agrees that additional guidance of what should be addressed in

the lender's credit management system would result in more uniformity

and it will provide such guidance in the agency handbook and lender

manual. In addition, Sec. 1980.106(d)(4) has been modified to state

that any lending criteria not specifically addressed in the lender's

credit management system will be governed by the CLP requirements.

One respondent stated that requiring that the PLP lender show a

consistent practice of submitting applications that are detailed with

complete information that supports the loan proposal is subjective, and

questioned how to ensure consistency across State lines. The Agency

will gather and review information from all of the States in which the

lender wishes to do business. The process by which this information

will be gathered will be addressed in the agency handbook and lender

manual.

The Agency proposed that a PLP lender have a history of using the

guaranteed programs for new loans instead of refinancing the lender's

existing debts. Comments from 93 respondents addressed this

requirement. Comments from seven respondents supported this requirement

or suggested that the restriction be expanded. One comment suggested

that the Agency disallow all refinancing of existing debt, another

suggested the Agency limit the guarantee to 80 percent in all cases of

refinancing, another suggested that refinancing not be allowed under

CLP or PLP, and another recommended that PLP be ``limited to lenders

with a past history of promoting new credit and willing to continue

activity promoting new credit.'' Comments from 88 respondents either

opposed the requirement or suggested that the requirement was too

ambiguous and counterproductive. These comments pointed out that the

requirement was not amenable to a bright line of interpretation and

that the Agency had provided little rationale for imposing the

criteria. They commented that this burdensome requirement would cause

some lenders to not participate in the program and could adversely

impact borrowers. The Agency agrees that the requirement is ambiguous,

of limited value, is burdensome and would cause some lenders not to

participate. The requirement has been removed.

Three comments suggested that the Agency pre-approve all Farm

Credit System lenders for CLP or PLP. Because each separate Farm Credit

System entity will need to select which status they desire and meet

those eligibility criteria, the Agency cannot adopt this recommended

change.

One respondent suggested that applicants for CLP and PLP status

should be required to have fulfilled obligations regarding graduation

and market placement. Since the Agency is responsible for these

programs and cannot transfer these obligations to a lending

institution. The Agency did not adopt the suggested additional

eligibility requirement.

One respondent suggested that the Agency revoke CLP or PLP status

if the lender does not make 40 percent of the guaranteed operating

loans and 25 percent of the guaranteed farm ownership loans to

beginning farmers. While the Agency agrees with the need to encourage

lending to beginning farmers and does target guarantee funds for that

purpose, the Agency does not feel revocation of lender status would be

a reasonable method of encouragement; therefore the Agency did not

adopt this suggestion.

Lender Eligibility

One respondent suggested that standard eligible lenders be approved

for 5 years, rather than demonstrating eligibility for each guarantee

request submitted. The Agency did not change the requirements from

existing practice and does not contemplate that a standard eligible

lender will need to provide all evidence demonstrating eligibility with

each guarantee request. The Agency did not adopt the multi-year

eligibility suggestion for standard eligible lenders. However, the

language in the introductory paragraph of Sec. 762.105(a) is clarified

so that the lender must demonstrate eligibility and provide evidence

when the Agency requests.

One comment suggested that the Agency use the terminology

``standard lender'' rather than ``standard eligible lender'' to

simplify reference and that the Agency add an abbreviation for

``standard lender.'' Another comment suggested the terminology should

be ``eligible lender.'' Since the use of terminology and an

abbreviation is within the Agency's discretion, FSA decided that its

own terminology is reasonably descriptive and did not to adopt either

recommendation for publication.

One respondent suggested that the Agency require lenders to have

agricultural loan experience. The respondent was concerned that without

this requirement, the lenders may not have the necessary experience to

properly make and service agricultural loans. The Agency generally

agrees with this concern, and has added clarifying language to

Sec. 762.105(b)(1) to require that the lender must have experience in

making and servicing agricultural loans.

One respondent suggested that the Agency require that lenders have

a permanent presence in the State where they originate loans. The

Agency believes that the eligibility requirement contained in the

proposed rule concerning lender locations is adequate to assure good

loan servicing and did not revise the rule.

The Agency received two comments requesting that the Agency clarify

or remove the requirement that a lender be in ``good standing'' with

all applicable State or Federal regulatory agencies. The Agency agrees

that this requirement was ambiguous and removed it.

Two comments suggested that a ``maximum loss rate'' eligibility

[[Page 7363]]

requirement for standard eligible lenders be established. The Agency

did not establish a ``maximum loss rate'' for Standard Eligible

Lenders; however, in response to these comments, it added a requirement

in Sec. 762.105(b)(2) that the lender must not have losses or

deficiencies in processing and servicing guaranteed loans above a level

which would indicate an inability to properly process and service a

guaranteed loan.

One respondent recommended that the Agency establish a method to

remove standard eligible lenders from the guaranteed loan program when

the lender does not perform in accordance with its agreements. The

Agency may revoke a lender's PLP or CLP status for failure to meet a

regulatory requirement, but the Agency has no comparable ``penalty''

for standard eligible lenders. The Agency may recommend that a lender

be debarred or suspended from participation in all Government programs,

but cannot merely revoke participation in the Agency's guaranteed

programs. The Agency agrees with the concern and Sec. 762.105 allows

the Agency to determine that a lender may no longer participate in the

guaranteed farm loan programs. This provides a less severe penalty than

debarment or suspension, which would restrict participation in all

Government programs. Additional guidance will be provided in the agency

handbook and lender manual.

One respondent suggested that lenders notify the Agency when the

lender assigns responsibilities to other than the authorized designee

and that the Agency should reconsider the lender's CLP or PLP status at

that time. The commenter noted that CLP loan making and servicing

quality often deteriorate when the lender changes their ``authorized

designee''. The purpose in revising the regulation was to reasonably

increase lender loan making and servicing flexibility. Therefore, the

Agency chose not to adopt the suggestion.

One respondent recommended that consideration be given to allowing

standard eligible lenders make farm ownership loans. The proposed and

final regulation allows all lenders, regardless of status, to make

either operating loans or farm ownership loans.

The agency received 161 comments concerning the Agency's

consideration of allowing certain non-traditional financial entities to

make guaranteed loans. The respondents in 156 comments opposed the

expansion of lender eligibility criteria, citing concerns that

unregulated lenders such as machinery manufacturers and agricultural

supply firms lack credit expertise and have an inherent conflict when

they are trying to provide financing for a sale. Two commenters

suggested that eligibility should be expanded based on financial

strength, while one commenter suggested that it would be ``beneficial''

to expand eligibility to some mortgage or insurance companies. One

respondent suggested that the guarantee program eligibility be expanded

to authorize guarantees for farmers when the individual is a retiring

farmer selling land to a beginning farmer. The general tenor of the

comments was that a lender must have experience in making and servicing

agricultural loans and have the capability to make and service the loan

for which a guarantee is requested. The Agency agrees and has decided

not to expand the eligibility to nontraditional lenders.

Several respondents suggested that the Agency not require lenders

to provide information to consumer and commercial credit reporting

agencies. The comments noted that this requirement is inconsistent with

standard practices of many lenders. Rather than requiring lenders to

provide the information, the Agency will provide the information on

guaranteed loan extension to credit reporting agencies, as required by

the Debt Collection Improvement Act of 1996. The proposed lender

requirement was removed.

Percent of Guarantee and Maximum Loss

The proposed regulation provided that all guarantees issued to PLP

lenders would be at 80 percent, unless the loan was eligible for a 95

percent guarantee. Comments from 15 respondents suggested that PLP

guarantees should be at a higher percentage, arguing that lenders would

not use the PLP if only an 80 percent guarantee was available and it is

inconsistent for the Agency to penalize the program's best performing

lenders with a lower percent of guarantee. The Agency should encourage

its best lenders to be active. The Agency agrees with these comments.

Loss rates for CLP lenders have been lower than those for other lenders

and the Agency expects this to continue under the PLP program. In

addition, since the PLP will take less time to process, the Agency's

administrative cost savings will be greater if more lenders participate

in the PLP. Also, the statutory language prescribing the percent of

guarantees for CLP and PLP lenders is identical. For these reasons, the

Agency has revised Sec. 762.129(c) to authorize up to a 90 percent

guarantee for PLP lenders.

Loan Approval and Issuing the Guarantee

Eight respondents suggested that the 14 day automatic approval for

PLP should be removed, arguing that it is unreasonable, a bad business

practice, and not in the best interest of the Government. The Agency is

sympathetic to these arguments, but disagrees with them. The review of

PLP applications will be significantly reduced from present guarantee

application review requirements and the Agency has management methods

and responsibilities to assure that the PLP loans are timely reviewed.

The automatic approval is statutorily mandated and will not be modified

in the final rule. One comment suggested that, at a minimum, the

automatic PLP approval requirement be changed to 14 business days,

citing concern for Agency office coverage. Because calendar days are

also statutorily mandated, this suggestion was not adopted.

Two respondents recommended requiring applications be submitted by

certified mail to document the beginning of the 14 day time period. The

Agency chose not to impose this additional burden; however, the Agency

will send the lender a letter confirming receipt of the application and

indicating the date of receipt. Section 762.130(a)(3) has been added to

include this procedure.

Two respondents suggested the Agency clarify what happens in cases

where the Agency has asked for additional information or clarification.

The Agency is committed to providing a response to the lender within 14

days of receipt of a complete application. However, in some situations,

it will be impossible for the Agency to satisfy its environmental

responsibilities based on the information supplied with a PLP

application. In those situations, the Agency will notify the lender

within the 14 day time period of the additional information that is

needed to complete the Agency's environmental review, and that the 14

day automatic approval is suspended until this information is received.

After the Agency receives this additional information, another 14 day

approval period will start. The Agency does not anticipate this

additional information will be required in a large number of cases.

Section 762.130(a)(2)(ii) has been revised to provide for this

procedure.

One respondent suggested the 14 day processing timeframe for CLP be

removed. Since this is a statutory

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requirement at Sec. 339(c)(4)(C) of the CONACT, no modification was

made in response to the comment.

Another respondent requested that the Agency ensure that all

approvals are made within 14 days. Since the Agency's methods to ensure

that all approvals are timely issued is an administrative matter, this

issue will be addressed in the agency handbook. No changes were made in

the regulation as a result of this comment.

Insurance and Farm Inspection Requirements

One comment suggested that the lender be required to obtain an

assignment of crop insurance and be shown as loss payee. This

requirement can be addressed, as necessary, as part of collateral

requirements in the agency's conditional commitment for guarantee. This

will be further clarified in the Agency handbook and lender manual.

Security Requirements

One respondent suggested that the requirement that a lien be taken

on all ``significant nonessential assets'' is contradictory to the

requirement that the lender is responsible for ensuring that adequate

security is obtained. A lien on nonessential assets is often

unnecessary for security purposes, and does not improve the quality of

the loan. The Agency agrees with the comment and removed the

requirement. If the Agency determines, on a case by case basis, that a

lien on a nonessential asset is needed, to assure that the loan has

adequate security that requirement may be included as a condition for

issuing the guarantee. Additional guidance will be provided in the

agency handbook and lender manual.

One respondent requested the Agency amend the proposed rule to

allow individual principals to own collateral where the borrower is a

legal entity. The proposed rule at Sec. 1980.126 did not specify who

has to own the collateral, therefore no change was made in Sec. 762.126

to address this comment.

One respondent suggested limiting real estate financing to no more

than 90 percent of the appraised value. While the Agency recognizes the

risk of 100 percent financing, and that additional collateral should be

taken when available to adequately secure the debt, the Agency does not

want to prohibit lenders from providing credit to otherwise viable

operations, because of tight collateral margins. This suggestion was

not adopted, however the agency handbook and lender manual will provide

guidance on this issue.

One respondent recommended that the Agency should clearly specify

that a line of credit used for the purchase of feeder livestock must

always be secured by a first lien on the livestock. The regulation

states at Sec. 762.126(e)(3) that junior liens on livestock will not be

relied upon for security unless the lender is involved in multiple

loans to the same borrower and also has first lien on the collateral.

This requirement adequately addresses the respondent's concern in that

it will assure a first lien on livestock except in very limited

situations. The suggestion to add an additional regulatory requirement

was therefore not adopted.

One respondent requested the regulation be clarified regarding

acceptable differentiation on identifiable livestock. The final

regulation, in Sec. 762.126(c) explains that, for security to be

identifiable, the lender must be able to distinguish the collateral

item and adequately describe it in the security instrument. This

requirement applies to all security, including livestock. The Agency

does not believe additional regulatory clarification is necessary,

however, additional guidance will be provided in the agency handbook

and lender manual.

Line of Credit

The proposed rule allows lenders to advance funds from a line of

credit for a borrower to make term debt payments on capital items.

Comments were received from 109 respondents concerning this proposed

change, with 98 comments supporting the change because it will conform

the guaranteed program more closely to current industry practices.

Eight respondents recommended the Agency not allow lenders to advance

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

on capital items. Two comments were concerned that this use would

reduce the number of loans the Agency could guarantee as each

borrower's lending needs would increase. The other opposing respondents

argued that advancing for term payments was not prudent lending, and

should be restricted. One respondent suggested that the Agency restrict

payments on non-agricultural and real estate debts. The Agency

considered the comments and determined that the practice of making term

payments on capital items cannot be deemed imprudent lending, because

that practice is customary in much of the agriculture lending industry.

While the Agency recognizes that this additional authorized purpose may

marginally impact funding availability, the advantages of a less

restrictive program that will benefit more borrowers outweigh that

concern. The Agency determined that an overall limitation on non-

agricultural and real estate debts was too restrictive, however the

Agency addressed the concern by clarifying in Sec. 762.121 that the

debt be for authorized FO loan or OL purposes.

One respondent recommended that the Agency eliminate the line of

credit program and allow the lender to renew loans annually without

submitting a complete new application. The Agency could not discern an

advantage for the lenders or borrowers from the suggested change and so

chose not to implement this recommendation.

One respondent suggested that the Agency authorize revolving lines

of credit for capital purchases and term loans. The Agency chose not to

implement this recommendation because it is concerned that adequate

controls cannot be effectively implemented to assure proper supervision

of major financial planning decisions.

Interest Rates, Terms, Charges, and Fees

The Agency provided the interest rate may not exceed the rate the

lender charges its average farm customer. Two comments recommended that

the Agency remove restrictions on the interest rate or allow a more

reasonable range of interest rate. One comment recommended that the

interest rate ceiling should be the rate paid by the average farm

customer in the same interest rate program. The comment explained that

a lender may have many rate options that are based on the risk profile

of the borrower and other factors, and it would be more acceptable to

limit the rate on guaranteed loans to no greater than some specific

spread over the lender's index rate. The comment argued that the

proposed regulation may not permit lenders to price to market in many

instances. Because the Agency believes that the interest rate

limitation is a reasonable, understandable restriction, and that the

guarantee reduces the lender's credit risk in loans, the Agency did not

adopt the proposal.

One respondent recommended that the Agency clarify what penalties

will be imposed upon a lender that charges more than the rate charged

to their average customer. A lender that charges more than the rate

charged to their average customer is in violation of the terms of the

lender's agreement and subject to revocation of PLP or CLP status under

Sec. 762.106(g). A standard eligible lender in violation of the terms

of the lender's agreement could be prohibited from making additional

loans under Sec. 762.105(b)(2). In addition, the

[[Page 7365]]

Agency may contest the guarantee under Sec. 762.103(a) if the lender

misrepresents the interest rate charged. Because these penalties were

already contained in the regulation, the Agency did not add any

clarifying language to the regulation in response to this comment.

One comment recommended creating incentives for lenders who seek

low cost funding sources, limit spreads and guide borrowers toward the

use of long term fixed rate loans. The Agency fully supports the goal

of providing competitive as well as fixed rates to guarantee borrowers,

the advantages to financially stressed producers are well documented.

Many lenders are able to provide such rates through participation in

the secondary market and such activity is encouraged by the Agency. The

comment did not provide specific suggestions, but encouraged the Agency

to study these issues further. The Agency agrees that this issue

warrants further study.

One respondent recommended that the 7 year limitation on operating

loans be removed because it is unrealistic for a young farmer to

completely pay for cattle and machinery in 7 years. Section 316(b) of

the CONACT requires that guarantees on all operating loans be repaid in

a term not to exceed 7 years; therefore, the Agency did not adopt the

recommendation. The regulation at Sec. 762.124(d) does provide that

repayment schedules may include unequal or balloon installments if

needed to establish a new enterprise.

The proposed rule stated that crops, livestock, or livestock

products produced are not sufficient collateral for loans with balloon

installments. Two comments recommended that breeding livestock should

be acceptable collateral. The Agency agrees with this recommendation

and has modified the rule accordingly.

One respondent recommended that balloon installments must be

secured by real estate. The Agency did not adopt this recommendation

because it would be too restrictive.

Two respondents recommended that balloon installments should be

authorized for FO loans. The final rule modified Sec. 762.124 to

provide that balloon installments are authorized for any loan issued

under a loan guarantee.

One respondent recommended that balloon installments should not be

authorized because the use of balloon payments will cause excessive

future servicing requirements and future losses. The Agency does not

agree with the rationale for limiting balloon installments and believes

there will be situations where a balloon payment is prudent, such as

when reduced installments are needed to establish a new enterprise,

develop a farm, or recover from a disaster or an economic reversal.

Therefore, the Agency did not change the rule.

Year 2000 Compliance

The proposed rule stated the Agency was considering adding a

requirement that lenders have computer systems which are year 2000

compliant and requested comments on this requirement. The Agency

received seven comments opposing this requirement and five comments in

support. Comments pointed out that lenders were already addressing the

issue internally and regulators are closely monitoring this problem.

Regulators already require lenders to have a year 2000 action plan and

have been incorporating this into lender reviews. Therefore, the Agency

did not adopt this requirement, however, lenders are encouraged to

ensure their systems are compliant.

Application and Forms

The proposed rule reduced application requirements to minimize

burden on all lenders applying for guarantees. Eliminating the need for

the lender to submit copies of all leases and contracts, and the need

to submit detailed legal documentation for all entity loan applicants

were adopted. The rule also permitted the agency to approve a loan

subject to an acceptable appraisal. The Agency received 90 comments

supporting its reduced application requirements.

The agency received one comment requesting articles of

incorporation or partnership agreements be submitted as part of a

complete application and one comment requesting the application provide

information on entity members. The comment requesting entity legal

documents indicated concerns that the Agency's approval official would

not be familiar with the entity's structure. The lender's loan

narrative submitted with each application will contain sufficient

description of the entity's structure, owners, and roles of the entity

members; therefore, no changes are being made regarding entity

information.

One comment requested the Agency specify the items which must be

contained in a line of credit agreement. In response to this comment

and to reduce the burden, the Agency removed the requirement in the

proposed Sec. 1980.110(b)(5) that a loan agreement be submitted to the

Agency. The information generally included in a loan agreement is

adequately addressed in the loan narrative.

Two comments were received regarding credit reports. One comment

requested all lenders submit credit reports or certify to credit

history. The Agency does not believe this is necessary and has proposed

no changes. Credit reports will be required for all loans and CLP

lenders may certify to satisfactory credit history. Any unusual items

will be addressed in the lender's loan narrative. One comment also

requested that commercial credit reports not be required for small,

closely held farm entities. The Agency does not specify when a

commercial credit report is required. We believe this is best addressed

on a case by case basis between the Agency's responsible office and the

lender. No changes are being made regarding credit reports.

Financial and Production History

The proposed rule reduced the amount of financial and production

history required to be gathered and analyzed by lenders. The Agency

reduced the history from 5 years to 3 years on loans above $50,000,

eliminated history requirements for loans under $50,000, and permitted

CLP lenders to base cash flows on financial history rather than

requiring production history. In addition to the 90 comments supporting

reduced application requirements, 17 comments specifically supported

reducing the financial history requirement from 5 years to 3 years.

The Agency received ten comments requesting the proposed

requirement be strengthened. Four comments requested 3 years of

production history be required in all cases; three comments requested 5

years of financial and production history be required in all cases; and

three comments requested the Agency require 5 years financial and

production history if the loan purpose is for refinancing debt. Two

comments suggested the lender's file contain production and financial

history. Comments requesting additional financial and production

history cited concerns over credit quality; specifically, the ability

of Agency loan officers to determine whether the loan applicant's

cashflow projection was reasonable.

The Agency has considered the credit quality concerns and continues

to believe that 3 years financial and production history is sufficient

to arrive at reasonable cashflow projections. In addition, CLP and PLP

lenders have already demonstrated the ability to properly process a

loan application and should not be required to submit financial and

production history. Therefore, the suggestions are not being adopted.

[[Page 7366]]

Regarding small loans, the risk of loss on loans under $50,000 is

much smaller and does not warrant the same amount of documentation.

Also, under past procedures, lenders often could not justify making

small loans under the guaranteed program because of the excessive

administrative costs to gather and process the required information.

However, operations requesting these loans are likely to be smaller,

and the lender typically can estimate the feasibility using industry

standards. Therefore, the Agency is not making any changes from the

proposed rule regarding financial and production history.

PLP Application

The Agency proposed that a complete application will consist of at

a 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.

The Agency received two comments requesting PLP lenders be required to

submit a cashflow and one comment requesting the Agency to require PLP

lenders to certify their cashflow is based on past history. Feasibility

of the loan applicant's request will be addressed in the lender's loan

narrative. Furthermore, as part of the request for PLP status, a lender

will describe their application requirements and underwriting

standards. The PLP lender will certify that each application is

processed as proposed in their application for status; therefore, the

proposed requirements are sufficient.

The Agency received one comment requesting the Agency clarify what

is required of PLP. PLP lenders will be required to submit an

application form and loan narrative to the Agency. The particular items

the lender maintains in their file will vary depending on that lender's

procedures and will be defined during application for PLP status.

Therefore, it would not be appropriate for the Agency to further define

the requirement in the Federal Register.

Small Loan Applications

In the proposed rule, the Agency substantially reduced the amount

of documentation required for loans under $50,000. This was directed by

333A(g)(1) of the CONACT. The Agency received 96 comments supporting

the abbreviated application requirements for loans under $50,000.

The Agency received four comments requesting the $50,000 threshold

be increased. While the Agency does have some administrative latitude

to increase this threshold, the CONACT clearly identifies $50,000 as

Congress' intended level. After the Agency has more experience and

historical data to analyze the impact of reduced documentation

requirements on its small loans, the level may be increased beyond

$50,000.

The Agency received four comments requesting lenders be able to

determine whether a sufficiently strong equity position exists to

require an appraisal. The proposed Sec. 1980.127(b)(2) stated that the

Agency determined whether a strong equity position exists. This

requirement was removed from Sec. 762(b)(2). As with most other

requirements, the lender is expected to make the initial determination

subject to Agency approval. On a case-by-case basis, if the Agency

disagrees with the lender's recommendation, they can require an

appraisal as an approval condition.

The Agency received three comments requesting clarification that a

lender's cash flow budget may be abbreviated. The Agency agrees with

this comment and clarified in the definition of cash flow budget at

Sec. 762.102(b) that cash flow budgets for loans under $50,000 are not

required to have income and expenses itemized by categories.

The Agency received three comments requesting it include the

ability to require lenders with excessive losses or poor performance to

submit full documentation required on loans above $50,000. The comments

were concerned about potential lender abuse with no Agency authority to

require needed documentation. The Agency agrees with these comments and

included the authority in Sec. 762.110(a)(4) to require lenders with

losses in excess of the maximum CLP loss rate to submit those

additional items required of loans above $50,000.

The proposed rule stated the Agency expects lenders to utilize the

same level of documentation and evaluation as they require for their

nonguaranteed loans under $50,000. The Agency received one comment

requesting banks be required to submit their written policies for

approval before the loan is made. While the Agency understands the

potential for lenders to perform lesser evaluation for Agency

guaranteed loans under $50,000 than it does for its nonguaranteed

loans, it believes sufficient safeguards are already in place to

prevent this from becoming a major problem. Lenders will be aware of

the requirement through the lender manual and training. Lenders who do

not perform the same level of evaluation may have a loss claim under

the guarantee adjusted or denied. Therefore, this recommendation was

not adopted.

The Agency received one comment requesting additional information

requirements be reduced, not just the application form. The Agency

already had language to reduce information required on the application

by eliminating financial and production history and verifications of

debt and income. The Agency feels the remaining requirements for

information are necessary for adequate oversight and program

administration. No further changes are being made.

The Agency received one comment requesting lenders be prohibited

from making two $50,000 loans to same borrower in order to circumvent

the threshold. The Agency agrees. The regulation as proposed did not

prevent this circumstance. The Agency revised the language in section

Sec. 762.110 to apply the $50,000 to any one package of loan guarantee

proposals.

Forms

Four comments requested the Agency automate forms or allow

applications to be filed electronically. Several private companies

provide financial software packages which print Agency application

forms. Many Agency forms are now available through the Agency internet

site. In addition, the Agency is working on the problem of applying

through the Internet. At this time, many of the Agency's local offices

do not have the ability to receive electronic applications. As our

automation system is updated we will pursue electronic applications.

Eligibility

The Agency received one comment requesting the Agency revise its

loan applicant eligibility criteria to require loan applicants to have

been truthful and not have provided false or misleading information.

The comment expressed concerns that the Agency has no way to deny loan

guarantees to these loan applicants. The Agency agrees with this

comment and has included the eligibility condition in Sec. 762.120(f).

The Agency received one comment requesting delinquent IRS debt be

included in the requirement that a borrower cannot be delinquent on

Federal Debt. This exception to the definition of a Federal Debt is

permitted by 31 U.S.C. 3720B(a). Rather than administratively modify

the definition of Federal Debt, the Agency considers delinquent IRS

debt as part of its creditworthiness determination and also in the cash

flow budget used to determine feasibility.

Family Farm Definition

Four comments suggested the Agency remove its requirement that a

loan applicant has been a family farmer, or

[[Page 7367]]

that the Agency provide a uniform definition of family farmer. Two

comments recommended simply ensuring the loan applicants were producers

of agricultural products. Any modification of the family farmer

definition should be consistent between the Agency's direct and

guaranteed programs; therefore, these comments will be addressed when

the Agency revises its direct program regulations.

Financial Feasibility

The Agency received one comment that financial feasibility

requirements be clarified to state that in cases of startup or

expansion, factors beyond financial history should be considered. This

was included under projecting yields, but not for other projections in

cash flows. This was an oversight and the Agency has added the ability

to use other sources to develop a cashflow projection when actual

history is not available or not appropriate to Sec. 762.125(a)(5).

Advancing Funds

The Agency received one comment recommending that the lender be

required to only advance funds when needed by the borrower. The

commenter was concerned that some lenders advance more funds than

needed by the borrower at that time, thereby accruing excessive

interest charges. While the Agency understands this does occur in

isolated cases, the problem should be worked out between the lender and

the borrower. The Agency believes it is the borrower's responsibility

as manager of the farm operation to decide when funds are needed.

Furthermore, identifying what amount is excessive would be unreasonably

burdensome for the Agency and the lender. No changes were made

regarding advancing of funds.

Environmental

The Agency received 82 comments requesting clarification of the

impact on a lender of finding a previously undetected environmental

hazard, particularly whether the guarantee will be put in jeopardy. The

proposed regulations require the lender to perform a due diligence

investigation for any guarantee request involving real estate. Unless

the lender fails to perform the due diligence investigation, or the

Agency can demonstrate that the lender was negligent in performing the

investigation, the guarantee will not be in jeopardy. Further

clarification may be incorporated into Agency environmental

regulations, agency handbook, and lender manual, see also the

discussion below concerning the use of the American Society of Testing

Materials (ASTM) transaction screen questionnaire.

The Agency received 72 comments requesting reduced environmental

review for small loans or expressing concern with the cost associated

with the reviews. In addition, the Agency received one comment

requesting the lender be required to provide evidence of environmental

compliance with a small loan application. The environmental statutes

governing Farm Loan Programs do not permit the Agency to differentiate

its review based solely on the amount of the transaction. However, the

Agency believes loan requests under $50,000 involving real estate will

normally not require a complicated environmental review. These loans

are typically made to smaller operations and do not involve extensive

land development or large animal populations. The Agency intends to

simplify its environmental review process as it revises its

environmental regulations.

The Agency received two comments requesting the ASTM transaction

screen questionnaire not be required. In considering this requirement,

the Agency believed a standard for due diligence needed to be

identified. In our research, the Agency selected ASTM as the most

widely accepted industry standard for a due diligence investigation.

The Agency also recognizes that many lenders already have adopted

investigation forms and procedures comparable with the ASTM form. To

permit lenders to use their own forms and processes, the proposed rule

stated the Agency will accept any similar documentation to the ASTM

transaction screen questionnaire. The Agency believes this provides

sufficient flexibility.

The Agency received one comment requesting clarification of lender

and Agency environmental responsibilities. Section 762.128 provides

that lenders will assist in the environmental review process by

providing environmental information, and enumerates the specific

requirements and documentation expectations. Any remaining

investigation or determination is the Agency's responsibility. There

are many environmental laws applying to Agency loans. Only those which

require direct input from the lender have been addressed in the these

regulations. Rather than duplicate the requirements for Agency review,

the environmental regulations governing the Agency's review are

presently published in 7 CFR part 1940 subpart G. The agency handbooks

will clarify the procedures for the Agency's review.

The Agency received one comment requesting that compliance with

wetlands and HEL be included as an eligibility requirement. This

requirement is already part of 7 CFR part 1940, subpart G. To avoid

duplication and potential conflicts between regulations, the Agency has

decided to reference the environmental regulations rather than repeat

the requirements in these regulations.

Lender's Debt Instruments

The Agency proposed removing the requirement that a lender's

promissory note not contain a ``payment on demand'' clause. The Agency

received two comments requesting this restriction be retained. This

long standing requirement was intended to ensure lenders clearly

establish the payment schedule on the promissory note. In evaluating

debt instruments, the Agency found that many contained industry

accepted language which ensured the lender's ability to accelerate a

note in the event the collection of the loan was impaired. Many Agency

offices interpreted this language to be in violation of the regulations

when the note satisfied the intent of the regulations. The Agency

therefore clarified its intent by stating the lenders note must clearly

state the principal and interest repayment schedule, but the regulation

does not prohibit demand clauses.

Loan Underwriting

The Agency requested comments on its underwriting standards,

particularly whether the Agency should adopt more comprehensive

criteria. The Agency received 16 comments on its underwriting criteria.

Seven comments suggested the Agency remove its requirement for a 1.10

term debt and capital lease coverage ratio (TDCLCR), with one commenter

offering the alternative of incorporating exception authority. Comments

stated that during years of depressed prices, disasters, or other

unforseen problems a 10 percent margin was not possible to project. The

Agency adopted the 10 percent margin as a provision for future capital

replacement as required by Sec. 339(b) of the CONACT. Approving a loan

to an operation unable to project a 10 percent margin would be

imprudent lending and surely result in higher default rates for the

program. The Agency continues to believe that a TDCLCR of 1.10 is

necessary, particularly in the absence of any other criteria to measure

financial feasibility.

One comment recommended the Agency implement a credit scoring

system and several comments suggested

[[Page 7368]]

the Agency incorporate additional financial ratios into its decision.

While the Agency is aware of the merits of incorporating financial

ratios or a credit scoring system, further analysis is needed before

implementing such a change. The Agency will continue to study improved

methods to underwrite its loans.

The Agency received 82 comments requesting clarification of its

positive cash flow definition. While the Agency did not add more detail

to this already extensive definition, it added a definition of the cash

flow budget in Sec. 762.102 to provide a mechanism for achieving a

positive cash flow.

Loan Servicing Comments

The comments received regarding loan servicing were overwhelmingly

in support of most of the changes proposed by the Agency. Most of the

comments received were from lenders that participate in the Agency's

guaranteed loan program, Agency field office personnel, or associations

that represent the interests of those groups. The lending community

unanimously supported the Agency's efforts to revise its guaranteed

lending regulations, as did the large majority of Agency personnel and

others who commented. However, there were some proposals, such as

mandatory lender buyback of loans sold on the secondary market, that

caused extensive concern. Numerous other comments were made requesting

clarification, pointing out potential problems with the proposed rule

or expressing personal opinion on a particular issue. The following is

a discussion of specific comments, grouped into main subject areas,

with Agency information providing clarification of some comments,

adoption of others, and explanations for those that are not being

incorporated into the final rule.

Mandatory Repurchase

The secondary market repurchase requirements proposed in

Sec. 1980.144 generated many comments. Of the 231 total comments

received on the proposed rule, 105 expressed vehement opposition to the

Agency proposal to require mandatory lender buyback of loans sold on

the secondary market. The overwhelmingly negative comments were

provided by farmer associations, secondary market purchasers, lenders

and lender associations, including the American Bankers Association

(ABA) and the Independent Bankers Association of America (IBAA). The

proposed change was supported by two Agency employees, two Agency

employee associations, and one bank. Most of the 105 negative comments

indicated that the requirement seems to punish all participating

lenders for the errors of a few. In summary, these comments said that

this policy would cause irreparable harm to the fledgling secondary

market for FSA guaranteed loans, and that lenders would be discouraged

from making long term fixed rate loans. The commenters almost all

agreed that it is essential for many banks to sell fixed rate loans

because they do not have the ability to match loan funding to the loan

term unless they structure the loans to be sold in the secondary

market. By selling the loan, the bank is better able to match its

interest rate risk. Also, by removing the loans from their books, they

obtain liquidity to make more loans. According to the ABA, requiring

the lender to buy the loan back is tantamount to restructuring them as

full recourse loans. As a result, the ABA and IBAA are concerned that

bank regulators may hold the full capital charge against these loans,

thereby increasing the cost of capital for banks and causing higher

interest rates for borrowers. Liquidity planning would be more

difficult because banks would be uncertain of funding capacity if they

must maintain reserves to potentially buy back loans that were sold.

As a result of these comments, the Agency has eliminated mandatory

repurchase of loans sold, and addressed problems with repurchased loans

in other ways. First, delinquent account servicing regulations in

Sec. 762.143(b)(2) now spell out that the lender consider repurchasing

the guaranteed portion of the loan sold on the secondary market.

Second, Sec. 762.144(b)(1) requires the lender to consider the request

according to the servicing actions that are necessary on the loan, and

encourages lenders to repurchase the loan upon the holder's request.

Third, direct consequences of a lender's failure to comply with

Sec. 762.144(c) were added at Sec. 762.160(a)(2). This states that if

the lender does not comply with requirements to reimburse the Agency

for the repurchase within 180 days, the Agency will not execute the

Assignment of Guarantee, and will prohibit the sale of future loans on

the secondary market. Provisions were included for waiver of this

prohibition if the lender is in compliance with an Agency approved

liquidation plan. The 180 day liquidation or reimbursement requirement

in Secs. 762.144(c)(7)(ii) and 762.144(c)(7)(iii) were proposed in

Sec. 1980.144(c)(6) and no negative comments were received. Finally,

the Agency has clarified proposed Sec. 1980.106(g)(2)(ix) by requiring

in Sec. 762.106(g) that consistent deficiencies in servicing loans sold

on the secondary market will be considered when reviewing PLP or CLP

status as part of the assessment of the lender's abilities. The agency

handbook will provide guidelines for implementing this requirement,

such as considering whether those repurchases resulted in increased

losses or servicing problems for the borrowers.

Reporting Requirements

Comments were received requesting the Agency specify the lender's

reporting requirements in the lenders agreement. The lenders agreement

for guaranteed loans currently references the Code of Federal

Regulations (CFR) for all reporting requirements. The Agency recognizes

that there are older loans with specific reporting requirements that

may differ from the CFR, but they represent a very small portion of the

existing portfolio. Several years ago it was recognized that different

lender designations had different reporting requirements in the

respective lender's agreements, that were inconsistent with

regulations. It was because of this inconsistency that a change was

made to have the new lender's agreement for guaranteed loans refer to

the CFR. The comment is not being adopted.

A comment was received requesting that the Agency reduce lender

status reporting from semi-annual to annual. The Department of Treasury

requires the Agency to report the condition of its loan portfolio on a

semi-annual basis. In the recent past, the Agency was able to reduce

the burden of its guaranteed loan status report by allowing multiple

loans to be included on one report and automating its input at the

local level. The Agency will continue to explore areas where it can

reduce reporting burdens; however, the comment cannot be adopted and

the semi-annual status requirement has not been revised.

Servicing Actions

Numerous comments were received on the Agency's various proposals

to authorize lenders to conduct servicing actions on their guaranteed

loans. One comment felt that lenders should conduct all servicing

actions and, to enforce this, suggested that the Agency provide for

revocation of preferred or certified status when a lender assigns or

contracts for applications or servicing with an outside agent. The

Agency did not adopt this comment. Part of the reason for this rule is

that the lending industry, especially in agriculture, is changing. For

the Agency to continue to

[[Page 7369]]

encourage lenders to provide credit to family farmers and ranchers, it

is critical that the Agency also change and adapt with the industry.

The rule will maintain the provisions that exist today in that a lender

has authority to contract with outside agents to service guaranteed

loans. However, under the guarantee, the lender remains accountable for

any actions of its agents or assignees that are inconsistent with the

loan requirements, regulations and statutes.

Another comment was made requesting that lender servicing

authorities be decided on a case by case basis, rather than basing this

on the particular lender designation (Preferred Lender Program (PLP),

Certified Lender Program (CLP), Standard Eligible Lender (SEL)). The

comment was assumed to mean a loan by loan basis, since these statuses

will be awarded on a per lender basis, as proposed. The comment is not

being adopted because lender status designation will be based on its

overall experience, including servicing, and expertise in conducting

business with the Agency. The lender is responsible for servicing the

loan in accordance with its agreements with the Agency. If a lender

chooses to ignore these requirements, that noncompliance will result in

the reduction or denial of a loss claim, should one be submitted. The

Agency cannot assume that lenders will purposely ignore Agency

requirements. The guaranteed loan is the lender's loan; lenders have

requested the additional responsibility placed upon them in this rule

with the full understanding that the Agency will hold them accountable

for carrying out servicing in accordance with regulations and loan

agreements.

A comment requested that the Agency require an annual loan

classification of the guaranteed loan in order to determine the risk of

loss. Currently the Agency uses existing loss rates on guaranteed loans

in determining the subsidy cost for this program. Guaranteed loan loss

rates have remained fairly stable since the farm crisis of the mid

1980's and, as a result, the Agency's current method of projecting

losses, which does take into effect noted weather or related economic

setbacks, is adequate for risk determination. Therefore, the Agency is

not adopting the comment at this time.

Another comment requested that the Agency not allow retroactive

servicing authority. In order to maintain consistency and provide a

more simplified approach for Agency personnel, the rule must be

retroactive. For example, Agency internal review procedures provide

that 20 percent of an SEL lender's loans and 40 percent of a CLP

lender's loan files will be reviewed annually. If the lender is worthy

of an enhanced status, it will likely service all loans equally well.

Requiring FSA field office review of 40 percent of a lender's loans

made before a certain date and 20 percent of the loans made after that

date would be burdensome and confusing.

A comment was made requesting that the Agency clarify that a line

of credit balance can go to zero. In the past the Agency has heard

concern from lenders that if a line is paid to a zero balance, then it

is paid in full. This is not an Agency requirement and our

interpretation is that a line of credit must be paid as its security is

sold. The fact that a multiple advance note may be paid to $0 does not

terminate it. Thus, no change was made in the final rule. The rule does

not prohibit or require an annual balance of zero.

Negligent Servicing

The Agency received multiple comments requesting clarification of

the definition of negligent servicing and how it would affect the

determination of a loss payment as stated in Sec. 762.149(c)(6).

Negligent servicing was defined in Sec. 1980.102(b) of the proposed

rule as follows:

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.

In addition, the Agency's guaranteed documents under the full faith

and credit provisions describe negligent servicing as those actions

which a reasonably prudent lender will take in the servicing of a loan

if such loan were not guaranteed. Moreover, failure to service a loan

in accordance with the corresponding lender's agreements and Agency

regulations can lead to reduction or denial of a loss claim due to

negligent servicing. The Agency believes that to protect the

government's interest, the definition of negligent servicing must

remain flexible, and no change is being made.

Borrower Analysis

One comment requested that the Agency remove the requirement that

all lenders complete a borrower analysis for chattel secured loans.

Along this same line, a few comments suggested that the Agency delete

the requirement for SEL to provide an annual statement of financial

condition. Since chattel loan security often depreciates quickly, and

is likely to deteriorate very quickly if an operation is struggling

financially, the first suggestion is not being adopted. Contrary to the

comment, the Agency has found that some level of security monitoring

and financial performance measurement is performed by most lenders on

their chattel secured agricultural loans. This analysis quickly

identifies potential problems and can be used to correct the problem,

change the operation or avoid future problems. It is a valuable

decision making tool for any chattel secured loan and is not overly

burdensome to lenders. As far as an annual balance sheet or statement

of financial condition is concerned, this comment appears to address

real estate loans and the SEL reporting requirements. While the Agency

has removed this requirement for CLP lenders, SEL may be more

inexperienced and may require a closer level of monitoring by the

Agency. The Agency will only review a sample of an SEL guaranteed loan

files in a given year; therefore a balance sheet in the Agency loan

file will assist monitoring of these loans.

A comment requested that the Agency clarify the rule to state that

any decision not to perform an annual analysis will be made after

consultation with the Agency. This comment deals with proposed

Sec. 1980.141(d)(1) that allowed CLP lenders to forgo a complete

analysis if there is sufficient financial strength to support the

decision. The comment is not being adopted. A large number of comments

indicated their support for the analysis requirements as proposed. The

Agency's internal handbook will provide examples of financial strength

factors that may be acceptable as reasons to waive the analysis. If

lenders do not perform an analysis, Sec. 762.141(d)(1) requires that

the reasons be documented in their file and in their narrative, which

is submitted to the Agency. FSA will review the narrative and the case

file can be audited during a routine lender monitoring visit.

Consolidation

Several comments were received discussing loan consolidation. The

Agency is also making some clarifications and minor modifications.

First, the Agency has removed consolidation from the distressed

servicing section. As used by FSA, consolidation is simply a

combination of two or more similar performing loans into one loan and,

thus, is not a distressed servicing action and is not useful as a tool

to correct default. Therefore, in the final rule, proposed

Sec. 1980.145(b) has been moved from the distressed servicing section

to Sec. 762.146(e), other servicing procedures.

[[Page 7370]]

A comment requested that loan consolidation authority be

eliminated. Loan consolidation is included as an authorized loan

restructuring action in the Consolidated Farm and Rural Development Act

and must be maintained as an authorized action. Moreover, loan

consolidation is a standard industry practice and, in the interest of

allowing lenders to conduct business as usual on their guaranteed

loans, the Agency wishes to allow the practice to continue.

A comment suggested that the prohibition against consolidating

loans made prior to fiscal year (FY) 1992 with those made after FY

1992, proposed in Sec. 1980.145(b)(3), be eliminated. The proposed rule

provided that consolidation of an FY 1991 loan with a post FY 1991 loan

that did not have interest assistance would eliminate the ability to

provide interest assistance for servicing on the consolidated loan.

This result ensues because, under Agency budgeting procedures, the

consolidated loan becomes an FY 1992 loan. The Budget Reconciliation

Act of 1991 eliminated budget authority for interest assistance on FO

loans and greatly restricted the Agency's ability to provide interest

assistance for servicing actions by, in effect, making the awarding of

subsidy on these loans cost prohibitive. To implement this authority

and adopt the comment would result in a dramatic increase in the

assumed cost of the guaranteed OL program and a commensurate decrease

in its loan funds. The result would be a drastic reduction in the

number of loans the Agency could guarantee and the number of farmers it

would be able to assist. Therefore, the comment was not adopted.

Comments were received requesting that consolidations be limited to

only those loans with the same percent of guarantee. The comment was

not adopted; however, the final rule provides that when a new guarantee

will be provided for a consolidated loan, the percentage of guarantee

will be the lesser of the loans being consolidated.

Interest Rates

Comments were received requesting that the Agency allow for

refinancing of existing guaranteed loans when the interest rate can be

fixed. The proposed rule at Sec. 1980.146(d) and the final rule at

Sec. 762.146(d)(3) provide for a change in rates from variable to fixed

even if the loan is not delinquent. Therefore refinancing for this

purpose is not necessary.

Substitution of Lenders

One comment was received requesting the Agency to clarify

substitution of lenders. When a borrower wishes to move a guaranteed

loan from one lender to another, or a lender wishes to sell a

guaranteed loan to another lender, with or without the borrower's

consent, FSA must process a substitution of lender. When a substitution

occurs, the existing guaranteed documents must be assigned to the new

lender. The Agency agrees with the comment that the lender substitution

provisions in Sec. 1980.105(c) were inadequate. The Agency has revised

Sec. 762.105 to clarify that the original lender and the Agency must

concur with the substitution. If the original lender does not agree to

assign their promissory note, lien instruments, loan agreements, and

other documents to the new lender, then the substitution cannot take

place and the new lender could only refinance the original lender.

Refinancing would require the use of new loan funds and a guarantee

fee. The Agency believes that the new authorities provided to lenders

in this rule, such as partial release, subordination and change in

interest rates will provide lenders with additional tools to continue

to service existing borrowers, so that a substitution request will be

less likely.

Partial Releases

Almost every comment received was in support of the Agency proposal

to add partial release authorities to its guaranteed lending

regulations. Additionally, many comments suggested that we, ``clarify

that partial release authority would be at the field office level,''

and ``clarify when appraisals will be required for partial releases.''

Agency approval authorities for partial releases is an administrative

matter and will be delegated through internal FSA directives. It is not

included as part of this rule. Authority is likely to be extended to

local offices. However, the Agency agrees that the proposed rule

contained excessive application requirements for some types of partial

releases. Therefore, Sec. 762.142 has been revised to clarify what

items are needed to request a partial release by CLP lenders and SELs.

Similarly, the proposed rule is revised from requiring Agency

concurrence to not requiring Agency approval when the security is being

sold for market value, and the proceeds will be applied in accordance

with lien priorities, when the security will be used as a trade-in or

as a source of down payment funds for a like item that will be taken as

security, or when the security item has no present or prospective

value. Agency concurrence is required only when the proceeds will be

used to make improvements to real estate in an amount equal to the

amount being released, as stated in the proposed rule, security is

being released without consideration but the loan to value after the

release will be .75 (loan balance to collateral value) or less. The

handbook will provide guidance as far as how proceeds would be applied

on the loan, and how input may be requested when there is a question of

whether reasonable value is being obtained for the security.

As for appraisals, the proposed rule at Sec. 1980.142(d)(2)(i)

provided that, for CLP lenders and SEL, the Agency would determine the

need for any chattel appraisals and that real estate appraisals will

not be required of the lender unless the Agency specifically requests

them. Section 762.142(b)(2)(vi) provides that appraisals will be

required when security is released without consideration. A suggestion

that the Agency never require an appraisal for restructuring a loan, or

for a partial release, was not adopted. Appraisals are not required to

reschedule a loan, but since partial releases involve releasing loan

security, an appraisal was not viewed as overly burdensome.

Subordination

Several commenters suggested that the Agency delegate to local

county offices concurrence with a lender's request to subordinate a

guaranteed loan. This comment is being partially adopted. The Agency

has revised Sec. 762.142(c)(3) to allow for the subordination of normal

income security for the guaranteed lender or another lender to make an

operating expense loan without Agency concurrence. The Agency agrees

that the subordination of normal income security for a lender to make

an operating loan is consistent with the mission of the Agency, to help

borrowers progress to the point of obtaining credit without Agency

assistance.

Some comments were received requesting that the Agency expand its

subordination authority to include real estate loans. This comment was

not adopted because, in most cases, subordination of guaranteed loan

security increases the risk of loss to the Government. The Agency will

continue to discourage subordination of real estate security and not

provide regulatory approval authority at levels lower than the Deputy

Administrator for Farm Loan Programs. See Sec. 762.142(c)(3). If a

request is received

[[Page 7371]]

that the State Executive Director feels is in the best interest of the

Government and the borrower, it can be forwarded to National office for

final consideration.

Other comments suggested that the Agency subordinate for tax exempt

transactions. This comment is not being adopted. The Agency understands

that tax exempt transactions often result in a lower interest rate for

the borrower; however, has determined that a subordination of a Federal

loan guarantee will not be provided in these types of transactions.

Emergency Advances

Overall comments were very favorable toward the proposal to add an

emergency line of credit advance provision, although, several comments

were received requesting that Agency approval be obtained on all

emergency advances. The proposed rule did not specifically require

Agency approval on emergency advances. The Agency recognizes that this

may be confusing, so the suggestion to clarify approval is being

adopted in Sec. 762.146(a)(2), which will require CLP lenders and SEL

to obtain prior FSA concurrence for emergency advances. PLP lenders

will make these advances in accordance with the provisions of the PLP

agreement. In all cases, the financial benefit to the lender and the

Government must exceed the amount of the advance and the lender must

document the financial justification for the advance.

Another comment requested that the Agency limit emergency advances

to 10 percent of the line of credit ceiling or set a dollar limit. This

comment is not being adopted. The Agency understands the comment's

concern that there be a limit to the amount of the advances. However,

if a specific percentage or dollar amount were established, it could

have the opposite effect of what the comment intended. This policy

would encourage lenders to assume 10 percent or a certain dollar limit

is always acceptable. Therefore, FSA will not adopt this policy. The

experiences supporting this proposal have shown that when this

situation arises, the need is usually less than 10 percent of the line.

However, in a few instances, a greater advance is required. In any

case, the benefit to the lender and the Government must exceed the

advance. For example, if a lender with a $400,000 line of credit

advances $20,000 as an emergency advance for irrigation and saves a

crop, the Government may pay $20,000 in losses on the loan. But had the

crop not been watered, it may have been a total loss and the Agency

loss may have been $400,000. In this example, the benefits derived

obviously exceed the advance amount.

Several comments requested that the Agency clarify the emergency

advance lien priority as it relates to the guaranteed loan and how it

is paid, and a few comments indicated confusion regarding the

difference among an emergency advance, protective advance, and an

additional loan. These comments are addressed in Sec. 762.146(a)(3)(iv)

by requiring that the emergency advance must constitute an advance

against the line of credit and be secured by the same lien instruments.

Emergency advances are not a separate loan, but part of the guaranteed

loan. To subordinate this advance in favor of the lender on a non

guaranteed basis, as was suggested by some, would provide an effective

100 percent guarantee of repayment of the advance, because the

emergency advance would be paid in full before application of payments

to the line of credit. Because the emergency advance is necessary for

the guaranteed loan, the lender should share the risk in proportion to

the guarantee. Emergency advances are similar to protective advances in

that they are made to protect security from being lost, constitute an

obligation under the promissory note, and cannot be made in lieu of a

new loan. They differ from protective advances in that emergency

advances are made only in the case of a line of credit to protect,

harvest or market only normal income security, when the borrower is not

in liquidation. Protective advances are made to protect any type of

security for a multitude of purposes, when a loan is in default and

liquidation is likely.

The Agency received a comment requesting expansion of the lender's

authority to make emergency advances in situations outside the

limitations placed in the rule. This comment is not being adopted. The

Agency does not agree that there are any circumstances justifying

further exposure on the guarantee, other than when loss of crops or

livestock is imminent, the advance is for authorized operating loan

purposes, and the benefit derived will exceed the amount of the

advance. These situations are covered by Sec. 762.146(a)(3).

Restructuring

In the proposed rule, only SELs required Agency approval when

restructuring a guaranteed loan. CLP and PLP lenders would not require

Agency approval with restructuring actions, except for loan writedowns.

While a majority of the comments were in favor of the rule, several

commenters felt that Agency approval of all restructuring actions was

necessary to assure that the restructuring is in accordance with

regulations. This suggestion was not adopted. PLP and CLP lenders are

more experienced lenders and they are more familiar with Agency

requirements. Still, they must restructure loans in accordance with the

minimum Agency requirements for restructuring for all lenders. Lenders

who do not restructure in accordance with minimum regulatory

requirements risk not being paid in the event of a loss. Furthermore,

Agency approval of a lender's restructuring action does not endorse

servicing that occurred prior to the restructuring, nor does a note's

compliance with Agency regulations ensure that the restructuring was

completed correctly. Agency officials often do not have the time to

thoroughly analyze all facets of a lender's restructuring request, and

lenders and their associations have suggested that Agency employees be

less involved with approval of a lender's actions. Therefore, the

Agency is placing this responsibility upon the more experienced lender.

A similar comment requested that the Agency require PLP lenders to

submit a credit analysis prior to Agency approval of rescheduling. PLP

lenders have significant agricultural lending experience in addition to

their familiarity with Agency guaranteed loan programs. Having the

Agency review the PLP lender analysis, in most instances serves no

useful purpose. PLP lenders know how to analyze credit and make loan

restructuring decisions based upon those analyses. In addition, they

are required to have documentation of their analysis in the file. If a

PLP lender does not take those actions required by the lender's

agreement and Agency regulations prior to restructuring, in the event

of a loss, the lender's loss claim under the guarantee may be reduced

or denied.

One comment requested that the Agency make a decision on the PLP or

CLP lender's servicing requests within 14 days, rather than state that

the Agency will ``consider the request.'' Proposed

Sec. 1980.145(a)(1)(i)(C) states that only SELs are required to obtain

Agency approval and the Agency must notify the SEL within 14 days of

the request. The comment apparently mistook the Agency's discussion of

proposed changes in the rule, which used the word ``consider'', for the

regulatory requirement.

Another comment suggested that the Agency not be required to act in

14 days if the borrower has a direct loan that is being serviced under

the provisions of 7 CFR part 1951, subpart S. This comment is also

apparently a

[[Page 7372]]

misunderstanding, because the rule stipulates certain items to be

submitted to the Agency for approval before the 14 day period begins.

If a guaranteed borrower is having direct loans rescheduled by the

Agency, much of the required information, such as a feasible plan,

cannot be provided by the lender until direct loan servicing is

complete.

One comment requested that the Agency require the lender to account

for security and provide a loan history as part of any loan

restructuring action. The Agency believes that the adoption of this

suggestion would not provide additional assurance that the loan was

adequately serviced. The existing rule states that a final loss claim

may be reduced, adjusted, or rejected as a result of negligent

servicing after the concurrence with a restructuring action. The intent

of this statement is to remind SELs that Agency concurrence with an

action does not mean that all actions up to that point regarding

servicing are satisfactory. The statement in the rule also applies to

CLP and PLP lenders, who do not require Agency concurrence prior to

restructuring.

Balloon Payments

Several comments were received requesting the Agency allow for the

reamortization and restructuring of loans with a balloon payment in the

repayment schedule. The Agency agreed to add a regulatory prohibition

against rescheduling loans with balloon payments several years ago in

response to a recommendation of the USDA Office of Inspector General

(OIG). OIG determined that many Agency guaranteed loans were being

restructured with no realistic planned repayment when the balloon

payment came due. As a result, the borrower did not receive any real

benefit and, in many cases, the balloon payment was used to simply put

off the inevitable. This caused continuing difficulties for the

borrower and, ultimately, a larger loss to the Agency. However, the

Agency does recognize the need for the lender to have the flexibility

of being able to restructure a loan with a payment schedule other than

equal amortized payments. Thus, Sec. 762.145(a)(3) allows a loan to be

rescheduled with uneven payments provided the borrower projects a

feasible plan for the upcoming year and can reasonably demonstrate that

when the installments increase they will be repaid without further

restructuring. The Agency intends that unequal installments will

coincide with the need to re-establish an enterprise or an unusual cash

flow cycle.

Prohibition of Advances on Rescheduled Lines of Credit

One comment requested that prohibiting advances on rescheduled

lines of credit should not apply to those lines of credit already in

effect. The comment suggested that FSA ``grandfather in'' all existing

lines of credit to allow them to be rescheduled, and permit advances on

the difference between the line maximum and the rescheduled balance.

FSA's intent in Sec. 762.145(b)(1)(ii) is that, on the effective date

of this rule, the change will apply to all lines of credit except those

that have been previously restructured. To adopt the comment's

suggestion would require gradual implementation of the restriction for

up to five years on existing lines of credit. This would create

problems in administering the restriction. Therefore, the Agency will

not adopt this suggestion for all lines of credit. While the final rule

will allow rescheduled lines of credit with remaining balances to be

re-advanced, on the effective date of this rule, the Agency will not

allow advances on lines of credit where restructuring has not already

occurred.

Debt Writedown

Several comments were received from Agency field offices concerning

the Agency's debt writedown provisions proposed in Sec. 1980.145(e).

One comment was received suggesting that the Agency require an OL loan

that is being written down to be amortized over a minimum of 10 years,

as opposed to the 5 year minimum that was proposed in

Sec. 1980.145(e)(5). The Agency understands the commenter's concern

that the amount written off and the resulting loss claim payment is

higher when the loan has a shorter term. However, the Agency intends to

be flexible in those situations where the life of the security is less

than 10 years and it is the lender's policy to not restructure beyond

the life of the security. This may provide an incentive for lenders to

provide a writedown to a farmer that needs one to stay in business.

Another comment requested that the Agency require the lender to

take a lien on all assets when writing down a guaranteed loan. The

Agency considered this option; however, it was not adopted because it

would create future credit problems for the operation. The Agency felt

that this situation should be handled on a case-by-case basis, with

guidance provided in the Agency handbook and in consideration of the

lender's internal policies. Also, Sec. 762.145(e)(9) does require a

cross collateralization of security if the borrower has other

guaranteed loans that are not secured with the same security as the

loan being written down.

Several comments expressed concern over the 20 year minimum

amortization for an FO loan that is being written down. For example,

there is concern that if there are only 19 years left on a 40 year FO

loan, in accordance with Sec. 307(a)(1) of the CONACT, it cannot be

reamortized to exceed 40 years from the original date of the loan. The

Agency has written Sec. 762.145(e)(5) to state that the loan will have

a 20 year term minimum, unless the remaining term exceeds the statutory

term. If the term cannot be extended to 20 years, it will be extended

to the maximum term available under the CONACT.

Servicing Fees

One comment requested the Agency not pay the holder a servicing fee

when repurchasing a guaranteed loan from the secondary market. The

proposed rule at Sec. 1980.144(b)(3) stated that the Agency will not

reimburse the lender for any servicing fees which have been assessed to

the holder. The comment is being adopted in Sec. 762.144(b)(3) of the

final rule by adding the words ``after the Agency repurchase.''

Bankruptcy Costs

The proposed rule at Sec. 1980.148 contained several revisions to

the Agency's loss claim procedures with regard to the costs incurred

when a borrower files for protection under the provisions of the

bankruptcy code. The most consequential of these changes is the

reversal of current policy prohibiting the payment of legal fees and

appraisal fees in a bankruptcy. A large number of comments were

received on this proposal, with the majority in favor of the change.

However, several comments were received requesting that these fees not

be covered or that they be covered at a reduced percentage. The

comments suggest that inclusion of these fees in the lender's

guaranteed loss will reduce a lender's incentive to minimize these

expenses and exacerbate the Government's losses on these loans. As

stated in the discussion of this change in the proposed rule, the

Agency believes that payment of the guaranteed percentage of legal fees

in a bankruptcy is a legitimate and logical extension of current

policies on the payment of a lender's losses. Also, this change will

benefit more family farmers and ranchers by encouraging lenders who

have not previously participated in the guaranteed loan program to now

make loans. Many lenders have said that one

[[Page 7373]]

of the reasons they do not participate, or participate at a minimum

level in the Agency's guaranteed loan program, is because the Agency

does not cover all fees with the guarantee. Maintaining the

reasonableness of legal fees is an issue that will have to be dealt

with through appropriate guaranteed loan portfolio management. The

Agency will retain the option of scrutinizing a lender's claimed

expenses and reducing a loss claim request when a lender has not

monitored expenses and has allowed unfettered fees to accumulate.

Where appraisals are concerned, the court often requires the lender

to have the collateral appraised, or at least share in the cost of an

appraisal. The Agency allows appraisal costs in a liquidation loss

claim, and this change will make bankruptcy procedures more consistent.

More importantly, the coverage of the cost of an appraisal will assure

that, in bankruptcy cases, accurate representations of security values

will be obtained.

Several comments suggested modifications in the final rule, such as

limiting coverage of lender legal fees to 50 percent, making sure that

the fees are not excessive, clarifying what expenses are reasonable,

requiring prior approval of estimated legal fees, and not guaranteeing

legal fees at all. One comment suggested that covering legal fees is

detrimental to the borrower. The Agency will only guarantee reasonable

legal fees. We believe, and lenders have stated, that they are more

likely to aggressively act in bankruptcy cases if they know that such

costs are covered by the guarantee. While a lender's aggressive action

in bankruptcy may be viewed as adverse to a borrower, the borrower's

interest is protected by the court. The Agency's exposure on the

guarantee is with the lender. The Agency believes it is unlikely that a

borrower will lack due process as a result of covering legal fees under

the guarantee. Since the Agency believes that the commenter's

suggestion embellishes the likely effect of the rule, it will not adopt

the comment. It is in the Government's interest to assure that the

lender takes every action to protect its loan security and ensure that

losses are minimized. The overriding consideration is that more lenders

will participate in the guaranteed loan program, increasing credit

availability and providing a benefit to family farmers and ranchers.

The suggestion that the Agency pre-approve estimates of fees was

also not adopted. Agency approval of an estimated expense is time

consuming and burdensome on both the Agency and the lender and serves

no purpose other than to have an estimate which may be higher or lower

than the actual amount.

Also, in response to another comment, the Agency will guarantee

attorney fees based upon the assumption that lenders will be using

sound, licensed, professional legal counsel when involved in such an

action. Losses incurred as a result of servicing deficiencies may not

be paid under a loss claim. Such deficiencies may include the failure

of a lender's legal counsel to represent its interest by not filing

objections where appropriate or other actions.

On a related subject, a comment suggested that FSA guarantee legal

fees incurred outside of bankruptcy, as well as fees incurred as a

result of lender liability suits brought by the borrower. For the

former, the rule provides that lenders subtract reasonable liquidation

expenses from the proceeds received from a liquidation action. However,

lender liability suits are actions specific to the relationship between

the lender and the borrower. As such, they are recognized as a risk of

business for which the Government is neither responsible, nor prepared

to assume responsibility for under the guarantee.

This rule does not expound on what the Agency regards as reasonable

or frivolous expenses as suggested by several comments. The Agency

acknowledges the potential for inconsistency in how ``frivolous'' or

``unreasonable'' is determined. By ``frivolous'', the Agency is

referring to those expenses which, in its opinion, the lender's

attorney cannot legitimately claim, or the lender cannot legitimately

request coverage of by FSA. The decision of what is ``reasonable'' is

situational. The Agency believes that the terms ``frivolous'' and

``unreasonable'' are sufficiently precise to establish standards of

``reasonable'' expenses. The standards are based on each case

considering the legal costs in the locality, the size of the debt, the

type of security, and the amount of opposition encountered. The

expenses will be adjusted based on a comparison of each of these items

for similar cases in the area. Guidance on review and approval of

bankruptcy loss claims will be included in the Agency field office

handbooks. Current policy of not covering the lender's in house, or

normal operating expenses, will continue. See Sec. 762.148(b)(1)(i) of

the final rule.

Default Meeting

One comment requested that the Agency require its personnel to be

included in a meeting described in the proposed rule at

Sec. 1980.143(b)(3). The Agency does not feel that it is necessary to

attend the meeting between the lender and the borrower to discuss the

loan delinquency. Agency personnel have the option to attend the

meeting, if requested by the lender, if they are unsure what actions

may or may not jeopardize the guarantee. However, the lender often

needs to act quickly and there may be scheduling conflicts. Placing

Agency employees at the meeting can leave the impression with the

borrower that Agency guidance regarding regulations means the FSA

employee is making the decisions. The loan is the lender's and it is

the lender's responsibility to service it.

Liquidation

Several comments were received regarding the time frames lenders

are required to meet in a liquidation action. A similar comment

suggested that the Agency not require the consideration of interest

assistance prior to liquidation. Both comments suggest removal of

proposed Sec. 1980.143(b)(3)(v). The reasons for the suggestion are

understandable, as nothing is accomplished by the required 60 day

waiting period. Nonetheless, lenders who participate in the Agency

guaranteed loan program are required by Sec. 351(g) the CONACT to wait

60 days after considering interest assistance before initiating

liquidation. However, if restructuring is not an option and liquidation

should proceed, the lender can conduct preliminary activities to

liquidation, to expedite recoveries after the 60 day period has passed.

Also, if the borrower waives interest assistance, liquidation may begin

immediately. This rule includes clarification of how interest

assistance is considered in conjunction with a distressed servicing

action and the FSA handbooks will include additional guidance on how

this provision is to be dealt with. The Agency believes the other time

frames for liquidations provided are reasonable considering the

complexities involved in any liquidation action.

A similar comment asked the Agency to clarify how the borrower's

eligibility for interest assistance is automatically determined upon

receipt of the default status report. As stated above, interest

assistance will not cure a default, except as part of a rescheduling

proposal. In response to this comment, the Agency added language to

Sec. 762.143(b)(iii) to state that lender's consideration of a borrower

for interest assistance will be included on a default status report.

This amended procedure will advise the Agency that interest assistance

has been considered, and to assure that the

[[Page 7374]]

interest assistance has been considered in all cases.

Liquidation Plans

Several comments requested that the Agency not require PLP lenders

to submit liquidation plans, while other comments requested that the

Agency not require lenders prepare liquidation plans. The first

suggestion is being adopted and Sec. 762.149(b)(2) is revised so that

PLP lenders are not required to submit liquidation plans unless the

lender's agreement requires it. PLP lenders will be required to have a

plan developed for liquidation, although each PLP liquidation plan may

differ slightly, as spelled out in the PLP agreement. Agency monitoring

of default status reports, which will contain previous actions and

planned actions, will allow Agency officials to monitor PLP progress on

liquidations. As far as non PLP lenders are concerned, the Agency feels

that a liquidation plan is necessary to protect the Government's

interest, and provide guidance on the status of defaulted guaranteed

loans. Plans can be brief as long as they include the items required to

be addressed by Sec. 762.149(b). Agency personnel must be kept informed

when a guaranteed loan moves to the liquidation stage. The liquidation

plan's preparation assures the Agency that repurchase from a secondary

market holder has been considered and advance preparation to minimize

losses has begun. Also it serves to assure the lender that the Agency

is in agreement with its actions, so misunderstandings may be avoided.

The Agency was requested not to specify how estimated loss payments

will be applied. The comment stated that since interest accrual ceases

upon payment of the estimated loss claim, it does not matter how the

lender applies the loss claim payment. The application of the proceeds

becomes insignificant because interest accrual on the defaulted loan

ceases. The Agency is adopting this comment and has amended

Sec. 762.149(d)(2) accordingly.

The Agency was also requested to respond to lenders' liquidation

plans sooner than 30 days. The Agency agrees that there is little

justification for the 30 day period since the Agency reply requirement

is based on a complete plan and the Agency must simply respond with an

approval, request for clarification or additional information. As a

result, Sec. 762.149(c)(2) was revised to state that the Agency will

respond within 20 calendar days; otherwise, the lender may assume the

plan is approved and proceed with reasonable actions to protect its

interest and liquidate the loan.

A commenter suggested that the Agency hold a lender harmless for

liquidation actions taken prior to FSA concurrence as long as they are

prudent and reasonable. The standard to which a lender will be held is

``reasonableness.'' The Agency will not penalize a lender in this

situation for reasonable actions. This comment will be addressed

further as an administrative matter in the Agency handbook, providing

that loss claims will only be reduced as far as the lender's actions

contributed to the loss.

Several comments requested that the Agency not require a

liquidation value appraisal be provided with a liquidation plan and

another suggested requiring a value in between the liquidation value

and the market value to be bid at any forced security sale. The

comment's suggestion that all estimated losses be based upon a market

value appraisal, less estimated liquidation costs, is being adopted.

The Agency agrees that the ``liquidation value'' term is confusing when

used in context of liquidation plans and estimated loss claims. Section

762.149(b)(4) has been revised to require the lender to provide a net

recovery value determination, defined in the final rule as the

difference between market value and anticipated selling expenses. At a

minimum the lender must bid the lesser of this value or the unpaid

guaranteed loan balance at any forced sale. See Sec. 762.149(h). This

complies with standard industry practices and the Agency sees no

benefit in bidding higher than net recovery value at a distress sale.

Another comment on this section requested that the Agency be flexible

on the requirement to obtain a balance sheet as part of the liquidation

plan, as it may be difficult for a lender to obtain a current balance

sheet from a distressed borrower. The comment is not being adopted;

however, clarification of expectations when a borrower is uncooperative

has been added to Sec. 762.149(b)(1). The Agency would expect the

lender to provide the most recent financial information available in

these instances.

Protective Advances

Comments were received requesting the Agency raise the limits on

protective advances proposed in Sec. 1980.149(e)(1). The proposed rule

required that protective advances in excess of $500 for SELs and $3,000

for CLP lenders must be approved in writing by the Agency. These limits

have been in place for several years and the Agency agrees that costs

have increased and these limits may be outdated. Therefore the rule has

been revised to raise the limits for CLP lenders to $5,000 and SELs to

$3,000. The Agency believes that these limits are sufficient for

advances that a lender must make before receiving a written response

from the Agency. PLP lenders will make protective advances in

accordance with the PLP agreement. These limits do not apply to

emergency advances described in Sec. 762.146(a).

Net Recovery Value

The Agency received a comment suggesting that it amend the

definition of net recovery value to reflect the difference between the

market value and the lender's cost of liquidation, instead of the

Government's cost. We have adopted this suggestion and made the change

in Sec. 762.102(b).

Another comment suggested the Agency define net recovery value. The

proposed rule at Sec. 1980.102(b) did define net recovery value;

however, further clarification was needed regarding the term

``estimated future value'' which was used in the definition. Section

762.102(b) has been revised to replace that element of net recovery

value with ``market value.'' This value, less the lender's estimated

cost associated with the disposal of the property, is the net recovery

value. Further guidance on net recovery value calculations and their

use in loan servicing actions will be provided in FSA handbooks.

Interest Accrual

One comment requested that the Agency clarify interest accrual on

loss claims. The suggestion is being adopted. While the rule clearly

states that interest accrual will cease upon the payment of an

estimated loss claim, the comment is concerned about a case where no

loss is expected, but there is a loss after final disposition. Section

762.149(d)(2) requires the lender to provide the Agency a loss estimate

of zero, whereupon interest accrual will cease on the defaulted loan.

This will encourage the lender to liquidate the account expeditiously

and provide the Agency with a record of a liquidating account. The

lender may collect all manner of late charges, fees, costs, and

interest on the loan up to the point it is paid in full, as long as

security proceeds are sufficient to pay the entire debt. If a loss

occurs upon submission of the final claim, the guaranteed percentage of

the loss will be paid; however, interest that accrues after receipt of

the no-loss estimate will not. This is consistent with the handling of

those accounts that have an additional final loss, not including

interest accrual which ceased

[[Page 7375]]

upon the Agency's payment of an estimated loss claim.

Final Loss Payment

Several comments suggested clarification of the Agency's policies

and procedures on payment of final loss settlements contained in

proposed Sec. 1980.149(i). One comment dealt with losses when a lender

takes possession of real estate collateral. The comment requested that

the Agency allow lenders to request a final loss payment upon the

borrower's transfer of the security, provided the lender receives the

full appraised value of the security. A related comment requested that

all final losses be based upon the ultimate disposition of collateral.

Agency experience and common sense, as discussed in the proposed rule,

indicates that few lenders opt for final payment prior to ultimate

disposition. In order to establish consistency in the final payment

process and avoid the misunderstandings that have occurred, this seldom

used option was eliminated.

One comment requested the Agency clarify proposed

Sec. 1980.149(i)(6) as to how the deduction for the value of security

that has not been accounted for will be calculated. Failure to obtain a

lien on, monitor, inspect, or properly apply proceeds from the sale of

collateral in most cases will be used as a reason for a reduction or

denial of a lender's claim under a guarantee due to negligent

servicing. However, the fact that there is unaccounted for security

will not necessarily cause a reduction because of negligent servicing.

The decision will be based upon the lender's servicing and collection

efforts. Also the Agency will not penalize a lender for servicing

deficiencies that did not contribute materially to a loss. The Agency

has clarified this provision in Sec. 762.149(i)(6) as suggested.

Future Recovery

Another comment requested that the Agency include specific

procedures and time frames for additional collection actions after a

guaranteed loan loss claim has been paid. The proposed rule at

Secs. 1980.149(j) and 1980.141(f) outlined what the lender's

responsibility is for future collections. The rule proposed submission

of an annual report on all unsatisfied accounts for three years

following payment of a claim. Sections 762.149(j) and 762.141(f) adopts

these provisions unchanged. Further explanation of the administrative

aspects of the rule will be provided in the Agency handbook.

Release of Liability

One commenter questioned why the Agency is giving the lender

release of liability authority. The meaning of the comment is unclear

since Secs. 1980.146(b) and (c) of the proposed rule provided for

Agency approval of release of liability in the case of SEL and CLP

lenders. Also, as outlined in the proposed rule, releases of liability

will only occur in cases of divorce, bankruptcy, withdrawal from the

operation (without retention of any farm assets), and liquidation, and

will be based on the strength of the remaining liable party. The Agency

estimates that this new authority will not impact current loss levels.

Termination

One comment was received requesting that the termination of

guaranteed loans be expanded to include the denial of loss claims upon

written notification by the Agency. The comment is not being adopted,

as such a provision is included in the guarantee document itself. Also,

termination of the guarantee automatically occurs upon the denial of a

loss claim after all appeal rights are concluded. Requiring Agency

personnel to specifically state this in a letter is an administrative

issue that will be covered in the Agency handbook. Similarly, it was

suggested that the Agency require lenders to return guarantees marked

paid in full on all paid guaranteed loans. The Agency has revised

Sec. 762.149(i)(11) to require this.

Interest Assistance

On February 28, 1991, Farmers Home Administration (FmHA) published

an interim rule [56 Fed. Reg. 8258-8272] with a comment period ending

April 29, 1991. The Omnibus Budget Reconciliation Act of 1990: (1)

increased the potential level of government reimbursement for interest

rate reductions made by lenders on guaranteed farm loans; (2) extended

the potential term of interest rate reduction on guaranteed farm loans;

and (3) extended authorization for the subsidy program through

September 30, 1995. On February 10, 1996, it was extended until

November 30, 2002. See Pub. L. 104-105 Sec. 220. It was necessary to

implement this rule upon publication to provide assistance to a large

number of farmers who would otherwise be unable to obtain sufficient

credit to operate in 1991. In response to the interim rule, 175

respondents from 24 States and the District of Columbia commented in

writing. Many of the respondents' letters contained comments on a

number of the sections of the interim rule. Comments were received from

individuals, Agency employees, interest groups, lenders, bankers

associations, Farmer Mac, Members of the Congress, and the Department

of Treasury. Several comments complimented various segments of the

program.

There were four comments on the consideration of significant non-

essential assets. Of those, one comment recommended that significant

non-essential assets be made available for security but that their sale

not be forced or assumed in cash flow. A second comment suggested that

all members of entities be required to pledge all non-essential assets.

Two respondents requested that borrowers be required to liquidate

significant non-essential assets before the interest assistance loan is

closed or before the subsidy is continued. In the interim rule, cash

flow is calculated based on the assumption that significant non-

essential assets will be sold. There is no requirement to actually sell

non-essential assets if the obligations can be met otherwise. The

Agency has adopted the recommendation to continue with the policy of

the interim rule, with a clarification in Sec. 762.150(b)(3) to

consider non-essential assets of entity members. FSA has a long-

standing policy not to provide subsidized credit to enable applicants

to retain assets which are not essential to the farming operation.

The interim rule provided for a floating maximum subsidy rate not

to exceed 4 percent. Two respondents commented that it was clearly the

intent of the legislation that the 4 percent subsidy be made available

to all eligible borrowers based on need. One comment suggested that the

maximum rate available be reduced in stages over the life of the

agreement.

Under the interim rule, the level of interest assistance to be

received is determined and set at .25 percent increments. One hundred

fourteen comments objected to the use of the increments. The Agency

agrees that projected farm budgets cannot be as precise as the .25

percent increment required and implied. Granting interest assistance at

the 4 percent level in every case would give recipients subsidy for

their need, and increase their probability of remaining a viable

farming enterprise. On December 17, 1993, the Agency published a change

at 58 FR 65871,65887 adopting the recommendation to determine and set

interest assistance at 4 percent in all interest assistance situations

which require any level of subsidy. This is adopted at

Sec. 762.150(d)(1)(i).

[[Page 7376]]

The Agency changed from incremental amounts of interest assistance

to a straight subsidy amount of 4 percent on December 17, 1993. The

Agency is considering whether alternative methods such as a return to

the use of increments in determining subsidy levels would be

appropriate. During the review of the regulations, questions were

raised as to whether alternative subsidy calculation methods would

produce a cost savings and increase the number of producers that could

be helped. By using incremental subsidy, rather than a 4 percent

subsidy, the Agency might be able to target the amount of interest

assistance subsidy paid more closely to borrower need, reducing the

assistance in some cases, so that more qualifying producers could be

assisted with the available subsidy. To assist us in considering

alternative proposals, we are specifically asking for comments

regarding the use of incremental subsidies, at what increments should

the subsidy be established, and any other alternative methods of

establishing the subsidy rate.

The interim rule provides for interest assistance payments to be

made to lenders on the basis of claims which can be submitted only once

annually. All comments on this issue wanted to be able to submit claims

more often than once annually. Various methods of payment were

suggested by the comments. Based upon the comments received, the Agency

believes that more frequent claims may be conducive to lenders sale of

the guaranteed portion of loans with interest assistance into the

secondary market and may allow the lender to offer a slightly lower

interest rate to the borrower. However, the lender's increased earnings

would be minimal and may or may not be passed on to the borrower in the

form of lower rates. Because Agency resources are limited, processing

frequent (i.e., monthly) claims would overload Agency offices.

Therefore, the Agency has decided to continue to allow claims only at

12-month intervals.

All comments regarding the cap on variable interest rates were in

opposition to it. The Agency has adopted the recommendation to remove

the cap on variable interest rate increases to be consistent with other

loan programs and the industry standard. See Sec. 762.150(b)(7).

The interim rule required that the need for interest assistance be

reviewed annually, and the level of assistance be adjusted if

necessary. One hundred twenty-one separate comments requested various

changes in this requirement. Most of the comments recommended the

review period be increased to 2 or 3 years, several recommended a 5

year interval and others objected the review, but offered no

alternative. The Agency acknowledges that periodic reviews place a

burden on the lender. However, this requirement was established as a

control to prevent borrowers whose financial position improves from

receiving unneeded subsidy in later years of the loan. The Agency has

considered the comments and believes that less frequent reviews will

create a significant risk of payment of excess subsidy. Therefore, the

Agency has decided to not change the review period.

Eight comments were received regarding the minimum loan terms for

interest assistance. Minimum terms are specified as a safeguard to

prevent use of a reduced payment term which would increase installments

so that an applicant or borrower, who would otherwise not need interest

assistance, might qualify. Two of these comments suggested that

existing loans whose original terms met the requirements, even though

they do not meet them now, should qualify for interest assistance.

Other comments suggested permitting a balloon payment in 5 or 10 years.

Balloon installments place additional risk on the long term viability

of the operation and are not acceptable for borrowers in need of a

subsidy. The Agency has changed Sec. 762.150(b)(1)(iii) to consider the

20-year requirement on farm ownership and soil and water loans secured

by real estate, to begin on the loan closing date (on loans with

existing guarantees) instead of the effective date of the interest

assistance agreement. This is consistent with the intent of the

provision, and reduces the cost and paperwork for borrowers who had a

loan with terms of 20 years or more, but have less than 20 years

remaining.

The interim rule required that requests for interest assistance on

annual operating loans and lines of credit be accompanied by a monthly

cash-flow budget. The Agency received seven comments in opposition to

the requirement. The purpose of this budget is to accurately estimate

the maximum credit needs of the borrower and the average loan balance.

This is a fundamental part of sound credit analysis. Therefore, the

Agency is not adopting this suggestion, since it would reduce the

quality of the analysis.

Three comments discussed the issue of the inadequacy of

compensation for lenders for the extra work required by the subsidy

program. Two of them suggested higher interest rates or assessing fees

to the borrower as compensation. One comment suggested that the Agency

pay a fee to the lender to cover additional costs. It is not reasonable

to expect that borrowers whose financial position allows them to

qualify for the subsidy program to afford the additional cost for

payment of a fee. Section 351(c) of the CONACT prohibits the Agency

from paying a fee in addition to 100% of the cost of interest

reduction. Therefore, the Agency has not adopted these suggestions.

One comment requested clarification of the penalty for lenders who

fail to complete annual analyses or submit claims within the 60-day

timeframe. The Agency is concerned that the analysis needs to be tied

to the claim to encourage timely analysis and planning. Section

762.150(d)(1)(ii) has been revised to encourage filing within 60 days

and state that failure to submit a claim within 1 year will result in

forfeiture of the payment.

Several comments requested that the Agency establish timeframes to

process claims. The Agency agrees that claims should be processed in a

timely manner. Suggested timeframes have been established in the agency

handbook.

The interim rule limited the term of interest assistance to 10

years on each loan. Eighty-seven comments were received on this

subject; one suggested that we should make the term of eligibility

limitation per borrower rather than per loan, two suggested allowing

interest assistance for the life of the loan, one was concerned that

the period of assistance is too long, and 83 were pleased to see the

increase from 3 to 10 years. The program is designed to provide

temporary assistance to borrowers. It is most reasonable to tie the

eligibility period to the borrower rather than any particular loan.

Tying eligibility to any loan provides an almost unending subsidy as

borrowers can receive additional loans and continue the subsidy almost

indefinitely. The Agency adopted the recommendation to limit the term

of interest assistance to 10 consecutive years per borrower.

The interim rule required a positive cash flow (with a 10-percent

margin) to be eligible for interest assistance. This subject drew a

variety of comments from 94 respondents. A few comments were in support

of the interim rule while the vast majority were opposed to various

aspects of the margin requirement. Recommendations ranged from deleting

the requirement altogether to allowing a greater than 10-percent

margin. Many respondents suggested allowing continuation of interest

assistance or applying subsidy to existing guaranteed

[[Page 7377]]

loans, with no margin requirement. The Agency continues to believe that

as a cash flow lender, a margin of at least 10 percent of the term debt

payments is essential for an applicant to have reasonable prospects for

success. See the definition of positive cash flow contained in

Sec. 762.102, which is required in Sec. 762.150(b)(4)(i) for interest

assistance on new guaranteed loans. However, it also agrees that

withdrawing or prohibiting subsidy in cases where the Agency already

has exposure only increases that exposure and is not consistent with

program objectives. The Agency partially adopted this recommendation by

deleting the requirement for a margin on continuation requests or

existing loans. See Sec. 762.150(b)(5)(i).

The interim rule provides for the level of need for subsidy to be

based upon a projected cash flow. One comment suggested that a second

needs test should be calculated at the end of the claim period based on

the borrower's actual performance, to determine the level of subsidy to

be paid. In order for the borrower and lender to make sound business

decisions, they must be able to project the effective interest rate for

the next plan period. Since this recommendation would reduce the

ability to plan, the Agency is not adopting it.

One respondent requested clarification on the method of performing

the needs test on multiple loans. This clarification has been provided

in the Agency handbook and lender manual.

One comment suggested that the definition of ``positive cash flow''

be added. An explanation of positive cash flow has been added in

Sec. 762.102.

Two respondents requested guidance on accounting for the subsidy

portion of the interest payment. This is a management decision to be

made by each individual lender and should not be dictated by the

Agency. Therefore, no change is made.

One respondent requested clarification as to whether ``other debt''

is to be considered for restructuring before interest assistance is to

be considered. This is not a requirement but an option under the

interim rule. No change is being made.

Many of the respondents who sent similar letters, recommended that

the Agency not cancel interest assistance due to a court ordered

reduction in the interest rate. Such a policy could result in having to

process two claims. For administrative simplicity, the Agency prefers

that the lender request the interest reduction through the loss claim

process rather than through an interest assistance claim. The interest

assistance agreement is changed to clarify this point. The interest

assistance agreement will also be revised for administrative

simplicity, to say that interest assistance will be canceled when a

debt write down is approved.

One comment requested clarification that lenders can reduce their

interest rate voluntarily in conjunction with interest assistance. This

has always been the policy and clarification is added to

Sec. 762.150(b)(7).

One comment feels that the proposed rule contains more stringent

rules and will hinder the ability of Agency direct loan customers to

graduate to guaranteed loans. The Agency feels that the new program is

less stringent and should be more appealing as several of the changes

being made with this final rule will be more beneficial to the loan

applicant and lender. Examples of these changes include a simplified

claim process, Agency timeframes to process claims, reduced margin

requirements for servicing, and elimination of .25 percent increments.

One respondent commented that the Agency does not seem to trust the

commercial lender in implementing the interest assistance program. The

regulations of this program reflect a balance of internal controls to

protect the Government's interest, with a workable program to benefit

the borrower and to appeal to lenders. No change will be made.

One comment suggested that mid-year adjustments of the subsidy

level should be available. Such an adjustment would not be significant

to either the lender or the borrower, especially since elimination of

the .25 percent increments, and would add to the administrative time

required of all parties. No change is made.

Thirty-four comments recommended limiting a borrower's effective

interest rate to a level no lower than the limited resource rate for

the same loan type. The limited resource rate is the lowest rate

charged for Agency direct loans. However, the standards for the

guaranteed program do not correlate with the direct loans program. Such

a limitation would be administratively burdensome to the lender and

would complicate the program. Therefore, the Agency is not adopting

this recommendation.

Seventy-nine respondents, requested that the Agency adopt a policy

that no guarantee fee will be charged for loans in which a majority of

the funds are used to refinance Agency loans. This would encourage

graduation of borrowers from the direct loan program to the guaranteed

loan program. The Agency implemented this recommendation without

publication in 1993 and in Sec. 762.130(d)(4).

Eighty-three comments, stated the amount of paperwork and

preparation time involved with the interest assistance application

process will prove too difficult and costly for borrowers and banks and

will decrease participation in the program. No specific changes were

recommended. Every effort has been made to minimize paperwork, while

protecting the interest of the Government and meeting statutory

requirements. Many changes that are being made in this rule will reduce

the paperwork associated with interest assistance loans. Examples

include a much less complex claims process, simplified needs test, and

elimination of an amortization schedule for loans with equal payments.

The Agency will continue to accept comments on specific changes which

will result in a burden reduction.

Twenty-two comments requested that consideration be given to an

Agency developed software program that would complete forms associated

with interest assistance. Development of software for public use is

outside the scope of the Agency's current focus. Commitment of time

necessary for development, service and maintenance of such software

would reduce the effectiveness of the Agency's other loan programs and

the software is available commercially. The Agency will not adopt this

recommendation at this time.

One comment suggested that an amortization table beyond the initial

24 months is not useful in analyzing the request. For loans with

unequal payments, this schedule is necessary to evaluate the long-term

viability of the plan. Since it is not essential for loans with equally

amortized installments, the Agency is changing the requirement to

exclude loans with equal payments from the amortization table.

Four comments recommended allowing lenders to cancel interest rate

buy down (IRBD) and have the interest rate revert back to the rate in

effect before IRBD. This recommendation cannot be adopted because it

would result in windfall gains to lenders while offering no benefit to

the borrower or the Agency.

One comment recommended that a provision be made for the Agency to

cancel interest assistance if borrowers do not adhere to their plan.

While this would be prudent lending, it is nearly impossible to monitor

and enforce such a requirement and would be primarily subjective. If

borrowers do not adhere to the plan, the appropriate remedy is

[[Page 7378]]

liquidation. The change will not be adopted.

Various comments concerning forms were received; as a result, the

forms were redesigned for clarity.

Justification for Effective Date

Good cause is shown for an immediate effective date because of the

need to accelerate the availability of assistance under this program.

Numerous natural disasters throughout the country have reduced farm

production and widespread reductions in commodity prices have lowered

income which has resulted in deteriorating financial conditions for

many producers. As a result of those deteriorating financial

conditions, we anticipate an increased demand for guaranteed farm

loans. These streamlining regulations will enable the Agency to serve

the needs of the financially stressed farmers and lenders more quickly

and efficiently; therefore an immediate implementation is justified.

List of Subjects

7 CFR Part 762

Agriculture, Loan programs--Agriculture.

7 CFR Part 1980

Agriculture, Loan programs--Agriculture.

The Farm Service Agency adopts the proposed rule published

September 25, 1998, in the Federal Register [63 FR 51458-51488] and

also adopts its interim rule published February 28, 1991, in the

Federal Register [56 FR 8258-8272] with changes based upon comments

received. Accordingly, 7 CFR chapters VII and XVIII are amended as

follows:

7 CFR Chapter VII

1. Part 762 is added to read as follows:

PART 762--GUARANTEED FARM LOANS

Sec.

762.1-762.100 [Reserved].

762.101 Introduction.

762.102 Abbreviations and definitions.

762.103 Full faith and credit.

762.104 Appeals.

762.105 Eligibility and substitution of lenders.

762.106 Preferred and certified lender programs.

762.107-762.109 [Reserved].

762.110 Loan application.

762.111-762.119 [Reserved].

762.120 Loan applicant eligibility.

762.121 Loan purposes.

762.122 Loan limitations.

762.123 Insurance and farm inspection requirements.

762.124 Interest rates, terms, charges, and fees.

762.125 Financial feasibility.

762.126 Security requirements.

762.127 Appraisal requirements.

762.128 Environmental and special laws.

762.129 Percent of guarantee and maximum loss.

762.130 Loan approval and issuing the guarantee.

762.131-762.139 [Reserved].

762.140 General servicing responsibilities.

762.141 Reporting requirements.

762.142 Servicing related to collateral.

762.143 Servicing distressed accounts.

762.144 Repurchase of guaranteed portion from a secondary market

holder.

762.145 Restructuring guaranteed loans.

762.146 Other servicing procedures.

762.147 Servicing shared appreciation agreements.

762.148 Bankruptcy.

762.149 Liquidation.

762.150 Interest assistance program.

762.151-762.159 [Reserved].

762.160 Sale, assignment and participation.

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

PART 762--GUARANTEED FARM LOANS

Secs. 762.1-762.100 [Reserved].

Sec. 762.101 Introduction.

(a) Scope. This subpart contains regulations governing Operating

Loans 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, or age, 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. 762.105,

(ii) Certified Lender, or

(iii) Preferred Lender under Sec. 762.106.

(3) Lenders may continue to make loans under Approved Lender

Program (ALP) agreements until they expire; however, these agreements

will not be renewed when they expire. All ALP agreements with farm

credit institutions will expire on February 12, 2001.

(d) Type of guarantee. Guarantees are available for both a loan

note or a line of credit. A loan note is used for a loan of fixed

amount and term. A line of credit 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. Both

guarantees are evidenced by the same loan guarantee form.

(e) Termination of loan guarantee. The loan 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 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 guarantee will be returned to

the Agency office for cancellation within 30 days of the date of the

notice by the lender.

Sec. 762.102 Abbreviations and definitions.

(a) Abbreviations.

ALP--Approved lender program

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

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

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

a 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 such

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

stocks and bonds, and life insurance, which they are able to pledge for

the loan.

Basic Security. All farm machinery, equipment, vehicles, foundation

and breeding livestock herds and flocks, including replacements, and

real estate which serves as security for a loan guaranteed by the

Agency.

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

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

applicant is an entity, the average farm acreage of the 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 or loan guarantee 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.

Capital leases. 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:

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

the end of the lease term.

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

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

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

economic life of the leased property.

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

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

Cash flow budget. A projection listing all anticipated cash inflows

(including all farm income, nonfarm income and all loan advances) and

all cash outflows (including all farm and nonfarm debt service and

other expenses) to be incurred by the borrower during the period of the

budget. Cash flow budgets for loans under $50,000 do not require income

and expenses itemized by categories. A cash flow budget may be

completed either for a 12 month period, a typical production cycle or

the life of the loan, as appropriate. It may also be prepared with a

breakdown of cash inflows and outflows for each month of the review

period and includes the expected outstanding operating credit balance

for the end of each month. The latter type is referred to as a

``monthly cash flow budget''.

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

applicant, the cosigner

[[Page 7380]]

cannot be a member, partner, joint operator, or stockholder of the

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