# Implementation of Preferred Lender Program and Streamlining of Guaranteed Loan Regulations

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URL: https://www.frixlaw.com/law-library/documents/fr%3A99-3256

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** February 12, 1999
- **Citation:** 64 FR 7358

## Text

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

[[Page 7364]]

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A99-3256. Public record. Not legal advice.