[Title 7 CFR ]
[Code of Federal Regulations (annual edition) - January 1, 2004 Edition]
[From the U.S. Government Printing Office]



[[Page i]]



          7


          Parts 1950 to 1999

                         Revised as of January 1, 2004


          Agriculture
          
          


________________________

          Containing a codification of documents of general 
          applicability and future effect

          As of January 1, 2004
          With Ancillaries
                    Published by:
                    Office of the Federal Register
                    National Archives and Records
                    Administration
                    A Special Edition of the Federal Register

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                     U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2004



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                            Table of Contents



                                                                    Page
  Explanation.................................................       v

  Title 7:
    Subtitle B--Regulations of the Department of Agriculture 
      (Continued)
          Chapter XVIII--Rural Housing Service, Rural 
          Business-Cooperative Service, Rural Utilities 
          Service, and Farm Service Agency, Department of 
          Agriculture (Continued)                                    5
  Finding Aids:
      Table of CFR Titles and Chapters........................     555
      Alphabetical List of Agencies Appearing in the CFR......     573
      List of CFR Sections Affected...........................     583

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                     ----------------------------

                     Cite this Code: CFR
                     To cite the regulations in 
                       this volume use title, 
                       part and section number. 
                       Thus, 7 CFR 1950.101 
                       refers to title 7, part 
                       1950, section 101.

                     ----------------------------

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                               EXPLANATION

    The Code of Federal Regulations is a codification of the general and 
permanent rules published in the Federal Register by the Executive 
departments and agencies of the Federal Government. The Code is divided 
into 50 titles which represent broad areas subject to Federal 
regulation. Each title is divided into chapters which usually bear the 
name of the issuing agency. Each chapter is further subdivided into 
parts covering specific regulatory areas.
    Each volume of the Code is revised at least once each calendar year 
and issued on a quarterly basis approximately as follows:

Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1

    The appropriate revision date is printed on the cover of each 
volume.

LEGAL STATUS

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HOW TO USE THE CODE OF FEDERAL REGULATIONS

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Register page number of the latest amendment of any given rule.

EFFECTIVE AND EXPIRATION DATES

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inserted following the text.

OMB CONTROL NUMBERS

    The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires 
Federal agencies to display an OMB control number with their information 
collection request.

[[Page vi]]

Many agencies have begun publishing numerous OMB control numbers as 
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OBSOLETE PROVISIONS

    Provisions that become obsolete before the revision date stated on 
the cover of each volume are not carried. Code users may find the text 
of provisions in effect on a given date in the past by using the 
appropriate numerical list of sections affected. For the period before 
January 1, 2001, consult either the List of CFR Sections Affected, 1949-
1963, 1964-1972, 1973-1985, or 1986-2000, published in 11 separate 
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the revision dates of the 50 CFR titles.

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in the Code of Federal Regulations.

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[[Page vii]]

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                              Raymond A. Mosley,
                                    Director,
                          Office of the Federal Register.

January 1, 2004.

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                               THIS TITLE

    Title 7--Agriculture is composed of fifteen volumes. The parts in 
these volumes are arranged in the following order: parts 1-26, 27-52, 
53-209, 210-299, 300-399, 400-699, 700-899, 900-999, 1000-1199, 1200-
1599, 1600-1899, 1900-1939, 1940-1949, 1950-1999, and part 2000 to end. 
The contents of these volumes represent all current regulations codified 
under this title of the CFR as of January 1, 2004.

    The Food and Nutrition Service current regulations in the volume 
containing parts 210-299, include the Child Nutrition Programs and the 
Food Stamp Program. The regulations of the Federal Crop Insurance 
Corporation are found in the volume containing parts 400-699.

    All marketing agreements and orders for fruits, vegetables and nuts 
appear in the one volume containing parts 900-999. All marketing 
agreements and orders for milk appear in the volume containing parts 
1000-1199. Part 900--General Regulations is carried as a note in the 
volume containing parts 1000-1199, as a convenience to the user.

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[[Page 1]]



                          TITLE 7--AGRICULTURE




                 (This book contains parts 1950 to 1999)

  --------------------------------------------------------------------
                                                                    Part

  SUBTITLE B--Regulations of the Department of Agriculture (Continued)

chapter xviii--Rural Housing Service, Rural Business--
  Cooperative Service, Rural Utilities Service, and Farm 
  Service Agency, Department of Agriculture (Continued).....        1950

[[Page 3]]

  Subtitle B--Regulations of the Department of Agriculture (Continued)

[[Page 5]]



   CHAPTER XVIII--RURAL HOUSING SERVICE, RURAL BUSINESS--COOPERATIVE 
SERVICE, RURAL UTILITIES SERVICE, AND FARM SERVICE AGENCY, DEPARTMENT OF 
                         AGRICULTURE (CONTINUED)




  --------------------------------------------------------------------


  Editorial Note: Nomenclature changes to chapter XVIII appear at 59 FR 
66443, Dec. 27, 1994, 61 FR 1109, Jan. 16, 1996 and 61 FR 2899, Jan. 30, 
1996.

              SUBCHAPTER H--PROGRAM REGULATIONS (CONTINUED)
Part                                                                Page
1950            General.....................................           7
1951            Servicing and collections...................          10
1955            Property management.........................         164
1956            Debt settlement.............................         243
1957            Asset sales.................................         268
1962            Personal property...........................         269
1965            Real property...............................         307
1980            General.....................................         412

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              SUBCHAPTER H_PROGRAM REGULATIONS (CONTINUED)





PART 1950_GENERAL--Table of Contents




Subparts A-B [Reserved]

   Subpart C_Servicing Accounts of Borrowers Entering the Armed Forces

Sec.
1950.101 Purpose.
1950.102 General.
1950.103 Borrower owing FmHA or its successor agency under Public Law 
          103-354 loans which are secured by chattels.
1950.104 Borrower owing FmHA or its successor agency under Public Law 
          103-354 loans which are secured by real estate.
1950.105 Interest rate.

Subparts A-B [Reserved]



   Subpart C_Servicing Accounts of Borrowers Entering the Armed Forces

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



Sec. 1950.101  Purpose.

    Borrowers with accounts serviced by the Farmers Home Administration 
or its successor agency under Public Law 103-354 (FmHA or its successor 
agency under Public Law 103-354) who have entered or who are entering 
military service will require special treatment. This subpart prescribes 
the authorities, policies, and routines for servicing such cases in 
addition to those contained in other FmHA or its successor agency under 
Public Law 103-354 regulations.

[45 FR 43152, June 26, 1980]



Sec. 1950.102  General.

    (a) FmHA or its successor agency under Public Law 103-354 will do 
everything possible to assist borrowers entering the armed forces to 
adjust their affairs in contemplation of military service. It is not the 
policy FmHA or its successor agency under Public Law 103-354 to renew, 
postpone, or modify annual installments due under a promissory note 
because of the borrower's entry into the armed services. However, under 
the Soldiers' and Sailors' Civil Relief Act of 1940, the property of a 
borrower in the armed forces cannot validly be seized or sold by 
foreclosure or otherwise during the borrower's tenure of service, or for 
three months thereafter, except (1) pursuant to an agreement entered 
into by the borrower after having been accepted for service, or (2) by 
order of the Court. Any person causing an invalid sale to be made is 
guilty of a misdemeanor. Regardless of the foregoing, the long-time 
interest of the borrower can best be served by prompt and satisfactory 
arrangements for the use and protection, or disposition, of the security 
property in accordance with the policies expressed herein. Upon request, 
OGC will inform the State Director with respect to relief which may be 
secured by a borrower under the Soldiers' and Sailors' Civil Relief Act 
of 1940.
    (b) In connection with Multiple Housing loans to individuals, 
references to County Supervisor and County Office in this subpart will 
be read as District Director and District Office.

[50 FR 45763, Nov. 1, 1985]



Sec. 1950.103  Borrower owing FmHA or its successor agency under Public 
Law 103-354 loans which are secured by chattels.

    (a) Policy. (1) Borrowers who owe loans other than Farm Ownership 
(FO), Operating (OL), Soil and Water (SW), Recreation (RL), Emergency 
(EM), Economic Emergency (EE), Economic Opportunity (EO), Special 
Livestock (SL), Softwood Timber (ST) loans, and/or Rural Housing loans 
for farm service buildings (RHF). When information is received that a 
borrower is entering the armed forces, the County Supervisor will be 
responsible for contacting the borrower immediately for the purpose of 
reaching an understanding concerning the actions to take in connection 
with the FmHA or its successor agency under Public Law 103-354 loan 
indebtedness. The borrower will be permitted to retain the chattel 
security if arrangements can be worked out which are satisfactory to the 
borrower and FmHA or its successor agency under Public Law 103-354. 
However, because

[[Page 8]]

of the nature of chattel security, the borrower will be informed of the 
usual depreciation of such property and will be encouraged to sell the 
property and apply the proceeds to the loan(s). In most cases, the 
interests of both the borrower and the Government can best be served by 
arranging for a voluntary sale of the security. A borrower retaining 
security will be expected to make payments on the loan(s) equal to the 
scheduled payments.
    (2) Borrowers who owe FO, SW, RL, OL, EE, EM, SL, EO, and/or RHF 
loans. If the borrower is delinquent in accordance with subpart S of 
part 1951 of this chapter, or otherwise in default, the County 
Supervisor will send exhibit A and the appropriate attachments, as 
outlined in subpart S of part 1951 of this chapter. If the borrower is 
not delinquent, the County Supervisor will explain the options set out 
in paragraph (b) of this section.
    (b) Methods of handling. In carrying out the above policy, the cases 
of borrowers entering the armed forces will be handled in accordance 
with one of the following methods:
    (1) Voluntary sale of security. This will be accomplished in 
accordance with Sec. 1962.41 of subpart A of part 1962 of this chapter. 
Any necessary forms will be signed:
    (i) Before being accepted for service in the armed forces, if the 
sale is to be completed before the borrower is accepted for service, or
    (ii) After being accepted for service, if the sale cannot be 
completed before the borrower is so accepted. For this purpose, an 
individual will be considered as accepted for service after being 
ordered to report for induction, or, if in the enlisted reserve, after 
being ordered to report for service in the armed forces.
    (2) Assumption of indebtedness. This will be accomplished in 
accordance with Sec. 1962.34 of subpart A of part 1962 of this chapter.
    (3) Arrangements with third persons. When the borrower arranges with 
a relative or other reliable person to maintain the security in a 
satisfactory manner and to make scheduled payments, the State Director 
is authorized to approve the arrangement. In such a case, the borrower 
will be required to execute a power of attorney, prepared or approved by 
OGC, authorizing an attorney-in-fact to act for the borrower during the 
latter's absence.
    (4) Possible legal actions. If the borrower fails or refuses to 
cooperate in the servicing of the loan indebtedness secured by chattels 
in accordance with one of the methods set forth in this section, the 
borrower's case folder will be forwarded to the State Director for 
referral to OGC for legal advice as to the steps to be taken in 
protecting the Government's interest.
    (c) Statements of accounts and transfers. Borrowers entering the 
armed forces will be requested to designate mailing addresses for the 
delivery of statements of account. Any changes in these addresses will 
be processed on Form FmHA or its successor agency under Public Law 103-
354 450-10, ``Advice of Borrower's Change of Address or Name,'' with 
appropriate explanations. Under this procedure, a statement of account 
may be mailed to a location other than where the account is maintained 
and serviced. This is a deviation from the established procedure. These 
cases will not be transferred unless the security, when retained by the 
borrower in accordance with paragraph (b)(3) of this section, is moved 
into another County Office territory. Then the transfer will be 
processed through the use of Form FmHA or its successor agency under 
Public Law 103-354 450-5, ``Application to Move Security Property and 
Verification of Address,'' and Form FmHA or its successor agency under 
Public Law 103-354 450-10 with appropriate explanations. In cases when 
assumption agreements have been executed, statements of account will be 
mailed to the assuming borrower. Cases involving assumption agreements 
will be transferred when the assuming borrower moves from one County 
Office territory to another.

[45 FR 43152, June 26, 1980, as amended at 50 FR 45763, Nov. 1, 1985; 52 
FR 26133, July 13, 1987; 55 FR 40646, Oct. 4, 1990]

[[Page 9]]



Sec. 1950.104  Borrower owing FmHA or its successor agency under Public 
Law 103-354 loans which are secured by real estate.

    County Supervisors, to the greatest extent possible, should keep 
themselves informed of the plans of borrowers with FmHA or its successor 
agency under Public Law 103-354 loans secured by real estate who may 
enter the armed forces. They should encourage any borrower who is 
definitely entering the armed forces to consult with them before the 
borrower's military service begins concerning the most advantageous 
arrangements that can be made regarding the security. County Supervisors 
will assist these borrowers in working out mutually satisfactory 
arrangements. Borrowers who owe FO, SW, RL, OL, EE, EM, SL, EO, ST, and/
or RHF loans and who are delinquent or otherwise in default must be sent 
exhibit A and the appropriate attachments, as outlined in subpart S of 
part 1951 of this chapter. The County Supervisor will follow the 
directions in subpart A of part 1965 of this chapter for liquidating 
real estate security. FO, SW, RL, OL, EE, EM, SL, EO, ST and/or RHF 
borrowers who are not delinquent will have their accounts handled as set 
out in the following paragraphs.
    (a) Power of attorney. Borrowers entering the armed forces who 
retain ownership of the security should be encouraged to execute a power 
of attorney authorizing the person of their choice to take any actions 
necessary to insure proper use and maintenance of the security, payment 
of insurance and taxes, and repayment of the loan. No FmHA or its 
successor agency under Public Law 103-354 employee will act as attorney-
in-fact for a borrower. The State Director will consult with OGC 
concerning any limitations upon the use of a power of attorney under 
local law and the circumstances under which the power of attorney should 
be exercised. In general, either spouse may act as attorney-in-fact for 
the other spouse, but, in a few States, a spouse cannot exercise the 
power of attorney in connection with a sale or encumbrance of the 
homestead. In a majority of States, a power of attorney is revoked by 
the death of a person granting the power, but, in some States, the power 
of attorney executed by a person in the armed services remains valid 
until actual notice is received of the death of the person granting the 
power. A power of attorney should not be used in conveying title to the 
farm except in those States where the power is good until actual notice 
of death. The State Director will request OGC to prepare a satisfactory 
form of power of attorney which may be duplicated in the State Office 
and furnished to County Supervisors with a State supplement concerning 
its use.
    (b) Borrower retains ownership of the security. When a borrower 
retains ownership of the security, FmHA or its successor agency under 
Public Law 103-354 will assist in making arrangements for the use of the 
security which will protect the interests of both the Government and the 
borrower.
    (1) Leasing. It will be more satisfactory if the security is leased 
under a written lease in accordance with equitable leasing policies and 
applicable FmHA or its successor agency under Public Law 103-354 
procedures. The borrower should make arrangements for the rental income 
to be used for regular payments on the loan in order to avoid the 
accumulation of unpaid interest. The borrower also should make 
arrangements for the payment of taxes and insurance and maintenance of 
the security to avoid having these charges paid by the Government and 
then charged to the account. It would be desirable to provide that the 
lease will continue for the duration of the borrower's military service 
unless either party gives written notice of earlier cancellation of the 
lease.
    (2) Operation by family. When a borrower wishes to have the farm 
occupied and operated by family members or relatives without a written 
lease, the County Supervisor should advise the borrower as to whether or 
not the proposed arrangements will be in the best interests of the 
borrower and the Government. When the farm is to be operated by 
relatives, the hazards and disadvantages to the borrower and the 
Government which are inherent in unwritten contracts will be discussed, 
and every effort will be made to induce the

[[Page 10]]

borrower to enter into formal contractual arrangements whenever possible 
to do so.
    (c) Borrower does not retain ownership of the security. The security 
may be transferred to another approved applicant or sold in accordance 
with applicable procedure.
    (d) Borrower abandons the security or fails to make satisfactory 
arrangements. This paragraph does not apply to borrowers with FO, SW, 
RL, OL, EE, EM, SL, EO, ST and/or RHF loans. Those borrowers should be 
sent exhibit A and the appropriate attachments as outlined in subpart S 
of part 1951 of this chapter. When a borrower abandons the security or 
fails to make satisfactory arrangements for maintenance of the security 
and payment of taxes, insurance, and installments on the loan, the 
County Supervisor will send a complete report on the case to the State 
Director. The report will include all the information that can be 
obtained regarding the borrower's plans for the security and any 
evidence to indicate that abandonment has, in fact, taken place. In 
these instances, it must be recognized that the borrower may have 
entered into verbal arrangements for the care of the security without 
properly advising the County Supervisor. Whether such cases may be 
construed to be in violation of the provisions of the mortgage, so as to 
support foreclosure by order of the Court under the provisions of the 
Soldiers' and Sailors' Civil Relief Act of 1940, will need to be 
determined on an individual case basis by the State Director and OGC. 
Clear-cut abandonment cases or instances in which the borrower fails to 
take action to transfer or sell the property, while evidencing no 
interest in it or desire to retain it, will be processed in accordance 
with applicable procedures.
    (e) Statement of account. Borrowers entering the armed forces who 
retain ownership of the security will be requested to designate mailing 
addresses for the delivery of statements of account. Any changes in 
addresses will be processed on Form FmHA or its successor agency under 
Public Law 103-354 450-10 with appropriate explanations.

[45 FR 43152, June 26, 1980, as amended at 50 FR 45764, Nov. 1, 1985; 52 
FR 26134, July 13, 1987; 55 FR 40646, Oct. 4, 1990]



Sec. 1950.105  Interest rate.

    (a) The Soldiers and Sailors Relief Act requires that the effective 
interest rate charged a borrower who enters active military duty after a 
loan is closed will not exceed 6 percent. This applies only to full-time 
active military duty and does not include military reserve status or 
National Guard participation.
    (b) As soon as the County Supervisor verifies that a borrower is on 
active duty, the County Supervisor will send the borrower a letter which 
states that the interest rate on the borrower's FmHA or its successor 
agency under Public Law 103-354 loans will not exceed 6 percent. At the 
same time, the County Supervisor will send the Finance Office a 
memorandum which states that the borrower is on active duty and that 
interest of not more than 6 percent should accrue on the borrower's 
loans, effective as of the date of the memorandum or as of the date of 
the last payment, whichever is later, until further notice. If a 
borrower's interest rate on any loan is less than 6 percent, the loan 
will continue to accrue interest at the lower rate. The assistance under 
this section may not be retroactively applied.
    (c) As soon as the County Supervisor verifies that a borrower is no 
longer on active duty, the County Supervisor will send the Finance 
Office a memorandum advising them to terminate the 6 percent interest 
rate. The rate will revert to the note rate (or the payment assistance 
rate), effective with the next scheduled payment. The 6 percent interest 
rate will not be cancelled retroactively.
    (d) Additional directions for handling Single Family Housing Loans 
are contained in 7 CFR part 3550.

[52 FR 26134, July 13, 1987, as amended at 60 FR 55122, Oct. 27, 1995; 
67 FR 78329, Dec. 24, 2002]



PART 1951_SERVICING AND COLLECTIONS--Table of Contents




                  Subpart A_Account Servicing Policies

Sec.
1951.1 Purpose.
1951.2 Policy.
1951.3 Authorities and responsibilities.
1951.4-1951.6 [Reserved]

[[Page 11]]

1951.7 Accounts of borrowers.
1951.8 Types of payments.
1951.9 Distribution of payments when a borrower owes more than one type 
          of FmHA or its successor agency under Public Law 103-354 loan.
1951.10 Application of payments on production type loan accounts.
1951.11 Application of payments on real estate accounts.
1951.12 Changes in the application of loan payments.
1951.13 Overpayments and refunds.
1951.14 Recoverable and nonrecoverable cost charges.
1951.15 Return of paid-in-full or satisfied notes to borrower.
1951.16 Other servicing actions on real estate type loan accounts.
1951.17-1951.24 [Reserved]
1951.25 Review of limited resource FO, OL, and SW loans.
1951.26-1951.49 [Reserved]
1951.50 OMB control number.

Exhibit A to Subpart A--Notice to FmHA or its successor agency under 
          Public Law 103-354 Borrowers
Exhibit B to Subpart A--Notice of Change in Interest Rate

Subpart B [Reserved]

     Subpart C_Offsets of Federal Payments to USDA Agency Borrowers

1951.101 General.
1951.102 Administrative offset.
1951.103-1951.105 [Reserved]
1951.106 Offset of payments to entities related to debtors.
1951.107-1951.110 [Reserved]
1951.111 Salary offset.
1951.112-1951.135 [Reserved]
1951.136 Procedures for Department of Treasury offset and cross-
          servicing for the Rural Housing Service (Community Facility 
          Program only) and the Rural Business-Cooperative Service.
1951.137 Procedures for Treasury offset and cross-servicing for the Farm 
          Service Agency (FSA) farm loan programs.
1951.138-1951.149 [Reserved]
1951.150 OMB control number.

                    Subpart D_Final Payment on Loans

1951.151 Purpose.
1951.152 Definition.
1951.153 Chattel security or note-only cases.
1951.154 Satisfaction and release of documents.
1951.155 County and/or District Office actions.
1951.156-1951.200 [Reserved]

Subpart E_Servicing of Community and Direct Business Programs Loans and 
                                 Grants

1951.201 Purposes.
1951.202 Objectives.
1951.203 Definitions.
1951.204 Nondiscrimination.
1951.205 Redelegation of authority.
1951.206 Forms.
1951.207 State supplements.
1951.208-1951.209 [Reserved]
1951.210 Environmental requirements.
1951.211 Refinancing requirements.
1951.212 Unauthorized financial assistance.
1951.213 Debt settlement.
1951.214 Care, management, and disposal of acquired property.
1951.215 Grants.
1951.216 Nonprogram (NP) loans.
1951.217 Public bodies.
1951.218-1951.219 [Reserved]
1951.220 General servicing actions.
1951.221 Collections, payments, and refunds.
1951.222 Subordination of security.
1951.223 Reamortization.
1951.224 Third party agreements.
1951.225 Liquidation of security.
1951.226 Sale or exchange of security property.
1951.227 Protective advances.
1951.228-1951.229 [Reserved]
1951.230 Transfer of security and assumption of loans.
1951.231 Special provisions applicable to Economic Opportunity (EO) 
          Cooperative Loans.
1951.232 Water and waste disposal systems which have become part of an 
          urban area.
1951.233-1951.239 [Reserved]
1951.240 State Director's additional authorizations and guidance.
1951.241 Special provision for interest rate change.
1951.242-1951.249 [Reserved]
1951.250 OMB control number.
Exhibit A to Subpart E--Report on Servicing Action
Exhibit B to Subpart E--Agreement for New Member (With or Without 
          Withdrawing Member)
Exhibit C to Subpart E--Agreement for Withdrawal of Member (Without New 
          Member)
Exhibit D to Subpart E--Items to be Included in Transfer and Assumption 
          Dockets (if applicable)
Exhibit E to Subpart E--Interest Rate Requirements and Effective Dates
Exhibit F to Subpart E--Instruction to FmHA or its successor agency 
          under Public Law 103-354 Personnel to Implement Public Law 
          100-233
Exhibit G to Subpart E--Letter to Borrower Notifying of Choice of 
          Interest Rate

[[Page 12]]

Exhibit H to Subpart E--Rescheduling Agreement--Public Bodies

      Subpart F_Analyzing Credit Needs and Graduation of Borrowers

1951.251 Purpose.
1951.252 Definitions.
1951.253 Objectives.
1951.254 [Reserved]
1951.255 Nondiscrimination.
1951.256-1951.261 [Reserved]
1951.262 Farm Credit Programs-graduation of borrowers.
1951.263 Graduation on non-Farm Credit programs borrowers.
1951.264 Action when borrower fails to cooperate, respond or graduate.
1951.265 Application for subsequent loan, subordination, or consent to 
          additional indebtedness from a borrower who has been requested 
          to graduate.
1951.266 Special requirements for MFH borrowers.
1951.267-1951.299 [Reserved]
1951.300 OMB control number.
Exhibit A to Subpart F [Reserved]
Exhibit B to Subpart F--Suggested Outline for Seeking Information From 
          Lenders on Credit Criteria for Graduation of Single Family 
          Housing Loans

Subparts G-I [Reserved]

      Subpart J_Management and Collection of Nonprogram (NP) Loans

1951.451 General.
1951.452 Policy.
1951.453 [Reserved]
1951.454 Review of adverse decisions.
1951.455 NP loan making for Single Family Housing (SFH) and farm 
          property (real and chattel).
1951.456 [Reserved]
1951.457 Payments.
1951.458 Servicing real estate taxes.
1951.459 Preservation of security.
1951.460 Release of security property or sale or lease of related 
          property rights.
1951.461 Release of valueless FmHA or its successor agency under Public 
          Law 103-354 lien without monetary consideration.
1951.462 Deceased borrower.
1951.463 Transfer of security and assumption of indebtedness.
1951.464-1951.467 [Reserved]
1951.468 Liquidation.
1951.469 Actions after liquidation of property.
1951.470-1951.478 [Reserved]
1951.479 Pilot projects.
1951.480 [Reserved]
1951.481 FmHA or its successor agency under Public Law 103-354 
          Instructions.
1951.482-1951.500 [Reserved]

  Subpart K_Predetermined Amortization Schedule System (PASS) Account 
                                Servicing

1951.501 General.
1951.502 [Reserved]
1951.503 Authorities and responsibilities.
1951.504 Definitions and statements of policy.
1951.505 [Reserved]
1951.506 Processing payments.
1951.507 Maintaining borrower accounts.
1951.508-1951.509 [Reserved]
1951.510 Payment application.
1951.511 [Reserved]
1951.512 Changes in the application of loan payments.
1951.513 Overpayments and refunds to borrowers.
1951.514 Recoverable and non-recoverable cost charges.
1951.515 Promissory notes for borrowers who convert to PASS.
1951.516 [Reserved]
1951.517 Conversion from DIAS to PASS.
1951.518 Determining current loan balances for transfer.
1951.519-1951.547 [Reserved]
1951.548 Exception authority.
1951.549 [Reserved]
1951.550 OMB control number.

  Subpart L_Servicing Cases Where Unauthorized Loan or Other Financial 
                 Assistance Was Received_Farmer Programs

1951.551 Purpose.
1951.552 Definitions.
1951.553 Policy.
1951.554-1951.555 [Reserved]
1951.556 Initial determination that unauthorized assistance was 
          received.
1951.557 Notification to borrower.
1951.558 Decision on servicing actions.
1951.559-1951.560 [Reserved]
1951.561 Servicing options in lieu of liquidation or legal action.
1951.562-1951.567 [Reserved]
1951.568 Account adjustments and reporting requirements.
1951.569 Exception authority.
1951.570-1951.599 [Reserved]
1951.600 OMB control number.

Subpart M [Reserved]

  Subpart N_Servicing Cases Where Unauthorized Loan or Other Financial 
             Assistance Was Received_Multiple Family Housing

1951.651 Purpose.
1951.652 Definitions.
1951.653 Policy.
1951.654 Categories of unauthorized assistance.
1951.655 [Reserved]

[[Page 13]]

1951.656 Initial determination that unauthorized assistance was 
          received.
1951.657 Notification to recipient.
1951.658 Decision on servicing actions.
1951.659-1951.660 [Reserved]
1951.661 Servicing options in lieu of liquidation or legal action to 
          collect.
1951.662-1951.667 [Reserved]
1951.668 Servicing unauthorized assistance accounts.
1951.669 Exception authority.
1951.670-1951.699 [Reserved]
1951.700 OMB control number.

Subpart O_Servicing Cases Where Unauthorized Loan(s) or Other Financial 
     Assistance Was Received_Community and Insured Business Programs

1951.701 Purpose.
1951.702 Definitions.
1951.703 Policy.
1951.704-1951.705 [Reserved]
1951.706 Initial determination that unauthorized assistance was 
          received.
1951.707 Notification to recipient.
1951.708 Decision on servicing actions.
1951.709-1951.710 [Reserved]
1951.711 Servicing options in lieu of liquidation or legal action to 
          collect.
1951.712-1951.714 [Reserved]
1951.715 Account adjustments and reporting requirement.
1951.716 Exception authority.
1951.717-1951.749 [Reserved]
1951.750 OMB Control number.

Subparts P-Q [Reserved]

               Subpart R_Rural Development Loan Servicing

1951.851 Introduction.
1951.852 Definitions and abbreviations.
1951.853 Loan purposes for undisbursed RDLF loan funds from HHS.
1951.854 Ineligible assistance purposes.
1951.855-1951.858 [Reserved]
1951.859 Terms of loans.
1951.860 Interest on loans.
1951.861-1951.865 [Reserved]
1951.866 Security.
1951.867 Conflict of interest.
1951.868-1951.870 [Reserved]
1951.871 Post award requirements.
1951.872 Other regulatory requirements.
1951.873-1951.876 [Reserved]
1951.877 Loan agreements.
1951.878-1951.880 [Reserved]
1951.881 Loan servicing.
1951.882 [Reserved]
1951.883 Reporting requirements.
1951.884 Non-Federal funds.
1951.885 Loan classifications.
1951.886-1951.888 [Reserved]
1951.889 Transfer and assumption.
1951.890 Office of Inspector General and Office of General Counsel 
          referrals.
1951.891 Liquidation; default.
1951.892-1951.893 [Reserved]
1951.894 Debt settlement.
1951.895 [Reserved]
1951.896 Appeals.
1951.897 Exception authority.
1951.898-1951.899 [Reserved]
1951.900 OMB control number.

        Subpart S_ Farm Loan Programs Account Servicing Policies

1951.901 Purpose.
1951.902 General.
1951.903 Authorities and responsibilities.
1951.904 Mediation, reviews and appeals.
1951.905 [Reserved]
1951.906 Definitions.
1951.907 Notice of Loan Service Programs.
1951.908 Servicing financially distressed current borrowers.
1951.909 Processing primary loan service programs requests.
1951.910 Consideration of borrower's other assets for new applications.
1951.911 Homestead protection.
1951.912 Mediation.
1951.913 Servicing Net Recovery Buyout Recapture Agreements.
1951.914 Servicing shared appreciation agreements.
1951.915 [Reserved]
1951.916 Exception authority.
1951.917-1951.949 [Reserved]
1951.950 OMB control number.
Exhibit A to Subpart S--Notice of the Availability of Loan Servicing and 
          Debt Settlement Programs for Delinquent Farm Borrowers
Exhibit D to Subpart S [Reserved]
Exhibit G to Subpart S--Deferral, Reamortization, and Reclassification 
          of Distressed Farmer Program (FP) Loans for Softwood Timber 
          Production (ST) Loans
Exhibit H to Subpart S--Conservation Contract Program

                  Subpart T_Disaster Set-Aside Program

1951.951 Purpose.
1951.952 General.
1951.953 Notification and request for DSA.
1951.954 Eligibility and loan limitation requirements.
1951.955-1951.956 [Reserved]
1951.957 Eligibility determination and processing.
1951.958 Cancellation and reversal of DSA.
1951.959 Exception authority.
1951.960-1951.1000 [Reserved]

    Authority: 5 U.S.C. 301; 7 U.S.C. 1932 Note; 7 U.S.C. 1989; 31 
U.S.C. 3716; 42 U.S.C. 1480

    Editorial Note: Some of the exhibits referenced in this part 1951 
are not published in

[[Page 14]]

the Code of Federal Regulations. Exhibits are available in any FmHA or 
its successor agency under Public Law 103-354 office.



                  Subpart A_Account Servicing Policies

    Source: 50 FR 45764, Nov. 1. 1985, unless otherwise noted.



Sec. 1951.1  Purpose.

    This subpart sets forth the policies and procedures to use in 
servicing Farmer Program loans (FP) which include Softwood Timber (ST), 
Operating Loan (OL), Farm Ownership (FO), Soil and Water (SW), 
Recreation Loan (RL), Emergency Loan (EM), Economic Emergency Loan (EE), 
Special Livestock Loan (SL), Economic Opportunity Loan (EO), and Rural 
Housing Loan for farm service buildings (RHF) accounts. This subpart 
also applies to Rural Rental Housing Loan (RRH), Rural Cooperative 
Housing Loan (RCH), Labor Housing Loan (LH), Rural Housing Site Loan 
(RHS), and Site Option Loan (SO) accounts not covered under the 
Predetermined Amortization Schedule System (PASS). Loans on PASS will be 
administered under subpart K of part 1951 of this chapter. Cases 
involving unauthorized assistance will be serviced under Subparts L and 
N of this part. Cases involving graduation of borrowers to other sources 
of credit will be serviced under Subpart F of this part.

[52 FR 26134, July 13, 1987]



Sec. 1951.2  Policy.

    Borrowers are expected to pay their debts to the Farmers Home 
Administration or its successor agency under Public Law 103-354 (FmHA or 
its successor agency under Public Law 103-354) in accordance with their 
agreements and ability to pay. They will be encouraged to pay ahead of 
schedule, consistent with sound financial management. When borrowers 
have acted in good faith and have exercised due diligence in an effort 
to pay their indebtedness but cannot pay on schedule because of 
circumstances beyond their control, servicing actions will be consistent 
with the best interests of the borrower and the Government. It is the 
policy of this agency to service borrower loan account without regard to 
race, color, religion, sex, marital status, national origin, age, 
physical or mental handicap (borrower must possess the capacity to enter 
into a legal contract for services).



Sec. 1951.3  Authorities and responsibilities.

    County Supervisors and District Directors are responsible for 
servicing all FmHA or its successor agency under Public Law 103-354 
accounts serviced by the County and District Offices as prescribed by 
this subpart under the general guidance and supervision of District 
Directors and State Office personnel. Full use will be made of the 
County Office Management System in account servicing. For the purposes 
of this Subpart, all references to ``County Supervisor'' shall be 
construed to mean ``District Director'' for all loans serviced by the 
District Office.



Sec. Sec. 1951.4-1951.6  [Reserved]



Sec. 1951.7  Accounts of borrowers.

    (a) Accounts of active borrowers. The foundation for proper and 
timely debt payment is sound farm and home planning or budgeting, 
including plans for debt payment, supplemented by effective followup 
management assistance. Account servicing, therefore, must begin with 
initial planning and must be an integral part of analysis and subsequent 
planning, as well as follow-up management assistance.
    (b) Accounts of collection-only borrowers. (1) Collection-only 
borrowers are expected to pay debts to FmHA or its successor agency 
under Public Law 103-354 in accordance with their ability to pay. 
Efforts to collect such debts, including use of collection letters and 
account servicing visits, must be coordinated with other program 
activities. If these borrowers are unable to pay in full, appropriate 
debt settlement policies should be promptly applied.
    (2) Envelopes addressed to collection-only borrowers will bear the 
legend ``DO NOT FORWARD.'' When an envelope is returned indicating the 
borrower has moved, appropriate steps will be taken to determine the 
borrower's correct address.

[[Page 15]]

    (3) Regular County Office employees are generally expected to 
service the collection-only caseload when it is of moderate size. State 
Directors may assign additional employees to County Offices having large 
collection-only caseloads when necessary to service such cases to a 
prompt conclusion. State Directors may inform the National Office of the 
need for employing special collection personnel in urban areas having 
large collection-only caseloads when employees are not available to 
assign to such areas.
    (4) The following actions will be taken in servicing accounts owed 
by collection-only borrowers:
    (i) District Directors will review, yearly, all collection-only 
cases in each County Office with the County Supervisor as early in each 
fiscal year as possible. They will jointly agree on the actions to take 
and will complete Form FmHA or its successor agency under Public Law 
103-354 451-27, ``Review of Collection-Only Accounts.''
    (ii) District Directors will establish with County Supervisors a 
systematic plan for collecting the accounts or initiating appropriate 
debt settlement actions during the year.
    (iii) County Supervisors will include in their monthly calendars 
plans for servicing these accounts.
    (iv) On visits to County Offices, District Directors will review the 
progress being made by County Supervisors to insure that goals will be 
reached.
    (v) For collection-only accounts in District Offices, the State 
Director will review the accounts as required in paragraphs (b)(4)(i) 
through (b)(4)(iv) of this section and the District Director will 
service the account.
    (c) Notifying borrowers of payments. County Supervisors will notify 
borrowers of the dates and amounts of payments that have been agreed on 
for all types of accounts. Form FmHA or its successor agency under 
Public Law 103-354 451-3, ``Reminder of Payment to be Made,'' or similar 
form approved by the State Director, will be used. The form will not 
contain any language indicating that an account is delinquent. These 
notices will be timed to reach borrowers immediately before the receipt 
of the income from which the payments should be made or before the 
installment due date on the note, as appropriate, and may include other 
pertinent information such as a reference to agreements reached during 
the year and sources of income from which the payment was planned. Such 
notices need not be sent when frequent payments are scheduled and the 
borrower customarily makes the payments when due.
    (d) Subsequent servicing. (1) When a Farmer Program borrower fails 
to make a payment as agreed, the County Supervisor will notify the 
borrower in accordance with subpart S of part 1951 of this chapter.
    (2) When a borrower other than a Farmer Program borrower fails to 
make a payment as agreed, the County Supervisor will contact the 
borrower to discuss the reasons why the payment was not made and to 
develop specific plans, for making the payment. Form FmHA or its 
successor agency under Public Law 103-354 451-32, ``Notice of Payment 
Due,'' may be used to notify borrowers who make payments directly to the 
Finance Office that their payment has not been received. Form FmHA or 
its successor agency under Public Law 103-354 450-13, ``Request for 
Assignment of Income From Trust Property,'' may be used when other 
methods of loan collection fail and debt repayment is possible from 
trust income. In the event the borrower refuses to make the payment when 
income is available, or if it is determined that income will not be 
available to make the payment within a reasonable length of time and 
will not be available to make future payments, action will be taken to 
protect the Government's interest in accordance with applicable 
regulations. Followup actions of subsequent servicing will be noted on 
appropriate Management System Cards.
    (e) Maintaining records of accounts in County Offices. Records of 
the accounts of FmHA or its successor agency under Public Law 103-354 
borrowers will be maintained in the County Office on Forms FmHA or its 
successor agency under Public Law 103-354 1905-1, FmHA or its successor 
agency under Public Law 103-354 1905-5, FmHA or its successor agency 
under Public Law 103-354 1905-10, ``Management System Card-
Association,'' as provided in FmHA or its

[[Page 16]]

successor agency under Public Law 103-354 Instruction 1905-A (available 
in any FmHA or its successor agency under Public Law 103-354 office).
    (f) Inquiry for Multiple Family Housing (MFH) loans. Inquiry for all 
RRH, RCH, LH, RHS and SO loans and grants will be made through field 
terminals using procedures in the ``MFH Users Procedures'' manual or by 
contacting the MFH Unit in the Finance Office.
    (g) Inquiry for other than Multiple Family Housing (MFH) loans. 
Inquiry for these loan programs will be made through field terminals 
using procedures in the ``Automated Discrepancy Processing System 
(ADPS)'' manuals.
    (h) Loan Summary Statements. Upon request of a borrower, FmHA or its 
successor agency under Public Law 103-354 issues a loan summary 
statement that shows the account activity for each loan made or insured 
under the Consolidated Farm and Rural Development Act. The field office 
will post on the bulletin board a notice informing the borrower of the 
availability of the loan summary statement. See Exhibit A for a sample 
of the required notice.
    (1) The loan summary statement period is from January 1 through 
December 31. The Finance Office forwards a copy of Form FmHA or its 
successor agency under Public Law 103-354 1951-9, ``Annual Statement of 
Loan Account,'' to field offices to be retained in borrower files as a 
permanent record of borrower activity for the year.
    (2) Quarterly Forms FmHA or its successor agency under Public Law 
103-354 1951-9 are retained in the Finance Office on microfiche. These 
quarterly statements reflect cumulative data from the beginning of the 
current year through the end of the most recent quarter. If a borrower 
requests a loan summary statement with data through the most recent 
quarter, county supervisors may request copies of these quarterly or 
annual statements by sending Form FmHA or its successor agency under 
Public Law 103-354 1951-57, ``Request for Loan Summary Statement,'' to 
the Finance Office.
    (3) When a loan summary statement is requested by the borrower, the 
field office will copy the applicable annual or quarterly Forms FmHA or 
its successor agency under Public Law 103-354 1951-9. A copy(ies) of 
Form FmHA or its successor agency under Public Law 103-354 1951-9; a 
copy of Form FmHA or its successor agency under Public Law 103-354 1951-
58, ``Basis for Loan Account Payment Application for Farmer Program 
Loans;'' and a copy of the promissory note showing borrower installments 
will constitute the loan summary statement provided to the borrower.

[50 FR 45764, Nov. 1, 1985, as amended at 52 FR 11457, Apr. 9, 1987; 53 
FR 35716, Sept. 14, 1988; 54 FR 10269, Mar. 13, 1989]



Sec. 1951.8  Types of payments.

    (a) Regular payments. Regular payments are all payments other than 
extra payments and refunds. Usually, regular payments are derived from 
farm income, as defined Sec. 1962.4 of subpart A of part 1962 of this 
chapter. Regular payments also include payments derived from sources 
such as Agricultural Stabilization and Conservation Service payments 
(other than those referred to in paragraph (b) of this section), off-
farm income, inheritances, life insurance, mineral royalties and income 
from mineral leases (see Sec. 1965.17 (c) of subpart A of part 1965 of 
this chapter), including income from leases or bonuses. Regular payments 
in the case of a Section 502 RH loan to an applicant involved in a 
mutual self-help project will include loan funds advanced for the 
payment of any part of the first and second installments. All payments 
to the lock box facility(s) by direct payment borrowers are considered 
regular payments.
    (b) Extra payments. Extra payments are payments derived from:
    (1) Sale of chattels other than chattels which will be sold to 
produce farm income or real estate security, including rental or lease 
of real estate security of a depreciating or depleting nature.
    (2) Refinancing of the real estate debt.
    (3) Cash proceeds of real property insurance as provided in subpart 
A of part 1806 of this chapter (FmHA or its successor agency under 
Public Law 103-354 Instruction 426.1).
    (4) A sale of real estate not mortgaged to the Government, pursuant 
to a condition of loan approval.

[[Page 17]]

    (5) Agricultural Conservation Program payments as provided in 
subpart A of part 1941 of this chapter.
    (6) Transactions of a similar nature which reduce the value of 
security other than chattels which will be sold to produce farm income.
    (c) Refunds. Refunds are payments derived from the return of unused 
loan or grant funds, except that the term ``refunds'' as used in Form 
1940-17, ``Promissory Note,'' will be construed to mean the return of 
funds advanced for capital goods, when a loan is made for operating 
purposes.

[50 FR 45764, Nov. 1. 1985, as amended at 51 FR 4137, Feb. 3, 1986; 53 
FR 35717, Sept. 14, 1988; 58 FR 52646, Oct. 12, 1993]



Sec. 1951.9  Distribution of payments when a borrower owes more than 
one type of FmHA or its successor agency under Public Law 103-354 loan.

    ``Distribution'' means dividing a payment into parts according to 
the rules set out in this section. This section only applies after the 
County Supervisor determines the amount of proceeds that will be 
released for other purposes in accordance with the annual plan (Form 
FmHA or its successor agency under Public Law 103-354 431-2, ``Farm and 
Home Plan'') and Form FmHA or its successor agency under Public Law 103-
354 1962-1, ``Agreement for the Use of Proceeds/Release of Chattel 
Security.''
    (a) Distribution of regular payments. (1) When a borrower owes more 
than one type of FmHA or its successor agency under Public Law 103-354 
loan, regular payments received from each crop year's income will be 
distributed in accordance with the following priorities:
    (i) First, to an amount equal to any advances made by FmHA or its 
successor agency under Public Law 103-354 for the crop year's living and 
operating expenses. If no advances were made, distribute the payment 
according to paragraph (a)(1)(ii) of this section. If the amount of the 
payment was greater than the amount of any advances, the excess should 
be distributed according to paragraph (a)(1)(ii) of this section.
    (ii) Second, to FmHA or its successor agency under Public Law 103-
354 loans in proportion to the approximate amounts due on each for the 
year. In determining the amounts due for the year, deduct an amount 
equal to any advances for the year's living and operating expenses. If 
the amount of the payment exceeds the amount of any advances plus the 
amount due on each loan for the year, the excess should be distributed 
according to paragraph (a)(1)(iii) of this section.
    (iii) Third, to FmHA or its successor agency under Public Law 103-
354 loans in proportion to the delinquencies existing on each. If the 
amount of the payment exceeds the amount of any advances plus the amount 
due on each loan for the year plus any delinquencies, the excess should 
be distributed according to paragraph (a)(1)(iv) of this section.
    (iv) Fourth, as advance payments on FmHA or its successor agency 
under Public Law 103-354 loans. In making such distribution consider the 
principal balance outstanding on each loan, the security position of the 
liens securing each loan, the borrower's request, and related 
circumstances.
    (2) When the County Supervisor determines it is reasonable to expect 
that the income which will be available for payment on FmHA or its 
successor agency under Public Law 103-354 debts will be sufficient to 
pay the installments scheduled for the year under the first and second 
priorities, collections may be distributed so as to avoid unnecessary 
delinquencies, and regular payments derived from rental or lease of real 
estate security after approval of foreclosure or voluntary conveyance 
will be distributed to the real estate lien of the highest priority.
    (3) Payments will be distributed differently than the priorities 
provided in this section if accounts are out of balance or a different 
distribution is needed to protect the government's interest.
    (4) Any income received from the sale of softwood timber on marginal 
land converted to the production of softwood timber must be applied on 
the ST loan(s).
    (b) Distribution of extra payments. Extra payments will be 
distributed first to the FmHA or its successor agency under Public Law 
103-354 loan having highest priority of lien on the

[[Page 18]]

security from which the payment was derived. When the payment is in 
excess of the unpaid balance of the FmHA or its successor agency under 
Public Law 103-354 lien having the highest priority, the balance of such 
payment will be distributed to the FmHA or its successor agency under 
Public Law 103-354 loan having the next highest priority.
    (c) Application of payments. After the decision is reached as to the 
amount of each payment that is to be distributed to the different loan 
types, application of the payment will be governed by Sec. Sec. 1951.10 
or 1951.11 of this subpart as appropriate.

[50 FR 45764, Nov. 1, 1985, as amended at 52 FR 26134, July 13, 1987; 53 
FR 35717, Sept. 14, 1988]



Sec. 1951.10  Application of payments on production type loan accounts.

    Employees receiving payments on OL, EO, SW codes ``24,'' EM for 
subtitle B purposes, EE operating-type, and other production-type loan 
accounts will select, in accordance with the provisions of this section, 
the account(s) to which such payment will be applied. All payments on OL 
and EM loans approved on or before December 31, 1971, will be credited 
first to any administrative costs, then to noncapitalized interest, then 
to the amount of accrued deferred interest, and then to principal. All 
payments on all other loans including OL and EM loans approved after 
December 31, 1971, will be credited first to any administrative costs, 
then to noncapitalized interest, then to the amount of accrued deferred 
interest, then to interest accrued to the date of the payment and then 
to principal, in accordance with the terms of the note. This section 
only applies after the County Supervisor determines the amount of 
proceeds that will be released for other purposes in accordance with the 
annual plan (Form FmHA or its successor agency under Public Law 103-354 
431-2) and Form FmHA or its successor agency under Public Law 103-354 
1962-1.
    (a) Rules for selection of accounts. The following rules will govern 
the selection of accounts and installments to which payments will be 
applied. As used in this section, ``recoverable costs'' are those which 
the loan agreement documents say the borrower is primarily responsible 
for paying and which the government can charge to the borrower's 
account.
    (1) Payments from farm income or from assignments of income will be 
applied first to accounts with small balances, including recoverable 
costs, to remove such accounts from the records. Any balance will be 
applied on debts secured by the lien in the following order:
    (i) To amounts due or falling due on loans made in connection with 
the current year's operations, except:
    (A) When funds loaned for the purchase of capital goods were used to 
meet the current year's operating expenses, payments will be applied 
first to the final unpaid installments to the extent of the loan funds 
so used. These payments will be treated as extra payments.
    (B) When installments on loans previously made fall due before the 
installment on the loan for the current year's operations or when such 
loans are delinquent and it is anticipated that sufficient income will 
be received to meet the installment on the current year's operations 
when due, collections may be applied first to installments on loans made 
in previous years.
    (ii) To accounts having the oldest delinquencies, or if no 
delinquencies, to the oldest unpaid account, except that the amount 
available for payment on OL and EM loan accounts will be prorated 
between the two accounts on the basis of:
    (A) The delinquent amount owed on each, or
    (B) The total amount owed on each if there are no delinquencies.
    (2) Non-farm income and payments derived from the sale of real 
estate security, will be applied to the earliest account secured by the 
earliest lien covering such security. The amount to be applied to 
principal will be applied to the final unpaid installment(s).
    (3) On partial refunds of loan advances, the amount to be applied to 
the principal will be applied to the final unpaid installment on the 
note which evidences such advance; however, a refund of an advance for 
current farm and home expenses repayable within

[[Page 19]]

the year may be applied to the principal on the first unpaid installment 
on such note as a regular payment.
    (4) Total refunds of loan advances will be applied to the notes 
which evidence such advances.
    (5) In applying payments from sources other than those in paragraphs 
(a)(2), (3), and (4) of this section the borrower has the right to 
select the loan account or accounts on which such payments will be 
applied. In the absence of the borrower's selection, such payments 
generally will be applied in the following order:
    (i) To accounts with small balances, including recoverable costs.
    (ii) To accounts with the oldest unsecured note(s).
    (iii) To accounts with the oldest delinquencies.
    (iv) To accounts with the oldest secured note or notes.
    (6) Employees receiving collections are authorized to make 
exceptions to paragraphs (a)(1), (2), and (6) of this section when it is 
necessary to apply a part of a payment to delinquent accounts to prevent 
the Federal Statute of Limitations from being asserted as a defense in 
suits on FmHA or its successor agency under Public Law 103-354 claims.
    (b) Payments in full. Errors of a significant amount in computation 
or collection will be called to the attention of the collection official 
by the Finance Office. The borrower's note will not be returned until 
the balance on the loan account is paid in full. Claims by or on behalf 
of the borrowers that the amounts owed have been computed incorrectly 
will be referred to the Finance Office.

[50 FR 45764, Nov. 1, 1985, as amended at 53 FR 35717, Sept. 14, 1988; 
54 FR 46844, Nov. 8, 1989; 57 FR 18680, Apr. 30, 1992]



Sec. 1951.11  Application of payments on real estate accounts.

    (a) Regular payments. If a borrower owes more than one type of real 
estate loan, or has received initial and subsequent real estate loans on 
which separate accounts are maintained, payments on such accounts should 
be applied so as to maintain the note accounts approximately in balance 
at the end of the year with respect to installments due on the notes, 
other charges, and delinquencies.
    (b) Refunds and extra payments. (1) Refunds will be applied to the 
note representing the loan from which the advance was made.
    (2) Extra payments will be applied to the note secured by the 
earliest mortgage on the property from which the extra payment was 
obtained.
    (3) Funds remaining from an RH grant or a combination loan and 
grant, after completion of development, will be refunded. If the 
borrower received a combination loan and grant, the remaining funds up 
to the amount of the grant are considered to be grant funds.
    (c) County Office actions. (1) The collecting official will complete 
Form FmHA or its successor agency under Public Law 103-354 451-1, 
``Acknowledgment of Cash Payment,'' in accordance with the FMI when cash 
or money orders are received as a payment.
    (2) The collection official will complete Form FmHA or its successor 
agency under Public Law 103-354 451-2, ``Schedule of Remittances,'' in 
accordance with the FMI.
    (d) Finance Office handling. (1) Regular payment will be handled as 
follows.
    (i) Payments will be applied first to satisfy any administrative 
costs such as a charge for an uncollectible check. (The amounts of any 
such charges are available from any FmHA or its successor agency under 
Public Law 103-354 office.)
    (ii) Amounts paid on direct loan accounts will be credited to the 
borrower's account as of the date of Form FmHA or its successor agency 
under Public Law 103-354 451-2 or for direct payments the date payment 
is received in the Finance Office, and will be applied first to a 
portion of any interest which accrues during the deferral period, second 
to interest accrued to the date received and third to principal, in 
accordance with the terms of the note.
    (iii) Amounts paid on insured loan accounts will be credited to the 
borrower's account as of the date of Form FmHA or its successor agency 
under Public Law 103-354 451-2 or for direct payments the date payment 
is received in the Finance Office, and will be applied in the following 
order:

[[Page 20]]

    (A) Advances from the insurance funds as shown on the latest Form 
FmHA or its successor agency under Public Law 103-354 389-404, 
``Analysis of Accounts Maturing.'' (If the collection is intended for 
final payment of the loan, or to pay the insurance account in connection 
with an assumption agreement, the collection will be applied first to 
the interest accrued on the advance to the date of the payment.)
    (B) Principal advanced from the insurance fund.
    (C) Unamortized costs.
    (D) Amount due for amortized costs for taxes and insurance.
    (E) Unpaid loan insurance charges, including the current year's 
charge, when applicable.
    (F) First to a portion of any interest which accrues during the 
deferral period, second to accrued interest to the date of the payment 
on the note account and then to the principal balance of the note 
account in accordance with the terms of the note.
    (2) Extra payments and refunds will be credited to the borrower's 
note account as of the date of Form FmHA or its successor agency under 
Public Law 103-354 451-2 and will be applied first to a portion of any 
interest which accures during the deferral period, second to interest 
accrued to the date of the receipt and third to principal in accordance 
with the terms of the note. The amount to be applied to principal will 
be applied to the final unpaid installment(s). Extra payments and 
refunds will not affect the schedule status of a borrower except 
indirectly in connection with the amortization of a direct loan.
    (3) The Finance Office will remit final payments promptly to 
lenders. Other collections (regular, extra, and refunds) applied to a 
borrower's insured note will be accumulated until the annual installment 
due date, and will be remitted along with any advances from the 
insurance fund to the lender within 30 days after the installment due 
date. All payments to a lender will be credited first to interest to the 
date of the Treasury check and then to principal. Since the application 
of a payment to a borrower's account with the Government and the 
Government's account with a lender is of a different effective date, the 
balance owed by a borrower to the government and by the Government to a 
lender ordinarily will not be the same.

[50 FR 45764, Nov. 1, 1985, as amended at 54 FR 46845, Nov. 8, 1989]



Sec. 1951.12  Changes in the application of loan payments.

    (a) Authority to change payments. County Supervisors and Assistant 
County Supervisors are hereby authorized to approve requests for changes 
in the application of payments between loan accounts when payments have 
been applied in error and such requests conform to the policies 
expressed in this Subpart. However, no change will be made if the 
payment applied in error resulted in the payment in full of any FmHA or 
its successor agency under Public Law 103-354 loan and the canceled note 
or notes have been returned to the borrower.
    (b) Form FmHA or its successor agency under Public Law 103-354 1951-
7, ``Request for Change in Application.'' Requests for changes in 
application of payments will be made on Form FmHA or its successor 
agency under Public Law 103-354 1951-7. For requests which County 
Supervisors or Assistant County Supervisors are authorized to approve, 
the County Supervisor or Assistant County Supervisor will sign the 
original of Form FmHA or its successor agency under Public Law 103-354 
1951-7 and forward it to the Finance Office. The Finance Office will 
send Form FmHA or its successor agency under Public Law 103-354 451-26 
to the County Office when the change is made on Finance Office records.
    (c) Changes by the Finance Office in application of remittances. (1) 
When reapplication of collection is made by the Finance Office Form FmHA 
or its successor agency under Public Law 103-354 451-8, ``Journal 
Voucher for Loan Account Adjustments,'' will be prepared. Form FmHA or 
its successor agency under Public Law 103-354 451-26 will be forwarded 
to the County Office to show the reapplication.
    (2) When necessary, the Finance Office will correct Form FmHA or its 
successor agency under Public Law 103-

[[Page 21]]

354 451-2 as prepared by the County Office.

[50 FR 45764, Nov. 1, 1985, as amended at 54 FR 18883, May 3, 1989]



Sec. 1951.13  Overpayments and refunds.

    (a) The Finance Office will mail any overpayment refund check to the 
County Supervisor, who will verify that the refund is due before 
delivering the check.
    (b) Borrower requests for overpayment refunds must be in writing. 
Borrowers will be discouraged from requesting refunds when the County 
Office records show that a refund is not due, however, the County 
Supervisor will forward any request to the Finance Office. Finance 
Office computations will control in determining the amount of any 
refund.
    (c) Underpayments or overpayments of less than $10 will not be 
collected or refunded (except as provided in paragraph (b) of this 
section) since the expense of processing the action would be more than 
the amount involved.



Sec. 1951.14  Recoverable and nonrecoverable cost charges.

    (a) The County Supervisor will:
    (1) Prepare vouchers for recoverable and nonrecoverable cost charges 
according to the applicable instruction for the type of advance being 
made. (``Recoverable costs'' is defined in Sec. 1951.10(a) of this 
subpart).
    (2) If a recoverable cost, show on the voucher the fund code to 
which the advance is to be charged.
    (3) If the cost item relates to security for more than one type of 
account, show the code for the loan secured by the earliest promissory 
note (if lien secures more than one note).
    (b) The Finance Office will forward Form FmHA or its successor 
agency under Public Law 103-354 451-26, to the County Office when the 
recoverable cost charge is processed.



Sec. 1951.15  Return of paid-in-full or satisfied notes to borrower.

    (a) Notes not held in County Office. When the original of the note 
is not held in the County Office the County Supervisor will request the 
Finance Office to acquire and forward the note to the County Office.
    (b) Return of notes after collection. When a note (or loan-type 
account) evidencing an OL, EM, EE, EO, special livestock (SL), SW loan 
coded ``24'', or other production-type loan has been satisfied by 
payment in full, the County Supervisor will examine the borrower's 
records in the County Office and determine that the account has been 
satisfied before delivering the note to the borrower (See Sec. 1962.27 
of subpart A of part 1962 on the satisfaction of chattel security 
instruments). The note(s) will be returned to the borrower immediately 
except that:
    (1) When the final payment is made in a form other than currency and 
coin, Treasury check, cashier's check, certified check, Postal or bank 
money order, bank draft, or a check issued by a responsible lending 
institution or a responsible title insurance or title and trust company, 
the note or notes will not be surrendered until 30 days after the date 
of final payment, and
    (2) When notes are needed in making marginal releases or 
satisfactions or security instruments, the notes will be held until the 
instruments are satisfied.
    (c) Surrender of notes to effect collection. (1) County Supervisors 
are authorized to surrender notes to borrowers when final payment of the 
amount due is made in the form of currency and coin, Treasury check, 
cashier's check, certified check, Postal or bank money order, bank 
draft, or a check issued by a responsible lending institution or a 
responsible title insurance or title trust company.
    (2) The amount due on the note(s) to be surrendered will be 
confirmed with the Finance Office. County Supervisors will request the 
original note(s) from the Finance Office if it is not in the County 
Office.
    (d) Return of notes reduced to judgment. Notes which have been 
reduced to judgment are a part of the court records and ordinarily 
cannot be withdrawn and returned to the borrower even after satisfaction 
of the judgment. Therefore, no effort will be made to obtain and return 
such notes except on the written request of the judgment debtor or 
debtor's attorney. Such requests will be referred to the Office of the 
General Counsel (OGC).

[[Page 22]]

    (e) Debt settlement case. See subparts B or C of part 1956 of this 
chapter for the handling of notes in debt settlement cases.
    (f) Lost notes. (1) All promissory notes dated on or after 11-1-73 
are held in the County Office. A few notes (with the exception of OL 
notes) are still held by investors. If a note dated prior to 11-1-73 
cannot be located in the County Office and it is needed for servicing 
the case, the County Supervisor will write a memorandum to the Finance 
Office explaining why the note is needed. The request should give the 
name and case number of the borrower, date and original amount of the 
loan, type of loan and loan code.
    (2) If a promissory note is lost in the County Office and it is 
needed for servicing a case, the State Director may authorize the County 
Supervisor to execute an appropriate affidavit regarding the lost note. 
The form of such an affidavit will be provided by OGC.

[50 FR 45764, Nov. 1, 1985, as amended at 51 FR 45432, Dec. 18, 1986; 53 
FR 13100, Apr. 21, 1988; 56 FR 10147, Mar. 11, 1991]



Sec. 1951.16  Other servicing actions on real estate type loan accounts.

    (a) Installment on note and other charges--(1) Direct loan accounts. 
For a borrower with a direct loan, the term ``installation on note and 
other charges,'' as used in this Subpart, will be the sum of the 
following:
    (i) Annual installment for the year as provided in the promissory 
note(s).
    (ii) Any recoverable cost charges paid for the borrower during the 
year. (``Recoverable costs'' is defined in Sec. 1951.10(a) of this 
Subpart.)
    (2) Insured loan accounts. ``Loan insurance charge'' means a 
separate insurance charge applying to FO and SW insured loans evidenced 
by promissory note forms bearing a form date before January 8, 1959. For 
all insured loans evidenced by note forms bearing a form date of January 
8, 1959, or later, the insurance charge is called ``annual charge'' and 
is included in the interest position of the annual installment in the 
note. For a borrower with an insured loan, the term ``Installment on 
note and other charge'' means the sum of the following:
    (i) Annual installment for the year as provided in the promissory 
note.
    (ii) Amounts owed the Agricultural Credit Insurance Fund. These 
amounts are covered by the general term ``Insurance Account'' and 
consist of the following:
    (A) Unpaid loan insurance charges from prior years.
    (B) Loan insurance charge for the current year. The loan insurance 
charge is computed on the basis of the amount of the unpaid principal 
obligation as of the installment due date and is due and payable on or 
before the next installment due date.
    (C) Any unpaid balance on advances from the insurance fund, 
including any recoverable cost charges paid for the borrower during the 
year.
    (D) Any accrued interest on advances from the insurance fund.
    (iii) The amounts owned on the insurance account must be paid by 
regular payments each year whether or not the note account is ahead of 
schedule.
    (b) Schedule status. For direct and insured loans, a borrower will 
be on schedule when the sum of regular payments through the last 
preceding due date of the note equals the sum of installments on the 
note and other charges due through the same date. Such a borrower will 
be ahead of schedule or behind schedule when the sum of such regular 
payments is larger or smaller, respectively, than the sum of such 
installments on the note and other charges.
    (c) Real estate payments. A borrower may make regular payments ahead 
of schedule at any time and use them later to forego payments or to 
supplement the amount available during any year for payment on the 
annual installment on the note and other charges. Refunds and extra 
payments will not be used in this way.



Sec. Sec. 1951.17-1951.24  [Reserved]



Sec. 1951.25  Review of limited resource FO, OL, and SW loans.

    (a) Frequency of reviews. OL, FO, and SW loans will be reviewed each 
year at the time the analysis is conducted in accordance with subpart B 
of part 1924

[[Page 23]]

of this chapter and any time a servicing action such as consolidation, 
rescheduling, reamortization or deferral is taken. The interest rate may 
not be changed more often than quarterly.
    (b) Method of review. (1) Each loan will be considered on its own 
merit.
    (2) The County Supervisor should consider:
    (i) The borrower's income and repayment record during the preceding 
years;
    (ii) The projections shown on the most recent Farm and Home Plan or 
other similar plan or operation acceptable to FmHA or its successor 
agency under Public Law 103-354, in light of the previous year's 
projected figures and actual figures; (See subpart B of part 1924 of 
this chapter)
    (iii) Whether improved production practices have been or need to be 
implemented;
    (iv) The borrower's progress as a farmer; and
    (v) All other factors which the County Supervisor believes should be 
considered.
    (3) The Farm and Home Plan projections for the coming year must show 
that the ``balance available to pay debts'' exceeds the amount needed to 
pay debts by at least 10 percent before an increase in interest rate is 
put into effect. Borrowers that continually purchase unplanned items 
without the County Supervisor's approval will have the interest rate on 
their loans increased to the current rate for that loan type. Borrowers 
that fail to provide the County Supervisor with the information needed 
to conduct the analysis required in subpart B of part 1924 of this 
chapter will have their interest rate on their loan increased to the 
current rate for the OL, FO, or SW loan as applicable. The rate may 
increase in increments of whole numbers to the current regular interest 
rate for borrowers. In the borrower's case file, the County Supervisor 
must document the unplanned purchases and the failure to provide 
information in a timely manner. The County Supervisor must write the 
borrower a letter which sets out the facts documented in the case file 
and advises the borrower that the interest rate will be increased unless 
the unplanned purchases cease or unless the borrower provides 
information in a timely manner. Whenever it appears that the borrower 
has a substantial increase in income and repayment ability or ceases 
farming, either the interest rate may be increased to the current rate 
for FO, OL or SW loans, as applicable, or the borrower will be graduated 
from the program as provided in subpart F of this part.
    (4) The County Office will be responsible for scheduling and 
completing the reviews.
    (5) Borrowers who have received a deferral under Subpart S of this 
part will not have the interest rate increased on their limited resource 
loans during the deferral period.
    (c) Processing. (1) If, after the review, the interest rate is to 
remain the same, no further action needs to be taken.
    (2) When the interest rate is increased to the current rate, the 
loan will be recorded as a regular loan and will no longer be considered 
a limited resource loan. The borrower must be notified in writing at 
least 30 days prior to the date of the change. Exhibit B of this subpart 
may be used as a guide. The effective date of the change in interest 
rate will be the effective date on Exhibit B. The borrower must be 
informed of the following for each loan:
    (i) The authorization for the change,
    (ii) Reason for change (repayment ability, etc.),
    (iii) The effective date and rate of the increase in interest,
    (iv) Amount of the new installments and dates due,
    (v) Right to appeal.
    (3) It is not necessary to obtain a new promissory note for this 
change in interest rate.

[50 FR 45764, Nov. 1, 1985, as amended at 53 FR 35717, Sept. 14, 1988; 
56 FR 3395, Jan. 30, 1991; 58 FR 15074, Mar. 19, 1993]



Sec. Sec. 1951.26-1951.49  [Reserved]



Sec. 1951.50  OMB control number.

    The collection of information requirements in Subpart A of part 1951 
have been approved by the Office of Management and Budget and assigned 
OMB control number 0575-0075.

[52 FR 26137, July 13, 1987]

[[Page 24]]

  Exhibit A to Subpart A of Part 1951--Notice to FmHA or its successor 
                agency under Public Law 103-354 Borrowers

    FmHA or its successor agency under Public Law 103-354 borrowers with 
farmer program and community program loan types made under the 
Consolidated Farm and Rural Development Act may request a loan summary 
statement which shows the calendar year account activity for each loan. 
Interested borrowers may request these statements through their local 
FmHA or its successor agency under Public Law 103-354 office.

[54 FR 10270, Mar. 13, 1989]

 Exhibit B to Subpart A of Part 1951--Notice of Change in Interest Rate

                              (insert date)

                    Notice of Change in Interest Rate

________________________________________________________________________

    (insert borrower's address)
Re: [squ] [squ]
    Fund code
    [squ] [squ]
    Loan number
    [squ] [squ]
Kind code
    Dear (insert borrower's name and case number): Your promissory note 
dated ------, for the original amount of ------ dollars ($------) 
provides for a change in interest rate for a limited resource loan in 
accordance with the Farmers Home Administration or its successor agency 
under Public Law 103-354 regulations.
    Effective (insert date) the interest rate on this loan will be ---- 
percent ( %) on the unpaid principal balance. Your installment due 
January 1, 19 , will be ------ dollars ($------). This change in 
interest rate is for the reason indicated below.

    [squ] Increase in repayment ability as per Farm and Home Plan dated 
------.
    [squ] (insert reason if other than above for increase in interest 
rate).

    You may appeal this action by writing to (hearing officer), 
(address), within 30 calendar days of the date of this letter, giving 
the reason why you believe this matter should be decided differently. 
This time may be extended if you cannot notify the hearing officer 
within 30 days for reasons beyond your control.

[56 FR 3396, Jan. 30, 1991]

Subpart B [Reserved]



     Subpart C_Offsets of Federal Payments to USDA Agency Borrowers



Sec. 1951.101  General.

    Federal debt collection statutes provide for the use of 
administrative, salary, and Internal Revenue Service (IRS) offsets by 
government agencies, including the Farm Service Agency (FSA), Rural 
Housing Service (RHS) for its community facility program, and Rural 
Business-Cooperative Service (RBS), herein referred to collectively as 
``United States Department of Agriculture (USDA) Agency,'' to collect 
delinquent debts. Any money that is or may become payable from the 
United States to an individual or entity indebted to a USDA Agency may 
be subject to offset for the collection of a debt owed to a USDA Agency. 
In addition, money may be collected from the debtor's retirement 
payments for delinquent amounts owed to the USDA Agency if the debtor is 
an employee or retiree of a Federal agency, the U.S. Postal Service, the 
Postal Rate Commission, or a member of the U.S. Armed Forces or the 
Reserve. Amounts collected will be processed as regular payments and 
credited to the borrower's account. USDA Agencies will process requests 
by other Federal agencies for offset in accordance with Sec. 1951.102 
of this subpart. This subpart does not apply to direct single family 
housing loans, direct multi-family housing loans, and the Rural 
Utilities Service. Section 1951.136 of this subpart only applies to RHS 
for its community facility program and RBS for the offset of Federal 
payments. Nothing in this subpart affects the common law right of set 
off available to USDA Agencies.

[67 FR 69671, Nov. 19, 2002]



Sec. 1951.102  Administrative offset.

    (a) General. Collections of delinquent debts through administrative 
offset will be taken in accordance with 7 CFR part 3, subpart B and 
Sec. 1951.106.
    (b) Definitions. In this subpart:
    (1) Agency means Farm Service Agency, Farm Loan Programs; Rural 
Housing Service, except direct Single Family Housing loans and direct 
Multi-

[[Page 25]]

Family Housing loans; and Rural Business-Cooperative Service, or any 
successor agency.
    (2) Contracting officer is any person who, by appointment in 
accordance with applicable regulations, has the authority to enter into 
and administer contracts and make determinations and findings with 
respect thereto. The term also includes the authorized representative of 
the contracting officer, acting within the limits of the 
representative's authority.
    (3) County Committee means the local committee elected by farmers in 
the county, as authorized by the Soil Conservation and Domestic 
Allotment Act and the Department of Agriculture Reorganization Act of 
1994, to administer FSA programs approved for the county as appropriate.
    (4) Creditor agency means a Federal agency to whom a debtor owes a 
monetary debt. It need not be the same agency that effects the offset.
    (5) Debt management officer means an agency employee responsible for 
collection by administrative offset of debts owed the United States.
    (6) Delinquent means a payment that has not been paid within 30 
calendar days after the due date.
    (7) Entity means a corporation, joint stock company, association, 
general partnership, limited partnership, limited liability company, 
irrevocable trust, revocable trust, estate, charitable organization, or 
other similar organization participating in the farming operation.
    (8) FP means Farm Programs.
    (9) FLP means Farm Loan Programs.
    (10) FSA means Farm Service Agency.
    (11) National Appeals Division means the organization within the 
Department of Agriculture that conducts appeals of adverse decisions for 
program participants under the purview of 7 CFR part 11.
    (12) Offsetting agency means an agency that withholds from its 
payment to a debtor an amount owed by the debtor to a creditor agency, 
and transfers the funds to the creditor agency for application to the 
debt.
    (13) Propriety means the offset is feasible. It includes offsetting 
a debtor's payments due any entity in which the debtor participates 
either directly or indirectly equal to the debtor's interest in the 
entity. To be feasible the debt must exist and be 60 days delinquent or 
past due for 90 days or the borrower must be in default of other 
obligations to the Agency, which can be cured by the payment of money.
    (14) Reviewing officer means an agency employee responsible for 
conducting a hearing or documentary review on the existence of debt and 
the propriety of administrative offset in accordance with 7 CFR 3.29. 
FSA District Directors or other State Executive Director designees are 
designated to conduct the hearings or reviews.

[65 FR 50602, Aug. 21, 2000, as amended at 67 FR 69671, Nov. 19, 2002]



Sec. Sec. 1951.103-1951.105  [Reserved]



Sec. 1951.106  Offset of payments to entities related to debtors.

    (a) General. Collections of delinquent debts through administrative 
offset will be in accordance with 7 CFR part 3, subpart B, and 
paragraphs (b) and (c) of this section.
    (b) Offsetting entities. Collections of delinquent debts through 
administrative offset may be taken against a debtor's pro rata share of 
payments due any entity in which the debtor participates when:
    (1) It is determined that FSA has a legally enforceable right under 
state law or Federal law, including program regulations at 7 CFR 
792.7(l) and 1403.7(q), to pursue the entity payment;
    (2) A debtor has created a shell corporation before receiving a 
loan, or after receiving a loan, established an entity, or has 
reorganized, transferred ownership of, or otherwise changed in some 
manner the debtor's operation or the operation of a related entity for 
the purpose of avoiding payment of the FSA, FLP debt or otherwise 
circumventing Agency regulations;
    (3) Assets used in the entity's operation include assets pledged as 
security to the Agency which have been transferred to the entity without 
payment to the Agency of the value of the security or Agency consent to 
transfer of the assets;
    (4) A corporation to which a payment is due is the alter ego of a 
debtor; or

[[Page 26]]

    (5) A debtor participates in, either directly or indirectly, the 
entity as determined by FSA.
    (c) Other remedies. Nothing in this section shall be deemed to limit 
remedies otherwise available to the Agency under other applicable law.

[65 FR 50603, Aug. 21, 2000]



Sec. Sec. 1951.107-1951.110  [Reserved]



Sec. 1951.111  Salary offset.

    Salary offset may be used to collect debts arising from delinquent 
USDA Agency loans and other debts which arise through such activities as 
theft, embezzlement, fraud, salary overpayments, under withholding of 
amounts payable for life and health insurance, and any amount owed by 
former employees from loss of federal funds through negligence and other 
matters. Salary offset may also be used by other Federal agencies to 
collect delinquent debts owed to them by employees of the USDA Agency, 
excluding county committee members. Administrative offset, rather than 
salary offset, will be used to collect money from Federal employee 
retirement benefits. For delinquent Farm Loan Programs direct loans, 
salary offset will not begin until the borrower has been notified of 
servicing options in accordance with 7 CFR 1951.907. In addition, for 
Farm Loan Programs direct loans, salary offset will not be instituted if 
the Federal salary has been considered on the Farm and Home Plan, and it 
was determined the funds were to be used for another purpose other than 
payment on the USDA Agency loan. For Farm Loan Programs guaranteed 
debtors, salary offset can not begin until a final loss claim has been 
paid. When salary offset is used, payment for the debt will be deducted 
from the employee's pay and sent directly to the creditor agency. Not 
more than 15 percent of the employee's disposable pay can be offset per 
pay period, unless the employee agrees to a larger amount. The debt does 
not have to be reduced to judgment or be undisputed, and the payment 
does not have to be covered by a security instrument. This section 
describes the procedures which must be followed before the USDA Agency 
can ask a Federal agency to offset any amount against an employee's 
salary.
    (a) Authorities. The following authorities are granted to USDA 
Agency employees in order that they may initiate and implement salary 
offset:
    (1) Certifying Officials are authorized to certify to the debtor's 
employing agency that the debt exists, the amount of the delinquency or 
debt, that the procedures in USDA Agency and United States Department of 
Agriculture's (USDA's) regulations regarding salary offsets have been 
followed, that the actions required by the Debt Collection Act have been 
taken; and to request that salary offset be initiated by the debtor's 
employing agency. This authority may not be redelegated.
    (2) Certifying Officials are authorized to advise the Finance Office 
to establish employee defalcation accounts and non-cash credits to 
borrower accounts in cases involving other debts, such as those arising 
from theft, fraud, embezzlement, loss of funds through negligence, and 
similar actions involving USDA Agency employees.
    (3) The Finance Office is authorized to establish defalcation 
accounts and non-cash credits to borrower accounts upon receipt of 
requests from the Certifying Officials.
    (b) Definitions--(1) Certifying Officials--State Directors; State 
Executive Directors; the Assistant Administrator; Finance Office; 
Financial Management Director; Financial Management Division, and the 
Deputy Administrator for Management, National Office.
    (2) Debt or debts. A term that refers to one or both of the 
following:
    (i) Delinquent debts. A past due amount owed to the United States 
from sources which include, but are not limited to, insured or 
guaranteed loans, fees, leases, rents, royalties, services, sales of 
real or personal property, overpayments, penalties, damages, interest, 
fines and forfeitures (except those arising under the Uniform Code of 
Military Justice).
    (ii) Other debts. An amount owed to the United States by an employee 
for pecuniary losses where the employee has been determined to be liable 
due to

[[Page 27]]

the employee's negligent, willful, unauthorized or illegal acts, 
including but not limited to:
    (A) Theft, misuse, or loss of Government funds;
    (B) False claims for services and travel;
    (C) Illegal, unauthorized obligations and expenditures of Government 
appropriations;
    (D) Using or authorizing the use of Government owned or leased 
equipment, facilities supplies, and services for other than official or 
approved purposes;
    (E) Lost, stolen, damaged, or destroyed Government property;
    (F) Erroneous entries on accounting record or reports; and,
    (G) Deliberate failure to provide physical security and control 
procedures for accountable officers, if such failure is determined to be 
the proximate cause for a loss of Government funds.
    (3) Defalcation account. An account established in the Finance 
Office for other debts owed the Federal government in the amount missing 
due to the action of an employee or former employee.
    (4) Disposable pay. Pay due an employee that remains after required 
deductions for Federal, State and local income taxes; Social Security 
taxes, including Medicare taxes; Federal retirement programs; premiums 
for life and health insurance benefits, and such other deductions 
required by law to be withheld.
    (5) Hearing Officer. An Administrative Law Judge of the USDA or 
another individual not under the supervision or control of the USDA, 
designated by the Certifying Official to review the determination of the 
alleged debt.
    (6) Non-cash credit. The accounting action taken by the Finance 
Office to credit and make a borrower's account whole for funds paid by 
the borrower but missing due to an employee's or former employee's 
actions.
    (7) Salary Offset. The collection of a debt due to the U.S. by 
deducting a portion of the disposable pay of a Federal employee without 
the employee's consent.
    (c) Feasibility of salary offset. The first step the Certifying 
Official must take to use this offset procedure is to decide, on a case 
by case basis, whether offset is feasible. If an offset is feasible, the 
directions in the following paragraphs of this section will be used to 
collect by salary offset. If the official making this determination 
decides that salary offset is not feasible, the reasons supporting this 
decision will be documented in the borrower's running case record in the 
case of delinquent debts, or the ``For Official Use Only'' file in cases 
of other debts. Ordinarily, and where possible, debts should be 
collected in one lump-sum; but payments may be made in installments. 
Installment deductions can be made over a period not greater than the 
anticipated period of employment. However, the amount deducted for a pay 
period will not exceed 15 percent of the disposable pay from which the 
deduction is made. If possible, the installment payment will be 
sufficient in size and frequency to liquidate the debt in approximately 
3 years. Based on the Comptroller General's decisions, other debts by 
employees cannot be forgiven. If the employee retires or resigns, or if 
employment ends before collection of the debt is completed, final salary 
payment, lump-sum leave, etc. may be offset to the extent necessary to 
liquidate the debt. Salary offset is feasible if:
    (1) The cost to the Government of collecting salary offset does not 
exceed the amount of the debt. County Committee members are exempt from 
salary offset because the amount collected by salary offset would be so 
small as to be impractical.
    (2) There are not any legal restrictions to the debt, such as the 
debtor being under the jurisdiction of a bankruptcy court, or the 
statute of limitations having expired. The Debt Collection Act of 1982 
permits offset of claims that have not been outstanding for more than 10 
years.
    (d) Notice to debtor. (1) After the Certifying Official determines 
that collection by salary offset is feasible, the debtor should be 
notified within 15 calendar days after the salary offset determination. 
This notice will notify the debtor of intended salary offset at least 30 
days before the salary offset begins. For Farm Loan Programs direct 
loans, this notice will be sent after

[[Page 28]]

the borrower is over 90 days past due and immediately after sending 
notification of servicing rights in accordance with 7 CFR 1951.907 of 
this subpart. For Farm Loan Programs guaranteed debtors, this notice 
will be sent after a final loss claim has been paid. The salary offset 
determination notice will be delivered to the debtor by regular mail.
    (2) The Debt Collection Act of 1982 requires that the hearing 
officer issue a written decision not later than 60 days after the filing 
of the petition requesting the hearing; thus, the evidence upon which 
the decision to notify the debtor is based, to the extent possible, 
should be sufficient for FmHA or its successor agency under Public Law 
103-354 to proceed at a hearing, should the debtor request a hearing 
under paragraph (f) of this section.
    (e) Notice requirement before salary offset. Salary offset will not 
be made unless the employee receives 30 calendar days written notice. 
This Notice of Intent (FmHA or its successor agency under Public Law 
103-354 Guide Letter 1951-C-4) will be addressed to the debtor or the 
debtor's representative. The Notice of Intent must be modified if it is 
addressed to the debtor's representative. In either case, the Notice of 
Intent will state:
    (1) It has been determined that the debt is owed, the amount of the 
debt, and the facts giving rise to the debt;
    (2) The cost to the Government of collecting salary offset does not 
exceed the amount of the debt;
    (3) There are not any legal restrictions that would bar collecting 
the debt;
    (4) The debt will be collected by means of deduction of not more 
than 15 percent from the employee's current disposable pay until the 
debt and all accumulated interest are paid in full;
    (5) The amount, frequency, approximate beginning date, and duration 
of the intended deductions;
    (6) An explanation of the requirements concerning interest, 
penalties and administrative costs, unless such payments are waived;
    (7) The employee's right to inspect and request a copy of records 
relating to the debt;
    (8) The employee's right to voluntarily enter into a written 
agreement for a repayment schedule with the agency different from that 
proposed by FmHA or its successor agency under Public Law 103-354, if 
the terms of the repayment proposed by the employee are agreeable with 
the agency;
    (9) That the employee has a right to a hearing conducted by an 
Administrative Law Judge of USDA or a hearing official not under the 
supervision or control of the Secretary of Agriculture, concerning the 
agency's determination of the existence or amount of the debt and the 
percentage of disposable pay to be deducted each pay period, if a 
petition for a hearing is filed by the employee as prescribed by FmHA or 
its successor agency under Public Law 103-354;
    (10) The timely filing of a petition for hearing will stay the 
collection proceedings;
    (11) That a final decision will be issued at the earliest practical 
date, but not later than 60 calendar days after the filing of petition 
requesting the hearing;
    (12) That any knowingly false or frivolous statements may subject 
the employee to disciplinary procedures, or penalties, under the 
applicable statutory authority;
    (13) Any other rights and remedies available to the employee under 
statutes or regulations governing the program for which the collection 
is being made;
    (14) That amounts paid on or deducted for the debt which are later 
waived or found not owed to the United States will be promptly refunded 
to the employee unless there are provisions to the contrary;
    (15) The method and time period for requesting a hearing; and
    (16) The name and address of an official of USDA to whom 
communications should be directed.
    (f) Debtor's request for records, offer to repay, request for a 
hearing or request for information concerning debt settlement--(1) If a 
debtor responds to FmHA or its successor agency under Public Law 103-354 
Guide Letter 1951-C-4 by asking to review and copy FmHA or its successor 
agency under Public Law 103-354's records relating to the debt, the 
Certifying Official will promptly respond by sending a letter which 
tells the debtor

[[Page 29]]

the location of the debtor's FmHA or its successor agency under Public 
Law 103-354 files and that the files may be reviewed and copied within 
the next 30 days. Copying costs (see subpart F of part 2018 of this 
Chapter) will be set out in the letter, as well as the hours the files 
will be available each day. If a debtor asks to have FmHA or its 
successor agency under Public Law 103-354 copy the records, a copy will 
be made within 30 days of the request.
    (2) If a debtor responds to FmHA or its successor agency under 
Public Law 103-354 Guide Letter 1951-C-4 by offering to repay the debt, 
the offer may be accepted by the Certifying Official, if it would be in 
the best interest of the government. FmHA or its successor agency under 
Public Law 103-354 Form Letter 1951-8 will be used if a repayment offer 
for an FmHA or its successor agency under Public Law 103-354 loan or 
grant is accepted. Upon receipt of an offer to repay, the Certifying 
Official will delay institution of a hearing until a decision is made on 
the repayment offer. Within 60 days after the initial offer to repay was 
made, the Certifying Official must decide whether to accept or reject 
the offer. This decision will be documented in the running case record 
or the ``For Official Use Only'' file, as appropriate, and the debtor 
will be sent a letter which sets out the decision to accept or reject 
the offer to repay. The decision to accept or reject a repayment offer 
should be based upon a realistic budget or farm and home plan and 
according to the servicing regulations for the type of loan(s) involved.
    (3) If a debtor responds to FmHA or its successor agency under 
Public Law 103-354 Guide Letter 1951-C-4 by asking for a hearing on FmHA 
or its successor agency under Public Law 103-354's determination that a 
debt exists and/or is due, or on the percentage of net pay to be 
deducted each pay period, the Certifying Official will notify the debtor 
in accordance with paragraph (g)(3) of this section and request the 
debtor's case file or the ``For Official Use Only'' file.
    (4) If a debtor is willing to have more than 15 percent of the 
disposable pay sent to FmHA or its successor agency under Public Law 
103-354, a letter prepared and signed by the debtor clearly stating this 
must be placed in the debtor's case file or the ``For Official Use 
Only'' file.
    (5) If a debtor who is an FmHA or its successor agency under Public 
Law 103-354 borrower requests debt settlement, the account must be in 
collection-only status or be an inactive account for which there is no 
security. The Certifying Official must inform the borrower of how to 
apply for debt settlement. Any application will be considered 
independently of the salary offset. A salary offset should not be 
delayed because the borrower applied for debt settlement.
    (6) The time limits set in FmHA or its successor agency under Public 
Law 103-354 Guide Letter 1951-C-4 and in paragraphs (f) (1), (2), and 
(3) of this section run concurrently. In other words, if a debtor asks 
to review the FmHA or its successor agency under Public Law 103-354 file 
and offers to repay the debt, the debtor cannot take 30 days to ask to 
review the file and then take another 30 days to offer to repay. The 
request to review the file and the offer to repay must both be made 
within 30 days of the date the debtor receives the notification letter.
    (7) If an employee is included in a bargaining unit which has a 
negotiated grievance procedure that does not specifically exclude salary 
offset proceedings, the employee must grieve the matter in accordance 
with the negotiated procedure. Employees who are not covered by a 
negotiated procedure must utilize the salary offset proceedings as 
outlined in FmHA or its successor agency under Public Law 103-354 Guide 
Letter 1951-C-4. The employee must be informed, in writing, which 
procedure to follow and, as appropriate, reference should be made to the 
appropriate sections of the negotiated agreement.
    (g) Hearings. (1) A hearing officer must be a USDA Administrative 
Law Judge or a person who is not a USDA employee. In order to ensure 
that a hearing officer will be available promptly when needed, 
Certifying Officials need to make appropriate arrangements with 
officials of nearby federal agencies for the use of each other's 
employees as hearing officers.

[[Page 30]]

    (2) Not later than 30 days from the date the debtor receives the 
Notice of Intent (FmHA or its successor agency under Public Law 103-354 
Guide Letter 1951-C-4), the employee must file with the Certifying 
Official issuing the notice, a written petition establishing his/her 
desire for a hearing on the existence and amount of the debt or the 
proposed offset schedule. The employee's petition must fully identify 
and explain all the information and evidence that supports his/her 
position. In addition, the petition must bear the employee's original 
signature and be dated upon receipt by the Certifying Official.
    (3) Certifying Officials are responsible for determining if the 
employee's petition for a hearing has been submitted in a timely 
fashion. Petitions received from employees after the 30-day time 
limitation expires will be accepted only if the employee can show the 
delay was because of circumstances beyond his/her control or because of 
failure to receive notice of the time limitation. Certifying Officials 
are required to provide written notification to the employee of the 
acceptance or non-acceptance of the employee's petition for hearing.
    (4) For those petitions accepted, FmHA or its successor agency under 
Public Law 103-354 will arrange for a hearing officer and notify the 
employee of the time and place of the hearing. The hearing location 
should be convenient to all parties involved. The employee will also be 
notified that the acceptance of the petition for hearing will stay the 
commencement of collection proceedings. Any payments collected in error 
due to untimely or delayed filing beyond the employee's control will be 
refunded unless there are applicable contractual or statutory provisions 
to the contrary.
    (5) The hearing will be based on written submissions and 
documentation provided by the debtor and FmHA or its successor agency 
under Public Law 103-354 unless:
    (i) A statute authorizes or requires consideration of waiving the 
debt, the debtor requests waiver of the debt, and the waiver 
determination turns on an issue of credibility or truth.
    (ii) The debtor requests reconsideration of the debt and the hearing 
officer determines that the question of the indebtedness cannot be 
resolved by a review of the documentary evidence; for example, when the 
validity of the debt turns on an issue of credibility or truth.
    (iii) The hearing officer determines that an oral hearing is 
appropriate.
    (6) Oral hearings may be conducted by conference call at the request 
of the debtor or at the discretion of the hearing officer. The hearing 
officer's determination that the offset hearing is on the written record 
is final and is not subject to review.
    (7) The hearing officer will issue a written decision not later than 
60 days after the filing of the petition requesting the hearing, unless 
the employee requests and the Certifying Official grants a delay in the 
proceedings. The written decision will state the facts supporting the 
nature and origin of the debt, the hearing officer's analysis, findings 
and conclusions as to the amount and validity of the debt, and repayment 
schedule. Both the employee and FmHA or its successor agency under 
Public Law 103-354 will be provided with a copy of the hearing officer's 
written decision on the debt.
    (h) Processing delinquent debts. (1) Form AD-343, ``Payroll Action 
Request,'' and FmHA or its successor agency under Public Law 103-354 
Form Letter 1951-6 will be prepared and submitted by the Certifying 
Official to the National Office, FMAS, for coordination and forwarding 
to the debtor's employing agency if:
    (i) The borrower does not respond to FmHA or its successor agency 
under Public Law 103-354 Guide Letter 1951-C-4 within 30 days.
    (ii) The borrower responds to FmHA or its successor agency under 
Public Law 103-354 Guide Letter 1951-C-4 within 30 days and
    (A) Has had an opportunity to review the file, if requested,
    (B) Has received a hearing, if requested, and
    (C) A decision has been made by the hearing officer to uphold the 
offset.
    (2) A copy of Form AD-343 and the Form letter 1951-6 will be sent to 
the

[[Page 31]]

Finance Office, St. Louis, MO 63103, Attn: Account Settlement Unit.
    (3) If the debtor is an FmHA or its successor agency under Public 
Law 103-354 employee, Form AD-343 will be sent to the National Office, 
FMAS, and a copy to the Finance Office, St. Louis, MO, Attn: Account 
Settlement Unit. This form can be signed for the Certifying Official by 
an employment officer, an Administrative Officer, or a personnel 
management specialist, or signed by the Certifying Official.
    (4) If the debtor has agreed to have more or less than 15 percent of 
the disposable pay sent to FmHA or its successor agency under Public Law 
103-354, a copy of the debtor's letter (FmHA or its successor agency 
under Public Law 103-354 Form Letter 1951-8) authorizing this must be 
attached to Form AD-343.
    (5) Field offices will be notified of payments received from salary 
offset by receipt of a transaction record from the Finance Office.
    (i) Deduction percentage. (1) Generally, installment deductions will 
be made over a period not greater than the anticipated period of 
employment. If possible, the installment payment will be sufficient in 
size and frequency to liquidate the debt in approximately 3 years. The 
size and frequency of installment deductions will bear a reasonable 
relation to the size of the debt and the employee's ability to pay. 
Certifying Officials are responsible for determining the size and 
frequency of the deductions. However, the amount deducted for any period 
will not exceed 15 percent of the disposable pay from which the 
deduction is made, unless the employee has agreed in writing to the 
deduction of a greater amount. Installment payments of less than $25 per 
pay period or $50 a month will be accepted only in the most unusual 
circumstances.
    (2) Deductions will be made only from basic pay, incentive pay, 
retainer pay, or, in the case of an employee not entitled to basic pay, 
other authorized pay. If there is more than one salary offset, the 
maximum deduction for all salary offsets against an employee's 
disposable pay is 15 percent unless the employee has agreed in writing 
to a greater amount.
    (j) Agency/NFC responsibility for other debts. (1) FmHA or its 
successor agency under Public Law 103-354 will inform NFC about other 
indebtedness by transmitting to NFC an AD-343. NFC will process the 
documents through the Payroll/Personnel System, calculate the net amount 
of the adjustment and generate a salary offset notice. This notice will 
be sent to the employee's employing office along with a duplicate copy 
for the FmHA or its successor agency under Public Law 103-354's records. 
FmHA or its successor agency under Public Law 103-354 is responsible for 
completing the necessary information and forwarding the employee's 
notice to the employee.
    (2) Other indebtedness falls into two categories:
    (i) An agency-initiated indebtedness (i.e. personal telephone calls, 
property damages, etc.).
    (ii) An NFC-initiated indebtedness (i.e. duplicate salary payments, 
etc.). NFC will send the salary offset notice to the employing office.
    (k) Establishing employees or former employees defalcation accounts 
and non-cash credits to borrower accounts. In cases where a borrower 
made a payment on an FmHA or its successor agency under Public Law 103-
354 account(s) and, due to theft, embezzlement, fraud, negligence, or 
some other action on the part of an FmHA or its successor agency under 
Public Law 103-354 employee or employees, the payment is not transmitted 
to the Finance Office for application to the borrower's account(s), 
certain accounting actions must be taken by the Finance Office to 
establish non-cash credits to the borrower's account and an employee 
defalcation account.
    (1) The Certifying Official will advise the Assistant Administrator, 
Finance Office by memorandum to establish a defalcation account. The 
memorandum must state the following information:
    (i) Employee's name (or former),
    (ii) Social Security Number,
    (iii) Present or last known address,
    (iv) Date of Payment, and
    (v) Amount of the defalcation account.
    (2) If a non-cash credit to a borrower's account(s) is required, the 
letter to the Finance Office will include:

[[Page 32]]

    (i) Borrower's name and case number,
    (ii) Fund Code and Loan Code,
    (iii) Date and amount of missing payment,
    (iv) Copy of receipt issued for the missing payment, and
    (v) Name of employee who last had custody of the missing funds.
    (3) To assist and assure proper accounting for defalcation accounts 
and non-cash credits, the request should be made at the same time. 
Should requests be made separately, be sure to identify appropriately.
    (4) The Certifying Official shall furnish a copy of the memorandum 
and supporting documentation for paragraphs (k) (1) and (2) of this 
section to the Deputy Administrator for Management for distribution to 
the Financial and Management Analysis Staff (FMAS) and Employee 
Relations Branch, Personnel Division.
    (l) Application of payments, refunds and overpayments. (1) If a 
debtor is delinquent or indebted on more than one FmHA or its successor 
agency under Public Law 103-354 loan or debt, amounts collected by 
offset will be applied as specified on Form AD-343, based on the 
advantage to agency or debtor. The check date will be used as the date 
of credit in applying payments to the borrower's accounts.
    (2) If a court or agency orders FmHA or its successor agency under 
Public Law 103-354 to refund the amount obtained by salary offset, a 
refund will be requested promptly by the Certifying Official in 
accordance with the order by sending FmHA or its successor agency under 
Public Law 103-354 Form Letter 1951-5 to the Finance Office. Processing 
FmHA or its successor agency under Public Law 103-354 Form Letter 1951-5 
in the Finance Office will cause a refund to be sent to the debtor 
through the county office or other appropriate FmHA or its successor 
agency under Public Law 103-354 office. The debtor is not entitled to 
any payment of interest, on the refunded amount.
    (3) If a debtor does not request a hearing within the required time 
and it is later determined that the delay was due to circumstances 
beyond the debtor's control, any amount collected before the hearing 
decision is made will be refunded promptly by the Certifying Official in 
accordance with paragraphs (l) (1) and (2) of this section.
    (4) If FmHA or its successor agency under Public Law 103-354 
receives money through an offset but the debtor is not delinquent or 
indebted at the time or the amount received is in excess of the 
delinquency or indebtedness, the entire amount or the amount in excess 
of the delinquency or indebtedness will be refunded promptly to the 
debtor by the Certifying Official in accordance with paragraphs (l) (1) 
and (2) of this section.
    (m) Cancellation of offset. If a debtor's name has been submitted to 
another agency for offset and the debtor's account is brought current or 
otherwise satisfied, the Certifying Official will complete Form AD-343 
and send it to the National Office, FMAS. FMAS will notify the paying 
agency with Form AD-343 that the debtor is no longer delinquent or 
indebted and to cancel the offset. A copy of the cancellation document 
will be sent to the debtor and the Finance Office, Attn: Account 
Settlement Unit.
    (n) Intra-departmental transfer. When an FmHA or its successor 
agency under Public Law 103-354 employee who is indebted to one agency 
in USDA transfers to another agency within USDA, a copy of the repayment 
schedule should be forwarded by the agency personnel office to the new 
employing agency. The NFC will continue to make deductions until full 
recovery is effected.
    (o) Liquidation from final checks. Upon the determination that an 
employee owing a debt to FmHA or its successor agency under Public Law 
103-354 is to retire, resign, or employment otherwise ends, the 
Certifying Official should forward a telegram with the appropriate 
employee identification and amount of the debt to the NFC. The telegram 
should request that the debt be collected from final salary/lump sum 
leave or other funds due the employee, and, if necessary, to put a hold 
on the retirement funds. The telegram information should be confirmed by 
completion of Form AD-343. Collection from retirement funds will be in 
accordance with Departmental Administrative Offset procedures (7 CFR 
Part 3, Subpart B, Sec. 3.32).

[[Page 33]]

    (p) Coordination with other agencies. (1) If FmHA or its successor 
agency under Public Law 103-354 is the creditor agency but not the 
paying agency, the Certifying Official will submit Form AD-343 to the 
National Office, FMAS, to begin salary offset against an indebted 
employee. The request will include a certification as to the 
determination of indebtedness, and that FmHA or its successor agency 
under Public Law 103-354 has complied with applicable regulations and 
instruction for submitting the funds to the Finance Office. (See FmHA or 
its successor agency under Public Law 103-354 Form Letter 1951-6).
    (2) When an employee of FmHA or its successor agency under Public 
Law 103-354 owes a debt to another Federal agency, salary offset may be 
used only when the Federal agency certifies that the person owes the 
debt and that the Federal agency has complied with its regulations. The 
request must include the creditor agency's certification as to the 
indebtedness, including the amount, and that the employee has been given 
the due process entitlements guaranteed by the Debt Collection Act of 
1982. When a request for offset is received, FmHA or its successor 
agency under Public Law 103-354 will notify the employee and NFC and 
arrange for offset. (See FmHA or its successor agency under Public Law 
103-354 Form Letter 1951-7).
    (q) Deductions by the National Finance Center (NFC). The NFC will 
automatically deduct the full amount of the delinquency or indebtedness 
if less than 15 percent of disposable pay or 15 percent of disposable 
pay if the delinquency or indebtedness exceeds 15 percent, unless the 
creditor agency advises otherwise. Deductions will begin the second pay 
period after the 30-day notification period has expired unless FmHA or 
its successor agency under Public Law 103-354 issues the notice. If FmHA 
or its successor agency under Public Law 103-354 issues the notice, the 
NFC will begin deductions on the first pay period after receipt of the 
Form AD-343.
    (r) Interest, penalties and administrative costs. Interest and 
administrative costs will normally be assessed on outstanding claims 
being collected by salary offset. However, penalties should not be 
charged routinely on debts being collected in installments by salary 
offsets, since it is not to be construed as a failure to pay within a 
given time period. Additional interest, penalties, and administrative 
costs will not be assessed on delinquent loans until FmHA or its 
successor agency under Public Law 103-354 publishes regulations 
permitting such charges.
    (s) Adjustment in rate of repayment. (1) When an employee who is 
indebted receives a reduction in basic pay that would cause the current 
deductions to exceed 15 percent of disposable pay, and the employee has 
not consented in writing to a greater amount, FmHA or its successor 
agency under Public Law 103-354 must take action to reduce the amount of 
the deductions to 15 percent of the new amount of disposable pay. Upon 
an increase in basic pay which results in the current deductions to be 
less than the specified percentage, FmHA or its successor agency under 
Public Law 103-354 may increase the amount of the deductions 
accordingly. In either case, when a change is made the employee will be 
notified in writing.
    (2) When an employee has an existing reduced repayment schedule 
because of financial hardship, the creditor agency may arrange for a new 
repayment schedule.

[52 FR 18544, May 18, 1987, as amended at 53 FR 44178, Nov. 2, 1988; 54 
FR 26945, June 27, 1989; 62 FR 41799, Aug. 1, 1997; 65 FR 50603, Aug. 
21, 2000; 67 FR 69671, Nov. 19, 2002]



Sec. Sec. 1951.112-1951.135  [Reserved]



Sec. 1951.136  Procedures for Department of Treasury offset and 

cross-servicing for the Rural Housing Service (Community Facility 
Program only) and the Rural Business-Cooperative Service.

    (a) The National Offices of the Rural Housing Service (RHS), 
Community Facilities (CF) and the Rural Business-Cooperative Service 
(RBS) will refer past due, legally enforceable debts which are over 180 
days delinquent to the Secretary of the Treasury for collection by 
centralized administrative offset (TOP), Internal Revenue Service offset 
administered through TOP and Treasury's Cross-Servicing (Cross-

[[Page 34]]

Servicing) Program, which centralizes all Government debt collection 
actions. A borrower with a workout agreement in place, in bankruptcy or 
litigation, or meeting other exclusion criteria, may be excluded from 
TOP or Cross-Servicing.
    (b) A 60 day due process notice will be sent to borrowers subject to 
TOP or Cross-Servicing. The borrower will be given 60 days to resolve 
any delinquency before the debt is reported to Treasury. The notice will 
include:
    (1) The nature and amount of the debt, the intention of the Agency 
to collect the debt through TOP or Cross-Servicing, and an explanation 
of the debtor's rights;
    (2) An opportunity to inspect and copy the records related to the 
debt from the Agency;
    (3) An opportunity to review the matter within the Agency or the 
National Appeals Division, if there has not been a previous opportunity 
to appeal the offset; and
    (4) An opportunity to enter into a written repayment agreement.
    (c) In referring debt to the Department of Treasury the Agency will 
certify that:
    (1) The debt is past due and legally enforceable in the amount 
submitted and the Agency will ensure that collections are properly 
credited to the debt;
    (2) Except in the case of a judgment debt or as otherwise allowed by 
law, the debt is referred for offset within 10 years after the Agency's 
right of action accrues;
    (3) The Agency has made reasonable efforts to obtain payment; and
    (4) Payments that are prohibited by law from being offset are exempt 
from centralized administrative offset.

[67 FR 69672, Nov. 19, 2002]



Sec. 1951.137  Procedures for Treasury offset and cross-servicing for 
the Farm Service Agency (FSA) farm loan programs.

    (a) The Farm Service Agency, Farm Loan Programs, will refer past 
due, legally enforceable debts which are over 180 days delinquent to the 
Secretary of the Treasury for collection by centralized administrative 
offset (TOP), Internal Revenue Service offset administered through TOP 
and Treasury's Cross-Servicing (Cross-Servicing) Program, which 
centralizes all Government debt collection actions. A borrower with a 
workout agreement in place, in bankruptcy or litigation, or meeting 
other exclusion criteria, may be excluded from TOP or Cross-Servicing. 
Guaranteed debtors will only be referred to TOP upon confirmation of 
payment on a final loss claim.
    (b) A 60 day due process notice will be sent to borrowers subject to 
TOP or Cross-Servicing by the Director of Kansas City Finance Office. 
The borrower will be given 60 days to resolve any delinquency before the 
debt is reported to Treasury. The notice will include:
    (1) The nature and amount of the debt, the intention of the Agency 
to collect the debt through TOP or Cross-Servicing, and an explanation 
of the debtor's rights;
    (2) An opportunity to inspect and copy the records related to the 
debt, from the Agency;
    (3) An opportunity to review the matter within the Agency; and
    (4) An opportunity to enter into a written repayment agreement.
    (c) In referring debt to the Department of Treasury the Agency will 
certify that:
    (1) The debt is past due and legally enforceable in the amount 
submitted and the Agency will ensure that collections are properly 
credited to the debt;
    (2) Except in the case of a judgment debt or as otherwise allowed by 
law, the debt is referred for offset within 10 years after the Agency's 
right of action accrues;
    (3) The Agency has made reasonable efforts to obtain payment; and
    (4) Payments that are prohibited by law from being offset are exempt 
from centralized administrative offset.

[67 FR 69672, Nov. 19, 2002]



Sec. Sec. 1951.138-1951.149  [Reserved]



Sec. 1951.150  OMB control number.

    The collection of information requirements in this regulation have 
been approved by the Office of Management and Budget and assigned OMB 
control number 0575-0119.

[51 FR 42821, Nov. 26, 1986]

[[Page 35]]



                    Subpart D_Final Payment on Loans

    Source: 57 FR 774, Jan. 9, 1992, unless otherwise noted.



Sec. 1951.151  Purpose.

    This subpart prescribes authorizations, policies, and procedures of 
the Farm Service Agency (FSA), Rural Housing Service (RHS), Rural 
Utility Service (RUS) for its water and waste programs, and Rural 
Business-Cooperative Service (RBS), herein referred to as ``Agency,'' 
for processing final payment on all loans. This subpart does not apply 
to direct single family housing customers of the RHS.

[61 FR 59778, Nov. 22, 1996]



Sec. 1951.152  Definition.

    As used in this subpart:
    Mortgage. Includes real estate mortgage, deed of trust or any other 
form of security instrument or lien on real property.



Sec. 1951.153  Chattel security or note-only cases.

    (a) If a loan secured by both real estate and chattels is paid in 
full, the chattel security instrument will be satisfied or released in 
accordance with subpart A of part 1962 of this chapter.
    (b) When a loan is evidenced by only a note and the note is paid in 
full, FmHA or its successor agency under Public Law 103-354 will deliver 
the note to the borrower in the manner prescribed in Sec. 1951.155(c) 
of this subpart.



Sec. 1951.154  Satisfaction and release of documents.

    (a) Authorization. FmHA or its successor agency under Public Law 
103-354 is authorized to execute the necessary releases and 
satisfactions and return security instruments and related documents to 
borrowers. Satisfaction and release of security documents takes place:
    (1) Upon receipt of payment in full of all amounts owed to the 
Government including any amounts owed to the loan insurance account, 
subsidy recapture amounts, all loan advances and/or other charges to the 
borrower's account;
    (2) Upon verification that the amount of payment received is 
sufficient to pay the full amount owed by the borrower; or
    (3) When a compromise or adjustment offer has been accepted and 
approved by the appropriate Government official in full settlement of 
the account and all required funds have been paid.
    (b) [Reserved]
    (c) Lost note. If the original note is lost FmHA or its successor 
agency under Public Law 103-354 will give the borrower an affidavit of 
lost note so that the release or satisfaction may be processed.



Sec. 1951.155  County and/or District Office actions.

    (a) Funds remaining in supervised bank accounts. When a borrower is 
ready to pay an insured or direct loan in full, any funds remaining in a 
supervised bank account will be withdrawn and remitted for application 
to the borrower's account. If the entire principal of the loan is 
refunded after the loan is closed, the borrower will be required to pay 
interest from the date of the note to the date of receipt of the refund.
    (b) Determining amount to be collected. FmHA or its successor agency 
under Public Law 103-354 will compute and verify the amount to be 
collected for payment of an account in full. Requests for payoff 
balances on all accounts will be furnished in writing in a format 
specified by FmHA or its successor agency under Public Law 103-354 
(available in any FmHA or its successor agency under Public Law 103-354 
office).
    (c) Delivery of satisfaction, notes, and other documents. When the 
remittance which paid an account in full has been processed by FmHA or 
its successor agency under Public Law 103-354, the paid note and 
satisfied mortgage may be returned to the borrower. If other provisions 
exist, the mortgage will not be satisfied until the total indebtedness 
secured by the mortgage is paid. For instance, in a situation where a 
rural housing loan is paid-in-full and there is a subsidy recapture 
receivable balance that the borrower elects to delay repaying, the 
amount of recapture to be repaid will be determined when the principal 
and interest balance

[[Page 36]]

is paid. The mortgage securing the RHS, RBS, RUS, and/or FSA or its 
successor agency under Public Law 103-354 debt will not be released of 
record until the total amount owed the Government is repaid. To permit 
graduation or refinancing by the borrower, the mortgage securing the 
recapture owed may be subordinated.
    (1) If FmHA or its successor agency under Public Law 103-354 
receives final payments in a form other than cash, U.S. Treasury check, 
cashier's check, certified check, money order, bank draft, or check 
issued by an institution determined by FmHA or its successor agency 
under Public Law 103-354 to be financially responsible, the mortgage and 
paid note will not be released until after a 30-day waiting period. If 
other indebtedness to FmHA or its successor agency under Public Law 103-
354 is not secured by the mortgage, FmHA or its successor agency under 
Public Law 103-354 will execute the satisfaction or release. When the 
stamped note is delivered to the borrower, FmHA or its successor agency 
under Public Law 103-354 will also deliver the real estate mortgage and 
related title papers such as title opinions, title insurance binders, 
certificates of title, and abstracts which are the property of the 
borrower. Any water stock certificates or other securities that are the 
property of the borrower will be returned to the borrower. Also, any 
assignments of income will be terminated as provided in the assignment 
forms.
    (2) Delivery of documents at the time of final payment will be made 
when payment is in the form of cash, U.S. Treasury check, cashier's 
check, certified check, money order, bank draft, or check issued by an 
institution determined by FmHA or its successor agency under Public Law 
103-354 to be responsible. FmHA or its successor agency under Public Law 
103-354 will not accept payment in the form of foreign currency, foreign 
checks or sight drafts. FmHA or its successor agency under Public Law 
103-354 will execute the satisfaction or release (unless other 
indebtedness to FmHA or its successor agency under Public Law 103-354 is 
covered by the mortgage) and mark the original note with a paid-in-full 
legend based upon receipt of the full payment balance of the borrower's 
account(s), computed as of the date final payment is received. In 
unusual cases where an insured promissory note is held by a private 
holder, FmHA or its successor agency under Public Law 103-354 can 
release the mortgage and deliver the note when it is received.
    (d)-(e) [Reserved]
    (f) Cost of recording or filing of satisfaction. The satisfaction or 
release will be delivered to the borrower for recording and the 
recording costs will be paid by the borrower, except when State law 
requires the mortgagee to record or file satisfactions or release and 
pay the recording costs.
    (g) Property insurance. When the borrower's loan has been paid-in-
full and the satisfaction or release of the mortgage has been executed, 
FmHA or its successor agency under Public Law 103-354 may release the 
mortgage interest in the insurance policy as provided in subpart A of 
part 1806 of this chapter (FmHA or its successor agency under Public Law 
103-354 Instruction 426.1).
    (h) [Reserved]
    (i) Outstanding Loan Balance(s). FmHA or its successor agency under 
Public Law 103-354 will attempt to collect any account balance(s) that 
may result from an error by FmHA or its successor agency under Public 
Law 103-354 in handling final payments according to paragraph 
1951.155(b) of this section. If collection cannot be made, the debt will 
be settled according to subpart B of part 1956 of this chapter or 
reclassified to collection-only. A deficiency judgment may be considered 
if the balance is a significant amount ($1,000 or more) and the borrower 
has known assets.

[57 FR 774, Jan. 9, 1992, as amended at 60 FR 55145, Oct. 27, 1995]



Sec. Sec. 1951.156-1951.200  [Reserved]



Subpart E_Servicing of Community and Direct Business Programs Loans and 
                                 Grants

    Source: 55 FR 4399, Feb. 8, 1990, unless otherwise noted.

[[Page 37]]



Sec. 1951.201  Purposes.

    This subpart prescribes the Rural Development mission area policies, 
authorizations, and procedures for servicing Water and Waste Disposal 
System loans and grants; Community Facility loans and grants; Rural 
Business Enterprise/Television Demonstration grants; loans for Grazing 
and other shift-in-land-use projects; Association Recreation loans; 
Association Irrigation and Drainage loans; Watershed loans and advances; 
Resource Conservation and Development loans; Direct Business loans; 
Economic Opportunity Cooperative loans; Rural Renewal loans; Energy 
Impacted Area Development Assistance Program grants; National Nonprofit 
Corporation grants; Water and Waste Disposal Technical Assistance and 
Training grants; Emergency Community Water Assistance grants; System for 
Delivery of Certain Rural Development Programs panel grants; section 
306C WWD loans and grants; and Rural and Cooperative Development Grants 
in subpart F of part 4284 of this title. Rural Development State Offices 
act on behalf of the Rural Utilities Service, the Rural Business-
Cooperative Service, and the Farm Service Agency as to loan and grant 
programs formerly administered by the Farmers Home Administration and 
the Rural Development Administration. Loans sold without insurance to 
the private sector will be serviced in the private sector and will not 
be serviced under this subpart. The provisions of this subpart are not 
applicable to such loans. Future changes to this subpart will not be 
made applicable to such loans.

[62 FR 33510, June 19, 1997, as amended at 62 FR 42387, Aug. 7, 1997; 66 
FR 1569, Jan. 9, 2001]

    Effective Date Note: At 68 FR 69952, Dec. 16, 2003, Sec. 1951.201 
was amended by removing the words ``loans for Grazing and other shift-
in-land-use projects;'' and ``Association Irrigation and Drainage 
loans'', effective Jan. 15, 2004.



Sec. 1951.202  Objectives.

    The purpose of loan and grant servicing functions is to assist 
recipients to meet the objectives of loans and grants, repay loans on 
schedule, comply with agreements, and protect FmHA or its successor 
agency under Public Law 103-354's financial interest. Supervision by 
FmHA or its successor agency under Public Law 103-354 includes, but is 
not limited to, review of budgets, management reports, audits and 
financial statements; performing security inspections and providing, 
arranging for, or recommending technical assistance; evaluating 
environmental impacts of proposed actions by the borrower; and 
performing civil rights compliance reviews.



Sec. 1951.203  Definitions.

    (a) Approval official. An official who has been delegated loan and/
or grant approval authorities within applicable programs, subject to the 
dollar limitations of exhibits A, B, and C of subpart A of part 1901 of 
this chapter (available in any FmHA or its successor agency under Public 
Law 103-354 office).
    (b) Assumption of debt. The agreement by one party to legally bind 
itself to pay the debt incurred by another.
    (c) CONACT. The Consolidated Farm and Rural Development Act, as 
amended.
    (d) Eligible applicant. An entity that would be legally qualified 
for financial assistance under the loan or grant program involved in the 
servicing action.
    (e) Ineligible applicant. An entity or individual that would not be 
considered eligible for financial assistance under the loan or grant 
program involved in the servicing action.
    (f) Nonprogram (NP) loan. An NP loan exists when credit is extended 
to an ineligible applicant and/or transferee in connection with loan 
assumptions or sale of inventory property; any recipient in cases of 
unauthorized assistance; or a recipient whose legal organization has 
changed as set forth in Sec. 1951.220(e) of this subpart resulting in 
the borrower being ineligible for program benefits.
    (g) Servicing office. The State, District, or County Office 
responsible for immediate servicing functions for the borrower or 
grantee.
    (h) Transfer fee. A one-time nonrefundable application fee, charged 
to ineligible applicants for FmHA or its successor agency under Public 
Law 103-354 services rendered in the processing of a transfer and 
assumption.

[[Page 38]]



Sec. 1951.204  Nondiscrimination.

    Each instrument of conveyance required for a transfer, assumption, 
or other servicing action under this subpart will contain the following 
covenant.

    The property described herein was obtained or improved with Federal 
financial assistance and is subject to the nondiscrimination provisions 
of title VI of the Civil Rights Act of 1964, title IX of the Education 
Amendments of 1972, section 504 of the Rehabilitation Act of 1973, and 
other similarly worded Federal statutes, and the regulations issued 
pursuant thereto that prohibit discrimination on the basis of race, 
color, national origin, handicap, religion, age, or sex in programs or 
activities receiving Federal financial assistance. Such provisions apply 
for as long as the property continues to be used for the same or similar 
purposes for which the Federal assistance was extended, for so long as 
the purchaser owns it, whichever is later.



Sec. 1951.205  Redelegation of authority.

    Servicing functions under this subpart which are specifically 
assigned to the State Director may be redelegated in writing to an 
appropriate sufficiently trained designee.



Sec. 1951.206  Forms.

    Forms utilized for actions under this subpart are to be modified 
appropriately where necessary to adapt the forms for use by corporate 
recipients rather than individuals.



Sec. 1951.207  State supplements.

    State supplements developed to carry out the provisions of this 
subpart will be prepared in accordance with subpart B of part 2006 of 
this chapter (available in any FmHA or its successor agency under Public 
Law 103-354 office) and applicable State laws and regulations. State 
supplements are to be used only when required by National Instructions 
or necessary to clarify the impact of State laws or regulations, and not 
to restate the provisions of National Instructions. Advice and guidance 
will be obtained as needed from the Office of the General Counsel (OGC).



Sec. Sec. 1951.208-1951.209  [Reserved]



Sec. 1951.210  Environmental requirements.

    Servicing activities such as transfers, assumptions, subordinations, 
sale or exchange of security property, and leasing of security will be 
reviewed for compliance with subpart G of part 1940 of this chapter. The 
appropriate environmental review will be completed prior to approval of 
the servicing action. When National Office approval is required, the 
completed environmental review will be included with other information 
submitted.



Sec. 1951.211  Refinancing requirements.

    In accordance with the CONACT, FmHA or its successor agency under 
Public Law 103-354 requires for most loans covered by this subpart that 
if at any time it shall appear to the Government that the borrower is 
able to refinance the amount of the indebtedness then outstanding, in 
whole or in part, by obtaining a loan for such purposes from responsible 
cooperative or private credit sources, at reasonable rates and terms for 
loans for similar purposes and periods of time, the borrower will, upon 
request of the Government, apply for and accept such loan in sufficient 
amount to repay the Government and will take all such actions as may be 
required in connection with such loan. Applicable requirements are set 
forth in subpart F of part 1951 of this chapter. A civil rights impact 
analysis is required.

[55 FR 4399, Feb. 8, 1990, as amended at 63 FR 16089, Apr. 2, 1998]



Sec. 1951.212  Unauthorized financial assistance.

    Subpart O of part 1951 of this chapter prescribes policies for 
servicing the loans and grants covered under this subpart when it is 
determined that a borrower or grantee was not eligible for all or part 
of the financial assistance received in the form of a loan, grant, 
subsidy, or any other direct financial assistance.

[[Page 39]]



Sec. 1951.213  Debt settlement.

    Subpart C of part 1956 of this chapter prescribes policies and 
procedures for debt settlement actions for loans covered under this 
subpart when it is determined that a debt is eligible for settlement 
except as provided in Sec. Sec. 1951.216 and 1951.231.



Sec. 1951.214  Care, management, and disposal of acquired property.

    Property acquired by Government or its successor agency under Public 
Law 103-354 will be handled according to subparts B and C of part 1955 
of this chapter.

[55 FR 4399, Feb. 8, 1990, as amended at 63 FR 16089, Apr. 2, 1998]



Sec. 1951.215  Grants.

    No monitoring action by FmHA or its successor agency under Public 
Law 103-354 is required after grant closeout. Grant closeout is when all 
required work is completed, administrative actions relating to the 
completion of work and expenditure of funds have been accomplished, and 
FmHA or its successor agency under Public Law 103-354 accepts final 
expenditure information. However, grantees remain responsible in 
accordance with the terms of the grant for property acquired with grant 
funds.
    (a) Applicability of requirements. Servicing actions relating to 
FmHA or its successor agency under Public Law 103-354 grants are 
governed by the provisions of this subpart, the terms of the Grant 
Agreement and, if applicable, the provisions of 7 CFR parts 3015, 3016, 
and 3017.
    (1) Servicing actions will be carried out in accordance with the 
terms of the ``Association Water or Sewer System Grant Agreement,'' and 
RUS Bulletin 1780-12, ``Water and Waste Grant Agreement'' (available 
from any USDA/Rural Development office or the Rural Utilities Service, 
United States Department of Agriculture, Washington, DC 20250-1500). 
Grant agreements with a revision date on or after January 29, 1979, 
require that the grantee request disposition instructions from the 
Agency before disposing of property which is no longer needed for 
original grant purposes.
    (2) When facilities financed in part by FmHA or its successor agency 
under Public Law 103-354 grants are transferred or sold, repayment of 
all or a portion of the grant is not required if the facility will be 
used for the same purposes and the new owner provides a written 
agreement to abide by the terms of the grant agreement.
    (3) 7 CFR 3015 first became effective on November 10, 1981; 7 CFR 
parts 3016 on October 1, 1988; and 7 CFR 3017 on March 18, 1989. Grants 
made on or after those dates are subject to the provisions of those 
regulations except to the extent of the express provisions of the Grant 
Agreement.
    (b) Authorities. Subject to the requirements of Sec. 1951.215(a), 
authority to approve servicing actions is as follows:
    (1) For water and waste disposal grants, the State Director is 
authorized to approve any servicing actions needed, except that prior 
approval of the Administrator is required when property acquired with 
grant funds is disposed of in accordance with Sec. Sec. 1951.226, 
1951.230, or 1951.232 of this subpart and the buyer or transferee 
refuses to assume all terms of the grant agreement.
    (2) All other grants will be serviced in accordance with the Grant 
Agreement and this subpart. Prior approval of the Administrator is 
required except for actions covered in the preceding paragraph.

[55 FR 4399, Feb. 8, 1990, as amended at 63 FR 16089, Apr. 2, 1998]



Sec. 1951.216  Nonprogram (NP) loans.

    Borrowers with NP loans are not eligible for any program benefits, 
including appeal rights. However, FmHA or its successor agency under 
Public Law 103-354 may use any servicing tool under this subpart 
necessary to protect the Government's security interest, including 
reamortization or rescheduling. The refinancing requirements of subpart 
F of part 1951 of this chapter do not apply to NP loans. Debt settlement 
actions relating to NP loans must be handled under the Federal Claims 
Collection Act; proposals will be submitted to the National Office for 
review and approval. Any exception to the servicing requirements of NP 
loans

[[Page 40]]

under this subpart must have prior concurrence of the National Office.



Sec. 1951.217  Public bodies.

    Servicing actions involving public bodies will be carried out to the 
extent feasible according to the provisions of this subpart. With prior 
National Office approval, the State Director is authorized to vary from 
such provisions if necessary and approved by OGC, provided such 
variation will not violate other regulatory or statutory provisions. To 
request approval, the case file, including copies of applicable 
documents, recommendations, and OGC comments, will be forwarded to the 
Administrator, Attention: (appropriate program division).



Sec. Sec. 1951.218-1951.219  [Reserved]



Sec. 1951.220  General servicing actions.

    (a) Payment in full. Payment in full of a loan is handled according 
to subpart D of part 1951 of this chapter. When a loan is paid in full, 
the servicing official will:
    (1) Notify the company providing fidelity bond coverage in writing 
that the government no longer has an interest in the bond if the 
government is named co-obligee on the bond.
    (2) Release FmHA or its successor agency under Public Law 103-354's 
interest in insurance policies according to applicable provisions of 
subpart A of part 1806 (FmHA or its successor agency under Public Law 
103-354 Instruction 426.1).
    (3) Release FmHA or its successor agency under Public Law 103-354's 
interest in any other security as appropriate, consulting with OGC if 
necessary.
    (b) Loan summary statements. Upon request of a borrower, FmHA or its 
successor agency under Public Law 103-354 will issue a loan summary 
statement showing account activity for each loan made or insured under 
the CONACT. Field offices will post a notice on the bulletin board 
informing borrowers of the availability of loan summary statements. See 
exhibit A of subpart A of this part for a sample of the required notice.
    (1) The loan summary statement period is from January 1 through 
December 31. The Finance Office forwards to field offices a copy of Form 
FmHA or its successor agency under Public Law 103-354 1951-9, ``Annual 
Statement of Loan Account,'' to be retained in borrower files as a 
permanent record of account activity for the year.
    (2) Quarterly Forms FmHA or its successor agency under Public Law 
103-354 1951-9 are retained in the Finance Office on microfiche. These 
statements reflect cumulative data from the beginning of the current 
year through the end of the most recent quarter. Servicing offices may 
request copies of these quarterly or annual statements by sending Form 
FmHA or its successor agency under Public Law 103-354 1951-57, ``Request 
for Loan Summary Statement,'' to the Finance Office.
    (3) The servicing office will provide a copy of the applicable loan 
summary statement to the borrower on request. A copy of Form FmHA or its 
successor agency under Public Law 103-354 1951-9 and, for loans with 
unamortized installments, a printout of future installments owed 
obtained using the borrower status screen option in the Automated 
Discrepancy Processing System (ADPS), will constitute the loan summary 
statement to be provided to the borrower.
    (c) Insurance. FmHA or its successor agency under Public Law 103-354 
borrowers shall maintain insurance coverage as follows:
    (1) Community and Insured Business Programs borrowers shall 
continuously maintain adequate insurance coverage as required by the 
loan agreement and Sec. 1942.17(j)(3) of subpart A of part 1942 of this 
chapter. Insurance coverage must be monitored in accordance with the 
above-referenced section to determine that adequate policies and bonds 
are in force.
    (2) For all other types of loans covered by this subpart, property 
insurance will be serviced according to subpart A of part 1806 of this 
chapter (FmHA or its successor agency under Public Law 103-354 
Instruction 426.1) in real estate mortgage cases, and according to the 
loan agreement in other cases.
    (d) Property taxes. Real property taxes are serviced according to 
Subpart A of

[[Page 41]]

part 1925 of this chapter. If State statutes permit a personal property 
tax lien to have priority over FmHA or its successor agency under Public 
Law 103-354's lien, such taxes are serviced according to Sec. Sec. 
1925.3 and 1925.4 of subpart A of part 1925 of this chapter.
    (e) Changes in borrower's legal organization. (1) The State Director 
may approve, with OGC's concurrence, changes in a recipient's legal 
organization, including revisions of articles of incorporation or 
charter and bylaws, when:
    (i) The change does not provide for a sole member type of 
organization;
    (ii) The borrower retains control over its assets and the operation, 
management, and maintenance of the facility, and continues to carry out 
its responsibilities as set forth in Sec. 1942.17(b)(4) of subpart A of 
part 1942 of this chapter; and
    (iii) The borrower retains significant local ties with the rural 
community.
    (2) The State Director may approve, with prior concurrence of the 
Administrator, changes in a recipient's legal organization which result 
in a sole member type of organization, or any other change which results 
in a recipient's loss of control over its assets and/or the operation, 
management and maintenance of the facility, provided all of the 
following have been or will be met:
    (i) The change is in the best interest of the Government;
    (ii) The State Director determines and documents that other 
servicing options under this subpart, such as sale or transfer and 
assumption, have been explored and are not feasible;
    (iii) The loan is classified as a nonprogram loan;
    (iv) The borrower is notified that it is no longer eligible for any 
program benefits, but will remain responsible under the loan agreement; 
and
    (v) Prior concurrence of the Administrator is obtained. Requests 
will be forwarded to the Administrator: Attention (appropriate program 
division), and will include the case file; Exhibit A of this subpart 
(available in any FmHA or its successor agency under Public Law 103-354 
office), appropriately completed; the proposed changes; OGC comments; 
and any other necessary supporting information.
    (f) Membership liability. As a loan approval requirement, some 
borrowers may have special agreements with members of the purchase of 
shares of stock or for payment of a pro rata share of the loan in the 
event of default, or they may have authority in their corporate 
instruments to make special assessments in that event. Such agreements 
may be referred to as individual liability agreements and may be 
assigned to and held by FmHA or its successor agency under Public Law 
103-354 as additional security. In other cases the borrower's note may 
be endorsed by individuals. The liability instruments will be serviced 
in a manner indicated by their contents and the advice of OGC to 
adequately protect FmHA or its successor agency under Public Law 103-
354's interest. Servicing actions necessary due to such provisions will 
be noted on Form FmHA or its successor agency under Public Law 103-354 
1905-10, ``Management System Card--Association.''
    (g) Other security. Other security such as collateral assignments, 
water stock certificates, notices of lienholder interest (Bureau of Land 
Management grazing permits) and waivers of grazing privileges (Forest 
Service grazing permits) will be serviced to protect the interest of 
FmHA or its successor agency under Public Law 103-354, and in compliance 
with any special servicing actions developed by the State Director with 
OGC assistance. Evidence of the security will be filed in the servicing 
office case file. Necessary servicing actions will be noted on Form FmHA 
or its successor agency under Public Law 103-354 1905-10.
    (h) Correcting errors in security instruments. Land, buildings, or 
chattels included in a mortgage through mutual mistake may be released 
from the mortgage by the State Director when substantiated by the 
factual situation. The release is contingent on the State Director 
determining, with OGC advice, that the property was included due to 
mutual error.
    (i) Present market value determination. For purposes of this 
subpart, the value of security is determined by the approval official as 
follows:

[[Page 42]]

    (1) Security representing a relatively small portion of the total 
value of the security property. The approval official will determine 
that the real estate and chattels are disposed of at a reasonable price. 
A current appraisal report may be required.
    (2) Security representing a relatively large portion of the total 
value of the security property. The approval official will require a 
current appraisal report, and the sale prices of the real estate and 
chattels disposed of will at least equal the present market value as 
determined by this appraisal.
    (3) Appraisal report. If required, a current appraisal report will 
be completed in accordance with Sec. 1942.3 of subpart A of part 1942 
of this chapter. The appraisal will be completed by a qualified FmHA or 
its successor agency under Public Law 103-354 employee or an independent 
appraiser as determined appropriate by the approval official.

[55 FR 4399, Feb. 8, 1990, as amended at 57 FR 775, Jan. 9, 1992; 57 FR 
21199, May 19, 1992; 57 FR 36591, Aug. 14, 1992]



Sec. 1951.221  Collections, payments and refunds.

    Payments and refunds are handled in accordance with the following:
    (a) Community and Insured Business Programs. (1) Field offices can 
obtain data on principal installments due for Community and Insured 
Business Programs loans with unamortized installments using the borrower 
status screen option in the ADPS.
    (2) Regular payments for Community and Insured Business Programs 
borrowers are all payments other than extra payments and refunds. Such 
payments are usually derived from facility revenues, and do not include 
proceeds from the sale of security. They also include payments derived 
from sources which do not decrease the value of FmHA or its successor 
agency under Public Law 103-354's security.
    (i) Distribution of such payments is made as follows:
    (A) First, to the FmHA or its successor agency under Public Law 103-
354 loan(s) in proportion to the delinquency existing on each. Any 
excess will be distributed in accordance with paragraphs (a)(2)(i) (B) 
and (C) of this section.
    (B) Second, to the FmHA or its successor agency under Public Law 
103-354 loan or loans in proportion to the approximate amounts due on 
each. Any excess will be distributed according to paragraph (a)(2)(i)(C) 
of this section.
    (C) Third, as advance payments on FmHA or its successor agency under 
Public Law 103-354 loans. In making such distributions, consider the 
principal balance outstanding on each loan, the security position of the 
liens securing each loan, the borrower's request, and related 
circumstances.
    (ii) Unless otherwise established by the debt instrument, regular 
payments will be applied as follows:
    (A) For amortized loans, first to interest accrued (as of the date 
of receipt of the payment), and then to principal.
    (B) For principal-plus-interest loans, first to the interest due 
through the date of the next scheduled installment of principal and 
interest and then to principal due, with any balance applied to the next 
scheduled principal installment.
    (3) Extra payments are derived from sale of basic chattel or real 
estate security; refund of unused loan funds; cash proceeds of property 
insurance as provided in Sec. 1806.5(b) of subpart A of part 1806 
(paragraph V B of FmHA or its successor agency under Public Law 103-354 
Instruction 426.1); and similar actions which reduce the value of basic 
security. At the option of the borrower, regular facility revenue may 
also be used as extra payments when regular payments are current. Unless 
otherwise established in the note or bond, extra payments will be 
distributed and applied as follows:
    (i) First to the account secured by the lowest priority of lien on 
the property from which the extra payment was obtained. Any balance will 
be applied to other FmHA or its successor agency under Public Law 103-
354 loans in ascending order of priority.
    (ii) For amortized loans, first to interest accrued to the date 
payment is received, and then to principal. For debt instruments with 
installments of principal plus interest, such payments will be applied 
to the final unpaid principal installment.
    (b) Grazing Association Loans, Irrigation, Drainage and other Soil 
and Water

[[Page 43]]

Conservation Loans. (1) Regular payments for such loans are defined in 
Sec. 1951.8(a) of subpart A of part 1951 of this chapter, and are 
distributed according to Sec. 1951.9(a) of that subpart unless 
otherwise established by the note or bond.
    (2) Extra payments are defined in Sec. 1951.8(b) of subpart A of 
part 1951 of this chapter, and are distributed according to Sec. 
1951.9(b) of that subpart.

[55 FR 4399, Feb. 8, 1990, as amended at 66 FR 1569, Jan. 9, 2001; 68 FR 
61331, Oct. 28, 2003]

    Effective Date Note: At 68 FR 69952, Dec. 16, 2003, Sec. 1951.221 
was amended in the paragraph (b) heading by removing the words ``Grazing 
Association Loans, Irrigation and Drainage and other'', effective Jan. 
15, 2004.



Sec. 1951.222  Subordination of security.

    When a borrower requests FmHA or its successor agency under Public 
Law 103-354 to subordinate a security instrument so that another 
creditor or lender can refinance, extend, reamortize, or increase the 
amount of a prior lien; be on parity with; or place a lien ahead of the 
FmHA or its successor agency under Public Law 103-354 lien, it will 
submit a written request to the servicing office as provided below. For 
purposes of this subpart, subordination is defined to include cases 
where a parity security position is being considered.
    (a) General. The following requirements must normally be met:
    (1) The request must be for subordination of a specific amount of 
the FmHA or its successor agency under Public Law 103-354 indebtedness, 
and the amount must be within the approval official's authority as set 
forth in exhibits A, B, and C of subpart A of part 1901 of this chapter 
(available in any FmHA or its successor agency under Public Law 103-354 
office).
    (2) It must be determined that the borrower cannot refinance its 
FmHA or its successor agency under Public Law 103-354 debt in accordance 
with subpart F of part 1951 of this chapter.
    (3) The transaction will further the purposes for which the FmHA or 
its successor agency under Public Law 103-354 loan was made, not 
adversely affect the borrower's debt-paying ability, and result in the 
FmHA or its successor agency under Public Law 103-354 debt being 
adequately secured.
    (4) The terms and conditions of the prior lien will be such that the 
borrower can reasonably be expected to meet them as well as the 
requirements of all other debts.
    (5) Any proposed development work will be planned and performed 
according to Sec. 1942.18 of subpart A of part 1942 of this chapter or 
in a manner directed by the creditor which reasonably attains the 
objectives of that section.
    (6) All contracts, pay estimates, and change orders will be reviewed 
and concurred in by the State Director.
    (7) In cases involving land purchase, the FmHA or its successor 
agency under Public Law 103-354 will obtain a mortgage on the purchased 
land.
    (8) When the transaction involves more than $10,000 or the approval 
official considers it necessary, a present market value appraisal report 
will be obtained. However, a new report need not be obtained if there is 
an appraisal report not over one year old which permits a proper 
determination of the present market value of the total property after 
the transaction.
    (9) The proposed action must not change the nature of the borrower's 
activities so as to make it ineligible for FmHA or its successor agency 
under Public Law 103-354 loan assistance.
    (10) Necessary consent and subordination of all other outstanding 
security interests must be obtained.
    (b) Authorities. Proposals not meeting one or more of the above 
requirements will be submitted to the Administrator, Attention 
(appropriate program division) for prior concurrence. All other 
proposals may be approved by the official with loan approval authority 
under subpart A of part 1901 of this chapter.
    (c) Processing. The case file is to include:
    (1) The borrower's written request on Form FmHA or its successor 
agency under Public Law 103-354 465-1, ``Application for Partial 
Release, Subordination, or Consent,'' if appropriate, or in other 
acceptable format. The request must contain the purpose of the 
subordination; exact amount of money or property involved; description 
of security property involved; type of security

[[Page 44]]

instrument; name, address, line of business and other general 
information pertaining to the party in favor of which the request is 
made; and other pertinent information to evaluate the need for the 
request;
    (2) Current balance sheet;
    (3) If development work is involved, an operating budget on Form 
FmHA or its successor agency under Public Law 103-354 442-7, ``Operating 
Budget,'' or similar form which projects income and expenses through the 
first full year of operation following completion of planned 
improvements; or if no development work is involved, an income statement 
and budget on Form FmHA or its successor agency under Public Law 103-354 
442-2, ``Statement of Budget, Income, and Equity,'' schedules 1 and 2, 
or similar form;
    (4) Copy of proposed security instrument;
    (5) Appraisal report, when applicable;
    (6) OGC opinion on the request;
    (7) Exhibit A of this subpart (available in any FmHA or its 
successor agency under Public Law 103-354 office), appropriately 
completed;
    (8) Appropriate environmental review; and
    (9) Any other necessary supporting information.
    (d) Closing. All requests for subordination will be closed according 
to instructions from OGC except those which affect only chattel liens 
other than pledges of revenue. FmHA or its successor agency under Public 
Law 103-354's consent on Form FmHA or its successor agency under Public 
Law 103-354 465-1 will be signed concurrently with Form FmHA or its 
successor agency under Public Law 103-354 460-2, ``Subordination by the 
Government,'' when applicable.

[55 FR 4399, Feb. 8, 1990, as amended at 66 FR 1569, Jan. 9, 2001]



Sec. 1951.223  Reamortization.

    (a) State Director authorization. The State Director is authorized 
to approve reamortization of loans under the following conditions:
    (1) The account is delinquent and cannot be brought current within 
one year while maintaining a reasonable reserve;
    (2) The borrower has demonstrated for at least one year by actual 
performance or has presented a budget which clearly indicates that it is 
able to meet the proposed payment schedule;
    (3) The amount being reamortized is within the State Director's loan 
approval authorization; and
    (4) There is no extension of the final maturity date.
    (b) Requests requiring National Office approval. Reamortizations not 
meeting the above conditions require prior National Office approval. 
Requests will be forwarded to the National Office with the case file, 
including:
    (1) Current budget and cash flow prepared on Form FmHA or its 
successor agency under Public Law 103-354 442-2, schedules 1 and 2, or 
similar form;
    (2) Current balance sheet and income statement;
    (3) Exhibit A of this subpart, appropriately completed;
    (4) Form FmHA or its successor agency under Public Law 103-354 1951-
33, ``Reamortization Request,'' completed in accordance with Sec. 
1951.223(c)(3) of this subpart, when applicable; and
    (5) Any other necessary supporting information.
    (c) Processing. When legally permissible and administratively 
acceptable, the total outstanding principal and interest balances will 
be reamortized rather than only the delinquent amount. Accrued interest 
will be at the rate currently reflected in Finance Office records.
    (1) Reamortizations will be perfected in accordance with OGC closing 
instructions.
    (2) When debt instruments are being modified or new debt instruments 
executed, bond counsel or local counsel, as appropriate, must provide an 
opinion indicating any effect on FmHA or its successor agency under 
Public Law 103-354's security position. The FmHA or its successor agency 
under Public Law 103-354 approval official must determine that the 
government's interest will remain adequately protected if the security 
position will be affected.
    (3) Notes. Except as provided in Sec. 1951.223(c)(4), loans 
evidenced by notes will be reamortized through a new evidence of debt 
unless OGC recommends

[[Page 45]]

that the terms of the existing document be modified. Form FmHA or its 
successor agency under Public Law 103-354 1951-33 may be used to effect 
such modifications, if legally adequate, or other forms may be used if 
acceptable to FmHA or its successor agency under Public Law 103-354. The 
original of a new note or any endorsement required by OGC is to be 
attached to the existing note, filed in the servicing office, and 
retained until the account is paid in full or otherwise satisfied. A 
copy will be forwarded to the Finance Office.
    (4) Bonds and notes with other than real or chattel security pledged 
to FmHA or its successor agency under Public Law 103-354. Loans 
evidenced by bonds, or by notes with other than real or chattel security 
pledged to FmHA or its successor agency under Public Law 103-354, may be 
reamortized using procedures acceptable to the State Director and 
legally permissible under State statutes in the opinion of the 
borrower's counsel and the OGC.
    (i) The procedure may consist of a new debt instrument or agreement 
for the total FmHA or its successor agency under Public Law 103-354 
indebtedness, including the delinquency, or a new instrument or 
agreement whereby the borrower agrees to repay the delinquency plus 
interest. If a new instrument or agreement for only the delinquent 
amount is used, a new loan number will be assigned to the delinquent 
amount, and the borrower will be required to pay the amounts due under 
both the original and the new instruments.
    (ii) When a delinquent or problem loan cannot be reamortized by 
issuing a new debt instrument due to State statutes, or the cost of 
preparation and closing is prohibitive, the rescheduling agreement 
provided as Exhibit H of this subpart (available in any FmHA or its 
successor agency under Public Law 103-354 office), may be used.
    (iii) Section 1942.19 of subpart A of part 1942 of this chapter 
applies to any new bonds issued unless precluded by State statutes or an 
exception is approved by the National Office.
    (iv) If State statutes do not require the release of existing bonds, 
they will be retained with the new bond instrument or agreement in the 
FmHA or its successor agency under Public Law 103-354 office authorized 
to store such documents. If State statutes require release of existing 
bonds, the exchange will be accomplished by the District Director, and 
the new bond and/or agreement will be retained in the appropriate 
office.
    (5) New debt instruments or agreements. (i) A copy will be sent to 
the Finance Office after execution, except that if serial bonds are 
used, the original bond(s) will be submitted to the Finance Office.
    (ii) Any agreement used will contain:
    (A) The amount delinquent, which must equal the total delinquency on 
the account and net advances (the unpaid principal on any advance and 
the accrued interest on any advance through the date of reamortization, 
less interest payments credited on the advance account);
    (B) The effective date of the reamortization;
    (C) The number of years over which the delinquency will be 
amortized;
    (D) The repayment schedule; and
    (E) The interest rate.
    (iii) A payment will be due on the next scheduled due date. 
Deferment of interest and/or principal payments is not authorized.
    (iv) A separate new instrument will be required for each loan being 
reamortized.
    (v) If amortized payments are not used, the schedule of principal 
installments developed will be such that combined payments of principal 
and interest closely approximate an amortized payment.
    (d) Reamortization with interest rate adjustment--Water and waste 
borrowers only. A borrower that is seriously delinquent in loan payments 
may be eligible for loan reamortization with interest rate adjustment. 
The purpose of loan reamortization with interest rate adjustment is to 
provide relief for a borrower that is unable to service the outstanding 
loan in accordance with its existing terms and to enhance recovery on 
the loan. A borrower must meet the conditions of this subpart to be 
considered eligible for this provision.

[[Page 46]]

    (1) Eligibility determination. The State Director, Rural 
Development, may submit to the Administrator for approval an adjustment 
in the rate of interest charged on outstanding loans only for those 
borrowers who meet the following requirements:
    (i) The borrower has exhausted all other servicing provisions 
contained in this subpart;
    (ii) The borrower is experiencing severe financial problems;
    (iii) Any management deficiencies must have been corrected or the 
borrower must submit a plan acceptable to the State Office to correct 
any deficiencies before an interest rate adjustment may be considered;
    (iv) Borrower user rates must be comparable to similar systems. In 
addition, the operating expenses reported by the borrower must appear 
reasonable in relation to similar system expenses;
    (v) The borrower has cooperated with Rural Development in exploring 
alternative servicing options and has acted in good faith with regard to 
eliminating the delinquency and complying with its loan agreements and 
agency regulations; and
    (vi) The borrower's account must be delinquent at least one annual 
debt payment for 180 days.
    (2) Conditions of approval. All borrowers approved for an adjustment 
in the rate of interest by the Administrator shall agree to the 
following conditions:
    (i) The borrower shall agree not to maintain cash or cash reserves 
beyond what is reasonable at the time of interest rate adjustment to 
meet debt service, operating, and reserve requirements.
    (ii) A review of the borrower's management and business operations 
may be required at the discretion of the State Director. This review 
shall be performed by an independent expert who has been recommended by 
the State Director and approved by the National Office. The borrower 
must agree to implement all recommendations made by the State Director 
as a result of the review.
    (iii) If requested, a copy of the latest audited financial 
statements or management report must be submitted to the Administrator.
    (3) Reamortization. At the discretion of the Administrator, the 
interest rate charged on outstanding loans of eligible borrowers may be 
adjusted to no less than the poverty interest rate and the term of the 
loans may be extended up to a new 40 year term or the remaining useful 
life of the facility, whichever is less.

[55 FR 4399, Feb. 8, 1990, as amended at 56 FR 25351, June 4, 1991; 63 
FR 41714, Aug. 5, 1998]



Sec. 1951.224  Third party agreements.

    The State Director may authorize all or part of a facility to be 
operated, maintained or managed by a third party under a contract, 
management agreement, written lease, or other third party agreement as 
follows:
    (a) Leases--(1) Lease of all or part of a facility (except when 
liquidation action is pending). The State Director may consent to the 
leasing of all or a portion of security property when:
    (i) Leasing is the only feasible way to provide the service and is 
the customary practice as required under Sec. 1942.17(b)(4) of subpart 
A of part 1942 of this chapter;
    (ii) The borrower retains ultimate responsibility for operating, 
maintaining, and managing the facility and for its continued 
availability and use at reasonable rates and terms as required under 
Sec. 1942.17(b)(4) of subpart A of part 1942 of this chapter. The lease 
agreement must clearly reflect sufficient control by the borrower over 
the operation, maintenance, and management of the facility to assure 
that the borrower maintains this responsibility;
    (iii) The lease agreement contains provisions prohibiting any 
amendments to the lease or any subleasing arrangements without prior 
written approval from FmHA or its successor agency under Public Law 103-
354;
    (iv) The lease document contains nondiscrimination requirements as 
set forth in Sec. 1951.204 of this subpart;
    (v) The lease contains a provision which recognizes that FmHA or its 
successor agency under Public Law 103-354 is a lienholder on the subject 
facility and, as such, the lease is subordinate to the rights and claims 
of FmHA or

[[Page 47]]

its successor agency under Public Law 103-354 as lienholder; and
    (vi) The lease does not constitute a lease/purchase arrangement, 
unless permitted under Sec. 1951.232 of this subpart.
    (2) Lease of all or part of a facility (pending liquidation action). 
The State Director may consent to the leasing of all or a portion of 
security property when:
    (i) The lease will not adversely affect the repayment of the loan or 
the Government's rights under the security or other instruments;
    (ii) The State Director has determined that liquidation will likely 
be necessary and the lease is necessary until liquidation can be 
accomplished;
    (iii) Leasing is not an alternative to, or means of delaying, 
liquidation action;
    (iv) The lease and use of any proceeds from the lease will further 
the objective of the loan;
    (v) Rental income is assigned to FmHA or its successor agency under 
Public Law 103-354 in an amount sufficient to make regular payments on 
the loan and operate and maintain the facility unless such payments are 
otherwise adequately secured;
    (vi) The lease is advantageous to the borrower and is not 
disadvantageous to the Government;
    (vii) If foreclosure action has been approved and the case has been 
submitted to OGC, consent to lease and use of proceeds will be granted 
only with OGC's concurrence; and
    (viii) The lease does not exceed a one-year period. The property may 
not be under lease more than two consecutive years without authorization 
from the National Office. Long-term leases may be approved, with prior 
authorization from the National Office, if necessary to ensure the 
continuation of services for which the loan was made and if other 
servicing options contained in this subpart have been determined 
inappropriate for servicing the loan.
    (b) Mineral leases. Unless liquidation is pending, the State 
Director is authorized to approve mineral leases when:
    (1) The lessee agrees, or is liable without any agreement, to pay 
adequate compensation for any damage to the real estate surface and 
improvements. Damage compensation will be assigned to FmHA or its 
successor agency under Public Law 103-354 or the prior lienholder by the 
use of Form FmHA or its successor agency under Public Law 103-354 443-
16, ``Assignment of Income from Real Estate Security,'' or other 
appropriate instrument;
    (2) Royalty payments are adequate and are assigned to FmHA or its 
successor agency under Public Law 103-354 on Form FmHA or its successor 
agency under Public Law 103-354 443-16 in an amount determined by the 
State Director to be adequate to protect the Government's interest;
    (3) All or a portion of delay rentals and bonus payments may be 
assigned on Form FmHA or its successor agency under Public Law 103-354 
443-16 if needed for protection of the Government's interest;
    (4) The lease, subordination, or consent form is acceptable to OGC;
    (5) The lease will not interfere with the purpose for which the loan 
or grant was made; and
    (6) When FmHA or its successor agency under Public Law 103-354 
consent is required, the borrower submits a completed Form FmHA or its 
successor agency under Public Law 103-354 465-1. The form will include 
the terms of the proposed agreement and specify the use of all proceeds, 
including any to be released to the borrower.
    (c) Management agreements. Management agreements should contain the 
minimum suggested contents contained in Guide 24 of part 1942, subpart A 
of this chapter (available in any FmHA or its successor agency under 
Public Law 103-354 office).
    (d) Affiliation agreements. An affiliation agreement between the 
borrower and a third party may be approved by the State Director, with 
OGC concurrence, if it provides for shared services between the parties 
and does not result in changes to the borrower's legal organizational 
structure which would result in its loss of control over its assets and/
or over the operation, management, and maintenance of the facility to 
the extent that it cannot carry out its responsibilities as set forth in 
Sec. 1942.17(b)(4) of subpart A of part 1942 of this chapter. However, 
affiliation

[[Page 48]]

agreements which result in a loss of borrower control may be approved 
with prior concurrence of the Administrator if the loan is reclassified 
as a nonprogram loan and the borrower is notified that it is no longer 
eligible for any program benefit. Requests forwarded to the 
Administrator will contain the case file, the proposed affiliation 
agreement, and necessary supporting information.
    (e) Processing. The consent of other lienholders will be obtained 
when required. When National Office approval is required, or if the 
State Director wishes to have a transaction reviewed prior to approval, 
the case file will be forwarded to the National Office and will include:
    (1) A copy of the proposed agreement;
    (2) Exhibit A of this subpart (available in any FmHA or its 
successor agency under Public Law 103-354 office), appropriately 
completed;
    (3) Any other necessary supporting information.

[55 FR 4399, Feb. 8, 1990, as amended at 57 FR 21199, May 19, 1992]



Sec. 1951.225  Liquidation of security.

    When the District Director believes that continued servicing will 
not accomplish the objectives of the loan, he or she will complete 
Exhibit A of this subpart (available in any FmHA or its successor agency 
under Public Law 103-354 office), and submit it with the District Office 
file to the State Office. If the State Director determines the account 
should be liquidated, he or she will encourage the borrower to dispose 
of the FmHA or its successor agency under Public Law 103-354 security 
voluntarily through a sale or transfer and assumption, and establish a 
specified period, not to exceed 180 days, to accomplish the action. If a 
transfer or voluntary sale is not carried out, the loan will be 
liquidated according to subpart A of part 1955 of this chapter.



Sec. 1951.226  Sale or exchange of security property.

    A cash sale of all or a portion of a borrower's assets or an 
exchange of security property may be approved subject to the conditions 
set forth below.
    (a) Authorities. (1) The District Director is authorized to approve 
actions under this section involving only chattels.
    (2) The State Director is authorized to approve real estate 
transactions except as noted in the following paragraph.
    (3) Approval of the Administrator must be obtained when a 
substantial loss to the Government will result from a sale; one or more 
members of the borrower's organization proposes to purchase the 
property; it is proposed to sell the property for less than the 
appraised value; or the buyer refuses to assume all the terms of the 
Grant Agreement. It is not FmHA or its successor agency under Public Law 
103-354 policy to sell security property to one or more members of the 
borrower's organization at a price which will result in a loss to the 
Government.
    (b) General. Approval may be given when the approval official 
determines and documents that:
    (1) The consideration is adequate;
    (2) The release will not prevent carrying out the purpose of the 
loan;
    (3) The remaining property is adequate security for the loan or the 
transaction will not adversely affect FmHA or its successor agency under 
Public Law 103-354's security position;
    (4) If the property to be sold or exchanged is to be used for the 
same or similar purposes for which the loan or grant was made, the 
purchaser will:
    (i) Execute Form FmHA or its successor agency under Public Law 103-
354 400-4, ``Assurance Agreement.'' The covenants involved will remain 
in effect as long as the property continues to be used for the same or 
similar purposes for which the loan or grant was made. The instrument of 
conveyance will contain the covenant referenced in Sec. 1951.204 of 
this subpart; and
    (ii) Provide to FmHA or its successor agency under Public Law 103-
354 a written agreement assuming all rights and obligations of the 
original grantee if grant funds were provided. See Sec. 1951.215 below 
for additional guidance on grant agreements.
    (5) The proceeds remaining after paying any reasonable and necessary 
selling expenses are used for one or more of the following purposes:
    (i) To pay on FmHA or its successor agency under Public Law 103-354 
debts

[[Page 49]]

according to Sec. 1951.221 of this subpart; on debts secured by a prior 
lien; and on debts secured by a subsequent lien if it is to FmHA or its 
successor agency under Public Law 103-354's advantage.
    (ii) To purchase or acquire through exchange property more suited to 
the borrower's needs, if the FmHA or its successor agency under Public 
Law 103-354 debt will be as well secured after the transaction as 
before.
    (iii) To develop or enlarge the facility if necessary to improve the 
borrower's debt-paying ability; place the operation on a sounder basis; 
or otherwise further the loan objectives and purposes.
    (6) Disposition of property acquired in whole or part with FmHA or 
its successor agency under Public Law 103-354 grant funds will be 
handled in accordance with the grant agreement.
    (c) Processing. (1) The case file will contain the following:
    (i) Except for actions approved by the District Director, Exhibit A 
of this subpart (available in any FmHA or its successor agency under 
Public Law 103-354 office), appropriately completed;
    (ii) The appraisal report, if appropriate;
    (iii) Name of purchaser, anticipated sales price, and proposed terms 
and conditions;
    (iv) Form FmHA or its successor agency under Public Law 103-354 
1965-8, ``Release from Personal Liability,'' including the County 
Committee memorandum and the State Director's recommendations;
    (v) An executed Form FmHA or its successor agency under Public Law 
103-354 400-4, if applicable;
    (vi) An executed Form FmHA or its successor agency under Public Law 
103-354 465-1, if applicable;
    (vii) Form FmHA or its successor agency under Public Law 103-354 
460-4, ``Satisfaction,'' if a debt has been paid in full or satisfied by 
debt settlement action. For cases involving real estate, a similar form 
may be used if approved by OGC; and
    (viii) Written approval of the Administrator when required under 
Sec. 1951.226(a)(3) of this subpart;
    (2) Releasing security. (i) The District Director is authorized to 
satisfy or terminate chattel security instruments when Sec. 1951.226(b) 
of this subpart and Sec. 1962.17 and Sec. 1962.27 of subpart A of part 
1962 of this chapter have been complied with. Partial release may be 
made by using Form FmHA or its successor agency under Public Law 103-354 
460-1, ``Partial Release,'' or Form FmHA or its successor agency under 
Public Law 103-354 462-12, ``Statements of Continuation, Partial 
Release, Assignment, Etc.''
    (ii) Subject to Sec. 1951.226(b) of this subpart, the State 
Director is authorized to release part or all of an interest in real 
estate security by approving Form FmHA or its successor agency under 
Public Law 103-354 465-1. Partial release of real estate security may be 
made by use of Form FmHA or its successor agency under Public Law 103-
354 460-1 or other form approved by OGC.
    (3) FmHA or its successor agency under Public Law 103-354 liens will 
not be released until the sale proceeds are received for application on 
the Government's claim. In states where it is necessary to obtain the 
insured note from the lender to present to the recorder before releasing 
a portion of the land from the mortgage, the borrower must pay any cost 
for postage and insurance of the note while in transit. The District 
Director will advise the borrower when it requests a partial release 
that it must pay these costs. If the borrower is unable to pay the costs 
from its own funds, the amounts shown on the statement of actual costs 
furnished by the insured lender may be deducted from the sale proceeds.
    (d) Release from liability. (1) When an FmHA or its successor agency 
under Public Law 103-354 debt is paid in full from the proceeds of a 
sale, the borrower will be released from liability by use of Form FmHA 
or its successor agency under Public Law 103-354 1965-8.
    (2) When sale proceeds are not sufficient to pay the FmHA or its 
successor agency under Public Law 103-354 debt in full, any balance 
remaining will be handled in accordance with procedures for debt 
settlement actions set forth in subpart C of part 1956 of this chapter.
    (i) In determining whether a borrower should be released from 
liability, the State Director will consider the borrower's debt-paying 
ability based on

[[Page 50]]

its assets and income at the time of the sale.
    (ii) Release from liability will be accomplished by using Form FmHA 
or its successor agency under Public Law 103-354 1965-8 and obtaining 
from the County Committee a memorandum recommending the release which 
contains the following statement:

    ---------------- in our opinion does not have reasonable debt-paying 
ability to pay the balance of the debt after considering its assets and 
income at the time of the sale. The borrower has cooperated in good 
faith, used due diligence to maintain the security against loss, and 
otherwise fulfilled the covenants incident to the loan to the best of 
its ability. Therefore, we recommend that the borrower be released from 
liabilty upon the completion of the sale.



Sec. 1951.227  Protective advances.

    The State Director is authorized to approve, without regard to any 
loan or total indebtedness limitation, vouchers to pay costs, including 
insurance and real estate taxes, to preserve and protect the security, 
the lien, or the priority of the lien securing the debt owed to or 
insured by FmHA or its successor agency under Public Law 103-354 if the 
debt instrument provides that FmHA or its successor agency under Public 
Law 103-354 may voucher the account to protect its lien or security. The 
State Director must determine that authorizing a protective advance is 
in the best interest of the government. For insurance, factors such as 
the amount of advance, occupancy of the structure, vulnerability to 
damage and present value of the structure and contents will be 
considered.
    (a) Protective advances are considered due and payable when 
advanced. Advances bear interest at the rate specified in the most 
recent debt instrument authorizing such an advance.
    (b) Protective advances are not to be used as a substitute for a 
loan.
    (c) Vouchers are prepared in accordance with applicable procedures 
set forth in FmHA or its successor agency under Public Law 103-354 
Instruction 2024-A (available in any FmHA or its successor agency under 
Public Law 103-354 office).

[55 FR 4399, Feb. 8, 1990, as amended at 57 FR 36591, Aug. 14, 1992]



Sec. Sec. 1951.228-1951.229  [Reserved]



Sec. 1951.230  Transfer of security and assumption of loans.

    (a) General. It is FmHA or its successor agency under Public Law 
103-354 policy to approve transfers and assumptions to transferees which 
will continue the original purpose of the loan in accordance with the 
following and specific requirements relating to eligible and ineligible 
borrowers set forth below:
    (1) The present borrower is unable or unwilling to accomplish the 
objectives of the loan.
    (2) The transfer will not be disadvantageous to the Government or 
adversely affect either FmHA or its successor agency under Public Law 
103-354's security position or the FmHA or its successor agency under 
Public Law 103-354 program in the area.
    (3) Transfers to eligible applicants will receive preference over 
transfers to ineligible applicants if recovery to FmHA or its successor 
agency under Public Law 103-354 is not less than it would be if the 
transfer were to an ineligible applicant.
    (4) If the FmHA or its successor agency under Public Law 103-354 
debt(s) exceed the present market value of the security as determined by 
the State Director, the transferee will assume an amount at least equal 
to the present value.
    (5) If the transfer and assumption is to one or more members of the 
borrower's organization, there must not be a loss to the government.
    (6) FmHA or its successor agency under Public Law 103-354 concurs in 
plans for disposition of funds in the transferor's debt service, 
reserve, operation and maintenance, and any other project account, 
including supervised bank accounts.
    (7) When the property to be transferred is to be used for the same 
or similar purposes for which the loan was made, the transferee will 
execute Form FmHA or its successor agency under Public Law 103-354 400-4 
to continue nondiscrimination covenants and provide to FmHA or its 
successor agency under Public Law 103-354 a written certification 
assuming all terms of the Grant Agreement executed by the

[[Page 51]]

transferor. All instruments of conveyance will contain the covenant 
referenced in Sec. 1951.204 of this subpart.
    (8) This subpart does not preclude the transferor from receiving 
equity payments when the full account of the FmHA or its successor 
agency under Public Law 103-354 debt is assumed. However, equity 
payments will not be made on more favorable terms than those on which 
the balance of the FmHA or its successor agency under Public Law 103-354 
debt will be paid.
    (9) Transferees must have the ability to pay the FmHA or its 
successor agency under Public Law 103-354 debt as provided in the 
assumption agreement and the legal capacity to enter into the contract. 
The applicant will submit a current balanced sheet using Form FmHA or 
its successor agency under Public Law 103-354 442-3, ``Balance Sheet,'' 
and budget and cash flow information using Form FmHA or its successor 
agency under Public Law 103-354 442-2, or similar forms. For ineligible 
applicants, such information may be supplemented by a credit report from 
an independent source or verified by an independent certified public 
accountant.
    (10) For purposes of this subpart, transfers to eligible applicants 
will include mergers and consolidations. Mergers occur when two or more 
corporations combine in such a manner that only one remains in 
existence. In a consolidation, two or more corporations combine to form 
a new, consolidated corporation, with all of the original corporations 
ceasing to exist. In both mergers and consolidations, the surviving or 
emerging corporation takes the assets and assumes the liabilities of the 
corporation(s) which ceased to exist. Such transactions must be 
distinguished from transfers and assumptions, in which a transferor will 
not necessarily go out of existence and the transferee will not always 
take all assets or assume all liabilities of the transferor.
    (11) A current appraisal report to establish the present market 
value of the security will be completed in accordance with Sec. 
1951.220(i) of this subpart when the full debt is not being assumed.
    (12) There must be no lien, judgment, or similar claims of other 
parties against the FmHA or its successor agency under Public Law 103-
354 security being transferred unless the transferee is willing to 
accept such claims and the FmHA or its successor agency under Public Law 
103-354 approval official determines that they will not prevent the 
transferee from repaying the FmHA or its successor agency under Public 
Law 103-354 debt, meeting all operating and maintenance costs, and 
maintaining required reserves. The written consent of any other 
lienholder will be obtained where required.
    (b) Authorities. The State Director is authorized to approve 
transfers and assumptions of FmHA or its successor agency under Public 
Law 103-354 loans in accordance with the provisions of paragraphs (c) 
and (d) of this section, except for the following, which require prior 
approval of the Administrator:
    (1) Proposals which will involve a loss to the Government;
    (2) Proposals involving a transfer to one or more members of the 
present borrower's organization;
    (3) Proposals involving rates and terms which are more liberal than 
those set forth in Sec. 1951.230(c) of this subpart;
    (4) Proposals involving a cash payment to the present borrower which 
exceeds the actual sales expenses;
    (5) The transferee refuses to assume all terms of the Grant 
Agreement for a project financed in part with FmHA or its successor 
agency under Public Law 103-354 grant funds; and
    (6) Proposed transfers to ineligible applicants when there is no 
significant downpayment and/or the repayment period is to exceed 25 
years.
    (c) Eligible applicants. Except as noted in Sec. 1951.230(b) of 
this subpart, the State Director is authorized to approve transfers of 
security property to and assumptions of FmHA or its successor agency 
under Public Law 103-354 debts by transferees who would be eligible for 
financial assistance under the loan program involved for the type of 
loan being transferred. The State Director must determine and document 
that eligibility requirements have been satisfied.

[[Page 52]]

    (1) If a loan is evidenced and secured by a note and lien on real or 
chattel property, Form FmHA or its successor agency under Public Law 
103-354 1951-15, ``Community Programs Assumption Agreement,'' will be 
executed by the transferee. When the terms of the loan are changed, the 
new repayment period may not exceed the lesser of the repayment period 
for a new loan of the type involved or the expected life of the 
facility. Interest will accrue at the rate currently reflected in 
Finance Office records.
    (2) If the loan is evidenced and secured by a bond, procedures will 
be followed which are acceptable to the State Director and legally 
permissible under State law in the opinion of the borrower's counsel and 
OGC. The interest rate will be the rate currently reflected in Finance 
Office records. Any new repayment period provided may not exceed the 
lesser of the repayment period for a new loan of the type involved or 
the expected life of the facility.
    (3) Loans being transferred and assumed may be combined when the 
security is the same, new terms are being provided, a new debt 
instrument will be issued, and the loans have the same interest rate and 
are for the same purpose. If applicable, Sec. 1942.19(h)(11) will 
govern the preparation of any new debt instruments required.
    (4) A loan may be made in connection with a transfer if the 
transferee meets all eligibility and other requirements for the kind of 
loan being made. Such a loan will be considered as a separate loan, and 
must be evidenced by a separate debt instrument. However, it is 
permissible to have one authorizing loan resolution or ordinance if 
permitted by State statutes.
    (5) Any development funds remaining in a supervised bank account 
which are not to be refunded to FmHA or its successor agency under 
Public Law 103-354 will be transferred to a supervised bank account for 
the transferee simultaneously with the closing of the transfer for use 
in completing planned development.
    (d) Ineligible applicants. Except as noted in Sec. 1951.230(b) of 
this subpart, the State Director is authorized to approve transfer and 
assumptions to transferees who would not be eligible for financial 
assistance under the loan program involved for the type of loan being 
transferred. However, the State Director is authorized to approve all 
transfers of incorporated Economic Opportunity Cooperative loans to 
ineligible applicants without regard to the requirements set forth in 
Sec. 1951.230(b). Such transfers are considered only when an eligible 
transferee is not available or when the recovery to FmHA or its 
successor agency under Public Law 103-354 from a transfer to an 
available eligible transferee would be less. Transfers are not to be 
considered as a means by which members of the transferor's governing 
body can obtain an equity or as a method of providing a source of easy 
credit for purchasers.
    (1) Ineligible applicants must pay a one-time nonrefundable transfer 
fee when they submit an application or proposal.
    (i) The National Office will issue a directive annually advising the 
field of the amount of the fee. Any cost for appraisals performed by 
non-FmHA or its successor agency under Public Law 103-354 personnel will 
be handled in accordance with FmHA or its successor agency under Public 
Law 103-354 Instruction 2024-A (available in any FmHA or its successor 
agency under Public Law 103-354 office), and will be added to the basic 
fee.
    (ii) Transfer fees will be deposited in accordance with current 
instructions governing the handling of collections. The fees will be 
identified as transfer fees on Form FmHA or its successor agency under 
Public Law 103-354 451-2, ``Schedule of Remittances,'' and will be 
included on the Daily Activity Report. The amount will be credited to 
the Rural Development Insurance Fund.
    (iii) If the State Director determines waiver of the transfer fee is 
in the best interest of the government, he or she will request prior 
approval by submitting the transfer case file established in accordance 
with processing requirements set forth below to the National Office, 
Attention (appropriate program division).
    (2) Any funds remaining in a supervised bank account will be 
refunded to FmHA or its successor agency under

[[Page 53]]

Public Law 103-354 and applied to the debt as a condition of transfer.
    (3) The interest rate will be the greater of the rate specified for 
the note in current Finance Office records or the market rate for 
Community Programs as of the transfer closing date.
    (4) The transferred loan will be identified as an NP loan and 
serviced in accordance with Sec. 1951.216 of this subpart.
    (5) Form FmHA or its successor agency under Public Law 103-354 465-
5, ``Transfer of Real Estate Security,'' will be used, and will be 
modified as appropriate before execution.
    (6) Consideration will be given to obtaining individual liability 
agreements from members of the transferee organization.
    (e) Release from liability. Except when nonprogram loans or Economic 
Opportunity Cooperative loans are involved, transferors may be released 
from liability in accordance with the following:
    (1) If the full amount of the debt is assumed, the State Director 
may approve the release from liability by use of Form FmHA or its 
successor agency under Public Law 103-354 1965-8.
    (2) If less than the full amount of the debt is assumed, any balance 
remaining will be handled in accordance with procedures for debt 
settlement actions set forth in subpart C of part 1956 of this chapter.
    (i) In determining whether a borrower should be released from 
liability, the State Director will consider the borrower's debt-paying 
ability based on its assets and income at the time of the sale.
    (ii) Release from liability will be accomplished by using Form FmHA 
or its successor agency under Public Law 103-354 1965-8 and obtaining 
from the County Committee a memorandum recommending the release which 
contains the statement set forth in Sec. 1951.226(d)(2)(ii) of this 
subpart.
    (f) Processing. Transfers and assumptions will be processed in 
accordance with the following:
    (1) A transfer case file organized in accordance with FmHA or its 
successor agency under Public Law 103-354 Instruction 2033-A (available 
in any FmHA or its successor agency under Public Law 103-354 office) 
will be established, and will contain all documents and correspondence 
relating to the transfer. The forms utilized for transfers and 
assumptions are listed in Exhibit D (available in any FmHA or its 
successor agency under Public Law 103-354 office). All forms listed must 
be completed and included in the case file unless inappropriate for the 
particular situation.
    (2) A letter of conditions establishing requirements to be met in 
connection with the transfer and assumption will be issued, and the 
transferee will be required to execute Form FmHA or its successor agency 
under Public Law 103-354 442-46, ``Letter of Intent to Meet 
Conditions,'' prior to the closing of the transfer.
    (3) Both the transferee and transferor are responsible for obtaining 
the legal services necessary to accomplish the transfer.
    (4) Transfers will be closed in accordance with instructions 
provided by OGC.
    (5) When the transferee is a public body and Form FmHA or its 
successor agency under Public Law 103-354 1951-15 is not suitable, the 
transferee's attorney will prepare the documents necessary to effect the 
transfer and assumption and submit them for approval by FmHA or its 
successor agency under Public Law 103-354 and OGC.
    (6) Accrued interest to be entered in either Table 1 of Form FmHA or 
its successor agency under Public Law 103-354 1951-15 or other 
appropriate assumption agreement is to be obtained using the status 
screen option in ADPS.
    (7) The following forms, if utilized, will be sent immediately to 
the Finance Office:
    (i) Form FmHA or its successor agency under Public Law 103-354 1951-
15 or other appropriate assumption agreement;
    (ii) A conformed copy of Form FmHA or its successor agency under 
Public Law 103-354 1965-8.
    (8) If an FmHA or its successor agency under Public Law 103-354 
grant was made in conjunction with the loan being transferred, the 
transferee must agree in writing to assume all rights and obligations of 
the original grantee.

[[Page 54]]

See Sec. 1951.215 for additional guidance on grant agreements.
    (9) The transferee will obtain insurance according to requirements 
for the loan(s) being transferred unless the approval official requires 
additional insurance. When the entire FmHA or its successor agency under 
Public Law 103-354 debt is being assumed and an amount has been advanced 
for insurance premiums or any other purposes, the transfer will not be 
completed until the Finance Office has charged the advance to the 
transferor's account.
    (10) Rates and terms. (i) If the transfer will be closed at the same 
rates and terms, the transferee will be informed of the amount needed to 
be on schedule by the next installment due date.
    (ii) If the transfer will be closed at new rates and terms, the 
transferee will be informed of the amount of principal and interest owed 
based on information obtained using the ADPS status screen option.
    (11) The effective date of a transfer is the actual date the 
transfer is closed, which is the same date Form FmHA or its successor 
agency under Public Law 103-354 1951-15 or other appropriate assumption 
agreement is signed.
    (12) Title to all assets will be conveyed from the transferor to the 
transferee unless other arrangements are agreed upon by all parties 
concerned, including FmHA or its successor agency under Public Law 103-
354. All instruments of conveyance will contain the covenant referenced 
in Sec. 1951.204 of this subpart.
    (13) If an insured loan being held by an investor is involved, the 
Finance Office will have to repurchase the note prior to processing the 
assumption agreement.
    (14) When National Office approval is required, the transfer case 
file will be submitted to the Administrator, Attention: (appropriate 
program division), with Exhibit A of this subpart (available in any FmHA 
or its successor agency under Public Law 103-354 office), appropriately 
completed, and a cover memorandum which denotes any unusual 
circumstances.
    (15) The District Director must review Form FmHA or its successor 
agency under Public Law 103-354 1910-11, ``Applicant Certification, 
Federal Collection Policies for Consumer or Commercial Debts,'' with the 
applicant, and the form must be signed by the applicant and included in 
the file.

[55 FR 4399, Feb. 8, 1990, as amended at 57 FR 36590, Aug. 14, 1992; 66 
FR 1569, Jan. 9, 2001]



Sec. 1951.231  Special provisions applicable to Economic Opportunity 
(EO) Cooperative Loans.

    (a) Withdrawal of member and transfer to and assumption by new 
members of Unincorporated Cooperatives. (1) Withdrawal of a member who 
is no longer utilizing the services of an association and transfer of 
withdrawing member interest in the association to a new member who will 
assume the entire unpaid balance of the indebtedness of the withdrawing 
member may be permitted, if the remaining members agree to accept the 
new member and the transfer will not adversely affect collection of the 
loan. The servicing office will submit to the State Office the borrow 
case file and the following:
    (i) Form FmHA or its successor agency under Public Law 103-354 1951-
15 executed by the proposed new member;
    (ii) Statement of the current amount of the indebtedness involved;
    (iii) A description and statement of the value of the security 
property;
    (iv) A memorandum to justify the transaction;
    (v) Form FmHA or its successor agency under Public Law 103-354 440-
2, ``County Committee Certification or Recommendation;''
    (vi) Exhibit B of this subpart, ``Agreement for New Member (With or 
Without Withdrawing Member),'' (available in any FmHA or its successor 
agency under Public Law 103-354 office), executed by the remaining 
members of the association, the proposed new member, and the withdrawing 
member; and
    (vii) Form FmHA or its successor agency under Public Law 103-354 
450-12, ``Bill of Sale (Transfer by Withdrawing Member),'' executed by 
the withdrawing member.
    (2) If the State Director determines after review of the above 
information that the proposed new member is eligible and the transfer is 
justified, the State Director may approve the transfer and assumption by 
executing Form

[[Page 55]]

FmHA or its successor agency under Public Law 103-354 1951-15.
    (3) Upon completion of the above actions, the State Director may 
release the outgoing member from personal liability using Form FmHA or 
its successor agency under Public Law 103-354 1965-8.
    (4) If Finance Office records must be changed due to changes in 
borrower name, address and/or case number, necessary documents, 
including Form FmHA or its successor agency under Public Law 103-354 
1951-15 and, if applicable, Form FmHA or its successor agency under 
Public Law 103-354 1965-8, will be forwarded to the Finance Office 
immediately with a memorandum indicating that the purpose of the 
submission is only to establish liability for a new member and release 
an old member from liability.
    (b) Withdrawal of members from Unincorporated Cooperatives when new 
member not available. Withdrawal of a member who no longer utilizes the 
services of an association may be permitted even though a new member is 
not available, provided:
    (1) The State Director determines that the remaining members have 
sufficient need for the property, and that the withdrawal of the member 
will not adversely affect collection of the loan; and
    (2) The remaining members obtain from the outgoing member an 
agreement conveying his or her interest in the cooperative property to 
them. They may also wish to agree to protect the outgoing member against 
liability on the debt owed to FmHA or its successor agency under Public 
Law 103-354 as well as any other debts. Exhibit C of this subpart, 
``Agreement for Withdrawal of Member (Without New Member),'' (available 
in any FmHA or its successor agency under Public Law 103-354 office), 
may be used by the cooperative. FmHA or its successor agency under 
Public Law 103-354 will not be a party to the agreement.
    (c) Addition of new members (no withdrawing member or transfer 
involved) for both Incorporated and Unincorporated Cooperatives. (1) A 
new member may be admitted to the association even though there is no 
withdrawing member, if:
    (i) The members of the association agree to accept the proposed new 
member, and
    (ii) The State Director determines that the association owns 
adequate facilities to provide service to the new member.
    (2) The servicing office will submit to the State Office the case 
file and items (i) through (vi) of Sec. 1951.231(a)(1).
    (3) If the State Director determines after the review of the above 
information that the proposed new member is eligible and the transaction 
is justified, the State Director may approve the transaction by 
executing Form FmHA or its successor agency under Public Law 103-354 
1951-15.
    (4) Form FmHA or its successor agency under Public Law 103-354 1951-
15 will be forwarded immediatly to the Finance Office with a memorandum 
indicating that the form is intended only to establish liability for a 
new member.
    (d) Deceased members of Unincorporated Cooperatives. Form FmHA or 
its successor agency under Public Law 103-354 442-24, ``Operating 
Agreement,'' (now obsolete) was executed by recipients of these loans. 
Paragraph 10 of that form provides that in case of the death of any 
member, the heirs or personal representative of the deceased member 
shall take the deceased member's place in the association. This 
provision also covers sale of the decedent's interest in the association 
if the sale is necessary to pay debts of the estate.
    (1) If the heirs or personal representative do not wish to continue 
membership in the association, the remaining members may be permitted to 
continue to operate the property if FmHA or its successor agency under 
Public Law 103-354's financial interest will not be jeopardized. The 
remaining members should obtain from the deceased member's estate an 
agreement conveying the estate's interest in the cooperative property to 
them. The remaining members may wish to agree to protect the estate 
against liability on the debt to FmHA or its successor agency under 
Public Law 103-354 as well as any other debts of the cooperative.
    (2) The requirement of Sec. 1962.46(h) of subpart A of part 1962 
will also be followed.

[[Page 56]]

    (e) Action which affects individual members of Unincorporated EO 
Cooperative security. The borrower will be expected to protect its own 
interest in condemnation, trespass, quiet title, and other cases 
affecting the security. The servicing office will immediately furnish 
the complete facts concerning any action taken against individual 
members of Unincorporated Cooperatives to the State Director together 
with the case file.
    (f) Debt Settlement. Debt settlement actions for Economic 
Opportunity Cooperative loans must be handled under the Federal Claims 
Collection Act; proposals will be submitted to the National Office for 
review and approval.



Sec. 1951.232  Water and waste disposal systems which have become 
part of an urban area.

    A water and/or waste disposal system serving an area which was 
formerly a rural area as defined in Sec. 1942.17(b)(2)(iii) and (iv) of 
subpart A of part 1942 of this chapter, but which has become in its 
entirety part of an urban area, will be serviced in accordance with this 
section.
    (a) Curtailment or limitation of service. Service may not be 
curtailed or limited by the inclusion of a system within an urban area.
    (b) Sale or transfer and assumption. (1) The urban community or 
another entity may purchase the facility involved and immediately pay 
the FmHA or its successor agency under Public Law 103-354 debt in full; 
or
    (2) The urban community or another entity may accept a transfer of 
the FmHA or its successor agency under Public Law 103-354 debt on an 
ineligible applicant basis.
    (3) When a grant is involved, the entity will agree in writing to 
assume all rights and obligations of the original grantee. See Sec. 
1951.215 for additional guidance on grant agreements.
    (c) Lease-purchase arrangement. If Sec. 1951.232(b) (l) and (2) of 
this section are not practicable, the urban community may, with prior 
approval of the National Office, operate and maintain the system under a 
lease-purchase arrangement which provides that:
    (1) The urban community will:
    (i) Assume responsibility for operation and maintenance of the 
facility, subject to nondiscrimination and all other requirements which 
are applicable to the borrower, which are to be specified in the 
agreement between the parties; and
    (ii) Pay the association annually an amount sufficient to enable it 
to meet all its obligations, including reserve account requirements.
    (2) The FmHA or its successor agency under Public Law 103-354 
borrower will:
    (i) Meet its debt service and reserve account requirements to FmHA 
or its successor agency under Public Law 103-354;
    (ii) Retain its corporate existence until FmHA or its successor 
agency under Public Law 103-354 has been paid in full; and
    (iii) If agreed upon by both parties, convey title to the facility 
to the urban community when the FmHA or its successor agency under 
Public Law 103-354 debt has been paid in full.
    (d) Processing. (1) Sale of a borrower's assets will be handled in 
accordance with Sec. 1951.226 of this subpart.
    (2) Transfer and assumption of a borrower's assets and indebtedness 
will be handled in accordance with Sec. 1951.230 of this subpart.
    (3) Lease-operation-to-purchase arrangements are not permitted.
    (4) When a lease-purchase arrangement is proposed, the State 
Director will obtain a proposed agreement drafted by either the borrower 
or the urban community. The following will be forwarded to the 
Administrator, Attention: Water and Waste Disposal Division, for review 
and approval authorization:
    (i) A copy of the proposed agreement;
    (ii) Exhibit A of this subpart (available in any FmHA or its 
successor agency under Public Law 103-354 office), appropriately 
completed;
    (iii) OGC comments;
    (iv) The case file, including all documentation appropriate for the 
type of servicing action involved.

[55 FR 4399, Feb. 8, 1992, as amended at 57 FR 21199, May 19, 1992]

[[Page 57]]



Sec. Sec. 1951.233-1951.239  [Reserved]



Sec. 1951.240  State Director's additional authorizations and guidance.

    (a) Promote financing purposes and improve or maintain 
collectibility. The State Director is authorized to perform the 
following functions when the action is determined likely to promote the 
loan or grant purposes without jeopardizing collectibility of the loan 
or imparing the adequacy of the security; will strengthen the security; 
or will facilitate, improve, or maintain the orderly collection of the 
loan:
    (1) Approve requests for permission to modify bylaws, articles of 
incorporation, or other rules and regulations of recipients, including 
changes in rate or fee schedules. Changes affecting the recipient's 
legal organizational structure must be approved by OGC.
    (2) Consent to requests by the recipient to incur additional 
indebtedness, subject to applicable FmHA or its successor agency under 
Public Law 103-354 instructions and covenants in the loan or grant 
agreement.
    (3) Renew existing security instruments.
    (4) Approve the extension or expansion of facilities and services.
    (5) Require additional security when:
    (i) Existing security is inadequate and the loan or security 
instruments obligate the borrower to give additional security; or
    (ii) The loan is in default and additional security is acceptable in 
lieu of other servicing actions.
    (6) Release properties being sold by the borrower from mortgages 
securing Rural Renewal loans if the amount of the notes and mortgages 
given by the purchaser to the borrower equal the present market value 
and are assigned and pledged to FmHA or its successor agency under 
Public Law 103-354, and any money payable to the borrower is applied as 
an extra payment on the Rural Renewal loan.
    (7) Approve requests for rights-of-way and easements and any 
subordination necessary in connection with such requests.
    (b) Referrals to National Office. All proposed servicing actions 
which the State Director is not authorized by this subpart to approve 
will be referred to the National Office.
    (c) Defeasance of FmHA or its successor agency under Public Law 103-
354 indebtedness. Defeasance is the use of invested proceeds from a new 
bond issue to repay outstanding bonds in accordance with the repayment 
schedule of the outstanding bonds. The new issue supersedes the 
contractual agreements the borrower agreed to in the prior issue. 
Defeasance, or amending outstanding loan instruments and agreements to 
permit defeasance, of FmHA or its successor agency under Public Law 103-
354 debt instruments is not authorized, since defeasance limits, or 
eliminates entirely, the borrower's ability to comply with statutory 
refinancing requirements implemented by subpart F of part 1951 of this 
chapter.



Sec. 1951.241  Special provision for interest rate change.

    (a) General. Effective October 1, 1981, and thereafter, upon request 
of the borrower, the interest rate charged by FmHA or its successor 
agency under Public Law 103-354 to water and waste disposal and 
community facility borrowers shall be the lower of the rates in effect 
at either the time of loan approval or loan closing. Pub. L. 99-88 
provides that any FmHA or its successor agency under Public Law 103-354 
grant funds associated with such loans shall be set in the amount based 
on the interest rate in effect at the time of loan approval. Loans 
closed October 1, 1981, through October 25, 1985, were closed at the 
interest rate in effect at the time of loan approval and that interest 
rate is reflected in the borrower's debt instrument. For community 
facility and water and waste disposal loans closed on or after October 
1, 1981, and for which the interest rate in effect at the time of loan 
closing is lower than the interest rate in effect at the time of loan 
approval, the borrower may request to be charged the lower interest 
rate. The loan closing interest rate will be determined by FmHA or its 
successor agency under Public Law 103-354 based upon requirements in 
effect at the date of loan closing. Exhibit E of this subpart (available 
in any FmHA or its successor agency under Public Law 103-354 office) 
contains a summary of

[[Page 58]]

interest rate requirements for specific time periods. Exhibit C of 
Subpart O of this part (available in any FmHA or its successor agency 
under Public Law 103-354 office) will be used to determine the interest 
rate and effective dates by category of poverty, intermediate, and 
market rates. Exhibit F of this subpart (available in any FmHA or its 
successor agency under Public Law 103-354 office) contains the 
instructions on how to process a change of interest rate. Loans meeting 
the criteria of this section that have been paid in full are eligible 
for the borrower to request the lower interest rate. For loan(s) that 
involved multiple advances of FmHA or its successor agency under Public 
Law 103-354 funds using temporary debt instruments, wherein the borrower 
requests the interest rate in effect at loan closing, the interest rate 
charged shall be the rate in effect on the date when the first temporary 
debt instrument was issued.
    (b) Notification to borrower and borrower selection of interest 
rate. (1) FmHA or its successor agency under Public Law 103-354 
servicing officials will notify each borrower meeting the provisions of 
this section of the availability of a choice of interest rate. The 
notification will be made in writing at the earliest possible date, 
utilizing Exhibit G of this subpart (available in any FmHA or its 
successor agency under Public Law 103-354 office), and sent by certified 
mail, return receipt requested. Borrowers will be advised at the time of 
notification that if a change of interest rate is requested, the change 
will be accomplished administratively by FmHA or its successor agency 
under Public Law 103-354. The effect of the change on the loan account 
will also be fully explained to the borrower.
    (2) Borrowers must notify FmHA or its successor agency under Public 
Law 103-354 within 90 calendar days of the date of FmHA or its successor 
agency under Public Law 103-354 notification indicating their election 
to retain the rate in effect at loan approval or to change the rate to 
the rate in effect at the time of loan closing. If the borrower does not 
respond within the 90-day period, FmHA or its successor agency under 
Public Law 103-354 will not consider a future request for a lower 
interest rate under the provisions of this subpart.
    (3) The borrower is responsible for assuring that the official 
executing the letter requesting the change of interest rate is duly 
authorized and any action(s) necessary for this authorization have been 
taken as required. Any costs associated with a change of interest rate 
will be the responsibility of the borrower.
    (c) Processing loan interest rate change. The State Director is 
authorized to approve loan interest rate changes which meet the 
requirements of this section. Loan interest rate changes will be 
accomplished as follows:
    (1) All loan payments already applied to the account(s) will be 
reversed and reapplied by FmHA or its successor agency under Public Law 
103-354 utilizing the changed interest rate. The balance remaining after 
the completion of the reversal and reapplication procedures will be 
applied first to any delinquency on the account and then to principal.
    (2) For paid-in-full accounts which meet the criteria of Sec. 
1951.241(a) of this subpart, the balance of loan payments after 
completion of the reversal and reapplication procedures will be returned 
to the borrower unless the borrower is delinquent on another FmHA or its 
successor agency under Public Law 103-354 loan of the same type. In 
those cases the amount will be applied to the delinquent amount owed, 
with any balance refunded to the borrower.
    (3) The Finance Office will administratively change the interest 
rate on a borrower's account in accordance with notification from the 
servicing official. The installment schedule set forth in each 
borrower's debt instrument will not change. The original principal 
schedule for principal-plus-interest accounts where principal only is 
stipulated will continue to be used for payment calculation by the 
Finance Office. Amortized accounts will adhere to the original payment 
schedule and amount. The last scheduled principal installment will be 
reduced by the amount of the balance previously generated by the 
reversal and reapplication of payments.

[[Page 59]]

    (4) When FmHA or its successor agency under Public Law 103-354 has 
processed a change of interest rate for an amortized loan and a 
reduction in installment amounts is needed to provide for a sound 
operation, the borrower may request reamortization in accordance with 
Sec. 1951.223 of this subpart.
    (5) The borrower will be notified in writing of the new interest 
rate as changed.



Sec. Sec. 1951.242-1951.249  [Reserved]



Sec. 1951.250  OMB control number.

    The reporting and recordkeeping requirements contained in this 
regulation have been approved by the Office of Management and Budget and 
have been assigned OMB Control Number 0575-0066. Public reporting burden 
for this collection of information is estimated to vary from fifteen 
minutes to three hours per response including time for reviewing 
instructions, searching existing data sources, gathering and maintaining 
the data needed, and completing and reviewing the collection of 
information. Send comments regarding this burden estimate or any other 
aspect of this collection of information, including suggestions for 
reducing this burden, to Department of Agriculture, Clearance Officer, 
OIRM, Room 404-W, Washington, DC 20250; and to the Office of Management 
and Budget, Washington, DC 20503.

                          Exhibits to Subpart E

    Editorial Note: Exhibits A through H are not published in the Code 
of Federal Regulations.

                  Exhibit A--Report on Servicing Action

Exhibit B--Agreement for New Member (With or Without Withdrawing Member)

   Exhibit C--Agreement for Withdrawal of Member (Without New Member)

 Exhibit D--Items to be Included in Transfer and Assumption Dockets (if 
                               applicable)

        Exhibit E--Interest Rate Requirements and Effective Dates

Exhibit F--Instruction to FmHA or its successor agency under Public Law 
            103-354 Personnel to Implement Public Law 100-233

   Exhibit G--Letter to Borrower Notifying of Choice of Interest Rate

            Exhibit H--Rescheduling Agreement--Public Bodies



      Subpart F_Analyzing Credit Needs and Graduation of Borrowers

    Source: 61 FR 35927, July 9, 1996, unless otherwise noted.



Sec. 1951.251  Purpose.

    This subpart prescribes the policies to be followed when analyzing a 
direct borrower's needs for continued Agency supervision, further 
credit, and graduation. All loan accounts will be reviewed for 
graduation in accordance with this subpart, with the exception of 
Guaranteed, Watershed, Resource Conservation and Development, Rural 
Development Loan Funds, and Rural Rental Housing loans made to build or 
acquire new units pursuant to contracts entered into on or after 
December 15, 1989, and Intermediary Relending Program loans. The term 
``Agency'' used in this subpart refers to the Farm Service Agency (FSA) 
including its county and state committees and their personnel), Rural 
Utilities Service (RUS), Rural Housing Service (RHS), or Rural Business-
Cooperative Service (RBS), depending upon the loan program discussed 
herein. This subpart

[[Page 60]]

does not apply to RHS direct single family housing (SFH) customers.

[61 FR 35927, July 9, 1996, as amended at 61 FR 59778, Nov. 22, 1996]



Sec. 1951.252  Definitions.

    Commercial classified. The Agency's highest quality Farm Credit 
Programs (FCP) accounts. The financial condition of the borrowers is 
strong enough to enable them to absorb the normal adversities of 
agricultural production and marketing. There is ample security for all 
loans, there is sufficient cash flow to meet the expenses of the 
agricultural enterprise and the financial needs of the family, and to 
service debts. The account is of such quality that commercial lenders 
would likely view the loans as a profitable investment.
    Farm Credit Programs (FCP) loans. FSA Farm Ownership (FO), Operating 
(OL), Soil and Water (SW), Recreation (RL), Emergency (EM), Economic 
Emergency (EE), Economic Opportunity (EO), Special Livestock (SL), 
Softwood Timber (ST) loans, and Rural Housing loans for farm service 
buildings (RHF).
    Graduation, FCP. The payment in full of all FCP loans or all FCP 
loans of one type (i.e., all loans made for chattel purposes or all 
loans made for real estate purposes) by refinancing with other credit 
sources either with or without an Agency loan guarantee. A loan made for 
both chattel and real estate purposes, for example an EM loan, will be 
classified according to how the majority of the loan's funds were 
expended. Borrowers must continue with their farming operations to be 
considered as graduated.
    Graduation, other programs. The payment in full of any direct loan 
for Community and Business Programs, and all direct loans for housing 
programs, before maturity by refinancing with other credit sources. 
Graduated housing borrowers must continue to hold title to the property. 
Graduation, for other than FCP, does not include credit which is 
guaranteed by the United States.
    Prospectus, FCP. Consists of a transmittal letter with a current 
balance sheet and projected year's budget attached. The applicant's or 
borrower's name and address need not be withheld from the lender. The 
prospectus is used to determine lender interest in financing or 
refinancing specific Agency direct loan applicants and borrowers. The 
prospectus will provide information regarding the availability of an 
Agency loan guarantee and interest assistance.
    Reasonable rates and terms. Those commercial rates and terms which 
borrowers are expected to meet when borrowing for similar purposes and 
similar periods of time. The ``similar periods of time'' of available 
commercial loans will be measured against, but need not be the same as, 
the remaining or original term of the loan. In the case of Multi-Family 
Housing (MFH) loans, ``reasonable rates and terms'' would be considered 
to mean financing that would allow the units to be offered to eligible 
tenants at rates consistent with other multi-family housing.
    Servicing official. The district or county office official 
responsible for the immediate servicing functions of the borrower.
    Standard classified. These loan accounts are fully acceptable by 
Agency standards. Loan risk and potential loan servicing costs are 
higher than would be acceptable to other lenders, but all loans are 
adequately secured. Repayment ability is adequate, and there is a high 
probability that all loans will be repaid as scheduled and in full.



Sec. 1951.253  Objectives.

    (a) [Reserved]
    (b) Borrowers must graduate to other credit at reasonable rates and 
terms when they are able to do so.
    (c) If a borrower refuses to graduate, the account will be 
liquidated under the following conditions:
    (1) The borrower has the legal capacity and financial ability to 
obtain other credit.
    (2) Other credit is available from a commercial lender at reasonable 
rates and terms. In the case of Labor Housing (LH), Rural Rental Housing 
(RRH), and Rural Cooperative Housing (RCH) Programs, reasonable rates 
and terms must also permit the borrowers to continue providing housing 
for low and moderate income persons at rental rates tenants can afford 
considering

[[Page 61]]

the loss of any subsidy which will be canceled when the loan is paid in 
full.
    (d) The Agency will enforce borrower graduation.



Sec. 1951.254  [Reserved]



Sec. 1951.255  Nondiscrimination.

    All loan servicing actions described in this subpart will be 
conducted without regard to race, color, religion, sex, familial status, 
national origin, age, or physical or mental handicap.



Sec. Sec. 1951.256-1951.261  [Reserved]



Sec. 1951.262  Farm Credit Programs--graduation of borrowers.

    (a)-(d) [Reserved]
    (e) Graduation candidates. Borrowers who are classified 
``commercial'' or ``standard'' are graduation candidates. At least every 
2 years, all borrowers who have a current classification of commercial 
or standard must submit a year-end balance sheet, actual financial 
performance information for the most recent year, and a projected budget 
for the current year to enable the Agency to reclassify their status and 
determine their ability to graduate.
    (f) Sending prospectus information to lenders. (1) The Agency will 
distribute a borrower's prospectus to local lenders for possible 
refinancing. The borrower's permission is not required, however, the 
borrower must be notified of this action.
    (2) The borrower is responsible for any application fees. The 
borrower has 30 days from the date the borrower is notified of lender 
interest in refinancing to make application, if required by the lender, 
and refinance the FLP loan. For good cause, the borrower may be granted 
a reasonable amount of additional time by the Agency.

[61 FR 35927, July 9, 1996, as amended at 62 FR 10120, Mar. 5, 1997]



Sec. 1951.263  Graduation of non-Farm Credit programs borrowers.

    (a)-(b) [Reserved]
    (c) The thorough review. Borrowers are required to supply such 
financial information as the Agency deems necessary to determine whether 
they are able to graduate to other credit. At a minimum, the financial 
statements requested from the borrower must include a balance sheet and 
a statement of income and expenses. Ordinarily, the financial statements 
will be those normally required at the end of the particular borrower's 
fiscal year. For borrowers who are not requested to furnish audited 
financial statements, the balance sheet and statement of income and 
expenses may be of the borrower's own format if the borrower's financial 
situation is accurately reflected. The borrower has 60 days for group 
type loans and 30 days for individual type loans to supply the financial 
information requested.
    (d) [Reserved]
    (e) Requesting the borrower to graduate. (1) The Agency will send 
written notice to borrowers found able to graduate requesting them to 
graduate. The borrower must seek a loan only in the amount necessary to 
repay the unpaid balance.
    (2) Borrowers must provide evidence of their ability or inability to 
graduate within 30 days for RH borrowers, and 90 days for group type 
borrowers, after the date of the request. The Agency may allow 
additional time for good cause, for example when a borrower expects to 
receive income in the near future for the payment of accounts which 
would substantially reduce the amount required for refinancing, or when 
a borrower is a public body and must issue bonds to accomplish 
graduation.
    (3) If a borrower is unable to graduate the full amount of the loan, 
the borrower must furnish evidence to the Agency, showing:
    (i) The names of other lenders contacted;
    (ii) The amount of loan requested by the borrower and the amount, if 
any, offered by the lenders;
    (iii) The rates and terms offered by the lenders or the specific 
reasons why other credit is not available; and
    (iv) The purpose of the loan request.
    (4) The difference in interest rates between the Agency and other 
lenders will not be sufficient reason for failure to graduate if the 
other credit is available at rates and terms which the borrower can 
reasonably be expected to pay. An exception is made where there is an 
interest rate ceiling imposed by

[[Page 62]]

Federal law or contained in the note or mortgage.
    (5) The Agency will notify the borrower in writing if it determines 
that the borrower can graduate. The borrower must take positive steps to 
graduate within 15 days for individual loans and 60 days for group loans 
from such notice to avoid legal action. The servicing official may grant 
a longer period where warranted.



Sec. 1951.264  Action when borrower fails to cooperate, respond or graduate.

    (a) When borrowers with other than FCP loans fail to:
    (1) Provide information following receipt of both FmHA Guide Letters 
1951-1 and 1951-2 (available in any Agency office), or letters of 
similar format, they are in default of the terms of their security 
instruments. The approval official may, when appropriate, accelerate the 
account based on the borrower's failure to perform as required by this 
subpart and the loan and security instruments.
    (2) Apply for or accept other credit following receipt of both FmHA 
Guide Letters 1951-F-5 and 1951-6 (available in any Agency office), or 
letters of similar format, they are in default under the graduation 
requirement of their security instruments. If the Agency determines the 
borrower is able to graduate, foreclosure action will be initiated in 
accordance with Sec. 1955.15(d)(2)(ii). If the borrower's account is 
accelerated, the borrower may appeal the decision.
    (b) If an FCP borrower fails to cooperate after a lender expresses a 
willingness to consider refinancing the Agency loan, the account will be 
referred for legal action.



Sec. 1951.265  Application for subsequent loan, subordination, or consent 
to additional indebtedness from a borrower who has been requested to graduate.

    (a) Any borrower who appears to meet the local commercial lending 
standards, taking into consideration the Agency's loan guarantee 
program, will not be considered for a subsequent loan, subordination, or 
consent to additional indebtedness until the borrower's ability or 
inability to graduate has been confirmed. An exception may be made where 
the proposed action is needed to alleviate an emergency situation, such 
as meeting applicable health or sanitary standards which require 
immediate attention.
    (b) If the borrower has been requested to graduate and has also been 
denied a request for a subsequent loan, subordination, or consent to 
additional indebtedness, the borrower may appeal both issues.



Sec. 1951.266  Special requirements for MFH borrowers.

    All requirements of subpart E of part 1965 must be met prior to 
graduation and acceptance of the full payment from an MFH borrower.



Sec. Sec. 1951.267-1951.299  [Reserved]



Sec. 1951.300  OMB control number.

    The reporting requirements contained in this regulation have been 
approved by the Office of Management and Budget (OMB) and have been 
assigned OMB control number 0575-0093.

             Exhibit A to Subpart F of Part 1951 [Reserved]

   Exhibit B to Subpart F of Part 1951--Suggested Outline for Seeking 
  Information From Lenders on Credit Criteria for Graduation of Single 
                          Family Housing Loans

Date:___________________________________________________________________
Name of Lender:_________________________________________________________
Title:__________________________________________________________________
Address:________________________________________________________________
Name of County Supervisor:______________________________________________
Service Area:___________________________________________________________
    1. Is the lender interested in making loans to refinance rural 
housing borrowers? Yes:----; No:----.
If later, when?_________________________________________________________

    How much credit does the lender expect to have available in the next 
three to four months for making such loans? $------------
    In the next twelve (12) months? $------------

    2. What are the loan terms? ------------

    3. What is the current interest rate? ------------ [squ] Variable 
rate. [squ] Fixed rate.
    If variable, how is it determined? ------------

    4. Is a risk differential used in establishing interest rates 
charged for new customers? Yes: ----; No: ----.
If yes, explain:________________________________________________________

[[Page 63]]

    5. What can a typical loan applicant be expected to pay for:

------------------------------------------------------------------------
                                              Dollars       Or percent
------------------------------------------------------------------------
a. Filing an application................  ..............  ..............
b. Real estate appraisal................  ..............  ..............
c. Credit report........................  ..............  ..............
d. Loan orgination fee..................  ..............  ..............
e. Loan closing costs...................  ..............  ..............
------------------------------------------------------------------------

    6. Is mortgage guarantee insurance required? Yes: ----; No: ----. If 
yes, how many years? ----. Cost? ------------.

    7. Is there a minimum or maximum loan size policy? Yes: ----; No: --
--.
If yes, explain: --_____________________________________________________
    8. Is there a minimum and maximum home value the lender will loan 
on? Yes: ----; No: ----. If yes, minimum: $------------; maximum: $----
--------.

    9. Does the lender use a loan to market value ratio? ------------

    10. Is there a minimum net and gross income criteria? Yes: ----; No: 
----. If yes, net: $------------; gross: $------------.

    11. Does the lender use a minimum loan or home value to income 
ratio? Yes: ----; No: ----. If yes, loan to income ratio: ------------ 
Value to income ratio: ------------

    12. Is there a percentage of gross income a typical applicant should 
have available to pay housing costs? ------------

    a. To pay for principal, interest, taxes and insurance (PITI)? ----
%.

    b. To pay for the total housing costs and other credit obligations? 
----%.

    13. Are there any age of home, housing type, site size, and/or 
geographic restriction policies? Yes: ----; No: ----.
If yes, List:___________________________________________________________
 14. Other Comments:____________________________________________________
    15. For the purpose of reducing the number of inappropriate 
referrals, would the lender like the opportunity to review specific 
borrower financial information prior to the borrower being asked to file 
a formal application? Yes: ----; No: ----. If the answer is yes, only 
those borrowers who are listed on Form FmHA or its successor agency 
under Public Law 103-354 1951-24 will be referred to the bank. The 
lenders should be advised, however, the information supplied to them 
will not include the borrower's name, social security number, exact 
address, or place of employment that could be used to link a specific 
borrower to the information being provided by FmHA or its successor 
agency under Public Law 103-354.

[48 FR 40203, Sept. 6, 1983; 48 FR 41142, Sept. 14, 1983]

Subpart G-I [Reserved]



      Subpart J_Management and Collection of Nonprogram (NP) Loans

    Source: 58 FR 52646, Oct. 12, 1993, unless otherwise noted.



Sec. 1951.451  General.

    This subpart contains policies and procedures of the Farm Service 
Agency (FSA) for making, managing, collecting, liquidating, and 
servicing loans on nonprogram (NP) terms. All references in this subpart 
to farm real estate, farm property and farm chattels also include 
nonfarm property that was security for a Farm Credit debt of the FSA.
    (a) An NP loan is a loan on terms more stringent than terms for a 
program loan and it is an extension of credit for the convenience of the 
Government because the applicant does not qualify for program assistance 
or the property to be financed is not suited for program purposes. Such 
loans are made or continued only when it is in the best interest of the 
Government. NP loans include:
    (1) Sale of inventory property on NP terms;
    (2) Assumption of a program loan on NP terms;
    (3) Loans converted to NP status as a result of receipt of 
unauthorized assistance;
    (4) Loans converted to NP status when only a portion of the security 
property is being transferred and the FmHA or its successor agency under 
Public Law 103-354 debt is not paid in full;
    (5) Sale of the real property that was security for an FP loan to 
the previous owner under the Leaseback/Buyback program on NP terms;
    (6) Sale of the real property of an FP borrower under the Homestead 
Protection program; or
    (7) FP accounts rescheduled under an accelerated repayment 
agreement.
    (b) C&BP/NP and MFH/NP transactions involving transfer of the 
security property will be submitted to the National Office for review, 
authorization and processing guidance. The submission must include a 
justification for the proposed action, a servicing and management plan, 
the State Director's

[[Page 64]]

recommendations, and the case files. The sale of C&BP and MFH inventory 
property to NP purchasers will be handled in accordance with subpart C 
of part 1955 of this chapter.
    (c) Borrowers who have program and NP loans will have their loan 
accounts serviced and liquidated in accordance with the regulation 
applicable to the particular loan(s). Therefore, NP loans are not 
eligible for any program servicing except those permitted in this 
subpart. However, even though the NP loan will not be eligible for 
program servicing benefits or entitlements, the borrower is not 
precluded from receiving assistance on the program loan (e.g., having an 
NP farm loan should not preclude a borrower from being considered for 
debt restructuring assistance in the form of a deferral, rescheduling, 
consolidation, etc., on a FP program loan). When the decision has been 
made to liquidate the program loan of a borrower who is also indebted 
for an NP loan and the NP security is also additional security for the 
program loan the NP loan will be accelerated at the same time as the 
program loan using the program acceleration notice. Likewise, if an NP 
loan is to be liquidated and the borrower is also indebted for a program 
loan which serves as additional security for the NP loan the program 
loan will be accelerated at the same time as the NP loan using the 
program acceleration notice. Any appeal of an adverse decision involving 
both an NP and program loan would affect only the program loan.

[58 FR 52646, Oct. 12, 1993, as amended at 61 FR 59778, Nov. 22, 1996]



Sec. 1951.452  Policy.

    NP credit is extended for the convenience of the Government in 
servicing an existing loan or to facilitate sale of inventory property. 
Where a borrower has both program and NP loans outstanding, servicing 
will be according to the regulation applicable to the particular 
loan(s). NP borrowers are not eligible for program entitlements or 
servicing actions such as subsidy, moratorium, reamortization, 
rescheduling, consolidation, deferral, limited resource assistance, 
buyout, writedown and conservation easements. Neither are NP borrowers 
subject to occupancy/operation requirements, graduation or other similar 
requirements imposed on program borrowers. NP borrowers are required to 
adequately maintain the security, pay real estate taxes and/or 
assessments when due or make scheduled escrow installments for taxes and 
insurance when required by FmHA or its successor agency under Public Law 
103-354, and keep buildings insured according to the promissory note and 
mortgage or security agreement, but may lease all or a portion of the 
security without FmHA or its successor agency under Public Law 103-354's 
consent, except as provided in Sec. 1951.460 (a) and (b) of this 
subpart.



Sec. 1951.453  [Reserved]



Sec. 1951.454  Review of adverse decisions.

    NP applicants and borrowers are not entitled to appeal rights under 
subpart B of part 1900 of this chapter or parts 11 and 780 of this 
title. However, decisions involving NP applicants, borrowers or property 
are reviewable by the next level supervisor.

[58 FR 52646, Oct. 12, 1993, as amended at 62 FR 10120, Mar. 5, 1997]



Sec. 1951.455  NP loan making for Single Family Housing (SFH) and farm 
property (real and chattel).

    (a) Application for NP credit. Applications for credit on NP terms 
are made at the County Office serving the area where the property is 
located or through an approved packager or real estate broker if so 
instructed by County Office personnel. To apply for NP credit, except 
Homestead Protection program, standard forms used to process program 
applications may be utilized or comparable documentation which contains 
information to establish financial stability, creditworthiness, and 
repayment ability for the requested credit. However, the loan approval 
official will have the discretion to determine what information is 
required to support approval of the loan. For property purchased under 
the Homestead Protection program the information required to support 
approval of the loan will be in accordance with subpart S of part 1951 
of this chapter. The creditworthiness standards in Sec. 1944.9 of 
subpart A of part 1944 of this

[[Page 65]]

chapter will be used to evaluate an NP applicant's eligibility for 
assistance to purchase a single family residence. The application is not 
complete until all information requested by the Agency is received.
    (b) Fees. In addition, credit reports will be ordered to determine 
the eligibility of NP applicants requesting FLP credit. A nonrefundable 
credit report fee will be charged the applicant. The amounts of these 
fees change periodically; current fees will be quoted by county office 
personnel upon request. A borrower whose loan is reclassified as NP 
because unauthorized assistance was received; or only a portion of the 
security property is being transferred and the FLP debt is not paid in 
full; or FLP accounts rescheduled under an accelerated repayment 
agreement will not be required to submit an application or pay the 
application fee.
    (c) Eligibility restrictions. If farm property is being purchased or 
the debt assumed, and an individual or member, stockholder, partner, or 
joint operator of a proposed entity transferee or purchaser has been 
convicted after December 23, 1985, under Federal or State law of 
planting, cultivating, growing, producing, harvesting, or storing a 
controlled substance (see 21 CFR part 1308, which is exhibit C of 
subpart A of part 1941 of this chapter (available in any agency office), 
for the definition of ``controlled substance'') prior to the approval of 
the credit sale or assumption in any crop year, the individual or entity 
shall be ineligible for FLP credit for the crop year in which the 
individual was convicted four succeeding crop years following the 
conviction. Purchasers will attest on the application form used that as 
individuals or that its members, if an entity, have not been convicted 
of such crime after December 23, 1985.
    (d) [Reserved]
    (e) Downpayment. A downpayment must be collected at closing. The 
minimum downpayment will be based on the purchase price for a credit 
sale and the current market value (less any prior liens for chattel 
security) or the debt, whichever is lower, for an assumption. 
Downpayment requirements vary from time to time and vary by type of 
property. Current downpayment requirements will be provided by county 
office personnel upon request.
    (f) Interest rate. The FP/NP interest rate for real property or 
chattel property, as applicable, in effect at the time of loan approval, 
will be charged on NP assumptions and credit sales involving all other 
types of sales, except as otherwise stated. The Homestead Protection 
program interest rate in effect at the time of loan approval will be 
charged on Homestead Protection properties.
    (g) Terms. The purchase price for credit sales or the FLP debt being 
assumed, less the downpayment amount, will be amortized as follows, 
except the term will never be longer than the period for which the 
property will serve as adequate security:
    (1) Farm property (real estate security) and CONACT residential 
property classified as surplus. The note amount will be amortized over a 
period not to exceed 15 years. When an NP loan was initially scheduled 
for repayment in 15 years or less together with a 25-year amortization, 
the agency may authorize an extension not to exceed a total of 25 years 
from the date the NP assumption or credit sale was closed provided it is 
in the Government's best interest and the agency retains the same lien 
priority.
    (2) Farm property (chattels security). The note amount will be 
amortized over a period not to exceed 5 years.
    (3) Homestead protection. The note amount will be amortized over a 
period not to exceed 35 years.
    (h) Modification of security instruments. Any convenants in the 
promissory note and/or security instruments (mortgage or deed of trust) 
relating to graduation to other credit, inability to secure other 
financing, restrictions on leasing, FLP operation requirements, and 
consent to junior lien encumbrance will be deleted.
    (i) Security. The security requirements for NP loans on farm real 
estate will be in accordance with subpart A of part 1943 of this chapter 
and NP loans on chattel property will be secured in accordance with 
subpart A of part 1962 of this chapter. Except that, an NP loan will be 
secured only by the property purchased.

[[Page 66]]

    (j) Closing. Title clearance, preparation of deeds, loan closing and 
property insurance requirements are the same as for a program loan on 
the same type property, except the purchaser must pay his/her own 
closing costs.

[58 FR 52646, Oct. 12, 1993, as amended at 62 FR 10120, Mar. 5, 1997; 68 
FR 61331, Oct. 28, 2003]



Sec. 1951.456  [Reserved]



Sec. 1951.457  Payments.

    (a) Receiving payments. Borrowers will mail or bring their payments 
to the county office. Borrowers will be responsible for any fees 
associated with converting cash payments to money orders. If the fee is 
not paid, it will be deducted from the payment.
    (b) Payments not received when due. NP borrowers are expected to 
make scheduled payments when due. The Agency personnel are not required 
to provide program supervision, servicing, management or credit 
counseling in accordance the agency servicing instructions if payments 
are not received when due. To ensure consistency, a series of contacts 
will be made when servicing delinquent accounts. All actions taken, 
agreements reached and recommendations made in the servicing of the 
borrower's account are to be documented. When appropriate, the Agency 
may work out a reasonable agreement with an NP borrower to cure a 
delinquency; however, such an agreement will not usually exceed 1 year. 
Failure to make payments as agreed will result in actions determined by 
the agency to best protect the Government's interest. Collection of a 
delinquency from an Internal Revenue Service (IRS) offset will be used 
to the extent permitted by law.

[58 FR 52646, Oct. 12, 1993, as amended at 60 FR 55146, Oct. 27, 1995; 
62 FR 10120, Mar. 5, 1997]



Sec. 1951.458   Servicing real estate taxes.

    Refer to subpart A of part 1925 of this chapter for servicing real 
estate taxes.

[62 FR 10120, Mar. 5, 1997]



Sec. 1951.459  Preservation of security.

    (a) Inspections of NP security property. Inspections will be made on 
NP security as necessary to protect FmHA or its successor agency under 
Public Law 103-354's security interest. In the event of abandonment, 
servicing actions will be taken according to Sec. 1955.55 of subpart B 
of part 1955 of this chapter.
    (b) Subordination. Subordination is not authorized where an NP 
borrower only owes FmHA or its successor agency under Public Law 103-354 
an NP loan(s). Subordination of a mortgage may be permitted to 
refinance, extend, reamortize, increase the amount of an existing prior 
lien, or to permit a prior lien only when the security for the NP loan 
is also security for an FmHA or its successor agency under Public Law 
103-354 program loan, the request for the subordination meets all the 
requirements for the subordination of the FmHA or its successor agency 
under Public Law 103-354 program loan and is in the best interest of the 
Government.
    (c) Bankruptcy. NP loans on single family residences will be 
serviced in accordance with subpart C of part 1965 of this chapter, farm 
real estate in accordance with subpart A of part 1965 of this chapter, 
and farm chattel in accordance with subpart A of part 1962 of this 
chapter.



Sec. 1951.460  Release of security property or sale or lease of related 
property rights.

    (a) Partial release. Release of a portion of the security property 
may be made when the borrower requests it and FmHA or its successor 
agency under Public Law 103-354 determines the release will not 
adversely affect the Government's interest. Release may be approved when 
payment is received by FmHA or its successor agency under Public Law 
103-354 in the amount of the market value, as determined by FmHA or its 
successor agency under Public Law 103-354, of the property to be 
released. Proceeds from such transactions (less related expenses 
authorized by FmHA or its successor agency under Public Law 103-354) 
will be applied to the FmHA or its successor agency under Public Law 
103-354 indebtedness as an extra payment or to prior liens in order of 
lien priority.
    (b) Easements, right-of-ways, and lease of mineral rights or other 
rights. Consent

[[Page 67]]

may be given by FmHA or its successor agency under Public Law 103-354 
for the borrower to grant an easement or lease mineral rights when it is 
determined by FmHA or its successor agency under Public Law 103-354 the 
action will not adversely affect the Government's interest. The granting 
of an easement or right-of-way and lease of mineral rights may be 
approved when payment is received by FmHA or its successor agency under 
Public Law 103-354 in the amount of the market value, as determined by 
FmHA or its successor agency under Public Law 103-354, for rights 
granted or benefits are derived which are equal to or greater than the 
value of the property being disposed of. Proceeds from these 
transactions (less related expenses authorized by FmHA or its successor 
agency under Public Law 103-354) will be applied to the FmHA or its 
successor agency under Public Law 103-354 debt as an extra payment or to 
prior liens in order of lien priority.
    (c)-(d) [Reserved]



Sec. 1951.461  Release of valueless FmHA or its successor agency under 
Public Law 103-354 lien without monetary consideration.

    Release of an FmHA or its successor agency under Public Law 103-354 
lien without monetary consideration may be granted when it is determined 
by FmHA or its successor agency under Public Law 103-354 to have no 
present or prospective value or when enforcement would be ineffectual or 
uneconomical. Judgment liens or statutory redemption rights may be 
released only with prior consent of OGC.



Sec. 1951.462  Deceased borrower.

    When an NP borrower dies, FmHA or its successor agency under Public 
Law 103-354 will determine whether or not arrangements can be effected 
for continuation of the loan under one of the provisions of this 
section. If not, the loan may be liquidated according to Sec. 1951.468 
of this subpart. The servicing actions and the circumstances under which 
they may be considered are outlined in paragraphs (a) through (d) of 
this section.
    (a) Continue with jointly liable borrower. If a jointly liable 
borrower will repay the loan and fulfill other obligations of the loan, 
FmHA or its successor agency under Public Law 103-354 will take no 
action to liquidate the loan.
    (b) Assumption by spouse not liable for the FmHA or its successor 
agency under Public Law 103-354 debt. The spouse of a deceased borrower 
who is not liable for the FmHA or its successor agency under Public Law 
103-354 debt and who wishes to assume the debt may do so in accordance 
with Sec. 1951.463(d)(1) of this subpart.
    (c) Continue with joint tenant, tenant by the entirety, or other 
person. When a joint tenant, tenant by the entirety, or other person who 
inherits title to (or an interest in) the security property, on which 
the principal residence is located, by devise, descent, or operation of 
law upon the death of a borrower makes payments as scheduled in the 
promissory note (or assumption agreement), FmHA or its successor agency 
under Public Law 103-354 may not take action to liquidate the loan as 
long as the property is adequately maintained, real estate taxes and 
assessments are paid when due, and the dwelling is not known to be 
uninsured (if funds for taxes and insurance are being escrowed, the 
escrow is a part of the scheduled payments). The loan may be assumed in 
accordance with Sec. 1951.463(d) of this subpart; however, assumption 
of the indebtedness is not required. Continuation with a joint tenant, 
tenant by the entirety, or other person under the provisions of this 
paragraph applies only to the transfer of title resulting from death of 
the borrower; it does not apply to any subsequent transfer of title by 
the inheritor(s) except by devise, descent, or operation of law upon the 
death of the inheritors or sale of interests among inheritors to 
consolidate title. Any other subsequent transfer of title will be 
treated as a sale and is subject to the requirements of Sec. 1951.463 
of this subpart.
    (d) Assumption by a person, other than the spouse, who is not liable 
for the FmHA or its successor agency under Public Law 103-354 loan. A 
person other than the deceased borrower's spouse who wishes to assume 
the loan for the benefit of persons who were dependent on the deceased 
borrower at the time of

[[Page 68]]

death, without receiving title to the property, may do so in accordance 
with Sec. 1951.463(d)(1) of this subpart provided:
    (1) The residence will continue to be occupied by one or more 
persons who were dependent on the borrower at the time of death; and
    (2) There is reasonable prospect for orderly repayment of the loan 
and other obligations of the loan will be met.



Sec. 1951.463  Transfer of security and assumption of indebtedness.

    When a borrower proposes to sell security property, assumption of 
the indebtedness may be approved on program or NP terms, as applicable, 
subject to the provisions of paragraphs (c) and (d) of this section. 
Assumptions under paragraphs (b)(2), (b)(3), (b)(4), (b)(5) and (d) of 
this section only are authorized on existing terms. When security 
property is sold (or title is otherwise conveyed), whether by full 
conveyance or by land contract, contract-for-deed, or other similar 
instrument, and the FmHA or its successor agency under Public Law 103-
354 debt is not assumed by the purchaser (new owner) or paid in full, 
the conveyance will not be approved, except as provided in paragraphs 
(b)(2) and (b)(5) of this section or Sec. 1951.462 of this subpart. If 
the conveyance is not approved the loan must be liquidated unless FmHA 
or its successor agency under Public Law 103-354 determines it is not in 
the Government's best interest. If FmHA or its successor agency under 
Public Law 103-354 decides to continue with the loan, the account will 
be serviced in the borrower's name and the borrower will remain liable 
for the loan under the terms of the security instrument.
    (a) [Reserved]
    (b) General. The following policies apply to all transfers and 
assumptions under this subpart:
    (1) Amount of assumption. Except for transfers covered in paragraphs 
(b)(2), (b)(3), (b)(4), (b)(5) and (d) of this section, the transferee 
will assume the lesser of the indebtedness, or current market value as 
determined by FmHA or its successor agency under Public Law 103-354, 
less any prior liens and the downpayment.
    (2) Conveyance of security property by borrower to spouse or child. 
When a borrower conveys security property to his/her spouse or children, 
assumption of the indebtedness is not required and FmHA or its successor 
agency under Public Law 103-354 may not take action to liquidate the 
loan as long as payments are made as scheduled and other obligations of 
the loan are met. In the event the transferee(s) wishes to assume the 
indebtedness, it may be assumed on the terms outlined in paragraph 
(d)(1) of this section as applicable to the circumstances.
    (3) Withdrawal of jointly liable borrower. When a stockholder/
member/partner/joint operator of an entity who is personally liable on 
the note withdraws from the entity or dies, and all of the remaining 
individuals are not personally liable on the note(s), the loan must be 
assumed by all remaining parties.
    (4) Addition of new transferee(s). When new stockholders/members/ 
partners/ joint operators enter an entity, assumption of the 
indebtedness is required, however, the indebtedness may be assumed on 
existing terms. A downpayment based on the unpaid balance of the loan is 
required when the assumption is closed.
    (5) Conveyance of security property into an inter vivos trust. When 
the borrower conveys security property into an inter vivos trust, 
whereby the borrower does not transfer rights of occupancy in the 
property, FmHA or its successor agency under Public Law 103-354 may not 
take action to liquidate the loan as long as payments are made as 
scheduled and other obligations of the loan are met.
    (c) Program assumption. A NP loan may be assumed by an eligible 
program applicant if the property meets the eligibility requirements for 
a currently authorized program (SFH, Farm Ownership (FO), etc.). In such 
cases, the assumption will be at the interest rate and up to the maximum 
term in effect for the type loan involved at the time the assumption is 
approved. After assumption on program terms, the loan will be 
reclassified as Rural Housing (RH), FO, etc., as applicable.
    (d) NP assumption. The rates and terms for an NP assumption will be 
as

[[Page 69]]

provided in Sec. 1951.455 of this subpart. A loan may be assumed on 
existing terms only in the situations outlined in paragraphs (b)(2), 
(b)(3), (b)(4), (b)(5), (d)(1), (d)(2), and (d)(3) of this section. An 
individual not liable for the loan who acquires title to or an interest 
in the security by means of one of the situations mentioned may assume 
the indebtedness on existing terms or current terms if more favorable, 
in which case a downpayment based on the unpaid balance would be 
required. The interest rate, final due date, payment date, and account 
status (current, delinquent, ahead of schedule) will not be changed by 
virtue of an assumption on existing terms, after assumption compliance 
with loan conditions is required. If a same terms assumption is 
consummated and the account is delinquent, it may be reamortized in 
accordance with applicable program regulations. Situations where these 
terms are authorized are:
    (1) An individual who acquires title to or an interest in the 
security property by virtue of death, divorce, or deed from a spouse or 
parent but is not liable for the debt and who wishes to assume the loan 
may do so. Any subsequent transfer of title, except between inheritors 
to consolidate title, will be treated as a sale and is not covered by 
these provisions. Individuals in this category are:
    (i) A deceased borrower's surviving spouse.
    (ii) A divorced borrower's spouse.
    (iii) A joint tenant with right of survivorship or relative of a 
deceased borrower.
    (2) The spouse or child of a living borrower to whom title to the 
security property has been conveyed by spouse or parent.
    (3) A person other than the deceased borrower's spouse who wishes to 
continue with the loan under conditions outlined in Sec. 1951.462 (c) 
or (d) of this subpart may do so.
    (e) [Reserved]
    (f) Title clearance and loan closing. Title clearance and closing 
will be the same as for any program loan of the same type.
    (g) Release from liability. Release from liability of NP borrowers 
is not authorized.

[58 FR 52646, Oct. 12, 1993, as amended at 68 FR 7698, Feb. 18, 2003]



Sec. Sec. 1951.464-1951.467  [Reserved]



Sec. 1951.468  Liquidation.

    When it is determined an NP borrower cannot or will not successfully 
repay the loan, FmHA or its successor agency under Public Law 103-354 
will attempt to have the borrower liquidate voluntarily.
    (a) Voluntary. If an NP borrower in default indicates a willingness 
to voluntarily liquidate, other liquidation actions by FmHA or its 
successor agency under Public Law 103-354 may be delayed for a 
reasonable period, usually not to exceed 120 days for real estate, if 
the borrower is earnestly seeking other financing, or has the security 
property listed or offered for sale and it is being actively marketed at 
a reasonable price.
    (b) Foreclosure. If an NP borrower in default (monetary or 
nonmonetary) does not cure the default and is not willing or able to 
voluntarily liquidate, the servicing official will refer the case to the 
next level supervisor with a recommendation for further action. If 
foreclosure is approved, the account will be accelerated. NP borrowers 
do not have appeal rights under subpart B of part 1900 of this chapter; 
however, the NP borrower may request a review of the decision to 
foreclose by the next level supervisor to consider evidence that the 
loan is not in default. If the borrower fails to satisfy the account 
during the period specified in the demand letter, FmHA or its successor 
agency under Public Law 103-354 will proceed with foreclosure without 
further notice or extension of time.
    (c) Conveyance to FmHA or its successor agency under Public Law 103-
354. FmHA or its successor agency under Public Law 103-354 does not 
solicit or encourage conveyance of NP security property to the 
Government and will consider a borrower's offer to convey by deed in 
lieu of foreclosure only after the debt has been accelerated and when it 
is in the Government's best interest. Release of the borrower from 
liability

[[Page 70]]

is not authorized. Upon receipt of an offer to convey, FmHA or its 
successor agency under Public Law 103-354 will remind the borrower of 
provisions for voluntary liquidation under paragraph (a) of this 
section. The borrower will also be informed of the consequences of a 
conveyance by deed in lieu of foreclosure as follows:
    (1) All costs related to the conveyance which FmHA or its successor 
agency under Public Law 103-354 pays will be added to the debt;
    (2) A credit equal to the market value of the property, as 
determined by FmHA or its successor agency under Public Law 103-354, 
less prior liens, will be applied to the debt; and
    (3) If the credit does not satisfy the debt, the debtor remains 
liable for the payment of the account balance and the account will be 
debt settled.
    (d) Consent to sale of real estate security when the FmHA or its 
successor agency under Public Law 103-354 debt and authorized selling 
expenses exceed market value. If an NP borrower proposes to sell real 
estate security for an amount which will be insufficient to pay the FmHA 
or its successor agency under Public Law 103-354 debt, prior lien(s) if 
any, and sale expenses authorized by FmHA or its successor agency under 
Public Law 103-354, an appraisal will be completed and FmHA or its 
successor agency under Public Law 103-354 may consent to the sale if the 
proposed sale price is not less than the market value. No commission 
will be allowed or paid under this paragraph when the sale is to the 
broker, broker's salesperson(s), to persons living in his/her or 
salesperson(s) immediate household or to legal entities in which the 
broker or salesperson(s) have an interest if the sale involves FmHA or 
its successor agency under Public Law 103-354 credit. If credit is not 
being extended to the persons mentioned in the preceding sentence (a 
cash sale), a commission will be allowed or paid. In no case will the 
borrower (seller) receive any cash proceeds from the sale. Any real 
estate taxes due from the transferor and other authorized selling 
expenses for which there is insufficient equity proceeds for payment at 
closing will be charged to the borrower's account prior to loan closing. 
Authorized selling expenses will not be considered or included in the 
amount assumed. Release from liability is not authorized.



Sec. 1951.469  Actions after liquidation of property.

    (a) [Reserved]
    (b) Servicing unsatisfied account balances. A current financial 
statement will be obtained, if possible, when application of sale 
proceeds does not satisfy an NP loan; or if a conveyance to FmHA or its 
successor agency under Public Law 103-354 has been accepted and credit 
of the market value less prior liens and estimated inventory handling 
expenses does not satisfy the debt, FmHA or its successor agency under 
Public Law 103-354 will pursue collection if there appears to be income 
or assets from which to collect. Where the borrower owns other real 
estate, or if the borrower is known to be in the process of purchasing 
other real estate (such as another dwelling), a judgment for the 
remaining debt including expenses paid by FmHA or its successor agency 
under Public Law 103-354 will be sought.
    (c) [Reserved]



Sec. Sec. 1951.470-1951.478  [Reserved]



Sec. 1951.479  Pilot projects.

    From time to time FmHA or its successor agency under Public Law 103-
354 conducts pilot projects to test concepts related to the management 
and/or sale of SFH inventory property which may deviate from the 
provisions of this subpart, but will not be inconsistent with provisions 
of the authorizing statutes, or other Acts affecting FmHA or its 
successor agency under Public Law 103-354's loan programs. Prior to 
initiation of a pilot project, FmHA or its successor agency under Public 
Law 103-354 will publish in the Federal Register a Notice outlining the 
nature, scope, and duration of the pilot. The pilot projects may be 
handled by FmHA or its successor agency under Public Law 103-354 
employees and/or under contract with persons, firms, or other entities 
in the private sector.

[[Page 71]]



Sec. 1951.480  [Reserved]



Sec. 1951.481  FmHA or its successor agency under Public Law 103-354 
Instructions.

    Detailed FmHA or its successor agency under Public Law 103-354 
Instructions for administering this subpart are available in any FmHA or 
its successor agency under Public Law 103-354 office (FmHA or its 
successor agency under Public Law 103-354 Instruction 1951-J).



Sec. Sec. 1951.482-1951.500  [Reserved]



  Subpart K_Predetermined Amortization Schedule System (PASS) Account 
                                Servicing

    Source: 50 FR 8597, Mar. 4, 1985, unless otherwise noted.



Sec. 1951.501  General.

    (a) This subpart prescribes the policies, authorizations, and 
procedures for implementing and servicing PASS for all of the following 
Farmers Home Administration or its successor agency under Public Law 
103-354 (FmHA or its successor agency under Public Law 103-354) Multiple 
Family Housing (MFH) loan recipients which includes Farm Labor Housing 
(LH) and Rural Rental Housing (RRH) including Rural Cooperative Housing 
(RCH) and Congregate Housing and includes:
    (1) All MFH loans, credit sales, reamortizations, and transfers 
closed on or after May 1, 1985, and
    (2) All MFH loan recipients converting from the Daily Interest 
Accrual System (DIAS) to PASS according to Sec. 1951.517 of this 
subpart, except:
    (i) Seasonal LH and LH loans to individual farmers may be closed on 
monthly or annual payment schedules and also may be closed on Daily 
Interest Accrual under subpart A of part 1951 of this chapter. 
Instructions for scheduling payments are according to the Forms Manual 
Insert (FMI) for Form FmHA or its successor agency under Public Law 103-
354 1944-52, ``Multiple Family Housing Promissory Note.''
    (ii) Rural Housing Site (RHS) loans and Site Option (SO) loans will 
be closed and serviced on Daily Interest Accrual under subpart A of part 
1951 of this chapter. Payment billings are subject to Sec. 1951.506 of 
this subpart.
    (b) All MFH loan recipients not described in paragraph (a) of this 
section will continue to be subject to the servicing and collection 
requirements of subpart A of part 1951 of this chapter. For the purposes 
of this subpart, all references to ``County Supervisor'' in subpart A of 
part 1951 shall be construed to mean ``District Director.''
    (c) All FmHA or its successor agency under Public Law 103-354 MFH 
loans (RRH, RCH, LH, RHS, and SO) whether DIAS or PASS, are subject to 
the definitions contained in Sec. 1951.504 of this subpart, and payment 
application as outlined in Sec. 1951.510 of this subpart.
    (d) All MFH loan payments will be processed using Exhibit A of this 
subpart (available in any FmHA or its successor agency under Public Law 
103-354 office).

[50 FR 8597, Mar. 4, 1985, as amended at 53 FR 16244, May 6, 1988; 56 FR 
28038, June 19, 1991]



Sec. 1951.502  [Reserved]



Sec. 1951.503  Authorities and responsibilities.

    District Directors are responsible for administering this subpart 
under the general guidance and supervision of the State Director. The 
District Office Management System will be fully used to accomplish this 
responsibility.



Sec. 1951.504  Definitions and statements of policy.

    Advance regular payment. Regular payments made at election of the 
borrower to pay the account ahead of schedule. These payments may be 
either full or partial payments and will be applied to the amortized 
payment schedule by the Finance Office.
    Amortization schedule. An amortization schedule is the projected 
application of periodic payments to principal and interest at the 
promissory note rate so the debt will be paid in full over the number of 
periods specified in the promissory note, assumption agreement (new 
terms), or reamortization agreement. Computation is based on a 30-day 
month and a 360-day year.
    Amortized recoverable costs. Recoverable cost items may be amortized 
over

[[Page 72]]

a period up to 5 years. This function will allow the servicing official 
to voucher recoverable cost items such as taxes.
    (1) Payment of real estate taxes. When a borrower's taxes are paid 
by voucher, the amortization period of the tax advance will be the 
number of months for which the taxes are being vouchered with a maximum 
of 5 years.
    (2) Costs other than real estate taxes. Advances for costs other 
than real estate taxes will be amortized for 12 months unless, based on 
the borrower's repayment ability, a longer period is needed. An 
amortization period of more than 12 months will be used only when the 
cost is of a nonrecurring type. In no case, however, will the repayment 
period exceed 5 years.
    (3) Retroactive amortization of recoverable costs. Recoverable costs 
which have been vouchered since May 1, 1985, may, with National Office 
approval, be retroactively amortized for applicable time periods as 
shown in paragraphs (c)(1) and (c)(2) of this section, if payments made 
since the costs were vouchered are sufficient to bring both the loan and 
cost accounts current. The following information should be forwarded to 
the National Office for approval of the reclassification to amortized 
status, and forwarded to the Finance Office for processing: An audit 
showing all costs vouchered along with payments made since the date of 
the cost item and to be made prior to the reclassification; the 
estimated reapplication of the payments due to reclassification showing 
that the account will be current after the reclassification; and the 
proposed budget and management case files.
    Audit receivables. Loan, grant or subsidy funds which were used by 
the borrower for unauthorized purposes; have been identified by the 
Office of Inspector General (OIG) in an audit; and, which FmHA or its 
successor agency under Public Law 103-354 is requiring the borrower to 
repay.
    Conversion. The act of changing a borrower's account from DIAS to 
PASS.
    Daily Interest Accrual System (DIAS). A system whereby interest is 
charged daily from the date a payment is received in the District Office 
to the next date a payment is received. A daily interest accrual factor 
is computed by multiplying the outstanding principal balance by the 
effective interest rate and dividing by 365 days. Computation is always 
based on a 365 day year. Interest on each payment is charged on the 
actual number of days that a principal balance is outstanding.
    District Director. For the purpose of this subpart the term includes 
the Assistant District Director, and other qualified District staff who 
may be delegated responsibilities according to Sec. 1930.143 of subpart 
C of part 1930 of this chapter, and the provisions of subpart F of part 
2006 of this chapter (available in any FmHA or its successor agency 
under Public Law 103-354 office). In the case of LH loans still being 
serviced in the County Office, this definition also includes qualified 
County Office staff. This definition further includes the Area Loan 
Specialists in Alaska, Island Directors in Hawaii, Directors of Western 
Pacific Territories, and other qualified staff members in Alaska, 
Hawaii, and Western Pacific Territories, respectively.
    Extra payment. Extra payments are applied all to principal on the 
end of the loan and are funds derived from:
    (1) Sale of basic chattel or real estate security, including rental 
or lease of real estate security of a depreciating or depleting nature.
    (2) Refinancing of real estate debt.
    (3) Mineral royalties.
    (4) Cash proceeds of real property insurance as provided in subpart 
A of part 1806 of this chapter (FmHA or its successor agency under 
Public Law 103-354 Instruction 426.1).
    (5) Sale of real estate not mortgaged to the Government, pursuant to 
a condition of loan approval.
    (6) Transactions of a similar nature which reduce the value of the 
security for the loan(s).
    Non-recoverable costs. Payments charged to a loan program insurance 
fund by use of a fund code. These costs are only incurred after 
Government acquisition of title to the property, and are therefore 
charged to an inventory account.
    Overage. This term refers to both ``overage'' and ``surcharge'' 
described

[[Page 73]]

in exhibit H to subpart C of part 1930 of this chapter.
    Payment effective date. The payment effective date is the day of the 
month on which payments will be effectively applied to the account by 
the Finance Office for the month payment is due regardless of the 
payment reception date. On PASS all payments will be applied as of the 
first day of the month.
    Payment reception date. The day of the month the payment is received 
in the District Office.
    Predetermined Amortization Schedule System (PASS). System whereby 
FmHA or its successor agency under Public Law 103-354 will apply loan 
payments based on an amortization schedule.
    Project late fee. The amount charged a borrower's project account 
for a delinquent payment according to Sec. 1951.510(c)(2) of this 
subpart, or when an uncollectible regular payment has been processed 
according to Sec. 1951.506(c) of this subpart.
    Promissory note installment. The unrounded amortized installment 
shown on the promissory note, conversion agreement, assumption agreement 
or reamortization agreement, whichever is currently in effect.
    Recoverable costs. Additional project costs such as vouchered 
insurance or taxes which FmHA or its successor agency under Public Law 
103-354 requires a borrower to pay.
    Refund payment. Payments from unused loan funds which are applied to 
principal on the end of the loan account.
    Regular payment. All monthly payments scheduled according to PASS. 
Does not include extra payments, advance regular payments, refund 
payments or voluntary additional principal payments.
    Subsidized installment. The promissory note installment reduced by 
the terms of Form FmHA or its successor agency under Public Law 103-354 
1944-7, ``Multiple Family Housing Interest Credit and Rental Assistance 
Agreement.'' The subsidized installment is the unrounded amortized 
installment computed at the subsidized interest rate.
    Subsidy credit. The difference between a borrower's monthly 
promissory note installment and the monthly subsidized installment.
    Voluntary additional principal payment. Payments applied all to 
principal which are made at the election of the borrower in addition to 
regularly scheduled payments and with FmHA or its successor agency under 
Public Law 103-354 approval. Such payments will not affect the schedule 
payment status or change the amount of the regular monthly payments. 
Funds for voluntary additional principal payments are derived from 
sources other than extra payment sources. Payments will be applied to 
current loans only.

[50 FR 8597, Mar. 4, 1985, as amended at 53 FR 2194, Jan. 26, 1988; 53 
FR 16244, May 6, 1988; 55 FR 25078, June 20, 1990; 56 FR 66961, Dec. 27, 
1991; 62 FR 25070, May 7, 1997]



Sec. 1951.505  [Reserved]



Sec. 1951.506  Processing payments.

    (a) Regular payments. Regular payments and advance regular payments 
will be processed as follows:
    (1) All payments will be based on tenants occupying the units as of 
the first day of the month prior to the payment due date. For example, a 
payment due on July 1 is based on tenants occupying the units June 1. 
For the purposes of this subpart, the word ``tenant'' also means RCH 
``member.''
    (2) The borrower must deliver all Forms FmHA or its successor agency 
under Public Law 103-354 1944-8, ``Tenant Certification,'' or for 
tenants receiving Section 8 assistance, the acceptable Department of 
Housing and Urban Development (HUD) form to the District Director 
according to paragraph VII F 1 of exhibit B to subpart C to part 1930 of 
this chapter. The District Director will date stamp each certification 
and will verify the information on the tenant certification also as 
required in paragraph VII F of exhibit B to subpart C of part 1930 of 
this chapter. The data from the tenant certifications must be entered 
into the Multi-Family Housing Tenant File System (MTFS) which will 
calculate the tenant's rent payment.
    (i) If the calculations on the tenant certification do not agree 
with MTFS, the District Office will contact the borrower/management to 
resolve the discrepancy. MTFS calculations will be

[[Page 74]]

used to calculate interest credit and rental assistance due the 
borrower.
    (ii) A copy of MTFS ``Project Worksheet--Interest Credit and Rental 
Assistance,'' an automated printout, will be generated and compared to 
the borrower's Form FmHA or its successor agency under Public Law 103-
354 1944-29, ``Project Worksheet for Interest Credit and Rental 
Assistance.'' Only tenants with current tenant certifications shown on 
MTFS will be certified for interest credit or rental assistance when 
processing payments.
    (iii) A copy of the monthly MTFS project worksheet report will be 
filed with Form FmHA or its successor agency under Public Law 103-354 
1944-29 to document the approved subsidies.
    (iv) At the borrower's request, a copy of the MTFS project worksheet 
report may be used as Parts I and II in lieu of Form FmHA or its 
successor agency under Public Law 103-354 1944-29. The District Office 
will provide a copy of the MTFS project worksheet report to the borrower 
about the 20th of the month. When using the MTFS project worksheet 
report as Parts I and II of Form FmHA or its successor agency under 
Public Law 103-354 1944-29, the borrower will verify the data, sign the 
MTFS project worksheet report, and return it with the monthly payment to 
the District Office. Borrowers using the MTFS project worksheet report 
as Part II, only, will complete, sign, and attach Part I of Form FmHA or 
its successor agency under Public Law 103-354 1944-29 to the MTFS 
project worksheet report, before returning it with the monthly payment. 
Borrowers with Section 8 units who are reporting overage payment, and/or 
excess HUD contract rent to the reserve account are required to complete 
Part I of either Form FmHA or its successor agency under Public Law 103-
354 1944-29 or the MTFS project worksheet report.
    (3) On or about the 11th day of each month, the Finance Office will 
generate and mail to each borrower that is delinquent and/or has late 
fees, Form FmHA or its successor agency under Public Law 103-354 1944-
9A, ``Multiple Family Housing Statement of Payment Due,'' showing the 
current monthly payment due, unpaid late fees, and delinquent payments, 
if any, due on the first day of the following month. This payment 
statement will be determined from current Finance Office records but 
will not reflect overage due from the borrower or rental assistance (RA) 
due the borrower.
    (4) Each borrower will submit to the District Office Form FmHA or 
its successor agency under Public Law 103-354 1944-29 with the required 
monthly payment indicated or adjusted as indicated in paragraph (a)(5) 
of this section regardless of whether or not Form FmHA or its successor 
agency under Public Law 103-354 1944-9A is received.
    (5) Form FmHA or its successor agency under Public Law 103-354 1944-
29, prepared by the borrower must reflect the following:
    (i) Only tenants occupying units the first day of the month prior to 
the payment due date.
    (ii) Interest credit and (RA) may be claimed only for tenants with 
current tenant certification as specified in paragraph VII F 2 of 
exhibit B to subpart F of part 1930 of this chapter.
    (iii) Overage up to the market rent must be paid to FmHA or its 
successor agency under Public Law 103-354 by the borrower for tenants 
without current tenant certifications unless there is a formal eviction 
in process, then the payment will be calculated based on the expired 
tenant certificate. The District Director may determine that the tenant 
may be required to reimburse the borrower for that overage as allowed in 
paragraph VII F 6 c of exhibit B to subpart C of part 1930 of this 
chapter.
    (iv) The borrower may subtract any RA due the project (supported by 
current tenant certifications) from the payment due and remit a ``net'' 
payment. Calculations supporting the ``net'' payment must be shown on 
Part I of Form FmHA or its successor agency under Public Law 103-354 
1944-29. The Finance Office will net enough RA to bring the account 
status current and pay any unpaid overage, late fees, interest on 
delinquent principal, etc., based on the payment reception date. If the 
account is on or ahead of schedule on the payment reception date, enough 
RA will be netted to pay one full installment and any unpaid coverage, 
interest on delinquent principal, etc.

[[Page 75]]

    (6) The District Director will certify that data on current tenant 
certifications held in the District Office supports claims on Form FmHA 
or its successor agency under Public Law 103-354 1944-29. The District 
Director will transmit payments as directed in exhibit A of this subpart 
(available in any FmHA or its successor agency under Public Law 103-354 
office).
    (7) Payment input by FmHA or its successor agency under Public Law 
103-354 will be based on correct amounts regardless of the amount 
remitted by the borrower.
    (b)-(c) [Reserved]

[50 FR 8597, Mar. 4, 1985, as amended at 51 FR 27671, Aug. 1, 1986; 55 
FR 25078, June 20, 1990; 56 FR 28038, June 19, 1991; 58 FR 40954, July 
30, 1993; 59 FR 54789, Nov. 2, 1994; 62 FR 25065, 25070, May 7, 1997; 68 
FR 61331, Oct. 28, 2003]



Sec. 1951.507  Maintaining borrower accounts.

    (a) Accounts of active borrowers. The foundation for proper and 
timely debt payment is sound budgeting and monthly review of income and 
expenses by the borrower and, as necessary, the District Office staff. 
Account maintenance, therefore, must begin with initial planning and 
must be an integral part of ongoing analysis, planning and follow-up 
management assistance.
    (b) Accounts of collection-only borrowers. Collection only accounts 
will be serviced according to Sec. 1951.7(b) of subpart A of this part.
    (c) Notifying borrowers of late fees and past due payments. The 
Finance Office will automatically notify each borrower of late fees for 
payments which were unpaid on the 10th day of the month. A copy of the 
notice will be mailed to the District Office servicing the account.
    (d) Subsequent servicing. Delinquent accounts will be serviced 
according to the respective program requirements. Accounts will also be 
serviced under subpart B of part 1965 of this chapter.
    (e) District Office monitoring. District Offices should review each 
account at least monthly by accessing the Automated Multi-Housing 
Accounting System (AMAS) through field office terminals. For projects on 
PASS, the Management System card will be flagged with an orange signal 
between Position ``5'' and ``RRH.'' Exhibit A-1 of this subpart 
(available in any FmHA or its successor agency under Public Law 103-354 
office) should be used to track payments.

[50 FR 8597, Mar. 4, 1985, as amended at 58 FR 40955, July 30, 1993]



Sec. Sec. 1951.508-1951.509  [Reserved]



Sec. 1951.510  Payment application.

    (a) Regular payment due date. The regular payment due date is the 
first day of each month. All months will be counted as 30 days (360 day 
year).
    (b) First regular payment. (1) The first regular amortized payment 
after loan closing for transfers (new terms), reamortizations, voluntary 
conversions, credit sales, or loans closed after interim financing must 
be at least one (1) month from closing. For example, if a loan is closed 
on January 31, the first regular amortized payment will be due March 1. 
For multiple advance loans the first payment must be at least one (1) 
month after the final advance.
    (2) For transfers (same terms) payments on loans already on PASS 
will be due on the next scheduled due date.
    (3) Transfers (same terms) converting from DIAS to PASS are loans 
retaining the same interest rate and final due date and regular 
amortized payments will be due 30 days form either the date of closing 
or the interest only installment, whichever is later.
    (c) Delinquent payments. (1) A loan payment is due on the first day 
of a month. A loan payment is considered past due when it is received on 
the second day or a subsequent day through the close of business of the 
tenth day of the month. A loan payment is late when it is received after 
normal business hours of the tenth day of the month, without regard to 
weekends, holidays or payment transmission factors. Thereafter, a late 
fee will be charged as described in paragraphs (c)(2) and (c)(4) of this 
section.
    (2) The project account will be charged a late fee when the regular 
payment is not received in the District Office by close of business of 
the tenth (10) day of the month the payment is due or when the payment 
is applied by the Finance Office and does not fully pay the regular 
payment and other

[[Page 76]]

charges for each project loan. Late fees collected by the Finance Office 
will be deposited in the Rural Housing Insurance Fund (RHIF).
    (i) The project late fee is six percent of the total regular 
payment(s) due shown on the promissory note(s), conversion agreement(s), 
assumption agreement(s) or reamortization agreement(s).
    (ii) A project late fee will be charged for any unpaid portion of 
the regular payment(s) exceeding $15.00.
    (iii) A project late fee will be charged one time only, for each 
regular payment.
    (iv) Except for cooperative housing, project late fees may not be 
paid from project income as specified in paragraph XIII B2a(4) of 
exhibit B to subpart C of part 1930 of this chapter.
    (v) Exceptions may be made to late fee charges only as follows:
    (A) The State Director may allow an exception for any project for 
three (3) monthly project late fee charges in any calendar year, based 
on the State Director's determination that the late fees place an unfair 
burden on the project. For each exception requested, the borrower must 
provide a written explanation of the circumstances which caused the late 
payment and what actions will be taken to bring the account current.
    (B) The National Office may authorize exceptions to late fees for 
borrowers who have late fees exceeding the State Director's exception 
authority. When the State Director determines that the application of a 
late fee would place an unfair burden on the borrower, the State 
Director may submit a request for an exception to the late fee to the 
National Office. The request will include an explanation of the 
circumstances, a recommendation for action and all relevant case file 
material. The National Office will review the request and notify the 
State Director what action should be taken on the account.
    (C) When an exception to late fees is granted, the State Director 
will notify the borrower on Form FmHA or its successor agency under 
Public Law 103-354 1951-51, ``Multiple Family Housing Exception to Late 
Fees,'' completed according to the FMI.
    (D) When an application for late fee exception is denied the State 
Director must give the borrower appeal rights under subpart B of part 
1900 of this chapter.
    (3) A project is considered delinquent on the 30th day of the month 
when any due amount is unpaid.
    (4) When a regular PASS payment continues to be delinquent on the 
first of the month following the delinquent payment due date, interest 
will be charged on the unpaid delinquent principal at the note rate from 
the date the principal was due until all regular payments, recoverable 
cost charges, late fees, and occupancy surcharges have been paid current 
in accordance with the number of full installments required by the 
promissory note. This interest will be in addition to the scheduled 
interest of the regular payment. The interest on delinquent principal 
will be added to the regular payment amount due for the month.
    (d) Subsidy credit. When the Finance Office receives the regular 
payment, subsidy credit will be applied to the loan account before any 
payment or other credit is applied to the account. Subsidy credit will 
be applied first to accrued interest and then to principal after all 
interest is paid. Subsidy credit will not be applied to late fees, audit 
receivables, or recoverable cost charges.
    (e) Regular payments. Regular payments will be applied in the 
following priority:
    (1) Amortized audit receivables.
    (2) Unamortized audit receivables.
    (3) All project late fees due.
    (4) Occupancy surcharges.
    (5) Amortized recoverable costs due.
    (6) Unamortized recoverable costs due.
    (7) Overage.
    (8) All other interest due.
    (9) Principal.
    (10) Any remaining regular payment will be applied as an advance 
regular payment unless specifically designated otherwise.
    (f) Advance regular payments. These payments affect the payment 
status of the loan. The loan account must be current before a payment 
can be applied as an advance payment. The payment effective date will be 
the due date

[[Page 77]]

of the next regular payment which is not fully paid.
    (g) Extra and refund payments. Both will be applied as principal to 
the last installment to become due under the note.
    (h) Voluntary additional principal payments. These payments will 
only be credited to the account when all regularly scheduled payments on 
the account have been paid. Voluntary additional principal payments are 
credited all to principal, as of the payment effective date, and do not 
affect the payment status of the loan.
    (i) Projects with initial and subsequent loan(s). Regular payments 
on projects with an initial and subsequent loan(s) will be applied 
according to the priorities listed in Sec. 1951.510(e) of this subpart. 
Each priority item will be paid for all project loans before moving to 
the next item.

Payments will be applied for each priority item in accordance with the 
loan number, beginning with the initial loan and ending with the highest 
numbered subsequent loan.
    (j) Final payments. Final payments will be applied on the next 
payment due date or the final due date shown on the promissory note, 
assumption agreement or reamortization agreement, whichever is sooner. 
The District Office must contact the Finance Office for the amount of 
the final payment. Final payment should be accepted under conditions 
specified in Sec. 1965.90 of subpart B to part 1965 of this chapter.

[50 FR 8597, Mar. 4, 1985, as amended at 53 FR 16245, May 6, 1988; 55 FR 
5975, Feb. 21, 1990; 55 FR 25078, June 20, 1990; 56 FR 2257, Jan. 22, 
1991; 58 FR 40955, July 30, 1993]



Sec. 1951.511  [Reserved]



Sec. 1951.512  Changes in the application of loan payments.

    District Office employees with State Director authorization 
according to Sec. 1930.143 of subpart C to part 1039 of this chapter 
are authorized to approve reapplication of loan payments between 
accounts when payments have been applied in error. All authorization for 
reapplication of payments must conform to the policies expressed in this 
subpart. No change may be made if the loan is paid in full, the 
cancelled note or notes have been returned to the borrower, and the 
security instruments have been satisfied. The District Director will 
process the changes as prescribed in exhibit A of this subpart 
(available in any FmHA or its successor agency under Public Law 103-354 
office) by the AMAS Coordinator.

[56 FR 28038, June 19, 1991, as amended at 58 FR 40955, July 30, 1993]



Sec. 1951.513  Overpayments and refunds to borrowers.

    Overpayments and refunds to borrowers will be processed according to 
Sec. 1951.13 of Subpart A of this part.



Sec. 1951.514  Recoverable and non-recoverable cost charges.

    The District Director will service recoverable and non-recoverable 
cost items according to Sec. 1951.14 of subpart A of this part and FmHA 
or its successor agency under Public Law 103-354 Instruction 2024-A 
which is available in any FmHA or its successor agency under Public Law 
103-354 office. (Recoverable and non-recoverable costs are defined in 
Sec. 1951.504 of this subpart.)

[53 FR 16245, May 6, 1988, as amended at 57 FR 36591, Aug. 14, 1992]



Sec. 1951.515  Promissory notes for borrowers who convert to PASS.

    Promissory notes in the hands of investors when a loan is converted 
to PASS will be repurchased by the Finance Office and forwarded to the 
District Office for storage.



Sec. 1951.516  [Reserved]



Sec. 1951.517  Conversion from DIAS to PASS.

    (a) Conversion prior to May 1, 1985. The account of any existing RRH 
loan recipient who elected to convert to PASS before October 31, 1983, 
by following instructions prescribed by FmHA or its successor agency 
under Public Law 103-354, and who signed their conversion documents 
before May 1, 1985, or any recipient of a new loan, credit sale, or 
transfer (new terms) closed between November 1, 1983, and April 30, 
1985, who elected to convert to PASS, was converted, as if the loan has 
been on an amortization schedule from the date of

[[Page 78]]

the loan, transfer (new terms), or reamortization (new terms), whichever 
occurred later.
    (b) Conversion on or after May 1, 1985--(1) Required conversion. 
After May 1, 1985, all MFH loans, transfers or reamortizations must be 
closed on PASS, except LH loans specified in Sec. 1951.501(a)(2)(i) of 
this subpart. All borrowers receiving subsequent loans or 
reamortizations must convert all initial and subsequent loans on the 
project to PASS. If the subsequent loan and conversion are not closed on 
the first of the month, the interest from the date of closing to the 
first of the month will be capitalized. Recoverable costs and unpaid 
interest may be capitalized on coversions required by subsequent loans 
or reamortization of one loan on the project account.
    (2) Voluntary conversion. District Directors shall approve voluntary 
conversion of any account from DIAS to PASS upon a request by the 
borrower, when the following conditions are met:
    (i) The loan account and reserve account are current less any 
authorized withdrawals at the time of conversion.
    (ii) Conversion does not result in a rent increase.
    (iii) The conversion is effective the first day of the month.
    (3) Processing conversions. The following actions must be taken to 
convert an account from DIAS to PASS:
    (i) Form FmHA or its successor agency under Public Law 103-354 1951-
50, ``Multiple Family Housing Conversion Agreement,'' will be completed 
according to the FMI except loans converted on Form FmHA or its 
successor agency under Public Law 103-354 1965-9, ``Multiple Family 
Housing Assumption Agreement,'' or FmHA or its successor agency under 
Public Law 103-354 1965-16, ``Multiple Family Housing Reamortization 
Agreement.'' The terms of Forms FmHA or its successor agency under 
Public Law 103-354 1965-9 and FmHA or its successor agency under Public 
Law 103-354 1965-16 convert the account to PASS.
    (ii) When the borrower will continue to receive interest credit 
following conversion, the current interest credit plan type will be 
passed through to the PASS loan. However, a new Form FmHA or its 
successor agency under Public Law 103-354 1944-7 must be prepared to 
reflect the PASS payment and subsidy amount.
    (iii) On the back of the original note or assumption agreement (new 
terms), below all signatures and endorsements, the District Director 
will insert the following: ``A Form FmHA or its successor agency under 
Public Law 103-354 1951-50 dated ------ 198--, in the principal sum of 
$------, has been given to modify the payment schedule of the note.
    (4) Principal balance to be converted. For transfers and 
reamortizations, the applicable transfer or reamortization form will 
convert the account to PASS. The principal balance converted to PASS 
will be established according to the FMI for Forms FmHA or its successor 
agency under Public Law 103-354 1965-9, FmHA or its successor agency 
under Public Law 103-354 1965-10, ``Information on Assumption of 
Multiple Family Housing Loans,'' or FmHA or its successor agency under 
Public Law 103-354 1965-16, and the following:
    (i) For DIAS to PASS transactions (new terms):
    (A) First of the month closings: The unpaid interest, overage and 
late fees accrued through the last day of the previous month will be 
capitalized.
    (B) Other than the first of the month closing: Accrued interest, 
overage and late fees through the date of closing will be capitalized. 
An interest only installment from the date of closing through the 30th 
day of the month will be collected from the transferee and applied to 
the transferee's account. This interest only installment will be 
calculated on the same interest credit rate in effect for the previous 
borrower.
    (ii) For DIAS to PASS transactions (same terms):
    (A) First of the month closings: Accrued interest, overage and late 
fees through the last day of the previous month will be collected from 
the transferor at closing and credited to the transferor's account.
    (B) Other than the first of the month closings: Accrued interest, 
overage and late fees through the date of closing will be collected from 
the transferor at closing and credited to the transferor's account. The 
date of credit is the day

[[Page 79]]

before closing. An interest only installment from the date of closing 
through the 30th day of the month will be collected from the transferee 
and credited to the transferee's account. This interest only installment 
will be calculated on the same interest credit rate in effect for the 
previous borrower.
    (iii) Reamortizations will always be effective the first day of the 
month. Unpaid interest, including any unpaid overage and late fees may 
be capitalized as follows: DIAS to PASS transactions, through the last 
day of the previous month; PASS to PASS transactions, through the 30th 
day of the previous month.
    (iv) Audit receivables may not be transferred or reamortized. They 
will be established as a ``Collection Only'' account for the transferor 
and must be collected or charged off.
    (5) Terms of conversion. All conversion on Form FmHA or its 
successor agency under Public Law 103-354 1951-50 will be at the 
interest rate and within the remaining terms shown on the converting 
promissory note, assumption agreement (new terms) or reamortization 
agreement (new terms).

[50 FR 8597, Mar. 4, 1985, as amended at 53 FR 16245, May 6, 1988; 58 FR 
40955, July 30, 1993; 62 FR 25065, May 7, 1997]



Sec. 1951.518  Determining current loan balances for transfer.

    Same terms transfers, when the transferor has been converted to 
PASS, must take place in a current loan status on the date of the 
transfer. Any delinquent principal and interest must be brought current. 
Overpayments and advance regular payments made on PASS accounts result 
in the creation of a ``future paid'' status account under AMAS. These 
advance payments must be reversed off and applied to the transferor's 
principal balance prior to determining the loan balance to be 
transferred. If the future payments have been made through rental 
assistance, they must be refunded to the transferor and reapplied in the 
form of cash on the loan balance.

[53 FR 16245, May 6, 1988]



Sec. Sec. 1951.519-1951.547  [Reserved]



Sec. 1951.548  Exception authority.

    The Administrator of the Farmers Home Administration or its 
successor agency under Public Law 103-354 may, in individual cases, make 
an exception to any requirements of this Subpart not required by the 
authorizing statute if the Administrator finds that application of such 
requirement would adversely affect the interest of the Government. The 
Administrator will exercise the authority only at the request of the 
State Director. The District Director will submit the request supported 
by data: demonstrating the adverse impact; identifying the particular 
requirement involved; showing proper alternative courses of action; and, 
identifying how the adverse impact will be eliminated.



Sec. 1951.549  [Reserved]



Sec. 1951.550  OMB control number.

    The collection of information requirements in this regulation have 
been approved by the Office of Management and Budget and assigned OMB 
control number 0575-0106. Public reporting burden for this collection of 
information is estimated to be 15 minutes per response, with an average 
of 15 minutes per response including time for reviewing instructions, 
searching existing data sources, gathering and maintaining the data 
needed, and completing and reviewing the collection of information. Send 
comments regarding this burden estimate or any other aspect of this 
collection of information, including suggestions for reducing this 
burden, to Department of Agriculture, Clearance Office, OIRM, Room 404-
W, Washington, DC 20250; and to the Office of Management and Budget, 
Paperwork Reduction Project (OMB 0575-0106), Washington, DC 
20503.

[56 FR 28039, June 19, 1991]



  Subpart L_Servicing Cases Where Unauthorized Loan or Other Financial 
                 Assistence was Received_Farmer Programs

    Source: 50 FR 45777, Nov. 1, 1985, unless otherwised noted.

[[Page 80]]



Sec. 1951.551  Purpose.

    This subpart prescribes the policies and procedures for servicing 
insured Operating (OL), Farm Ownership (FO), Soil and Water (SW), 
Recreation (RL), Emergency (EM), Economic Emergency (EE), Special 
Livestock (SL), Softwood Timber (ST), Economic Opportunity (EO) loans, 
and Rural Housing loans for farm service buildings (RHF) (referred to as 
farmer program (FP) loans), when it is determined that the borrower was 
not eligible for all or part of the financial assistance received in the 
form of a loan or subsidy granted. It does not apply to guaranteed 
loans.

[52 FR 26138, July 13, 1987]



Sec. 1951.552  Definitions.

    As used in this subpart, the following definitions apply:
    (a) Active borrower. A borrower who has an outstanding account in 
the records of the Finance Office, including collection-only or an 
unsatisfied account balance where a voluntary conveyance was accepted 
without borrower being released from liability or where liquidation did 
not satisfy the indebtedness.
    (b) Assistance. Financial assistance in the form of a loan or 
interest subsidy received.
    (c) Debt instrument. Used as a collective term to include promissory 
note or assumption agreement.
    (d) False information. Information, known to be incorrect, provided 
with the intent to obtain benefits which would not have been obtainable 
based on correction information.
    (e) Inaccurate information. Incorrect information provided 
inadvertently without intent to obtain benefits fraudulently.
    (f) Inactive borrower. A former active borrower whose loan(s) 
has(have) been paid in full or assumed by another party(ies), and who 
does not have an outstanding account in the records of the Finance 
Office.
    (g) Unauthorized Assistance. Any loan, primary loan servicing 
action, including Net Recovery Buyout, or interest subsidy received for 
which there was no authorization, for which the borrower was not 
eligible, or which was obligated from the wrong appropriation or fund. 
An unauthorized interest subsidy is a benefit received through a loan 
that was made at a lower interest rate than that to which the borrower 
was entitled, whether the incorrect interest rate was selected 
erroneously by the approval official, or the documents were prepared in 
error.

[50 FR 45777, Nov. 1, 1985, as amended at 56 FR 33862, July 24, 1991]



Sec. 1951.553  Policy.

    When it is determined that unauthorized assistance has been 
received, an effort must be made to collect from the borrower the sum 
which is determined to be unauthorized, regardless of amount, unless any 
applicable Statute of Limitations has expired.



Sec. Sec. 1951.554-1951.555  [Reserved]



Sec. 1951.556  Initial determination that unauthorized assistance was received.

    Unauthorized assistance may be identified through audits conducted 
by the Office of the Inspector General (OIG), USDA; through reviews made 
by Farmers Home Administration or its successor agency under Public Law 
103-354 (FmHA or its successor agency under Public Law 103-354) 
personnel; or through other means such as information provided by a 
private citizen which documents that unauthorized assistance has been 
received by a borrower. If FmHA or its successor agency under Public Law 
103-354 has reason to believe unauthorized assistance was received, but 
is unable to determine whether or not the assistance was in fact 
unauthorized, the case will be referred to the Office of the General 
Counsel (OGC) or the National Office, as appropriate, for review and 
advice. In every case where it is known or believed by FmHA or its 
successor agency under Public Law 103-354 that the assistance was based 
on false information, investigation by the OIG will be requested, as 
provided for in FmHA or its successor agency under Public Law 103-354 
Instruction 2012-B (available in any FmHA or its successor agency under 
Public Law 103-354 office). If OIG conducts an investigation, the 
actions outlined in Sec. 1951.557 of this subpart

[[Page 81]]

will be deferred until the OIG investigation is completed and the report 
is received. The reason(s) for the unauthorized assistance being 
received by the borrower will be well documented in the case file, and 
will specifically state whether it was due to:
    (a) Submission of inaccurate information by the borrower;
    (b) Submission of false information by the borrower;
    (c) Submission of inaccurate or false information by another party 
on the borrower's behalf such as a seller, developer, real estate 
broker, or attorney, when the borrower did not know the other party had 
submitted inaccurate or false information;
    (d) Error by FmHA or its successor agency under Public Law 103-354 
personnel, either in making computations or failure to follow published 
regulations or other agency issuances; or
    (e) Error in preparation of a debt instrument which caused a loan to 
be closed at an interest rate lower than the correct rate in effect when 
the loan was approved.



Sec. 1951.557  Notification to borrower.

    (a) Collection efforts will be initiated by the County Supervisor by 
a letter substantially similar to Exhibit A of this Subpart (available 
in any FmHA or its successor agency under Public Law 103-354 office), 
and mailed to the borrower by ``Certified Mail, Return Receipt 
Requested,'' with a copy to the State Director; and, for a case 
identified in an OIG audit report, copies to the OIG office which 
conducted the audit and the Planning and Analysis Staff of the National 
Office. This letter will be sent to all borrowers who received 
unauthorized assistance, regardless of amount. The letter will:
    (1) Specify in detail the reason(s) the assistance was determined to 
be unauthorized;
    (2) State the amount of unauthorized assistance to be repaid 
according to Exhibit D of this Subpart (available in any FmHA or its 
successor agency under Public Law 103-354 office); and
    (3) Establish an appointment for the borrower to discuss with the 
County Supervisor the basis for FmHA or its successor agency under 
Public Law 103-354's claim; and give the borrower an opportunity to 
provide facts, figures, written records or other information which might 
refute FmHA or its successor agency under Public Law 103-354's 
determination that the assistance received was unauthorized.
    (b) If the borrower meets with the County Supervisor, the County 
Supervisor will outline to the borrower why the assistance was 
determined to be unauthorized. The borrower will be given an opportunity 
to provide information to refute FmHA or its successor agency under 
Public Law 103-354's findings. When requested by the borrower, the 
County Supervisor may grant additional time for the borrower to assemble 
documentation. When an extension is granted, the County Supervisor will 
specify a definite number of days to be allowed and establish the follow 
up necessary to assure that servicing of the case continues without 
undue delay.



Sec. 1951.558  Decision on servicing actions.

    When the County Supervisor is the same official who approved the 
unauthorized assistance, the District Director must review the case 
before further actions are taken by the County Supervisor.
    (a) Payment in full. If the borrower agrees with FmHA or its 
successor agency under Public Law 103-354's determination and agrees to 
repay in a lump sum, the County Supervisor may allow a reasonable period 
of time (not to exceed 90 days) for the borrower to arrange for 
repayment. The amount due will be the amount stated in the letter as 
shown in Exhibit A of this subpart (available in any FmHA or its 
successor agency under Public Law 103-354 office). The County Supervisor 
will remit collections to the Finance Office according to the Forms 
Manual Insert (FMI) for Form FmHA or its successor agency under Public 
Law 103-354 451-2, ``Schedule of Remittances,'' for application to the 
borrower's account as an extra payment. After a borrower repays an 
unauthorized interest subsidy benefit in a lump sum, the loan will be 
serviced in accordance with Sec. 1951.561(a)(3) of this subpart. In the 
case of unauthorized assistance which was identified in an OIG audit, 
the

[[Page 82]]

County Supervisor will report the repayment as outlined in Sec. 
1951.568(a) of this subpart.
    (b) Continuation with borrower. If the borrower agrees with FmHA or 
its successor agency under Public Law 103- 354's determination or is 
willing to repay but cannot repay the unauthorized assistance in a lump 
sum within a reasonable period of time, continuation may be authorized. 
Servicing actions outlined in Sec. 1951.561 of this subpart will be 
taken, provided all of the following conditions are met:
    (1) The borrower did not provide false information as defined in 
Sec. 1951.552(d) of this subpart.
    (2) It would be highly inequitable to require prompt repayment of 
the unauthorized assistance; and
    (3) Failure to collect the unauthorized assistance in full will not 
adversely affect FmHA or its successor agency under Public Law 103-354's 
financial interests.
    (c) Liquidation of loan(s) or legal action to enforce collection. 
When a case cannot be handled according to the provisions of paragraph 
(a) or (b) of this section, or if the borrower refuses to execute the 
documents necessary to make account adjustments or establish an 
obligation to repay the unauthorized assistance as provided in Sec. 
1951.561 of this subpart, or when a borrower fails to respond to the 
initial letter prescribed in Sec. 1951.557 of this subpart within 30 
days, one of the following actions will be taken:
    (1) Active borrower with a secured loan. (i) The County Supervisor 
will send Exhibit B of this subpart (available in any FmHA or its 
successor agency under Public Law 103-354 office.)
    (ii) If the borrower wants to voluntarily convey, the County 
Supervisor will follow the directions in Sec. 1955.10 or Sec. 1955.20 
as applicable, of subpart A of part 1955 of this chapter.
    (iii) If the borrower does not appeal, does not repay the 
unauthorized assistance in full, does not voluntarily convey, 
voluntarily sell or refinance the entire FmHA or its successor agency 
under Public Law 103-354 debt, the borrower's account will be 
accelerated and there will be no appeal of this action. The County 
Supervisor and District Director will follow the directions in Sec. 
1955.15 of subpart A of part 1955 of this chapter.
    (iv) Forced liquidation will not be pursued when:
    (A) The amount of unauthorized assistance outstanding, including 
principal, accrued interest, and recoverable costs charged to the 
account, is less that $1,000; or
    (B) It can be clearly documented that it would not be in the best 
financial interest of the Government to force liquidation. If the 
servicing official wishes to make an exception to forced liquidation 
under paragraph (c)(1)(B) of this section, a request for an exception 
under Sec. 1951.569 of this subpart will be made.
    (v) Account adjustments will be made by FmHA or its successor agency 
under Public Law 103-354 without the signature of the borrower according 
to Sec. 1951.568(a)(5) of this subpart. In these cases, the borrower 
will be notified by letter of the actions taken with a copy of Forms 
FmHA or its successor agency under Public Law 103-354 1951-12, 
``Correction of Loan Account,'' or 1951-13, ``Change in Interest Rate,'' 
as applicable, enclosed to reflect the adjustments.
    (2) (Inactive borrower or active borrower with unsecured loan such 
as collection-only or unsatisfied balance after liquidation). The County 
Supervisor will document the facts in the case and submit it to the 
State Director who will request the advice of OGC on pursuing legal 
action to effect collection. The State Director will tell OGC what 
assets, if any, are available from which to collect.

[50 FR 45777, Nov. 1, 1985, as amended at 53 FR 35717, Sept. 14, 1988]



Sec. Sec. 1951.559-1951.560  [Reserved]



Sec. 1951.561  Servicing options in lieu of liquidation or legal action.

    When all of the conditions outlined in Sec. 1951.558(b) of this 
subpart are met, servicing options outlined in this section will be 
considered; and accounts will be serviced according to this section and 
Sec. 1951.568 of this subpart.
    (a) Active borrower--(1) Entire loan, or loan servicing 
unauthorized. When the entire loan, or all or a portion of primary loan 
servicing, is determined to

[[Page 83]]

be unauthorized because the borrower was not eligible, or because the 
loan or primary loan servicing was approved for unauthorized purposes, 
the following alternatives will be considered in the order listed:
    (i) Execution of Form FmHA or its successor agency under Public Law 
103-354 1965-11, ``Accelerated Repayment Agreement,'' according to Sec. 
1965.26(e) of subpart A of part 1965 of this chapter, for loans secured 
by real estate, or rescheduling according to Subpart A of this part, for 
loans not secured by real estate, based on the borrower's repayment 
ability.
    (ii) Refinancing with another type of FmHA or its successor agency 
under Public Law 103-354 loan to repay the unauthorized loan, if the 
borrower is eligible for the type loan being considered.
    (iii) When the case cannot be handled according to paragraph 
(a)(1)(i) or (a)(1)(ii) of this section, continuance with the loan on 
the existing terms may be approved, and the loan will, thereafter, be 
serviced as an authorized loan.
    (2) Portion of loan unauthorized. When a portion of a loan is 
determined to be unauthorized, the Finance Office will be instructed to 
separate the authorized and unauthorized portions of the loan, setting 
up each as a separate loan at the correct interest rate. The correct 
interest rate will be taken from Exhibit C of this subpart (available in 
any FmHA or its successor agency under Public Law 103-354 office) as of 
the date of loan approval. All payments made on the loan being corrected 
will be reversed and reapplied to the unauthorized portion. If after 
reapplication of payments the unauthorized portion is not paid in full, 
the options outlined in paragraph (a) of this section may be considered 
for repayment of the balance of the unauthorized portion; and the 
authorized portion will be serviced as an outlined loan. See Sec. 
1951.568 of this subpart for instructions on setting up separate 
accounts.
    (3) Unauthorized interest subsidy benefits received. When the 
borrower was eligible for the loan, but should properly have been 
charged a higher interest rate than that shown in the debt instrument on 
all or a portion of the loan, resulting in the receipt of unauthorized 
interest subsidy benefits, the case will be handled as outlined below. 
The unauthorized interest rate will be corrected to the interest rate in 
effect on the date the original loan was approved as outlined in 
paragraph (a)(3)(iii) of this section.
    (i) When a subsidized interest rate was incorrectly charged on the 
entire loan, all payments made will be reversed and reapplied at the 
correct interest rate; and future installments will be scheduled at the 
correct interest rate. After reapplication of payments, the loan will be 
treated as an authorized loan.
    (ii) When a subsidized interest rate was incorrectly charged on only 
a portion of the loan, the Finance Office will be instructed by the 
County Supervisor to separate the loan into two portions, with the 
correct interest rate established for the portion having the incorrect 
subsidized interest rate. All payments made on the loan being adjusted 
will be reversed and reapplied, first to the portion with the corrected 
interest rate. After reapplication of payments at the correct interest 
rate, both portions will be serviced as authorized loans.
    (iii) Incorrect interest rates will be corrected as follows 
referring to Exhibit C of this subpart (available in any FmHA or its 
successor agency under Public Law 103-354 office) for interest rates in 
effect on specific dates:
    (A) For disaster Emergency (EM) loans, to the rate for EM annual 
production loans.
    (B) For Operating Loans--Limited Resource (OL-LR), to the rate for 
regular Operating Loans (OL).
    (C) For Farm Ownership--Limited Resource (FO-LR), to the rate for 
regular Farm Ownership (FO).
    (D) For all other types of FP loans, to the correct rate for the 
type loan involved which was in effect when the loan was approved.
    (b) Inactive borrower. When the individual or entity does not have 
an outstanding account in the records of the Finance Office, the 
following actions will be taken:
    (1) Have the inactive borrower execute a promissory note in the 
amount

[[Page 84]]

of the assistance determined to be unauthorized according to Sec. 
1951.557 of this subpart. This note will bear interest at the rate which 
was in effect for the type loan associated with the unauthorized 
assistance when it was approved. The term will not exceed 10 years or 
the term of the original loan, whichever is the shorter term.
    (2) Take the best lien obtainable on any collateral having equity 
value to secure the note.

[50 FR 45777, Nov. 1, 1985, as amended at 51 FR 4138, Feb. 3, 1986; 56 
FR 33862, July 24, 1991]



Sec. Sec. 1951.562-1951.567  [Reserved]



Sec. 1951.568  Account adjustments and reporting requirements.

    When a final determination has been made that unauthorized 
assistance has been granted, the Finance Office will be notified of 
necessary account adjustments as outlined in this section, depending 
upon whether the case of unauthorized assistance was identified by OIG 
in an audit report or by another means. The Finance Office will service 
the accounts as prescribed in this section.
    (a) Audit cases. Only cases of unauthorized assistance identified by 
OIG will be reported to the Finance Office by submission on Form FmHA or 
its successor agency under Public Law 103-354 1951-12 completed in 
accordance with the FMI. The Finance Office will flag the account for 
monitoring and reporting as required. Each payment reversed will be 
reapplied as of the original date of credit. ``Loan'' refers to an 
account with an active borrower unless specified as ``inactive.'' If the 
borrower has arranged to repay in a lump sum, the payment will be 
remitted with Form FmHA or its successor agency under Public Law 103-354 
451-2, according to the FMI. Form FmHA or its successor agency under 
Public Law 103-354 1951-12 will reflect the amount and the Schedule 
Number.
    (1) Entire loan unauthorized. When the entire loan is unauthorized 
because the borrower was not eligible or because the loan was approved 
for unauthorized purposes, and continuation is authorized, the Finance 
Office will be advised as follows:
    (i) Accelerated repayment agreement or loan rescheduled. If the 
borrower has executed Form FmHA or its successor agency under Public Law 
103-354 1965-11 for loans secured by real estate; or has executed Form 
FmHA or its successor agency under Public Law 103-354 1951-4 for loans 
not secured by real estate, the form(s) will be prepared and distributed 
according to the FMIs, attaching the original form(s) to Form FmHA or 
its successor agency under Public Law 103-354 1951-12.
    (ii) Continuation with loan on existing terms. When it is determined 
that all the conditions outlined in Sec. 1951.558(b) of this subpart 
are met and continuation with the loan on the existing terms is 
approved, the servicing official will submit Form FmHA or its successor 
agency under Public Law 103-354 1951-12 to the Finance Office to reflect 
this.
    (2) Portion of loan unauthorized. When a loan is to be separated 
into authorized and unauthorized portions, the authorized portion will 
retain the original loan number, and the original principal amount will 
be reduced by the unauthorized amount. A new loan in the unauthorized 
amount will be established as the unauthorized loan with the next 
available number assigned by the Finance Office. Payments made on the 
loan being adjusted will be reversed and reapplied first to the 
unauthorized loan. If the reapplication of payments does not pay the 
unauthorized loan in full, upon receipt of Forms FmHA or its successor 
agency under Public Law 103-354 451-26, ``Transaction Record,'' showing 
the balances of the authorized and unauthorized loans, the servicing 
official will proceed under the provisions of Sec. 1951.561(a)(2) and 
will submit a revised Form FmHA or its successor agency under Public Law 
103-354 1951-12 (along with a copy of the original Form FmHA or its 
successor agency under Public Law 103-354 1951-12).
    (3) Unauthorized subsidy benefits received--(i) Entire loan. When 
the interest rate on an entire loan is changed, Form FmHA or its 
successor agency under Public Law 103-354 1951-12 will be submitted to 
notify the Finance Office of the correct interest rate to be charged 
from the original loan closing date. Payments made will be reversed

[[Page 85]]

and reapplied at the corrected interest rate, after which the 
unauthorized subsidy benefits will be reported to OIG as resolved. The 
loan will then be treated as an authorized loan.
    (ii) Portion of loan. When the interest rate on only a portion of a 
loan must be changed, the portion which has the incorrect interest rate 
will be established as a new loan at the correct interest rate shown on 
Form FmHA or its successor agency under Public Law 103-354 1951-12. 
Payments made on the loan being adjusted will be reversed and reapplied 
first to the loan with the corrected interest rate. Both loans will then 
be treated as authorized loans.
    (4) Liquidation pending. When liquidation is initiated under the 
provisions of this subpart, Form FmHA or its successor agency under 
Public Law 103-354 1951-12 will be submitted to advise the Finance 
Office to establish the unauthorized assistance account. This account 
will be flagged ``FAP'' (Foreclosure Action Pending) or ``CAP'' (Court 
Action Pending), as applicable.
    (5) Liquidation not initiated. Cases in which liquidation would 
normally be initiated, but where it is not because of the provisions of 
Sec. 1951.558 (c)(1)(iv)(A) or (c)(1)(iv)(B) of this subpart, will be 
adjusted according to Sec. 1951.561 (a)(2) or (a)(3) of this subpart 
and this section, and the adjustments will be reflected on Form FmHA or 
its successor agency under Public Law 103-354 1951-12. In this instance 
only, account adjustments will be made even though the borrower does not 
sign Form FmHA or its successor agency under Public Law 103-354 1951-12 
and any related documents.
    (6) Establishment of account of inactive borrower. (i) When an 
inactive borrower agrees to repay unauthorized assistance and executes 
documents to evidence such an obligation, Form FmHA or its successor 
agency under Public Law 103-354 1951-12 will reflect this, and the 
Finance Office will establish or the account according to the terms 
indicated on Form FmHA or its successor agency under Public Law 103-354 
1951-12.
    (ii) When a judgment is obtained against such a borrower, Form FmHA 
or its successor agency under Public Law 103-354 1962-20, ``Notice of 
Judgment,'' will be prepared and distributed in accordance with the FMI 
to establish a judgment account. The FmHA or its successor agency under 
Public Law 103-354 field office will process the judgment or the third 
party judgment via the FmHA or its successor agency under Public Law 
103-354 field office terminal system.
    (7) Payments on authorized and unauthorized loans concurrently. When 
a borrower has both authorized and unauthorized loans outstanding, 
installments may be scheduled to be paid concurrently on all loans. 
Payments may be adjusted by means of rescheduling or reamortizing to 
coincide with the borrower's repayment ability according to servicing 
regulations for the type loan involved. The County Supervisor will 
complete Form FmHA or its successor agency under Public Law 103-354 451-
2 so that payments received will be applied first to the unauthorized 
loan account to maintain it current, with the remainder of the payment 
applied to the other loan(s).
    (8) Reporting. At prescribed intervals, the Finance Office will 
report to the OIG on the status of cases involving unauthorized 
assistance which were identified by OIG in audit reports. For reporting 
purposes, the following applies:
    (i) For an unauthorized loan account established as provided in 
paragraph (a) (1), (2), or (6) of this section, reporting will be as 
follows:
    (A) When unauthorized assistance is paid in full, it will be 
reported on the next scheduled report only, giving the amount collected.
    (B) When unauthorized assistance is to be repaid under an 
accelerated repayment agreement, the unpaid balance will be reported 
initially and the collections and status will be included on each 
scheduled report until the account is paid in full.
    (C) When continuation with the loan on existing terms is approved, 
or after a loan is rescheduled or reamortized, it will be reported as 
resolved on the next scheduled report, and no further reporting is 
required.
    (ii) For unauthorized subsidy cases as provided in paragraph (a)(3) 
of this section, when the unauthorized amount has been repaid, or 
payments have been

[[Page 86]]

reversed and reapplied at the correct interest rate, the unauthorized 
subsidy will be reported as resolved on the next scheduled report. No 
further reporting is required.
    (iii) When an account is established with liquidation action pending 
as provided in paragraph (a)(4) of this section, the status will be 
included on each scheduled report until the liquidation is completed or 
the account is otherwise paid in full.
    (iv) When liquidation is not initiated as provided in paragraph 
(a)(5) of this section, it will be reported on the next scheduled report 
(along with collections, if any). No further reporting is required.
    (b) Nonaudit cases. Basically, servicing options which may be used 
are the same for audit and nonaudit cases; however, when receipt of 
unauthorized assistance is identified by a means other than an OIG audit 
report, the Finance Office will be notified only if adjustments to an 
account or reinstatement of an inactive account are necessary. Once 
adjustments are made as provided in this paragraph, the loan(s) will be 
treated as an authorized loan(s). Each payment reversed will be 
reapplied as of the original date of credit. After payments are reversed 
and reapplied, the servicing official will receive Forms FmHA or its 
successor agency under Public Law 103-354 451-26 from the Finance Office 
reflecting the account status.
    (1) Account adjustments will be handled as follows:
    (i) When a change in interest rate is necessary, retroactive to the 
date of loan closing on all or a portion of a loan, Form FmHA or its 
successor agency under Public Law 103-354 1951-13 will be completed 
according to the FMI and submitted to the Finance Office. Payments will 
be reversed and reapplied accordingly.
    (ii) For accounts to be rescheduled or reamortized, Forms FmHA or 
its successor agency under Public Law 103-354 1951-4, or 1965-11, as 
applicable, will be prepared and submitted in accordance with the 
respective FMI.
    (iii) When an inactive borrower agrees to repay unauthorized 
assistance and executes documents to evidence such an obligation, the 
County Supervisor will notify the Finance Office by memorandum, 
attaching a copy of the promissory note. The Finance Office will 
establish or reinstate the account according to the terms of the 
promissory note.
    (iv) If a loan is paid in full, the remittance will be handled in 
the same manner as any other final payment.
    (2) A delinquency created through reversal and reapplication of 
payments to effect corrections outlined in paragraph (b)(1) of this 
section will be serviced according to the applicable servicing 
regulations for the type loan involved.

[50 FR 45777, Nov. 1, 1985, as amended at 55 FR 35295, Aug. 29, 1990]



Sec. 1951.569  Exception authority.

    The Administrator may in individual cases make an exception to any 
requirement or provision of this subpart which is not inconsistent with 
the authorizing statute or other applicable law if the Administrator 
determines that application of the requirement or provision would 
adversely effect the Government's interest. The Administrator will 
exercise this authority only at the request of the State Director and on 
the recommendation of the appropriate Program Assistant Administrator. 
Requests for exceptions must be made in writing by the State Director 
and supported with documentation to explain the adverse effect on the 
Government's interest, propose alternative courses of action, and show 
how the adverse effect will be eliminated or minimized if the exception 
is granted.



Sec. Sec. 1951.570-1951.599  [Reserved]



Sec. 1951.600  OMB control number.

    The collection of information requirements in this regulation have 
been approved by the Office of Management and Budget and assigned OMB 
control number 0575-0102.

Subpart M [Reserved]

[[Page 87]]



  Subpart N_Servicing Cases Where Unauthorized Loan or Other Financial 
             Assistance Was Received_Multiple Family Housing

    Source: 50 FR 12996, Apr. 2, 1985, unless otherwise noted.



Sec. 1951.651  Purpose.

    This subpart prescribes the policies and procedures for servicing 
multiple family housing (MFH) loans and/or grants made by Farmers Home 
Administration or its successor agency under Public Law 103-354 (FmHA or 
its successor agency under Public Law 103-354) when it is determined 
that the borrower or grantee was not eligible for all or part of the 
financial assistance received in the form of a loan, grant, subsidy 
granted, any other direct financial assistance, or was not made subject 
to restrictive-use provisions required by law and/or regulation. As used 
in this subpart, MFH loans and grants are section 515 rural rental 
housing (RRH) and rural cooperative housing (RCH) loans and sections 514 
and 516 labor housing (LH) loans and grants.

[58 FR 38926, July 21, 1993]



Sec. 1951.652  Definitions.

    As used in this subpart, the following definitions apply:
    (a) Active borrower. A borrower who has an outstanding account in 
the records of the Finance Office, including collection-only or an 
unsatisfied account balance where a voluntary conveyance was accepted 
without release from liability or foreclosure did not satisfy the 
indebtedness.
    (b) Assistance. Financial assistance in the form of a loan, grant, 
or subsidy received.
    (c) Debt instrument. Used as a collective term to include promissory 
note, assumption agreement, grant agreement/resolution, or bond.
    (d) False information. Information, known to be incorrect, provided 
with the intent to obtain benefits which would not have been obtainable 
based on correct information.
    (e) Inaccurate information. Incorrect information provided 
inadvertently without intent to obtain benefits fraudulently.
    (f) Inactive borrower. A former borrower whose loan(s) has(have) 
been paid in full or assumed by another party(ies) and who does not have 
an outstanding account in the records of the Finance Office.
    (g) Recipient. ``Recipient'' refers to an individual or entity that 
received a loan, or portion of a loan, an interest subsidy, or a grant 
which was unauthorized or was not made subject to restrictive-use 
provisions required by law and/or regulation.
    (h) Unauthorized assistance. Any loan, interest subsidy, or grant, 
or any portion thereof, received by a borrower or grantee for which 
there was no regulatory authorization, or for which the recipient was 
not eligible.

Interest subsidy includes interest credits, rental assistance, and 
subsidy benefits received because a loan was made at a lower interest 
rate than that to which the recipient was entitled, whether the 
incorrect interest rate was selected erroneously by the approval 
official, or the documents were prepared in error.

[50 FR 12996, Apr. 2, 1985, as amended at 58 FR 38926, July 21, 1993]



Sec. 1951.653  Policy.

    When unauthorized assistance has been received, an effort must be 
made to collect the sum which is determined to be unauthorized from the 
recipient, regardless of amount, unless any applicable statute of 
limitations has expired.

[58 FR 38926, July 21, 1993]



Sec. 1951.654  Categories of unauthorized assistance.

    Unauthorized assistance includes, but is not limited to, these 
categories:
    (a) The recipient was not eligible for the assistance.
    (b) The property, as approved, does not qualify for the program. For 
example: An RRH or LH project which clearly is above modest in size, 
design and/or cost or was not located in an area designated as rural 
when the initial loan was made.
    (c) The loan or grant was made for unauthorized purposes. For 
example:

[[Page 88]]

Purchase of an excessive amount of land.
    (d) The recipient was granted unauthorized subsidy in the form of:
    (1) Interest credits (IC) on an RRH loan;
    (2) Rental Assistance (RA) in connection with an RRH or LH loan; or
    (3) A subsidy benefit received through use of an incorrect interest 
rate.
    (e) The recipient was not subjected to obligations required by the 
assistance, such as restrictive-use provisions, at the time the 
assistance was provided.

[50 FR 12996, Apr. 2, 1985, as amended at 58 FR 38926, July 21, 1993]



Sec. 1951.655  [Reserved]



Sec. 1951.656  Initial determination that unauthorized assistance was received.

    Unauthorized assistance may be identified through audits conducted 
by the Office of the Inspector General, USDA, (OIG); through reviews 
made by FmHA or its successor agency under Public Law 103-354 personnel; 
or through other means such as information provided by a private citizen 
which documents that unauthorized assistance has been received by a 
recipient of FmHA or its successor agency under Public Law 103-354 
assistance. If FmHA or its successor agency under Public Law 103-354 has 
reason to believe unauthorized assistance was received, but is unable to 
determine whether or not the assistance was in fact unauthorized, the 
case will be referred to the Regional Office of the General Counsel 
(OGC) or the National Office, as appropriate, for review and advice. In 
every case where it is known or believed by FmHA or its successor agency 
under Public Law 103-354 that the assistance was based on false 
information, investigation by the Office of the Inspector General (OIG) 
will be requested as provided for in FmHA or its successor agency under 
Public Law 103-354 Instruction 2012-B (available in any FmHA or its 
successor agency under Public Law 103-354 office). If OIG conducts an 
investigation, the actions outlined in Sec. 1951.657 of this subpart 
will be deferred until the OIG investigation is completed and the report 
is received. The reason(s) for the unauthorized assistance being 
received by the recipient will be well documented in the case file, and 
will specifically state whether it was due to:
    (a) Submission of inaccurate information by the recipient;
    (b) Submission of false information by the recipient;
    (c) Submission of inaccurate or false information by another party 
on the recipient's behalf such as a loan packager, developer, real 
estate broker, or professional consultants such as engineers, 
architects, management agents and attorneys, when the recipient did not 
know the other party had submitted inaccurate or false information;
    (d) Error by FmHA or its successor agency under Public Law 103-354 
personnel, either in making computations or failure to follow published 
regulations or other agency issuances; or
    (e) Error in preparation of a debt instrument which caused a loan to 
be closed at an interest rate lower than the correct rate in effect when 
the loan was approved or which was caused by omission from the 
instrument of language required by applicable regulation.

[50 FR 12996, Apr. 2, 1985, as amended at 58 FR 38926, July 21, 1993]



Sec. 1951.657  Notification to recipient.

    (a) Collection efforts will be initiated by the District Director by 
a letter substantially similar to exhibit A of this subpart (available 
in any FmHA or its successor agency under Public Law 103-354 office), 
and mailed by the servicing official to the recipient by ``Certified 
Mail, Return Receipt Requested,'' with a copy to the State Director and, 
for a case identified in an OIG audit report, a copy to the OIG office 
which conducted the audit and the Planning and Analysis Staff of the 
National Office. This letter will be sent to all recipients who received 
unauthorized assistance, regardless of amount. The letter will:
    (1) Specify in detail the reason(s) the assistance was determined to 
be unauthorized;
    (2) State the amount of unauthorized assistance to be repaid 
according to exhibit C of this subpart (available in any FmHA or its 
successor agency under Public Law 103-354 office); and

[[Page 89]]

    (3) Establish an appointment for the recipient to discuss with the 
District Director the basis for FmHA or its successor agency under 
Public Law 103-354's claim; and give the recipient an opportunity to 
provide facts, figures, written records or other information which might 
alter FmHA or its successor agency under Public Law 103-354's 
determination that the assistance received was unauthorized.
    (b) If the recipient meets with the District Director, the District 
Director will outline to the recipient why the assistance was determined 
to be unauthorized. The recipient will be given an opportunity to 
provide information to refute FmHA or its successor agency under Public 
Law 103-354's findings. When requested by the recipient, the District 
Director may grant additional time for the recipient to assemble 
documentation. When an extension is granted, the District Director will 
specify a definite number of days to be allowed and establish the 
followup necessary to assure that servicing of the case continues 
without undue delay.



Sec. 1951.658  Decision on servicing actions.

    When the District Director is the same individual who approved the 
unauthorized assistance, the State Director must review the case before 
further actions are taken by the District Director.
    (a) Payment in full. If the recipient agrees with FmHA or its 
successor agency under Public Law 103-354's determination or will pay in 
a lump sum, the District Director may allow a reasonable period of time 
(usually not to exceed 90 days) for the recipient to arrange for 
repayment. The amount due will be the amount stated in the letter as 
shown in exhibit A of this subpart (available in any FmHA or its 
successor agency under Public Law 103-354 office). The requirements of 
subpart E of part 1965 will be followed with appropriate modifications 
for prepayments under this subpart. If the loan was subject to 
restrictive-use provisions prior to the request for payment in full, the 
project will remain subject to restrictive-use provisions. Wherever 
feasible, appropriate, or necessary to protect tenants and the low- and 
moderate-income population of the community, all attempts to encourage 
the borrower to sell the project to an acceptable transferee will be 
made before the prepayment is accepted. All tenant notifications and 
restrictive-use provisions, when applicable, must be followed when 
prepayment of all debt on an MFH project is demanded. The District 
Director will remit collections as follows:
    (1) In the case of the loan, for application to the borrower's 
account as an extra payment.
    (2) In the case of a grant, as a ``Miscellaneous Collection for 
Application to the General Fund.''
    (3) In the case of a loan or grant which was identified in an OIG 
audit, the District Director will report the repayment as outlined in 
Sec. 1951.668 (a)(1)((i), (a)(3), or (a)(6) as applicable.
    (4) In the case of RA, the repayment will be handled as outlined in 
Sec. 1951.661 (a)(3) and exhibit E to FmHA or its successor agency 
under Public Law 103-354 Instruction 1930-C.
    (b) Continuation with recipient. If the recipient agrees with FmHA 
or its successor agency under Public Law 103-354's determination or is 
willing to pay the amount in question but cannot repay the unauthorized 
assistance within a reasonable period of time, continuation is 
authorized and servicing actions outlined in Sec. 1951.668 will be 
taken provided all of the following conditions are met:
    (1) The recipient did not provide false information as defined in 
Sec. 1951.652 (d);
    (2) It would be highly inequitable to require prompt repayment of 
the unauthorized assistance; and
    (3) Failure to collect the unauthorized assistance in full will not 
adversely affect FmHA or its successor agency under Public Law 103-354's 
financial interests.
    (c) Notice of determination when agreement is not reached. If the 
recipient does not agree with FmHA or its successor agency under Public 
Law 103-354's determination, or if the recipient fails to respond to the 
initial letter prescribed in Sec. 1951.657 within 30 days, the District 
Director will notify the recipient by letter substantially similar to 
exhibit B of this subpart (available in any FmHA or its successor agency 
under

[[Page 90]]

Public Law 103-354 office) (sent by Certified Mail, Return Receipt 
Requested), with a copy to the State Director, and for a case identified 
in an OIG audit report, a copy to the OIG office which conducted the 
audit and the Planning and Analysis Staff of the National Office. This 
letter will include:
    (1) The amount of assistance finally determined by FmHA or its 
successor agency under Public Law 103-354 to be unauthorized;
    (2) A statement of further actions to be taken by FmHA or its 
successor agency under Public Law 103-354 as outlined in paragraph 
(e)(1) or (e)(2) of this section; and
    (3) The appeal rights as prescribed in exhibit B of this subpart 
(available in any FmHA or its successor agency under Public Law 103-354 
office).
    (d) Appeals. Appeals resulting from the letter prescribed in 
paragraph (c) of this section will be handled according to subpart B of 
part 1900 of this chapter. All appeal provisions will be concluded 
before proceeding with further actions. If the recipient does not 
prevail in an appeal, or when an appeal is not made during the time 
allowed, the District Director will proceed with the actions outlined in 
paragraph (e) of this section, as applicable. If during the course of 
appeal the appellant decides to agree with FmHA or its successor agency 
under Public Law 103-354's findings or is willing to repay the 
unauthorized assistance, the District Director will proceed with the 
actions outlined in paragraph (a) or (b) of this section.
    (e) Liquidation of loan(s) or legal action to enforce collection. If 
the recipient is unwilling or unable to arrange for repayment as 
provided in paragraph (a) of this section or continuation is not 
feasible as provided in paragraph (b) of this section, one of the 
following actions, as appropriate, will be taken:
    (1) Active borrower with a secured loan. (i) The District Director 
will attempt to have the recipient liquidate voluntarily. If the 
recipient agrees to liquidate voluntarily, this will be documented by an 
entry in the running record of the case file. Where real property is 
involved, a letter will be prepared by the District Director and signed 
by the recipient agreeing to voluntary liquidation. For organizations, a 
resolution of the governing body may be necessary in addition to the 
running record notation. If the recipient does not agree to voluntary 
liquidation, or agrees but it cannot be accomplished within a reasonable 
period of time (usually not more than 90 days), forced liquidation 
action will be initiated in accordance with subpart A of 1955 of this 
chapter unless:
    (A) The amount of unauthorized assistance outstanding, including 
principal, accrued interest, and any recoverable costs charged to the 
account, is less than $1,000; or
    (B) It can be clearly documented that it would not be in the best 
financial interest of the Government to force liquidation. If the 
District Director wishes to make an exception to forced liquidation 
under paragraph (e)(1)(i)(B) of this section, a request for an exception 
under Sec. 1951.669 will be made.
    (ii) When all of the conditions of paragraph (a) or (b) or this 
section are met, but the recipient does not repay or refuses to execute 
documents to effect necessary account adjustments according to the 
provisions of Sec. 1951.661, liquidation action will be initiated as 
provided in paragraph (e)(1)(i) of this section.
    (iii) When forced liquidation would be initiated except that the 
loan is being handled under paragraph (e)(1)(i)(A) or (e)(1)(i)(B) of 
this section account adjustments will be made by FmHA or its successor 
agency under Public Law 103-354 without the signature of the recipient 
according to Sec. 1951.668(a)(5). In these cases, the recipient will be 
notified by letter of the actions taken with a copy of Form FmHA or its 
successor agency under Public Law 103-354 1951-12, ``Correction of Loan 
Account,'' if applicable.
    (2) Grantee, inactive borrower, or active borrower with unsecured 
loan (such as collection-only, or unsatisfied balance after 
liquidation). The District Director will document the facts in the case 
and submit it to the State Director who will request the advice of OGC 
on pursuing legal action to effect collection. The State Director will 
tell OGC what assets, if any, are available from which

[[Page 91]]

to collect. The case file, recommendation of State Director and OGC 
comments will be forwarded to the National Office for review and 
authorization to implement recommended servicing actions.

[50 FR 12996, Apr. 2, 1985, as amended at 58 FR 38926, July 21, 1993]



Sec. Sec. 1951.659-1951.660  [Reserved]



Sec. 1951.661  Servicing options in lieu of liquidation or legal action to collect.

    When all of the conditions outlined in Sec. 1951.658(b) are met, an 
unauthorized loan or grant will be serviced according to this section 
and Sec. 1951.668, provided the recipient has the legal and financial 
capabilities.
    (a) Active borrower/grantee--(1) Unauthorized loan--(i) Correction 
of problem. If the problem causing the assistance to be unauthorized can 
be corrected, corrective action will be required. For example, where a 
loan was in excess of the authorized amount, the recipient will be 
required to refund the difference; or where the loan included funds for 
purchase of excess land, the recipient will be required to sell the 
excess land and the proceeds will be applied to the account as an extra 
payment; or where a restrictive-use provision was omitted from a loan 
document, the provision will be inserted.
    (ii) Continuation on existing terms. When there is no specific 
problem which can be corrected, continuation on the existing terms is 
authorized.
    (2) Unauthorized subsidy benefits received through use of incorrect 
interest rate. When the recipient was eligible for the loan but should 
properly have been charged a higher interest rate than that shown in the 
debt instrument, resulting in the receipt of unauthorized subsidy 
benefits, the interest rate must be corrected to that which was in 
effect when the loan was approved. All payments made will be reversed 
and reapplied at the correct interest rate and future installments will 
be scheduled at the correct interest rate. A delinquency which is 
created will be serviced according to subpart B of part 1965 of this 
chapter. After reapplication of payments, the loan will be serviced as 
an authorized loan. Change in interest rate will be accomplished 
according to Sec. 1951.668. When the recipient is a public body with 
loans secured by bonds on which interest rate cannot legally be changed 
or payments reversed or reapplied, continuation on existing terms is 
authorized.
    (3) Unauthorized interest credits or rental assistance. In cases 
involving RA and/or IC, the subsidy benefits should be terminated as 
provided in the Interest Credit and Rental Assistance Agreement. 
Unauthorized RA will be serviced as a delinquent account according to 
paragraph X B of exhibit E of subpart C of part 1930 of this chapter.
    (i) Tenant's failure to properly report changes in income or size of 
the household to the borrower. In cases where a tenant has received RA 
and/or IC benefits to which he/she was not entitled because of the 
tenant's failure to properly report income or changes in household size, 
the borrower-landlord will provide the tenant with a notice of intent to 
recoup improperly advanced rental subsidy benefits. Such a notice must 
inform the tenant of the amount improperly advanced and the lump sum or 
monthly amount that will be added to the tenant's rent to recoup the 
improper rental subsidy. The borrower will inform the District Director 
of the unauthorized benefits and of the agreement made by the tenant to 
repay. Money collected will be remitted according to the FMI for Form 
FmHA or its successor agency under Public Law 103-354 1944-9. If the 
borrower has rental assistance, that portion attributable to RA will be 
credited to the borrower's RA account. In the event that the tenant does 
not repay through active collection efforts including legal remedy, the 
borrower will report the facts to the District Director. The District 
Director will report to the State Director who will obtain the advice of 
OGC on further actions.
    (ii) Tenant knowingly misrepresented income or number of occupants 
to the borrower. If it appears the tenant has knowingly misrepresented 
income to the borrower, the District Director will look into the case to 
determine the

[[Page 92]]

facts. If the District Director determines that income or number of 
occupants was misrepresented, he/she will direct the borrower-landlord 
to demand and to attempt to recoup improperly received rental subsidy 
from the tenant. Money collected will be remitted to the Finance Office 
according to the FMI for Form FmHA or its successor agency under Public 
Law 103-354 1944-9. If the tenant fails to make restitution, the 
District Director will refer the case to the State Director who will 
request the advice of OGC on further actions.
    (iii) Unauthorized RA and/or IC paid due to borrower's error. 
Whether unauthorized RA or IC was received by the borrower due to 
miscalculation or oversight by the borrower or the borrower's management 
agent, the borrower is required to make restitution to FmHA or its 
successor agency under Public Law 103-354. This restitution will not be 
charged to any tenant or to the project as any part of the budget or 
operating expense. The restitution will be handled as a refund according 
to the FMI for Form FmHA or its successor agency under Public Law 103-
354 1944-49. In the case of a nonprofit or public body borrower, when 
funds from nonproject sources are not available, the State Director may 
make an exception and allow project income not required for approved 
operating budget items to cover the cost of restitution.
    (iv) Rental assistance assigned to wrong household. When the tenant 
has correctly reported income and household size, but RA was assigned by 
the borrower to the household in error, the tenant's RA benefit will be 
cancelled and reassigned.
    (A) Notification and cancellation. Before the borrower notifies the 
tenant, the borrower or management agent will review the case with the 
District Director. If the District Director verifies that an error was 
made based on information available at the time the unit was assigned, 
the tenant will be given 30 days written notice by the borrower or 
management agent that the unit was assigned in error and that the RA 
benefit will be cancelled effective on the next monthly rental payment 
due after the end of the 30-day notice period. The written notice will 
provide that:
    (1) The tenant has the right to cancel the lease based on the loss 
of subsidy benefit to the tenant.
    (2) The RA granted in error will not be recaptured.
    (3) The tenant may meet with management to discuss the cancellation 
and the facts on which the decision was based. The borrower must give 
the tenant appeal rights under subpart L or part 1944 of this chapter.
    (B) Reassignment of RA. Rental assistance will be reassigned in 
accordance with paragraph XII of exhibit E to subpart C of part 1930 of 
this chapter.
    (v) Rental assistance in excess of contract. When rental assistance 
is advanced in excess of the RA contract limit, the District Director 
will send a report of the facts and a recommendation of proposed action 
through the State Director to the Assistant Administrator, Housing. The 
Assistant Administrator will determine the disposition of the case and 
notify the State Director, who will instruct the District Director of 
the required action.
    (4) Unauthorized grant assistance. (i) When the recipient will repay 
unauthorized grant assistance over a period of time, interest will be 
charged at the rate specified in the grant agreement for default from 
the date received until paid. Repayment will be scheduled over a period 
consistent with the recipient's repayment ability but not to exceed 10 
years. The District Director must maintain collection records as the 
Finance Office cannot set upon an account for repayment of a grant. The 
District Director will attempt to collect the monies due, and all 
collections will be remitted with Form FmHA or its successor agency 
under Public Law 103-354 451-2, ``Schedule of Remittances,'' as a 
``Miscellaneous Collection for Application to the General Fund.'' For 
cases identified in OIG audits only, the District Director will report 
quarterly to the State Office according to Sec. 1951.668 (a)(6).
    (ii) If it is determined the recipient cannot repay unauthorized 
grant assistance, the assistance may be left outstanding under the terms 
of the grant agreement. In the case of committed funds not yet 
disbursed, no further disbursements will be made without prior consent 
of the Administrator.

[[Page 93]]

    (5) Cases where recipient has both authorized and unauthorized loans 
outstanding. When a recipient has both authorized and unauthorized loans 
outstanding, installments will be scheduled to be paid concurrently on 
all loans. Each loan will be serviced according to the loan servicing 
regulations in effect for an authorized loan of its type.
    (b) Inactive borrower. When a borrower no longer has an outstanding 
account in the records of the Finance Office, the following actions will 
be taken:
    (1) Have the recipient execute a promissory note in the amount of 
the assistance determined to be unauthorized in the exhibit A (available 
in any FmHA or its successor agency under Public Law 103-354 office) 
letter according to Sec. 1951.657. This note will bear interest at the 
rate which was in effect for the type loan associated with the 
unauthorized assistance when it was approved. The term will not exceed 
10 years.
    (2) Take the best mortgage obtainable to secure the note.

[50 FR 12996, Apr. 2, 1985, as amended at 51 FR 11563, Apr. 4, 1986; 58 
FR 38926, July 21, 1993]



Sec. Sec. 1951.662-1951.667  [Reserved]



Sec. 1951.668  Servicing unauthorized assistance accounts.

    When a final determination has been made that unauthorized 
assistance has been granted, the Finance Office will be notifed of 
necessary account adjustments as outlined in this section, depending 
upon whether the case or unauthorized assistance was identified by OIG 
in an audit report or by another means. The Finance Office will service 
the accounts as prescribed in this section.
    (a) Audit cases. Ony the cases of unauthorized assistance identified 
by OIG will be reported to the Finance Office. Form FmHA or its 
successor agency under Public Law 103-354 1951-12 will be completed in 
accordance with the FMI, and the District Director will prepare and 
submit Form FmHA or its successor agency under Public Law 103-354 1951-
52, ``MFH Record Adjustment--Audit Claim,'' according to the FMI to 
advise the Finance Office. The Finance Office will flag the account for 
monitoring and reporting as required. Each payment reversed will be 
reapplied as of the original date of credit. ``Loan'' as used in this 
section refers to an account with an active borrower unless specified as 
``inactive.''
    (1) Unauthorized loan. When the loan is unauthorized because the 
recipient was not eligible or because the loan was approved for 
unauthorized purposes, the Finance Office will be advised as follows:
    (i) Repayment in full. If the recipient has arranged to repay the 
unauthorized loan, the payment will be remitted with Form FmHA or its 
successor agency under Public Law 103-354 1944-9, in accordance with the 
FMI. Forms FmHA or its successor agency under Public Law 103-354 1951-12 
and 1951-52 will reflect the amount and the Schedule Number from Form 
FmHA or its successor agency under Public Law 103-354 1944-9.
    (ii) Continuation with loan on existing terms. When continuation 
with the loan on the existing terms is approved according to Sec. 
1951.661 (a)(1)(ii), the District Director will submit Form FmHA or its 
successor agency under Public Law 103-354 1951-52 to the Finance Office 
to reflect this.
    (2) Unauthorized subsidy benefits received through use of incorrect 
interest rate. When the interest rate on an entire loan is changed, Form 
FmHA or its successor agency under Public Law 103-354 1951-52 will be 
submitted to notify the Finance Office of the correct interest rate to 
be charged from the loan closing date. Payments made will be reversed 
and reapplied at the corrected interest rate, after which the 
unauthorized subsidy benefits will be reported to OIG as resolved. The 
loan will thereafter be treated as an authorized loan.
    (3) Unauthorized interest credits and/or rental assistance. 
Unauthorized rental assistance and/or interest credits will be recovered 
according to the provisions of Sec. 1951.661. The District Director 
will report to the State Office by the 1st of March, June, September, 
and December of each year, the repayment of unauthorized rental 
assistance and/or interest credits by account name, case

[[Page 94]]

number, account code, audit report number, finding number, date of 
claim, amount of claim, amount collected during period, and balance owed 
at end of reporting period. The State Office will forward a consolidated 
report to the Finance Office no later than the 15th of March, June, 
September, and December of each year for inclusion in the OIG report.
    (4) Liquidation pending. When liquidation is initiated under the 
provisions of this subpart, Form FmHA or its successor agency under 
Public Law 103-354 1951-52 will be submitted to advise the Finance 
Office of the unauthorized assistance account to be established. This 
account will be flagged ``FAP'' (Foreclosure Action Pending) or ``CAP'' 
(Court Action Pending), as applicable. The account status will also be 
amended in the MFH Information Tracking and Retrieval System (MISTR) 
according to subpart G of part 2033 (available in any FmHA or its 
successor agency under Public Law 103-354 State or District Office).
    (5) Liquidation not initiated. Cases in which Liquidation has not 
been initiated because of the provisions of Sec. 1951.658 (e)(1)(i)(A) 
or (e)(1)(i)(B) will be adjusted according to Sec. 1951.661 and this 
section of this subpart, and the adjustments will be reflected on Form 
FmHA or its successor agency under Public Law 103-354 1951-52. In this 
instance only, account adjustments will be made even though the 
recipient does not sign Form FmHA or its successor agency under Public 
Law 103-354 1951-52 and any related documents.
    (6) Unauthorized grant assistance. When grant funds are to be repaid 
as provided in Sec. 1951.661(a)(4) the District Director will report to 
the State Office by the 1st of March, June, September, and December of 
each year, the amount of collections by account name, case number, fund 
code, audit report number, finding number, date of claim, original 
amount of claim, amount collected during period, and the balance owed at 
end of reporting period on the unauthorized grant assistance. The State 
Office will submit a composite report to the Finance Office by the 15th 
of March, June, September, and December of each year.
    (7) Establishment of account for inactive borrower. When an inactive 
borrower agrees to repay unauthorized assistance and executes documents 
to evidence such an obligation, Forms FmHA or its successor agency under 
Public Law 103-354 1951-12 and 1951-52 will be completed according to 
the FMIs. The Finance Office will establish the account according to the 
terms indicated on Form FmHA or its successor agency under Public Law 
103-354 1951-52.
    (8) Reporting. At prescribed intervals, the Finance Office will 
report to the OIG on the status of cases involving unauthorized 
assistance which were identified by OIG in audit reports. The amounts to 
be reported will be determined by the Finance Office after account 
servicing actions have been completed. For reporting purposes, the 
following applies:
    (i) For an unauthorized loan account as provided in paragraph (a)(1) 
or (a)(4) of this section, reporting will be as follows:
    (A) When unauthorized assistance is paid in full, this will be 
reported on the next scheduled report only.
    (B) When continuation with the loan on existing terms is approved, 
the case will be reported as resolved on the next scheduled report, and 
no further reporting is required.
    (ii) For unauthorized subsidy cases as provided in paragraph (a)(2) 
or (a)(3) of this section, after the unauthorized amount has been repaid 
or payments have been reversed and reapplied at the correct interest 
rate, the unauthorized subsidy will be reported as resolved on the next 
scheduled report. No further reporting is required.
    (iii) When an account is established with liquidation action pending 
as provided in paragraph (a)(4) of this section, the status will be 
included on each scheduled report until the liquidation is completed or 
the account is otherwise paid in full.
    (iv) When liquidation is not initiated as provided in paragraph 
(a)(5) of this section, this will be reported on the next scheduled 
report (along with collections, if any). No further reporting is 
required.

[[Page 95]]

    (v) When unauthorized grant assistance is scheduled to be repaid, 
the collections and status reported by the State Office to the Finance 
Office by memorandum according to paragraph (a)(6) of this section will 
be included in the OIG Report until the account is paid in full.
    (vi) When an inactive borrower has agreed to repay unauthorized 
assistance according to paragraph (a)(7) of this section, the account 
will be reported initially, and collections and status will be included 
in each scheduled report until the account is paid in full.
    (b) Nonaudit cases. Basically, servicing is the same for audit and 
nonaudit case; however, when receipt of unauthorized assistance is 
identified by a means other than an OIG audit report, the Finance Office 
will be notified only if adjustments to an active account or 
reinstatement of an inactive account are necessary, or grant funds are 
repaid. Once adjustments are made as provided in this paragraph, the 
loan(s) will be treated as an authorized loan(s). Any payment reversed 
will be reapplied as of the original date of credit. After payments are 
reversed and reapplied, the District Director will receive Form FmHA or 
its successor agency under Public Law 103-354 451-26, ``Transaction 
Record,'' from the Finance Office reflecting the account status.
    (1) Account adjustments will be handled as follows:
    (i) When a change in interest rate retroactive to the date of loan 
closing is necessary, Form FmHA or its successor agency under Public Law 
103-354 1951-13, ``Change in Interest Rate,'' will be completed 
according to the FMI and executed by the borrower. Form FmHA or its 
successor agency under Public Law 103-354 1951-521 will be submitted to 
the Finance Office. Payments will be reversed and reapplied accordingly.
    (ii) When an inactive borrower agrees to repay unauthorized 
assistance and executes documents to evidence such an obligation, the 
District Director will notify the Finance Office by memorandum, 
attaching a copy of the promissory note. The Finance Office will 
establish or reinstate the account according to the terms of the 
promissory note.
    (iii) If a loan is paid in full, the remittance will be handled in 
the same manner as any other final payment.
    (2) A delinquency created through reversal and reapplication of 
payments to effect corrections outlined in paragraph (b)(1)(i) of this 
section will be serviced according to subpart B of part 1965 of this 
chapter.
    (c) Collection of unauthorized assistance. Collection of 
unauthorized assistance will be made in accordance with the appropriate 
sections of subpart K of part 1951 of this chapter. If full prepayment 
of an MFH loan is required, the prepayment will be accepted in 
accordance with the requirements of subpart E of part 1965 of this 
chapter, and appropriate restrictive-use provisions, if applicable, will 
remain in the deeds of release.

[50 FR 12996, Apr. 2, 1985, as amended at 58 FR 38926, July 21, 1993]



Sec. 1951.669  Exception authority.

    The Administrator may in individual cases make an exception to any 
requirement or provision of this subpart which is not inconsistent with 
any applicable law or opinion of the Comptroller General, provided the 
Administrator determines that application of the requirement or 
provision would adversely affect the Government's interest. Requests for 
exceptions must be made in writing by the State Director and submitted 
through the Assistant Administrator, Housing. Requests will be supported 
with documentation to explain the adverse effect on the Government's 
interest, proposed alternative courses of action, and show how the 
adverse effect will be eliminated or minimized if the exception is 
granted.



Sec. Sec. 1951.670-1951.699  [Reserved]



Sec. 1951.700  OMB control number.

    The collection of information requirements in this regulation have 
been approved by the Office of Management and Budget and assigned OMB 
control number 0575-0104.

[[Page 96]]



Subpart O_Servicing Cases Where Unauthorized Loan(s) or Other Financial 
     Assistance Was Received_Community and Insured Business Programs

    Source: 50 FR 13000, Apr. 2, 1985, unless otherwise noted.



Sec. 1951.701  Purpose.

    This subpart prescribes the policies and procedures for servicing 
Community and Business Program loans and/or grants made by Farmers Home 
Administration or its successor agency under Public Law 103-354 (FmHA or 
its successor agency under Public Law 103-354) when it is determined 
that the borrower or grantee was not eligible for all or part of the 
financial assistance received in the form of a loan, grant, or subsidy 
granted, or any other direct financial assistance. It does not apply to 
guaranteed loans. Loans sold without insurance by the FmHA or its 
successor agency under Public Law 103-354 to the private sector will be 
serviced in the private sector and will not be serviced under this 
subpart. The provisions of this subpart are not applicable to such 
loans. Future changes to this subpart will not be made applicable to 
such loans.

[52 FR 38908, Oct. 20, 1987]



Sec. 1951.702  Definitions.

    As used in this subpart, the following definitions apply:
    (a) Active borrower. A borrower who has an outstanding account in 
the records of the Finance Office, including collection-only or an 
unsatisfied account balance where a voluntary conveyance was accepted 
without release from liability of foreclosure did not satisfy the 
indebtedness.
    (b) Assistance. Finance assistance in the form of a loan, grant, or 
subsidy received.
    (c) Debt instrument. Used as a collective term to include promissory 
note, assumption agreement, grant agreement agreement/resolution, or 
bond.
    (d) False information. Information, known to be incorrect, provided 
with the intent to obtain benefits which would not have been obtainable 
based on correct information.
    (e) Inaccurate information. Incorrect information provided 
inadvertently without intent to obtain benefits fraudulently.
    (f) Inactive borrower. A former borrower whose loan(s) has (have) 
been paid in full or assumed by another party(ies) and who does not have 
an outstanding account in the records of the Finance Office.
    (g) Recipient. ``Recipient'' refers to an individual or entity that 
received a loan, or portion of a loan, an interest subsidy, a grant, or 
a portion of a grant which was unauthorized.
    (h) Servicing official. For Community Programs, the servicing 
official is the District Director, an Assistant District Director, or a 
District Loan Specialist so designated. For Business Programs, the 
servicing official is the State Director or Designee.
    (i) Unauthorized assistance. Any loan, interest subsidy, grant, or 
portion thereof received by a recipient for which there was no 
regulatory authorization for which the recipient was not eligible. 
Interest subsidy includes subsidy benefits received because a loan was 
closed at a lower interest rate than that to which the recipient was 
entitled, whether the incorrect interest rate was selected erroneously 
by the approval official or the documents were prepared in error.



Sec. 1951.703  Policy.

    When unauthorized assistance has been received, an effort must be 
made to collect from the recipient the sum which is determined to be 
unauthorized, regardless of amount, unless any applicable Statute of 
Limitation has expired.



Sec. Sec. 1951.704-1951.705  [Reserved]



Sec. 1951.706  Initial determination that unauthorized assistance was received.

    Unauthorized assistance may be identified through audits conducted 
by the Office of the Inspector General, USDA, (OIG); through reviews 
made by FmHA or its successor agency under Public Law 103-354 personnel; 
or through other means such as information provided by

[[Page 97]]

a private citizen which documents that unauthorized assistance has been 
receive by a recipient of FmHA or its successor agency under Public Law 
103-354 assistance. If the servicing official has reason to believe 
unauthorized assistance was received, but is unable to determine whether 
or not the assistance was in fact unauthorized, the case file including 
the advice of the Regional Office of the General Counsel (OGC) will be 
referred to the National Office for review and comment. In every case 
where it is known or believed by FmHA or its successor agency under 
Public Law 103-354 that the assistance was based on false information, 
investigation by the OIG will be requested as provided for in FmHA or 
its successor agency under Public Law 103-354 Instruction 2012-B 
(available in any FmHA or its successor agency under Public Law 103-354 
office). If OIG conducts an investigation, the actions outlined in Sec. 
1951.707 will be deferred until the OIG investigation is completed and 
the report is received. The reason(s) for the unauthorized assistance 
being received by the recipient will be well documented in the case 
file, and will specifically state whether it was due to:
    (a) Submission of inaccurate information by the recipient;
    (b) Submission of false information by the recipient.
    (c) Submission of inaccurate or false information by another 
authorized party acting on the recipient's behalf including professional 
consultant such as engineers, architects, and attorneys, when the 
recipient did not know the other part had submitted inaccurate or false 
information;
    (d) Error by FmHA or its successor agency under Public Law 103-354 
personnel, either in making computations or failure to follow published 
regulations or other agency issuances; or
    (e) Error in preparation of a debt instrument which caused a loan to 
be closed at an interest rate lower than the correct rate in effect when 
the loan was approved.



Sec. 1951.707  Notification to recipient.

    (a) Collection efforts will be initiated by the servicing official 
by a letter substantially similar to exhibit A of this subpart 
(available in any FmHA or its successor agency under Public Law 103-354 
office), and mailed to the recipient by ``Certified Mail, Return Receipt 
Requested,'' with a copy to the State Director and, for a case identifed 
in an OIG audit report, a copy to the OIG office which conducted the 
audit and the Planning and Analysis Staff of the National Office. This 
letter will be sent to all recipients who received unauthorized 
assistance, regardless of amount. The letter will:
    (1) Specify in detail the reason(s) the assistance was determined to 
be unauthorized;
    (2) State the amount of unauthorized assistance, including any 
accrued interest to be repaid; and
    (3) Establish an appointment for the recipient to discuss with the 
servicing official the basis for FmHA or its successor agency under 
Public Law 103-354's claim; and give the recipient an opportunity to 
provide facts, figures, written records or other information which might 
alter FmHA or its successor agency under Public Law 103-354's 
determination that the assistance received was unauthorized.
    (b) If the recipient meets with the servicing official, the 
servicing official will outline to the recipient why the assistance was 
determined to be unauthorized. The recipient will be given an 
opportunity to provide information to refute FmHA or its successor 
agency under Public Law 103-354's findings. When requested by the 
recipient, the servicing official may grant additional time for the 
recipient to assemble documentation. When an extension is granted, the 
servicing official will specify a definite number of days to be allowed 
and establish the follow up necessary to assure that servicing of the 
case continues without undue delay.



Sec. 1951.708  Decision on servicing actions.

    When the servicing official is the same individual who approved the 
unauthorized assistance, the next-higher supervisory official must 
review the case before further actions are taken by the servicing 
official.
    (a) Payment in full. If the recipient agrees with FmHA or its 
successor

[[Page 98]]

agency under Public Law 103-354's determination or will pay the amount 
in question, the servicing official may allow a reasonable period of 
time (usually not to exceed 90 days) for the recipient to arrange for 
repayment. The amount due will be determined according to Sec. 
1951.711(a). the servicing official will remit collections to the 
Finance Office according to the Forms Manual Insert (FMI) for Form FmHA 
or its successor agency under Public Law 103-354 451-2, ``Schedule of 
Remittances,'' as follows:
    (1) In the case of a loan, for application to the borrower's account 
as an extra payment.
    (2) In the case of a grant, as a ``Miscellaneous Collection for 
Application to the General Fund.''
    (3) In the case of a loan or grant which was identified in an OIG 
audit, the servicing official will report the repayment as outlined in 
Sec. 1951.711(b)(2) or 1951.715 as applicable.
    (b) Continuation with recipient. If the recipient agrees with FmHA 
or its successor agency under Public Law 103-354's determination or is 
willing to pay the amount in question but cannot repay the unauthorized 
assistance within a reasonable period of time, continuation is 
authorized and servicing actions outlined in Sec. 1951.711 will be 
taken provided all of the following conditions are met:
    (1) The recipient did not provide false information as defined in 
Sec. 1951.702(d);
    (2) It would be highly inequitable to require prompt repayment of 
the unauthorized assistance; and
    (3) Failure to collect the unauthorized assistance in full will not 
adversely affect FmHA or its successor agency under Public Law 103-354's 
financial interests.
    (c) Notice of determination when agreement is not reached. If the 
recipient does not agree with FmHA or its successor agency under Public 
Law 103-354's determination, or if the recipient fails to respond to the 
initial letter prescribed in Sec. 1951.707 within 30 days, the 
servicing official will notify the recipient by letter substantially 
similar to exhibit B of this subpart (available in any FmHA or its 
successor agency under Public Law 103-354 office) (sent by Certified 
Mail, Return Receipt Requested), with a copy to the State Director, and 
for a case identified in an OIG audit report, a copy to the OIG office 
which conducted the audit and the Planning and Analysis Staff of the 
National Office. This letter will include:
    (1) The amount of assistance finally determined by FmHA or its 
successor agency under Public Law 103-354 to be unauthorized including 
any accrued interest.
    (2) A statement of further actions to be taken by FmHA or its 
successor agency under Public Law 103-354 as outlined in paragraph 
(e)(1) or (e)(2) of this section; and
    (3) The appeal rights as prescribed in exhibit B of this subpart 
(available in any FmHA or its successor agency under Public Law 103-354 
office).
    (d) Appeals. Appeals resulting from the letter prescribed in 
paragraph (c) of this section will be handled according to subpart B of 
part 1900 of this chapter. All appeal provisions will be concluded 
before proceeding with further actions. If the recipient does not 
prevail in an appeal, or when an apeal is not made during the time 
allowed, the servicing official will document the facts in the case file 
and submit to State Director, if the servicing official is other than 
State Director, who will proceed with the actions outlined in paragraph 
(e) of this section, as applicable. If during the course of appeal the 
appellant decides to agree with FmHA or its successor agency under 
Public Law 103-354's findings or is willing to repay the unauthorized 
assistance, the servicing official will proceed with the actions 
outlined in paragraph (a), (b), or (e) of this section.
    (e) Liquidation of loan(s) or legal action to enforce collection. 
When a case cannot be handled according to the provisions of paragraph 
(a) or (b) of this section, or if the recipient refuses to execute the 
documents necessary to establish an obligation to repay the unauthorized 
assistance as provided in Sec. 1951.711, one of the following actions 
will be taken:
    (1) Active borrower with a secured loan. (i) The servicing official 
will attempt to have the recipient liquidate voluntarily. If the 
recipient agrees to liquidate voluntarily, this will be documented in 
the case file. Where real

[[Page 99]]

property is involved, a letter will be prepared by the servicing 
official and signed by the recipient agreeing to voluntary liquidation. 
A resolution of the governing body may be required. If the recipient 
does not agree to voluntary liquidation, or agrees but it cannot be 
accomplished within a reasonable period of time (usually not more than 
90 days), forced liquidation action will be initiated in accordance with 
applicable provisions of subpart A of part 1955 of this chapter unless:
    (A) The amount of unauthorized assistance outstanding, including 
principal, accrued interest, and any recoverable costs charged to the 
account, is less than $1,000; or
    (B) It can be clearly documented that it would not be in the best 
financial interest of the Government to force liquidation. If the 
servicing official wishes to make an exception to forced liquidation 
under paragraph (e)(1)(i)(B) of this section, a request for an exception 
under Sec. 951.716 will be made.
    (ii) When all of the conditions of paragraph (a) or (b) of this 
section are met, but the recipient does not repay or refuses to execute 
documents to effect necessary account adjustments according of the 
provisions of Sec. 1951.711, liquidation action will be initiated as 
provided in paragraph (e)(1)(i) of this section.
    (iii) When forced liquidation would be initiated except that the 
loan is being handled under paragraph (e)(1)(i)(A) or (e)(1)(i)(B) of 
this section, continuation with the loan on existing terms will be 
provided. In these cases, the recipient will be notified by letter of 
the actions taken.
    (2) Grantee, inactive borrower, or active borrower with unsecured 
loan (such as collection-only, or unsatisfied balance after 
liquidation). The servicing official will document the facts in the case 
file and submit it to the State Director, if the servicing official is 
other than the State Director, who will request the advice of the OGC on 
pursuing legal action to effect collection. The case file, 
recommendation of State Director and OGC comments will be forwarded to 
the National Office for review and authorization to implement 
recommended servicing actions. The State Director will tell OGC what 
assets, if any, are available from which to collect.



Sec. Sec. 1951.709-1951.710  [Reserved]



Sec. 1951.711  Servicing options in lieu of liquidation or legal action to collect.

    When the conditions outlined in Sec. 1951.708(b) are met, the 
servicing options outlined in this section will be considered. Accounts 
will be serviced according to this section and Sec. 1951.715.
    (a) Determination of unauthorized loan and/or grant assistance 
amount--(1) Unauthorized loan amount. The principal loan amount that was 
unauthorized will be determined. The unauthorized amount will be the 
unauthorized principal plus any accrued interest on the unauthorized 
principal at the note interest rate until the date paid in accordance 
with Sec. 1951.708(a), or until the date other satisfactory financial 
arrangements are made in accordance with paragraph (b)(1) or (c) of this 
section.
    (2) Unauthorized grant amount. The unauthorized grant actually 
expended will be determined. The unauthorized amount will be the 
unauthorized grant with accrued interest at the interest rate stipulated 
in the respective executed grant agreement for default cases until the 
date paid in accordance with Sec. 1951.708(a), or until the date other 
satisfactory financial arrangements are made in accordance with 
paragraph (b)(2) or (c) of this section.
    (b) Continuation on modified terms. When the recipient has the legal 
and financial capabilities, the case will be serviced according to one 
of the following, as appropriate. In each instance, the servicing 
official will advise the Finance Office by memorandum of the actions 
necessary to effect the account adjustment.
    (1) Unauthorized loan. A loan for the unauthorized amount determined 
according to paragraph (a)(1) of this section will be established at the 
interest rate specified in the outstanding debt instrument or at the 
present market interest rate, whichever is greater, for the respective 
Community and Business program area. The loan will be amortized for a 
period not to exceed fifteen (15) years, the remaining term of the 
original loan, or the remaining

[[Page 100]]

useful life of the facility whichever is shorter.
    (2) Unauthorized grant. The unauthorized grant amount determined 
according to paragraph (a)(2) of this section will be converted to a 
loan at the market interest rate for the respective Community and 
Business Programs area in effect on the date the financial assistance 
was provided, and will be amortized for a period not to exceed fifteen 
(15) years. The recipient will be required to execute a debt instrument 
to evidence this obligaton, and the best security position practicable 
in a manner which will adequately protect the FmHA or its successor 
agency under Public Law 103-354's interests during the repayment period 
will be taken as security. When the recipient is to repay grant 
assistance, the servicing official must maintain records on the 
``account'' as the Finance Office cannot set up an account for repayment 
of a grant. The servicing official will attempt to collect the monies 
due and all collections will be remitted with Form FmHA or its successor 
agency under Public Law 103-354 451-2 to the Finance Office as 
``Miscellaneous Collections for Application to the General Fund.'' For 
cases identified in OIG audits only, the servicing official will report 
by the 1st of March, June, September, and December of each year the 
following information on cases of this type to the State Director: 
Recipient's name, fund code, audit report number, audit finding number, 
date of claim, amount of claim, amount collected during the reporting 
period, and the balance owed on the unauthorized grant assistance.
    (3) Unauthorized subsidy benefits received. When the recipient was 
eligible for the loan but should have been charged a higher interest 
rate than that in the debt instrument, which resulted in the receipt of 
unauthorized subsidy benefits, the case will be handled as outlined in 
this paragraph. The recipient will be given the option to submit a 
written request that the interest rate be adjusted to the lower of the 
rate for which they were eligible that was in effect at the date of loan 
approval or loan closing. (See exhibit C of this subpart for interest 
rates (available in any FmHA or its successor agency under Public Law 
103-354 office).) FmHA or its successor agency under Public Law 103-354 
servicing officials will make a concerted effort to collect all 
unauthorized subsidy benefits from the recipient and will contact the 
Office of General Counsel in each case for advice in accomplishing 
corrective actions.
    (c) Continuation on existing terms. When the recipient does not have 
the legal and/or financial capabilities for the options outlined in 
paragraph (b)(1), (b)(2), or (b)(3) of this section, as appropriate, to 
be exercised, the recipient may be allowed to continue to meet the loan/
grant obligations outlined in the existing loan/grant instruments. 
Unless the unauthorized assistance was identified in an OIG audit, no 
Finance Office notification or action is necessary. If identified by 
OIG, the servicing official will advise the Finance Office by memorandum 
of the determination to continue with the recipient on the existing 
terms of the loan/grant.
    (d) Reporting requirements to National Office. An annual report will 
be submitted by the State Office to the Assistant Administrator, 
Community and Business Programs, within 30 days following the end of the 
Government's fiscal year for each case of unauthorized assistance or 
subsidy benefits. The report will include for each case the account 
name, case number, fund code, OIG audit number (if applicable), amount 
collected during period, and the balance owed on the unauthorized 
assistance. Each State Office is responsible for coordinating with the 
servicing official's office so that this information can be accumulated 
and consolidated by the State Office within the allotted time. A 
negative report is required from States which have no unauthorized 
assistance cases.

[50 FR 13000, Apr. 2, 1985, as amended at 51 FR 11563, Apr. 4, 1986; 54 
FR 28020, July 5, 1989]



Sec. Sec. 1951.712-1951.714  [Reserved]



Sec. 1951.715  Account adjustments and reporting requirement.

    Cases of unauthorized assistance which require Finance Office 
notification and action, regardless of whether they were identified in 
an OIG audit or

[[Page 101]]

by other means, will be submitted to the Finance Office by memorandum 
from the servicing official, as provided in applicable paragraphs of 
Sec. 1951.711 of this subpart. Each memorandum should include account 
(borrower) name, case number, audit report number (if applicable), 
finding number (if applicable), fund code, loan number, and an 
explanation of the actions to be taken. If the unauthorized assistance 
was identified in an OIG audit report, the memorandum should be clearly 
annotated ``Audit Claim for OIG Report'' as a part of the subject. The 
explanation should provide sufficient details to allow the Finance 
Office to properly adjust the account. The State Office will forward a 
consolidated report on unauthorized grant assistance identified in an 
OIG audit to the Finance Office by the 15th of March, June, September, 
and December of each year reflecting the information reported by 
servicing officials in accordance with Sec. 1951.711(b)(2) for 
inclusion in the report to OIG.
    (a) Entire loan unauthorized. When the entire loan is unauthorized 
because the recipient was not eligible or because the loan was approved 
for unauthorized purposes, the servicing official will advise the 
Finance Office, by memorandum, which of the following servicing actions 
will be taken.
    (1) Repayment in full. If the recipient has arranged to repay the 
unauthorized loan in full through refinancing or other available 
resources, the payment will be remitted with Form FmHA or its successor 
agency under Public Law 103-354 451-2 and the schedule number will be 
included in the memorandum.
    (2) Continuation with loan on existing or modified terms. When it is 
determined, according to Sec. 1951.711 (b)(1) or (c), that continuation 
with the loan on the existing or modified terms will be provided, the 
servicing official will advise the Finance Office by memorandum of this 
determination including an explanation of the terms, if modified.
    (b) Portion of loan unauthorized. When only a portion of the loan 
has been determined to be for unauthorized purposes, the servicing 
official will advise the Finance Office, by memorandum, of the servicing 
actions as follows:
    (1) Repayment in full of unauthorized portion. If the recipient has 
arranged to repay the unauthorized portion of the loan through 
refinancing or other available resources, the remittance will be 
submitted with Form FmHA or its successor agency under Public Law 103-
354 451-2, and the schedule number will be included in the memorandum.
    (2) Continuation with unauthorized portion of loan on existing or 
modified terms. When it is determined, according to Sec. 1951.711 
(b)(1) or (c), that continuation with the unauthorized portion of the 
loan on the existing or modified terms will be provided, the servicing 
official will advise the Finance Office by memorandum of this 
determination, including an explanation of the terms if modified. The 
authorized portion will retain the original loan number with 
installments adjusted accordingly. Payments previously made will not be 
reversed and reapplied. The amortized unauthorized amount will be 
assigned the next available loan number. Installments for the authorized 
and unauthorized loans will be scheduled and paid concurrently.
    (c) Unauthorized subsidy benefits received. The unauthorized subsidy 
benefits received will be serviced according to Sec. 1951.711 (b)(3) or 
(c).
    (d) Liquidation pending. When liquidation is initiated under the 
provisions of this subpart, the servicing official will advise the 
Finance Office, by memorandum, that an unauthorized assistance account 
is to be established. This account will be flagged ``FAP'' (Foreclosure 
Action Pending) or ``CAP'' (Court Action Pending), as applicable.
    (e) Liquidation not initiated. Cases in which liquidation would 
normally be initiated, but where it is not because of the provisions of 
Sec. 1951.708(e)(1), will be serviced in accordance with Sec. 
1951.708(e)(1)(iii). If the unauthorized assistance was identified 
through means other than an OIG audit report, the Finance Office will 
not be notified and no action is necessary.
    (f) Unauthorized grant assistance. A grant that is to be repaid will 
be serviced according to Sec. 1951.711(b)(2). If the unauthorized 
assistance was identified through means other than an OIG audit report 
and a determination has been

[[Page 102]]

made not to recover, the Finance Office will not be notified and no 
action is necessary.
    (g) Reporting. At prescribed intervals, the Finance Office will 
report to the OIG on the status of cases involving unauthorized 
assistance which were identified by OIG in audit reports. The amounts to 
be reported will be determined by the Finance Office after account 
servicing actions have been completed. For reporting purposes, the 
following applies:
    (1) For an unauthorized loan account established as provided in 
paragraph (a) or (b) of this section, reporting will be as follows:
    (i) When unauthorized assistance is paid in full, this will be 
reported on the next scheduled report only.
    (ii) When continuation with the loan on existing or modified terms 
is approved, this will be reported on the next scheduled report, and no 
further reporting is required.
    (2) For unauthorized subsidy cases as provided in paragraph (c) of 
this section, once the interest rate has been appropriately adjusted, 
the unauthorized subsidy will be reported as resolved on the next 
scheduled report. No further reporting is required.
    (3) When an account is established with liquidation action pending 
as provided in paragraph (d) of this section, the status will be 
included on each scheduled report until the liquidation is completed or 
the account is otherwise paid in full.
    (4) When liquidation is not initiated as provided in paragraph (e) 
of this section, this will be reported on the next scheduled report. No 
further reporting is required.
    (5) When unauthorized grant assistance is scheduled to be repaid as 
provided in paragraph (f) of this section, collections and status will 
be included in the report to OIG until the amount is paid in full.



Sec. 1951.716  Exception authority.

    The Administrator may in individual cases make an exception to any 
requirement or provision of this subpart which is not inconsistent with 
any applicable law or opinion of the Comptroller General, provided the 
Administrator determines that application of the requirement or 
provision would adversely affect the Government's interest. Requests for 
exceptions must be made in writing by the State Director and submitted 
through the Assistant Administrator, Community and Business Programs. 
Requests will be supported with documentation to explain the adverse 
effect on the Government's interest, propose alternative courses of 
action, and show how the adverse effect will be eliminated or minimized 
if the exception is granted.



Sec. Sec. 1951.717-1951.749  [Reserved]



Sec. 1951.750  OMB control number.

    The collection of information requirements in this regulation have 
been approved by the Office of Management and Budget and assigned OMB 
control number 0575-0103.

Subparts P-Q [Reserved]



               Subpart R_Rural Development Loan Servicing

    Source: 53 FR 30656, Aug. 15, 1988, unless otherwise noted.



Sec. 1951.851  Introduction.

    (a) This subpart contains regulations for servicing or liquidating 
loans made by the Farmers Home Administration or its successor agency 
under Public Law 103-354 (FmHA or its successor agency under Public Law 
103-354) under the Intermediary Relending Program (IRP) to eligible IRP 
intermediaries and applies to ultimate recipients and other involved 
parties. The provisions of this subpart supersede conflicting provisions 
of any other subpart.
    (b) This subpart also contains regulations for servicing the 
existing Rural Development Loan Fund (RDLF) loans previously approved 
and administered by the U.S. Department of Health and Human Services 
(HHS) under 45 CFR part 1076. This action is needed to implement the 
provisions of Section 1323 of the Food Security Act of 1985, Pub. L. 99-
198, which provides for the transfer of the loan servicing authority for 
those loans from the HHS to the U.S. Department of Agriculture (USDA).
    (c) The portion of this regulation pertaining to loanmaking applies 
to RDLF

[[Page 103]]

intermediaries cited in Sec. 1951.851(b) which have RDLF funds from HHS 
and have not fully utilized relending of those funds to ultimate 
recipients at the date of these regulations. The loanmaking of all other 
IRP loans serviced by this regulation is in accordance with part 1948, 
subpart C of this chapter.
    (d) These regulations do not negate contractual arrangements that 
were previously made by the HHS, Office of Community Services (OCS), or 
the intermediaries operating relending programs that have already been 
entered into with ultimate recipients under previous regulations.
    (e) The loan program is administered by the FmHA or its successor 
agency under Public Law 103-354 National Office. The Director, Business 
and Industry Division, is the point of contact for servicing activities 
unless otherwise delegated by the Administrator.



Sec. 1951.852  Definitions and abbreviations.

    (a) General definitions. The following definitions are applicable to 
the terms used in this subpart.
    (1) Intermediary (Borrower). The entity receiving FmHA or its 
successor agency under Public Law 103-354 loan funds for relending to 
ultimate recipients. FmHA or its successor agency under Public Law 103-
354 becomes an intermediary in the event it takes over loan servicing 
and/or liquidation.
    (2) Loan Agreement. The signed agreement between FmHA or its 
successor agency under Public Law 103-354 and the intermediary setting 
forth the terms and conditions of the loan.
    (3) Low-income. The level of income of a person or family which is 
at or below the Poverty Guidelines as defined in section 673(2) of the 
Community Services Block Grant Act (42 U.S.C. 9902(2)).
    (4) Market value. The most probable price which property should 
bring, as of a specific date in a competitive and open market, assuming 
the buyer and seller are prudent and knowledgeable, and the price is not 
affected by undue stimulus such as forced sale or loan interest subsidy.
    (5) Principals of intermediary. Includes members, officers, 
directors, and other entities directly involved in the operation and 
management of an intermediary organization.
    (6) Ultimate recipient. The entity receiving financial assistance 
from the intermediary. This may be interchangeable with the term 
``subrecipient'' in some documents previously issued by HHS.
    (7) Rural area. Includes all territory of a State that is not within 
the outer boundary of any city having a population of twenty-five 
thousand or more.
    (8) State. Any of the fifty States, the Commonwealth of Puerto Rico, 
the Virgin Islands of the United States, Guam, American Samoa, and the 
Commonwealth of the Northern Mariana Islands.
    (9) Technical assistance or service. Technical assistance or service 
is any function unreimbursed by FmHA or its successor agency under 
Public Law 103-354 performed by the intermediary for the benefit of the 
ultimate recipient.
    (10) Working capital. The excess of current assets over current 
liabilities. It identifies the liquid portion of total enterprise 
capital which constitutes a margin or buffer for meeting obligations 
within the ordinary operating cycle of the business.
    (b) Abbreviations. The following abbreviations are applicable:
    B&I--Business and Industry
    CSA--Community Services Administration
    EIS--Environmental Impact Statement
    HHS--U.S. Department of Health and Human Services
    IRP--Intermediary Relending Program
    OCS--Office of Community Services
    OIG--Office of Inspector General
    OGC--Office of the General Counsel
    RDLF--Rural Development Loan Fund
    USDA--United States Department of Agriculture

[53 FR 30656, Aug. 15, 1988, as amended at 63 FR 6052, Feb. 6, 1998]



Sec. 1951.853  Loan purposes for undisbursed RDLF loan funds from HHS.

    (a) RDLF Intermediaries. Rural Development Loan funds will be used 
by the RDLF intermediary to provide loans to ultimate recipients in 
accordance with

[[Page 104]]

paragraph (b) of this section. Interest income, service fees, and other 
authorized financing charges received by RDLF intermediaries operating 
relending programs may be used to pay for: The costs of administering 
the RDLF relending program, the provision of technical assistance to 
borrowers, the absorption of bad debts associated with RDLF loans, and 
repayment of debt. All proceeds in excess of those needed to cover 
authorized expenses, as described above, must be returned to the Agency.
    (b) Ultimate recipients.(1) Financial assistance from the 
intermediary to the ultimate recipient must be for business facilities 
and community development projects in rural areas.
    (2) Financial assistance involving Rural Development Loan funds from 
the intermediary to the ultimate recipient may include but not be 
limited to:
    (i) Business acquisitions, construction, conversion, enlargement, 
repair, modernization, or development cost.
    (ii) Purchasing and development of land, easements, rights-of-way, 
building, facilities, leases, or materials.
    (iii) Purchasing of equipment, leasehold improvements, machinery or 
supplies.
    (iv) Pollution control and abatement.
    (v) Transportation services.
    (vi) Startup operating costs and working capital.
    (vii) Interest (including interest on interim financing) during the 
period before the facility becomes income producing, but not to exceed 3 
years.
    (viii) Feasibility studies.
    (ix) Reasonable fees and charges only as specifically listed in this 
subparagraph. Authorized fees include loan packaging fees, environmental 
data collection fees, and other professional fees rendered by 
professionals generally licensed by individual State or accreditation 
associations, such as engineers, architects, lawyers, accountants, and 
appraisers. The amount of fee will be what is reasonable and customary 
in the community or region where the project is located. Any such fees 
are to be fully documented and justified.
    (x) Aquaculture including conservation, development, and utilization 
of water for aquaculture. Aquaculture means the culture or husbandry of 
aquatic animals or plants by private industry for commercial purposes 
including the culture and growing of fish by private industry for the 
purpose of granting or augmenting publicly-owned or regulated stock of 
fish.

[53 FR 30656, Aug. 15, 1988, as amended at 63 FR 6053, Feb. 6, 1998]



Sec. 1951.854  Ineligible assistance purposes.

    (a) RDLF Intermediaries. RDLF loans may not be used by the 
intermediary:
    (1) For payment of the intermediary's own administrative costs or 
expenses.
    (2) To purchase goods or services or render assistance in excess of 
what is needed to accomplish the purpose of the ultimate recipient 
project.
    (3) For distribution or payment to the owner, partners, 
shareholders, or beneficiaries of the ultimate recipient or members of 
their families when such persons will retain any portion of their equity 
in the ultimate recipient.
    (4) For charitable and educational institutions, churches, 
organizations affiliated with or sponsored by churches, and fraternal 
organizations.
    (5) For assistance to government employees, military personnel, or 
principals or employees of the intermediary who are directors, officers 
or have major ownership (20 percent or more) in the ultimate recipient.
    (6) For relending in a city with a population of twenty-five 
thousand or more as determined by the latest decennial census.
    (7) For a loan to an ultimate recipient which has applied or 
received a loan from another intermediary unless FmHA or its successor 
agency under Public Law 103-354 provides prior written approval for such 
loan.
    (8) For any line of credit.
    (9) To finance more than 75 percent of the total cost of a project 
by the ultimate recipient. The total amount of RDLF loan funds requested 
by the ultimate recipient plus the outstanding balance of any existing 
RDLF loan(s) will not exceed $150,000. Other loans, grants, and/or 
intermediary or ultimate recipient contributions or funds from other 
sources must be used to

[[Page 105]]

make up the difference between the total cost and the assistance 
provided with RDLF funds.
    (10) For any investments in securities or certificates of deposit of 
over 30-day duration without the concurrence of FmHA or its successor 
agency under Public Law 103-354. If the RDLF funds have been unused to 
make loans to ultimate recipients for 6 months or more, those funds will 
be returned to FmHA or its successor agency under Public Law 103-354 
unless FmHA or its successor agency under Public Law 103-354 provides an 
exception to the RDLF intermediary. Any exception would be based on 
evidence satisfactory to FmHA or its successor agency under Public Law 
103-354 that every effort is being made by the intermediary to utilize 
the RDLF funding in conformance with program objectives.
    (b) Ultimate recipients. Ultimate recipients may not use assistance 
received from RDLF intermediaries involving RDLF funds:
    (1) For agricultural production, which means the cultivation, 
production (growing), harvesting, either directly or through integrated 
operations, of agricultural products (crops, animals, birds and marine 
life, either for fiber or food for human consumption, and disposal or 
marketing thereof, the raising, housing, feeding, breeding, hatching, 
control and/or management of farm and domestic animals). Exceptions to 
this definition are:
    (i) Aquaculture as identified under eligible purposes.
    (ii) Commercial nurseries primarily engaged in the production of 
ornamental plants and trees and other nursery products such as bulbs, 
florists' greens, flowers, shrubbery, flower and vegetable seeds, sod, 
the growing of vegetables from seed to the transplant stage.
    (iii) Forestry, which includes establishments primarily engaged in 
the operation of timber tracts, tree farms, forest nurseries, and 
related activities such as reforestation.
    (iv) Financial assistance for livestock and poultry processing as 
identified under eligible purposes.
    (v) The growing of mushrooms or hydroponics.
    (2) For the transfer of ownership unless the loan will keep the 
business from closing, or prevent the loss of employment opportunities 
in the area, or provide expanded job opportunities.
    (3) For community antenna television services or facilities.
    (4) For any legitimate business activity when more than 10 percent 
of the annual gross revenue is derived from legalized gambling activity.
    (5) For any illegal activity.
    (6) For any otherwise eligible project that is in violation of 
either a Federal, State or local environmental protection law or 
regulation or an enforceable land use restriction unless the financial 
assistance required will result in curing or removing the violation.
    (7) For any hotels, motels, tourist homes, or convention centers.
    (8) For any tourist, recreation, or amusement centers.



Sec. Sec. 1951.855-1951.858  [Reserved]



Sec. 1951.859  Term of loans.

    (a) No loans shall be extended for a period exceeding 30 years. 
Principal payments on loans will be made at least annually. The initial 
principal payment may be deferred not more than 3 years.
    (b) The terms of loan repayment will be those stipulated in the loan 
agreement and/or promissory note.



Sec. 1951.860  Interest on loans.

    (a) RDLF intermediaries: When the RDLF loan portfolio was 
transferred from HHS to USDA as required under Pub. L. 99-198, section 
1323 of the Food Security Act of 1985, there were provisions that 
affected the interest rates on those loans.
    (1) Those loans made in 1980 and 1981 carried an original note rate 
of 1 percent interest when they were first issued. The legislation 
provides for those loans made in 1980 and 1981 to have a permanent 
interest rate reduction to 1 percent effective December 23, 1985, to 
maturity. However, the interest rates on the loans made in 1983 and 1984 
may remain the same as the original note rate.
    (2) Loans made in 1983 and 1984 do not automatically qualify for a 
lower rate than the level of interest rates when

[[Page 106]]

the notes were first issued. Section 407 of Pub. L. 99-425 provides for 
a weighted average requirement that would affect those loans made in 
1983 and 1984 to intermediary borrowers.
    (3) In those cases where loans were made in RDLF intermediaries and 
the weighted average of all loans made by the RDLF intermediary after 
December 31, 1982, does not exceed the sum of 6 percent plus the 
interest rate to the intermediary (7 percent), the interest rate to be 
charged the RDLF intermediary will be the rate charged on such loans 
made in 1980, or 1 percent. Should the weighted average exceed 7 
percent, the note rate will control.
    (i) In order for FmHA or its successor agency under Public Law 103-
354 to determine the weighted average of the loan portfolio, the RDLF 
intermediary will be required to complete a weighted loan average rate 
on its outstanding portfolio. The schedule prepared for FmHA or its 
successor agency under Public Law 103-354's review should include:
    (A) Calculations of the interest amount scheduled to accrue on each 
loan outstanding over a 1-year period based on the current interest rate 
of each ultimate recipient's loan.
    (B) The sum total of interest on each individual loan will be added 
together to determine the total interest amount scheduled to accrue over 
a 1-year period.
    (C) Divide the total of paragraph (a)(2) of this section by the 
total principal outstanding to determine the average interest percent 
yield in the intermediary's loan portfolio.
    (D) The loans to be included in determining the weighted interest 
average will be those made from January 1, 1983, forward.
    (E) FmHA or its successor agency under Public Law 103-354 will use 
the anniversary date of October 1 of each year to request the 
intermediary to complete a weighted interest average to determine the 
interest rate on its RDLF loan for the coming calendar year, January 1 
through December 31. All loans made in 1980 and 1981 have had the 
interest rate permanently reduced by legislation to 1 percent, effective 
December 25, 1985.
    (F) The weighted loan average interest rate on the outstanding loan 
portfolio as referenced in this section will be forwarded to FmHA or its 
successor agency under Public Law 103-354 along with sufficient 
documentation which should include calculations, list of outstanding 
loans, current interest rate being charged on the loan, etc.
    (b) Interest rates charged by intermediaries to the ultimate 
recipients shall be at rates negotiated by those parties. Intermediaries 
are encouraged to make loans to ultimate recipients at the lowest 
possible rate, taking into account the cost of the loan funds to the 
intermediary and the cost of administering the loan portfolio.



Sec. Sec. 1951.861-1951.865  [Reserved]



Sec. 1951.866  Security.

    (a) Loans from RDLF intermediaries to ultimate recipients. Security 
requirements for loans from intermediaries to ultimate recipients will 
be negotiated between the intermediaries and ultimate recipients. FmHA 
or its successor agency under Public Law 103-354 concurrence in the 
intermediary's security proposal is required only when security for the 
loan from the intermediary to the ultimate recipient will also serve as 
security for the FmHA or its successor agency under Public Law 103-354 
loan.
    (b) Additional security. The FmHA or its successor agency under 
Public Law 103-354 may require additional security at any time during 
the term of a loan to an intermediary if, after review and monitoring, 
an assessment indicates the need for such security.
    (c) Appraisals. Real property serving as security for all loans to 
intermediaries and for loans to ultimate recipients serving as security 
for loans to intermediaries will be appraised by a qualified appraiser. 
For all other types of property, a valuation shall be made using any 
recognized, standard technique for the type of property involved 
(including standard reference manuals), and this valuation shall be 
described in the loan file.

[[Page 107]]



Sec. 1951.867  Conflict of interest.

    The intermediary will, for each proposed loan to an ultimate 
recipient, inform FmHA or its successor agency under Public Law 103-354 
in writing and furnish such additional evidence as FmHA or its successor 
agency under Public Law 103-354 requests as to whether and the extent to 
which the intermediary or its principal officers (including immediate 
family) hold any legal or financial interest or influence in the 
ultimate recipient or the ultimate recipient or any of its principal 
officers (including immediate family) holds any legal or financial 
interest or influence in the intermediary. FmHA or its successor agency 
under Public Law 103-354 shall determine whether such ownership, 
influence or financial interest is sufficient to create potential 
conflict of interest. In the event FmHA or its successor agency under 
Public Law 103-354 determines there is a conflict of interest, the 
intermediary's assistance to the ultimate recipient will not be approved 
until such conflict is eliminated.



Sec. 1951.868-1951.870  [Reserved]



Sec. 1951.871  Post award requirements.

    (a) RDLF intermediaries with undisbursed RDLF loan funds shall be 
governed by these regulations, the loan agreement, the approved work 
program, security interests, and other conditions which FmHA or its 
successor agency under Public Law 103-354 may require in awarding a 
loan.
    (b) Unless otherwise specifically agreed to in writing by the FmHA 
or its successor agency under Public Law 103-354, any loan funds held by 
an intermediary and any funds obtained from loaning FmHA or its 
successor agency under Public Law 103-354-derived funds and recollecting 
them that are not immediately needed by the intermediary for an ultimate 
recipient should be deposited in an interest-bearing account in a bank 
or other financial institution which will be covered by a form of 
Federal deposit insurance. Any interest or income earned as a result of 
such deposits shall be used by the intermediary only for purposes 
authorized by FmHA or its successor agency under Public Law 103-354.
    (c) Intermediaries operating relending programs must maintain 
separate ledgers and segregated accounts for RDLF funds at all times.
    (d) Reporting requirements shall be those delineated in the loan 
agreement between the United States and the intermediary and such 
subsequent requirements as FmHA or its successor agency under Public Law 
103-354 deems appropriate. The intermediaries must document periodically 
the extent to which increased employment, income and ownership 
opportunities are provided to rural residents for each loan made by such 
intermediary.
    (e) No intermediary may make a loan to an ultimate recipient who has 
applied for or received a loan from another intermediary unless FmHA or 
its successor agency under Public Law 103-354 provides prior written 
approval for such loan.
    (f) All loan payments that are due on RDLF loans will be made 
payable to the Farmers Home Administration or its successor agency under 
Public Law 103-354, using the number assigned, and mailed directly to: 
Farmers Home Administration or its successor agency under Public Law 
103-354, Finance Office, FC 35, 1520 Market Street, St. Louis, Missouri 
63103.



Sec. 1951.872  Other regulatory requirements.

    (a) Intergovenmental consultation. The RDLF program is subject to 
the provisions of Executive Order 12372 which requires intergovernmental 
consultation with State and local officials. For each ultimate recipient 
to be assisted with a loan under this subpart and for which the State in 
which the ultimate recipient is to be located has elected to review the 
program under their intergovernmental review process, the State Point of 
Contact must be notified. Notification, in the form of a project 
description, can be initiated by the intermediary or the ultimate 
recipient. Any comments from the State must be included with the 
intermediary's request to use the loan funds for the ultimate recipient. 
Prior to FmHA or its successor agency under Public Law 103-354's 
decision on the request, compliance with the requirements of 
intergovernmental consultation must be

[[Page 108]]

demonstrated for each ultimate recipient. These requirements should be 
carried out in accordance with FmHA or its successor agency under Public 
Law 103-354 Instruction 1940-J, ``Intergovernmental Review of Farmers 
Home Administration or its successor agency under Public Law 103-354 
Programs and Activities,'' available in any FmHA or its successor agency 
under Public Law 103-354 office.
    (b) Environmental requirements. (1) Unless specifically modified by 
this section, the requirements of subpart G of part 1940 of this chapter 
apply to this subpart. FmHA or its successor agency under Public Law 
103-354 will give particular emphasis to ensuring compliance with the 
environmental policies contained in Sec. Sec. 1940.303 and 1940.304 in 
subpart G of part 1940 of this chapter. Intermediaries and ultimate 
recipients of loans must consider the potential environmental impacts of 
their projects at the earliest planning stages and develop plans to 
minimize the potential to adversely impact the environment.
    (2) As part of the intermediary's request to FmHA or its successor 
agency under Public Law 103-354 for concurrence to make a loan to an 
ultimate recipient, the intermediary will include for the ultimate 
recipient a properly completed Form FmHA or its successor agency under 
Public Law 103-354 1940-20, ``Request for Environmental Information,'' 
if it is classified as a Class I or Class II action. FmHA or its 
successor agency under Public Law 103-354 will complete the 
environmental review required by subpart G of part 1940 of this chapter. 
The results of this review will be used by FmHA or its successor agency 
under Public Law 103-354 in making its decision on the request.
    (c) Equal opportunity and nondiscrimination requirements.(1) In 
accordance with Title V of Pub. L. 93-495, the Equal Credit Opportunity 
Act, neither the intermediary nor FmHA or its successor agency under 
Public Law 103-354 will discriminate against any applicant on the basis 
of race, color, religion, national origin, age, physical or mental 
handicap (provided that the applicant has the capacity to enter into a 
binding contract), sex or marital status with respect to any aspect of a 
credit transaction anytime Federal funds are involved.
    (2) The regulations contained in part 1901, subpart E of this 
chapter apply to loans made under this program.
    (3) The Administrator will assure that equal opportunity and 
nondiscrimination requirements are met in accordance with Title VI of 
the Civil Rights Act of 1964, ``Nondiscrimination in Federally Assisted 
Programs,'' 42 U.S.C. 2000d-2000d-4. If there is indication of 
noncompliance with these requirements, such facts will be reported in 
writing to the Administrator, ATTN: Equal Opportunity Officer.



Sec. Sec. 1951.873-1951.876  [Reserved]



Sec. 1951.877  Loan agreements.

    (a) A loan agreement will have been executed by the RDLF 
intermediary and OCS or HHS for each loan. The loan agreement ordinarily 
would contain the following provisions:
    (1) The amount of the loan.
    (2) The interest rate.
    (3) The term and repayment schedule.
    (4) The provisions for late charges.
    (5) Provisions regarding default.
    (6) Disbursement procedure.
    (7) Insurance requirements.
    (i) Hazard insurance with a standard mortgage clause naming the 
intermediary as beneficiary will be required on every ultimate recipient 
in an amount that is at least the lesser of the depreciated replacement 
value of the property being insured or the amount of the loan. Hazard 
insurance includes fire, windstorm, lightning, hail, business 
interruption, explosion, riot, civil commotion, aircraft, vehicle, 
marine, smoke, builder's risk, public liability, property damage, flood 
or mudslide, or any other hazard insurance that may be required to 
protect the security. The RDLF intermediary's interest in the insurance 
ordinarily will be assigned to the FmHA or its successor agency under 
Public Law 103-354.
    (ii) Ordinarily, life insurance, which may be decreasing term 
insurance, is required for the principals and key employees of the 
ultimate recipient and will be assigned or pledged to the RDLF 
intermediary and subsequently to FmHA or its successor agency under

[[Page 109]]

Public Law 103-354. A schedule of life insurance available for the 
benefit of the loan will be included as part of the application.
    (iii) Workmen's compensation insurance on ultimate recipients is 
required in accordance with State law.
    (iv) The RDLF intermediary is responsible for determining if an 
ultimate recipient is located in a special flood or mudslide hazard area 
anytime Federal funds are involved. If the ultimate recipient is in a 
flood or mudslide area, then flood or mudslide insurance must be 
provided.
    (b) The RDLF intermediary will agree:
    (1) Not to make any changes in the RDLF intermediary's articles of 
incorporation, charter or bylaws without the concurrence of FmHA or its 
successor agency under Public Law 103-354.
    (2) Not to make a loan commitment to an ultimate recipient without 
first receiving FmHA or its successor agency under Public Law 103-354's 
written concurrence in the proposed use of loan funds.



Sec. Sec. 1951.878-1951.880  [Reserved]



Sec. 1951.881  Loan servicing.

    (a) These regulations do not negate contractual arrangements that 
were previously made by the HHS, Office of Community Services (OCS), or 
the intermediaries operating relending programs that have already been 
entered into with ultimate recipients under previous regulations. 
preexisting documents control when in conflict with these regulations. 
The loan is governed by terms of existing legal documents of each 
intermediary. The RDLF/IRP intermediary is responsible for compliance 
with the terms and conditions of the loan agreement.
    (b) Each intermediary will be monitored by FmHA or its successor 
agency under Public Law 103-354 based on progress reports submitted by 
the intermediary, audit findings, disbursement transactions, 
visitations, and other contract with the intermediary as necessary.
    (c) Loan servicing is intended to be preventive rather than a 
curative action. Prompt followup on delinquent accounts and early 
recognition of potential problems and pursuing a solution to them are 
keys to resolving many problem loan cases.
    (d) Written notices on payments coming due will be prepared and sent 
to the intermediary by the FmHA or its successor agency under Public Law 
103-354 Finance Office approximately 15 days in advance of the due date 
of the payments. A copy of the notice will be sent to the FmHA or its 
successor agency under Public Law 103-354 Administrator or designee.
    (e) If the scheduled payment is not made by the intermediary within 
30 days after the due date of the payment, the Finance Office will send 
a past due notice to the intermediary. The notice will show the late 
charge amount, if applicable, and the interest amount past due. The late 
charge amount, if applicable, and the interest past due amount will be 
capitalized as principal due 30 days after the due date of the monthly 
payment unless existing loan documents prior to this regulation state 
otherwise. If the loan documents state when late charge amounts or 
interest accruals are to be capitalized, the loan documents will 
prevail.
    (1) A per diem amount will be shown on the late notice sent to the 
intermediary. The Finance Office will send this notice to the 
Administrator or designee 30 days after the past due notice has been 
sent to the intermediary and the account remains delinquent. Thereafter, 
further notices by FmHA or its successor agency under Public Law 103-354 
designee will be sent to the intermediary on the late payments or any 
further payments until the account is in a current status.
    (2) The Finance Office will notify the Administrator or designee on 
any payments due from the delinquent intermediary. It will be the 
responsibility of the Administrator or designee to follow up on 
delinquent payments to bring the account to a current status.
    (3) A copy of any correspondence or notice generated by the 
Administrator or designee on any delinquent loan will be sent to the 
Finance Office.
    (4) Interest will be computed on a 365-day basis unless legal 
documents state otherwise.

[[Page 110]]

    (f) It is the responsibility of the Finance Office to maintain 
complete accounting records for each intermediary. The Finance Office 
will:
    (1) Coordinate with the Administrator or designee to assure that 
interest and principal payments received are in accordance with the 
promissory notes and its companion documents, and the effective 
amortization schedule. If the payments received appear to be incorrect, 
the Finance Office will advise the Administrator or designee. The 
Administrator or designee will take the necessary action to clear the 
issue and promptly advise the Finance Office of the proper accounting 
procedure.
    (2) Send monthly statements to the National Office reflecting all 
payments received to date on each borrower.
    (3) Send to the Administrator or designee a monthly summary of all 
intermediary loans as follows:
    (i) Number and amount of all loans.
    (ii) Total advanced on all loans.
    (iii) Total interest and principal received on the loans.
    (iv) Total outstanding balance on all loans.
    (4) Prepare reamortization schedules needed as a result of 
restructuring any loans and send to the Administrator or designee.
    (5) Furnish in writing to the Administrator or designee a per diem 
amount on the actual interest amount due when requested by the 
Administrator.
    (g) It is the responsibility of the Administrator or designee to:
    (1) Review and analyze the semiannual report of the intermediaries 
and reconcile same to the annual audits.
    (2) Review the annual audits of intermediaries.
    (3) Review the semiannual reports of the intermediaries and take 
appropriate action when necessary.
    (4) Follow up on delinquent intermediaries to bring the account 
current.
    (5) Notify the Finance Office in writing when a loan is determined 
to be uncollectible in order for the Finance Office to make provisions 
for an appropriate timely entry to the loss account.
    (6) Furnish to the Finance Office the necessary information to 
produce reamortization schedules.
    (7) Provide the Finance Office a copy of any correspondence in 
regard to the restructuring of the loans.
    (8) Review reamortization schedules, the schedule will then be 
forwarded to the intermediary.
    (9) Confirm account balances. Payment history of loans and any other 
related matter will be furnished to the requesting party, (i.e. third 
party auditing firms) if warranted and proper. If there are 
discrepancies in any loan balances being confirmed, the Finance Office 
should be consulted before the Administrator or designee writes the 
requested parties.
    (10) Furnish upon request by the Finance Office, the information 
necessary to help reconcile account balances, obtain evidence of 
payments made by the borrower, and any other related data necessary to 
keep the financial records correct and in balance.
    (11) Answer Congressional and other correspondence.
    (12) Review intermediary's plans, cash flow projections, balance 
sheets, and operating statements.



Sec. 1951.882  [Reserved]



Sec. 1951.883  Reporting requirements.

    (a) Intermediaries are to provide FmHA or its successor agency under 
Public Law 103-354 with reports as required in their respective loan 
agreements, applicable statutes and as required by FmHA or its successor 
agency under Public Law 103-354. The report shall include the following:
    (1) An annual audit; dates of audit report period need not 
necessarily coincide with other reports on the RDLF/IRP. Audits shall be 
due 90 days following the audit period. Audits must cover all of the 
intermediary's activities. Audits will be performed by an independent 
certified public accountant or by an independent public accountant 
licensed and certified on or before December 31, 1970, by a regulatory 
authority of a State or other political subdivision of the United 
States. An acceptable audit will be performed in accordance with 
generally accepted auditing standards and include such tests of the 
accounting records as the auditor considers necessary in order to 
express an opinion on the financial

[[Page 111]]

condition of the intermediary. FmHA or its successor agency under Public 
Law 103-354 does not require an unqualified audit opinion as a result of 
the audit. Compilations or reviews do not satisfy the audit requirement.
    (2) Quarterly or semiannual reports (due 30 days after the end of 
the period).
    (i) Reports will be required quarterly during the first year after 
loan closing and, if all loan funds are not utilized during the first 
year, quarterly reports will be continued until at least 90 percent of 
the Agency IRP loan funds have been advanced to ultimate recipients. 
Thereafter, reports will be required semiannually. Also, the Agency may 
require quarterly reports if the intermediary becomes delinquent in 
repayment of its loan or otherwise fails to fully comply with the 
provisions of its work plan or Loan Agreement, or the Agency determines 
that the intermediary's IRP revolving fund is not adequately protected 
by the current sound worth and paying capacity of the ultimate 
recipients.
    (ii) These reports shall contain only information on the IRP 
revolving loan fund, or if other funds are included, the IRP loan 
program portion shall be segregated from the others; and in the case 
where the intermediary has more than one IRP revolving fund from the 
Agency a separate report shall be made for each of the IRP revolving 
funds.
    (iii) The reports will include, on a form provided by the Agency, 
information on the intermediary's lending activity, income and expenses, 
financial condition, and a summary of names and characteristics of the 
ultimate recipients the intermediary has financed.
    (3) An annual report on the extent to which increased employment 
income and ownership opportunities are provided to low-income persons, 
farm families, and displaced farm families for each loan made by such 
intermediary.
    (4) Proposed budget for the following year.
    (5) Other reports as FmHA or its successor agency under Public Law 
103-354 may require from time to time.
    (b) Intermediaries shall report to FmHA or its successor agency 
under Public Law 103-354 whenever an ultimate recipient is more than 90 
days in arrears in the repayment of principal or interest.

[53 FR 30656, Aug. 15, 1988, as amended at 63 FR 6053, Feb. 6, 1998]



Sec. 1951.884  Non-Federal funds.

    Once all the FmHA or its successor agency under Public Law 103-354-
derived loan funds have been utilized by the intermediary for assistance 
to ultimate recipients according to the provisions of these regulations 
and the loan agreement, assistance to new ultimate recipients financed 
thereafter from the intermediary's revolving loan fund shall not be 
considered as being derived from Federal funds and the requirements of 
these regulations will not be imposed on those new ultimate recipients. 
Ultimate recipients assisted by the intermediary with FmHA or its 
successor agency under Public Law 103-354-derived loan funds shall be 
required to comply with the provisions of these regulations and/or loan 
agreement.



Sec. 1951.885  Loan classifications.

    All loans to intermediaries in the FmHA or its successor agency 
under Public Law 103-354 portfolio will be classified by FmHA or its 
successor agency under Public Law 103-354 at loan closing and again 
whenever there is a change in the loan which would impact on the 
original classification. No one classification should be viewed as more 
important than others. The uncollectibility aspect of Doubtful and Loss 
classifications is of obvious importance. However, the function of the 
Substandard classification is to indicate those loans that are unduly 
risky which may result in future losses. Substandard, Doubtful and Loss 
are adverse classifications. The special mention classification is for 
loans which are not adversely classified but which require the attention 
and followup of FmHA or its successor agency under Public Law 103-354. 
The loans will be classified as follows:
    (a) Seasoned loan classification. To be classified as a seasoned 
loan, a loan must:
    (1) Have a remaining principal loan balance of two-thirds or less of 
the original aggregate of all existing loans made to that intermediary.

[[Page 112]]

    (2) Be in compliance with all loan conditions and FmHA or its 
successor agency under Public Law 103-354 regulations.
    (3) Have been current on the loan(s) payments for 24 consecutive 
months.
    (4) Be secured by collateral which is determined to be adequate to 
ensure there will be no loss on the loan.
    (b) Current non-problem classification. This classification includes 
those loans which have been current for less than 24 consecutive months 
and are in compliance with the loan conditions and FmHA or its successor 
agency under Public Law 103-354 regulations, and are not considered to 
pose a credit risk to FmHA or its successor agency under Public Law 103-
354. These loans would be classified as seasoned but for the ``24 
months'' and ``two-thirds'' requirements for seasoned loans.
    (c) Special mention classification. This classification includes 
loans which do not presently expose FmHA or its successor agency under 
Public Law 103-354 to a sufficient degree of risk to warrant a 
Substandard classification but do possess credit deficiencies deserving 
FmHA or its successor agency under Public Law 103-354's close attention 
because the failure to correct these deficiencies could result in 
greater risk in the future. This classification would include loans that 
may be high quality, but which FmHA or its successor agency under Public 
Law 103-354 is unable to supervise properly because of an inadequate 
loan agreement, the condition or lack of control over the collateral, 
failure to obtain proper documentation or any other deviations from 
prudent lending practices. Adverse trends in the intermediary's 
operation or an imbalanced position in the balance sheet which has not 
reached a point that jeopardizes the repayment of the loan should be 
assigned to this classification. Loans in which actual, not potential, 
weaknesses are evident and significant should be considered for a 
Substandard classification.
    (d) Substandard classification. This classification includes loans 
which are inadequately protected by the current sound worth and paying 
capacity of the obligor or of the collateral pledged, if any. Loans in 
this classification must have a well defined weakness or weaknesses that 
jeopardize the payment in full of the debt. If the deficiencies are not 
corrected, there is a distinct possibility that FmHA or its successor 
agency under Public Law 103-354 will sustain some loss.
    (e) Doubtful classification. This classification includes those 
loans which have all the weaknesses inherent in those classified 
Substandard with the added characteristic that the weaknesses make 
collection or liquidation in full, based on currently known facts, 
conditions and values, highly questionable and improbable.
    (f) Loss classification. This classification includes those loans 
which are considered uncollectible and of such little value that their 
continuance as loans is not warranted. Even though partial recovery may 
be effected in the future, it is not practical or desirable to defer 
writing off these basically worthless loans.



Sec. Sec. 1951.886-1951.888  [Reserved]



Sec. 1951.889  Transfer and assumption.

    (a) All transfers and assumptions must be approved in advance in 
writing by FmHA or its successor agency under Public Law 103-354. Such 
transfers and assumptions must be to an eligible intermediary.
    (b) Available transfer and assumption options to eligible 
intermediaries include the following:
    (1) The total indebtedness may be transferred to another eligible 
intermediary on the same terms.
    (2) The total indebtedness may be transferred to another eligible 
intermediary on different terms not to exceed those terms for which an 
initial loan can be made to an organization that would have been 
eligible originally.
    (3) Less than total indebtedness may be transferred to another 
eligible intermediary on the same terms.
    (4) Less than total indebtedness may be transferred to another 
eligible intermediary on different terms.
    (c) The transferor will prepare the transfer document for FmHA or 
its successor agency under Public Law 103-354's review prior to the 
transfer and assumption.

[[Page 113]]

    (d) The transferee will provide FmHA or its successor agency under 
Public Law 103-354 with a copy of its latest financial statement and a 
copy of its annual financial statement for the past 3 years if 
available; its Federal Tax Identification number; organizational 
charter; minutes from the Board of Directors authorizing the 
transaction; certification of good standing from the Secretary of State 
or whatever regulatory agency oversees nonprofit corporations for that 
State or Commonwealth where the entity is headquartered; and any other 
information that FmHA or its successor agency under Public Law 103-354 
deems necessary for its review.
    (e) The assumption agreement will contain the FmHA or its successor 
agency under Public Law 103-354 case nunber of the transferor and 
transferee.
    (f) When the transferee makes a cash downpayment in connection with 
the transfer and assumption, any proceeds received by the transferor 
will be credited on the transferor's loan debt in inverse order of 
maturity.
    (g) The Administrator or designee will approve or decline all 
transfers and assumptions.



Sec. 1951.890  Office of Inspector General and Office of General Counsel referrals.

    When facts or circumstances indicate that criminal violations, civil 
fraud, misrepresentations, or regulatory violations may have been 
committed by an applicant or an intermediary, FmHA or its successor 
agency under Public Law 103-354 will refer the case to the appropriate 
Regional Inspector General for Investigations, OIG, USDA, in accordance 
with FmHA or its successor agency under Public Law 103-354 Instruction 
2012-B (available in any FmHA or its successor agency under Public Law 
103-354 office) for criminal investigation. Any questions as to whether 
a matter should be referred will be resolved through consultation with 
OIG and FmHA or its successor agency under Public Law 103-354 and 
confirmed in writing. In order to assure protection of the financial and 
other interests of the Government, a duplicate of the notification will 
be sent to the OGC. OGC will be consulted on legal questions. After OIG 
has accepted any matter for investigation, FmHA or its successor agency 
under Public Law 103-354 staff must coordinate with OIG in advance 
regarding routine servicing actions on existing loans.



Sec. 1951.891  Liquidation; default.

    (a) In the event that FmHA or its successor agency under Public Law 
103-354 takes over the servicing of the ultimate recipient of an 
intermediary, those loans will be serviced by this regulation and in 
accordance with the contractual arrangement between the intermediary and 
the ultimate recipient. Should the FmHA or its successor agency under 
Public Law 103-354 determine that it is necessary or desirable to take 
action to protect or further the interests of FmHA or its successor 
agency under Public Law 103-354 in connection with any default or breach 
of conditions under any loan made hereunder, the FmHA or its successor 
agency under Public Law 103-354 may:
    (1) Declare that the loan is immediately due and payable.
    (2) Assign or sell at public or private sale, or otherwise dispose 
of for cash or credit at its discretion and upon such terms and 
conditions as FmHA or its successor agency under Public Law 103-354 
shall determine to be reasonable, any evidence of debt, contract, claim, 
personal or real property or security assigned to or held by the FmHA or 
its successor agency under Public Law 103-354 in connection with 
financial assistance extended hereunder.
    (3) Adjust interest rates, use fixed or variable rates, grant 
moratoriums on repayment of principal and interest, collect or 
compromise any obligations held by FmHA or its successor agency under 
Public Law 103-354 and take such actions in respect to such loans as are 
necessary or appropriate, consistent with the purpose of the program and 
this subpart. The Administrator will notify the FmHA or its successor 
agency under Public Law 103-354 Finance Office of any change in payment 
terms, such as reamortizations or interest rate adjustments, and 
effective dates of any changes resulting from servicing actions.

[[Page 114]]

    (b) Failure by an ultimate recipient to comply with the provisions 
of these regulations and/or loan agreement shall constitute grounds for 
a declaration of default and the demand for immediate and full repayment 
of its loan.
    (c) Failure by an intermediary to comply with the provisions of 
these regulations or to relend funds in accordance with an approved work 
plan or loan agreement shall constitute grounds for a declaration of 
default and the demand for immediate and full repayment of the loan.
    (d) In the event of default, the intermediary will promptly be 
informed in writing of the consequences of failing to comply with loan 
covenant(s).
    (e) Protective advances to the intermediary will not be made in lieu 
of additional loans, in particular working capital loans. Protective 
advances are advances made by FmHA or its successor agency under Public 
Law 103-354 for the purpose of preserving and protecting the collateral 
where the intermediary has failed to and will not or cannot meet its 
obligations. The Administrator or designee must approve in writing all 
protective advances.
    (f) In the event of bankruptcy by the intermediary and/or ultimate 
recipient, FmHA or its successor agency under Public Law 103-354 is 
responsible for protecting the interests of the Government. All 
bankruptcy cases should be reported immediately to the Regional 
Attorney. The Administrator must approve in advance and in writing the 
estimated liquidation expenses on loans in liquidation backruptcy. These 
expenses must be considered by FmHA or its successor agency under Public 
Law 103-354 to be reasonable and customary.
    (g) Liquidation, management, and disposal of inventory property will 
be handled in accordance with subparts A, B, and C of part 1955 of this 
chapter.



Sec. Sec. 1951.892-1951.893  [Reserved]



Sec. 1951.894  Debt settlement.

    Debt settlement of all claims will be handled in accordance with the 
Federal Claims Collection Standards (4 CFR parts 101-105).



Sec. 1951.895  [Reserved]



Sec. 1951.896  Appeals.

    Any appealable adverse decision made by FmHA or its successor agency 
under Public Law 103-354 which affects the borrower may be appealed upon 
written request of the aggrieved party in accordance with subpart B of 
part 1900 of this chapter.



Sec. 1951.897  Exception authority.

    The Administrator may, in individual cases, grant an exception to 
any requirement or provision of this subpart which is not inconsistent 
with an applicable law or opinion of the Comptroller General, provided 
the Administrator determines that application of the requirement or 
provision would adversely affect the Government's interest. The basis 
for this exception will be fully documented. The documentation will: 
demonstrate the adverse impact; identify the particular requirement 
involved; and show how the adverse impact will be eliminated.



Sec. Sec. 1951.898-1951.899  [Reserved]



Sec. 1951.900  OMB control number.

    The collection of information requirements in this regulation have 
been approved by the Office of Management and Budget and assigned OMB 
Control Number 0575.0131. In accordance with 5 CFR part 1320, summarized 
below is the annualized public reporting burden for this regulation.

[[Page 115]]



--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                      Total     Est. No. of
                                                                                 Estimated       Report filed         annual      man-hrs.    Est. total
      Sect. of regulations                 Title            Form No. (if any)      No. of          annually         responses       per        manhours
                                                                                respondents                         (d) x (e)     response    (f) x (g)
(A)                               (B)...................  (C).................          (D)  (E).................          (F)          (G)          (H)
---------------------------------
Reporting Requirements--No Forms
--------------------------------------------------------------------------------------------------------------------------------------------------------
1951.860(a)(3)(i)...............  Weighted average        Written.............           12  1...................           12          3.0           36
                                   interest calculation.
1951.877(a)(7)(i)...............  Insurance.............  Assignment..........           36  On occasion.........          100          1.0          100
1951.882(a).....................  Intermediary            Meeting.............           36  1...................           36          4.5          162
                                   visitations.
1951.882(b).....................  Audited financial       Written.............           36  1...................           36           .5           18
                                   statement.
1951.883(a)(2)(ii)..............  Program narrative.....  Written.............  ...........  ....................  ...........  ...........  ...........
                                  IRP borrower..........  ....................           10  4...................           40          4.0          160
                                  RDLF borrower.........  ....................           26  2...................           52          4.0          208
1951.833(a)(2)(iii).............  Employment/income       Written.............           36  1...................           36          1.5           54
                                   narrative.
1951.883(a)(2)(iv)..............  Proposed budget.......  Written.............           36  1...................           36          2.5           90
1951.883(c).....................  Intermediary's report   Written.............           36  On occasion.........           50          1.0           50
                                   of loans 90 days in
                                   arrears.
1951.889(c).....................  Assumption Agreement..  Written.............            2  1...................            2          3.5            7
1951.889(d).....................  Transferee financial    Written.............            2  1...................            2           .5            1
                                   statement.
---------------------------------
Form Approved with this Docket
--------------------------------------------------------------------------------------------------------------------------------------------------------
1951.883(a)(2)..................  IRP Lending Activity    1951-4..............  ...........  ....................  ...........  ...........  ...........
                                   Report.
                                  IRP borrower..........  ....................           10  4...................           40           20          800
                                  RDLF borrower.........  ....................           26  2...................           52           20         1040
---------------------------------
Reporting Requirements Under Other Numbers
--------------------------------------------------------------------------------------------------------------------------------------------------------
1951.872(b).....................  Request for             1940-20 (0575-0094).  ...........  ....................  ...........  ...........  ...........
                                   Environmental
                                   Information.
                                                                                ...........                             \1\494  ...........     \2\2,726
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Docket totals. \2\ Total hours.


[[Page 116]]



        Subpart S_ Farm Loan Programs Account Servicing Policies

    Source: 57 FR 18626, Apr. 30, 1992, unless otherwise noted.



Sec. 1951.901   Purpose.

    This subpart describes the policies and procedures that the agency 
will use in servicing most Farm Loan Program (FLP) loans. The loans 
include Operating Loan (OL), Farm Ownership Loan (FO), Soil and Water 
Loan (SW), Softwood Timber Production Loan (ST), Emergency Loan (EM), 
Economic Emergency Loan (EE), Economic Opportunity Loan (EO), Recreation 
Loan (RL), and Rural Housing Loan for farm service buildings (RHF) 
accounts. Shared Appreciation amortized payments (SA) may be reamortized 
under this subpart if the borrower also has outstanding FLP program 
loans. Cases involving unauthorized assistance will be serviced as 
described in subpart L of this part. When it has been determined that 
all the conditions outlined in Sec. 1951.558(b) of subpart L of this 
part have been met, the loan will be treated as an authorized loan and 
may be serviced under this subpart. Cases involving graduation of 
borrowers to other sources of credit will be serviced as described in 
subpart F of this part. This subpart does not apply to FLP Non-Program 
(NP) loans. Examples of Primary Loan Servicing actions are: 
consolidation, rescheduling and/or reamortization, deferral of principal 
and interest payments, reclassifying to ST loans, reducing interest rate 
on the loan, writedown of debt and conservation contract, or a 
combination of these actions. Preservation loan servicing is the 
Homestead Protection program. Any processing or servicing activity 
conducted pursuant to this subpart involving authorized assistance to 
agency employees, members of their families, known close relatives, or 
business or close personal associates, is subject to the provisions of 
subpart D of part 1900 of this chapter. Applicants for this assistance 
are required to identify any known relationship or association with an 
agency employee.

[62 FR 10120, Mar. 5, 1997, as amended at 63 FR 6628, Feb. 10, 1998; 67 
FR 7943, Feb. 21, 2002]



Sec. 1951.902   General.

    Supervision and Servicing. It is a primary objective of the Agency 
to provide supervised credit to borrowers in financial, production or 
other difficulty in a manner that will assure the maximum opportunity 
for their recovery and, at the same time, get the best recovery for the 
Government. Supervision and servicing are continuing processes that 
begin the day a farmer comes into the office. Providing supervised 
credit has two objectives:
    (a) To help farmers set goals, work on problem areas and work toward 
graduation to commercial credit;
    (b) To recover the maximum possible amount for the Government.

[62 FR 10120, Mar. 5, 1997]



Sec. 1951.903   Authorities and responsibilities.

    (a) Responsibilities. Servicing officials will make full use of the 
National automated tracked system to track and manage the FLP primary 
and preservation loan servicing and debt settlement programs.
    (b) Authorities. All loan servicing decisions except as set forth in 
this section will be made by the servicing official except the approval 
of writedown and buyout of a borrower's debt. Also, all applications for 
debt settlement of FLP loans must be approved by the State Executive 
Director or the Administrator (depending upon the amount of debt to be 
settled), and processed in accordance with the provisions of subpart B 
of part 1956 of this chapter. Servicing officials are authorized to 
accept a buyout payment when the borrower(s) pays the current market 
value of the security set forth in Sec. 1951.909 of this Instruction. 
Only State Executive Directors are authorized to approve writedown and 
buyout in accordance with Sec. 1951.909 of this part and release a 
divorced spouse from liability

[[Page 117]]

on the debt in accordance with Sec. 1951.909(a) of this part.

[62 FR 10121, Mar. 5, 1997, as amended at 68 FR 7698, Feb. 18, 2003]



Sec. 1951.904  Mediation, reviews and appeals.

    (a) Participant rights. (1) For loan servicing under this subpart, 
mediation or a voluntary meeting of creditors will be offered if the 
DALR$ calculations indicate that a feasible plan of operation cannot be 
developed considering all primary loan service programs, Softwood 
Timber, and Conservation Contracts. In states with a USDA Certified 
Mediation Program, mediation will be offered. In all other states, a 
voluntary meeting of creditors will be offered.
    (2) Any negotiation of an Agency appraisal must be completed prior 
to the meeting of creditors or mediation.
    (3) If the borrower does not request mediation or a voluntary 
meeting of creditors as offered in Exhibit E of this subpart within 45 
days, the servicing official will issue the appropriate ``Notice of 
Intent to Accelerate or to Continue Acceleration and Notice of 
Borrowers' Rights.''
    (4) Whenever the servicing official makes a decision that will 
adversely affect a participant, the participant will be informed that 
the decision can be reviewed in accordance with 7 CFR part 780 and 
indicate whether it can be appealed to the USDA National Appeals 
Division (NAD) according to regulations set forth in 7 CFR part 11. 
Nonprogram (NP) participants are not entitled to appeal rights.
    (b) Non-appealable decisions. The following types of decisions are 
not appealable:
    (1) Decisions made by parties outside the agency, even when those 
decisions are used as a basis for the agency's decisions.
    (2) Decisions that do not meet the eligibility requirements of 7 CFR 
part 11.
    (3) Interest rates as set forth in Agency procedures, except appeals 
alleging application of the incorrect interest rate.
    (4) Refusal to request or grant an administrative waiver permitted 
by program regulations.
    (5) Denials of assistance due to lack of funds.
    (6) In cases where the adverse decision is based on both appealable 
and non-appealable actions, the adverse action is not appealable.
    (7) Determinations previously made by the Agency that have been 
appealed, and a NAD decision adverse to the participant has been 
entered; or upon which the time frame for appeal has expired with no 
appeal being requested.
    (c) Next-level review. Any adverse decision, whether appealable or 
non-appealable, may be reviewed in accordance with 7 CFR part 780.
    (d) NAD review. (1) A participant may request that NAD review the 
Agency's determination that the decision may not be appealed.
    (2) A participant may request that NAD review any decision that is 
appealable.
    (3) NAD will review the participant's request in accordance with 7 
CFR part 11.
    (e) Agency actions pending outcome of appeal. Assistance will not be 
discontinued pending the outcome of an appeal of any adverse action. 
Releases for essential family living and farm operating expenses will 
not be terminated until the account has been accelerated.
    (f) Time limits. Time limits for action under this subpart will be 
tolled during the pendency of an appeal, but not during the pendency of 
a request that NAD determine that a matter is or is not appealable.

[62 FR 10121, Mar. 5, 1997]



Sec. 1951.905  [Reserved]



Sec. 1951.906  Definitions.

    As used in this subpart, the following definitions apply:
    Borrower. An individual or entity which has outstanding obligations 
to the agency under any Farm Loan Programs (FLP) loan, without regard to 
whether the loan has been accelerated. This does not include any such 
debtor whose total loans and accounts have been foreclosed or 
liquidated, voluntarily or otherwise. Collection-only borrowers are 
considered borrowers. Borrower also includes any other party liable for 
the FLP debt. Nonprogram

[[Page 118]]

(NP) borrowers are not considered borrowers for the purposes of this 
subpart.
    CONACT or CONACT property. Property which secured a loan made or 
insured under the Consolidated Farm and Rural Development Act. Within 
this part, it shall also be construed to cover property which secured 
other FLP loans.
    Conservation contract. A contract under which a borrower agrees to 
set aside land for conservation, recreation or wildlife purposes in 
exchange for cancellation of a portion of an outstanding FLP debt. 
Relief obtained in this manner is not considered debt forgiveness as 
defined in this section.
    Consolidation. The combining and rescheduling of the rates and terms 
of two or more notes of the same type of OL or EO loans, EE operating-
type loans or EM loans. EM actual loss loans will not be consolidated.
    Current market value buyout. Termination of a borrower's loan 
obligations to the agency in exchange for payment of the current 
appraised value of the security property, less any prior liens.
    Debt forgiveness. For the purposes of loan servicing, debt 
forgiveness is defined as a reduction or termination of a direct FLP 
loan in a manner that results in a loss to the Agency. Included, but not 
limited to, are losses from a writedown or writeoff under this subpart, 
subpart J of this part, subpart B of part 1956 of this chapter, after 
discharge under the bankruptcy code, and associated with release of 
liability. Debt cancellation through conservation contracts is not 
considered debt forgiveness under this subpart.
    Debt settlement. The settlement of debts owed the United States for 
FLP loans. The types of debt settlement programs are: compromise, 
adjustment, cancellation and chargeoff.These programs are administered 
in accordance with subpart B of part 1956 of this chapter. Any action 
through debt settlement which results in a loss to the Agency will be 
considered debt forgiveness.
    Deferral. An approved delay in making regularly scheduled payments, 
including softwood timber (ST) loans. Deferral is not considered debt 
forgiveness.
    Delinquent borrower. A borrower who has failed to make all or part 
of a payment which is due for 30 or more calendar days after the due 
date.
    Entity. A corporation, partnership, joint operation, or cooperative.
    Farm Loan Programs (FLP) loans. This refers to Farm Ownership (FO), 
Soil and Water (SW), Recreation (RL), Economic Opportunity (EO), 
Operating (OL), Emergency (EM), Economic Emergency (EE), Softwood Timber 
(ST) loans, and Rural Housing loans for farm service buildings (RHF).
    Farm plan. Form FmHA 431-2, ``Farm and Home Plan,'' or other plans 
or documents acceptable to the agency that will accurately reflect the 
production and financial management of the farming operation for one 
production cycle. The agency will not require the use of consolidated 
financial statements.
    Feasible plan. A feasible plan must be based upon the applicant or 
borrower's actual records that show the farming operation's actual 
income, production and expenses. These records will include income tax 
returns and supporting documents (hereafter called income tax records). 
The records must be for the most recent five-year period or, if the 
borrower has been farming less than five years, for the period which the 
borrower has farmed. For borrowers who have been farming for less than 
five years, other available records will be used in the order listed in 
section Sec. 1924.57(d)(1) of subpart B of part 1924 of this chapter to 
complete a five-year history. Future production yields will be based on 
an average of the most recent past five years' actual production yields. 
Borrowers with yields affected by disasters in at least two of the five 
most recent years may exclude the crop year with the lowest actual 
yield. In addition, in accordance with section Sec. 1924.57(d)(1) of 
subpart B of part 1924 of this chapter, if the applicant's remaining 
disaster years' yields are less than the County average yield, and the 
borrower's yields were affected by the disaster, County average yields 
will be used for those years. If County average yields are not 
available, State average yields will be used. These records will be used 
along with realistic anticipated prices, including any

[[Page 119]]

planned FLP loan payments, to determine that the income from the farming 
operation, and any reliable off-farm income, will provide the income 
necessary for an applicant or borrower to at least be able to:
    (1) Pay all operating expenses and taxes which are due during the 
projected farm business accounting period.
    (2) Meet scheduled payments on all debts.
    (3) Meet up to 110 percent, but not less than 100 percent, of the 
amount indicated for payment of farm operating expenses, debt servicing 
obligations and family living expenses. The Agency will assume that a 
borrower needs this margin to meet all obligations and continue farming. 
However, this will not prohibit a borrower from receiving debt 
restructuring because the farm and home plan shows less than such a 
margin. In no case will a borrower with a cash flow of less than 100 
percent receive restructuring.
    (d) Provide living expenses for the family members of an individual 
borrower or a wage for the farm operator in the case of a cooperative, 
corporation, partnership, or joint operation borrower, which is in 
accordance with the essential family needs. Family members include the 
individual borrower or farm operator in the case of an entity, and the 
immediate members of the family which reside in the same household.
    Financially distressed. A financially distressed borrower is one who 
will not be able to make payments as planned for the current or next 
business accounting period. Borrowers will also be considered as in 
financial distress if it is determined that they will not be able to 
project a feasible plan of operation for the next business accounting 
period.
    Foreclosed. The completed act of selling security either under the 
``power of sale'' in the security instrument or through court 
proceedings.
    Good faith. An eligibility requirement for Primary Loan Servicing 
and Current Market Value Buyout. Borrowers are considered to have acted 
in ``good faith'' if they have demonstrated ``honesty'' and 
``sincerity'' in complying with the requirements of Form 1962-1, 
``Agreement for the Use of Proceeds/Release of Chattel Security,'' and 
any other written agreements made with the agency, as documented in the 
case file. In addition, the agency must substantiate any allegations of 
fraud, waste, or conversion with a written legal opinion from the Office 
of the General Counsel (OGC) when such allegations are used to deny a 
servicing request. A borrower will not be considered to lack ``good 
faith'' if the sole basis for such a determination was the disposition 
of normal income security (Sec. 1962.4 of subpart A of part 1962 of 
this chapter) prior to October 14, 1988, without the Agency's consent 
and the borrower demonstrates that the proceeds were used to pay 
essential family living and farm operating expenses that could have been 
approved according to Sec. 1962.17 of subpart A of part 1962 of this 
chapter.
    Homestead Protection. The right of a former owner to apply to lease, 
with an option to purchase the Homestead Protection property, not to 
exceed 10 acres.
    Homestead Protection property. This refers to the principal 
residence which secured a FLP loan.
    Indian Reservation. Indian reservation means all land located within 
the limits of any Indian reservation under the jurisdiction of the 
United States, notwithstanding the issuance of any patent, and including 
rights-of-way running through the reservation; trust or restricted land 
located within the boundaries of a former reservation of a Federally 
recognized Indian tribe in the State of Oklahoma; or all Indian 
allotments the Indian titles to which have not been extinguished if such 
allotments are subject to the jurisdiction of a Federally recognized 
Indian Tribe.
    Limited Resource Program. A reduction of interest rates for 
operating loans (OL), farm ownership loans (FO) and soil and water loans 
(SW).
    Liquidated. The completed act of voluntarily selling security to end 
the obligation for the debt, or involuntarily as the result of a 
completed civil suit against a borrower to recover collateral against 
the debt. The filing of a claim in a bankruptcy action is not a complete 
liquidation of the borrower's accounts. Collection-only accounts are not 
considered liquidated.

[[Page 120]]

    Loan service program. A Primary Loan Servicing program or a 
Preservation Loan Servicing program (Homestead Protection) for FLP loan 
borrowers.
    New application. An application submitted on or after November 28, 
1990, for loan servicing programs. This does not include an application 
reconsidered after an appeal or revision of an application submitted 
before November 28, 1990.
    Nonessential assets. Nonessential assets are those in which the 
borrower has an ownership interest, that:
    (1) Do not contribute a net income to pay essential family living 
expenses or to maintain a sound farming operation (see 1962.17 of 
subpart A of part 1962 of this chapter); and
    (2) Are not exempt from judgment creditors or in a bankruptcy 
action. Each State Executive Director, with the guidance of the Office 
of the General Counsel, will issue a State Supplement to establish 
guidelines on items that are exempt from judgment creditors and are 
exempt under bankruptcy law in accordance with statute.
    Nonprogram (NP) loan. An NP loan results when a loan is made to an 
ineligible applicant or transferee in connection with a loan assumption 
and sale of inventory properties at ineligible terms. Borrowers 
originally determined eligible by the agency and found to be ineligible 
after the loan was made due to an agency error are not considered to 
have nonprogram loans.
    Preservation loan service program. See Homestead Protection.
    Primary loan service program. Primary loan service program means:
    (1) Loan consolidation, rescheduling, or reamortization;
    (2) Interest rate reduction, including use of the limited resource 
program;
    (3) Loan restructuring, including deferral, or writing down of the 
principal or accumulated interest; or
    (4) Any combination of the above.
    Reamortization. Reamortization is rearranging the installment 
payments of a real estate loan, and may include changing the interest 
rate and terms of a loan made for Subtitle A purposes.
    Rescheduling. Rescheduling is rewriting the rates and/or terms of 
OL, SL, EO loans, EE operating-type loans or EM loans made for Subtitle 
B purposes.
    Writedown. For purposes of this subpart, writedown is reducing a 
borrower's debt to an amount that will result in a feasible plan of 
operation.

[62 FR 10121, Mar. 5, 1997]



Sec. 1951.907  Notice of Loan Service Programs.

    In those instances where the applicable notice is sent certified 
mail, and the certified mail is not accepted by the borrower, the County 
Supervisor will immediately send the documents from the certified mail 
package to the borrower's last known address, first class mail. The 
appropriate response time will commence 3 days following the date of 
first class mailing.
    (a) Notification of borrowers who file bankruptcy. The account will 
be serviced in accordance with instructions from the Regional Office of 
the General Counsel (OGC), and in accordance with Sec. 1962.47(a)(3) of 
subpart A of part 1962 of this chapter.
    (b) Notification of borrowers who have been discharged in bankruptcy 
or who have plans confirmed by bankruptcy courts. If the borrower has 
been discharged in bankruptcy or the borrower is operating under a 
confirmed plan, the account will be serviced in accordance with 
instructions from the Regional OGC and in accordance with Sec. 1962.47 
(a) or (c) of subpart A of part 1962 of this chapter.
    (c) Notification of borrowers 90 days past due on payments. FLP 
borrowers who are at least 90 days past due (60 days delinquent) will be 
sent Exhibit A of this subpart with attachments 1 and 2 by certified 
mail, return receipt requested. If the borrower submits an incomplete 
application, see paragraph (e) of this section for procedures on 
requesting additional information. Delinquent borrowers who have also 
violated their loan agreements with the agency will be handled in 
accordance with Sec. 1951.907(e). In addition to the requirements set 
forth above, servicing officials will provide Attachments 1 and 2 of 
Exhibit A of this subpart to these borrowers, as set forth below:
    (1) At the time an application is made for participation in an FLP 
loan service program, unless such application is the result of the 
notice provided

[[Page 121]]

to the borrower in accordance with this section,
    (2) On written request of any FLP borrower, whether delinquent or 
not, prior to the sending of a packet under paragraph (c) of this 
section, and
    (3) If a borrower has not previously received exhibit A and 
attachments 1 and 2 of this subpart, such exhibit and attachments will 
be provided before the earliest of:
    (i) Initiating any liquidation action,
    (ii) Accepting a voluntary conveyance of security, or the borrower 
requesting permission to sell security,
    (iii) Accelerating payments on the loan,
    (iv) Repossessing the borrower's property,
    (v) Foreclosing on property, or
    (vi) Taking any other collection action.
    (d) Notification of borrowers in non-monetary default; delinquent 
borrowers also in non monetary default, or when a junior or senior 
lienholder is foreclosing. FLP borrowers who are in non-monetary default 
will be sent attachments 1, 3, and 4 of exhibit A of this subpart by 
certified mail, return receipt requested. If a case is in the hands of 
the Department of Justice or in litigation, no loan servicing action 
will be taken without Department of Justice or OGC concurrence (see 
1962.49 of this chapter). Any servicing request will be processed as 
indicated in Sec. 1951.909. The account will not be liquidated until 
the borrower has the opportunity to appeal any adverse decision. After 
any final appeal decision that does not result in a resolution of the 
loan defaults, the account will be accelerated.
    (e) Request for primary and preservation loan service programs. (1) 
To request consideration for Primary and Preservation Loan Service 
programs, borrowers who are sent exhibit A, with attachments 1 and 2 or 
attachments 1, 3, and 4 must complete and return attachment 2 or 
attachment 4, as appropriate, to the local county office within 60 days 
after receiving those documents, with the forms required by this 
paragraph for a completed application.
    (2) If borrowers are sent attachments 3 and 4 and do not request 
servicing within 60 days, the agency will proceed with liquidation in 
accordance with Sec. 1955.15 of this chapter.
    (3) If borrowers are sent exhibit A and attachments 1 and 2 of this 
subpart and do not submit a completed application within the 60-day time 
period, the servicing official will send attachments 9 and 10, or 9-A 
and 10-A of exhibit A of this subpart, as applicable. These attachments 
will not be sent to borrowers who are being serviced in accordance with 
Sec. 1951.908. For borrowers receiving attachments 9 and 10 or 9-A and 
10-A, the agency will proceed with liquidation in accordance with Sec. 
1955.15 of this chapter.
    (4) If a borrower has moved and left a forwarding address, the 
certified mail will be forwarded. If no forwarding address is given, the 
mail will be returned to the county office. The servicing official will 
immediately send the documents from the certified mail package to the 
borrower's last known address, first class mail. The borrower's response 
date for a completed application will begin on the date of receipt of 
the certified mail or 3 days following the date of first class mailing, 
whichever is earlier.
    (5) An application for loan service programs must include the 
following forms (available in any agency office), and data, unless the 
information is already in the borrower's case file and still current, as 
determined by the approval official:
    (i) Attachment 2 or 4 of exhibit A to this subpart, response form to 
apply for loan servicing.
    (ii) Form 410-1, ``Application for FmHA Services,'' including a 
current (within 90 days) financial statement of all individuals and 
entities personally liable for the FLP debt.
    (iii) Form 431-2, ``Farm and Home Plan,'' or any other form or 
submission acceptable to the agency that sets forth a plan of operation 
and the necessary information. Commodity prices supplied by the agency 
will be used to complete the forms.
    (iv) Form 440-32, ``Request for Statement of Debts and Collateral.''
    (v) Form RD 1910-5, ``Request for Verification of Employment.''
    (vi) Form AD-1026, ``Highly Erodible Land Conservation (HELC) and 
Wetland Conservation (WC) Certification,''

[[Page 122]]

if the one on file with the agency does not reflect all the land owned 
and leased by the borrower.
    (vii) Form SCS CPA-26, ``Highly Erodible Land and Wetland 
Determination,'' if not previously on file with the agency for the farm 
operation. This form is included as part of the application after being 
completed by NRCS. (This form is available at NRCS local offices.)
    (viii) If the applicant wants to be considered for a conservation 
contract, a map or copy of an aerial photo of the farm, on which the 
applicant must show that portion of the farm and approximate acres to be 
considered in a request for debt restructuring provided for in the 
conservation contract program.
    (ix) The most recent five years' income tax returns and supporting 
documents, unless the borrower has been farming for less than five 
years. In such case, income tax returns and supporting documents for the 
tax years that the borrower farmed.
    (x) If the borrower is applying for debt settlement, Form RD1956-1, 
``Application for Settlement of Indebtedness.''
    (6) The borrower will be provided with copies of these forms when 
Exhibit A is sent, and may request copies of regulations and the forms 
manual inserts (FMI) in writing within 30 days of receipt of the loan 
servicing notice. If these latter items are not provided within 10 days 
of such a request, the borrower's time for submission of a complete 
application will be increased by the period of delay in excess of 10 
days caused by the Agency.
    (7) Not more than one 60-day period will be provided to a borrower 
to respond to the notice of loan service programs except in accordance 
with Sec. 1951.908. Subsequent notices as provided for in this section 
will not be issued until the first notice is resolved.

[57 FR 18626, Apr. 30, 1992, as amended at 62 FR 10123, Mar. 5, 1997]



Sec. 1951.908  Servicing financially distressed current borrowers.

    A borrower who is financially distressed, but is not yet delinquent 
on FLP payments, may request servicing at any time.
    (a) Notification. If a current plan of operation demonstrates that 
the borrower is or will be financially distressed, as defined in Sec. 
1951.906, or if the borrower otherwise requests servicing, the servicing 
official will provide attachments 1 and 2 of exhibit A of this subpart.
    (b) Eligibility. To be considered for servicing in accordance with 
this section, the borrower must submit to the county office within 60 
days Attachment 2 of exhibit A of this subpart and a complete 
application in accordance with the requirements of Sec. 1951.907(e).
    (1) The eligibility requirements of Sec. 1951.909(c) (1) and (2) 
apply to servicing under this section.
    (2) Eligible financially distressed borrowers who are current on 
their FLP loan payments may be considered for the Primary Loan Service 
programs described in Sec. Sec. 1951.909(e) (1), (2) and (3).
    (3) Financially distressed borrowers who are not delinquent are not 
eligible for writedown of debt or buyout as described in 1951.909.
    (c) Processing the application. The servicing official must process 
a completed application and notify the borrower of the decision.
    (1) Current borrowers will be considered only for the Primary Loan 
Servicing programs described in Sec. Sec. 1951.909 (e) (1), (2), and 
(3). The servicing official must use the Debt and Loan Restructuring 
System (DALR$) program, in accordance with exhibit J-1 of this subpart, 
to determine if a feasible plan can be developed as defined in Sec. 
1951.906.
    (2) If a feasible plan can be developed, the borrower will be sent 
exhibit B of this subpart with attachment 1 and the printout of the 
DALR$ calculations as notification of the favorable decision. The 
borrower must accept the offer within 45 days of its receipt by 
returning attachment 1 to exhibit B of this subpart or the offer will 
expire. If the borrower accepts, loan restructuring will be processed in 
accordance with Sec. Sec. 1951.909 (e) (1), (2), or (3), as applicable.
    (3) If a feasible plan cannot be developed, the borrower will be 
informed of the reasons for the adverse decision. The DALR$ printout 
will be attached.
    (4) Current borrowers who have received notices under this section 
and

[[Page 123]]

who do not apply for primary loan servicing, or who refuse an offer to 
restructure their debt, and later become 90 days past due on the FLP 
loan payment, will be sent notices as described in Sec. 1951.907.
    (5) Borrowers whose accounts are not delinquent may receive 
rescheduling, reamortization, consolidation, or deferral under this 
subpart only after they have paid at least a portion of the interest due 
on their FLP debt. The portion due will be based on the applicant's 
ability to pay, as determined by thoroughly analyzing the farm 
operation, including any off-farm income. The payment must be made on or 
before the date that restructuring is closed. Borrowers in non-monetary 
default, but not delinquent on their FLP debt, must cure the non-
monetary default before they may be considered for servicing under this 
paragraph.

[62 FR 10124, Mar. 5, 1997]



Sec. 1951.909  Processing primary loan service programs requests.

    (a) Servicing official responsibilities. (1) After receipt of 
attachment 2 or 4 and a completed application in accordance with Sec. 
1951.907(e), the servicing official will consider all primary service 
programs options in this subpart. That official must use the Debt and 
Loan Restructuring System (DALR$) computer program, in accordance with 
exhibit J-1 of this subpart for borrowers who submit a new application, 
to attempt to find the combination of loan service programs that will 
result in a feasible plan. Borrowers who request loan servicing and who 
have disposed of all the FLP loan security, including Collection-Only 
borrowers, will be processed in accordance with part 1956, subpart B, of 
this chapter. If the application includes a request for the Conservation 
Contract program, as indicated by the submission of the information 
required in Sec. 1951.907(e)(5)(viii), the servicing official will 
determine whether the borrower is eligible, based on criteria as set 
forth in exhibit H of this subpart. If the borrower is eligible, the 
servicing official will make an estimate of the information needed to 
permit the DALR$ program to make the calculations of feasibility of the 
Conservation Contract. The assumptions used to establish the estimates 
will be based on the servicing official's knowledge of the farmland 
values, the borrower's repayment ability, and the proposed contract 
acreage. When the DALR$ calculations for restructuring are completed, 
the borrower will be notified as set forth in paragraph (h) of this 
section.
    (2) When jointly liable individual borrowers have been divorced and 
one has withdrawn from the operation, the State Executive Director will 
consider, upon the recommendation of the servicing official, the release 
of liability for the individual who has withdrawn if the following 
conditions are met.
    (i) A divorce decree or property settlement document held the 
withdrawing party not responsible for the loan payments;
    (ii) The withdrawing party's interest in the security is conveyed to 
the borrower with whom the loan will be continued;
    (iii) The person withdrawing does not have any repayment ability for 
the loan, and does not own any nonessential assets, as defined in Sec. 
1951.906;
    (iv) The individual withdrawing has never received debt forgiveness 
on another direct loan; and.
    (v) The withdrawing party provides a copy of the divorce decree and 
property settlement, evidence of conveyance, a current financial 
statement, verification of income and debts, and Form 431-2 or Form RD-
1944-3 as applicable.
    (3) If a completed application includes a request for a waiver from 
the training required by paragraph (c)(5) of this section, the Agency 
will, prior to any offer of Primary Loan Servicing, evaluate the 
borrower's knowledge and ability in production and financial management 
and determine the need for additional training as set out in Sec. 
1924.74 of this chapter.
    (b) Adverse determination. (1) If the approval official determines 
that the borrower is not eligible for any of the Primary Loan Service 
programs or restructuring is not feasible because of debt held by other 
lenders, the borrower will be advised of mediation or meeting of 
creditors as provided in paragraph (h)(3) of this section. If mediation 
or the meeting of creditors does

[[Page 124]]

not result in a feasible plan, the borrower will be sent attachments 5 
and 6, or 5-A and 6-A, of exhibit A of this subpart, as applicable.
    (2) Borrowers who do not buy out their debt at its current market 
value, or who indicate in writing that they do not wish to buy out, will 
automatically be considered for debt settlement if they submitted an 
``Application For Debt Settlement.'' Any appeal of a primary loan 
servicing denial will be completed before the servicing official begins 
any further processing of a Debt Settlement or Homestead Protection 
request. If the adverse decision on restructuring is upheld on appeal, 
the borrower will be considered for these options. The servicing 
official will complete the processing of the borrower's application for 
Debt Settlement in accordance with part 1956 of this chapter. Homestead 
Protection will be processed in accordance with Sec. 1951.911. No 
acceleration or foreclosure will occur until the appeal process has been 
completed for servicing or debt settlement requests timely submitted 
under this subpart.
    (3) Applicants may request a negotiated appraisal in accordance with 
paragraph (i) of this section if they object to the agency's appraisal. 
Negotiation of the appraisal, if requested by the borrower, will take 
place before mediation or a voluntary meeting of creditors.
    (c) Eligibility. Applicants will be eligible for Primary Loan 
Service programs if the servicing official has determined that they meet 
all of the following requirements:
    (1) The delinquency or financial distress does exist and is due to 
circumstances beyond the control of the borrower, due to a reduction in 
income which reduces cash flow to a point where outflows exceed inflows, 
only as follows:
    (i) The reduction in essential income from a non-farm job due to 
unemployment or underemployment of the borrower-operator or spouse is 
caused by circumstances beyond their control;
    (ii) Illness, injury, or death of an individual borrower, 
stockholder, member or partner who operates the farm;
    (iii) Natural disasters, an outbreak of uncontrollable disease, or 
uncontrollable insect damage which caused severe loss of agricultural 
production that reduced repayment ability so that scheduled payments 
cannot be made; or
    (iv) Economic factors that are widespread and not limited to an 
individual case, such as high interest rates or low market prices for 
agricultural commodities as compared to production costs, that reduce 
repayment ability so that the scheduled payments cannot be made.
    (2) The borrower has acted in good faith.
    (3) Borrowers who do not meet the eligibility requirements of this 
section will be notified of the adverse decision by sending attachments 
5 and 6, or 5-A and 6-A, of exhibit A of this subpart, as appropriate.
    (4) Borrowers with sufficient nonessential assets to bring the FLP 
loan account current are not eligible for assistance under this subpart 
and will be processed in accordance with Sec. 1951.910 of this subpart.
    (5) The borrower must agree to meet the training requirements of 
Sec. 1924.74 of this chapter unless a waiver is granted in accordance 
with that section. The training requirement applies to all primary loan 
servicing programs.
    (d) Feasibility determinations. The servicing official must 
determine:
    (1) That the borrower will be able to develop a feasible plan.
    (2) If restructured, the loan will result in a net recovery to the 
Government that will be equal to or greater than the net recovery value 
from involuntary liquidation or foreclosure as calculated in accordance 
with paragraph (f) of this section. A comparison with net recovery to 
the Government, however, will not be made when establishing conservation 
contracts under exhibit H of this subpart.
    (e) Primary loan service programs. Any FLP borrower may request 
Primary Loan Servicing Programs described in this subpart at any time 
prior to becoming 90 days past due. However, borrowers must show that 
they are not able to pay their debt as scheduled before the agency will 
approve Primary Loan Servicing Programs. The agency will consider the 
borrower's other assets in accordance with Sec. 1951.910 of this 
subpart. Rescheduling, reamortization,

[[Page 125]]

consolidation, or deferral may be utilized for any eligible borrower. 
Existing deferrals will be cancelled at the same time additional primary 
loan servicing is received. The loan will be entered into DALR$ as if 
the deferral were already cancelled. If DALR$ shows that a borrower can 
develop a feasible plan without a writedown at a lower cash flow margin 
than with a writedown, that borrower will be provided the opportunity to 
choose between restructuring with or without a writedown.
    (1) Consolidation and rescheduling of OL and EO loans, EE operating-
type loans and EM loans made for subtitle B purposes including EM loss 
loans. This subsection explains how to consolidate and/or reschedule 
existing loans, providing the borrower agrees to such actions. When the 
servicing official determines that consolidation and/or rescheduling 
will assist in the orderly collection of the loan, the servicing 
official should take such action provided all of the following 
conditions exist:
    (i) The borrower meets the eligibility requirements in paragraph (c) 
of this section;
    (ii) Such action is not taken to circumvent the FLP graduation 
requirements;
    (iii) The borrower's account is not being serviced by the OGC or the 
U.S. Attorney and there are no plans to have the account serviced by 
either of these offices in the near future;
    (iv) Loans may be rescheduled or reamortized, as appropriate, to 
bring the account current or to keep the account from becoming 
delinquent. A sufficient number of notes including all delinquent notes 
will be rescheduled to permit the development of a feasible plan of 
operation;
    (v) The borrower will comply with the highly Erodible Land and 
Wetland Conservation provisions of exhibit M of subpart G of part 1940 
of this chapter, if applicable;
    (vi) Loans secured by real estate will not be consolidated and/or 
rescheduled, until the servicing official reviews the Government's real 
estate lien priority and value of security and decides that such an 
action will be in the best interest of the Government and the borrower. 
If there are any liens which were not in existence at the time the note 
was signed, the servicing official will ask the OGC for an opinion as to 
what lien position the Government will have if a new note is taken 
unless a State supplement authorizing this action has been issued on 
this subject;
    (vii) Only loans of the same type will be consolidated;
    (viii) EM actual loss loans will not be consolidated;
    (ix) Loans serviced under subpart L of this part will not be 
consolidated with another loan;
    (x) Loans that have been deferred under this section will not be 
consolidated and/or rescheduled during the deferral period;
    (xi) Terms of consolidated and/or rescheduled loans are as follows:
    (A) Consolidated and/or rescheduled loans will be repaid according 
to the borrower's repayment ability, but will not exceed 15 years from 
the date of the consolidation and/or rescheduling action, except:
    (B) Repayment of loans solely for recreation and/or nonfarm 
enterprise purposes may not exceed seven years from the date of the 
consolidation and/or rescheduling action (the date the new note is 
signed).
    (C) Repayment of EE loans may not exceed 15 years from the date of 
rescheduling.
    (xii) Interest rates of consolidated and/or rescheduled loans will 
be as follows:
    (A) The interest rate for loans made at the regular interest rate 
will be the lesser of:
    (1) The lowest interest rate for that type of loan on the date a 
complete servicing application was received;
    (2) The lowest interest rate for that type of loan on the date of 
restructure; or
    (3) The lowest original loan note rate on any of the original notes 
being consolidated and/or rescheduled.
    (B) The interest rate for loans made at the limited resource 
interest rate will be the lesser of:
    (1) The limited resource interest rate for that type of loan on the 
date a complete servicing application was received;

[[Page 126]]

    (2) The limited resource interest rate for that type of loan on the 
date of restructure; or
    (3) The lowest original loan note rate on any of the original notes 
being consolidated and/or rescheduled.
    (C) OL loans that were not assigned a limited resource rate when the 
loan was received, may be assigned a limited resource rate if:
    (1) The borrower meets the requirements for the limited resource 
interest rate; and
    (2) A feasible plan cannot be developed at regular interest rates 
and maximum terms permitted in this section.
    (xiii) The original (old) note(s) will be marked ``Rescheduled'' and 
stapled to the new rescheduled promissory note and will be filed in the 
operation file. Copy(ies) for the borrower's(s') case file should be 
marked and stapled the same and filed in position 2 of the case file. If 
a transfer is involved, assumption agreement(s) will be marked and 
stapled with the note(s) and copies filed as indicated above. If part of 
a note is written down, the written down note will be marked 
``Rescheduled with Debt Write Down,'' and will be filed in the operation 
file.
    (xiv) For applications received before November 28, 1990, the amount 
of outstanding accrued interest more than 90 days overdue and any 
outstanding protective advances, as defined in Sec. 1965.11(b) of 
subpart A of part 1965 of this chapter, made on the loan will be added 
to the principal at the time of consolidation and/or rescheduling (the 
date the new note is signed by the borrower). Protective advances are 
not authorized for the payment of prior or junior liens except real 
estate tax liens. See section II E of exhibit J of this subpart for an 
explanation of how to schedule payment of interest not more than 90 days 
overdue; and
    (xv) For new applications, the amount of outstanding accrued 
interest and any outstanding protective advances, as defined in Sec. 
1965.11(b) subpart A of part 1965 of this chapter, made on the loan will 
be added to the principal at the time of consolidation and/or 
rescheduling (the date the new note is signed by the borrower) in 
accordance with the provisions of exhibit J-1 of this subpart. 
Protective advances are not authorized for the payment of prior or 
junior liens except real estate tax liens.
    (2) Reamortization of FO, SW, RL, RHF, EE, or EM loans made for real 
estate purposes. When the servicing official determines that a 
reamortization action will assist in the orderly collection of the loan, 
the servicing official should take such action, provided:
    (i) The borrower meets the eligibility requirements of Sec. 
1951.909(c) of this subpart;
    (ii) Such action is not taken to circumvent the FLP graduation 
requirements;
    (iii) The borrower's account is not being serviced by the OGC or the 
U.S. Attorney, and there are no plans to have the account serviced by 
either of these offices in the foreseeable future;
    (iv) A feasible plan for the borrower cannot be developed with the 
existing repayment schedule. A sufficient number of notes, including all 
delinquent notes, will be reamortized to permit the development of a 
feasible plan of operation;
    (v) The borrower will comply with the Highly Erodible Land and 
Wetland Conservation requirements of exhibit M of subpart G of part 1940 
of this chapter, if applicable;
    (vi) Loans that have been deferred in this supbart will not be 
reamortized during the deferral period unless the deferral is cancelled;
    (vii) Reamortized installments usually will be scheduled for 
repayment within the remaining time period of the note or assumption 
agreement being reamortized. If repayment is extended, the new repayment 
period plus the period the loan has been in effect may not exceed the 
maximum number of years for that type of loan as set forth below, or the 
useful life of the security, whichever is less:
    (A) FO, SW, RL, EE, and EM loans may not exceed 40 years from the 
date of the original note or assumption agreement.
    (B) EE loans for real estate purposes, which are secured by chattels 
only, may be reamortized over a period not to exceed 20 years from the 
date of the original note or assumption agreement.

[[Page 127]]

    (C) RHF loans may not exceed 33 years from the date of the original 
note or assumption agreement.
    (D) SA payment agreements may not exceed 25 years from the date of 
the original amortized agreement.
    (viii) Interest rates of reamortized loans will be as follows:
    (A) The interest rate for loans made at the regular interest rate 
will be the lesser of:
    (1) The interest rate for that type of loan on the date a complete 
servicing application was received;
    (2) The interest rate for that type of loan on the date of 
restructure; or
    (3) The original loan note rate of the note being reamortized.
    (B) The interest rate of FO or SW loans made at the limited resource 
interest rate will be the lesser of:
    (1) The limited resource interest rate for that type of loan on the 
date a complete servicing application was received;
    (2) The limited resource interest rate for that type of loan on the 
date of restructure; or
    (3) The original loan note rate on the note being reamortized.
    (C) FO or SW loans that were not assigned a limited resource rate 
when the loan was received, may be assigned a limited resource rate if:
    (1) The borrower meets the requirements for the limited resource 
interest rate;
    (2) A feasible plan cannot be developed at regular interest rates 
and maximum terms permitted in this section; and
    (3) For SW loans, the loan funds were used for soil and water 
conservation and protection purposes as set forth in Sec. 1943.66 
(a)(1) through (a)(5) of this chapter.
    (D) SA payment agreement will be reamortized at the current SA 
amortization rate in effect on the date of approval or the rate on the 
original payment agreement, whichever is less.
    (ix) If there are no deferred installments, the first installment 
payment under the reamortization will be at least equal to the interest 
amount which will accrue on the new principal between the date the 
Promissory Note is processed and the next installment due date. The 
amount of outstanding accrued interest and any outstanding protective 
advances made on the loan will be added to the principal at the time of 
reamortization (the date the new note is signed by the borrower). 
Protective advances are not authorized for the payment of prior or 
junior liens except real estate tax liens.
    (x) The original (old) note(s) will be marked ``Reamortized'' and 
will be stapled to the new promissory note and filed in the operational 
file. Copies for the borrower(s) case file should be marked and stapled 
the same and filed in position 2 of the case file. If a transfer is 
involved, assumption agreement(s) will be marked and stapled with the 
note(s) and copies filed as indicated above. If a part of a note is 
written down, the written down note will be marked ``Reamortized with 
Debt Writedown'' and will be filed as indicated above in this paragraph.
    (3) Deferral of existing OL, FO, SW, RL, EM, EO, RHF, and EE loans--
(i) Loan deferrals. Deferrals will be considered only after it has been 
determined that consolidation, rescheduling, and reamortization, in 
accordance with this subpart, will not provide a feasible plan.
    (ii) Conditions. In order to be considered for a deferral, the 
borrower must meet both of the following conditions:
    (A) The need for the deferral must be temporary. To be temporary 
means that the borrowers will be able to show to the satisfaction of the 
servicing official that they will be able to resume payment on the debt 
by the end of the deferral period, or the new payments, as established 
by using consolidation, rescheduling, or reamortization can be resumed 
at the end of the deferral period; and
    (B) Continuation of loan payments as presently scheduled without 
change, will unduly impair the borrower's standard of living. An unduly 
impaired standard of living is a condition whereby the borrower, due to 
circumstances beyond the borrower's control, is unable to pay essential 
family living expenses (partnerships, joint operators, corporations, and 
cooperatives do not have family living expenses), pay normal farm 
operating expenses, including reasonable and customary hired labor and/
or salary paid to the operator(s) of

[[Page 128]]

a partnership, a joint operation, a corporation, or a cooperative, 
maintain essential chattels and real estate, and meet the scheduled 
payments of all debts.
    (iii) Approval offical determinations. The approval official must:
    (A) Determine that the borrower meets the eligibility requirements 
of Sec. 1951.909(c) of this subpart;
    (B) Determine that a deferral of payments is necessary and 
appropriately document the conditions causing the need for deferral;
    (C) If a borrower owns 50 acres or more of marginal land as defined 
in exhibit G of this subpart and a feasible plan cannot be developed 
after consideration of a deferral, the servicing official will inform 
the borrower about the Softwood Timber (ST) loan program authorized by 
exhibit G of this subpart by sending Attachment 1 of exhibit G of this 
subpart by certified mail, return receipt requested, within 5 days after 
the adverse deferral determination. If the borrower requests the 
servicing official to determine that an ST loan may allow the borrower 
to continue to farm, within 15 days of the borrower's receipt of 
attachment 1, the servicing official will determine if the borrower is 
eligible, based on criteria as set forth in exhibit G of this subpart. 
If the borrower is eligible the servicing official will help the 
borrower to develop a plan to determine if a feasible operation can be 
developed utilizing this program. The discussion will be documented in 
the borrower's case file.
    (iv) Loan deferral considerations. The servicing official will 
assist the borrower in completing a typical-year plan. If there is no 
typical year, the servicing official will assist the borrower with 
completing a plan of operation for each year of the deferral. The plans 
must be considered in DALR$.
    (A) A sufficient number of loans must be considered for deferral to 
permit the borrower to have a feasible plan.
    (B) A deferral plan may include a reorganization of the farming 
operation, including the use of new enterprises, to overcome existing 
financial, economic or other limitations of the operation. If the 
proposed restructuring requires capital expenditures, a subordination or 
additional loan will be considered. Deferral of additional loan 
installments beyond those needed to allow the borrower to develop a 
feasible plan will not be used to create additional cash reserve for 
capital purchases. Such purchases are not considered operating expenses.
    (C) A typical year during the deferral period is a year which most 
closely represents the borrower's average operation for the entire 
deferral period. There may be no typical year for farming or ranching 
operations undergoing a major reorganization. If there is no typical 
year, then it will be necessary to develop a plan of operation for each 
year of the deferral. The plans must be considered in DALR$ to determine 
if each plan is feasible.
    (D) The deferral of loan installments is not intended to create a 
high net cash reserve where revenue substantially exceeds expenses. If 
the deferral of a complete note would cause a high net cash reserve 
during the entire deferral period, a full deferral should not be 
granted. In such a case, a partial deferral should be considered to 
obtain a feasible plan of operation. The same approach should be used 
for situations in which there is no typical year and debt payments must 
vary throughout the deferral period.
    (E) The borrower must have feasible plans of operation to support 
any deferral request. Plans of operation in conjunction with loan 
deferrals must be realistic and supported by the borrower's actual 
records.
    (v) Additional and subsequent deferrals. If, during the period of 
the initial deferral, the borrower is unable to make the scheduled 
payments, the borrower may again request primary loan service actions. 
When considering primary servicing actions, existing deferred notes must 
be entered into DALR$ as if they had not been deferred. If it is 
necessary to defer additional loans to develop a feasible plan, such 
action will be taken if the deferral will result in a greater net 
recovery to the Government than debt writedown. Borrowers may obtain 
subsequent deferrals after the deferral period provided the conditions 
of this subsection are met.
    (vi) Term and interest rate. A deferral period will not exceed five 
(5) annual installments. Deferral interest rates

[[Page 129]]

will be determined as specified in paragraphs (e)(1)(xii) and 
(e)(2)(viii) of this section.
    (A) All loans being deferred will be consolidated, rescheduled or 
reamortized, as applicable. The promissory note rescheduled, reamortized 
or consolidated for the deferral will show ``zero'' as the installments 
due during the period of the deferral if the whole note is deferred and 
will not be changed during the deferral period unless the conditions of 
paragraph (e)(3)(v) of this section are met. The servicing official will 
determine the amount of interest that will accrue during the deferred 
period. This interest will be repaid in equal amortized installments 
during the term of the loan remaining after the deferral period. The 
calculated installments will be added to the remaining installments for 
the remaining principal balance and inserted on the promissory note as a 
scheduled installment for the remaining period of the loan. The Finance 
Office will apply the payments made on the note in accordance with 
subpart A of this part. For applications received before November 28, 
1990, the amount of outstanding accrued interest more than 90 days 
overdue and any outstanding protective advances, as described in Sec. 
1965.11(b) of subpart A of part 1965 of this chapter, made on the loan 
will be added to the principal at the time of the deferral (the date the 
new note is signed by the borrower). Protective advances are not 
authorized for the payment of prior or junior liens except real estate 
taxes. See section II E of exhibit J of this subpart for an explanation 
of how to schedule payment of interest not over 90 days overdue. For new 
applications, the amount of outstanding accrued interest and any 
outstanding protective advances made on the loan will be added to the 
principal at the time of deferral (the date the new note is signed by 
the borrower).
    (B) The field office will process the deferral via the Automated 
Discrepancy Processing System (ADPS).
    (C) If a deferral is approved, the borrower's name and the date of 
approval will be recorded and maintained in accordance with subpart A of 
part 1905 of this chapter. The Finance Office will provide the county 
office with a quarterly status report for each borrower who has received 
a deferral.
    (D) Six months prior to the end of the deferral period the servicing 
official will notify the borrower in writing of the expiration of the 
deferral and the amount and date of the borrower's first upcoming 
installment of the debt.
    (E) A deferral will be cancelled if the loan is later restructured 
in accordance with this subpart. The cancellation will be processed via 
ADPS.
    (vii) Increase in repayment ability. At the time the servicing 
official makes the analysis required by Sec. 1924.60 of subpart B of 
part 1924 of this chapter, the servicing official will determine whether 
the borrower has had an increase in income and repayment ability. If an 
income increase is substantial enough to enable the borrower to 
graduate, the case will be handled in accordance with subpart F of this 
part. If an increase would enable the borrower to make some payments 
during the deferral period, the servicing official will, in writing, ask 
the borrower to sign a Form 440-9, ``Supplementary Payment Agreement,'' 
within 30 days of the date of the written request. The borrower will be 
provided appeal rights. When doing the analysis to determine whether 
there is a substantial increase in income and repayment ability, the 
servicing official will determine whether this increase exists by 
comparing it to the original plan developed in the deferral application 
and also to plans developed for the current operating year to determine 
that the excess income is not needed for essential living and operating 
expenses or scheduled debt payment. Refusal to sign Form 440-9 will be 
considered a non-monetary default and will be handled as set forth in 
Sec. 1951.907(e) of this subpart. If the borrower signs Form 440-9 and 
later does not honor the terms and conditions of the repayment 
agreement, the borrower's account will be handled as set forth in Sec. 
1951.907 of this subpart.
    (4) Writedown. The following conditions shall be met in order for a 
borrower to receive writedown of FLP debts:
    (i) No other Primary Loan Service programs, including deferral, nor 
any combination thereof, will produce a

[[Page 130]]

feasible plan that will permit the borrower to continue the operation. 
However, if DALR$ shows that a borrower can develop a feasible plan 
without a writedown at a lower cash flow margin than with a writedown, 
then the borrower will be provided the opportunity to choose between 
restructuring with or without a writedown;
    (ii) The borrower must never have received debt forgiveness on 
another direct loan at any time;
    (iii) The amount written off may not exceed $300,000.
    (iv) A feasible plan must be developed that will result in a present 
value of loans to be repaid to the Government which is equal to or more 
than a net recovery from an involuntary liquidation or foreclosure;
    (v) The borrower must comply with the Highly Erodible Land and 
Wetland Conservation requirements of exibibit M of subpart G of part 
1940 of this chapter, if applicable;
    (vi) The borrower must agree to a Shared Appreciation Agreement if 
the loan is secured by real estate;
    (vii) Loans written down with the Primary Loan Servicing programs 
will be rescheduled, reamortized, or deferred in accordance with 
paragraph (e) of this section; and
    (viii) Borrower must agree to a lien on certain assets as provided 
in 1951.910 of this subpart, including nonessential assets, where the 
net recovery value of these assets was not paid to the Agency. (The 
Agency's lien will be taken only at the time of closing the restructured 
loans); and
    (ix) Debt reduction received through conservation easements or 
contracts will not be counted toward the limitations in paragraphs 
(e)(4) (ii) and (iii) of this section.
    (f) Determining value of net recovery from involuntary liquidation. 
After receipt of a complete application for Primary and Preservation 
Loan Service programs, the servicing official will make the calculations 
required in this section and notify the borrower of the result. For New 
Applications, nonessential assets will be considered in accordance with 
Sec. 1951.910(a) of this subpart.
    (1) The servicing official will use the computer program, DALR$, to 
determine the net recovery to the Government equivalent to involuntary 
liquidation of the collateral securing the FLP debt in accordance with 
Exhibit J or J-1 of this subpart, ``Debt and Loan Restructuring 
System,'' as applicable, and will follow the guidance provided by State 
supplements and Exhibit I of this subpart, ``Guidelines for Determining 
Adjustments for Net Recovery Value of Collateral.'' The servicing 
official will determine the current market value of the collateral in 
the borrower's possession including tangible property in existence and 
of record in accordance with Sec. 761.7 of this title for real estate 
property, and on Form 440-21, ``Appraisal of Chattel Property.'' The 
servicing official also will determine the current market value of any 
bank accounts, stocks and bonds, certificates of deposit and the like 
pledged to and/or in the possession of the Agency. Collateral may 
include real estate, chattels, tangible property and property such as 
bank accounts, stocks and bonds, certificates of deposit, and the like. 
Chattels include machinery, equipment, livestock, growing crops, and 
crops in storage. Tangible property may include accounts receivable 
(including Government payments), inventories, supplies, feed, etc. From 
the current market value of the collateral in the borrower's possession, 
or pledged to and/or in the possession of the Agency (in the case of 
bank accounts, stock and bonds, certificates of deposit, and the like), 
the following adjustments will be made:
    (i) Subtract the amount which would be required to pay prior liens 
on the collateral;
    (ii) Subtract taxes and assessments, depreciation, management costs, 
and interest cost to the Government based on the 90-day Treasury Bills 
(published in a National Office issuance). Taxes and assessments, 
depreciation, management costs, as well as interest costs will be 
calculated on the current market value of the property for the average 
inventory holding period. The holding period for suitable inventory farm 
property will be established by each State as of July 1 each year using 
Report Code 597. The months that the suitable property is under lease 
will

[[Page 131]]

not be included in determining the average holding period for purposes 
of this subpart;
    (iii) Adjust the current market value for estimated increases or 
decreases in value of the property for the holding period specified in 
paragraph (f)(1)(ii) of this section;
    (iv) Subtract resale expenses, such as repairs, commissions, and 
advertising;
    (v) Other administrative and attorney's expenses;
    (vi) Add income which will be received after acquisition; and
    (vii) For a borrower who submits a ``new application'' as defined in 
Sec. 1951.906 of this subpart, add the value of any collateral that is 
not in the borrower's possession and that has not been approved on the 
Form 1962-1 or released in writing by the Agency, minus the value of any 
prior lienholder's interest. Collateral not in possession of the 
borrower is defined as any property specified in any agency security 
instruments for such borrower's FLP debt that the borrower has disposed 
of and that the Agency has not approved or released in writing. The 
value of normal income security not in possession of the borrower will 
not be added to the NRV if it could be post-approved for release in 
accordance with Sec. 1962.17 of subpart A of part 1962. The value of 
any collateral that is not in the possession of the borrower will be 
determined by the servicing official based upon the best information 
available about the value of the collateral on or about the time of its 
disposition. In determining the value of such property, the Agency will 
use such sources as the publications Hotline (Farm Equipment Guide) and 
Official Guide (Tractor and Farm Equipment), sale prices at local public 
auctions, public livestock sale barn prices, comparable real estate 
sales, etc. Agency appraisal forms will be used to record the value of 
the missing collateral and the basis for the valuation.
    (2) The State Executive Director will determine costs of involuntary 
liquidation of collateral for farm loans by analyzing the costs of 
involuntary liquidation within the geographic areas of their 
jurisdiction. The State Executive Director also will issue a State 
supplement of estimated costs and average holding time to be used as 
guidelines by servicing officials in making calculations of net recovery 
value under this subsection. Such cost analyses will be carried out in 
July of each year. The State Executive Director will consult with State 
Executive Directors of adjoining States, other lenders, real estate 
agents, auctioneers, and others in the community to gather and analyze 
the information specified in this subpart.
    (g) Determining net recovery value resulting from primary servicing. 
The value of the restructured debt will be based on the present value of 
payments the borrower would make to the Agency using any combination of 
primary loan service programs that will provide a feasible plan. Present 
value is a calculation concept which assigns a lower current value to 
dollars received in later years than to dollars received at the present 
time. Servicing officials will use a discount rate based on 90-day 
Treasury Bills as of the date the borrower files the application for 
restructuring. The National Office will publish the 90-day Treasury Bill 
rate in a National Office issuance.
    (h) Notification requirements. In those instances where the 
applicable notice is sent certified mail, and the certified mail is not 
accepted by the borrower, the servicing official will immediately send 
the documents from the certified mail package to the borrower's last 
known address, first class mail. The appropriate response time will 
commence 3 days following the date of mailing.
    (1) Offer. If the calculations show that the value of the 
restructured debt is greater than or equal to the NRV as determined in 
paragraph (f) of this section, the servicing official will forward to 
the State Executive Director the borrower's Farm and Home Plan and the 
original printout of the DALR$ calculations. The servicing official will 
certify that the borrower meets all requirements for debt restructuring 
with the writedown amount specified on the printout. The State Executive 
Director's authorization to the servicing official to proceed with the 
writedown will be evidenced by the State Executive Director's signature 
affixed to the original copy of the DALR$ printout

[[Page 132]]

returned to the servicing official. Within 60 days after receiving a 
complete application, the servicing official will notify the borrower of 
the results of the calculations by sending Exhibit F of this subpart, 
certified mail, return receipt requested, and offer to restructure the 
debt. A printout of the DALR$ calculations will be attached to Exhibit F 
of this subpart.
    (i) Exhibit F of this subpart will inform the borrower(s) of the 
Agency's offer to restructure the debt, the right to request a copy of 
the agency's appraisal, and other options which may include payment of 
nonessential assets and negotiation of the appraisal. If the borrower 
accepts the offer within 45 days following any appeal, the servicing 
official will restructure the debt within 45 days after receipt of the 
written notice of the borrower's acceptance.
    (ii) If the borrower does not respond to exhibit F within 45 days, 
or declines the Agency's offer to restructure the debt without 
requesting an appeal or negotiation, the servicing official will send 
attachments 9 and 10, or 9-A and 10-A of exhibit A of this subpart, as 
applicable. If the borrower requests an appeal and the Agency is upheld, 
attachments 9-A and 10-A will not be sent until the borrower is given 
the opportunity to accept the original offer within 45 days following 
the final appeal decision. These borrowers will not have an additional 
opportunity to appeal the offer in attachments 9-A and 10-A. If 
attachment 10 or 10-A is not returned within 30 days of the borrower's 
receipt of the attachments, the account will be accelerated or 
foreclosed in accordance with Sec. 1955.15 of subpart A of part 1955 of 
this chapter.
    (iii) If the borrower submitted a new application and requests a 
negotiated appraisal within 30 days of receiving exhibit F, the 
negotiation of the appraisal will be completed in accordance with 
paragraph (i) of this section.
    (A) After completing a negotiation of the appraisal, if the debt can 
be restructured, the servicing official will send exhibit F to the 
borrower making the new offer in accordance with paragraph (h)(1)(i) of 
this section.
    (B) If the negotiated appraisal changes the DALR$ calculations so 
that the debt cannot be restructured, the borrower will be sent exhibit 
E, ``Notification of Adverse Decision for Primary Loan Servicing, 
Mediation or Meeting of Creditors and Other Options,'' in accordance 
with paragraph (h)(3) of this section. The appraisal cannot be 
negotiated again and is not subject to appeal.
    (2) Conservation contracts. If the borrower returned attachment 2 or 
4 to Exhibit A of this subpart within 60 days, requesting a conservation 
contract by submitting a map or aerial photo showing the portion of the 
farm and approximate acres to be considered in the request, the 
servicing official will proceed with processing the request for debt 
relief as set forth in Exhibit H of this subpart. Borrowers who did not 
previously ask for this option can make a request for the contract at 
this time by submitting a map or copy of an aerial photo indicating that 
portion of the farm and appropriate acres to be considered. Borrowers 
must submit the photo within 30 days of receiving Exhibit E of this 
subpart.
    (3) Mediation/voluntary meeting of creditors. If the DALR$ 
calculations indicate a feasible plan of operation cannot be developed 
considering all Primary Loan Service Programs, Softwood Timber, or 
Conservation Contracts, the servicing official will take the following 
actions within 15 days from the date of the determination that the 
borrower's debt cannot be restructured as requested:
    (i) Exhibit E, ``Notification of Adverse Decision for Primary Loan 
Servicing, Mediation or Meeting of Creditors and Other Options,'' of 
this subpart will be sent to the borrower in all cases by certified 
mail, return receipt requested. A printout of the DALR$ calculations 
will be attached to exhibit E of this subpart.
    (A) When the borrower is in a State with a USDA Certified Mediation 
Program, paragraph I in exhibit E will be used. Paragraph I tells the 
borrower that the Agency is requesting mediation with the borrower's 
creditors in an effort to obtain debt adjustment which would permit the 
development of a feasible plan of operation. If the borrower submitted a 
new application, the borrower must respond to exhibit E of

[[Page 133]]

this subpart if the borrower wants to negotiate the Agency's appraisal 
in accordance with paragraph (i) of this section. The borrower may 
request a copy of the Agency's appraisal. The Agency must participate in 
USDA Certified Mediation Programs whether or not the borrower responds 
to exhibit E of this subpart. Any negotiation of the appraisal must be 
completed prior to any mediation.
    (B) In States without a certified mediation program, exhibit E of 
this subpart will be sent by certified mail, return receipt requested, 
to inform the borrower about the applicable options which may include a 
request for a copy of the Agency's appraisal, a meeting of creditors, 
payment of nonessential assets, negotiation of the appraisal and a 
request for an independent appraisal. Paragraph I of exhibit E of this 
subpart will be deleted. The purpose of the voluntary meeting of 
creditors is to develop a feasible plan. Paragraph II of exhibit E of 
this subpart, therefore, will be used to offer a voluntary meeting of 
creditors when the borrower has undersecured creditors who hold a 
substantial part of the borrower's total debt. A ``substantial part of 
the borrower's total debt'' means that the debt of the undersecured 
creditors is large enough so that if it were written down to zero, a 
feasible plan could be developed considering all primary servicing 
options. The servicing official will document such determination in the 
case file, and the servicing official will not offer to carry out a 
voluntary meeting of creditors when the undersecured debt is not a 
substantial part of the borrower's total debt. Such borrower will be 
informed later of additional rights, including appeal rights, when the 
Agency sends attachments 5 and 6, or attachments 5-A and 6-A, of exhibit 
A of this subpart. Any appeal may challenge the Agency's determination 
not to offer a voluntary meeting of creditors because the undersecured 
debt is not a substantial part of the borrower's total debt.
    (C) Any negotiation of the Agency's appraisal must be completed 
prior to the meeting of creditors or mediation. If the borrower does not 
request any of the options offered in exhibit E of this subpart within 
45 days, the servicing official will send attachments 5 and 6, or 5-A 
and 6-A of exhibit A of this subpart, as applicable, certified mail, 
return receipt requested.
    (ii) If mediation or the voluntary meeting of creditors is held but 
is not successful, the borrower will be sent attachments 5 and 6, or 5-A 
and 6-A, of exhibit A of this subpart, as applicable, certified mail, 
return receipt requested, within 15 days of the unsuccessful mediation 
or meeting. The DALR$ computer printout will be attached to attachment 5 
or 5-A of exhibit A of this subpart.
    (4) Buyout of loans. The following notification and processing 
provisions also apply to buyout as offered in Attachments 5 and 5-A of 
Exhibit A of this subpart. After July 3, 1996, buyout will be at the 
Current Market Value (CMV) of the security.
    (i) Eligible borrowers will have 90 days after the receipt of the 
notification of ineligibility for Primary Loan Service programs to buy 
out their loans at Current Market Value, or the balance of their unpaid 
FLP debt, whichever is lower.
    (ii) The present value of the restructured loan must be less than 
the net recovery value to receive buyout.
    (iii) The Agency will not provide direct or guaranteed credit for a 
buyout.
    (iv) The borrower must never have received debt forgiveness on 
another direct loan. (Applies if any debt will be written off.)
    (v) The amount written off may not exceed $300,000.
    (vi) The borrower must have acted in good faith.
    (vii) Debt reduction received through conservation easements or 
contracts will not be counted toward the limitations in paragraphs 
(h)(4) (iv) and (v) of this section.
    (viii) Upon payment by the borrower of current market value buyout, 
the security instruments will be released for the Farm Loan Programs 
loans bought out.
    (ix) The State Executive Director must approve the buyout prior to 
offering buyout to the borrower if the Agency will be writing off any 
debt.
    (i) Administrative appeals and negotiation of appraisals--(1) 
Appeals. The time limit to pay the current market value

[[Page 134]]

of the security, as set out in paragraph (h)(4) of this section, will 
start on the day the borrower receives the final appeal or review 
decision upholding the initial decision. The borrower will have 
conclusively presumed to have received that decision within 3 days of 
mailing.
    (2) Appeal process. (i) If the administrative appeal process results 
in a determination that the borrower is eligible for Primary Loan 
Servicing, the servicing official will process the request pursuant to 
this section. The servicing official will use the information the appeal 
officer used in making the decision on the appeal, unless stated 
otherwise in the final appeal decision letter. In cases of debt 
restructuring resulting from appeals, the interest rate will be 
determined in accordance with paragraphs (e)(1)(xii) and (e)(2)(viii) of 
this section as applicable. If implementation of the appeal decision 
would cause writedown or writeoff of more than $300,000 because of 
interest accrued after the adverse decision, the servicing official will 
process the action so as to complete the transaction.
    (ii) If the administrative appeal process results in a determination 
that the borrower is ineligible for Primary Loan Servicing, the 
servicing official will send Exhibit K and Attachment 1 of this subpart 
and continue processing any application for debt settlement that may 
have been submitted in accordance with subpart B of part 1956 of this 
chapter. If the borrower does not return Attachment 1 of Exhibit K 
within 15 days of the date that it is sent, the servicing official will 
continue to process the application for Preservation Loan Servicing and 
any debt settlement. The account will not be accelerated or foreclosure 
will not continue until the borrower has the opportunity to appeal any 
denial of the Preservation Loan Servicing and any Debt Settlement 
request. If the borrower returns Attachment 1 of Exhibit K within 15 
days of its mailing, the account will be accelerated.
    (3) Appraisal appeals. (i) Borrowers appealing the current market 
appraisal completed by the Agency may obtain an appraisal by an 
independent appraiser selected from a list of at least three names 
provided by the servicing official. A borrower who submitted a new 
application may appeal the Agency's appraisal, if it has not previously 
been negotiated under paragraph (i)(4) of this section, and the denial 
of other issues of Primary Loan Service programs in which the appraisal, 
as part of the NRV calculation, is relevant. The cost of the independent 
appraisal must be paid by the borrower. The borrower will, upon request, 
have access to the case file and receive a copy of the Agency's 
appraisal. The independent appraiser must be a State certified general 
appraiser.
    (ii) The appraisal report must conform to Sec. 761.7 of this title 
for real estate and chattels.
    (iii) If either the servicing official or the borrower discovers any 
mathematical or property description errors in the appraisal prior to or 
at the time of the review and comparison, necessary corrections may be 
made if both parties agree. The party discovering the error must contact 
the other for a meeting to approve the corrections.
    (iv) If the Agency's appraisal and the borrower's independent 
appraisal vary in value by five percent or less, the borrower will 
select the appraisal to be used for servicing under this subpart.
    (4) Negotiation of appraisals. A borrower who submits a new 
application may request to negotiate the appraisal one time only. 
Negotiation of appraisals is offered in Exhibits E and F of this 
subpart, as discussed in paragraph (h) of this section. All appraisals 
used in the negotiations must reflect the value of the property as of 
the same time frame as the Agency's initial appraisal. Errors will be 
handled in accordance with paragraph (i)(3)(iii) of this section.
    (i) The borrower can request the list of independent appraisers from 
the servicing official on Attachment 2 of Exhibits E and F of this 
subpart. The borrower must provide the servicing official with a copy of 
his or her independent appraisal within 30 days of requesting 
negotiation. The borrower must pay for this independent appraisal. The 
borrower's independent appraiser and appraisal report must meet the 
qualifications described in paragraph (i)(3)(ii) of this section, but 
the independent appraiser need not be on

[[Page 135]]

the Agency's list of qualified appraisers. If the Agency's appraisal and 
the borrower's independent appraisal vary in value by five percent or 
less, the borrower will select the appraisal to be used for servicing 
under this subpart. No further negotiation will occur.
    (ii) If the two appraisals differ by more than five percent, the 
servicing official will give the borrower a list of qualified, 
independent appraisers. The borrower will select one appraiser from the 
Agency's list to conduct a third appraisal. The appraiser cannot have 
conducted either the Agency's or the borrower's independent appraisal, 
and must meet the qualifications set out in paragraph (i)(3) of this 
section. The borrower, the appraiser and the servicing official will 
complete and sign the Appraisal Agreement (Attachment 3 of Exhibit F of 
this subpart). The appraiser will be sent a copy of the appraisal 
standards, subpart E of part 1922 of this chapter, for real estate and 
Form 440-21 for chattels. The borrower will submit to the servicing 
official the original or a copy of the third appraisal and its 
attachments and the appraiser's bill. The Agency will pay 50 percent of 
the cost. The borrower is responsible for paying the appraiser directly 
the remaining 50 percent of the cost.
    (iii) Following the completion of the third appraisal, the three 
appraisals will be compared by the servicing official, who will average 
the two that are the closest in value. The average of the two closest in 
value will become the final appraised value. Errors will be handled in 
accordance with paragraph (i)(3)(iii) of this section.
    (j) Processing of writedown. The DALR$ computer program will be used 
to determine the notes and amount to be written down. The borrower's 
account will be credited for the amount written down and the loans 
remaining after writedown will be rescheduled or reamortized.
    (1) A separate note will be signed for each loan being reamortized.
    (2) If any loan written down was secured by real estate, the 
borrower must enter into a ``Shared Appreciation Agreement.'' This 
agreement provides for FSA to collect back all or part of the amount 
written down by taking a share in any positive appreciation in the value 
of the real property securing the SAA and the remaining debt after the 
writedown. The maximum amount of shared appreciation collected will not 
exceed the amount written down. If a borrower's FLP loan was not secured 
by real estate, the borrower will not be required to enter into a shared 
appreciation agreement.
    (3) A lien will be taken on assets in accordance with Sec. 
1951.910. The Agency's real estate liens will be maintained even if the 
writedown of the borrower's debt results in all real estate debts to the 
Agency being written down. The Agency's real estate lien will not be 
surbordinated to increase the amount of the prior liens during the 
shared appreciation period.

[62 FR 10124, Mar. 5, 1997, as amended at 63 FR 6628, Feb. 10, 1998; 63 
FR 56290, Oct. 21, 1998; 64 FR 62568, Nov. 17, 1999; 65 FR 50404, Aug. 
18, 2000; 67 FR 7943, Feb. 21, 2002; 68 FR 7698, Feb. 18, 2003]



Sec. 1951.910  Consideration of borrower's other assets for new applications.

    If a delinquent borrower has other assets that are not serving as 
collateral for the FLP debt, the servicing official will determine 
whether these assets are nonessential, as defined in Sec. 1951.906 of 
this subpart.
    (a) Nonessential assets. The net recovery value (NRV) of 
nonessential assets must be considered when the borrower's application 
is processed for loan servicing in accordance with this subpart. The 
Agency will not write down or write off any debt or portion of a debt 
that could be paid by liquidation of nonessential assets, or by payment 
of the loan value of the assets that could be received from non-Agency 
sources. The loan value of the assets will be considered as the same as 
the NRV of the assets.
    (1) Determining the value of nonessential assets. The NRV of the 
nonessential assets is the market value less any prior liens and any 
selling costs which may include such items as taxes due, commissions and 
advertising costs. The determination of NRV of nonessential assets does 
not include a deduction for carrying the property in inventory. The 
market value of the nonessential assets must be estimated

[[Page 136]]

by a current appraisal in accordance with Sec. 761.7 of this title for 
real estate property, and on Form 440-21, ``Appraisal of Chattel 
Property,'' for chattels. Borrowers who disagree with the Agency's 
appraisal may request a negotiated appraisal or appeal in accordance 
with Sec. 1951.909(i) of this subpart.
    (2) Eligibility. If the NRV of the nonessential assets is sufficient 
to bring the delinquent FLP account current, the borrower is not 
eligible for primary loan servicing including buyout in accordance with 
this subpart. The borrower, instead, will be sent attachments 5-A and 6-
A of exhibit A of this subpart. The servicing official will indicate the 
values of both the NRV of nonessential assets and the FLP security on 
attachment 5-A. The borrower's nonessential assets and their NRVs also 
will be listed on attachment 5-A. The borrower will have 90 days to 
bring the FLP account current from the date of the receipt of 
attachments 5-A and 6-A. If the borrower does not pay current within 
this time period, the account will be accelerated after all appeal 
rights have been exhausted. If the NRV of the nonessential assets is not 
sufficient to bring the FLP account current, then the nonessential 
assets will be considered as set out in paragraph (a)(3) of this 
section.
    (3) Inclusion in NRV. If the NRV of the nonessential assets is not 
sufficient to bring the FLP account current, then the servicing official 
will add the NRV of these assets to the NRV of the FLP collateral 
according to Sec. 1951.909(f) of this subpart. The servicing official 
will encourage, but not require the borrower to liquidate those 
nonessential assets and apply the proceeds to his/her outstanding debts. 
If the borrower liquidates the nonessential assets, or obtains a loan 
against the equity in such assets, and pays the Agency the NRV of the 
nonessential assets within 45 days of receiving exhibit E or F of this 
subpart, as appropriate, the payment will be subtracted from the FLP 
debt and then the servicing official will recalculate the debt 
restructuring without considering the NRV of the nonessential assets. If 
the borrower does not sell these assets, the servicing official will 
include their NRV in calculating the debt restructuring and take a lien 
on the assets at the time of closing the restructured loan.
    (b) Lien on certain assets. Delinquent borrowers must pledge certain 
assets, essential and nonessential, unencumbered to the Agency as 
security at the time FLP loans are restructured, as follows:
    (1) The best lien obtainable will be taken on all assets owned by 
the borrower. When the borrower is an entity, the best lien obtainable 
will be taken on all assets owned by the entity, and all assets owned by 
all members of the entity. Different lien positions on real estate are 
considered separate and identifiable collateral.
    (2) Security will include, but is not limited to, the following: 
land, buildings, structures, fixtures, machinery, equipment, livestock, 
livestock products, growing crops, stored crops, inventory, supplies, 
accounts receivable, certain cash or special cash collateral accounts, 
marketable securities, certificates of ownership of precious metals, and 
cash surrender value of life insurance.
    (3) Security will also include assignments of leases or leasehold 
interests having mortgageable value, revenues, royalties from mineral 
rights, patents and copyrights, and pledges of security by third 
parties.
    (4) The exceptions set forth in Sec. 1941.19(c) of subpart A of 
part 1941 of this chapter apply.
    (5) These assets will be considered as additional security for the 
loans as well as any shared appreciation agreement. The value of the 
essential assets will not be included in the NRV calculation to 
determine restructuring. The Agency's lien will be taken only at the 
time of closing the restructured FLP loans.

[62 FR 10132, Mar. 5, 1997, as amended at 64 FR 62568, Nov. 17, 1999]



Sec. 1951.911  Homestead protection.

    (a) General. If the Agency has only chattel property as security, 
preservation servicing will not be offered. Borrowers who submitted a 
complete application prior to April 4, 1996 will be considered for 
leaseback/buyback in accordance with the previous CFR volume containing 
revisions as of January

[[Page 137]]

1, 1996 and Agency procedures, (available in any county office.) 
Inventory property which is located within the boundaries of an Indian 
reservation of a Federally recognized Indian Tribe and the previous 
owner is a member of the Indian Tribe that has jurisdiction over that 
reservation should be handled in accordance with Sec. 1955.66(d) of 
subpart A of part 1955 of this chapter.
    (b) Homestead protection. Borrowers and former borrowers who had or 
have an FLP loan secured by the real property containing the dwelling 
owned by them and used as their principal residence may apply for 
homestead protection before or after the Agency acquires the property. 
Real property that is in inventory as of the effective date of the 
statute or is acquired in the future will be considered for homestead 
protection as set forth in this subpart.
    (1) Purpose. The purpose of the Homestead Protection Program is to 
permit borrowers or former borrowers to retain their dwellings through a 
lease or purchase. Such lease or purchase could permit these individuals 
to have a home and providing an opportunity to continue to farm.
    (2) Notification and processing. If a feasible plan for 
restructuring debt cannot be developed using Primary Loan Service 
programs, the borrower will be advised by the use of Exhibit K with 
Attachment 1 of this subpart that the Agency will continue with the 
processing of Preservation Service programs, if applicable. A borrower 
who desires homstead protection must request it in accordance with Sec. 
1951.907. A borrower who meets the eligibility requirements of paragraph 
(b)(3) of this section will be permitted to retain possession of the 
homestead, in accordance with paragraph (b)(2)(ii) of this section, 
before title is acquired or under a lease with an option to purchase 
after title is acquired.
    (i) Determining homestead protection property. (A) The homestead 
protection property will include the borrower's principal residence and 
not more than 10 acres of adjoining land that is used to maintain the 
borrower's family and a reasonable number of farm service buildings 
located on land adjoining the residence which are useful to the 
occupants of the dwelling.
    (B) The servicing official will review the proposed homestead 
protection property. If the servicing official does not agree with the 
proposed shape or size of the property, an alternate configuration will 
be negotiated with the borrower.
    (C) If the borrower and the servicing official cannot agree on the 
proposed shape and size of the property, the servicing official will 
make the determination.
    (D) When the size and shape of the property is agreed upon and the 
borrower has been found eligible, the servicing official will request a 
licensed surveyor to survey the property, have a legal description 
prepared, and mark the property lines with permanent type markers.
    (E) Appraisals will be completed in accordance with paragraphs 
(b)(6) and (b)(7)(ii)(B) of this section.
    (ii) Processing homestead protection before the Agency acquires 
title. (A) A borrower will be considered for homestead protection when 
it is determined that the Primary Loan Service programs cannot resolve 
the delinquency. To process an application, the borrower must indicate 
the buildings and land to be included in the request for homestead 
protection. If determined eligible for homestead protection, the 
borrower and the servicing official will enter into a Homestead 
Protection Program Agreement (Exhibit L of this subpart) to lease the 
property if and when the Agency acquires title. A copy of Form 1955-20, 
``Lease of Real Property,'' will be attached to the agreement as an 
exhibit.
    (B) Concurrently with the execution of the preacquisition Homestead 
Protection Program Agreement, the borrower will deliver a completed Form 
RD 1955-1 to the Agency. The Agreement is subject to the provisions of 
subpart A of part 1955 of this chapter. If the Agency acquires title 
during the processing of a preacquisition Homestead Protection 
Agreement, processing of the agreement will be terminated and the owner 
will be given homestead protection rights pursuant to paragraph 
(b)(2)(iii) of this section.
    (C) The Agency's obligation to lease the dwelling to the borrower 
will be

[[Page 138]]

contingent on the Agency's prior compliance with all State and local 
laws, ordinances and regulations governing the subdivision of land. If 
the Agency cannot satisfy the conditions within 2 years from the date of 
the agreement, the agreement (and the Agency's obligation to lease with 
option to purchase) will terminate. If an agreement has been entered 
into, but title to the property has not been conveyed to the Agency (or 
acquisition has been determined not to be in its financial interest), 
the Agency will continue with acceleration and foreclosure of the 
property. It is not the intent of the 2-year term of the agreement to 
limit the Agency's ability to foreclose on the property, provided that 
all the terms have been met except that title has not been conveyed.
    (iii) Application for homestead protection when the Agency acquires 
title. When the Agency acquires title to the farm property, the borrower 
will be sent Exhibit M of this subpart, by certified mail, return 
receipt requested, no later than the date of acquisition. The borrower 
must request homestead protection by notifying the servicing official in 
writing not later than 30 days after the date of acquisition and must 
provide the information set forth in Sec. 1951.907(e) of this subpart 
and indicate the buildings and land to be included in the request.
    (iv) Lease with option. A lease with an option to purchase will be 
entered into with an eligible borrower on Form 1955-20 after the Agency 
acquires title to the property. Form 1955-20 will be completed in 
accordance with Sec. 1951.911 (b)(8) of this subpart.
    (3) Eligibility. The servicing official will make the determination 
on eligibility. To qualify for homestead protection, the borrower must 
meet the following requirements:
    (i) An applicant must be an individual who is or was personally 
liable for the Farm Loan Programs (FLP) loan that was secured in part by 
the Homestead Protection property, or, if a non-borrower pledged the 
property to secure the FLP loan, the owner of the property. In either 
case, the applicant must be or have been the owner of the Homestead 
Protection property. A member of an entity who is or was personally 
liable for a loan that is or was secured by the Homestead protection 
property is considered an owner for homestead protection purposes, so 
long as either the member of the entity or the entity itself held fee 
title to the property.
    (ii) When more than one member of an entity was personally liable 
for an FLP loan, each such member who possessed and occupied a separate 
dwelling as his or her principal residence, on property that is or was 
security for the loan may apply separately for homestead protection of 
their individual dwellings;
    (iii) The applicant and any spouse must have received, from the 
farming or ranching operations, gross farm income reasonably 
commensurate with the size and location of the farm and reasonably 
commensurate with local agricultural conditions (including natural and 
economic conditions) in at least 2 calendar years during the 6-year 
period preceding the calendar year in which the application is made. 
Farms used for comparison purposes must be of similar size, type of 
operation and locality. For the purposes of Sec. Sec. 1951.911(b)(3) 
(iii) and (iv) of this subpart, income from farming or ranching 
operations will include rent paid by a lessee of agricultural land 
during any period in which the borrower, due to circumstances beyond his 
or her control, such as economic, natural disaster or health problems, 
was unable to actively farm that property. The borrower's records will 
be used in determining whether the gross farm income was reasonably 
commensurate with the farm size and location and local agricultural 
conditions. When applying for homestead protection, the borrower will 
give the servicing official at least 2 calendar years of records of 
planned and actual gross farm income for the 6-year period preceding the 
calendar year in which the application is made. If such records do not 
exist, they may be developed by the applicant and servicing official 
from information relating to yields, expenses and prices found in the 
borrower's county office case file, agency records, or other reliable 
sources;
    (iv) The applicant and any spouse must have received, from the 
farming

[[Page 139]]

or ranching operations, at least 60 percent of their gross annual income 
in at least 2 of the 6 calendar years preceding the calendar year in 
which the application is made;
    (v) The applicant must have continuously occupied the homestead 
protection property during the 6-year period preceding the calendar year 
in which the application is made, unless it was necessary to leave for a 
period of time not to exceed 12 months during the 6-year period due to 
circumstances beyond the borrower's control, such as illness, 
employment, or conditions that made the dwelling uninhabitable; and
    (vi) The applicant must have sufficient income to make rental 
payments for the term of the lease and the ability to maintain the 
property in good condition, and must agree to all the terms and 
conditions set forth in paragraph (b)(7) of this section and in Form 
1955-20.
    (4) Transfer of homestead protection. An applicant's right to 
request homestead protection and rights under the Agreement or lease 
entered into pursuant to this section are not transferable or assignable 
by the applicant or by operation of law, except that, in the case of 
death or incompetency of the applicant, such rights and agreements shall 
be transferable to the spouse upon agreement to comply with the terms 
and conditions of the lease.
    (5) Property requirements. (i) The proposed homestead protection 
property tract must meet all requirements for the division into a 
separate legal lot as required by State and local laws. All 
environmental considerations required under subpart G of part 1940 of 
this chapter will be complied with.
    (ii) Costs for a survey, legal description or other service needed 
to establish, appraise, define or describe the homestead protection 
property as a separate tract, will be paid for by the Agency. No repairs 
or improvements will be paid for by the Agency except as provided for in 
Sec. 1955.64 (a) of subpart A of part 1955 of this chapter.
    (iii) If necessary, the Agency will grant or retain for the benefit 
of adjoining property reasonable easements for ingress, egress, 
utilities, water rights, etc.
    (6) Appraisal. The current market value of the homestead protection 
property shall be determined by an independent appraisal made within 6 
months from the date of the borrower's application for homestead 
protection. The applicant will select an independent real estate 
appraiser from a list of appraisers approved by the servicing official. 
The cost of such an appraisal will be handled in accordance with 
paragraph (b)(5)(ii) of this section.
    (7) Terms of the lease and exercising the option. (i) All leases 
will have an option to purchase. Any reference to a lease for homestead 
protection purposes will mean a lease with an option to purchase. The 
lease will be offered with an option to purchase on Form 1955-20 and 
will be for a period of not more than 5 years as requested by the 
applicant. A lease of less than 5 years may be extended, but not beyond 
5 years from the date of the beginning of the term of the original 
lease.
    (A) The amount of the rent will be based upon equivalent rents 
charged for similar residential properties in the area in which the 
dwelling is located.
    (B) Lease payments will be retained by the Government.
    (C) Failure to make lease payments as scheduled or to maintain the 
property in good condition shall constitute cause for the termination of 
all rights of the lessee to possession and occupancy of the dwelling and 
property under this section. If a lease default is not cured within 30 
days of notice, the servicing official will notify the lessee in writing 
of the termination of the lease and option.
    (D) Any interference by the lessee with the Government's efforts to 
lease or sell the remainder of farm inventory property shall constitute 
cause for the termination of all rights of the lessee to possession and 
occupancy of the dwelling and property including the right to exercise 
the option to purchase.
    (ii) Exercising the option to purchase.
    (A) The lessee may exercise the option in writing at any time prior 
to the expiration of the lease by delivering to the servicing official a 
signed, written statement notifying the Agency that the lessee is 
exercising the option to

[[Page 140]]

purchase the property. Failure to exercise the option within the lease 
period will end the lessee's rights under the option to purchase.
    (B) When the lessee exercises the option to purchase the property, 
the purchase price will be the current market value of the property. 
That value will be determined by an appraisal in accordance with 
paragraph (b)(6) of this section providing the appraisal is not more 
than 1 year old. If the appraisal is more than 1 year old, the current 
market value will be determined by a new appraisal requested in 
accordance with paragraph (b)(6) of this section.
    (C) At the time the lessee exercises the option, the lessee must 
notify the servicing official if he or she wants to purchase the 
property for cash or finance it through a credit sale from the Agency.
    (D) If a credit sale is involved, the applicant must furnish the 
servicing official the information required by Sec. 1951.907 (e) to 
assist in determining whether or not the applicant has adequate 
repayment ability.
    (8) Rates and terms for a credit sale. Terms for a credit sale of 
homestead protection property when the lessee is exercising the option 
to purchase will be in accordance with subpart J of this part.
    (9) Closing. A credit sale will be closed in accordance with subpart 
J of this part.
    (10) Conflict with State law. In the event of a conflict between a 
borrower's homestead protection rights and any provisions of the law of 
any State relating to the right of a borrower to designate for separate 
sale or redeem part or all of the property securing a loan foreclosed on 
by a lender, such provision of State law shall prevail. A State 
supplement will be prepared as necessary to supplement paragraph (b) of 
this section.
    (11) Servicing homestead protection loans. Homestead protection 
loans will be serviced as set forth in subpart J of this part.

[62 FR 10132, Mar. 5, 1997]



Sec. 1951.912  Mediation.

    (a) States with a USDA certified mediation program. The FmHA or its 
successor agency under Public Law 103-354 is required to participate in 
USDA Certified State Mediation Programs. The purpose of mediation is to 
participate with farm borrowers, and their creditors, in an effort to 
resolve issues necessary to overcome the borrower's financial 
difficulties. Any negotiation of an FmHA or its successor agency under 
Public Law 103-354 appraisal pursuant to Sec. 1951.909(i) of this 
subpart will be completed prior to mediation.
    (1) FmHA or its successor agency under Public Law 103-354 shall 
participate in a USDA Certified Mediation Program under the same terms 
and conditions as other creditors. Decisions will not be binding on FmHA 
or its successor agency under Public Law 103-354 unless approved by the 
representative assigned by FmHA or its successor agency under Public Law 
103-354 in accordance with paragraph (a)(4) of this section.
    (2) FmHA or its successor agency under Public Law 103-354 will pay 
the same mediation fees to the USDA Certified State Mediation Board that 
are charged to all creditors that participate in mediation. The 
Contracting Officer (CO) will complete Form AD-838, ``Purchase Order,'' 
to establish a mediation contract and submit Form FmHA or its successor 
agency under Public Law 103-354 838-B, ``Invoice-Receipt 
Certification,'' for payment upon receipt of an invoice from the 
Mediator or the Contracting Officer's Representative (COR) recommending 
payment.
    (3) Failure of creditors and/or borrowers to participate in 
mediation will not preclude FmHA or its successor agency under Public 
Law 103-354 from granting Primary Loan Service Programs to assist 
borrowers.
    (4) The FmHA or its successor agency under Public Law 103-354 State 
Director will designate a representative to represent FmHA or its 
successor agency under Public Law 103-354 in the mediation process. 
Authorities of the representatives can vary from complete authority to 
act for FmHA or its successor agency under Public Law 103-354, to a 
requirement for review and concurrence by the State Director or designee 
prior to approving a mediation agreement. The State Director

[[Page 141]]

will set forth in writing the specific authority delegated to the 
designated representative.
    (5) The FmHA or its successor agency under Public Law 103-354 State 
Director will arrange for adequate training for representatives 
designated to represent FmHA or its successor agency under Public Law 
103-354 in mediation.
    (6) When mediation is not successful in resolving the borrower's 
financial difficulty, the County Supervisor will send the borrower 
attachments 5 and 6, or 5-A and 6-A, of exhibit A of this subpart, as 
applicable.
    (7) The FmHA or its successor agency under Public Law 103-354 State 
Director will develop a State supplement that describes how FmHA or its 
successor agency under Public Law 103-354 will participate in the State 
Mediation Program. In developing the State supplement the State Director 
should confer with the State Attorney General's Office, farm 
organizations that are interested in the development of the State's 
Certified Agricultural Loan Meditation Program, and Departments of State 
Governments to ensure that all interested parties have input on the 
content of the State supplement. The State Director will consult with 
the Regional OGC as necessary to develop the State supplement. State 
supplements will be submitted to the National Office for post approval 
in accordance with FmHA or its successor agency under Public Law 103-354 
Instruction 2006-B (available in any FmHA or its successor agency under 
Public Law 103-354 office).
    (b) States without a Certified Mediation Program. To service those 
borrowers in States where there is no USDA Certified Mediation Program 
established, the State Director will provide the means of conducting a 
voluntary meeting of creditors, either with a mediator or a designated 
FmHA or its successor agency under Public Law 103-354 representative. 
``Creditors,'' for purposes of this paragraph, means all the borrower's 
undersecured creditors holding a substantial part of the borrower's debt 
in accordance with Sec. 1951.909(h)(3)(i) of this subpart. State 
Directors are encouraged to contract for qualified mediators within 
their jurisdictional areas to conduct the voluntary meeting of creditors 
in an effort to help farmers resolve their financial difficulty. The 
National Office will provide the State a list of qualified mediators for 
contracting purposes. Any negotiation of an FmHA or its successor agency 
under Public Law 103-354 appraisal pursuant to Sec. 1951.909(i) of this 
subpart will be completed prior to meeting with other creditors.
    (1) When a mediator is available, the County Supervisor will assist 
the meditator in scheduling a meeting with the borrower and all of the 
borrower's creditors and will encourage them to participate in such a 
meeting. The mediator will be responsible for conducting the meeting in 
accordance with accepted mediation practices and to develop an Agreement 
to assist the farmer in resolving their financial difficulties.
    (2) When a mediator is not available, the State Director will 
designate an FmHA or its successor agency under Public Law 103-354 
representative to conduct a meeting of creditors and attempt to develop 
a plan with borrowers and their creditors that will assist the borrowers 
to resolve their financial difficulty. The State Director will designate 
a representative not previously involved in servicing the borrower's 
account. State Directors will designate a representative, or FmHA or its 
successor agency under Public Law 103-354 employees who have 
demonstrated good human relations skills and ability to resolve problems 
and settle disputes.
    (3) The designated FmHA or its successor agency under Public Law 
103-354 representative for conducting a meeting of creditors will do the 
following:
    (i) Schedule a meeting between the borrower and the borrower's 
creditors and encourage them to participate in such a meeting;
    (ii) State that the parties understand that the representative is 
neutral and does not represent any of the parties;
    (iii) Inform the borrower and creditors concerning FmHA or its 
successor agency under Public Law 103-354 programs available to assist 
the borrowers;
    (iv) Encourage the parties to utilize all available means to assist 
the borrower to overcome the financial difficulty;

[[Page 142]]

    (v) Advise, counsel, and facilitate the development of a debt 
restructure agreement between the borrower and creditors which will 
permit the borrower to remain in farming;
    (vi) Review with the parties any proposed solution to determine if 
it can be effectively implemented and to help the parties understand the 
consequences of the proposed solution;
    (vii) Review the obligations of the participants, including but not 
limited to the maintenance of confidentiality and the promotion of good 
faith discussions in an effort to reach agreement; and
    (viii) Develop a written document that specifies the agreements 
reached in the meeting. The agreement will be signed by all parties with 
authority to approve the agreement for the participating creditors. When 
signed, copies will be distributed to the borrower and participating 
creditors. A copy will be filed in the borrower's County Office case 
file.
    (4) If agreements are reached which will permit the development of a 
feasible plan of operation, the County Supervisor will proceed with 
processing and approval of the borrower's request for primary loan 
servicing.
    (5) When the FmHA or its successor agency under Public Law 103-354 
representative has exhausted all efforts to develop an agreement between 
the borrower and creditors and an agreement cannot be reached, the FmHA 
or its successor agency under Public Law 103-354 representative will 
report the results of this meeting to the State Director by memorandum. 
Copies of the memorandum will be sent to the borrower and all creditors 
participating in the meeting. When the County Supervisor receives a copy 
of this memorandum indicating that an agreement cannot be reached, 
attachments 5 and 6, or 5-A and 6-A, of exhibit A of this subpart, as 
applicable, will be sent to the borrower.
    (6) State Directors will provide the necessary training to ensure 
that the FmHA or its successor agency under Public Law 103-354 
representative has the necessary skills to effectively conduct a 
voluntary meeting between a borrower and creditors which may result in 
reaching an agreement.
    (7) Failure of creditors to participate in a voluntary meeting of 
creditors will not preclude FmHA or its successor agency under Public 
Law 103-354 from using debt writedown if it would result in a greater 
net recovery to FmHA or its successor agency under Public Law 103-354 
than liquidation. Whenever the net recovery to FmHA or its successor 
agency under Public Law 103-354 will be greater using the writedown than 
to go through foreclosure, FmHA or its successor agency under Public Law 
103-354 will use the writedown, regardless of the actions of the other 
creditors. Voluntary meetings of creditors cannot delay consideration of 
a borrower for Primary Loan Service Programs, except with the consent of 
the borrower.
    (8) If the borrower does not participate in the voluntary meeting of 
creditors without good cause and a feasible plan of operation cannot be 
developed, the County Supervisor will send the borrower attachments 5 
and 6, or 5-A and 6-A, of exhibit A of this subpart, as applicable.



Sec. 1951.913  Servicing Net Recovery Buyout Recapture Agreements.

    (a) Death or retirement. If upon the death or retirement of a 
borrower who submitted a ``new application,'' as defined in Sec. 
1951.906 of this subpart, the borrower executed exhibit C-1 of this 
subpart and transferred title of the borrower's real estate security to 
a spouse or child who is actively engaged in farming on the property, 
then the transaction will not be treated as a ``sale'' or ``conveyance'' 
under the recapture agreement. The borrower's spouse or child, however, 
must assume the full liability of the borrower under the provisions of 
the borrower's Net Recovery Buyout Recapture Agreement and real estate 
lien instrument in accordance with instructions from OGC.
    (b) Record of net recovery buyout. The Finance Office will credit 
the borrower's account with the net recovery value (NRV) amount paid by 
the borrower. An equity record will be established in accordance with 
the provisions of the ADPS manual.
    (1) For borrowers who applied for Loan Servicing and Preservation 
Service Programs before November 28, 1990,

[[Page 143]]

and executed exhibit C of this subpart, a recapture equity record will 
be established in an amount equal to the difference between the NRV and 
the market value of the real estate security as of the date the net 
recovery buyout agreement was signed by the borrower.
    (2) For borrowers who submit ``new applications,'' as defined in 
Sec. 1951.906 of this subpart, and execute exhibit C-1 of this subpart, 
an equity record will be established in an amount equal to the amount of 
debt secured by real estate that was written off as of the date the net 
recovery buyout agreement was signed by the borrower. This is the 
maximum amount that can be recaptured.
    (c) Review by County Supervisor. The County Supervisor will 
establish a follow-up to review the County real estate records every 24 
months starting from the date of the Net Recovery Buyout Recapture 
Agreement to determine if the borrower has sold or conveyed the real 
estate property covered by the agreement. Scheduled reviews to be 
conducted must be posted on the borrower's Form FmHA or its successor 
agency under Public Law 103-354 1905-1, ``Management System Card--
Individual,'' for follow-up purposes. The results of the review will be 
recorded in the borrower's County Office case file. These reviews will 
end at the expiration of the agreement. If there is no recapture due, 
then the County Supervisor will proceed in accordance with paragraph (g) 
of this section.
    (d) Notification of recapture due. If the County Supervisor 
determines that the borrower has sold the real estate, the borrower will 
be notified in writing, certified mail, return receipt requested, of the 
following:
    (1) The amount of recapture due in accordance with exhibits C or C-1 
of this subpart, as applicable. The County Supervisor will establish an 
equity receivable account in accordance with the provisions of the ADPS 
manual;
    (2) The date the recapture is due (not to exceed 30 days from the 
date the Notice of Recapture Letter is received by the borrower);
    (3) Appeal rights as set forth in subpart B of part 1900 of this 
chapter; and
    (4) If the borrower fails to pay any amount due to FmHA or its 
successor agency under Public Law 103-354 as the result of a sale of the 
property, the account will be accelerated as set forth in Sec. 1955.15 
of subpart A of part 1955 of this chapter after all appeal rights have 
been exhausted.
    (e) Processing payments. The County Supervisor will issue Form FmHA 
or its successor agency under Public Law 103-354 451-2, ``Schedule of 
Remittance,'' for all the payments received under the Recapture 
Agreement. The following should be recorded in the body of the form: 
``Equity Receivable Payment.''
    (f) Release of liability. When the total amount due under the 
agreement has been paid and credited to the borrower's account, the 
borrower will be released from personal liability. The recapture 
agreement will be marked ``Recapture Agreement Satisfied'' and returned 
to the debtor or to the debtor's legal representative. In such cases, 
the security instrument(s) will be released of record in accordance with 
subpart A of part 1965 of this chapter.
    (g) No recapture due. If the County Supervisor determines there is 
no recapture due, the County Supervisor will close the borrower's equity 
record in accordance with the provisions of the ADPS manual. Exhibit C 
or C-1 of this subpart, as applicable, will be terminated and security 
instruments will be processed as set forth in paragraph (f) of this 
section.



Sec. 1951.914  Servicing shared appreciation agreements.

    (a) [Reserved]
    (b) When shared appreciation is due. For agreements entered into on 
or after August 18, 2000, the term of the agreement is five years. 
Shared appreciation is due at the end of either a five or ten year term, 
as specified in the Shared Appreciation Agreement, or sooner, if one of 
the following events occur:
    (1) The sale or conveyance of any or all the real estate security, 
including gift, contract for sale, purchase agreement, or foreclosure. 
Transfer to the spouse of the borrower in case of the death of the 
borrower will not be treated as a conveyance; until the spouse further 
conveys the property;

[[Page 144]]

    (2) Repayment of the loans; or the loans are otherwise satisfied;
    (3) The borrower or surviving spouse ceases farming operations or no 
longer receives farm income, including lease income; or
    (4) The notes are accelerated.
    (c) Determining the amount of shared appreciation due. (1) The value 
of the real estate security at the time of maturity of the Shared 
Appreciation agreement (current market value) shall be the appraised 
value of the security at the highest and best use less the increase in 
the value of the security resulting from capital improvements added 
during the term of the Shared Appreciation Agreement (contributory 
value) as set out herein. The current market value of the real estate 
security property will be determined based on a current appraisal in 
accordance with 7 CFR Sec. 761.7 and subject to the following:
    (i) Upon request, the borrower will identify any capital 
improvements that have been added to the property since the execution of 
the Shared Appreciation Agreement.
    (ii) The appraisal must specifically identify the contributory value 
of capital improvements made to the Agency real estate security during 
the term of the Shared Appreciation Agreement in order to make 
deductions for that value under this subsection.
    (iii) For calculation of Shared Appreciation recapture, the 
remaining contributory value of capital improvements added during the 
term of the Shared Appreciation Agreement will be deducted from the 
current market value of the property. Such capital improvements must 
also meet at least one of the following criteria:
    (A) It is the borrower's primary residence. If the new residence is 
affixed to the real estate security as a replacement for a home which 
existed on the security property when the Shared Appreciation Agreement 
was originally executed, or the living area square footage of the 
original dwelling was expanded, only the value added to the real 
property by the new or expanded portion of the original dwelling (if it 
added value) will be deducted from the current market value. Living area 
square footage will not include square footage of patios, porches, 
garages, and similar additions.
    (B) The item is an improvement to the real estate with a useful life 
of over 1 year and is affixed to the property. The item must have been 
capitalized and not taken as an annual operating expense on the 
borrower's Federal income tax records. The borrower must provide copies 
of appropriate tax documentation to verify that capital improvements 
claimed for shared appreciation recapture reduction are capitalized on 
borrower income taxes.
    (2) In the event of a partial sale, an appraisal of the property 
being sold may be required to determine the market value at the time the 
Shared Appreciation Agreement was signed if such value cannot be 
obtained through another method.
    (3) Shared appreciation will be due if there is a positive 
difference between the market value of the security property at the time 
of calculation and the market value of the security property as of the 
date of the SAA. The maximum appreciation requested will not be more 
than the total amount written down. The amount of shared appreciation 
will be:
    (i) 75% of any positive appreciation if any one of the events listed 
in paragraphs (b)(1) through (4) of this section occur within 4 years or 
less from the date of the SAA; or
    (ii) 50% of any positive appreciation if any one of the events 
listed in paragraphs (b)(1) through (4) of this section occurs more than 
4 years from the date of the SAA, or if the term of the SAA expires.
    (4) [Reserved]
    (5) When the full amount of the appreciation due under this section 
and any remaining FSA debt is paid in full and credited to the account, 
the borrower will be released from liability.
    (6) Shared appreciation that will become due will be included in the 
amount owed to FSA, such as with any debt settlement. Nonamortized 
shared appreciation may be assumed and amortized on program or 
nonprogram terms based on the transferee's eligibility as contained in 
subpart A of part 1965 of this chapter.
    (d) [Reserved]

[[Page 145]]

    (e) Shared appreciation amortization. Shared appreciation may be 
amortized to a nonprogram amortized payment for borrowers who will 
continue with FSA on program loans. Shared appreciation will not be 
amortized if the amount is due because of acceleration, payment in full 
or satisfaction of the debt, or the borrower ceases farming. The amount 
due may be converted to an SA amortized payment under the following 
conditions:
    (1) The borrower must have a feasible plan as defined in Sec. 
1951.906 including the SA amortized payment.
    (2) The borrower must be unable to pay the shared appreciation, or 
obtain the funds elsewhere to pay the shared appreciation.
    (3)-(4) [Reserved]
    (5) The payment agreement term will be based on the borrower's 
repayment ability and the life of the security, not to exceed 25 years.
    (6) The interest rate will be the SA amortization rate contained in 
RD Instruction 440.1 (available in any FSA office).
    (7) A lien will be obtained on any remaining FSA security, or if 
there is no security remaining, the best lien obtainable on any other 
real estate or chattel property sufficient to secure the SA payment 
agreement, if available.
    (8) The borrower will sign a payment agreement for each SA amortized 
payment established.
    (9)-(10) [Reserved]
    (11) If the borrower has no outstanding Farm Loan Program loans and 
becomes delinquent on the SA amortized payment, the SA payment agreement 
will be serviced in accordance with subpart J of this part. If the 
borrower has outstanding Farm Loan Programs loans, and becomes 
delinquent or financially distressed in accordance with Sec. 1951.906, 
the SA amortized payment will be considered for reamortization in 
accordance with Sec. 1951.909(e).
    (f) Priority of collection application. Proceeds from the sale of 
security property will first be applied to any prior lienholder's debt, 
then to any shared appreciation due, and to the balance of outstanding 
FLP loans in accordance with subpart A of this part.
    (g) Subordination. Subordination of FSA's lien on property securing 
the Shared Appreciation Agreement may be approved and processed in 
accordance with subpart A of part 1965 of this chapter provided the 
prior lien debt is not increased.
    (h) Suspension of Recapture Payment Obligation under a Shared 
Appreciation Agreement. (1) A borrower may request from a Farm Loan 
Program (FLP) servicing official, a suspension of the obligation to pay 
the recapture amount under a shared appreciation agreement, if:
    (i) The shared appreciation agreement recapture payment is now due 
but there has been no agreement to pay the recapture payment;
    (ii) The 10 year term of the agreement ends on or before December 
31, 2000;
    (iii) The secured real estate has not yet been conveyed so that the 
entire amount of the shared appreciation agreement recapture payment is 
due;
    (iv) The borrower has complied with the other terms of the 
agreement;
    (v) The borrower certifies in writing that the borrower is not able 
to pay the recapture amount;
    (vi) The agreement or the obligations thereunder have not been 
accelerated and there are pending servicing rights under this subpart 
still available to the borrower; and
    (vii) The Agency's mortgage which secures the agreement remains in 
effect for a period not less than the suspension period under this 
paragraph plus 3 additional years or the Agency determines that the 
mortgage can be extended for an additional 3 years beyond the suspension 
period.
    (2) A request for suspension of the obligation to pay the recapture 
amount must be submitted in writing to the FLP servicing official after 
the borrower has received notification of the recapture amount due by 
the later of:
    (i) 30 days after the borrower has received notification of the 
recapture amount due; or
    (ii) May 24, 1999.
    (3) The term of the suspension of the obligation to pay the 
recapture amount is 1 year.

[[Page 146]]

    (4) A suspension may be renewed by the Agency at the request of a 
borrower in writing not more than twice. Prior to renewal of a 
suspension, the Agency will determine, based on a Farm and Home Plan, 
the portion of the recapture amount the borrower is still unable to pay, 
or obtain credit to pay, from any other source (including nonprogram 
loans from the Agency, in accordance with this part), the suspension 
will be limited to such an amount. The Agency must also determine that 
the conditions prescribed in paragraphs (h)(1)(i) through (h)(1)(vi) are 
still met.
    (5) The amount of the recapture payment suspended will accrue 
interest at a rate equal to the applicable rate of interest of Federal 
borrowing, as determined by the Agency.
    (6) Thirty days before the end of the suspension period, the FLP 
Servicing Official shall inform the borrower by letter of the suspended 
amount, including accrued interest that is owed and the date such 
payment is due.
    (7) At the end of the suspension period, the borrower will be 
obligated to pay the amount suspended, plus any accrued interest and the 
borrower will be so notified.
    (8) If the real estate that is the subject of the Shared 
Appreciation Agreement during the suspension period is conveyed, the 
suspended amount, plus any accrued interest shall be come immediately 
due and payable by the borrower in accordance with paragraph (c) of this 
section.
    (9)-(10) [Reserved]
    (11) Capital improvement deductions are available to a borrower on 
any unpaid recapture amount under an existing Suspension Agreement in 
accordance with 1951.914(c).

[63 FR 6629, Feb. 10, 1998, as amended at 64 FR 19865, Apr. 23, 1999; 65 
FR 50404, Aug. 18, 2000; 65 FR 81326, Dec. 26, 2000; 67 FR 7943, Feb. 
21, 2002]



Sec. 1951.915  [Reserved]



Sec. 1951.916  Exception authority.

    (a) Administrator. The Administrator or delegate may, in individual 
cases, make an exception to any requirement or provision of this subpart 
or address any omission of this subpart which is not inconsistent with 
the authorizing statute or other applicable law if the Administrator 
determines that the Government's interest would be adversely affected. 
The Administrator will exercise this authority upon request of the State 
Director with recommendation of the appropriate Program Assistant 
Administrator, or upon request initiated by the appropriate Program 
Assistant Administrator. In certain situations such as a natural 
disaster, the Administrator may delegate this authority to specific 
State Director positions in certain states. In such cases, the State 
Director will exercise the delegation of authority upon the request of 
the County Supervisor with the recommendation of the District Director, 
rather than the appropriate Program Assistant Administrator. Requests 
for exceptions must be made in writing and supported with documentation 
to explain the adverse effect, propose alternative courses of action, 
and show how the adverse effect will be eliminated or minimized if the 
exception is granted.
    (b) State Director. The State Director may, in individual cases of 
extraordinary circumstances, make an exception to the requirement that 
attachments 2 or 4 of exhibit A of this subpart, as appropriate, must be 
completed and returned to the FmHA or its successor agency under Public 
Law 103-354 County Office with the appropriate forms and documents for a 
complete application within 60 days after receiving attachments 1 and 2 
or 3 and 4 of exhibit A of this subpart. If the borrower requests 
additional time to submit a complete application or submits a complete 
application after the deadline, the County Supervisor must ask the 
borrower why the additional time is or was needed. The County Supervisor 
must ask the borrower whether there are extraordinary circumstances like 
serious medical illness, severe adverse weather, or a family emergency, 
and explain that only the State Director can authorize an extension of 
time for extraordinary circumstances. In such cases, the County 
Supervisor must document the situation in the case file and immediately 
submit the request with his or her recommendation on whether the State 
Director

[[Page 147]]

should grant an exception for an extension of time. The request should 
describe the circumstances in accordance with the examples of 
extraordinary circumstances mentioned above and recommend an estimate of 
the additional time needed. Normally, such an extension of time should 
not exceed 30 days.

[58 FR 4066, Jan. 13, 1993, as amended at 58 FR 15418, Mar. 23, 1993]



Sec. Sec. 1951.917-1951.949  [Reserved]



Sec. 1951.950  OMB control number.

    The reporting and recordkeeping requirements contained in this 
regulation have been approved by the Office of Management and Budget and 
have been assigned OMB control number 0560-0161. Public reporting burden 
for this collection of information is estimated to average five minutes 
per response including time for reviewing instructions, searching 
existing data sources, gathering and maintaining the data needed, and 
completing and reviewing the collection of information. Send comments 
regarding this burden estimate or any other aspect of this collection of 
information, including suggestions for reducing this burden, to 
Department of Agriculture, Clearance Officer, OIRM, room 404-W, 
Washington, DC 20250; and to the Office of Management and Budget, 
Paperwork Reduction Project (OMB 0560-0161), Washington, DC 
20503.

[57 FR 18626, Apr. 30, 1992, as amended at 63 FR 6629, Feb. 10, 1998]

Exhibit A to Subpart S of Part 1951--Notice of the Availability of Loan 
  Servicing and Debt Settlement Programs for Delinquent Farm Borrowers

    Dear (Borrower's Name):
    This notice is to inform you that you are behind with your loan 
payments and to inform you of your options.

                  I. Loan Servicing Programs Available

    Primary loan servicing programs are intended to adjust the debt so 
that you can continue farming and the Agency will receive a better 
recovery on the money it loaned you.
    The Preservation loan servicing program (Homestead Protection) is 
intended to help farmers who may lose their land to the Agency get their 
home back through a lease with an option to buy.

                       II. Application Information

                               Time Limits

    You must notify the county office within 60 days of getting this 
notice if you want to be considered for these programs.

                              How to Apply

    To apply, you must complete and return the required forms enclosed 
with this notice, including your signed Acknowledgment Of Notice Of 
Program Availability within the 60-day time limit. The county office 
will process your completed forms and let you know if you qualify.
    Included With This Notice You Will Find:
    (1) A summary of primary loan servicing programs options;
    (2) A summary of the preservation loan servicing program;
    (3) A summary of debt settlement programs;
    (4) The forms you need to apply for services;
    (5) Information on how to get copies of the Agency's regulations;
    (6) A description of the National Appeals Division appeal process.

                    III. Foreclosure and Liquidation

            What Happens if You Do Not Apply Within 60 Days?

    The Agency will accelerate your loan if you continue to be 
delinquent or in nonmonetary default. Acceleration of your loan is very 
severe. This means the Agency will take legal action to collect all the 
money you owe them.
    After acceleration, the Agency will start foreclosure proceedings. 
They will repossess or take legal action to take any real estate, 
personal property, crops, livestock, equipment, or any other assets in 
which the Agency has a security interest. The Agency will also stop 
allowing you to use your crop, livestock, and milk checks to pay living 
and operating expenses. The Agency will also take by administrative 
offset money which other federal agencies owe you.
     Sincerely,

     Attachment 1--Primary and Preservation Loan Servicing and Debt 
                       Settlement Programs Purpose

                                 Purpose

    These programs are to help you repay the loan and keep your farm 
property and settle your Farm Loan Programs loan debt. This notice tells 
you:

(1) How To get more information
(2) How to apply

[[Page 148]]

(3) Your appeal rights if you apply and are turned down

                       How To Get More Information

    Ask at any county office for copies of the rules describing these 
programs. These rules must be given to you within 10 days of when we 
receive your request.

                             Who Can Apply?

    All ``farm loan programs borrowers'' who have one of the following 
loans:

Operating (OL)
Farm Ownership (FO)
Emergency (EM)
Economic Emergency (EE)
Soil and Water (SW)
Recreation (RL)
Rural Housing Loans made for farm service buildings (RHF)
Economic Opportunity (EO)

    Borrowers that are current on their scheduled payments but are 
financially distressed through no fault of their own may be eligible for 
some assistance to restructure their debt.

                      You May Need Help in Applying

    The legal requirements for these programs are very complicated. You 
may need help to understand them. You may want to ask an attorney to 
help you. If you cannot get an attorney, there are organizations that 
give free or low-cost advice to farmers. Ask your State Department of 
Agriculture or the USDA Extension Service what services are available to 
your state.

    Note: Agency employees cannot recommend a particular attorney or 
organization.

                    I. Primary Loan Service Programs

                         (1) Loan Consolidation

    Two or more of the same type of loans can be combined into one 
larger loan. For example, operating loans can only be joined with 
operating loans.

                          (2) Loan Rescheduling

    The payment schedule can be altered to give you longer to repay 
loans secured by equipment, livestock, or crops. For example, the time 
for repayment of an operating-type loan can be extended up to 15 years 
from the date the loan is rescheduled. When a loan is rescheduled, the 
interest rate may be reduced.

                         (3) Loan Reamortization

    The payment schedule can be changed to give you longer to repay 
loans secured by real estate. For example, a Farm Ownership loan payback 
period may be extended to 40 years from the date the original loan was 
signed. When a loan is reamortized, the interest rate may be reduced.

                       (4) Interest Rate Reduction

                          Regular Interest Rate

    FSA has specific interest rates for each type of loan. These 
interest rates change quite often. They depend on what it costs the 
Government to borrow money. Each type of loan will have a regular rate.

                     Limited Resource Interest Rate

    If you have an Operating Loan (OL), Soil and Water (SW) loan or a 
Farm Ownership (FO) loan, it may be possible for you to get a ``limited 
resource interest rate.'' The limited resource interest rate can be as 
low as 5 percent. It changes quite often and depends on what it cost the 
Government to borrow money.

                    Interest Rate for Loan Servicing

    When loans are consolidated, rescheduled, or reamortized, the 
interest rate of the new loan will be either the interest rate on the 
original loan, the interest rate on the date you submit a complete 
application for loan servicing, or the interest rate for that type of 
loan on the date of restructure, whichever is less. If you meet the 
eligibility requirements, you may be able to get the limited resource 
interest rate on OL, SW, or FO loans, if the loan was not originally 
approved with a limited resource rate. For information about current 
interest rates, contact the FSA county office.

                            (5) Loan Deferral

    Payments of principal and interest can be temporarily delayed for up 
to 5 years. You must show that you cannot pay essential living expenses 
or maintain your property and pay your debts. You must also show you 
will be able to pay at the end of the deferral period.
    The interest rate on a deferred loan will be either the current rate 
of interest for loans of the same type or the original rate on the loan, 
whichever one is lower.
    The interest that builds up during the deferral period will be added 
to the principal of the loan. You must pay this interest in yearly 
payments for the rest of the loan term.

    Note: You can only get a loan deferral if the FSA determines options 
1-4 will not work for you.

                       (6) Softwood Timber Program

    Marginal land including highly erodible land and pasture can be 
planted in softwood timber. If you qualify, a debt of up to $1000

[[Page 149]]

an acre can be deferred up to 45 years. Interest will be charged during 
the deferral period. The debt must be paid when the timber is sold.

                    (7) Conservation Contract Program

    You may enter into a contract with the Secretary of Agriculture to 
protect highly erodible land, wetlands, or wildlife habitat located on 
your property that serves as security for your farm loan debt. In 
exchange for the contract, FSA will reduce your FSA debt. The amount of 
land left after the contract must be enough to continue your farming 
operation.

                           (8) Debt Writedown

    This is not available to borrowers who are current in their loan 
payments or to borrowers who have had previous debt forgiveness on 
another direct loan.
    Debt writedown means the FSA debt you owe is reduced. FSA can reduce 
both the principal and interest of your debt. Your debt can be reduced 
to the recovery value.
    Recovery value. The recovery value is the fair market value of the 
collateral pledged as security for FSA loans minus all of the expenses 
such as sale costs, attorneys fees, management costs, taxes and payment 
of prior liens on the collateral that FSA would have to pay if it 
foreclosed on and sold the collateral. The fair market value of any 
collateral that is not in your possession and has not been released for 
sale by FSA in writing will also be used in determining recovery value.
    Also considered, will be the fair market value of any other assets 
that you may own that are not essential for family living or for farm 
operation, and are not exempt from your judgment creditors or in a 
bankruptcy action, minus the value of any creditors' prior security 
interests and your selling costs. The value of the collateral and any 
other assets must be decided by a qualified appraiser.
    In order to get debt writedown, you must show that after the 
writedown, you will have up to 110 percent, but not less than 100 
percent, of income available to pay all of your family living and 
farming operating expenses and scheduled debt payments. This means you 
must have a feasible plan of operation. FSA will not write down more of 
the debt than is necessary for you to show a feasible plan. You have the 
choice to select a smaller cash flow margin without a writedown. If you 
choose to do this, you will avoid taking your one time debt forgiveness 
as explained below.
    The writedown is used only when the loan servicing programs listed 
in 1-7 above alone will not be enough for you to have a feasible plan. 
If you get writedown, some of the principal and interest on your loans 
will be written down in addition to changing the payback period, and 
possibly the interest rate, using 1-7 above.
    You can receive a writedown if you have not previously received any 
form of debt forgiveness from FSA on any other direct farm loan. The 
maximum debt that can be written down on all loans is $300,000.

          II. Who Can Qualify for Primary Loan Service Programs

    To qualify you must prove that:
    (1) You cannot repay your FSA debt due to circumstances beyond your 
control. If you have certain nonessential assets with a value high 
enough to bring your account current, then you are not eligible for 
Primary Loan Service Programs. These assets are only those that are not 
essential for necessary family living or for your farm operation. FSA 
cannot reduce or write off any of your debt that you could pay by 
selling any of these assets or borrowing against your equity in the 
assets.
    You must have had less income than expected due to such things as:

(a) A natural disaster, weather, or insect problems;
(b) Family illness or injury;
(c) Loss or reduction of off-farm income;
(d) Disease in your livestock;
(e) Low commodity prices and high operating expenses in your local area; 
or
(f) Other circumstances beyond your control.

    (2) You have acted in ``good faith'' to keep your agreements with 
FSA in that you have kept all written agreements with FSA including 
those for the use of proceeds and release of property used to secure the 
loan, and your file shows no fraud, waste, or conversion.
    You must agree to give FSA a lien on certain other assets for 
additional security for the FSA debt. If you are offered restructuring 
and accept the offer, you must provide this lien at closing.
    You must agree to meet, at your own cost, FSA's training 
requirements in production and financial management. The cost will be 
included in your farm plan as an operating expense. The training must be 
completed within 2 years from the date of restructuring. This 
requirement may be waived if you are able to demonstrate that you have 
adequate training in this area. To request a waiver of this training 
requirement, complete Form FmHA 1924-27, ``Request for Waiver of 
Borrower Training Requirements,'' and submit with your request for FSA 
servicing. This training requirement is not applicable if you have 
previously received a waiver or you have successfully completed the 
required FSA Borrower Training program.

[[Page 150]]

                     Who Will Decide if You Qualify?

    The FSA servicing official will decide if you qualify. The servicing 
official will decide whether you can pay as much or more on the loan as 
FSA would get if they foreclosed and sold the collateral for the loan 
plus the value of any nonessential assets. To do this, the servicing 
official must decide whether the total payments of principal and 
interest on your adjusted debt will be at least as much as the 
``recovery value'' defined in part I above.

                  Can You Get Your Debts Written Down?

    Only if FSA will get as much or more by writing down part of your 
debt than through foreclosure or sale of the collateral for the loan and 
any nonessential assets. You also must be delinquent on your FSA debt 
payments.

             Conditions of the New Agreement if You Qualify

    You must sign a shared appreciation agreement for 5 years. Under the 
terms of the agreement:
    (1) You must repay a part of the sum written down.
    (2) The amount you must repay depends on how much your real estate 
collateral increases in value.
    During the 5 years, FSA will ask you to repay part of the debt 
written down if you do one of the following:
    (1) Sell or convey the real estate;
    (2) Stop farming; or
    (3) Pay off the entire debt
    If you do not do one of these things during the 5 years, FSA will 
ask you to repay part of the debt written down at the end of the 5 year 
period.
    FSA can only ask you to repay if the value of your real estate 
collateral goes up.
    If either 1, 2, or 3 above occurs in the first four years of the 
agreement, FSA will ask you to pay 75 percent of the increase in value 
of the real estate. In the last year, you will be asked to pay only 50 
percent of the increase in value. FSA will not ask you to pay more than 
the amount of the debt written down.

                  Date To Begin Restructured Agreement

    If you are found eligible, you will be informed of the date for an 
appointment so your debt can be restructured. You must notify FSA that 
you accept its offer to restructure your debt within 45 days of when you 
receive the offer.

                III. Preservation Loan Servicing Program

                                 Purpose

    This program applies when the primary loan service programs cannot 
help you.
    Homestead Protection. (Keeping your farm home.) You may lease your 
farm home, certain outbuildings and up to 10 acres of land. The lease 
time will be for up to 5 years. The lease will include an option for you 
to purchase the property you lease.

              IV. Who Can Qualify for Homestead Protection?

    (1) Your gross annual income from your farm or ranch must have been 
similar to other comparable operations in your area. This must be true 
for at least 2 years of the last 6 years.
    (2) Sixty percent (60%) of your gross annual income in at least 2 of 
the last 6 years must have come from the farming operation.
    (3) You must have lived in your homestead property for 6 years 
immediately before your application. If you had to leave for less than 
12 months during the 6-year period and you had no control over the 
circumstances, you still may qualify.
    (4) You must be the owner or former owner of the property.
    (5) If FSA has already taken your property, you must apply within 30 
days of the date FSA took your property.

                       How To Lease Your Dwelling

    (1) You may lease your home and up to 10 acres if you pay FSA 
reasonable rent. The rent prices FSA charges you will be similar to 
comparable property in your area.
    (2) You must maintain the property in good condition during the term 
of the lease.
    (3) You may lease for up to 5 years.
    (4) You cannot sublease your property.
    (5) If you do not keep up your rental payments to FSA, FSA will 
force you to leave.
    You can buy back your homestead property at current market value at 
any time during the lease. FSA may place an easement on your property to 
protect and restore any wetlands or converted wetlands. Current market 
value will be decided by an independent appraiser. The appraisal will be 
made within 6 months of your application for homestead protection. The 
appraised value of your property will reflect the value of the land 
after any placement of a wetland conservation easement.
    You should be aware that any real property, located in special areas 
or having special characteristics, which comes into FSA's inventory, may 
have restrictions or easements placed on the property which prevent your 
use of all or a portion of the property, should you choose to lease or 
buy your former dwelling. These restrictions and encumbrances will be 
placed in leases and in deeds on properties containing wetlands, 
floodplains, endangered species, wild and scenic rivers, historic and 
cultural properties, coastal barriers, and highly erodible soils.

[[Page 151]]

                      V. Debt Settlement Programs.

                                 Purpose

    These programs apply after it has been determined that primary loan 
service programs cannot help you. You may be eligible for both debt 
settlement and homestead protection. If you do not have FSA collateral 
you will need to apply for debt settlement only. Under these programs, 
the debt you owe FSA may be settled for less than the amount you owe. 
Please apply for debt settlement from FSA by submitting an application 
for debt settlement on Form RD 1956-1 within 30 days of receiving an 
additional debt settlement notice. See section IX. These programs are 
subject to the discretion of the agency and are not a matter of 
entitlement or right.

                           Programs Available

    (1) Compromise offer: A lump-sum payment of less than the total FSA 
debt owed.
    (2) Adjustment offer: One or more payments of less than the total 
amount owed to FSA. Your payments can be spread out over a maximum of 
five years if FSA decides you will be able to make the payments as they 
become due.
    (3) Cancellation: The final settlement of a debt without any 
payment. FSA must decide there is no FSA security or other asset from 
which FSA can collect. You must be unable to pay any part of the debt 
now or in the future.

                          Approval Requirements

    If you sell your collateral, you must apply the proceeds from the 
sale to your FSA account before you can be considered for debt 
settlement. In the case of compromise or adjustment, however, you may 
keep your collateral if you are unable to pay your total FSA debt and 
pay FSA the present market value of your collateral along with any 
additional amount you are able to pay as determined by FSA. You will be 
allowed to retain a reasonable equity in essential nonsecurity property 
to continue your normal operations and meet minimum family living 
expenses. FSA will not finance a compromise or adjustment offer.
    The County Committee will be consulted on all debt settlements of 
FLP loans. FSA must find that the statements on your application are 
true, and that you do not have assets or income in addition to what you 
stated in your application. You must also have not previously received 
any form of debt forgiveness from FSA on any other direct farm loan. If 
you qualify, your application must also be approved by the FSA State 
Executive Director or the FSA Administrator depending on the amount of 
the debt to be settled.

 VI. How to Apply for Primary and Preservation Loan Servicing Programs.

                Application Forms and Information Needed

    The forms set out below should be included with this notice. If they 
are not, you can obtain them from the FSA county office or as directed 
below.
    (1) Attachment 2 or 4 of Exhibit A Response form to apply for loan 
services.
    (2) FmHA 410-1 Application for FSA Services (The financial statement 
on this form must include information no more than 90 days old. The 
financial statement must be for all individuals and entities personally 
liable for the FSA debt.
    (3) FmHA 431-2 Farm and Home Plan, or other acceptable plan of 
operation. The commodity prices to use for this plan of operation or 
Farm and Home Plan are included with the form. You may request the 
servicing official to assist you in completing your plans.
    (4) FmHA 440-32 Request for Statement of Debts and Collateral. 
Complete the name and address of the creditor, account number, if 
applicable, and your name. All parties liable to the creditor must sign 
and date the forms. FSA will obtain the creditor information.
    (5) FmHA 1910-5 Request for Verification of Employment. Complete 
employer's name and address, employee's name and address, social 
security number, sign and date. FSA will send the form to your employer 
to obtain the needed information.
    (6) SCS-CPA-026 Highly Erodible Land and Wetland Conservation 
Determination (This form must be obtained from and completed by the 
Natural Resources Conservation Service office, if not already on file 
with FSA.)
    (7) AD-1026 Highly Erodible Land Conservation (HELC) and Wetland 
Conservation (WC) Certification (You will be required to complete this 
form in the FSA office if the one you have on file does not reflect all 
the land you own and lease.)
    (8) FmHA 1960-12 Financial and Production Farm Analysis Summary 
(Complete the backside of the form or other similar type worksheets to 
provide production and expense history for crops, livestock, livestock 
products, etc. for each of the five years immediately preceding the year 
of application or the years you have been farming, whichever is less and 
if not already in the FSA case file. You must be able to support this 
information with farm or income tax records.)
    (9) Copies of income tax records and any supporting documents for 
the last five years immediately preceding the year of application if not 
already on file with the FSA county office. (If you have been farming 
for less than 5 years, submit the tax records for the tax years 
immediately preceding the year of application during which you farmed.

[[Page 152]]

If copies of tax records are not readily available, you can obtain 
copies from the Internal Revenue Service (IRS).)
    (10) Map or aerial photo of your farm from FSA or Natural Resources 
Conservation Service if you are applying for the conservation contract 
program. (Identify on the map or photo the portion of the land and 
approximate number of acres to be considered in the contract.)
    (11) RD 1956-1 Application for Settlement of Indebtedness (Complete 
this form only if you wish to apply for debt settlement.)

   Time to Apply for Primary and Preservation Loan Servicing Programs

    To apply, you must complete the appropriate forms and return them 
and the required information to the FSA county office within 60 days 
from the date you received this notice.

  VII. What Happens When You Are Not Eligible for Primary Loan Service 
                                Programs?

    If the servicing official decides you are not eligible, you may 
request a meeting with that official so the official can explain the 
decision.
    If you do not agree with the FSA servicing official's decision, you 
can tell the official why. If you can make the necessary realistic 
changes to your Farm and Home Plan to show a feasible plan, you should 
show these changes to the servicing official.

                      Negotiation of the Appraisal

    A negotiation of the appraisal is a process whereby the borrower 
objects to the FSA appraisal, obtains an independent appraisal at the 
borrower's own costs, pays one-half of the cost for a third appraisal, 
and the average of the two appraisals closest in value is taken as the 
final appraised value to be used in considering restructuring. In all 
cases of primary and preservation loan servicing where the borrower 
presents an independent appraisal which is conducted by a qualified 
appraiser and is within 5 percent of the value of the FSA appraisal, the 
borrower must choose one of these two appraisals for the servicing 
official to use to continue processing the request. Negotiation of 
appraisal may affect your right to appeal the appraisal.

                You May Request Mediation of Other Loans

    If you cannot show a feasible farm plan because you owe too much to 
other creditors and suppliers, FSA will help you try to get your other 
creditors to adjust your debts. This will be done by FSA asking for 
mediation if your State has a mediation program approved by the United 
States Department of Agriculture. If there is no State mediation 
program, FSA will try to set up a meeting with your other creditors and 
suppliers if it can be shown that a reduction in these debts can provide 
a feasible farm plan.

                      You Have the Right to Appeal

    Appeal. Appeal rights will be provided to you after FSA has made a 
decision on your request for primary loan servicing. If you first 
request a meeting with the servicing official instead of an appeal, the 
time for requesting an appeal will be extended until you are advised of 
the results of your meeting. You will be provided with the address of 
USDA's National Appeals Division. Your request for an appeal must be 
postmarked no later than 30 days from the date you received the agency's 
adverse decision. If you disagree with FSA's determination that any 
determination is not appealable, you may request a determination of 
appealability from the National Appeals Division.

   You May Buyout (Pay Off) Your Loan at the ``Current Market Value''

    (1) Current market Value. If the analysis of your debt shows that 
you cannot ``cash flow'' even if your debt to FSA is reduced to the 
value of the collateral, the servicing official will advise you in 
writing that you can buyout the loan by paying the ``current market 
value'' minus any prior liens. The current market value is determined by 
a current appraisal completed by a qualified appraiser.
    (2) Limits. You may receive a buyout if you have not previously 
received any form of debt forgiveness from FSA on any other direct farm 
loan. The maximum debt that can be written off with buyout is $300,000.
    (3) Eligibility. To qualify you must prove that:
    You cannot repay your FSA delinquent debt and the reason you cannot 
repay was due to circumstances beyond your control,
    You have acted in good faith, and
    The value of your restructured loan is less than the recovery value.
    (4) Time Limit. If you want to buy out your farm loan debt at the 
current market value, you must pay FSA within 90 days of the date you 
receive the offer. If you appeal the servicing official's decision not 
to give you primary loan servicing, this 90 days will not start until 
the administrative appeal process ends.
    (5) Cash. If you pay off the loan at the current market value, you 
must pay in cash. FSA will not make or guarantee a loan for this 
purpose.

           Consideration for Preservation Loan Service Program

                         (Homestead Protection)

    You will be considered for homestead protection if:

[[Page 153]]

    (1) You applied for primary loan servicing as required and did not 
qualify.
    (2) You do not appeal your primary loan servicing denial, or do not 
win your appeal.
    (3) You do not pay off the loan through buyout.
    (4) You agree to give FSA title to your land at the time FSA signs 
the written homestead protection agreement with you. FSA will not accept 
title and will deny your preservation request if it is not in FSA's best 
financial interest to accept title. FSA will compute the costs of taking 
title including the cost of paying other creditors who have outstanding 
liens on the property. FSA will take title only if it can obtain a 
recovery on its cost. Any written agreement for preservation loan 
servicing will include the amount you must pay for rent, the number of 
years you can rent, and an option to purchase the property at the fair 
market value at the time you exercise the option to purchase.
    (5) You must request Homestead Protection within 30 days of FSA 
obtaining title to the property.

               Consideration for Debt Settlement Programs

    If you wish to be considered for debt settlement, you will need to 
request and return a completed Form RD 1956-1. You may request debt 
settlement from FSA within 30 days of receiving an additional debt 
settlement notice. See section IX. Usually, the most appropriate time 
for making this request is when FSA has determined that Primary Loan 
Servicing options will not provide the best net recovery to the 
Government and you are requesting preservation loan servicing. If you no 
longer have any security remaining for the outstanding FSA loans, you 
may want to request debt settlement instead of primary and preservation 
loan servicing.

VIII. What Happens When You Are Turned Down for Homestead Protection or 
                        Debt Settlement Programs?

    If FSA decides that you cannot get homestead protection or debt 
settlement you can ask for
    (1) A meeting with FSA to discuss the decision, or
    (2) Appeal the determination.

                         The Right to a Meeting

    The servicing official will send you a letter telling you why FSA 
decided not to give you homestead protection or debt settlement. That 
letter will give you 15 days to ask for a meeting with FSA.

                         The Right to an Appeal

    Appeal rights will be provided to you after FSA has made a decision 
on your request for homestead protection. If you first request a meeting 
with the servicing official instead of an appeal, the time for 
requesting an appeal will be extended until you are advised of the 
results of your meeting. You will be provided with the address of USDA's 
National Appeals Division. Your request for an appeal must be postmarked 
no later than 30 days from the date you received the final 
determination.
    On appeal, you can contest FSA's rental amount and its decision not 
to give you homestead protection. You can also contest FSA's decision to 
reject your debt settlement application.

                    IX. Acceleration and Foreclosure

    If you do not appeal an adverse determination or if you are denied 
relief on appeal, FSA will accelerate your loan account and make demand 
for payment of the whole debt. FSA will stop allowing you to use any of 
your crop, livestock, and milk checks, on which they have a claim, to 
pay for living and operating expenses. FSA will repossess the collateral 
or start legal foreclosure or liquidation proceedings to take and sell 
the collateral, including your equipment, livestock, crops, and land. 
FSA will continue to take by administrative offset, money which FSA and 
other Federal Government agencies owe you.
    FSA may refrain from taking these actions if you agree to do one, or 
a combination of the following actions, within an agreed upon time, with 
FSA's approval:
    (1) Sell all the collateral for the loan at market value.
    (2) Convey (legally transfer) the collateral to FSA. You may apply 
or reapply for homestead protection jointly with this action, even if 
you applied before and were not accepted.
    (3) Apply to transfer the collateral to someone else and have that 
person assume all or part of the FSA debt. (This is called transfer and 
assumption.)
    If any of these options, or foreclosure, result in payment of less 
than you legally owe, the servicing official will send you a notice 
providing you with 30 days to submit a debt settlement application. If 
you do not respond in a timely manner, your account will be sent to the 
U.S. Department of the Treasury (Treasury) for collection through cross-
servicing. If you submit a debt settlement application within the 
required time frame, and the application is rejected, your debt will be 
referred to Treasury for cross-servicing after all appeal rights on the 
debt settlement application are exhausted. Referral of debt to Treasury 
for cross-servicing is not an appealable action. If your debt is 
referred for cross-servicing, Treasury may:
    (1) Take action to collect the debt by offset or garnishment, 
including offset of tax refunds and garnishment of salary,
    (2) Refer the debt to a private collection agency for collection, or
    (3) Refer the debt for collection by the U.S. Department of Justice 
(DOJ).

[[Page 154]]

    Collection fees may be charged to you when collections are made. In 
addition, FSA will report the debt to a credit bureau. After your 
account is referred to Treasury, any debt settlement offer must be 
submitted to Treasury, or its private collection agency contractor. If 
your account is referred to DOJ for collection, your offer must be made 
to DOJ.

[62 FR 10134, Mar. 5, 1997, as amended at 64 FR 62972, 62973, Nov. 18, 
1999; 65 FR 50405, Aug. 18, 2000; 67 FR 12458, Mar. 19, 2002; 68 FR 
7699, Feb. 18, 2003]

            Exhibits B-F to Subpart S of Part 1951 [Reserved]

   Exhibit G to Subpart S of Part 1951--Deferral, Reamortization and 
 Reclassification of Distressed Farmer Program (FP) Loans for Softwood 
                      Timber Production (ST) Loans

                               I. General.

    Borrowers with distressed FP loans, as defined in this exhibit, with 
50 or more acres of marginal land may request FmHA or its successor 
agency under Public Law 103-354 assistance under the provisions of this 
section. Such distressed FP loans may be reamortized with the use of 
future revenue produced from the planting of softwood timber on marginal 
land as set out in this section. The basic objectives of the FmHA or its 
successor agency under Public Law 103-354 in reamortizing and deferring 
payments of distressed FP loans (ST loans) to financially distressed 
farmers are to develop a feasible plan to assist eligible FmHA or its 
successor agency under Public Law 103-354 borrowers to improve their 
financial condition, to repay their outstanding FmHA or its successor 
agency under Public Law 103-354 debts in an orderly manner, to carry on 
a feasible farming operation, and to take marginal land, including 
highly erodible land, out of the production of agricultural commodities 
other than for the production of softwood timber. County Supervisors are 
authorized to approve softwood timber (ST) loans subject to the 
limitations in paragraph VI of this exhibit.
    (A) Management assistance. FmHA or its successor agency under Public 
Law 103-354 management assistance will be provided to borrowers to 
assist them to achieve loan objectives and protect the Government's 
financial interests, in accordance with subpart B of part 1924 of this 
chapter.
    (B) Definitions.
    (1) Distressed FmHA or its successor agency under Public Law 103-354 
loan. An FP loan which is delinquent or in financial distress because a 
borrower cannot project a feasible plan by using the other loan 
modification actions including rescheduling, reamortizing or deferral 
for the maximum term.
    (2) Marginal land. Land determined suitable for softwood timber 
production by the Soil Conservation Service (SCS) that was previously 
pasture land or within the last five years used for the production of 
agricultural commodities, as defined in Sec. 12.2 of subpart A of part 
12 of this chapter and which is Attachment 1 of Exhibit M of subpart 
1940 of this chapter. This could include:
    (a) Highly erodible land as defined or classified by the SCS under 
Sec. 12.2 of subpart A of part 12 of this chapter, or
    (b) Marginal lands that predominantly include soils that are in 
Class IV, V, VI, VII, or VIII in the SCS's Land Capability 
Classification System. However, marginal land shall not include wetlands 
as defined in Sec. 12.2 (a)(26) of subpart A of part 12 of this chapter 
and which is attachment 1 of exhibit M of subpart G of part 1940 of this 
chapter.
    (3) Softwood timber. The wood of a coniferous tree having soft wood 
that is easy to work or finish and is commonly grown and commercially 
sold for pulpwood, chip, and sawtimber.
    (c) ST loan eligibility. A borrower must:
    (1) Have the debt repayment ability and reliability, managerial 
ability and industry to carry out the proposed timber production 
operation.
    (2) Be willing to place not less than 50 acres of marginal land in 
softwood timber production; such land (including timber) may not have 
any lien against it other than a lien for ST loans.
    (3) Have properly maintained chattel (i.e. movable property) and 
real estate security and accurately accounted for the sale of security, 
including crops, and livestock production.
    (4) Be an FmHA or its successor agency under Public Law 103-354 FP 
loan borrower who owns 50 acres or more of marginal land which SCS 
determines to be suitable for softwood timber.
    (5) Have sufficient training or farming experience to assure 
reasonable prospects of success in the proposed timber operation.
    (6) Have one or more distressed FmHA or its successor agency under 
Public Law 103-354 loans as defined by this exhibit.
    (7) Not have a total indebtedness of ST loan(s) that will exceed 
$1,000 per acre for the marginal land at closing. Example: If 50 acres 
of marginal land is put in softwood timber production, the total ST loan 
indebtedness may not exceed $50,000 at closing.
    (8) Be able to obtain sufficient money through FmHA or its successor 
agency under Public Law 103-354 or other sources including cost-sharing 
programs for forestry purposes for the planting, caring, and harvesting 
of the softwood timber trees.

[[Page 155]]

                    II. Reamortization requirements.

    (A) A Timber Management Plan must be developed with the assistance 
of the Federal Forest Service (FS), State Forest Service or such other 
State or Federal agencies or qualified private forestry service. The 
plan will outline the necessary site preparation, planting practices, 
environmental protection practices, tree varieties, the harvesting 
projection, the planned use of the timber, etc.
    (B) The following requirements must also be met:
    (1) If the borrower is otherwise eligible, the County Supervisor 
must determine that a feasible farm plan as defined by subpart B of part 
1924 of this chapter on the present farm operation is not possible 
without using the provisions of this section. The County Supervisor must 
calculate the borrower's plan of operation, using the maximum terms for 
the rescheduling, reamortization and deferral authorities set out in 
this subpart. If a feasible projection can be achieved by using any of 
these authorities, the borrower's account will be rescheduled, 
reamortized or deferred, as applicable. Limited Resource rates must be 
considered, if the borrower is eligible, in determining whether a 
feasible plan can be achieved. The County Supervisor must document the 
steps taken to develop these cash flow projections and must place this 
documentation in the borrower's case file. A copy of this documentation 
must also be given to the borrower. If a feasible plan is shown, the 
borrower is not eligible for a reamortization of a distressed loan(s) as 
set out in this section. The borrower will be given an opportunity to 
appeal the FmHA or its successor agency under Public Law 103-354 denial, 
as provided in Sec. 1951.909(i) of this subpart after the County 
Supervisor determines the borrower's eligibility for the other servicing 
programs in this subpart.
    (2) If a feasible plan cannot be developed on the present farm 
operation, the County Supervisor will determine if a feasible plan would 
be possible by deferring and reamortizing a portion of one or more 
distressed FP loans as ST loans. The ST loan is limited to the loan 
amount (rounded up to the nearest $1,000) sufficient to produce a 
feasible plan. However, the amount of the loan cannot exceed the $1,000 
per acre specified in paragraph I (C)(7) of this exhibit. The borrower, 
with assistance from the County Supervisor, must be able to develop a 
feasible farm plan for the first full crop year of the deferral.
    (3) For applications received before November 28, 1990, when a loan 
is reamortized the accrued interest less than 90 days overdue will not 
be capitalized. For new applications, as defined in Sec. 1951.906 of 
this subpart, the total amount of outstanding accrued interest will be 
added to the principal at the time of reamortization. Payments may be 
deferred for up to 45 years or until the timber crop produces revenue, 
whichever comes first, except as required in paragraph VIII(B) of this 
section. If income is available, payments will be required as determined 
in paragraph II(B)(4) of this exhibit. Repayment of such a reamortized 
loan shall be made not later than 46 years after the date of the 
reamortization unless the borrower qualifies for a further 
reamortization as authorized in section IX(H) of this exhibit.
    (4) If assistance is granted, an annual plan will be developed each 
year to determine if there is any balance available to pay interest and/
or principal on ST loans before the deferral period ends. If a balance 
is available, the borrower will sign Form FmHA or its successor agency 
under Public Law 103-354 440-9, ``Supplementary Payment Agreement.''
    (5) Applicable requirements of subpart G of part 1940 of this 
chapter must be met.
    (C) If a borrower has requested an ST loan that has a portion of the 
debt set-aside under this subpart, the set-aside will be cancelled at 
the time the reamortization is granted. The borrower may retain the set-
aside on other loans. A borrower who requests a reamortization of a 
distressed set-aside loan must agree in writing to the cancellation of 
the set-aside. The written agreement must be placed in the borrower's 
case file.
    (D) If the total amount of the distressed FP loan(s) exceeds $1,000 
per acre of the marginal land designated for softwood timber production, 
the FP loan must be split. The split portion of the loan may not exceed 
$1,000 per acre for the marginal land. A new mortgage will be required 
to secure this portion of the loan unless the FmHA or its successor 
agency under Public Law 103-354 State supplement allows otherwise. The 
mortgage must ensure that FmHA or its successor agency under Public Law 
103-354 has a security interest in the timber. The remaining balance of 
such a split loan will be secured by the remaining portion of the farm 
and such other security previously held as security prior to the split. 
Separate promissory notes will be executed for each portion of the split 
loan. The remaining portion of the note will be rescheduled, deferred, 
or reamortized, as applicable, in accordance with this subpart. The ST 
loan will be deferred and reamortized in accordance with this section. 
The ST loan(s) will be secured by the marginal land including timber.
    (E) The County Supervisor will release all other liens securing FmHA 
or its successor agency under Public Law 103-354 loans including NP 
loans on such marginal land when the ST loan is closed. Only ST loans 
will be secured by such marginal land including timber. Releases will be 
processed in accordance with subpart A of part 1965 of this chapter. 
Such releases are authorized by this paragraph. If other lenders have 
liens on this marginal land, the lenders must release their liens before 
or simultaneously with FmHA or

[[Page 156]]

its successor agency under Public Law 103-354's release of liens. No 
additional liens can be placed on the marginal land and timber after the 
closing of a ST loan.

                     III. Interest rate of ST loans.

    See Exhibit B of FmHA or its successor agency under Public Law 103-
354 Instruction 440.1 for the applicable interest rate (available in any 
FmHA or its successor agency under Public Law 103-354 office). The 
interest rate will be the lower of (1) the rate of interest on the 
original loan which has been deferred and reamortized as the ST loan or 
(2) the Exhibit B rate.

                        IV. Special requirements.

    (A) Size of the timber tract. The minimum parcels of marginal land 
selected as a tract for softwood timber production must be contiguous 
parcels of land containing at least 50 acres. Small scattered parcels 
will be excluded.
    (B) Farm or residence situated in different counties. If a farm is 
situated in more than one State, county, or parish, the loan will be 
processed and serviced in the State, county, or parish in which the 
borrower's residence on the farm is located. However, if the residence 
is not situated on the farm, the loan will be serviced by the county 
office serving the county in which the farm or a major portion of the 
farm is located unless otherwise approved by the State Director.
    (C) Graduation of ST borrowers. If, at any time, it appears that the 
borrower may be able to obtain a refinancing loan from cooperative or 
private credit source at reasonable rates and terms, the borrower will, 
upon FmHA or its successor agency under Public Law 103-354 request, 
apply for and accept such financing.

                              V. Planning.

    A farm plan will be completed as provided in subpart B of part 1924 
of this chapter. The State Director will supplement this subpart with a 
State supplement to guide the County Supervisor regarding the sources 
available to obtain a Timber Management Plan. The required Timber 
Management Plan developed with the assistance of the FS, State Forest 
Service or such other State or Federal agencies or qualified private 
forestry service should provide management recommendations to assist the 
borrower in establishing, managing and harvesting softwood timber. 
Borrowers are responsible for implementing the Timber Management Plan.

        VI. Distressed reamortized loan approval or disapproval.

    County Supervisors are authorized to approve or disapprove the 
reamortization of distressed FmHA or its successor agency under Public 
Law 103-354 loans as described in this section. No more than 50,000 
acres nationwide can be placed in the program. Acres for the program 
will be allocated to borrowers on a first-come, first-serve basis. 
``Administrative Notices'' containing reporting requirements will be 
issued to field offices so that the National Office can keep a tally of 
the acres placed in the program. The County Supervisor will obtain a 
verification from the State Director that the acres can be allocated to 
the program prior to approval of the reamortization of the distressed FP 
loan(s). Normally, the verification of allocated acres will be obtained 
when the loan docket is complete and ready for approval. Loans for the 
program will not be approved until a confirmation is received for the 
allocation of acres for the loan(s). When a reamortization is approved, 
the County Supervisor will notify the borrower by letter of the approval 
of the ST loan(s). The FmHA or its successor agency under Public Law 
103-354 field office will process the reamortization via the FmHA or its 
successor agency under Public Law 103-354 field office terminal system 
in accordance with Form FmHA or its successor agency under Public Law 
103-354 1940-18.

                     VII. Reamortizing disapproval.

    When a reamortization is disapproved, the County Supervisor will 
notify the borrower in writing of the action taken and the reasons for 
the action, and include any suggestions that could result in favorable 
action. The borrower will be given written notice of the opportunity to 
appeal as provided in Sec. 1951.909 (i) of this subpart after the 
County Supervisor has determined whether the borrower is eligible for 
the remaining servicing programs authorized by this subpart.

                      VIII. Processing of ST loans.

    (A) If the reclassified ST loan is approved, all other FmHA or its 
successor agency under Public Law 103-354 loans must be current on or 
before the date the reclassified ST notes are signed except for FmHA or 
its successor agency under Public Law 103-354-authorized recoverable 
cost items that cannot be rescheduled or reamortized. All other 
delinquent loans including NP loans will be rescheduled, reamortized, 
consolidated, deferred or paid current as applicable to bring the 
borrower's account current.
    (B) ST loans on the dwelling. If the only liens on the borrower's 
dwelling are the reclassified ST loans, the borrower must make payments 
on the loan(s):
    (1) The total of which will be at least equal to the market value 
rent for the dwelling as determined by the County Supervisor, or
    (2) The minimum equally amortized installment for the term of the 
loan, whichever is less. Such payments cannot be deferred

[[Page 157]]

and will be shown in the promissory note as a regular scheduled payment 
for the reclassified ST loan.
    (C) Form FmHA or its successor agency under Public Law 103-354 1940-
18, ``Promissory Note for ST Loans,'' will be used for ST loans. Form 
FmHA or its successor agency under Public Law 103-354 1940-17, 
``Promissory Note,'' will be used for any remaining portion of a split 
distressed loan. The forms will be completed, signed and distributed as 
provided in the Forms Manual Inset.
    (D) For applications for Primary and Preservation Loan Service 
Programs received before November 28, 1990, interest payments which are 
90 days or more past due will be added to the principal balance to form 
a new principal balance upon which interest will accrue over the 
Softwood Timber deferral period; interest less than 90 days past due 
will not be capitalized and will be payable at the end of the Softwood 
Timber deferral period. For new applications, as defined in Sec. 
1951.906 of this subpart, the total amount of outstanding accrued 
interest will be added to the principal balance to form a new principal 
balance upon which interest will accrue over the Softwood Timber 
deferral period. The FMI for Form FmHA or its successor agency under 
Public Law 103-354 1940-17 has examples (IV, V) which explain this 
procedure. The Finance Office will apply the payments made on the note 
in accordance with subpart A of part 1951 of this chapter.
    (E) The following addendum will be typed and signed by the borrower 
and attached to the promissory note:
    Addendum For Deferred Interest For Softwood Timber Loans
    Addendum to promissory note dated -------- in the original amount of 
$-------- at an annual interest rate of -------- percent. This agreement 
amends and attaches to the above note. $-------- of each regular payment 
on the note will be applied to the interest which will accrue during the 
deferral period. The remainder of the regular payment will be applied in 
accordance with 7 CFR part 1951, subpart A. I (we) agree to sign a 
supplementary payment agreement and make additional payments if during 
the deferral period we have a substantial increase in income and 
repayment ability.
________________________________________________________________________
    Borrower
    (F) New mortgages on farm property or related assets must be filed 
unless otherwise excused from being filed by the State supplement. If a 
new mortgage or separate security agreement is taken, the new mortgage 
and/or security agreement should be filed and perfected in the manner 
described by the State supplement. In many cases a survey of the land 
securing the ST loan will be required.
    (G) The borrower will obtain any required releases for previous 
mortgages from other lienholders and the County Supervisor will release 
any other FmHA or its successor agency under Public Law 103-354 liens in 
accordance with paragraph II (E) of this exhibit.

                             IX. Servicing.

    ST loans will be serviced in accordance with Subpart A of Part 1965 
of this chapter with the following exceptions:
    (A) ST loans will not be subordinated for any purpose.
    (B) Security property for ST loans will not be leased except for 
softwood timber production as authorized by the ST loan.
    (C) During the life of the ST loan, land designated for softwood 
timber production cannot be used for grazing or the production of other 
agricultural commodities, as defined in Sec. 12.2(a)(1) of Subpart A of 
Part 12 of this chapter and which is in Attachment 1 of Exihibit M of 
subpart G of part 1940 of this chapter.
    (D) ST loans will only be transferred as NP loans in accordance with 
subpart A of part 1965 of this chapter except in the case of the death 
of the borrower. Deceased borrower cases involving transfers will be 
handled by FmHA or its successor agency under Public Law 103-354 in 
accordance with Subpart A of Part 1962 of this chapter.
    (E) Land designated for softwood timber production under this 
subpart must remain in the production of softwood timber for the life of 
the loan. If the trees die or are destroyed or the production of timber 
ceases, as recognized by acceptable timber management practices, and the 
borrower is unable to develop feasible plans for the reestablishing of 
the timber production, the account will be liquidated in accordance with 
the provisions of Subpart A of Part 1965 of this chapter. Any appeal to 
FmHA or its successor agency under Public Law 103-354 must be concluded 
before any adverse action can be taken on the loan.
    (F) The Timber Management Plan will be updated and revised, as 
needed, every five years or more often if necessary.
    (G) Harvesting softwood timber for Christmas trees is prohibited.
    (H) An ST loan will only be reamortized if:
    (1) The timber is not harvested in the year stated in the initial 
promissory note, and
    (2) The borrower is unable to pay the note as agreed.
    Interest charges more than 90 days overdue will be capitalized at 
the time of the reamortization. The term of the reamortized note will 
not exceed 50 years from the date of the initial ST note. The total 
years of deferred payments will not exceed 45 years, including the 
payments deferred in the initial note. The note should be scheduled for 
payment when the timber is expected to be harvested, or when income will 
be available to

[[Page 158]]

pay on the note, whichever comes first. However, partial payments must 
be scheduled for those years that exceed the deferral period.
    (3) For applications received before November 28, 1990, the interest 
less than 90 days past due will not be capitalized. For new 
applications, the total amount of outstanding accrued interest will be 
capitalized. The term of the reamortized note will not exceed 50 years 
from the date of the initial ST note. The total years of deferred 
payments will not exceed 45 years, including the payments deferred in 
the initial note. The note should be scheduled for payment when the 
timber is expected to be harvested, or when income will be available to 
pay on the note, whichever comes first. However, partial payments must 
be scheduled for those years that exceed the deferral period.

    S. State supplements.

    State supplements will be issued immediately and updated as 
necessary to implement this section.

  Attachment 1--Notice of Availability of Option To Reamortize Certain 
  Loans Secured by Future Revenue Produced by Planting Softwood Timber

 (Used by the County Supervisor to inform borrowers of the availability 
                        of Softwood Timber Loans)

CERTIFIED MAIL
RETURN RECEIPT REQUESTED
(Name and Address)
    Dear ----------------------:
    To implement a provision in the 1985 Farm Bill, the Farmers Home 
Administration or its successor agency under Public Law 103-354 (FmHA or 
its successor agency under Public Law 103-354) is offering the 
additional loan servicing option of reamortizing Farmer Program loans 
with repayment secured by and postponed until the harvesting of a 
Softwood timber crop. Eligible applicants may request or receive an 
operating loan to cover the actual cost of the required planting. If you 
are using marginal land for farming or pasture, and desire to use at 
least 50 acres of this marginal land to plant and produce softwood 
timber, contact this office within 15 days of the receipt of this letter 
to apply for this option so that your request can be processed in a 
timely manner. Please note the following limitations to this program: 
FmHA or its successor agency under Public Law 103-354 must be the sole 
lienholder of both the land growing the softwood timber and the revenues 
from the timber; the total amount of loans secured by the land and 
softwood timber cannot exceed $1,000 per acre; and the program is 
limited to 50,000 acres of softwood timber nationwide.

    Sincerely,
County Supervisor

[53 FR 35718, Sept. 14, 1988, as amended at 56 FR 3396, Jan. 30, 1991; 
57 FR 18661, Apr. 30, 1992]

   Exhibit H to Subpart S of Part 1951--Conservation Contract Program

                               I. General

    A Conservation Contract (CC) may be exchanged, when requested by a 
borrower (current or delinquent), for a cancellation of a portion of the 
borrower's FSA indebtedness. The CC may be considered alone, or with 
other Primary Loan Servicing Programs as set forth in 7 CFR 1951.909. 
These contracts can be established for conservation, recreational, and 
wildlife purposes on farm property that is wetland, wildlife habitat, 
upland or highly erodible land. Such land must be suitable for the 
purposes involved. All Farm Loan Programs loans which are secured by 
real estate may be considered for a CC. Non-program loan debtors are not 
eligible to receive any benefits under this section.

                               Definitions

    (1) Conservation purposes. These include protecting or conserving 
any of the following environmental resources or land uses:
    (a) Wetland, except when such term is part of the term Converted 
wetland, is land that the Natural Resources Conservation Service (NRCS) 
has determined has a predominance of hydric soils and that is inundated 
or saturated by surface or ground water at a frequency and duration 
sufficient to support, and that under normal circumstances does support, 
a prevalence of hydrophytic vegetation typically adapted for life in 
saturated soil conditions, except that this term does not include lands 
in Alaska identified as having a high potential for agricultural 
development and a predominance of permafrost soils.
    (i) Hydric soils means soils that, in an undrained condition, are 
saturated, flooded, or ponded long enough during a growing season to 
develop an anaerobic condition that supports the growth and regeneration 
of hydrophytic vegetation;
    (ii) Hydrophytic vegetation means a plant growing in--
    (A) Water; or
    (B) A substrate that is at least periodically deficient in oxygen 
during a growing season as a result of excessive water content;
    (b) Highly erodible land is land that NRCS has determined has an 
erodibility index of 8 or more.
    (c) Upland is a term used in the law to refer to land other than 
highly erodible land and wetland. Although upland in its normal use 
implies many types of land, it has been

[[Page 159]]

more narrowly defined for this purpose to include land or water areas 
that meet any one of the following criteria:
    (i) One-hundred year floodplain,
    (ii) Aquatic life, or wildlife habitat or endangered plant habitat 
of local, regional, State or Federal importance,
    (iii) Aquifer recharge area of local, regional or State importance, 
including lands in the wellhead protection program for public water 
supplies authorized by the Safe Drinking Water Act Amendments of 1986,
    (iv) Area of high water quality or scenic value,
    (v) Area containing historic or cultural property, which is listed 
in or eligible for the National Register of Historic Places, as provided 
by the National Historic Preservation Act (NHPA),
    (vi) Area that provides a buffer zone necessary for the adequate 
protection of proposed conservation contract areas,
    (vii) Area within or adjacent to a National Park, U.S. Fish and 
Wildlife Service administered area, State Fish and Wildlife agency 
administered area, a National Forest, a Bureau of Land Management 
administered area, a Wilderness Area, a National Trail, a unit of the 
Coastal Barrier Resource System, abandoned railroad corridors contained 
in local, State or Federal open space, recreation or trail plans, 
Federal or State Wild or Scenic River, U.S. Army Corps of Engineers land 
designated for flood control or recreation purposes, State and local 
recreation, natural or wildlife areas or State Conservation Agency 
administered areas.
    (viii) Area that NRCS determines contains soils that are generally 
not suited for cultivation such as soils in land capability classes IV, 
V, VI, VII or VIII in the NRCS's Land Capability Classification System.
    (d) Wildlife habitat is a term used to include the area that 
provides direct support for given wildlife species, species life stages, 
populations, or communities determined appropriate by the Conservation 
Agency within the State as being of State, regional or local importance 
or as determined by the Fish and Wildlife Service to be of national 
importance. This wildlife habitat area includes all acceptable 
environmental features such as air quality, water quality, vegetation, 
and soil characteristics.
    (2) Management authority. Any agency of the United States, a State, 
or a unit of local Government of a State, a person, or an individual 
that is designated in writing by FSA to carry out all or a portion of 
the activities necessary to manage and implement the terms and 
conditions of a contract or its management plan. The borrower whose land 
is subject to the contract may be eligible to be designated as a 
management authority.
    (3) Person. Any agency of the United States, a State, a unit of 
local Government within a State, or a private or public nonprofit 
organization.
    (4) Recreational purposes. These activities include providing public 
use for both consumption (e.g. hunting, fishing) and nonconsumption 
(e.g. camping, hiking) recreational activities, in a manner that 
conserves wildlife and their habitats, ensures public safety, complies 
with applicable laws, regulations, and ordinances and permits the 
operation of the remaining farm enterprise.
    (5) Wildlife. Means any wild animal, whether alive or dead, 
including any wild mammal, bird, reptile, amphibian, fish, mollusk, 
crustacean, arthropod, coelenterate, or other invertebrate, whether or 
not bred, hatched, or born in captivity, and includes any part, product, 
egg, or offspring.
    (6) Wildlife purposes. These program objectives include establishing 
and managing areas that contain fish and wildlife habitats of local, 
regional, State or Federal importance.

                             II. Eligibility

    The following steps must be taken to determine if the borrower is 
eligible for a conservation contract. If the borrower is found to be 
ineligible, the FSA servicing official will notify the borrower of the 
opportunity to appeal the adverse decision on the eligibility for the 
contract after a final decision is made on whether the borrower 
qualifies for any other servicing options. The servicing official must 
find that:
    (1) All Farm Loan Programs loans which are secured by real estate 
may be considered for a CC. A real estate mortgage or deed of trust 
taken on a borrower's real estate as additional security for a Farm Loan 
Programs loan qualifies as real estate security.
    (2) The proposed contract helps a qualified borrower to repay the 
loan in a timely manner.
    (3) If the land being proposed for the contract is within the FSA 
Conservation Reserve Program, both the requirements of that program and 
this section can be met.

               III. Establishing the Contract Review Team

    The servicing official will establish a contract review team by 
notifying the appropriate field offices of the Natural Resources 
Conservation Service (NRCS), U.S. Fish and Wildlife Service (FWS), State 
Fish and Wildlife Agencies, Conservation Districts, National Park 
Service, Forest Service (FS), State Historic Preservation Officer, State 
Conservation Agencies, State Environmental Protection Agency, State 
Natural Resource Agencies, adjacent public landowner, and any other 
entity that may have an interest and qualifies to be a management 
authority for a contract. The notified parties may in turn notify other 
eligible entities. NRCS, for example, may want to notify the appropriate

[[Page 160]]

Conservation District. As part of the notification, the servicing 
official will provide an approximate location and a general description 
of the potentially affected land. All notified parties will be invited 
to serve on the contract review team.

            IV. Responsibilities of the Contract Review Team

    NRCS will lead the contract review team which in every case will be 
composed of an NRCS, FSA and FWS representative, plus all other parties 
that accepted the invitation to participate. To the extent practicable, 
a site visit will be conducted within fifteen days from the date the 
review team members are invited to participate. Any lien holder and the 
borrower will be informed of the site visit time and invited to attend. 
Within thirty days after the site visit, a report will be developed by 
the review team and provided to the servicing official. The report will 
cover the items listed in paragraphs (A) through (F) of this paragraph 
and will be prepared by the review team. The items to be addressed in 
the review team report are:
    (A) The amount of land, if any, which is wetland, wildlife habitat, 
upland or highly erodible land and the approximate boundaries of each 
type of land. If applicable, contract boundaries may be recommended 
which go beyond the wetland, upland, or highly erodible land but are 
necessary for either the establishment of identifiable contract 
boundaries or are required for the efficient management of the 
contract's terms and conditions.
    (B) A finding of whether the land is suitable for conservation, 
recreation or wildlife habitat purposes and a priority ranking of 
purposes included, if the land can be so classified and ranked.
    First, priority will be given to land contract opportunities to 
benefit wildlife species of Federal Trust responsibility (e.g., 
migratory birds and endangered species) and their habitats (e.g., 
wetlands). Special consideration will be given to opportunities to 
benefit a combination of conservation, recreation and wildlife habitat 
purposes. When there are other land contracts already established or 
under review within the local area and the intent of these contracts has 
been established, the review team will consider these actions as purpose 
rankings are developed.
    (C) If appropriate, any special terms or conditions that would need 
to be placed on the contract plus unique or important features of the 
property which would not be adequately addressed by the standard 
contract terms and conditions.
    (D) A proposed management plan consistent with the purpose or 
purposes for which the contract would be established. The management 
plan will outline the various management alternatives for the proposed 
contract. The selection of the alternatives to be followed will be based 
upon future needs, fund availability, and identification within the 
management plan. The management plan will provide guidance as to the 
conservation practices to be followed and the costs which may occur in 
the establishment and maintenance of the contract. This management plan 
will specifically recommend whether or not public recreational use and 
public hunting should be allowed on the contract and provide supporting 
reasons for the recommendation made. Whenever changes are required in 
the management plan, FSA, may update the management plan to reflect the 
changes.

                V. FSA's Review of Contract Team's Report

    Upon receipt, the Servicing Official will review the contract team's 
report. If the report indicates that a contract is not feasible given 
the nature of the land, or other factors, the servicing official will 
inform the borrower of the reasons that the contract has been denied and 
that the borrower may appeal the denial of the contract or meet with the 
servicing official.

                         VI. Terms of Contracts

    Borrowers participating in the debt cancellation conservation 
contract program will be given the option of selecting a 50, 30 or 10 
year contract term. The amount of debt to be canceled will be directly 
proportional to the length of the contract. The area placed under the 
conservation contract cannot be used for the production of agricultural 
commodities during the term of the contract.

VII. Determining the Amount of Farm Loan Programs (FLP) Debt That Can Be 
                                Canceled

    (A) Calculate the amount of debt to be canceled for a delinquent 
borrower as follows:
    (1) Step 1. Determine what percent the number of contract acres is 
of the total acres of land that secures the borrower's FLP loans by 
dividing the contract acres that secure the borrower's FLP loans by the 
total acres that secure the borrower's FLP loans.
    Contract acres divided by Total Farm and Ranch Acres = Percent of 
Contract Acres to Total Acres.
    (2) Step 2. Determine the amount of FLP debt that is secured by the 
contract acreage by multiplying the borrower's total unpaid FLP loan 
balance (principal, interest and recoverable costs already paid by FSA) 
by the percentage calculated in step 1. Total FLP Debt x Percent 
Calculated in step 1 = --------
    (3) Step 3. Determine the current value of the land in the contract 
by multiplying the present market value of the farm that secures the 
borrower's FLP loans by the percent calculated in step 1. PMV of Total 
Farm x Percent Calculated in step 1 = --------

[[Page 161]]

    (4) Step 4. Subtract the current value of the contract acres in step 
3 from the FLP debt that is secured by the contract acres in step 2. 
Result from step 2-Result from step 3 = --------
    (5) Step 5. Select the greater of the amounts calculated in step 3 
and step 4.
    (6) Step 6. Select the lessor of the amounts calculated in steps 2 
and 5. This will be the maximum amount of debt that can be canceled for 
a 50-year contract term.
    (7) Step 7. For a 30-year contract term, the borrower will receive 
60 percent of the amount calculated in step 6. Result from Step 6 x 60% 
= --------
    (8) Step 8. For a 10-year contract term, the borrower will receive 
20 percent of the amount calculated in step 6. Result from Step 6 x 20% 
= --------
    (B) Calculate the amount of debt to be canceled for a current 
borrower as follows:
    (1) Step 1. Determine what percent the number of contract acres is 
of the total acres of land that secures the borrower's FLP loans by 
dividing the contract acres that secure the borrower's FLP loans by the 
total acres that secure the borrower's FLP loans. Contract Acres divided 
by Total Farm and Ranch Acres = --------%
    (2) Step 2. Determine the amount of FLP debt that is secured by the 
contract acreage by multiplying the borrower's total unpaid FLP loan 
balance (principal, interest and recoverable costs already paid by FSA) 
by the percentage calculated in step 1. Total FLP Debt x Percent 
Calculated in step 1 = --------
    (3) Step 3. Multiply the borrower's total unpaid FLP loan balance 
(principal, interest and recoverable costs already paid by thirty-three 
(33) percent. Total FLP Debt x 33% = --------
    (4) Step 4. Select the lessor of the amounts calculated in steps 2 
and 3. This is the maximum amount of debt that can be canceled for a 
current borrower receiving a 50-year contract.
    (5) Step 5. For a 30-year contact term, the borrower will receive 60 
percent of the amount calculated in step 4. Amount calculated in step 4 
x 60% = --------
    (6) Step 6. For a 10-year contract term, the borrower will receive 
20 percent of the amount calculated in step 4. Amount calculated in Step 
4 X 20% = --------
    (C) Feasibility of debt cancellation. The servicing official will 
determine whether or not the borrower, if provided the amount of debt 
cancellation allowed by paragraph (VII) coupled with other servicing 
options will be able to develop a feasible plan for farm operations for 
the current and coming year. In no instance will the total debt 
cancellation exceed the maximum amount calculated in paragraphs (A) or 
(B) above. If the borrower would not be able to develop a feasible plan, 
the servicing official will notify the borrower of the reason that the 
contract has been denied and that the borrower may appeal this adverse 
decision after the servicing official has decided whether the borrower 
qualifies for the additional servicing programs in this subpart.
    (D) The boundaries of the contract area will be determined by the 
most appropriate method including rectangular surveys, and aerial 
photographs. A professional survey of the contract area will not be 
required but can be used where needed.
    (E) Reaching an agreement with the borrower. The borrower will be 
informed of the contract's value, the impact on the remaining financial 
obligation, and the terms and conditions of the contract. The borrower 
also will be provided a copy of the contract review team's report. If 
the borrower decides to enter into the contract, approval will be made 
by the servicing official, and the borrower by signing Form FSA 1951-39.
    (F) Recording of noncash credit. The total credit to the borrower's 
account will not exceed the greater of the value of the land on which 
the contract is acquired; or the difference between the amount of the 
outstanding indebtedness secured by the real estate, and the value of 
the real estate taking into consideration the term of the contract. In 
the case of a non-delinquent borrower, the amount to be credited will 
not exceed 33 percent of the amount of the loan secured by the real 
estate on which the contract is obtained taking into consideration the 
term of the contract. In all cases, the amount credited will be applied 
on the FSA loan as an extra payment in order of lien priority on the 
security. The loan may be reamortized if needed for both current and 
delinquent borrowers.
    (G) [Reserved]
    (H) Contract Records. If State law allows, the CC will be recorded 
in the real estate records.

                 VIII. Violation of Terms and Conditions

    If the borrower violates any of the terms or conditions of the 
contract, the violations will be handled in accordance with the 
provisions outlined in the contract.

                       IX. Authorization Requests

    When under the circumstances stated in the contract's terms and 
conditions (Form FSA 1951-39), the grantor needs the Government's 
written authorization to proceed with an action, a written request for 
such authorization must be provided by the grantor to the servicing 
official. In order to provide the requested written authorization, the 
servicing official must determine that the request does not violate the 
contract's terms and conditions and must receive the written concurrence 
of the enforcement authority.

[62 FR 10147, Mar. 5, 1997]

[[Page 162]]



                  Subpart T_Disaster Set-Aside Program

    Source: 60 FR 46756, Sept. 8, 1995, unless otherwise noted.



Sec. 1951.951  Purpose.

    This subpart sets forth the policies and procedures for the Disaster 
Set-Aside (DSA) Program. The DSA program is available to Farm Loan 
Program (FLP) borrowers, as defined in subpart S of this part, who 
suffered losses as a result of a natural disaster. FLP loans that may be 
serviced under this subpart include Farm Ownership (FO), Operating (OL), 
Soil and Water (SW), Emergency (EM), Economic Emergency (EE), Special 
Livestock (SL), Economic Opportunity (EO), Softwood Timber (ST), 
Recreation (RL), and Rural Housing loans for farm service buildings 
(RHF). Nonprogram (NP) farm type loans may be serviced under this 
subpart for borrowers who also have FLP loans.

[60 FR 46756, Sept. 8, 1995, as amended at 64 FR 393, Jan. 5, 1999; 65 
FR 31249, 31250, May 17, 2000; 68 FR 55303, Sept. 25, 2003]



Sec. 1951.952  General.

    DSA is a program whereby borrowers who are current or less than 90 
days past due on all FLP loans, may apply to move the scheduled annual 
installment for each eligible FLP loan to the end of the loan term. The 
intent of this program is to relieve some of the borrower's immediate 
financial stress caused by a natural disaster. DSA will not be used to 
circumvent the servicing available under subpart S of this part.

[68 FR 55303, Sept. 25, 2003]



Sec. 1951.953  Notification and request for DSA.

    (a) [Reserved]
    (b) Deadline to apply. Subject to Sec. 1951.954(a)(5), all FLP 
borrowers liable for the debt must request DSA within 8 months from the 
date the natural disaster was designated in accordance with 7 CFR part 
1945, subpart A.
    (c) Information needed for a complete application. (1) A written 
request for DSA signed by all parties liable for the debt;
    (2) Actual production, income, and expense records for the past five 
years, including the production and marketing period in which the 
natural disaster occurred; and
    (3) Other information requested by the servicing official when 
needed to make an eligibility determination.

[68 FR 55303, Sept. 25, 2003]



Sec. 1951.954  Eligibility and loan limitation requirements.

    (a) Eligibility requirements. The following requirements must be met 
to be eligible for DSA:
    (1) The borrower must have:
    (i) Operated a farm or ranch in a county designated a natural 
disaster area or a contiguous county as provided in 7 CFR part 1945, 
subpart A, and
    (ii) Been a borrower and operated the farm or ranch at the time of 
the disaster period.
    (2) A borrower cannot have more than one installment set aside under 
the DSA program on each loan. If all previously approved set-asides are 
paid in full, or cancelled through restructuring under subpart S of this 
part, the set-aside will no longer exist and the loan may again be 
considered for DSA.
    (3) The borrower must have acted in good faith as defined in Sec. 
1951.906 of subpart S of this part and the borrowers inability to make 
the upcoming scheduled FSA payments must be for reasons which are not 
within the borrower's control.
    (4) All nonmonetary defaults must have been resolved. This means 
that even though the borrower has acted in good faith, the borrower may 
still be in default for reasons, such as, but not limited to: no longer 
farming; prior lienholder foreclosure; bankruptcy or under court 
jurisdiction; not properly maintaining chattel and real estate security; 
not properly accounting for the sale of security; or not carrying out 
any other agreement made with the Agency.
    (5) The borrower must be current or less than 90 days past due on 
all FLP loans at the time the application for DSA is complete. Borrowers 
paying under a debt settlement adjustment agreement in accordance with 
subpart B of part 1956 of this chapter are not eligible.

[[Page 163]]

    (6) The borrower must not be 165 or more days past due when Exhibit 
A of Agency Instruction 1951-T (available in any FSA office) is 
executed.
    (7) As a direct result of the designated natural disaster, the 
borrower does not have sufficient income available to pay all family 
living and operating expenses, other creditors, and FSA. This 
determination will be based on the borrower's actual production, income 
and expense records for the disaster or affected year and any other 
records required by the servicing official. Compensation received for 
losses shall be considered as well as increased expenses incurred 
because of the disaster.
    (8) For the next business accounting year, the borrower must develop 
a positive cash flow projection showing that the borrower will at least 
be able to pay all operating expenses and taxes due during the year, 
essential family living expenses and meet scheduled payments on all 
debts, including FLP debts. The cash flow projection must be prepared in 
accordance with 7 CFR 1924.56. The borrower will provide any 
documentation required to support the cash flow projection.
    (9) After the amount for each loan is set-aside, all FLP and NP farm 
type loans of the borrower must be current.
    (10) The borrower's FLP loans have not been accelerated.
    (11) The borrower's FLP loans have not been restructured under 
subpart S of this part since the natural disaster occurred.
    (b) Loan limitation requirements. (1) The loan must have been 
outstanding at the time of the natural disaster.
    (2) The term remaining on the loan receiving DSA equals or exceeds 2 
years from the due date of the installment being set-aside.
    (3) The amount set-aside may not exceed the amount of the first or 
second scheduled annual installment due after the disaster occurred.
    (4) The amount set-aside may not exceed the amount the borrower was 
unable to pay FSA due to the disaster. Borrowers are required to pay any 
portion of an installment that they are able to pay.
    (5) The amount set-aside will equal the unpaid balance remaining on 
the installment at the time the borrower signs Exhibit A of Agency 
Instruction 1951-T (available in any FSA office.) This amount will 
include the unpaid interest and any principal that would be credited to 
the account as if the installment were paid on the due date taking into 
consideration any payments applied to principal and interest since the 
due date. Recoverable cost items may not be set aside and the account 
must be serviced in accordance with Sec. 1951.907(d).

[68 FR 55303, Sept. 25, 2003; 68 FR 69955, Dec. 16, 2003]



Sec. Sec. 1951.955-1951.956  [Reserved]



Sec. 1951.957  Eligibility determination and processing.

    (a) Eligibility determination. (1) Within 30 days of a complete DSA 
application, the Agency official will determine if the borrower meets 
the requirements set forth in Sec. 1951.954. Approval shall be 
contingent upon the borrower's continuing eligibility through the 
signing of Exhibit A of Agency Instruction 1951-T (available in any FSA 
office).
    (2) The borrower has 45 days to sign Exhibit A of Agency Instruction 
1951-T (available in any FSA office) for each loan installment set-aside 
approved. Subject to Sec. 1951.954(a)(6), the Agency may provide for a 
longer period of time under extenuating circumstances, such as where the 
Agency's approval is contingent upon the borrower paying a portion of 
the FLP payments from proceeds that may not be immediately available.
    (b) Processing.(1) [Reserved]
    (2) Interest will accrue on any principal amount set-aside at the 
same rate charged the non-set-aside portion. Interest will not accrue on 
the interest portion set-aside. Limited resource interest rate changes 
will affect the principal set-aside.
    (3) The amount set-aside, including interest accrual on any 
principal set-aside, will be due on or before the final due date of the 
loan.
    (4) If the borrower is not current on all FLP loans when Exhibit A 
of Agency Instruction 1951-T (available in any FSA office) is executed, 
the borrower, and all obligors in the case of an entity, must execute 
and provide to the

[[Page 164]]

Agency a best lien obtainable on all of their assets except:
    (i) When taking a lien on such property will prevent the borrower 
from obtaining credit from other sources;
    (ii) When the property could have significant environmental problems 
or costs;
    (iii) When the Agency cannot obtain a valid lien;
    (iv) When the property is the borrower's personal residence and 
appurtenances; provided:
    (A) They are located on a separate parcel; and
    (B) The real estate that serves as collateral for the Agency loan 
plus crops and chattels are valued at greater than or equal to 150 
percent of the unpaid balance due on the loan.; or
    (v) When the property is subsistence livestock, cash, special 
collateral accounts the borrower uses for the farming operation or for 
necessary living expenses, retirement accounts, personal vehicles 
necessary for family living or farm operating purposes, household goods 
and small tools and small equipment such as hand tools and lawn mowers, 
and other similar items.
    (5)-(6) [Reserved]
    (7) Payments applied to the amount set-aside will be applied first 
to interest and then to principal. If more than one installment is set-
aside on the loan, payments will be applied to the oldest installment 
set-aside until paid in full, before applying payments to the second 
installment set-aside.
    (c) Adverse determination. If the borrower becomes more than one 
installment behind on any FLP loan while processing the DSA request, or 
while an appeal is being considered, and the second installment cannot 
be paid current prior to exhibit A of FmHA Instruction 1951-T (available 
in any FSA office) being signed, the DSA request will be denied.

[60 FR 46756, Sept.8, 1995, as amended at 62 FR 41253, Aug. 1, 1997; 65 
FR 31250, May 17, 2000; 68 FR 55303, Sept. 25, 2003]



Sec. 1951.958  Cancellation and reversal of DSA.

    (a) Reasons for cancellation. The set-aside may be reversed and 
exhibit A of FmHA Instruction 1951-T cancelled under the following 
described situations:
    (1) The loan is later restructured with primary loan servicing, (the 
total unpaid balance must be restructured);
    (2) If prior to the first scheduled installment due date after set-
aside, the servicing official determines that the current borrower, if 
delinquent, would qualify for a writedown or buyout in accordance with 
subpart S of this part; or
    (3) When it has been determined that the borrower was provided 
unauthorized DSA assistance. (The set-aside will be cancelled after all 
appeal rights are exhausted. The set-aside will be removed from the 
account and the payment terms of the original promissory note will be 
retained as if DSA was never granted. Borrowers financially distressed 
or delinquent after reversal of the set-aside will be serviced in 
accordance with subpart S of this part).
    (b) [Reserved]

[60 FR 46756, Sept. 8, 1995, as amended at 62 FR 10157, Mar. 5, 1997]



Sec. 1951.959  Exception authority.

    The Administrator may, in individual cases, make an exception to any 
requirement or provision of this subpart which is not inconsistent with 
the authorizing statute or other applicable law if it is determined that 
application of the requirement or provision would adversely affect the 
Government's interest. The Administrator will exercise this authority 
upon the request of the State Director with the recommendation of the 
Deputy Administrator for Farm Credit Programs, or upon request initiated 
by the Deputy Administrator for Farm Credit Programs.



Sec. Sec. 1951.960-1951.1000  [Reserved]



PART 1955_PROPERTY MANAGEMENT--Table of Contents




Subpart A_Liquidation of Loans Secured by Real Estate and Acquisition of 
                        Real and Chattel Property

Sec.
1955.1 Purpose.
1955.2 Policy.
1955.3 Definitions.
1955.4 Redelegation of authority.
1955.5 General actions.

[[Page 165]]

1955.6-1955.8 [Reserved]
1955.9 Requirements for voluntary conveyance of real property located 
          within a federally recognized Indian reservation owned by a 
          Native American borrower-owner.
1955.10 Voluntary conveyance of real property by the borrower to the 
          Government.
1955.11 Conveyance of property to FmHA or its successor agency under 
          Public Law 103-354 by trustee in bankruptcy.
1955.12 Acquisition of property which served as security for a loan 
          guaranteed by FmHA or its successor agency under Public Law 
          103-354 or at sale by another lienholder, bankruptcy trustee, 
          or taxing authority.
1955.13 Acquisition of property by exercise of Government redemption 
          rights.
1955.14 [Reserved]
1955.15 Foreclosure by the Government of loans secured by real estate.
1955.16-1955.17 [Reserved]
1955.18 Actions required after acquisition of property.
1955.19 [Reserved]
1955.20 Acquisition of chattel property.
1955.21 Exception authority.
1955.22 State supplements.
1955.23-1955.49 [Reserved]
1955.50 OMB control number.

Exhibits A-F to Subpart A of Part 1955 [Reserved]

                    Subpart B_Management of Property

1955.51 Purpose.
1955.52 Policy.
1955.53 Definitions.
1955.54 Redelegation of authority.
1955.55 Taking abandoned real or chattel property into custody and 
          related actions.
1955.56 Real property located in Coastal Barrier Resources System 
          (CBRS).
1955.57 Real property containing underground storage tanks.
1955.58-1955.59 [Reserved]
1955.60 Inventory property subject to redemption by the borrower.
1955.61 Eviction of persons occupying inventory real property or 
          dispossession of persons in possession of chattel property.
1955.62 Removal and disposition of nonsecurity personal property from 
          inventory real property.
1955.63 Suitability determination.
1955.64 [Reserved]
1955.65 Management of inventory and/or custodial real property.
1955.66 Lease of real property.
1955.67-1955.71 [Reserved]
1955.72 Utilization of inventory housing by Federal Emergency Management 
          Agency (FEMA) or under a Memorandum of Understanding between 
          the Agency and the Department of Health and Human Services 
          (HHS) for transitional housing for the homeless.
1955.73-1955.80 [Reserved]
1955.81 Exception authority.
1955.82 State supplements.
1955.83-1955.99 [Reserved]
1955.100 OMB control number.
Exhibit A to Subpart B--Memorandum of Understanding Between the Federal 
          Emergency Management Agency and the Farmers Home 
          Administration or its successor agency under Public Law 103-
          354
Exhibit B to Subpart B--Notification of Tribe of Availablity of Farm 
          Property for Purchase
Exhibit C to Subpart B--Cooperative Agreement (Example)
Exhibit D to Subpart B--Fact Sheet--The Federal Interagency Task Force 
          on Food and Shelter for the Homeless

                Subpart C_Disposal of Inventory Property

                              Introduction

1955.101 Purpose.
1955.102 Policy.
1955.103 Definitions.
1955.104 Authorities and responsibilities.

   Consolidated Farm and Rural Development Act (CONACT) Real Property

1955.105 Real property affected (CONACT).
1955.106 Disposition of farm property.
1955.107 Sale of FSA property (CONACT).
1955.108 Sale of (CONACT) property other than FSA property.
1955.109 Processing and closing (CONACT).

                    Rural Housing (RH) Real Property

1955.110 [Reserved]
1955.111 Sale of real estate for RH purposes (housing).
1955.112 Method of sale (housing).
1955.113 Price (housing).
1955.114 Sales steps for program property (housing).
1955.115 Sales steps for nonprogram (NP) property (housing).
1955.116 Requirements for sale of property not meeting decent, safe and 
          sanitary (DSS) standards (housing).
1955.117 Processing credit sales on program terms (housing).
1955.118 Processing cash sales or MFH credit sales on NP terms.
1955.119 Sale of SFH inventory property to a public body or nonprofit 
          organization.
1955.120 Payment of points (housing).

                            Chattel Property

1955.121 Sale of acquired chattels (chattel).
1955.122 Method of sale (chattel).
1955.123 Sale procedures (chattel).
1955.124 Sale with inventory real estate (chattel).

[[Page 166]]

1955.125-1955.126 [Reserved]

           Use of Contractors To Dispose of Inventory Property

1955.127 Selection and use of contractors to dispose of inventory 
          property.
1955.128 Appraisers.
1955.129 Business brokers.
1955.130 Real estate brokers.
1955.131 Auctioneers.

                                 General

1955.132 Pilot projects.
1955.133 Nondiscrimination.
1955.134 Loss, damage, or existing defects in inventory real property.
1955.135 Taxes on inventory real property.
1955.136 Environmental Assessment (EA) and Environmental Impact 
          Statement (EIS).
1955.137 Real property located in special areas or having special 
          characteristics.
1955.138 Property subject to redemption rights.
1955.139 Disposition of real property rights and title to real property.
1955.140 Sale in parcels.
1955.141 Transferring title.
1955.142-1955.143 [Reserved]
1955.144 Disposal of NP or surplus property to, through, or acquisition 
          from other agencies.
1955.145 Land acquisition to effect sale.
1955.146 Advertising.
1955.147 Sealed bid sales.
1955.148 Auction sales.
1955.149 Exception authority.
1955.150 State supplements.
Exhibit A to Subpart C--Notice of Flood, Mudslide Hazard, or Wetland 
          Area

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

    Source: 50 FR 23904, June 7, 1985, unless otherwise noted.

    Editorial Note: Exhibits A, C, D, and E referenced in this part are 
not published in the Code of Federal Regulations.



Subpart A_Liquidation of Loans Secured by Real Estate and Acquisition of 
                        Real and Chattel Property



Sec. 1955.1  Purpose.

    This subpart delegates authority and prescribes procedures for the 
liquidation of loans to individuals and to organizations as identified 
in Sec. 1955.3. It pertains to the Farm Credit programs of the Farm 
Service Agency (FSA), Water and Waste programs of the Rural Utilities 
Service (RUS), Multi-Family Housing (MFH) and Community Facility (CF) 
programs of the Rural Housing Service (RHS), and direct programs of the 
Rural Business-Cooperative Service (RBS). Guaranteed RBS loans are 
liquidated upon direction from the Deputy Administrator, Business 
Program, RBS. This subpart does not apply to RHS single family housing 
loans, or to CF loans sold without insurance in the private sector. 
These CF loans will be serviced in the private sector and future 
revisions to this subpart no longer apply to such loans.

[61 FR 59778, Nov. 22, 1996]



Sec. 1955.2  Policy.

    When it has been determined in accordance with applicable loan 
servicing regulations that further servicing will not achieve loan 
objectives and that voluntary sale of the property by the borrower 
(except for Multiple Family Housing (MFH) loans subject to prepayment 
restrictions) cannot be accomplished, the loan(s) will be liquidated 
through voluntary conveyance of the property to FmHA or its successor 
agency under Public Law 103-354 or by foreclosure as outlined in this 
subpart. For MFH loans subject to the prepayment restrictions, voluntary 
liquidation may be accomplished only through voluntary conveyance to 
FmHA or its successor agency under Public Law 103-354 in accordance with 
applicable portions of Sec. 1955.10 of this subpart. Nonprogram (NP) 
loans, except for Community and Business Programs, will be liquidated as 
provided in subpart J of part 1951 of this chapter, unless specifically 
referenced in this subpart.

[51 FR 4138, Feb. 3, 1986, as amended at 53 FR 27826, July 25, 1988; 58 
FR 52652, Oct. 12, 1993]



Sec. 1955.3  Definitions.

    As used in this subpart, the following definitions apply:
    Closing agent. An attorney or title insurance company which is 
approved as a loan closing agent in accordance with subpart B of part 
1927 of this chapter.
    CONACT or CONACT property. Property acquired or sold pursuant to the 
Consolidated Farm and Rural Development Act. Within this subpart, it 
shall also be construed to cover property

[[Page 167]]

which secured loans made pursuant to the Agriculture Credit Act of 1978; 
the Emergency Agricultural Credit Adjustment Act of 1978; the Emergency 
Agricultural Credit Act of 1984; the Food Security Act of 1985; and 
other statutes giving agricultural lending authority to FmHA or its 
successor agency under Public Law 103-354.
    Farmer Programs loans. The term ``Farmer Program loans'' (FP) refers 
to the following types of loans: Farm Ownership (FO), Soil and Water 
(SW), Recreation (RL), Economic Opportunity (EO), Operating (OL), 
Emergency (EM), Economic Emergency (EE), Softwood Timber (ST), and Rural 
Housing Loans for farm service buildings (RHF).
    Government. The United States of America acting through the Farmers 
Home Administration or its successor agency under Public Law 103-354 
(FmHA or its successor agency under Public Law 103-354), U.S. Department 
of Agriculture; used interchangeably herein with ``FmHA or its successor 
agency under Public Law 103-354.''
    Homestead protection. The Farmer Programs borrower-owner's right to 
lease with an option to purchase the principal residence located on or 
off the farm and up to 10 acres of adjoining land possessed and occupied 
by the borrower-owner, including a reasonable number of farm 
outbuildings located on the adjoining land that are useful to the 
occupants of the homestead.
    Interest credit. The terms ``interest credit'' and ``interest credit 
assistance,'' as they relate to Single Family Housing (SFH) loans, are 
interchangeable with the term ``payment assistance.'' Payment assistance 
is the generic term for the subsidy provided to eligible SFH borrowers 
to reduce mortgage payments.
    Loans to individuals. Farm Ownership (FO), Soil and Water (SW), 
Recreation (RL), Special Livestock (SL), Economic Opportunity (EO), 
Operating (OL), Emergency (EM), Economic Emergency (EE), Softwood Timber 
(ST), and Rural Housing loans for farm service buildings (RHF), whether 
to individuals or entities, referred to in this subpart as Farmer 
Programs (FP) loans; and Land Conservation and Development (LCD); and 
Single-Family Housing (SFH), including both Section 502 and 504 loans.
    Loans to Native Americans. Farmer Program loans secured by real 
estate located within the boundaries of a federally recognized Indian 
reservation. The Native American borrower-owner is defined as the party 
who pledged real estate as collateral for an FP loan and is the tribe or 
a member of the tribe with control over the reservation.
    Loans to organizations. Community Facility (CF); Water and Waste 
Disposal (WWD); Association Recreation; Watershed (WS); Resource 
Conservation and Development (RC&D); insured Business and Industrial 
(B&I) both to individuals and groups; Rural Development Loan Fund 
(RDLF); Intermediary Relending Program (IRP); Nonprofit National 
Corporations (NNC); loans to associations for Irrigation and Drainage 
(I&D) and other Soil and Water conservation measures; loans to Indian 
Tribes and Tribal Corporations; Shift-In-Land Use (Grazing Association); 
Economic Opportunity Cooperative (EOC); Rural Housing Site (RHS); Rural 
Cooperative Housing (RCH); Rural Rental Housing (RRH) and Labor Housing 
(LH) to both individuals and groups. The housing-type organization loans 
identified here are referred to in this subpart collectively as 
Multiple-family Housing (MFH) loans.
    Market value. The most probable price which property should bring, 
as of a specific date, in a competitive and open market, assuming the 
buyer and seller are prudent and knowledgeable, and the price is not 
affected by undue stimulus such as forced sale or loan interest subsidy.
    Nonrecoverable cost is a contractual or noncontractual program loan 
cost expense not chargeable to a borrower, property account, or part of 
the loan subsidy.
    OGC. The Office of the General Counsel, U.S. Department of 
Agriculture; refers to the Regional Attorney or Attorney-in-Charge in an 
OGC field office unless otherwise indicated.
    Prior lien. A security instrument (such as a mortgage or deed of 
trust) or a judgment which was of public record before the FmHA or its 
successor agency under Public Law 103-354 security instrument(s) as well 
as real estate

[[Page 168]]

taxes or assessments which are or will become a lien against the 
property which is superior to FmHA or its successor agency under Public 
Law 103-354's security instrument(s).
    Recoverable cost is a contractual or noncontractual program loan 
cost expense chargeable to a borrower, property account, or part of the 
loan subsidy.
    Servicing official. For loans to individuals as defined in paragraph 
(d) of this section, the servicing official is the County Supervisor. 
For insured B&I loans, the servicing official is the State Director. For 
RDLF and IRP, the servicing official is the Director, Business and 
Industry Division. For NNC, the servicing official is the Director, 
Community Facility Division. For all other types of loans, the servicing 
official is the District Director.

[50 FR 23904, June 7, 1985, as amended at 50 FR 45782, Nov. 1, 1985; 52 
FR 26138, July 13, 1987; 53 FR 27826, July 25, 1988; 53 FR 30664, Aug. 
15, 1988; 53 FR 35762, Sept. 14, 1988; 56 FR 15821, Apr. 18, 1991; 56 FR 
29402, June 27, 1991; 56 FR 67484, Dec. 31, 1991; 58 FR 68723, Dec. 29, 
1993; 60 FR 55147, Oct. 27, 1995; 62 FR 44395, Aug. 21, 1997; 63 FR 
41716, Aug. 5, 1998]



Sec. 1955.4  Redelegation of authority.

    Authorities will be redelegated to the extent possible, consistent 
with program requirements and available resources.
    (a) Except as provided in Sec. 1900.6(c) of this chapter, any 
authority in this subpart which is specifically delegated to the 
Administrator or to an Deputy Administrator may only be delegated to a 
State Director. The State Director cannot redelegate such authority.
    (b) Except as provided in paragraph (a) of this section, the State 
Director is authorized to redelegate, in writing, any authority 
delegated to the State Director in this subpart to a Program Chief, 
Program Specialist or Property Management Specialist on the State Office 
staff; except the authority to approve or disapprove foreclosure as 
outlined in Sec. 1955.115(a)(2) of this subpart may not be redelegated. 
However, a duly-designated Acting State Director may approve or 
disapprove foreclosure.
    (c) The District Director is authorized to redelegate, in writing, 
any authority delegated to the District Director in this subpart to an 
Assistant District Director or District Loan Specialist determined by 
the District Director to be qualified; except the authority to approve 
or disapprove foreclosure as outlined in Sec. 1955.15(a)(1) of this 
subpart may not be redelegated. However, a duly designated Acting 
District Director may approve or disapprove foreclosure. Authority of 
District Directors in this subpart applies to Area Loan Specialists in 
Alaska and the Director for the Western Pacific Territories.
    (d) The County Supervisor is authorized to redelegate, in writing, 
any authority delegated to the County Supervisor in this subpart to an 
Assistant County Supervisor, GS-7, or above, determined by the County 
Supervisor to be qualified. Authority of County Supervisors in this 
subpart applies to Area Loan Specialists in Alaska and Area Supervisors 
in the Western Pacific Territories and American Samoa.
    (e) The monetary limitations on acceptance of voluntary conveyance 
as provided in Sec. 1955.10(a) of this subpart may not be redelegated 
from a higher-level official to a lower level official.

[53 FR 27826, July 25, 1988, as amended at 54 FR 6875, Feb. 15, 1989; 59 
FR 43441, Aug. 24, 1994; 62 FR 44395, Aug. 21, 1997]



Sec. 1955.5  General actions.

    (a) Assignment of notes to FmHA or its successor agency under Public 
Law 103-354. When liquidation action is approved and the insured note is 
not held in the County or District Office, the approval official will 
request the Finance Office to purchase the note and forward it to the 
appropriate office. Voluntary conveyance may be closed pending receipt 
of the note(s), and foreclosure may also be processed pending receipt of 
the note(s), unless the original note is required in connection with the 
foreclosure action.
    (b) Execution of documents. (1) After liquidation of loans to 
individuals has been approved by the appropriate official, the County 
Supervisor is authorized to execute all necessary forms and documents 
except notices of acceleration required to complete transactions covered 
by this subpart.

[[Page 169]]

    (2) After liquidation of loans to organizations has been approved by 
the appropriate official, the District Director is authorized to execute 
all forms and documents for completion of the liquidation except:
    (i) Notice of acceleration; or
    (ii) Other form or document which specifically required State or 
National Office approval because of monetary limits or policy statement 
established elsewhere in this subpart.
    (c) Unused loan funds. (1) Funds remaining in a supervised bank 
account will be handed in accordance with Sec. 1902.15 of subpart A of 
part 1902 of this chapter before a voluntary conveyance or foreclosure 
is processed.
    (2) Funds remaining in a construction or other account will be 
applied to the borrower's FmHA or its successor agency under Public Law 
103-354 accounts.
    (d) Payment of costs. Costs related to liquidation of a loan or 
acquisition of property will be paid according to FmHA or its successor 
agency under Public Law 103-354 Instruction 2024-A (available in any 
FmHA or its successor agency under Public Law 103-354 office) as either 
a recoverable or nonrecoverable cost as defined in Sec. 1955.3 of this 
subpart.
    (e) Escrow funds. Any funds remaining in the borrower's escrow 
account at the time of liquidation by voluntary conveyance or 
foreclosure are nonrefundable and will be credited to the borrower's 
loan account.

[50 FR 23904, June 7, 1985, as amended at 56 FR 6953, Feb. 21, 1991, 57 
FR 36590, Aug. 14, 1992]



Sec. Sec. 1955.6-1955.8  [Reserved]



Sec. 1955.9  Requirements for voluntary conveyance of real property 

located within a federally recognized Indian reservation owned by a 
Native American borrower-owner.

    (a) The borrower-owner is a member of the tribe that has 
jurisdiction over the reservation in which the real property is located. 
An Indian tribe may also meet the borrower-owner criterion if it is 
indebted for Farm Credit Programs loans.
    (b) A voluntary conveyance will be accepted only after all 
preacquisition primary and preservation servicing actions have been 
considered in accordance with subpart S of part 1951 of this chapter.
    (c) When all servicing actions have been considered under subpart S 
of part 1951 of this chapter and a positive outcome cannot be achieved, 
the following additional actions are to be taken:
    (1) The county official will notify the Native American borrower-
owner and the tribe by certified mail, return receipt requested, and by 
regular mail if the certified mail is not received, that:
    (i) The borrower-owner may convey the real estate security to FSA 
and FSA will consider acceptance of the property into inventory in 
accordance with paragraph (d) of this section.
    (ii) The borrower-owner must inform FSA within 60 days from receipt 
of this notice of the borrower and owner's decision to deed the property 
to FSA;
    (iii) The borrower-owner has the opportunity to consult with the 
Indian tribe that has jurisdiction over the reservation in which the 
real property is located, or counsel, to determine if State or tribal 
law provides rights and protections that are more beneficial than those 
provided the borrower-owner under Agency regulations;
    (2) If the borrower-owner does not voluntarily deed the property to 
FSA, not later than 30 days before the foreclosure sale, FSA will 
provide the Native American borrower-owner with the following options:
    (i) The Native American borrower-owner may require FSA to assign the 
loan and security instruments to the Secretary of the Interior. If the 
Secretary of the Interior agrees to such an assignment, FSA will be 
released from all further responsibility for collection of any amounts 
with regard to the loans secured by the real property.
    (ii) The Native American borrower-owner may require FSA to complete 
a transfer and assumption of the loan to the tribe having jurisdiction 
over the reservation in which the real property is located if the tribe 
agrees to the assumption. If the tribe assumes the loans, the following 
actions shall occur:
    (A) FSA shall not foreclose the loan because of any default that 
occurred before the date of the assumption.

[[Page 170]]

    (B) The assumed loan shall be for the lesser of the outstanding 
principal and interest of the loan or the fair market value of the 
property as determined by an appraisal.
    (C) The assumed loan shall be treated as though it is a regular 
Indian Land Acquisition Loan made in accordance with subpart N of part 
1823 of this chapter.
    (3) If a Native American borrower-owner does not voluntarily convey 
the real property to FSA, not less than 30 days before a foreclosure 
sale of the property, FSA will provide written notice to the Indian 
tribe that has jurisdiction over the reservation in which the real 
property is located of the following:
    (i) The sale;
    (ii) The fair market value of the property; and
    (iii) The ability of the Native American borrower-owner to require 
the assignment of the loan and security instruments either to the 
Secretary of the Interior or the tribe (and the consequences of either 
action) as provided in Sec. 1955.9(c)(2).
    (4) FSA will accept the offer of voluntary conveyance of the 
property unless a hazardous substance, as defined in the Comprehensive 
Environmental Response, Compensation, and Liability Act of 1980, is 
located on the property which will require FSA to take remedial action 
to protect human health or the environment if the property is taken into 
inventory. In this case, a voluntary conveyance will be accepted only if 
FSA determines that it is in the best interests of the Government to 
acquire title to the property.
    (d) When determining whether to accept a voluntary conveyance of a 
Native American borrower-owner's real property, the county official must 
consider:
    (1) The cost of cleaning or mitigating the effects if a hazardous 
substance is found on the property. A deduction equal to the amount of 
the cost of a hazardous waste clean-up will be made to the fair market 
value of the property to determine if it is in the best interest of the 
Government to accept title to the property. FSA will accept the property 
if clear title can be obtained and if the value of the property after 
removal of hazardous substances exceeds the cost of hazardous waste 
clean-up.
    (2) If the property is located within the boundaries of a federally 
recognized Indian reservation, and is owned by a member of the tribe 
with jurisdiction over the reservation, FSA will credit the Native 
American borrower-owner's account based on the fair market value of the 
property or the FSA debt against the property, whichever is greater.

[62 FR 44395, Aug. 21, 1997]



Sec. 1955.10  Voluntary conveyance of real property by the borrower 
to the Government.

    Voluntary conveyance is a method of liquidation by which title to 
security is transferred to the Government. FmHA or its successor agency 
under Public Law 103-354 will not make a demand on a borrower to 
voluntarily convey. If there is equity in the property. FmHA or its 
successor agency under Public Law 103-354 should advise the borrower, in 
writing, that there is equity in the property before accepting an offer 
to voluntarily convey. If FmHA or its successor agency under Public Law 
103-354 receives an offer of voluntary conveyance, acceptance should 
only be considered when the Government will likely receive a recovery on 
its investment. In cases where there are outstanding liens, a full 
assessment should be made of the debts against the property compared to 
the current market value. FmHA or its successor agency under Public Law 
103-354 should refuse the voluntary conveyance, if the FmHA or its 
successor agency under Public Law 103-354 lien has neither present nor 
prospective value or recovery of the value would be unlikely or 
uneconomical. Instead, for loans to individuals, FmHA or its successor 
agency under Public Law 103-354 should release its lien as valueless in 
accordance with Sec. 1965.25(d) of subpart A of part 1965 of this 
chapter or Sec. 1965.118(c) of subpart C of this chapter, as 
appropriate. For non-FP borrowers, a voluntary conveyance should only 
beconsidered after all available servicing actions outlined in the 
respective servicing regulations have been used or considered and it is 
determined that the borrower will not be

[[Page 171]]

successful. For FP borrowers, if the borrower has not received exhibit A 
with attachments 1 and 2 of subpart S of part 1951 of this chapter, a 
voluntary conveyance should be accepted only after the borrower has been 
sent exhibit A with attachments 1 and 2 of subpart S of 1951 of this 
chapter; all available servicing actions outlined in the respective 
program servicing regulations have been used or considered; and it will 
be in the Government's best financial interest to accept the FP 
voluntary conveyance. Exhibit G of this subpart will be used to 
determine whether or not to accept an FP voluntary conveyance. In 
determining if the acceptance of the FP voluntary conveyance is in the 
best financial interest of the Government, the County Supervisor will 
determine if the borrower has exhausted all possibilities of 
restructuring the loan to where a feasible plan of operation may be 
developed, the borrower has acted in good faith in trying to service the 
debt and FmHA or its successor agency under Public Law 103-354 may 
recover its investment in return for the acceptance of the voluntary 
conveyance. In addition, prior to acceptance of a voluntary conveyance 
of farm real property that collateralizes an FP loan, the County 
Supervisor will remind the borrower-owner of possible deed restrictions 
and easement that may be placed on the property in the event the 
property contains wetlands, floodplains, historical sites and/or other 
federally protected environmental resources as set forth in exhibit M of 
subpart G of part 1940 of this chapter and Sec. 1955.137 of subpart C 
of part 1955 of this chapter. When it is determined that all conditions 
of Sec. 1951.558(b) of subpart L of part 1951 of this chapter have been 
met, loans for unauthorized assistance will be treated as authorized 
loans and exhibit A with attachments 1 and 2 of subpart S of part 1951 
of this chapter will be sent prior to accepting a voluntary conveyance. 
Those borrowers who are indebted for nonprogram (NP) loans who wish to 
voluntarily convey property will not be sent exhibit A with attachments 
1 and 2 of subpart S of part 1951 of this chapter. For Farmer Program 
borrowers who have received exhibit A with attachments 1 and 2 of 
subpart S of part 1951 of this chapter, a voluntary conveyance should 
only be accepted when it is determined to be in the Government's best 
financial interest. Rejection of an offer of voluntary conveyance made 
before or after acceleration from an FP borrower is appealable. For 
borrowers having both FP and non-FP loans secured by a farm tract, a 
voluntary conveyance should be handled as outlined above for non-FP 
loans secured by farm tracts, except that the applicable servicing 
option for the FP and non-FP loans should be considered separately. This 
separation of servicing options may permit a borrower to retain the 
nonfarm tract. For newly constructed SFH properties with major 
construction defects, see subpart F of part 1924 of this chapter.
    (a) Authority--(1) Loans to individuals--(i) SFH loans. The County 
Supervisor is authorized to accept voluntary conveyances regardless of 
amount of indebtedness.
    (ii) [Reserved]
    (2) Loans to organizations. (i) The State Director is authorized to 
approve voluntary conveyance of property securing Farmer Programs and 
EOC loans regardless of amount of indebtedness.
    (ii) The State Director is authorized to approve voluntary 
conveyance of property securing MFH loans if the total indebtedness 
against the property, including prior and junior liens, does not exceed 
his/her approval authority for the type loan involved. Loan approval 
authorities are outlined in exhibits A through E of FmHA or its 
successor agency under Public Law 103-354 Instruction 1901-A (available 
in any FmHA or its successor agency under Public Law 103-354 office).
    (iii) Offers to convey property securing loans other than those 
outlined in paragraphs (a)(2)(i) and (ii) of this section will be 
submitted to the Administrator for approval prior to acceptance of the 
conveyance offer. Submissions will include the case file; OGC's opinion 
on settling any other liens involved; a statement of essential facts; 
and recommendations of the State Director and Program Chief. Submissions 
are to be addressed to the Administrator, ATTN: (appropriate program 
division.)

[[Page 172]]

    (b) Forms and documents. All forms and documents in connection with 
voluntary conveyance will be prepared and distributed in accordance with 
the respective FMI or applicable OGC instructions. For loans to 
individuals when the County Supervisor has approval authority, the facts 
will be documented in the running record of the borrower's case file. 
For all other loans, the servicing official will submit the voluntary 
conveyance offer, the case file and a narrative report to the 
appropriate approval official.
    (c) Liens against the property other than FmHA or its successor 
agency under Public Law 103-354 liens--(1) Prior liens. (i) The approval 
official will determine whether or not prior liens will be paid. 
Normally, the Government will pay prior liens in full prior to 
acquisition if:
    (A) A substantial recovery on the Government's investment plus the 
amount of the prior lien(s) can be obtained; and
    (B) The holder of the prior lien(s) objects to the Government 
accepting voluntary conveyance subject to the prior lien(s), if consent 
of the prior lienholder(s) is required.
    (ii) If property is acquired subject to prior lien(s), payment of 
installments on the lien(s) may be made while title to the property is 
held by the Government in accordance with Sec. 1955.67 of subpart B of 
part 1955 of this chapter.
    (2) Junior liens. The borrower must satisfy junior liens on the 
property (except FmHA or its successor agency under Public Law 103-354 
liens) and pay real estate taxes or assessments which are or will become 
a lien on the property. However, if the borrower is unable or unwilling 
to do so, settlement of the liens may be made by FmHA or its successor 
agency under Public Law 103-354 if settlement would be in the best 
interest of the Government, considering all factors such as length of 
time required to foreclose, vandalism or other deterioration of the 
property which might occur, and effect on management of a MFH project 
and its tenants. An FmHA or its successor agency under Public Law 103-
354 official will contact junior lienholders, negotiate the most 
favorable settlement possible, and determine whether it is in the 
Government's best interest to settle the junior liens and accept the 
voluntary coveyance.
    (i) For loans to individuals, the approval official is authorized to 
settle junior liens in the smallest amount possible, but not to exceed 
an aggregate amount of $1,000 in each SFH case or $5,000 for other type 
loans. For junior liens in greater amounts when the approval official is 
the County Supervisor or District Director, prior authorization must be 
obtained from the State Director.
    (ii) For loans to organizations, the State Director will determine 
whether or not junior liens will be settled and voluntary conveyance 
accepted.
    (3) Payment of liens. A lien to be settled in accordance with 
paragraph (c)(1)(i) or (c)(2) of this section will be paid as outlined 
in Sec. 1955.5(d) of this subpart and charged to the borrower's account 
as a recoverable cost.
    (d) Offer of voluntary conveyance. An offer of voluntary conveyance 
will consist of the following:
    (1) Form FmHA or its successor agency under Public Law 103-354 1955-
1, ``Offer to Convey Security.''
    (2) Warranty deed, or other deed approved by OGC to comply with 
State Laws. The deed will not be recorded until it is determined the 
voluntary conveyance will be accepted. At the time of the offer, the 
borrowers will be informed that the conveyance will not be accepted 
until the property has been appraised and a lien search has been 
obtained. If the voluntary conveyance is not accepted, the deed and Form 
FmHA or its successor agency under Public Law 103-354 1955-1, properly 
executed, will be returned to the borrower along with a memorandum 
stating the reason(s) for nonacceptance.
    (3) A current financial statement containing information similar to 
that required to complete Forms FmHA or its successor agency under 
Public Law 103-354 410-1, ``Application for FmHA or its successor agency 
under Public Law 103-354 Services'' or FmHA or its successor agency 
under Public Law 103-354 442-3, ``Balance Sheet,'' and information on 
present income and potential earning ability. Exception for SFH loans: 
FmHA or its successor agency under Public Law 103-354 requires a

[[Page 173]]

budget and/or financial statement and, if necessary to discover 
suspected undisclosed assets, a search of public records, only when the 
value of the security property may be less than the debt.
    (4) For organization borrowers, a duly-adopted Resolution by the 
governing body authorizing the conveyance and certified by the attesting 
official with the corporate seal affixed. The Resolution will indicate 
which officials are authorized to execute the offer to convey and the 
deed on behalf of the borrower. If shareholder approval is necessary, 
the Resolution will specifically recite that shareholder approval has 
been obtained.
    (5) If water rights, mineral rights, development rights, or other 
use rights are not fully covered in the deed, the advice of OGC will be 
obtained and appropriate documents to transfer rights to the Government 
will be obtained before the voluntary conveyance is accepted. The 
documents will be recorded, if necessary, in connection with closing the 
conveyance.
    (6) If property is under lease, an assignment of the lease to the 
Government will be obtained with the effective date being the date the 
voluntary conveyance is closed. If an oral lease is in force, it will be 
reduced to writing and assigned to the Government.
    (7) The borrower may be required to provide a title insurance policy 
or a final title opinion from a designated attorney when the State 
Director determines it is necessary to protect the Government's 
interest. Such title insurance policy or final title opinion will show 
title vested to the Government subject only to exceptions and liens 
approved by the County Supervisor.
    (8) Farmer program loan borrowers who voluntarily convey after 
receiving the appropriate loan servicing notice(s) contained in the 
attachments of exhibit A of subpart S of part 1951 of this chapter, must 
properly complete and return the acknowledgement form sent with the 
notice.
    (9) For MFH loans, assignment of Housing Assistance Payment (HAP) 
Contracts will be obtained. Rental Assistance will be retained until the 
State Director is advised by OGC that FmHA or its successor agency under 
Public Law 103-354 has title to the property, but may be suspended while 
the conveyance is pending according to exhibit E of subpart C of part 
1930 of this chapter.
    (e) Appraisal of property. After an offer of voluntary conveyance, 
but before acceptance by FmHA or its successor agency under Public Law 
103-354, an appraisal of the property will be made to establish the 
current market value of the property. If a qualified FmHA or its 
successor agency under Public Law 103-354 appraiser is not available to 
appraise property securing a loan other than MFH, the State Director may 
obtain an appraisal from a qualified appraiser outside FmHA or its 
successor agency under Public Law 103-354 in accordance with FmHA or its 
successor agency under Public Law 103-354 Instruction 2024-A (available 
in any FmHA or its successor agency under Public Law 103-354 office). 
For property securing MFH, prior authorization must be obtained by the 
Assistant Administrator, Housing, to secure an appraisal from a source 
outside FmHA or its successor agency under Public Law 103-354. For 
property securing FP loan(s), the contract appraiser must complete the 
appraisal in accordance with Sec. 761.7 of this title for FP property, 
or subpart C of part 1922 for Single Family Housing property. Also, the 
appraiser must meet at least one of the following qualifications:
    (1) Certification by a National or State Appraisal Society.
    (2) If a certified appraiser is not available, the appraiser may be 
one who meets the criteria for certification in a National or State 
Appraisal Society.
    (3) The appraiser has recent, relevant documented appraisal 
experience or training, or other factors clearly establishing the 
appraiser's qualifications.
    (f) Processing offer to convey security and acceptance by FmHA or 
its successor agency under Public Law 103-354. If a borrower has both 
SFH and other type loans, the portion of this paragraph dealing with the 
loan(s) other than SFH will be followed.
    (1) SFH loans. FmHA or its successor agency under Public Law 103-354 
does not solicit or encourage conveyance of

[[Page 174]]

SFH security property to the Government and will consider a borrower's 
offer to convey by deed in lieu of foreclosure only after the debt is 
accelerated and when it is in the Government's interest. Upon receipt of 
an offer to convey, the servicing official will remind the borrower of 
provisions for voluntary liquidation under 7 CFR part 3550,and the 
consequences of a conveyance by deed in lieu of foreclosure as follows: 
All costs related to the conveyance which FmHA or its successor agency 
under Public Law 103-354 pays will be added to the debt; a credit equal 
to the market value of the property, as determined by FmHA or its 
successor agency under Public Law 103-354, less prior liens, will be 
applied to the debt; and if the credit does not satisfy the debt, the 
borrower will not automatically be released of liability. The 
unsatisfied debt, after acceleration under Sec. 1955.10(h)(5) of this 
subpart, may be settled according to subpart B of part 1956 of this 
chapter; however, a deficiency judgment will not be pursued when the 
borrower was granted a moratorium if the borrower faithfully tried to 
meet loan obligations. The conveyance is processed as follows:
    (i) Before accepting the offer, the County Supervisor will transmit 
the deed to a closing agent requesting a title search covering the 
period of time since the latest title opinion in the case file. The same 
agent who closed the loan should be used, if possible; otherwise one 
will be selected from the approved list of closing agents, taking care 
that cases are distributed fairly among approved agents. The closing 
agent may be instructed that the County Supervisor considers the 
voluntary conveyance offer conditionally approved, and the closing agent 
may record the deed after the title search if there are no liens against 
the property other than:
    (A) The FmHA or its successor agency under Public Law 103-354 
lien(s);
    (B) Prior liens when FmHA or its successor agency under Public Law 
103-354 has advised the closing agent that title will be taken subject 
to the prior lien(s) or has told the closing agent that the prior 
lien(s) will be handled in accordance with Sec. 1955.10(c)(1) of this 
subpart; and/or
    (C) Real estate taxes and/or assessments which must be paid when 
title to the property is transferred.
    (ii) If junior liens are discovered, the closing agent will be 
requested to provide FmHA or its successor agency under Public Law 103-
354 with the lienholder's name, amount of lien, date recorded, and the 
recording information (recording office, book and page), return the 
unrecorded deed to FmHA or its successor agency under Public Law 103-
354, and await further instructions from FmHA or its successor agency 
under Public Law 103-354. In such cases, the County Supervisor will 
proceed in accordance with Sec. 1955.10(c)(2) of this subpart. If 
agreement has been reached with the lienholder(s) for settling the 
junior lien(s) in order to accept the conveyance, the deed will be 
returned to the closing agent for a title update and recording.
    (iii) The closing agent will be requested to provide a certification 
of title to FmHA or its successor agency under Public Law 103-354 after 
recordation of the deed. A certification of title in a statement that 
fee title is vested in the Government subject only to the FmHA or its 
successor agency under Public Law 103-354 lien(s) and prior liens 
previously approved by FmHA or its successor agency under Public Law 
103-354. After receipt of the certification of title, the County 
Supervisor will notify the borrower that the conveyance has been 
accepted in accordance with Sec. 1955.10(g) of this subpart.
    (2) Consolidated Farm and Rural Development Act (CONACT) loans to 
individuals. If the Agency indebtedness plus any prior liens exceeds the 
market value of the property, the indebtedness cannot be satisfied but a 
credit can be given equal to the market value less prior liens. Debt 
settlement will be considered in accordance with subpart B of part 1956 
of this chapter.
    (i) Crediting accounts. The Agency will credit an account by an 
amount equal to the market value less prior liens, unless the borrower 
is Native American. Native American borrower-owners will be credited 
with the fair market value or the Agency debt against the property, 
whichever is greater, provided:

[[Page 175]]

    (A) The borrower-owner is a member of a tribe or the tribe, and
    (B) The property is located within the confines of a federally 
recognized Indian reservation.
    (ii) Agency approval. The same procedure outlined in paragraphs 
(f)(1)(i) through (f)(1)(iii) of this section will be followed for 
approving the voluntary conveyance. The conveyance will be accepted in 
full satisfaction of the indebtedness unless the market value of the 
property to be conveyed is less than the total of Government 
indebtedness and prior liens, and the borrower has agreed to accept a 
credit in the amount of the market value of the security property less 
prior liens, if any.
    (3) Loans to organizations. When an offer of voluntary conveyance is 
received from an organization borrower, and the market value of the 
property being conveyed (less prior liens, if any) is less than the 
Government debt, full consideration must be given to the borrower's 
present situation and future prospects for paying all or a part of the 
debt.
    (g) Closing of conveyance. (1) The conveyance to the Government will 
be considered closed when the recorded deed has been returned to FmHA or 
its successor agency under Public Law 103-354, a certification of title 
is received from the closing agent that title is vested in the 
Government with no outstanding encumbrances other than the FmHA or its 
successor agency under Public Law 103-354 lien(s) or previously approved 
prior liens, and the borrower is notified of the acceptance of the 
conveyance. For loans to organizations, OGC will be requested to review 
the case to verify that it was closed properly. The property will be 
assigned an ID number and entered into the Acquired Property Tracking 
System through the Automated Discrepancy Processing System (ADPS) 
terminal in the County Office.
    (2) When costs incident to the completion of the transaction are to 
be paid by the Government, the servicing official will prepare and 
process the necessary documents as outlined in Sec. 1955.5(d) of this 
subpart and the costs will be charged to the borrower's account as 
recoverable costs. This includes taxes and assessments, water charges 
which protect the right to receive water, other liens, closing agent's 
fee, and any other costs related to the conveyance.
    (h) Actions to be taken after closing conveyance. (1) When the FmHA 
or its successor agency under Public Law 103-354 account is satisfied, 
the note(s) will be stamped ``Satisfied by Surrender of Security and 
Borrower Released from Liability,'' and the statement must be signed by 
the servicing official.
    (2) When the FmHA or its successor agency under Public Law 103-354 
account is not satisfied and the borrower is not released from 
liability, the note(s) will be retained by FmHA or its successor agency 
under Public Law 103-354.
    (3) The servicing official will release the lien(s) of record, 
indicating that the debt was satisfied by surrender of security or that 
the lien is released but the debt not satisfied, whichever is 
applicable. If the lien is to be released but the debt not satisfied, 
OGC will provide the type of instrument required to comply with 
applicable State laws.
    (4) After release of the lien(s), the servicing official will return 
the following to the borrower:
    (i) If borrower is released from liability, the satisfied note(s) 
and a copy of Form FmHA or its successor agency under Public Law 103-354 
1955-1 showing acceptance by the Government; or
    (ii) If borrower is not released from liability, a copy of Form FmHA 
or its successor agency under Public Law 103-354 1955-1 showing 
acceptance by the Government.
    (5) When the FmHA or its successor agency under Public Law 103-354 
account is not satisfied and the borrower not released from liability, 
the account balance, after deducting the ``as is'' market value and 
prior liens, if any, will be accelerated utilizing exhibit F of this 
subpart (available in any FmHA or its successor agency under Public Law 
103-354 office).
    (6) For MFH loans, the State Director will cancel any interest 
credit and suspend any rental assistance. These actions will be 
accomplished by notifying the Finance Office unit which handles MFH 
accounts. In the interm

[[Page 176]]

the tenants will continue rental payments in accordance with their 
lease. Tenants will be informed of the pending liquidation action and 
the possible consequences of the action. FmHA or its successor agency 
under Public Law 103-354 Guide Letters 1965-E-2, 1965-E-3, and 1965-E-5 
(available in any FmHA or its successor agency under Public Law 103-354 
office) may be used to inform tenants, but should be modified to reflect 
the specific action and circumstances. If the project is to be removed 
from the FmHA or its successor agency under Public Law 103-354 program, 
a minimum of 180 days' notice to the tenants is required. Letters of 
Priority Entitlement must be made available to any tenants that will be 
displaced as required by Sec. 1965.215(e)(4) of subpart E of part 1965 
of this chapter.
    (7) Actions outlined in Sec. 1955.18 of this subpart will be taken, 
as applicable.

[50 FR 23904, June 7, 1985, as amended at 50 FR 45782, Nov. 1, 1985; 51 
FR 45433, Dec. 18, 1986; 52 FR 48519, Dec. 23, 1987; 53 FR 27826, July 
25, 1988; 53 FR 35762, Sept. 14, 1988; 56 FR 12645, Mar. 27, 1991; 56 FR 
15821, Apr. 18, 1991; 56 FR 40245, Aug. 14, 1991; 57 FR 1372, Jan. 14, 
1992; 58 FR 38926, July 21, 1993; 58 FR 44752, Aug. 25, 1993; 58 FR 
68725, Dec. 29, 1993; 60 FR 28320, May 31, 1995; 64 FR 62568, Nov. 17, 
1999; 66 FR 7568, Jan. 24, 2001; 67 FR 78329, Dec. 24, 2002; 68 FR 7699, 
Feb. 18, 2003]



Sec. 1955.11  Conveyance of property to FmHA or its successor agency 
under Public Law 103-354 by trustee in bankruptcy.

    (a) Authority. With the advice of OGC (and prior approval of the 
National Office for MFH, Community Programs, and insured B&I loans), the 
State Director within his/her authority is authorized to accept a 
conveyance of property to the Government by the Trustee in Bankruptcy, 
provided:
    (1) The Bankruptcy Court has approved the conveyance;
    (2) The conveyance will permit a substantial recovery on the FmHA or 
its successor agency under Public Law 103-354 debt; and
    (3) FmHA or its successor agency under Public Law 103-354 will 
acquire title free of all liens and encumbrances except FmHA or its 
successor agency under Public Law 103-354iens.
    (b) Fees and deed. (1) FmHA or its successor agency under Public Law 
103-354 may pay any necessary and proper fees approved by the bankruptcy 
court in connection with the conveyance. Before paying a fee to a 
trustee for a Trustee's Deed in excess of $300 for any loan type(s) 
other than Farmer Programs or $1,000 for Farmer Program loans, prior 
approval of the Administrator must be obtained. The State Director will 
process the necessary documents as outlined in Sec. 1955.5(d) of this 
subpart for payment of fees as recoverable costs.
    (2) Conveyance may be by Trustee's Deed instead of a warranty deed. 
If upon advice of OGC it is determined a deed from any other person or 
entity (including the borrower) is necessary to obtain clear title, a 
deed from such person or entity will be obtained.
    (c) Acceptance. The conveyance will be accepted for an amount of 
credit to the borrower's FmHA or its successor agency under Public Law 
103-354 account(s) as set forth in Sec. 1955.18(e)(4) of this subpart.
    (d) Reporting. Acquisition of property under this section will be 
reported in accordance with Sec. 1955.18(a) of this subpart.

[50 FR 23904, June 7, 1985, as amended at 53 FR 27827, July 25, 1988]



Sec. 1955.12  Acquisition of property which served as security for a 

loan guarantee by FmHA or its successor agency under Public Law 103-354 
or at sale by another lienholder, bankruptcy trustee, or taxing authority.

    When the servicing regulations for the type of loan(s) involved 
permit FmHA or its successor agency under Public Law 103-354 to acquire 
property by one of these methods, the acquisition will be reported in 
accordance with Sec. 1955.18(a) of this subpart.



Sec. 1955.13  Acquisition of property by exercise of Government redemption rights.

    When the Government did not protect its interest in security 
property in a foreclosure by another lienholder, and if the Government 
has redemption rights, the State Director will determine whether to 
redeem the property. This determination will be based on all pertinent 
factors including the value of the property after the sale, and costs

[[Page 177]]

which may be incurred in acquiring and reselling the property. For 
Farmer Program loans, the County Supervisor will document the 
determination on exhibit G of this subpart. The decision must be made 
far enough in advance of expiration of the redemption period to permit 
exercise of the Government's rights. If the property is to be redeemed, 
complete information documenting the basis for not acquiring the 
property at the sale and factors which justify redemption of the 
property will be included in the case file. The assistance of OGC will 
be obtained in effecting the redemption. If the State Director decides 
not to redeem the property, the Government's right of redemption under 
Federal law (28 U.S.C. 2410) may be waived without consideration. If a 
State law right of redemption exists and may be sold, it will not be 
disposed of for less than its value.

[53 FR 35762, Sept. 14, 1988]



Sec. 1955.14  [Reserved]



Sec. 1955.15  Foreclosure by the Government of loans secured by real estate.

    Foreclosure will be initiated when all reasonable efforts have 
failed to have the borrower voluntarily liquidate the loan through sale 
of the property, voluntary conveyance, or by entering into an 
accelerated repayment agreement when applicable servicing regulations 
permit; when either a net recovery can be made or when failure to 
foreclose would adversely affect FmHA or its successor agency under 
Public Law 103-354 programs in the area. Also, in Farmer Program cases 
(except graduation cases under subpart F of part 1951 of this chapter), 
the borrower must have received exhibit A with attachments 1 and 2 of 
subpart S of part 1951 of this chapter, and any appeal must have been 
concluded. For real property located within the confines of a federally 
recognized Indian reservation and owned by a Native American borrower, 
proper notice of voluntary conveyance must be given as outlined in Sec. 
1955.9 (c)(1) of this subpart.
    (a) Authority--(1) Loans to individuals. The District Director is 
authorized to approve or disapprove foreclosure and accelerate the 
account.
    (2) Loans to organizations. (i) The State Director or District 
Director is authorized to approve or disapprove foreclosure of MFH loans 
when the amount of the FmHA or its successor agency under Public Law 
103-354 secured debt does not exceed their respective loan approval 
authority. The State Director is authorized to approve or disapprove 
foreclosure of I&D, Shift-In-Land-Use (Grazing Association), loans to 
Indian Tribes and Tribal Corporations, and EOC loans, regardless of the 
amount of debt.
    (ii) For all other organization loans, foreclosure will not be 
initiated without prior approval of the Administrator. The State 
Director will obtain OGC's opinion on the steps necessary to foreclose 
the loan, and forward the appropriate problem case report, a statement 
of essential facts, his/her recommendation, a copy of the OGC opinion, 
and the borrower's case file to the Administrator, Attn: Assistant 
Administrator (appropriate loan division) with a request for 
authorization to initiate foreclosure.
    (b) Problem case report. When foreclosure is recommended, the 
servicing official will prepare Form FmHA or its successor agency under 
Public Law 103-354 1955-2 for Farmer Program or SFH loans, exhibit A to 
this subpart for MFH loans, or exhibit A of FmHA or its successor agency 
under Public Law 103-354 Instruction 1951-E (available in any FmHA or 
its successor agency under Public Law 103-354 office) for other 
organization loans. If chattel security is also involved, Forms FmHA or 
its successor agency under Public Law 103-354 455-1, ``Request for Legal 
Action''; 455-2, ``Evidence of Conversion''; and 455-22, ``Information 
for Litigation''; as applicable to the case, will be prepared in 
accordance with the respective FMIs and made a part of the problem case 
submission. A statement must be included by the servicing official in 
the narrative that all servicing actions required by FmHA or its 
successor agency under Public Law 103-354 loan servicing regulations 
have been taken and all required notices given to the borrower.
    (1) Appraisal. The market value of the property may be estimated in 
completing the problem case report unless

[[Page 178]]

there are one or more prior liens other than current-year real estate 
taxes. Where such prior liens are involved, an appraisal report 
reflecting market value in existing condition will be included in the 
case file as a basis for determining the Government's prospects for 
financial recovery through foreclosure.
    (2) Recommendation for deficiency judgment. If the debt will not be 
satisfied by the foreclosure, the borrower's financial situation will be 
assessed to determine if there is a possibility of further recovery on 
the account through a deficiency judgment. A summary of these 
determinations will be fully documented and appropriate recommendations 
made concerning deficiency judgment in the applicable problem case 
report.
    (3) Historic preservation. If it is likely that FmHA or its 
successor agency under Public Law 103-354 will acquire title to the 
property as a result of the foreclosure, and the structure(s) on the 
property will be in excess of 50 years old at the time of acquisition or 
meet any of the other criteria contained in Sec. 1955.137(c) of subpart 
C of part 1955 of this chapter, steps should be initiated to meet the 
requirements of the National Historic Preservation Act as outlined in 
Sec. 1955.137(c). Formal steps should not be initiated until the 
conclusion of all appeals. However, any such documentation required may 
be completed when the problem case report is prepared. This action 
should eliminate delays in selling the property after acquisition.
    (c) Submission of problem case. The servicing official will submit 
the completed problem case docket to the official authorized to approve 
the foreclosure (approval official). Before approval of foreclosure and 
acceleration of the account, the approval official is responsible for 
review of the problem case report to see that all items are complete and 
that all required servicing actions have been taken and all required 
notices given the borrower. The narrative portion of the report should 
provide complete information on the borrower's financial condition, 
deficiency judgment in case the debt is not satisfied by the 
foreclosure, and other pertinent background items. The approval official 
will approve or disapprove the foreclosure, or make a recommendation and 
refer the case to the National Office, if not within his/her approval 
authority. If foreclosure is not approved, the case will be returned to 
the originating office with instructions for further servicing. Problem 
case submission is as follows:
    (1) For loans to individuals. The County Supervisors will submit the 
case to the District Director.
    (2) For loans to organizations. The District Director will submit 
the case to the State Director along with a proposed liquidation and 
management plan covering the time the foreclosure is in process. The 
State Director will obtain the advice of OGC if required in connection 
with the type of loan being liquidated.
    (d) Approval of foreclosure. When foreclosure is approved, it will 
be handled as follows:
    (1) Prior lien(s). If there is a prior lien, all foreclosure 
alternatives should be explored including whether FmHA or its successor 
agency under Public Law 103-354 will give the prior lienholder the 
opportunity to foreclose; join in the action if the prior lienholder 
wishes to foreclose; or foreclose the FmHA or its successor agency under 
Public Law 103-354 loan(s), either settling the prior lien or 
foreclosing subject to it. The provisions of Sec. 1965.11(c) of subpart 
A of part 1965 of this chapter must be followed for loans serviced under 
subpart A of part 1965. The assistance of OGC should be obtained in 
weighing the alternatives, with the objective being to pursue the course 
which will result in the greatest net recovery by the Government. After 
it is decided which option will be most advantageous to the Government, 
the approval official, either directly or through a designee, will 
contact the prior lienholder to outline FmHA or its successor agency 
under Public Law 103-354's position. If State laws affect this action, a 
State Supplement will be issued with the advice of OGC to establish the 
procedure to be followed. For real property located within the confines 
of a federally recognized Indian reservation owned by a Native American 
borrower-owner, an analysis of whether FmHA or its successor agency

[[Page 179]]

under Public Law 103-354 should acquire title must include facts which 
demonstrate the fair market value after considering the cost of clean-up 
of hazardous substances on the property.
    (2) Acceleration of account. Subject to paragraphs (d)(2)(i), 
(d)(2)(ii), and (d)(2)(iii) of this section, the account will be 
accelerated using a notice substantially similar to exhibits B, C, D, or 
E of this subpart, or for multi-family housing, FmHA or its successor 
agency under Public Law 103-354 Guide Letters 1955-A-1 or 1955-A-2 
(available in any FmHA or its successor agency under Public Law 103-354 
Office), as appropriate, to be signed by the official who approved the 
foreclosure. The accounts of borrowers with pending Chapter 12 and 13 
cases which have not been discharged will be accelerated in accordance 
with instructions from OGC. Upon OGC approval, accounts of these 
borrowers may be accelerated using a notice substantially similar to 
exhibit D of this subpart. Loans secured by chattels must be accelerated 
at the same time as loans secured by real estate in accordance with 
Sec. 1965.26 (c) of subpart A of part 1965 of this chapter. The notice 
will be sent by certified mail, return receipt requested, to each 
obligor individually, addressed to the last known address. If different 
from the property address and/or the address the Finance Office uses, a 
copy of the notice will also be mailed to the property address and the 
address currently used by the Finance Office. (In chattel liquidation 
cases which have been referred for civil action under subpart A of part 
1962 of this chapter, the Finance Office will be sent a copy of exhibits 
D, E, or E-1 (available in any FmHA or its successor agency under Public 
Law 103-354 office) as applicable. County Office and Finance Office loan 
records will be adjusted to mature the entire debt in such cases). If a 
signed receipt for at least one of these acceleration notices sent by 
certified mail is received, no further notice is required. If no receipt 
is received, a copy of the acceleration notice will be sent by regular 
mail to each address to which the certified notices were sent. This type 
mailing will be documented in the file. A State Supplement may be issued 
if OGC advises different or additional language or format is required to 
comply with State laws or if notice and mailing instructions are 
different from that outlined in this paragraph. A conformed copy of the 
acceleration notice will be forwarded to the servicing official. Farmer 
Program appeals will be concluded before acceleration. For MFH loans, a 
copy of the acceleration letter will also be forwarded to the National 
Office, ATTN: MFH Servicing and Property Management Division, for 
monitoring purposes. Accounts may be accelerated as follows:
    (i) Where monetary default is involved, the account may be 
accelerated immediately after approval of foreclosure.
    (ii) Where monetary default is not involved, the account will not be 
accelerated until the concurrence of OGC is obtained.
    (iii) If borrower obtained the loan while a civilian, entered 
military service after the loan was closed, the FmHA or its successor 
agency under Public Law 103-354 has not obtained a waiver of rights 
under the Soldiers and Sailors Relief Act, the account will not be 
accelerated until OGC has reviewed the case and given instructions.
    (iv) If the decision is made to liquidate the farm loan(s) of a 
borrower who also has a SFH loan(s), and the dwelling was used as 
security for the farm loan(s) it will not be necessary to meet the 
requirements of 7 CFR part 3550 prior to accelerating the account. 
Except that, if the borrower is in default on his/her farm loan(s), the 
SFH account must have been considered for interest credit and/or 
moratorium at the time servicing options are being considered for the FP 
loan(s) prior to acceleration. If it is later determined the FP loan(s) 
are to receive additional servicing in lieu of liquidation, the RH loan 
will be reinstated simultaneously with the FP servicing actions and may 
be reamortized in accordance with 7 CFR part 3550. Accounts of a 
borrower who has both Farmer Program and SFH loan(s) may be accelerated 
as follows:
    (A) When the borrower's dwelling is financed with an SFH loan(s) is 
secured by and located on the same farm real estate as the Farmer 
Program loan(s)

[[Page 180]]

(dwelling located on the farm), the SFH loan(s) will be serviced in 
accordance with Sec. 1965.26(c)(1) of subpart A of part 1965 of this 
chapter.
    (B) When the borrower's dwelling is financed with an SFH loan(s) and 
is located on a nonfarm tract which also serves as additional security 
for the Farmer Program loan(s), the loans(s) will be serviced in 
accordance with Sec. 1965.26 (c)(2) of subpart A of part 1965 of this 
chapter.
    (C) When the borrower's dwelling is financed with an SFH loan(s) and 
is on a non-farm tract which does not serve as additional security for 
the Farmer Program loan(s), it will NOT be accelerated simultaneously 
with sending out attachments 5 and 6, or 5-A and 6-A, or attachment 9 
and 10, or 9-A and 10-A, of exhibit A of subpart S of part 1951 of this 
chapter, as applicable, unless it is subject to liquidation based on 
provisions of 7 CFR part 3550, taking into consideration the prospects 
for success that may evolve when the borrower's livelihood is from a 
source other than the farming operation. If the SFH loan is in default 
and subject to liquidation based on provisions of 7 CFR part 3550, the 
SFH loan(s) must be accelerated at the same time the borrower is sent 
attachment 5 and 6, or 5-A and 6-A, or attachments 9 and 10, or 9-A and 
10-A, to exhibit A of subpart S of part 1951 of this chapter, as 
applicable. For those borrowers who are in non-monetary default on their 
Farmer Programs loans and fail to return attachment 4 of exhibit A of 
subpart S of part 1951 of this chapter, the Farmer Programs loans and 
SFH loans will be accelerated at the same time. If the borrower appeals, 
one appeal hearing and one review will be held for both adverse actions.
    (D) If a borrower's FP loan(s) were accelerated prior to May 7, 
1987, and the SFH loan(s) is not accelerated, the SFH loan will be 
accelerated at the same time the borrower is sent attachments 5 and 6, 
or 5-A and 6-A, or attachments 7 and 8 to exhibit A of subpart S of 1951 
of this chapter, as applicable, unless the requirements of Sec. 1965.26 
of subpart A of part 1965 of this chapter are met or the liquidation of 
the SFH loan is based on provisions of 7 CFR part 3550. If the borrower 
is sent attachments 5 and 6, or 5-A and 6-A to exhibit A of subpart S of 
1951 of this chapter, as applicable, and requests an appeal, one hearing 
and one review will be held for both the adverse action on the FP loan 
restructuring request and SFH acceleration notices. If the borrower is 
sent attachments 7 and 8 to exhibit A of subpart S of 1951 of this 
chapter, there are no further appeals on the FP loans; but, the borrower 
is entitled to a hearing and a review on the SFH acceleration notice.
    (v) For MFH loans, the acceleration notice will advise the borrower 
of all applicable prepayment requirements, in accordance with subpart E 
of part 1965 of this chapter. The requirements include the application 
of restrictive-use provisions to loans made on or after December 21, 
1979, prepaid in response to acceleration notices and all tenant and 
agency notifications. The acceleration notice will also remind borrowers 
that rent levels cannot be raised during the acceleration without FmHA 
or its successor agency under Public Law 103-354 approval, even after 
subsidies are canceled or suspended. Tenants are to be notified of the 
status of the project and of possible consequences of these actions. 
FmHA or its successor agency under Public Law 103-354 Form Letters 1965-
E-2, 1965-E-3 and 1965-E-5 may be used as guides, but modified 
appropriately. If the borrower wishes to prepay the project in response 
to the acceleration and FmHA or its successor agency under Public Law 
103-354 makes a determination that the housing is no longer needed, a 
minimum of 180 days' notice to tenants is required before the project 
can be removed from the FmHA or its successor agency under Public Law 
103-354 program. Letters of Priority Entitlement must be made available 
in accordance with Sec. 1965.215(e)(4) or subpart E of part 1965 of 
this chapter.
    (3) Offers by borrowers after acceleration of account--(i) Farmers 
Programs (FP) accelerations. This category also includes non-FP loans to 
the same borrower which have been accelerated as part of the same 
action. After the account is accelerated, the borrower will have 30 days 
from the date of the acceleration notice to make payment in full to stop 
the acceleration, unless State

[[Page 181]]

or tribal law requires that the foreclosure be withdrawn if the account 
is brought current and a State supplement is issued to specify the 
requirement.
    (A) Payment in full [see exhibit D of this subpart (available in any 
FmHA or its successor agency under Public Law 103-354 office)] may 
consist of the following means of fully satisfying the debt.
    (1) Cash.
    (2) Transfer and assumption.
    (3) Sale of property.
    (4) Voluntary conveyance.
    (B) Payments which do not pay the account in full can be accepted 
subject to the following requirements:
    (1) Payments will be accepted if there is no remaining security for 
the debt (real estate and chattel).
    (2) If the borrower is in the process of selling security or 
nonsecurity, payments may be accepted unless State law would require the 
acceleration to be reversed. In States where payments cannot be accepted 
unless the acceleration is reversed, the payments will not be accepted. 
A State supplement will be issued to address State law on accepting 
payments after acceleration.
    (3) If payments are mistakenly credited to the borrower's account, 
no waiver or prejudice to any rights which the United States may have 
for breach of any promissory note or convenant in the real estate 
instruments will result. Disposition of such payments will be made after 
consulting OGC.
    (4) The servicing official will notify the approval official of any 
other offer. This includes a request by the borrower for an extension of 
time to accomplish voluntary liquidation or a proposal to cure the 
default(s). In all other cases, the approval official will decide 
whether an offer from a borrower will be accepted and servicing of the 
loan reinstated or whether foreclosure will be delayed to give the 
borrower additional time to voluntarily liquidate as authorized in 
servicing regulations for the type loan(s) involved. If an offer is 
received after the case has been referred to OGC, the approval official 
will consult OGC before accepting or rejecting the offer. The denial of 
an offer to stop foreclosure is not appealable. In all cases, the 
approval official will notify the servicing official of the decision 
made.
    (ii) All other accelerations. After the account is accelerated, loan 
servicing ceases. For example, for SFH loans, the renewal or granting of 
interest credit or a moratorium is not authorized. The servicing 
official will accept no payment for less than the unpaid loan balance, 
unless State law requires that foreclosure be withdrawn if the account 
is brought current and a State supplement is issued to specify this 
requirement. If payments are mistakenly accepted and credited to the 
borrower's account, no waiver or prejudice to any rights which the 
United States may have for breach of any promissory note or covenants in 
the real estate instruments will result. Disposition of such payments 
will be made after consultation with OGC. The servicing official will 
notify the approval official of any offer received from the borrower. 
This includes a request by the borrower for an extension of time to 
accomplish voluntary liquidation or a written proposal to cure the 
default(s). The receipt of a payment with no proposal to cure the 
defaults is not considered a viable offer, and such payments will be 
returned to the borrower. The approval official will decide whether an 
offer from a borrower will be accepted and servicing of the loan 
reinstated or whether foreclosure will be delayed to give the borrower 
additional time to voluntarily liquidate as authorized in servicing 
regulations for the type loan involved. If an offer is received after 
the case has been referred to OGC, the approval official will consult 
OGC before accepting or rejecting the offer. The denial of an offer to 
stop foreclosure is not appealable. In all cases, the approval official 
will notify the servicing official of the decision made. For MFH loans, 
the National Office will be notified when foreclosure is withdrawn. When 
an account is reinstated under this section, the servicing official will 
grant or reinstate assistance for which the borrower qualifies, such as 
interest credit on an SFH loan. When granting interest credit in such a 
case:

[[Page 182]]

    (A) If an interest credit agreement expired after the account was 
accelerated, the effective date will be the date the previous agreement 
expired.
    (B) If an interest credit agreement was not in effect when the 
account was accelerated, the effective date will be the date foreclosure 
action was withdrawn.
    (C) For MFH loans with rental assistance, after acceleration and 
after any appeal or review has been concluded, rental assistance will be 
suspended if foreclosure is to continue. If the account is reinstated, 
the rental assistance will be reinstated retroactively to the date of 
suspension. In the interim, the tenants will continue rental payments in 
accordance with their leases, and all rental rates and lease renewals 
and provisions will be continued as if acceleration had not taken place.
    (4) Statement of account. If a statement of account is required for 
foreclosure proceedings, Form FmHA or its successor agency under Public 
Law 103-354 451-10, ``Request for Statement of Account,'' will be 
processed in accordance with the FMI. When an official statement of 
account is not required, account balances and recapture information may 
be obtained from the field office terminal.
    (5) Appeals. All appeals will be handled pursuant to subpart B of 
part 1900 of this chapter. Foreclosure actions will be held in abeyance 
while an appeal is pending. No case will be referred to OGC for 
processing of foreclosure until a borrower's appeal and appeal review 
have been concluded, or until the time has elapsed during which an 
appeal or a request for review may be made. In Farmer Programs cases, 
(except graduation cases under subpart F of part 1951 of this chapter), 
the borrower must have received the appropriate notices and 
consideration for primary loan servicing per subpart S of part 1951 of 
this chapter. Any Farmer Programs cases may be accelerated after all 
primary loan servicing options have been considered and all related 
appeals concluded, but will not be submitted to OGC for foreclosure 
action until all appeals related to any preservation rights have been 
concluded.
    (6) Petition in bankruptcy filed by borrower after acceleration of 
account.(i) When bankruptcy is filed after an account has been 
accelerated, any foreclosure action initiated by FmHA or its successor 
agency under Public Law 103-354 must be suspended until:
    (A) The bankruptcy case is dismissed or closed (a discharge of 
debtor does not close the case);
    (B) An Order lifting the automatic stay is obtained from the 
Bankruptcy Court; or
    (C) The property is no longer property of the bankruptcy estate and 
the borrower has received a discharge.
    (ii) The State Director will request the assistance of OGC in 
obtaining the Order(s) described in paragraph (c)(6)(i)(B) of this 
section.
    (e) Referral of case. If the borrower fails to satisfy the account 
during the period of time specified in the acceleration notice, and no 
appeal is pending, the foreclosure process will continue:
    (1) If the District Director is the approval official, he/she will 
forward the case file with all pertinent documents and information 
concerning the foreclosure action and appeal, if any, to the State 
Director for completion of the foreclosure.
    (2) If the State Director is the approval official, or in cases 
referred by the District Director under paragraph (e)(1) of this 
section, the State Director will forward to OGC the case file and all 
documents needed by OGC to process the foreclosure. A State Supplement 
will be issued, with the advice and assistanced of OGC, to reflect the 
make-up of the foreclosure docket. Since foreclosure processing varies 
widely from State to State, each State Supplement will be explicit in 
outlining step-by-step procedures. At the time indicated by OGC in the 
foreclosure instructions, Form FmHA or its successor agency under Public 
Law 103-354 1951-6, ``Borrower Account Description Flag,'' will be 
processed in accordance with the FMI. After referral to OGC, further 
actions will be in accordance with OGC's instructions for completion of 
the foreclosure. If prior approval of the Administrator is obtained, 
nonjudicial foreclosure for monetary default may be handled as outlined 
in a State Supplement approved by OGC without referral to OGC before 
foreclosure.

[[Page 183]]

    (f) Completion of foreclosure--(1) Foreclosure advertisement for 
organization loans subject to title VI of the Civil Rights Act of 
1964.(i) The advertisement for foreclosure sale of property subject to 
title VI of the Civil Rights Act of 1964 will contain a statement 
substantially similar to the following: ``The property described herein 
was purchased or improved with Federal financial assistance and is 
subject to the nondiscrimination provisions of title VI of the Civil 
Rights Act of 1964, section 504 of the Rehabilitation Act of 1973 and 
other similarly worded Federal statutes and regulations issued pursuant 
thereto that prohibit discrimination on the basis of race, color, 
national origin, handicap, religion, age or sex in programs or 
activities receiving Federal financial assistance, for as long as the 
property continues to be used for the same or similar purposes for which 
the Federal assistance was extended or for so long as the purchaser owns 
it, whichever is later.'' At least 30 days before the foreclosure sale, 
the County Supervisor will notify, in writing, the Indian tribe which 
has jurisdiction over the reservation, and in which the real property is 
owned by a Native American member of said tribe that a foreclosure sale 
will be conducted to resolve this account, and will provide:
    (A) Projected sale date and location;
    (B) Fair market value of property;
    (C) Amount FmHA or its successor agency under Public Law 103-354 
will bid on the property; and
    (D) Amount of FmHA or its successor agency under Public Law 103-354 
debt against the property.
    (ii) The purchaser will be required to sign Form FmHA or its 
successor agency under Public Law 103-354 400-4, ``Assurance 
Agreement,'' if the property will be used for its original or similar 
purposes.
    (2) Restrictive-use provisions for MFH loans. For MFH loans, the 
advertisement will state the restrictive-use provisions which will be 
included in any deed used to transfer title.
    (3) Expenses. Expenses which are incurred in connection with 
foreclosure, including legal fees, will be paid at the time recommended 
by OGC by processing the necessary documents as outlined in Sec. 1955.5 
(d) of this subpart. Costs will be charged as outlined in FmHA or its 
successor agency under Public Law 103-354 Instruction 2024-A (available 
in any FmHA or its successor agency under Public Law 103-354 office).
    (4) Notice of judgment. In states with judicial foreclosure, as soon 
as the foreclosure judgment is obtained, Form FmHA or its successor 
agency under Public Law 103-354 1962-20, ``Notice of Judgment,'' will be 
processed in accordance with the FMI. This will establish a judgment 
account to accrue interest at the rate stated in the judgment order so 
that an accurate account balance can be obtained for calculating the 
Government's foreclosure bid.
    (5) Gross investment. The gross investment is the sum of the 
following:
    (i) The unpaid balance of one of the following, as applicable:
    (A) In States with nonjudicial foreclosure, the borrower's FmHA or 
its successor agency under Public Law 103-354 account balance reflecting 
secured loan(s) and advances; and where State law permits, unsecured 
debts; or
    (B) In States with judicial foreclosure, the judgment account 
established as a result of the foreclosure judgment in favor of FmHA or 
its successor agency under Public Law 103-354.
    (ii) All recoverable costs charged (or to be charged) to the 
borrower's account in connection with the foreclosure action and other 
costs which OGC advises must be paid from proceeds of the sale before 
paying the FmHA or its successor agency under Public Law 103-354 secured 
debt, including but not limited to payment of real estate taxes and 
assessments, prior liens, legal fees including U.S. Attorney's and U.S. 
Marshal's, and management fees; and
    (iii) If a SFH loan subject to recapture of interest credit is 
involved, the total amount of subsidy granted and principal reduction 
attributed to subsidy.
    (6) Amount of Government's bid. Except for FP loans and as modified 
by paragraph (f)(7)(ii) of this section, the Government's bid will be 
the amount of FmHA or its successor agency under Public Law 103-354's 
gross investment or the market value of the security,

[[Page 184]]

whichever is less. For real property located within the confines of a 
federally recognized Indian reservation and which is owned by an FmHA or 
its successor agency under Public Law 103-354 borrower who is a member 
of the tribe with jurisdiction over the reservation, the Government's 
bid will be the greater of the fair market value or the FmHA or its 
successor agency under Public Law 103-354 debt against the property, 
unless FmHA or its successor agency under Public Law 103-354 determines 
that, because of the presence of hazardous substances on the property, 
it is not in the best interest of the Government to bid such amount, in 
which case there may be a deduction from the bid for the costs for 
hazardous material assessment and/or mitigation. For FP loans, except as 
modified by paragraph (f)(7)(ii) of this section, the Government's bid 
will be the amount of FmHA or its successor agency under Public Law 103-
354's gross investment or the amount determined by use of exhibit G-1 of 
this subpart, whichever is less. When the foreclosure sale is imminent, 
the State Director must request the servicing official to submit a 
current appraisal (in existing condition) as a basis for determining the 
Government's bid. Except for MFH properties, if an FmHA or its successor 
agency under Public Law 103-354 appraiser is not available, the State 
Director may authorize an appraisal to be obtained by contract from a 
source outside FmHA or its successor agency under Public Law 103-354 in 
accordance with FmHA or its successor agency under Public Law 103-354 
Instruction 2024-A (available in any FmHA or its successor agency under 
Public Law 103-354 office). For MFH properties, prior approval of the 
Assistant Administrator, Housing, is necessary to procure an outside 
appraisal.
    (7) Bidding. The State Director will designate an individual to bid 
on behalf of the Government unless judicial proceedings or State 
nonjudicial foreclosure law provides for someone other than an FmHA or 
its successor agency under Public Law 103-354 employee to enter the 
Government's bid. When the State Director determines attendance of an 
FmHA or its successor agency under Public Law 103-354 employee at the 
sale might pose physical danger, a written bid may be submitted to the 
Marshal, Sheriff, or other party in charge of holding the sale. The 
Government's bid will be entered when no other party makes a bid or when 
the last bid will result in the property being sold for less than the 
bid authorized in paragraph (f)(6) of this section.
    (i) When FmHA or its successor agency under Public Law 103-354 is 
the senior lienholder, only one bid will be entered, and that will be 
for the amount authorized by the State Director.
    (ii) When FmHA or its successor agency under Public Law 103-354 is 
not the senior lienholder and OGC advises that the borrower has no 
redemption rights or if a deficiency judgment will be obtained, the 
State Director may authorize the person who will bid for the Government 
to make incremental bids in competition with other bidders. If 
incremental bidding is desired, the State Director's instructions to the 
bidder will state the initial bid, bidding increments, and the maximum 
bid.
    (g) Reports on sale and finalizing foreclosure. Immediately after a 
foreclosure sale at which the State Director has designated a person to 
bid on behalf of the Government, the servicing official will furnish the 
State Director a report on the sale. The State Director will forward a 
copy of this report to OGC and, for MFH loans, to the National Office. 
Based on OGC's instructions, a State supplement will provide a detailed 
outline of actions necessary to complete the foreclosure.

[50 FR 23904, June 7, 1985, as amended at 50 FR 45782, Nov. 1, 1985; 51 
FR 4138, Feb. 3, 1986; 51 FR 45433, Dec. 18, 1986; 53 FR 27827, July 25, 
1988; 53 FR 35763, Sept. 14, 1988; 56 FR 6953, Feb. 21, 1991; 56 FR 
15822, Apr. 18, 1991; 57 FR 18671, Apr. 30, 1992; 57 FR 31642, July 17, 
1992; 57 FR 60085, Dec. 18, 1992; 58 FR 38927, July 21, 1993; 58 FR 
58648, Nov. 3, 1993; 58 FR 68725, Dec. 29, 1993; 60 FR 55147, Oct. 27, 
1995; 62 FR 44396, Aug. 21, 1997; 67 FR 78329, Dec. 24, 2002]



Sec. Sec. 1955.16-1955.17  [Reserved]



Sec. 1955.18  Actions required after acquisition of property.

    The approval official may employ the services of local designated 
attorneys, of a case by case basis, to process all legal procedures 
necessary to clear the

[[Page 185]]

title of foreclosure properties. Such attorneys shall be compensated at 
not more than their usual and customary charges for such work. 
Contracting for such attorneys shall be accomplished pursuant to the 
Federal acquisition regulations and related procurement regulations and 
guidance.
    (a)-(d) [Reserved]
    (e) Credit to the borrower's account or foreclosure judgment 
account--(1) For SFH accounts. When FmHA or its successor agency under 
Public Law 103-354 acquired the property, the account will be satisfied 
unless:
    (i) In a voluntary conveyance case where the debt exceeds the market 
value of the property and the borrower is not released from liability, 
in which case the account credit will be the market value (less 
outstanding liens if any); or
    (ii) In a foreclosure where the bid is less than the account balance 
and a deficiency judgment will be sought for the difference, in which 
case the account credit will be the amount of FmHA or its successor 
agency under Public Law 103-354's bid.
    (2) For all types of accounts other than SFH. When FmHA or its 
successor agency under Public Law 103-354 acquired the property, the 
account credit will be as follows:
    (i) In a voluntary conveyance case:
    (A) Where the market value of the property equals or exceeds the 
debt or where the borrower is released from liability for any 
difference, the account will be satisfied.
    (B) Where the debt exceeds the market value of the property and the 
borrower is not released from liability, the account credit will be the 
market value (less outstanding liens, if any).
    (ii) In a foreclosure, the account credit will be the amount of FmHA 
or its successor agency under Public Law 103-354's bid except when 
incremental bidding as provided for in Sec. 1955.15(f)(7)(ii) of this 
subpart was used, in which case the account credit will be the maximum 
bid that was authorized by the State Director.
    (3) For all types of accounts when FmHA or its successor agency 
under Public Law 103-354 did not acquire the property. The sale proceeds 
will be handled in accordance with applicable State laws with the advice 
and assistance of OGC, including remittance of funds, application of the 
borrower's account credit, and disbursement of any funds in excess of 
the amount due FmHA or its successor agency under Public Law 103-354.
    (4) In cases where FmHA or its successor agency under Public Law 
103-354 acquired security property by means other than voluntary 
conveyance or foreclosure. In these cases, such as conveyance by a 
bankruptcy trustee or by Court Order, the account credit will be as 
follows:
    (i) If the market value of the acquired property equals or exceeds 
the debt, the account will be satisfied.
    (ii) If the debt exceeds the market value of the acquired property, 
the account credit will be the market value.
    (f)-(l)

[50 FR 23904, June 7, 1985, as amended at 52 FR 41957, Nov. 2, 1987; 53 
FR 27827, July 25, 1988; 53 FR 35764 Sept. 14, 1988; 55 FR 35295, Aug. 
29, 1990; 56 FR 10147, Mar. 11, 1991; 56 FR 29402, June 27, 1991; 58 FR 
38927, July 21, 1993; 58 FR 68725, Dec. 29, 1993; 60 FR 34455, July 3, 
1995]



Sec. 1955.19  [Reserved]



Sec. 1955.20  Acquisition of chattel property.

    Every effort will be made to avoid acquiring chattel property by 
having the borrower or FmHA or its successor agency under Public Law 
103-354 liquidate the property according to Subpart A of Part 1962 of 
this chapter and apply the proceeds to the borrower's account(s). 
Methods of acquisition authorized are:
    (a) Purchase at the following types of sale: (1) Execution sale 
conducted by the U.S. Marshal, sheriff or other party acting under Court 
order to satisfy judgment liens.
    (2) FmHA or its successor agency under Public Law 103-354 
foreclosure sale conducted by the U.S. Marshal or sheriff in States 
where a State Supplement provides for sales to be conducted by them.
    (3) Sale by trustee in bankruptcy.
    (4) Public sale by prior lienholder.
    (5) Public sale conducted under the terms of Form FmHA or its 
successor agency under Public Law 103-354 455-4, ``Agreement for 
Voluntary Liquidation of Chattel Security,'' the power of sale

[[Page 186]]

in security agreements or crop and chattel mortgage, or similar 
instrument, if authorized by State Supplement.
    (b) Voluntary conveyance. Voluntary conveyance of chattels will be 
accepted only when the borrower can convey ownership free of other liens 
and the borrower can be released from liability under the conditions set 
forth in Sec. 1955.10(f)(2) of this subpart. Payment of other 
lienholders' debts by FmHA or its successor agency under Public Law 103-
354 in order to accept voluntary conveyance of chattels is not 
authorized. Before a voluntary conveyance from a Farmer Program loan 
borrower can be accepted, the borrower must be sent Exhibit A with 
Attachments 1 and 2 of Subpart S of Part 1951 of this chapter.
    (1) Offer. The borrower's offer of voluntary conveyance will be made 
on Form FmHA or its successor agency under Public Law 103-354 1955-1. If 
it is determined the conveyance offer can be accepted, the borrower will 
execute a bill of sale itemizing each item of chattel property being 
conveyed and will provide titles to vehicles or other equipment, where 
applicable.
    (2) Acceptance of offer release from liability. Before accepting an 
offer to convey chattels to FmHA or its successor agency under Public 
Law 103-354, the concurrence of the State Director must be obtained. 
When chattel security is voluntarily conveyed to the Government and the 
borrower and cosigner(s), if any, are to be released from liability, the 
servicing official will stamp the note(s) ``Satisfied by Surrender of 
Security and Borrower Released from Liability.'' When the Agency debt 
less the market value and prior liens is $1 million or more (including 
principal, interest and other charges), release of liability must be 
approved by the Administrator or designee; otherwise, the State Director 
must approve the release of liability. All cases requiring a release of 
liability will be submitted in accordance with Exhibit A of Subpart B of 
Part 1956 of this chapter (available in any FmHA or its successor agency 
under Public Law 103-354 office). Form FmHA or its successor agency 
under Public Law 103-354 1955-1 will be executed by the servicing 
official showing acceptance by the Government, and the satisfied note(s) 
and a copy of Form FmHA or its successor agency under Public Law 103-354 
1955-1 will be furnished to the borrower.
    (3) Release of lien(s). When an offer has been accepted as outlined 
in paragraph (b)(2) of this section, the servicing official will release 
any liens of record which secured the satisfied indebtedness.
    (4) Rejection of offer. If it is determined an offer of voluntary 
conveyance will not be accepted, the servicing official will indicate on 
Form FmHA or its successor agency under Public Law 103-354 1955-1 that 
the offer is rejected, execute the form, and furnish a copy to the 
borrower.
    (c) Attending sales. The servicing official will:
    (1) Attend all sales described in paragraph (a)(5) of this section 
unless an exception is authorized by the State Director because of 
physical danger to the FmHA or its successor agency under Public Law 
103-354 employee or adverse publicity would be likely.
    (2) Attend public sales by prior lienholders when the market value 
of the chattel property is significantly more than the amount of the 
prior lien(s).
    (3) Obtain the advice of the State Director on attending sales 
described in paragraphs (a) (1), (2), and (3) of this section.
    (d) Appraising chattel property. Prior to the sale, the servicing 
official will appraise chattel property using Form FmHA or its successor 
agency under Public Law 103-354 440-21, ``Appraisal of Chattel 
Property.'' If a qualified appraiser is not available to appraise 
chattel property, the State Director may obtain an appraisal from a 
qualified source outside FmHA or its successor agency under Public Law 
103-354 by contract in accordance with FmHA or its successor agency 
under Public Law 103-354 Instruction 2024-A (available in any FmHA or 
its successor agency under Public Law 103-354 office).
    (e) Abandonment of security interest. The State Director may 
authorize abandonment of the Government's security interest when chattel 
property,

[[Page 187]]

considering costs of moving or rehabilitation, has no market value and 
obtaining title would not be in the best interest of the Government.
    (f) Bidding at sale. (1) The servicing official is authorized to bid 
at sales described in paragraph (a) of this section. Ordinarily, only 
one bid will be made on items of chattel security unless the State 
Director authorizes incremental bidding. Bids will be made only when no 
other party bids or when it appears bidding will stop and the property 
will be sold for less than the amount of the Government's authorized 
bid. When the State Director determines attendance of an FmHA or its 
successor agency under Public Law 103-354 employee might pose physical 
danger, a written bid may be submitted to the party holding the sale. 
The bid(s) will be the lesser of:
    (i) The market value of the item(s) less the estimated costs 
involved in the acquisition, care, and sale of the item(s) of security; 
or
    (ii) The unpaid balance of the borrower's secured FmHA or its 
successor agency under Public Law 103-354 debt plus prior liens, if any.
    (2) Bids will not be made in the following situations unless 
authorized by the State Director:
    (i) When chattel property under prior lien has a market value which 
is not significantly more than the amount owed the prior lienholder. If 
FmHA or its successor agency under Public Law 103-354 holds a junior 
lien on several items of chattel property, advice should be obtained 
from the State Director on bidding.
    (ii) After sufficient chattel property has been bid in by FmHA or 
its successor agency under Public Law 103-354 to satisfy the FmHA or its 
successor agency under Public Law 103-354 debt; prior liens, and cost of 
the sale.
    (iii) When the sale is being conducted by a lienholder junior to 
FmHA or its successor agency under Public Law 103-354.
    (iv) At a private sale.
    (v) When the sale is being conducted under the terms of Form FmHA or 
its successor agency under Public Law 103-354 455-3, ``Agreement for 
Sale by Borrower (Chattels and/or Real Estate)''.
    (g) Payment of costs. Costs to be paid by FmHA or its successor 
agency under Public Law 103-354 in connection with acquisition of 
chattel property will be paid as outlined in Sec. 1955.5(d) of this 
subpart as recoverable costs.

    Note: Payment of other lienholders' debts in connection with 
voluntary conveyance of chattels is not authorized.

    (h) Reporting acquisition of chattel property. Acquisition of 
chattel property will be reported by use of Form FmHA or its successor 
agency under Public Law 103-354 1955-3 prepared and distributed in 
accordance with the FMI.

[50 FR 23904, June 7, 1985, as amended at 50 FR 45783, Nov. 1, 1985; 51 
FR 45433, Dec. 18, 1986; 53 FR 27828 July 25, 1988; 53 FR 35764, Sept. 
14, 1988; 60 FR 28320, May 31, 1995]



Sec. 1955.21  Exception authority.

    The Administrator may, in individual cases, make an exception to any 
requirement or provision of this subpart or address any omission of this 
subpart which is not inconsistent with the authorizing statute or other 
applicable law if the Administrator determines that the Government's 
interest would be adversely affected or the immediate health and/or 
safety of tenants or the community are endangered if there is no adverse 
effect on the Government's interest. The Administrator will exercise 
this authority upon the request of the State Director with 
recommendation of the appropriate program Assistant Administrator; or 
upon request initiated by the appropriate program Assistant 
Administrator. Requests for exceptions must be made in writing and 
supported with documentation to explain the adverse effect, propose 
alternative courses of action, and show how the adverse effect will be 
eliminated or minimized if the exception is granted.



Sec. 1955.22  State supplements.

    State Supplements will be prepared with the assistance of OGC as 
necessary to comply with State laws or only as specifically authorized 
in this regulation to provide guidance to FmHA or its successor agency 
under

[[Page 188]]

Public Law 103-354 officials. State supplements will be submitted to the 
National Office for post approval in accordance with FmHA or its 
successor agency under Public Law 103-354 Instruction 2006-B (available 
in any FmHA or its successor agency under Public Law 103-354 office).



Sec. Sec. 1955.23-1955.49  [Reserved]



Sec. 1955.50  OMB control number.

    The collection of information requirements contained in this 
regulation have been approved by the Office of Management and Budget 
(OMB) and have been assigned OMB control number 0575-0109. Public 
reporting burden for this collection of information is estimated to vary 
from 5 minutes to 5 hours per response, with an average of .56 hours per 
response including time for reviewing instructions, searching existing 
data sources, gathering and maintaining the data needed, and completing 
and reviewing the collection of information. Send comments regarding 
this burden estimate or any other aspect of this collection of 
information, including suggestions for reducing this burden, to 
Department of Agriculture, Clearance Officer, OIRM, room 404-W, 
Washington, DC 20250; and to the Office of Management and Budget, 
Paperwork Reduction Project (OMB 0575-0109), Washington, DC 
20503.

[57 FR 1372, Jan. 14, 1992]

            Exhibits A-F to Subpart A of Part 1955 [Reserved]



                    Subpart B_Management of Property

    Source: 53 FR 35765, Sept. 14, 1988, unless otherwise noted.



Sec. 1955.51  Purpose.

    This subpart delegates authority and prescribes policies and 
procedures for the Rural Housing Service (RHS), Rural Business-
Cooperative Service (RBS), the Water and Waste programs of the Rural 
Utilities Service (RUS), and Farm Service Agency (FSA), herein referred 
to as ``Agency,'' and references contained in this subpart to the 
Farmers Home Administration (FmHA) are synonymous with ``Agency.'' This 
subpart does not apply to RHS single family housing loans or community 
program loans sold without insurance to the private sector. These 
community program loans will be serviced by the private sector and 
future revisions to this subpart no longer apply to such loans. This 
subpart covers:
    (a) Management of real property which has been taken into custody by 
the respective Agency after abandonment by the borrower;
    (b) Management of real and chattel property which is in Agency 
inventory; and
    (c) Management of real and chattel property which is security for a 
guaranteed loan liquidated by an Agency (or which the Agency is in the 
process of liquidating).

[61 FR 59778, Nov. 22, 1996]



Sec. 1955.52  Policy.

    Inventory and custodial real property will be effectively managed to 
preserve its value and protect the Government's financial interests. 
Properties owned or controlled by FmHA or its successor agency under 
Public Law 103-354 will be maintained so that they are not a detriment 
to the surrounding area and they comply with State and local codes. 
Generally, FmHA or its successor agency under Public Law 103-354 will 
continue operation of Multiple Family Housing (MFH) projects which are 
acquired or taken into custody. Servicing of repossessed or abandoned 
chattel property is covered in subpart A of part 1962 of this chapter, 
and management of inventory chattel property is covered in Sec. 1955.80 
of this subpart.



Sec. 1955.53  Definitions.

    As used in this subpart, the following definitions apply:
    CONACT or CONACT property. Property acquired or sold pursuant to the 
Consolidated Farm and Rural Development Act (CONACT). Within this 
subpart, it shall also be construed to cover property which secured 
loans made pursuant to the Agriculture Credit Act of 1978; the Emergency 
Agricultural Credit Adjustment Act of 1978; the Emergency Agricultural 
Credit Act of 1984; the Food Security Act of 1985; and

[[Page 189]]

other statutes giving agricultural lending authority to FmHA or its 
successor agency under Public Law 103-354.
    Contracting Officer (CO). CO means a person with the authority to 
enter into, administer, and/or terminate contracts and make related 
determinations and findings. The term includes authorized 
representatives of the CO acting within the limits of their authority as 
delegated by the CO.
    Custodial property. Borrower-owned real property and improvements 
which serve as security for an FmHA or its successor agency under Public 
Law 103-354 loan, have been abandoned by the borrower, and of which FmHA 
or its successor agency under Public Law 103-354 has taken possession.
    Farmer program loans. This includes Farm Ownership (FO), Soil and 
Water (SW), Recreation (RL), Economic Opportunity (EO), Operating (OL), 
Emergency (EM), Economic Emergency (EE), Special Livestock (SL), 
Softwood Timber (ST) loans, and Rural Housing loans for farm service 
buildings (RHF).
    Government. The United States of America, acting through the FmHA or 
its successor agency under Public Law 103-354, U.S. Department of 
Agriculture.
    Indian reservation. All land located within the limits of any Indian 
reservation under the jurisdiction of the United States notwithstanding 
the issuance of any patent, and including rights-of-way running through 
the reservation; trust or restricted land located within the boundaries 
of a former reservation of a federally recognized Indian tribe in the 
State of Oklahoma; or all Indian allotments the Indian titles to which 
have not been extinguished if such allotments are subject to the 
jurisdiction of a federally recognized Indian tribe.
    Inventory property. Real and chattel property and related rights to 
which the Government has acquired title.
    Loans to individuals. Farmer Program loans, as defined above, 
whether to individuals or entities; Land Conservation and Development 
(LCD); and Single-Family Housing (SFH), including both Sections 502 and 
504 loans.
    Loans to organizations. Community Facility (CF), Water and Waste 
Disposal (WWD), Association Recreation, Watershed (WS), Resource 
Conservation and Development (RC&D), loans to associations for 
Irrigation and Drainage and other Soil and Water Conservation measures, 
loans to Indian Tribes and Tribal Corporations, Shift-in-Land-Use 
(Grazing Associations) Business and Industrial (B&I) to both individuals 
and groups, Rural Development Loan Fund (RDLF), Intermediary Relending 
Program (IRP), Nonprofit National Corporation (NNC), Economic 
Opportunity Cooperative (EOC), Rural Housing Site (RHS), Rural 
Cooperative Housing (RCH), and Rural Rental Housing (RRH) and Labor 
Housing (LH) to both individuals and groups. The housing-type loans 
identified here are referred to in this subpart collectively as MFH 
loans.
    Nonprogram (NP) property. SFH and MFH property acquired pursuant to 
the Housing Act of 1949, as amended, that cannot be used by a borrower 
to effectively carry out the objectives of the respective loan program; 
for example, a dwelling that cannot be feasibly repaired to meet the 
requirements for existing housing as described in 7 CFR part 3550. It 
may contain a structure which would meet program standards; however, is 
so remotely located it would not serve as an adequate residential unit 
or an older house which is excessively expensive to heat and/or maintain 
for a very-low or low-income homeowner.
    Nonrecoverable cost is a contractual or noncontractual program loan 
cost expense not chargeable to a borrower, property account, or part of 
the loan subsidy.
    Office of the General Counsel (OGC). The OGC, U.S. Department of 
Agriculture, refers to the Regional Attorney or Attorney-in-Charge in an 
OGC field office unless otherwise indicated.
    Program property. SFH and MFH inventory property that can be used to 
effectively carry out the objectives of their respective loan programs 
with financing through that program. Inventory property located in an 
area where the designation has been changed from rural to nonrural will 
be considered as if it were still in a rural area.
    Recoverable cost is a contractual or noncontractual program loan 
expense

[[Page 190]]

chargeable to a borrower, property account, or part of the loan subsidy.
    Servicing official. For loans to individuals as defined in this 
section, the servicing official is the County Supervisor. For insured 
B&I loans, the servicing official is the State Director. For Rural 
Development Loan Fund and Intermediary Relending Program loans, the 
servicing official is the Director, Business and Industry Division. For 
Nonprofit National Corporations loans, the servicing official is 
Director, Community Facility Division. For all other types of loans, the 
servicing official is the District Director.
    Suitable property. For FSA inventory property, real property that 
can be used for agricultural purposes, including those farm properties 
that may be used as a start up or add-on parcel of farmland. It also 
includes a residence or other off-farm site that could be used as a 
basis for a farming operation. For agencies other than FSA, real 
property that could be used to carry out the objectives of the Agency's 
loan program with financing provided through that program.
    Surplus property. For FSA inventory property, real property that 
cannot be used for agricultural purposes including nonfarm properties. 
For other agencies, property that cannot be used to carry out the 
objectives of financing available through the applicable loan program.

[53 FR 35765, Sept. 14, 1988, as amended at 56 FR 29402, June 27, 1991; 
57 FR 19525, 19528, May 7, 1992; 58 FR 58648, Nov. 3, 1993; 62 FR 44396, 
Aug. 21, 1997; 63 FR 41716, Aug. 5, 1998; 67 FR 78329, Dec. 24, 2002]



Sec. 1955.54  Redelegation of authority.

    Authorities will be redelegated to the extent possible, consistent 
with program objectives and available resources.
    (a) Any authority in this subpart which is specifically provided to 
the Administrator or to an Assistant Administrator may only be delegated 
to a State Director. The State Director cannot redelegate such 
authority.
    (b) Except as provided in paragraph (a) of this section, the State 
Director may redelegate, in writing, any authority delegated to the 
State Director in this subpart, unless specifically excluded, to a 
Program Chief, Program Specialist, or Property Management Specialist on 
the State Office staff.
    (c) The District Director may redelegate, in writing, any authority 
delegated to the District Director in this subpart to an Assistant 
District Director or District Loan Specialist. Authority of District 
Directors in this subpart applies to Area Loan Specialists in Alaska and 
the Director for the Western Pacific Territories.
    (d) The County Supervisor may redelegate, in writing, any authority 
delegated to the County Supervisor in this subpart to an Assistant 
County Supervisor, GS-7 or above, who is determined by the County 
Supervisor to be qualified. Authority of County Supervisors in this 
subpart applies to Area Loan Specialists in Alaska, Island Directors in 
Hawaii, the Director for the Western Pacific Territories, and Area 
Supervisors in the Western Pacific Territories and American Samoa.



Sec. 1955.55  Taking abandoned real or chattel property into custody 
and related actions.

    (a) Determination of abandonment. (Multiple housing type loans will 
be handled in accordance with Sec. 1965.75 of Subpart B of Part 1965 of 
this chapter.) When it appears a borrower has abandoned security 
property, the servicing official shall make a diligent attempt to locate 
the borrower to determine what the borrower's intentions are concerning 
the property. This includes making inquiries of neighbors, checking with 
the Postal Service, utility companies, employer(s), if known, and 
schools, if the borrower has children, to see if the borrower's 
whereabouts can be determined and an address obtained. A State 
supplement may be issued if necessary to further define ``abandonment'' 
based on State law. If the borrower is not occupying or is not in 
possession of the property but has it listed for sale with a real estate 
broker or has made other arrangements for its care or sale, it will not 
be considered abandoned so long as it is adequately secured and 
maintained. Except for borrowers with Farmers Program loans, if the 
borrower has made no effort to sell the property and can be located, an 
opportunity to voluntarily

[[Page 191]]

convey the property to the Government will be offered the borrower in 
accordance with Sec. 1955.10 of Subpart A of this part. In farmer 
program cases, borrowers must receive Attachments 1 and 2 of Exhibit A 
of Subpart S of Part 1951 of this chapter and any appeal must be 
concluded before any adverse action can be taken. The County Supervisor 
will send these forms to the borrower's last known address as soon as it 
is determined that the borrower has abandoned security property.
    (b) Taking security property into FmHA or its successor agency under 
Public Law 103-354 custody. When security property is determined to be 
abandoned, the running record in the borrower's file will be fully 
documented with the facts substantiating the determination of 
abandonment, and the servicing official shall proceed as follows without 
delay:
    (1) For loans to individuals (except those with Farmer Program 
loans), if there are no prior liens, or if a prior lienholder will not 
take the measures necessary to protect the property, the County 
Supervisor shall take custody of the property, and a problem case report 
will be prepared recommending foreclosure in accordance with Sec. 
1955.15 of Subpart A of this part, unless the borrower can be located 
and voluntary liquidation accomplished. Farmer Program loan borrowers 
will be sent the forms listed in paragraph (a) of this section and the 
provisions of Sec. 1965.26 of Subpart A of Part 1965 of this chapter 
will be followed.
    (2) For MFH loans, if there are no prior liens, the District 
Director will immediately notify the State Director, who will request 
guidance from OGC and may also request advice from the National Office. 
The State Director, with the advice of OGC, will advise the borrower by 
writing a letter, certified mail, return receipt requested, at the 
address currently used by Finance Office, outlining proposed actions by 
FmHA or its successor agency under Public Law 103-354 to secure, 
maintain, and operate the project.
    (i) If the unpaid loan balance plus recoverable costs do not exceed 
the State Director's loan approval authority, the State Director will 
authorize the District Director to take custody of the property, make 
emergency repairs if necessary to protect the Government's interest, and 
will advise how the property is to be managed in accordance with Subpart 
C of Part 1930 of this chapter.
    (ii) If the unpaid loan balance plus recoverable costs exceeds the 
State Director's loan approval authority, the State Director will refer 
the case to the National Office for advice on emergency actions to be 
taken. The docket will be forwarded to the National Office with detailed 
recommendations for immediate review and authorization for further 
action, if requested by the MFH staff.
    (iii) Costs incurred in connection with procurement of such things 
as management services will be handled in accordance with FmHA or its 
successor agency under Public Law 103-354 Instruction 2024-A (available 
in any FmHA or its successor agency under Public Law 103-354 office).
    (iv) The District Director will prepare a problem case report to 
initiate foreclosure in accordance with Sec. 1955.15 of Subpart A of 
this part and submit the report to the State Director along with a 
proposed plan for managing the project while liquidation is pending.
    (3) For organization loans other than MFH, if there are no prior 
liens, the District Director will immediately notify the State Director 
that the property has been abandoned and recommend action which should 
be taken to protect the Government's interest. After obtaining the 
advice of OGC and the appropriate staff in the National Office, the 
State Director may authorize the District Director to take custody of 
the property and give instructions for immediate actions to be taken as 
necessary. The District Director will prepare a Report on Servicing 
Action (Exhibit A of Subpart E of Part 1951 of this chapter) 
recommending that foreclosure be initiated in accordance with Sec. 
1955.15 of Subpart A of this part and submit the report to the State 
Director, along with a proposed plan for management and/or operation of 
the project while liquidation is pending.
    (c) Protecting custodial property. The FmHA or its successor agency 
under Public Law 103-354 official who takes

[[Page 192]]

custody of abandoned property shall take the actions necessary to 
secure, maintain, preserve, lease, manage, or operate the property.
    (1) Nonsecurity personal property on premises. If a property has 
been abandoned by a borrower who left nonsecurity personal property on 
the premises, the personal property will not be removed and disposed of 
before the real property is acquired by the Government. If the premises 
are in a condition which presents a fire, health or safety hazard, but 
also contains items of value, only the trash and debris presenting the 
hazard will be removed. The servicing official may request advice from 
the State Director as necessary. The servicing official shall check for 
liens on nonsecurity personal property left on abandoned premises. If 
there is a known lienholder(s), the lienholder(s) will be notified by 
certified mail, return receipt requested, that the borrower has 
abandoned the property and that FmHA or its successor agency under 
Public Law 103-354 has taken the real property into custody.
    Actions by FmHA or its successor agency under Public Law 103-354 
must not damage or jeopardize livestock, growing crops, stored 
agricultural products, or any other personal property which is not FmHA 
or its successor agency under Public Law 103-354 security.
    (2) Repairs to custodial property. Repairs to custodial property 
will be limited to those which are essential to prevent further 
deterioration of the property. Expenditures in excess of an aggregate of 
$1,000 per property must have prior approval of the state Director.
    (d) Emergency advances where liquidation is pending. Although 
security property may not be defined as abandoned in accordance with 
paragraph (a) of this section, if the borrower is not occupying the 
property and refuses or is unable to protect the security property, the 
servicing official is authorized to make expenditures necessary to 
protect the Government's interest. This would include, but is not 
limited to, securing or winterizing the property or making emergency 
repairs to prevent deterioration. Expenditures will be handled in 
accordance with paragraph (e) of this section. Situations where this 
authority may be used include, but are not limited to, where a borrower 
has a sale pending or when a voluntary conveyance is in process.
    (e) Income and costs. Income received from the property will be 
applied to the borrower's account as an extra payment. Expenditures will 
be charged to the borrower's account as a recoverable cost.
    (f) Off-site procurements. Circumstances may require off-site 
procurement action(s) to be taken by FmHA or its successor agency under 
Public Law 103-354 to protect custodial, security or inventory property 
from damage or destruction and/or protect the Government's investment in 
the property. Such procurements may include, but are not limited to 
construction or reconstruction of roads, sewers, drainage work or 
utility lines. This type work may be accomplished either through FmHA or 
its successor agency under Public Law 103-354 procurement or cooperative 
agreement. However, if FmHA or its successor agency under Public Law 
103-354 is obtaining a service or product for itself only, it must be a 
procurement and any such actions will be in accordance with FmHA or its 
successor agency under Public Law 103-354 Instruction 2024-A (available 
in any FmHA or its successor agency under Public Law 103-354 office). 
Funding will come from the appropriate insurance fund.
    (1) Conditions for procurement. Such expenditures may be made only 
when all of the following conditions are met:
    (i) A determination is made that failure to procure work would 
likely result in a property loss greater than the expenditure;
    (ii) There are no other feasible means (including cooperative 
agreements) to accomplish the same result;
    (iii) The recovery of such advance(s) is not authorized by security 
instruments in the case of security or custodial property (no such 
limitation exists for inventory property);
    (iv) Written documentation supporting subparagraphs (i), (ii) and 
(iii) has been obtained from the authorized program official;

[[Page 193]]

    (v) Approval has been obtained from the appropriate Assistant 
Administrator.
    (2) Direct procurement action. Where direct procurement action is 
contemplated, an opinion must be obtained from the Regional Attorney 
that:
    (i) FmHA or its successor agency under Public Law 103-354 has the 
authority to enter the off-site property to accomplish the contemplated 
work, or
    (ii) A specific legal entity has authority to grant an easement 
(right-of-way) to FmHA or its successor agency under Public Law 103-354 
for the contemplated work and such an easement, in a form approved by 
the Regional Attorney, has been obtained.
    (3) Cooperative agreements. Cooperative agreements between FmHA or 
its successor agency under Public Law 103-354 and other entities may be 
made to accomplish the requirement where the principal purpose is to 
provide money, property, services or items of value to state or local 
governments or other recipients to accomplish a public purpose. Exhibit 
C of this subpart (available in any FmHA or its successor agency under 
Public Law 103-354 office) is an example of a typical cooperative 
agreement. A USDA handbook providing detailed guidance for all parties 
is available from the USDA--Office of Operations and Finance. Although 
cooperative agreements are not a contracting action, the authority, 
responsibility and administration of these agreements will be handled 
consistent with contracting actions.
    (4) Consideration of maintenance agreements. Maintenance 
requirements must be considered in evaluating the economic benefits of 
off-site procurements. Where feasible, arrangements or agreements should 
be made with state, local governments or other entities to ensure 
continued maintenance by dedication or acceptance, letter agreements, or 
other applicable statutes.

[53 FR 35765, Sept. 14, 1988, as amended at 54 FR 20521, May 12, 1989; 
57 FR 36591, Aug. 14, 1992; 68 FR 61331, Oct. 28, 2003]



Sec. 1955.56  Real property located in Coastal Barrier Resources System (CBRS).

    (a) Approval official's scope of authority. Any action that is not 
in conflict with the limitations in paragraphs (a)(1), (a)(2) or (a)(3) 
of this section shall not be undertaken until the approval official has 
consulted with the appropriate Regional Director of the U.S. Fish and 
Wildlife Service. The Regional Director may or may not concur that the 
proposed action does or does not violate the provisions of the Coastal 
Barrier Resources Act (CBRA). Pursuant to the requirements of the CBRA, 
and except as specified in paragraphs (b) and (c) of this section, no 
maintenance or repair action may be taken for property located within a 
CBRS where:
    (1) The action goes beyond maintenance, replacement-in-kind, 
reconstruction, or repair and would result in the expansion of any 
roads, structures or facilities. Water and waste disposal facilities as 
well as community facilities may be improved to the extent required to 
meet health and safety requirements but may not be improved or expanded 
to serve additional users, patients, or residents;
    (2) The action is inconsistent with the purposes of the CBRA; or
    (3) The property to be repaired or maintained was initially the 
subject of a financial transaction that violated the CBRA.
    (b) Administrator's review. Any proposed maintenance or repair 
action that does not conform to the requirements of paragraph (a) of 
this section must be forwarded to the Administrator for review and 
approval. Approval will not be granted unless the Administrator 
determines, through consultation with the Department of the Interior, 
that the proposed action does not violate the provisions of the CBRA.
    (c) Emergency provisions. In emergency situations to prevent 
imminent loss of life, imminent substantial damage to the inventory 
property or the disruption of utility service, the approval official may 
take whatever minimum steps are necessary to prevent

[[Page 194]]

such loss or damage without first consulting with the appropriate 
Regional Director of the U.S. Fish and Wildlife Service. However, the 
Regional Director must be immediately notified of any such emergency 
action.



Sec. 1955.57  Real property containing underground storage tanks.

    Within 30 days of acquisition of real property into inventory, FmHA 
or its successor agency under Public Law 103-354 must report certain 
underground storage tanks to the State agency identified by the 
Environmental Protection Agency (EPA) to receive such reports. 
Notification will be accomplished by completing an appropriate EPA or 
alternate State form, if approved by EPA. A State supplement will be 
issued providing the appropriate forms required by EPA and instructions 
on processing same.
    (a) Underground storage tanks which meet the following criteria must 
be reported:
    (1) It is a tank, or combination of tanks (including pipes which are 
connected thereto) the volume of which is ten percent or more beneath 
the surface of the ground, including the volume of the underground 
pipes; and
    (2) It is not exempt from the reporting requirements as outlined in 
paragraph (b) of this section; and
    (3) The tank contains petroleum or substances defined as hazardous 
under section 101(14) of the Comprehensive Environmental Response 
Compensation and Liability Act, 42 U.S.C. 9601. The State Environmental 
Coordinator should be consulted whenever there is a question regarding 
the presence of a regulated substance; or
    (4) The tank contained a regulated substance, was taken out of 
operation by FmHA or its successor agency under Public Law 103-354 since 
January 1, 1974, and remains in the ground. Extensive research of 
records of inventory property sold before the effective date of this 
section is not required.
    (b) The following underground storage tanks are exempt from the EPA 
reporting requirements:
    (1) Farm or residential tanks of 1,100 gallons or less capacity used 
for storing motor fuel for noncommercial purposes;
    (2) Tanks used for storing heating oil for consumptive use on the 
premises where stored;
    (3) Septic tanks;
    (4) Pipeline facilities (including gathering lines) regulated under; 
(i) The Natural Gas Pipeline Safety Act of 1968; (ii) the Hazardous 
Liquid Pipeline Safety Act of 1979; or (iii) for an intrastate pipeline 
facility, regulated under State laws comparable to the provisions of law 
referred to in (b)(4) (i) or (ii) of this section;
    (5) Surface impoundments, pits, ponds, or lagoons;
    (6) Storm water or wastewater collection systems;
    (7) Flow-through process tanks;
    (8) Liquid traps or associated gathering lines directly related to 
oil or gas production and gathering operations; or
    (9) Storage tanks situated in an underground area (such as a 
basement, cellar, mineworking, drift, shaft, or tunnel) if the tank is 
situated upon or above the surface of the floor.
    (c) A copy of each report filed with the designated State agency 
will be forwarded to and maintained in the State Office by program area.
    (d) Prospective purchasers of FmHA or its successor agency under 
Public Law 103-354 inventory property with a reportable underground 
storage tank will be informed of the reporting requirement, and provided 
a copy of the form filed by FmHA or its successor agency under Public 
Law 103-354.
    (e) In a State which has promulgated additional underground storage 
tank reporting requirements, FmHA or its successor agency under Public 
Law 103-354 will comply with such requirements and a State supplement 
will be issued to provide necessary guidance.
    (f) Regardless of whether an underground storage tank must be 
reported under the requirements of this section, if FmHA or its 
successor agency under Public Law 103-354 personnel detect or believe 
there has been a release of petroleum or other regulated substance from 
an underground storage tank on an inventory property, the incident will 
be reported to the appropriate State Agency, the State Environmental 
Coordinator and appropriate

[[Page 195]]

program chief. These parties will collectively inform the servicing 
official of the appropriate response action.



Sec. Sec. 1955.58-1955.59  [Reserved]



Sec. 1955.60  Inventory property subject to redemption by the borrower.

    If inventory property is subject to redemption rights, the State 
Director, with prior approval of OGC, will issue a State Supplement 
giving guidance concerning the former borrower's rights, whether or not 
the property may be leased or sold by the Government, payment of taxes, 
maintenance, and any other items OGC deems necessary to comply with 
State laws. Routine care and maintenance will be provided according to 
Sec. 1955.64 of this subpart to preserve and protect the property. 
Repairs are limited to those essential to prevent further deterioration 
of the property or to remove a health or safety hazard to the community 
in accordance with Sec. 1955.64(a) of this subpart unless State law 
permits full recovery of cost of repairs in which case usual policy on 
repairs is applicable. If the former borrower with redemption rights has 
possession of the property or has a right to lease proceeds, FmHA or its 
successor agency under Public Law 103-354 will not rent the property 
until the redemption period has expired unless the State Director 
obtains prior authorization from OGC. Further guidance on sale subject 
to redemption rights is set forth in Sec. 1955.138 of Subpart C of this 
part.

[54 FR 20522, May 12, 1989]



Sec. 1955.61  Eviction of persons occupying inventory real property 
or dispossession of persons in possession of chattel property.

    Advice and assistance will be obtained from OGC where eviction from 
realty or dispossession of chattel property is necessary. Where OGC has 
given written authorization, eviction may be effected through State 
courts rather than Federal courts when the former borrower is involved, 
or through local courts instead of Federal/State courts when the party 
occupying/possessing the FmHA or its successor agency under Public Law 
103-354 property is not the former borrower. In those cases, a State 
Supplement will be issued to provide explicit instructions. For MFH, 
eviction of tenants will be handled in accordance with Subpart L of Part 
1944 of this chapter and with the terms of the tenant's lease. If no 
written lease exists, the State Director will obtain advice from OGC.

[54 FR 20522, May 12, 1989]



Sec. 1955.62  Removal and disposition of nonsecurity personal property 
from inventory real property.

    If the former borrower has vacated the inventory property but left 
items of value which do not customarily pass with title to the real 
estate, such as furniture, personal effects, and chattels not covered by 
an FmHA or its successor agency under Public Law 103-354 lien, the 
personal property will be handled as outlined below unless otherwise 
directed by a State supplement approved by OGC which is necessary to 
comply with State law. For MFH, the removal and disposition of 
nonsecurity personal property will be handled in accordance with the 
tenant's lease or advice from OGC. When property is deemed to have no 
value, it is recommended that it be photographed for documentation 
before it is disposed of. The FmHA or its successor agency under Public 
Law 103-354 official having custody of the property may request advice 
from the State Office staff as necessary. Actions to effect removal of 
items of value from inventory property shall be as follows:
    (a) Notification to owner or lienholder. The servicing official will 
check the public records to see if there is a lien on any of the 
personal property.
    (1) If there is a lien(s) of record, the servicing official will 
notify the lienholder(s) by certified mail, return receipt requested, 
that the personal property will be disposed of by FmHA or its successor 
agency under Public Law 103-354 unless it is removed from the premises 
within 7 days from the date of the letter.
    (2) If there are no liens of record, or if a lienholder notified in 
accordance with paragraph (a)(1) of this section fails to remove the 
property within the time specified, the servicing official will notify 
the former borrower at the last known address by certified mail,

[[Page 196]]

return receipt requested, that the personal property remaining on the 
premises will be disposed of by FmHA or its successor agency under 
Public Law 103-354 unless it is removed within 7 days from the date of 
the letter. If no address can be determined, a copy of the letter should 
be posted on the front door of the property and documentation entered in 
the running record of the FmHA or its successor agency under Public Law 
103-354 file.
    (b) Disposal of unclaimed personal property. If the property is not 
removed by the former borrower or a lienholder after notification as 
outlined in paragraphs (a)(1) and (a)(2) of this section, the servicing 
official shall list the items with clear description, estimated value, 
and indication of which are covered by a lien, if any, and submit the 
list to the State Director with a request for authorization to have the 
items removed and disposed of. Based on advice from OGC, the State 
Director will give authorization and provide instructions for removal 
and disposal of the personal property. If approved by OGC, the property 
may be disposed of as follows:
    (1) If a reasonable amount can likely be realized by the agency from 
sale of the personal property, it may be sold at public sale. Items 
under lien will be sold first and the proceeds up to the amount of the 
lien paid to the lienholders less a pro rata share of the sale expenses. 
Proceeds from sale of items not under lien and proceeds in excess of the 
amount due a lienholder will be remitted and applied in the following 
order:
    (i) To the inventory account up to the amount of expenses incurred 
by the Government in connection with sale of the personal property (such 
as advertising and auctioneer, if used).
    (ii) To an unsatisfied balance on the FmHA or its successor agency 
under Public Law 103-354 loan account, if any.
    (iii) To the borrower, if whereabouts are known.
    (2) If personal property is not sold, a mover or hauler may be 
authorized to take the items for moving costs. Refer to FmHA or its 
successor agency under Public Law 103-354 Instruction 2024-A (available 
in any FmHA or its successor agency under Public Law 103-354 office) for 
guidance.
    (c) Payment of costs. Upon payment of all expenses incurred by the 
Government in connection with the personal property, FmHA or its 
successor agency under Public Law 103-354 will allow the former borrower 
or a lienholder access to the property to reclaim the personal property 
at any time prior to its disposal.
    (d) Removal of abandoned motor vehicles from inventory property. 
Since State laws vary concerning disposal of abandoned motor vehicles, 
the State Director shall, with the advice of OGC, issue a State 
supplement outlining the method to be followed which will comply with 
applicable State laws.

[53 FR 35765, Sept. 14, 1988, as amended at 68 FR 61332, Oct. 28, 2003]



Sec. 1955.63  Suitability determination.

    As soon as real property is acquired, a determination must be made 
as to whether or not the property can be used for program purposes. The 
suitability determination will be recorded in the running record of the 
case file.
    (a) Determination. The Agency will classify property that secured 
loans or was acquired under the CONACT as ``suitable property'' or 
``surplus property'' in accordance with the definitions found in Sec. 
1955.53.
    (b) Grouping and subdividing farm properties. To the maximum extent 
practicable, the Agency will maximize the opportunity for beginning 
farmers and ranchers to purchase inventory properties. Farm properties 
may be subdivided or grouped according to Sec. 1955.140, as feasible, 
to carry out the objectives of the applicable loan program. Properties 
may also be subdivided to facilitate the granting or selling of a 
conservation easement or the fee title transfer of portions of a 
property for conservation purposes. The environmental effects of such 
actions will be considered pursuant to subpart G of part 1940 of this 
chapter.
    (c) Housing property. Property which secured housing loans will be 
classified as ``program'' or ``nonprogram (NP).'' After a determination 
of whether the property is suited for retention in the respective 
program, the repair policy outlined in Sec. 1955.64(a) of this subpart

[[Page 197]]

will be followed. In determining whether a property is suited for 
retention in the program, items such as size, design, possible health 
and/or safety hazards and obsolescence due to functional, economic, or 
locational conditions must carefully be considered. Generally, program 
property will meet, or can be realistically repaired to meet, the 
standards for existing housing outlined in Subpart A of Part 1944 of 
this chapter provided the property is typical of modest homes in the 
area. The cost of repairs will generally not be considered in 
determining suitability. Since houses, sites and locations vary widely 
throughout the country, discretion and sound judgment must be used in 
determining suitability. The majority of houses RHS acquires will be 
suited for retention and classified as program property. In some 
instances, property will not be suited for retention in the program and 
will be classified as ``nonprogram (NP)'' property. Situations of this 
type include, but are not limited to:
    (1) A dwelling which has been enlarged or improved to the point 
where it is clearly above modest.
    (2) When a determination is made that the property should not have 
been financed originally.
    (3) A dwelling brought into the program as an existing dwelling 
which met program standards at the time it was originally financed by 
the Agency but which does not conform to current policies. This includes 
older and/or larger houses of a type which have proven to create 
excessive energy and/or maintenance costs to very-low and low-income 
borrowers.
    (4) A dwelling which is obsolete due to location, design, 
construction or age.
    (5) A dwelling which requires major redesign/renovation to be 
brought to program standards.
    (d) [Reserved]

[53 FR 35765, Sept. 14, 1988, as amended at 54 FR 20522, May 12, 1989; 
58 FR 58648, Nov. 3, 1993; 60 FR 34455, July 3, 1995; 60 FR 55147, Oct. 
27, 1995; 62 FR 44396, Aug. 21, 1997; 68 FR 7700, Feb. 18, 2003]



Sec. 1955.64  [Reserved]



Sec. 1955.65  Management of inventory and/or custodial real property.

    (a) Authority--(1) County Supervisor. The County Supervisor, with 
the assistance of the District Director and State Office program staff 
as necessary, will select the management method(s) used for property 
which secures (or secured) loans to individuals as defined in this 
subpart.
    (2) State Director. The State Director will select the management 
method to be used for property which secures (or secured) loans to 
organizations as defined in this subpart. The State Director shall also 
provide guidance and assistance to County Supervisors and District 
Directors as necessary to insure that property under their jurisdiction 
is effectively managed.
    (b) Management methods. Management methods and requirements will 
vary depending on such things as the number of properties involved, 
their density of location, and market conditions. Management tools which 
may be used effectively range from contracts to secure individual 
property, have the grass cut, or winterize a dwelling; a simple 
management contract to provide maintenance and other services on a group 
of properties (including but not limited to specification writing, 
inspection of repairs, and yard and directional signs and their 
installation), or manage an MFH project; blanket-purchase arrangement 
contracts to obtain services for more than one property; to a broad-
scope management contract with a real estate broker or management agent 
which may include inspection and specification-writing services, making 
simple repairs, obtaining lessees, collecting rents, coordination with 
listing brokers in marketing the properties and effecting eviction of 
tenants when necessary. A contractor may handle evictions only where 
State laws permit the contractor to do so in his/her own name; a 
contractor may not pursue eviction in the name of the Government (FmHA 
or its successor agency under Public Law 103-354). Custodial property 
may be managed in the same manner as inventory property except that it 
may be leased only if it is

[[Page 198]]

habitable without repairs in excess of those authorized in Sec. 
1955.55(c) of this subpart. Farm or organization property, such as 
rental housing and community facilities, may be operated under a 
management contract if the State Director has determined it is 
approporiate to have the property in operation. In any case, the primary 
consideration in selecting the method of management to be used is to 
protect the Government's interest. If property to be operated or leased 
under a management contract is located in an area identified by the 
Federal Insurance Administration as a special flood or mudslide hazard 
area, lessees or tenants must be notified to that effect in accordance 
with Sec. 1955.66(e) of this subpart. A management contract which 
covers property in such a hazard area may provide for the contractor to 
issue the required notices.
    (c) Obtaining services for management and/or operation of 
properties. Services for management, repair, and/or operation of 
properties will be obtained by contract in accordance with FmHA or its 
successor agency under Public Law 103-354 Instruction 2024-A (available 
in any FmHA or its successor agency under Public Law 103-354 office).
    (1) Management contracts. Management contracts are flexible 
instruments which may be tailored to meet the specific needs of almost 
any situation involving custodial or inventory property. This type of 
contract may be used to manage and maintain SFH properties, farms, and 
any other type of facility for which FmHA or its successor agency under 
Public Law 103-354 is responsible. Organization-type properties will be 
secured, maintained, repaired, and operated if authorized, in accordance 
with a management plan prepared by the District Director and approved by 
the State Director if the amount of total debt does not exceed the State 
Director's loan approval authority, or by the Administrator. For MFH, 
this plan should follow the guidance provided by Subpart C of Part 1930 
of this chapter. An audit of the borrower's records may be required if 
recent financial information is not available. For MFH projects, tenant 
occupancy and selection will be in accordance with the occupancy 
standards set forth in Subpart C of Part 1930 of this chapter. Tenants 
will be required to sign a written lease if one does not exist when the 
property is acquired or taken into custody. If a contract involves 
management of an MFH project with 5 or more units, or 5 or more single-
family dwellings located in the same subdivision, the contractor must 
furnish Form HUD 935.2, ``Affirmative Fair Housing Marketing Plan,'' 
subject to FmHA or its successor agency under Public Law 103-354's 
approval. Contracts for management of farm inventory property will be 
offered on a competitive bid basis, giving preference to persons who 
live in, and own and operate qualified small businesses in the area 
where the property is located in accordance with the provisions in FmHA 
or its successor agency under Public Law 103-354 Instruction 2024-Q 
(available in any FmHA or its successor agency under Public Law 103-354 
office).
    (2) Authority to enter into management contracts. (i) The County 
Supervisor may enter into a management contract for basic services 
involving farms or not more than 25 single-family dwellings; however, 
the aggregate amount paid under a contract may not exceed the 
contracting authority limitation for County Supervisors outlined in FmHA 
or its successor agency under Public Law 103-354 Instruction 2024-A 
(available in any FmHA or its successor agency under Public Law 103-354 
office).
    (ii) A District Director may enter into a management contract for 
basic maintenance and management services for an MFH project within the 
contracting authority outlined in FmHA or its successor agency under 
Public Law 103-354 Instruction 2024-A (available in any FmHA or its 
successor agency under Public Law 103-354 office). The aggregate amount 
of any contract may not exceed that contracting authority.
    (iii) A CO in the State Office may enter into a management contract 
for basic services involving more than 25 single-family dwellings, a 
more complex management contract for SFH property, or an appropriate 
contract for management or operation of farm

[[Page 199]]

or organization-type property. The aggregate amount paid under a 
contract may not exceed the contracting authority limitation for State 
Office staff outlined in FmHA or its successor agency under Public Law 
103-354 Instruction 2024-A (available in any FmHA or its successor 
agency under Public Law 103-354 office).
    (iv) If a proposed management contract will exceed the contracting 
authority for State Office staff within a short time, a request for 
contract action will be forwarded to the Administrator, to the attention 
of the appropriate program division.
    (3) Specification of services. All management contracts will provide 
for termination by either the contractor or the Government upon 30 days 
written notice. Contracts providing for management of multiple 
properties will also provide for properties to be added or removed from 
the contractor's assignment whenever necessary, such as when a property 
is acquired or taken into custody during the period of a contract or 
when a property is sold from inventory. If a contractor prepares repair 
specifications, that contractor will be excluded from the solicitation 
for making the repairs to avoid a conflict of interest. If a management 
contract calls for specification writing services, a clause must be 
inserted in the contract prohibiting the preparer of his/her associates 
from doing the repair work. Examples of both basic and more complex 
management contracts are included in Exhibit A to FmHA or its successor 
agency under Public Law 103-354 Instruction 2024-A (available in any 
FmHA or its successor agency under Public Law 103-354 office).
    (4) Costs. Costs incurred with the management of property will be 
paid according to FmHA or its successor agency under Public Law 103-354 
Instruction 2024-A (available in any FmHA or its successor agency under 
Public Law 103-354 office). For management of custodial property, costs 
will be charged to the borrower's account as recoverable; and for 
management of inventory property as nonrecoverable. Except for 
management fees, costs of managing MFH inventory property when tenants 
are still in residence will be paid to the extent possible with rental 
income. Management fees will be paid to the manager in accordance with 
FmHA or its successor agency under Public Law 103-354 Instruction 2024-A 
(available in any FmHA or its successor agency under Public Law 103-354 
Office).
    (d) Additional management services. Additional types of management 
services and supplies for which the State Director may authorize 
acquisition include: Appraisal services (except for MFH), security 
services, newspaper copy preparation services, market data and 
comparable list acquisition, and tax data acquisition. If the State 
Director believes there is a need to acquire other services not listed 
in this paragraph or authorized elsewhere in this subpart, the State 
Director should make a written request to the Assistant Administrator 
(appropriate program) for consideration and/or authorization.

[53 FR 35765, Sept. 14, 1988, as amended at 57 FR 36591, Aug. 14, 1992]



Sec. 1955.66  Lease of real property.

    When inventory real property, except for FSA and MFH properties, 
cannot be sold promptly, or when custodial property is subject to 
lengthy liquidation proceedings, leasing may be used as a management 
tool when it is clearly in the best interest of the Government. Leasing 
will not be used as a means of deferring other actions which should be 
taken, such as liquidation of loans in abandonment cases or repair and 
sale of inventory property. Leases will provide for cancellation by the 
lessee or the Agency on 30-day written notice unless Special 
Stipulations in an individual lease for good reason provide otherwise. 
If extensive repairs are needed to render a custodial property suitable 
for occupancy, this will preclude its being leased since repairs must be 
limited to those essential to prevent further deterioration of the 
security in accordance with Sec. 1955.55(c) of this subpart. The 
requirements of subpart G of part 1940 of this chapter will be met for 
all leases.
    (a) Authority to approve lease of property--(1) Custodial property. 
Custodial

[[Page 200]]

property may be leased pending foreclosure with the servicing official 
approving the lease on behalf of the Agency.
    (2) Inventory property. Inventory property may be leased under the 
following conditions. Except for farm property proposed for a lease 
under the Homestead Protection Program, any property that is listed or 
eligible for listing on the National Register of Historic Places may be 
leased only after the servicing official and the State Historic 
Preservation Officer determine that the lease will adequately ensure the 
property's condition and historic character.
    (i) SFH. SFH inventory will generally not be leased; however, if 
unusual circumstances indicate leasing may be prudent, the county 
official is authorized to approve the lease.
    (ii) MFH. MFH projects will generally not be leased, although 
individual living units may be leased under a management agreement. 
After the property is placed under a management contract, the contractor 
will be responsible for leasing the individual units in accordance with 
subpart C of part 1930 of this chapter. In cases where an acceptable 
management contract cannot be obtained, the District Director may 
execute individual leases.
    (iii) Farm property. (A) Any property which secures an insured loan 
made under the CONACT and which contains a dwelling (whether located on 
or off the farm) that is possessed and occupied as a principal residence 
by a prior owner who was personally liable for a Farm Credit Programs 
loan must first be considered for Homestead Protection in accordance 
with subpart S of part 1951 of this chapter.
    (B) Other than for Homestead Protection and except as provided in 
paragraph (c), the county official may only approve the lease of farm 
property to a beginning farmer or rancher who was selected through the 
random selection process to purchase the property but is not able to 
complete the purchase due to the lack of Agency funding.
    (C) When the servicing official determines it is impossible to sell 
farm property after advertising the property for sale and negotiating 
with interested parties in accordance with Sec. 1955.107 of subpart C of 
this part, farm property may be leased, upon the approval of the 
Administrator, on a case-by-case basis. This authority cannot be 
delegated. Any lease under this paragraph shall be for 1 year only, and 
not subject to renewal or extension. If the servicing official 
determines that the prospective lessee may be interested in purchasing 
the property, the lease may contain an option to purchase.
    (D) When a lease with an option to purchase is signed, the lessee 
should be advised that FSA cannot make a commitment to finance the 
purchase of the property.
    (E) Chattel property will not normally be leased unless it is 
attached to the real estate as a fixture or would normally pass with the 
land.
    (F) The property may not be used for any purpose that will 
contribute to excessive erosion of highly erodible land or to conversion 
of wetlands to produce an agricultural commodity. See Exhibit M of 
subpart G of part 1940 of this chapter. All prospective lessees of 
inventory property will be notified in writing of the presence of highly 
erodible land, converted wetlands and wetland and other important 
resources such as threatened or endangered species. This notification 
will include a copy of the completed and signed Form SCS-CPA-26, 
``Highly Erodible Land and Wetland Conservation Determination,'' which 
identifies whether the property contains wetland or converted wetlands 
or highly erodible land. The notification will also state that the lease 
will contain a restriction on the use of such property and that the 
Agency's compliance requirements for wetlands, converted wetlands, and 
highly erodible lands are contained in Exhibit M of subpart G of part 
1940 of this chapter. Additionally, a copy of the completed and signed 
Form SCS-CPA-26 will be attached to the lease and the lease will contain 
a special stipulation as provided on the FMI to Form RD 1955-20, ``Lease 
of Real Property,'' prohibiting the use of the property as specified 
above.
    (iv) Organization property other than MFH. Only the State Director, 
with the advice of appropriate National Office staff, may approve the 
lease of organization property other than MFH, such

[[Page 201]]

as community facilities, recreation projects, and businesses. A lease of 
utilities may require approval by State regulatory agencies.
    (b) Selection of lessees for other than farm property. When the 
property to be leased is residential, a special effort will be made to 
reach prospective lessees who might not otherwise apply because of 
existing community patterns. A lessee will be selected considering the 
potential as a program applicant for purchase of the property (if 
property is suited for program purposes) and ability to preserve the 
property. The leasing official may require verification of income or a 
credit report (to be paid for by the prospective lessee) as he or she 
deems necessary to assure payment ability and creditworthiness of the 
prospective lessee.
    (c) Selection of lessees for FSA property. FSA inventory property 
may only be leased to an eligible beginning farmer or rancher who was 
selected to purchase the property through the random selection process 
in accordance with Sec. 1955.107(a)(2)(ii) of subpart C of this part. 
The applicant must have been able to demonstrate a feasible farm plan 
and Agency funds must have been unavailable at the time of the sale. Any 
applicant determined not to be a beginning farmer or rancher may request 
that the State Executive Director conduct an expedited review in 
accordance with Sec. 1955.107(a)(2)(ii) of subpart C of this part.
    (d) Property securing Farm Credit Programs loans located within an 
Indian Reservation. (1) State Executive Directors will contact the 
Bureau of Indian Affairs Agency supervisor to determine the boundaries 
of Indian Reservations and Indian allotments.
    (2) Not later than 90 days after acquiring a property, FSA will 
afford the Indian tribe having jurisdiction over the Indian reservation 
within which the inventory property is located an opportunity to 
purchase the property. The purchase shall be in accordance with the 
priority rights as follows:
    (i) To a member of the Indian tribe that has jurisdiction over the 
reservation within which the real property is located;
    (ii) To an Indian corporate entity;
    (iii) To the Indian tribe.
    (3) The Indian tribe having jurisdiction over the Indian reservation 
may revise the order of priority and may restrict the eligibility for 
purchase to:
    (i) Persons who are members of such Indian tribe;
    (ii) Indian corporate entities that are authorized by such Indian 
tribe to purchase lands within the boundaries of the reservation; or
    (iii) The Indian tribe itself.
    (4) If any individual, Indian corporate entity, or Indian tribe 
covered in paragraphs (d)(1) and (d)(2) of this section wishes to 
purchase the property, the county official must determine the 
prospective purchaser has the financial resources and management skills 
and experience that is sufficient to assure a reasonable prospect that 
the terms of the purchase agreement can be fulfilled.
    (5) If the real property is not purchased by any individual, Indian 
corporate entity or Indian tribe pursuant to paragraphs (d)(1) and 
(d)(2) of this section and all appeals have concluded, the State 
Executive Director shall transfer the property to the Secretary of the 
Interior if they are agreeable. If present on the property being 
transferred, important resources will be protected as outlined in 
Sec. Sec. 1955.137 and 1955.139 of subpart C of this part.
    (6) Properties within a reservation formerly owned by entities and 
non-tribal members will be treated as regular inventory that is not 
located on an Indian Reservation and disposed of pursuant to this part.
    (e) Lease amount. Inventory property will be leased for an amount 
equal to that for which similar properties in the area are being leased 
or rented (market rent). Inventory property will not be leased for a 
token amount.
    (1) Farm property. To arrive at a market rent amount, the county 
official will make a survey of lease amounts of farms in the immediate 
area with similar soils, capabilities, and income potential. The income-
producing capability of the property during the term of the lease must 
also be considered. This rental data will be maintained in an 
operational file as well as in the running records of case files for 
leased inventory properties. While cash rent is preferred, the lease of 
a farm on a

[[Page 202]]

crop-share basis may be approved if this is the customary method in the 
area. The lessee will market the crops, provide FSA with documented 
evidence of crop income, and pay the pro rata share of the income to 
FSA.
    (2) SFH property. The lease amount will be the market rent unless 
the lessee is a potential program applicant, in which case the lease 
amount may be set at an amount approximating the monthly payment if a 
loan were made (reflecting payment assistance, if any) calculated on the 
basis of the price of the house and income of the lessee, plus \1/12\ of 
the estimated real estate taxes, property insurance, and maintenance 
which would be payable by a homeowner.
    (3) Property other than farm or SFH. Any inventory property other 
than a farm or single-family dwelling will generally be leased for 
market rent for that type property in the area. However, such property 
may be leased for less than market rent with prior approval of the 
Administrator.
    (f) Property containing wetlands or located in a floodplain or 
mudslide hazard area. Inventory property located in areas identified by 
the Federal Insurance Administration as special flood or mudslide hazard 
areas will not be leased or operated under a management contract without 
prior written notice of the hazard to the prospective lessee or tenant. 
If property is leased by FSA, the servicing official will provide the 
notice, and if property is leased under a management contract, the 
contractor must provide the notice in compliance with a provision to 
that effect included in the contract. The notice must be in writing, 
signed by the servicing official or the contractor, and delivered to the 
prospective lessee or tenant at least one day before the lease is 
signed. A copy of the notice will be attached to the original and each 
copy of the lease. Property containing floodplains and wetlands will be 
leased subject to the same use restrictions as contained in Sec. 
1955.137(a)(1) of subpart C of this part.
    (g) Highly erodible land. If farm inventory property contains 
``highly erodible land,'' as determined by the NRCS, the lease must 
include conservation practices specified by the NRCS and approved by FSA 
as a condition for leasing.
    (h) Lease of FSA property with option to purchase. A beginning 
farmer or rancher lessee will be given an option to purchase farm 
property. Terms of the option will be set forth as part of the lease as 
a special stipulation.
    (1) The lease payments will not be applied toward the purchase 
price.
    (2) The purchase price (option price) will be the advertised sales 
price as determined by an appraisal prepared in accordance with Sec. 
761.7 of this title.
    (3) For inventory properties leased to a beginning farmer or rancher 
applicant, the term of the lease shall be the earlier of:
    (i) A period not to exceed 18 months from the date that the 
applicant was selected to purchase the inventory farm, or
    (ii) The date that direct, guaranteed, credit sale or other Agency 
funds become available for the beginning farmer or rancher to close the 
sale.
    (4) Indian tribes or tribal corporations which utilize the Indian 
Land Acquisition program will be allowed to purchase the property for 
its market value less the contributory value of the buildings, in 
accordance with subpart N of part 1823 of this chapter.
    (i) Costs. The costs of repairs to leased property will be paid by 
the Government. However, the Government will not pay costs of utilities 
or any other costs of operation of the property by the lessee. Repairs 
will be obtained pursuant to subpart B of part 1924 of this chapter. 
Expenditures on custodial property as limited in Sec. 1955.55 (c) (2) 
of this subpart will be charged to the borrower's account as recoverable 
costs.
    (j) Security deposit. A security deposit in at least the amount of 
one month's rent will be required from all lessees of SFH properties. 
The security deposit for farm property should be determined by 
considering only the improvements or facilities which might be subject 
to misuse or abuse during the term of the lease. For all other types of 
property, the leasing official may determine whether or not a security 
deposit will be required and the amount of the deposit.

[[Page 203]]

    (k) Lease form. Form RD 1955-20 approved by OGC will be used by the 
agency to lease property.
    (l) Lease income. Lease proceeds will be applied as follows:
    (1) Custodial property. The proceeds from a lease of custodial 
property will be applied to the borrower's account as an extra payment 
unless foreclosure proceedings require that such payments be held in 
suspense.
    (2) Inventory property. The proceeds from a lease of inventory 
property will be applied to the lease account.

[62 FR 44397, Aug. 21, 1997, as amended at 64 FR 62568, Nov. 17, 1999; 
68 FR 61332, Oct. 28, 2003]



Sec. Sec. 1955.67-1955.71  [Reserved]



Sec. 1955.72  Utilization of inventory housing by Federal Emergency 

Management Agency (FEMA) or under a Memorandum of Understanding 
between the Agency and the Department of Health and Human Services 
(HHS) for transitional housing for the homeless.

    (a) FEMA. By a Memorandum of Understanding between the Agency and 
FEMA, inventory housing property not under lease or sales agreement may 
be made available to shelter victims in an area designated as a major 
disaster area by the President. See Exhibit A of this subpart (available 
in any FmHA or its successor agency under Public Law 103-354 office). 
Authority is hereby delegated to the State Director to implement this 
Memorandum of Understanding; and the State Director may redelegate this 
authority to County Supervisors or District Directors.
    (b) HHS. By a Memorandum of Understanding between the Agency and 
HHS, inventory housing property not under lease or sales agreement may 
be made available by lease to public bodies and nonprofit organizations 
to provide transitional housing for the homeless. See Exhibit D of this 
subpart (available in any FmHA or its successor agency under Public Law 
103-354 office). Authority is hereby delegated to the State Director to 
implement this Memorandum of Understanding; and the State Director may 
redelegate this authority to County Supervisors or District Directors. 
Copies of all executed leases and/or questions regarding this program 
should be referred by State Offices to the Single Family Housing 
Servicing and Property Management (SFH/SPM) Division in the National 
Office.

[54 FR 20523, May 12, 1989, as amended at 60 FR 34455, July 3, 1995]



Sec. Sec. 1955.73-1955.80  [Reserved]



Sec. 1955.81  Exception authority.

    The Administrator may, in individual cases, make an exception to any 
requirement or provision of this subpart, or address any omission of 
this subpart which is not inconsistent with the authorizing statute or 
other applicable law, if the Administrator determines that the 
Government's interest would be adversely affected or the immediate 
health and/or safety of tenants or the community are endangered if there 
is no adverse effect on the Government's interest. The Administrator 
will exercise this authority upon request of the State Director with the 
recommendation of the appropriate program Assistant Administrator or 
upon a request initiated by the appropriate program Assistant 
Administrator. Requests for exceptions must be made in writing and 
supported with documentation to explain the adverse effect, propose 
alternative courses of action, and show how the adverse effect will be 
eliminated or minimized if the exception is granted.

[53 FR 35765, Sept. 14, 1988, as amended at 58 FR 58649, Nov. 3, 1993]



Sec. 1955.82  State supplements.

    State supplements will be prepared with the assistance of OGC as 
necessary to comply with State laws or only as specifically authorized 
in this regulation to provide guidance to FmHA or its successor agency 
under Public Law 103-354 officials. State supplements applicable to MFH 
must have prior approval of the National Office; others may receive post 
approval. Requests for approval for those affecting MFH must include 
complete justification, citations of State law, and an opinion from OGC.

[[Page 204]]



Sec. Sec. 1955.83-1955.99  [Reserved]



Sec. 1955.100  OMB control number.

    The collection of information requirements in this regulation have 
been approved by the Office of Management and Budget and assigned OMB 
control number 0575-0110.

                          Exhibits to Subpart B

    All exhibits are available in any FmHA or its successor agency under 
Public Law 103-354 County Office. Exhibit B is also published in the 
Code of Federal Regulations.

Exhibit A to Subpart B of Part 1955--Memorandum of Understanding Between 
      the Federal Emergency Management Agency and the Farmers Home 
     Administration or its successor agency under Public Law 103-354

     Exhibit B to Subpart B of Part 1955--Notification of Tribe of 
               Availability of Farm Property for Purchase

           (To Be Used By Farm Service Agency to Notify Tribe)

From: County official
To: (Name of Tribe and address)
Subject: Availability of Farm Property for Purchase
    [To be Used within 90 days of acquisition]
    Recently the Farm Service Agency (FSA) acquired title to -------- 
acres of farm real property located within the boundaries of your 
Reservation. The previous owner of this property was --------. The 
property is available for purchase by persons who are members of your 
tribe, an Indian Corporate entity, or the tribe itself. Our regulations 
provide for those three distinct priority categories which may be 
eligible; however, you may revise the order of the priority categories 
and may restrict the eligibility to one or any combination of 
categories. Following is a more detailed description of these 
categories:
    1. Persons who are members of your Tribe. Individuals so selected 
must be able to meet the eligibility criteria for the purchase of 
Government inventory property and be able to carry on a family farming 
operation. Those persons not eligible for FSA's regular programs may 
also purchase this property as a Non-Program loan on ineligible rates 
and terms.
    2. Indian corporate entities. You may restrict eligible Indian 
corporate entities to those authorized by your Tribe to purchase lands 
within the boundaries of your Reservation. These entities also must meet 
the basic eligibility criteria established for the type of assistance 
granted.
    3. The Tribe itself is also considered eligible to exercise their 
right to purchase the property. If available, Indian Land Acquisition 
funds may be used or the property financed as a Non-Program loan on 
ineligible rates and terms.
    We are requesting that you notify the local FSA county office of 
your selection or intentions within 45 days of receipt of this letter, 
regarding the purchase of this real estate. If you have questions 
regarding eligibility for any of the groups mentioned above, please 
contact our office. If the Tribe wishes to purchase the property, but is 
unable to do so at this time, contact with the FSA county office should 
be made.

                               Sincerely,

                             County official

[62 FR 44399, Aug. 21, 1997]

         Exhibit C to Subpart B--Cooperative Agreement (Example)

 Exhibit D to Subpart B--Fact Sheet--The Federal Interagency Task Force 
                  on Food and Shelter for the Homeless



                Subpart C_Disposal of Inventory Property

                              Introduction



Sec. 1955.101  Purpose.

    This subpart delegates program authority and prescribes policies and 
procedures for the sale of inventory property including real estate, 
related real estate rights and chattels. It also covers the granting of 
easements and rights-of-way on inventory property. Credit sales of 
inventory property to ineligible (nonprogram (NP)) purchasers will be 
handled in accordance with subpart J of part 1951 of this chapter, 
except Community and Business Programs (C&BP) and Multi-Family Housing 
(MFH) which will be handled in accordance with this subpart. In 
addition, credit sales of Single Family Housing (SFH) properties 
converted to MFH will be handled in accordance with this subpart. This 
subpart does

[[Page 205]]

not apply to Single Family Housing (SFH) inventory property.

[50 FR 23904, June 7, 1985, as amended at 58 FR 52652, Oct. 12, 1993; 61 
FR 59778, Nov. 22, 1996]



Sec. 1955.102  Policy.

    The terms ``nonprogram (NP)'' and ``ineligible'' may be used 
interchangeably throughout this subpart, but are identical in their 
meaning. Sales efforts will be initiated as soon as property is acquired 
in order to effect sale at the earliest practicable time. When a 
property is of a nature that will enable a qualified applicant for one 
of Farmers Home Administration or its successor agency under Public Law 
103-354s (FmHA or its successor agency under Public Law 103-354's) loan 
programs to meet the objectives of that loan program, preference will be 
given to the program applicants. Sales are authorized for program 
purposes which differ from the purposes of the loan the property 
formerly secured, and property which secured more than one type loan may 
be sold under the program most appropriate for the specific property and 
community needs as long as the price is not diminished. Examples are: 
(RH) property; detached Labor Housing or Rural Rental Housing units may 
be sold as SFH units; or SFH units may be sold as a Rural Rental Housing 
project. All such properties and applicants must meet the requirements 
for the loan program under which the sale is proposed.

[53 FR 35776, Sept. 14, 1988, as amended at 58 FR 52652, Oct. 12, 1993; 
62 FR 44399, Aug. 21, 1997]



Sec. 1955.103  Definitions.

    As used in this subpart, the following apply:
    Approval official. The FmHA or its successor agency under Public Law 
103-354 official having loan and grant approval authority auhorized 
under Subpart A of Part 1901 of this chapter.
    Auction sale. A public sale in which property is sold to the highest 
bidder in open verbal competition.
    Beginning farmer or rancher. A beginning farmer or rancher is an 
individual or entity who:
    (1) Is an eligible applicant for FO loan assistance in accordance 
with Sec. 1943.12 of subpart A of part 1943 of this chapter or Sec. 
1980.180 of subpart B of part 1980 of this chapter.
    (2) Has not operated a farm or ranch, or who has operated a farm or 
ranch for not more than 10 years. This requirement applies to all 
members of an entity.
    (3) Will materially and substantially participate in the operation 
of the farm or ranch.
    (i) In the case of a loan made to an individual, individually or 
with the immediate family, material and substantial participation 
requires that the individual provide substantial day-to-day labor and 
management of the farm or ranch, consistent with the practices in the 
county or State where the farm is located.
    (ii) In the case of a loan made to an entity, all members must 
materially and substantially participate in the operation of the farm or 
ranch. Material and substantial participation requires that the 
individual provides some amount of the management, or labor and 
management necessary for day-to-day activities, such that if the 
individual did not provide these inputs, operation of the farm or ranch 
would be seriously impaired.
    (4) Agrees to participate in any loan assessment, borrower training, 
and financial management programs required by FmHA or its successor 
agency under Public Law 103-354 regulations.
    (5) Does not own real farm or ranch property or who, directly or 
through interests in family farm entities, owns real farm or ranch 
property, the aggregate acreage of which does not exceed 25 percent of 
the average farm or ranch acreage of the farms or ranches in the county 
where the property is located. If the farm is located in more than one 
county, the average farm acreage of the county where the applicant's 
residence is located will be used in the calculation. If the applicant's 
residence is not located on the farm or if the applicant is an entity, 
the average farm acreage of the county where the major portion of the 
farm is located will be used. The average county farm or ranch acreage 
will be determined from the most recent Census of Agriculture developed 
by the U.S. Department of

[[Page 206]]

Commerce, Bureau of the Census. State Directors will publish State 
supplements containing the average farm or ranch acreage by county.
    (6) Demonstrates that the available resources of the applicant and 
spouse (if any) are not sufficient to enable the applicant to enter or 
continue farming or ranching on a viable scale.
    (7) In the case of an entity:
    (i) All the members are related by blood or marriage.
    (ii) All the stockholders in a corporation are qualified beginning 
farmers or ranchers.
    Borrower. An individual or entity which has outstanding obligations 
to the FmHA or its successor agency under Public Law 103-354 under any 
Farmer Programs loan(s), without regard to whether the loan has been 
accelerated. A borrower includes all parties liable for the FmHA or its 
successor agency under Public Law 103-354 debt, including collection-
only borrowers, except for debtors whose total loans and accounts have 
been voluntarily or involuntarily foreclosed or liquidated, or who have 
been discharged of all FmHA or its successor agency under Public Law 
103-354 debt.
    Capitalization value. The value determined in accordance with 
subpart E of part 1922 of this chapter.
    Closing agent. An attorney or title insurance company which is 
approved as a loan closing agent in accordance with subpart B of part 
1927 of this chapter.
    CONACT or CONACT property, Property acquired or sold pursuant to the 
Consolidated Farm and Rural Development Act (CONACT). Within this 
subpart, it shall also be construed to cover property which secured 
loans made pursuant to the Emergency Agricultural Credit Act of 1984; 
the Food Security Act of 1985; and other statutes giving agricultural 
lending authority to FmHA or its successor agency under Public Law 103-
354.
    Credit sale. A sale in which financing is provided to an applicant 
for the purchase of inventory property.
    Decent, safe and sanitary (DSS) housing. Standards required for the 
sale of Government acquired SFH, MFH and LH structures acquired pursuant 
to the Housing Act of 1949, as amended. ``DSS'' housing unit(s) are 
structures which meet the requirements of FmHA or its successor agency 
under Public Law 103-354 as described in Subpart A of Part 1924 of this 
chapter for existing construction or if not meeting the requirements:
    (1) Are structurally sound and habitable,
    (2) Have a potable water supply,
    (3) Have functionally adequate, safe and operable heating, plumbing, 
electrical and sewage disposal systems,
    (4) Meet the Thermal Performance Standards as outlined in exhibit D 
of subpart A of part 1924 of this chapter, and
    (5) Are safe; that is, a hazard does not exist that would endanger 
the safety of dwelling occupants.
    Eligible terms. Credit terms, for other than SFH or MFH property 
sales, prescribed in FmHA or its successor agency under Public Law 103-
354 program regulations for its various loan programs; available only to 
persons/entities meeting eligibility requirements set forth for the 
respective loan program. For SFH and MFH properties, see the definition 
of ``Program terms.''
    Farmer program loans. This includes Farm Ownership (FO), Soil and 
Water (SW), Recreation (RL), Economic Opportunity (EO), Operating (OL), 
Emergency (EM), Economic Emergency (EE), Special Livestock (SL), 
Softwood Timber (ST) and Rural Housing loans for farm service buildings 
(RHF).
    Homestead protection (FP only). The program which permits former 
Farmer Program borrowers to lease their former principal residence with 
an option to buy. See subpart S of part 1951 of this chapter.
    Indian Reservation. All land located within the limits of any Indian 
reservation under the jurisdiction of the United States notwithstanding 
the issuance of any patent and including rights-of-way running through 
the reservation; trust or restricted land located within the boundaries 
of a former reservation of a federally recognized Indian Tribe in the 
State of Oklahoma; or all Indian allotments the Indian titles to which 
have not been extinguished if such allotments are subject to the 
jurisdiction of a federally recognized Indian Tribe.

[[Page 207]]

    Ineligible terms. Credit terms, for other than SFH or MFH property 
sales, offered for the convenience of the Government to facilitate 
sales; more stringent than terms offered under FmHA or its successor 
agency under Public Law 103-354's loan programs. Applicable when the 
purchaser does not meet program eligibility requirements or when the 
property is classified as surplus. Loans made on ineligible terms are 
classified as Nonprogram (NP) loans and are serviced accordingly. For 
SFH and MFH properties, see the definition of ``Nonprogram (NP) terms.''
    Inventory property. Property for which title is vested in the 
Government and which secured an FmHA or its successor agency under 
Public Law 103-354 loan or which was acquired from another Agency for 
program purposes.
    Market value. The most probable price which property should bring, 
as of a specific date, in a competitive and open market, assuming the 
buyer and seller are prudent and knowledgeable, and the price is not 
affected by undue stimulus such as forced sale or loan interest subsidy.
    Negotiated sale. A sale in which there is a bargaining of price and/
or terms.
    Nonprogram (NP) property. SFH and MFH property acquired pursuant to 
the Housing Act of 1949, as amended, that cannot be used by a borrower 
to effectively carry out the objectives of the respective loan program; 
for example, a dwelling that cannot be feasibly repaired to meet the 
FmHA or its successor agency under Public Law 103-354 requirements for 
existing housing as described in subpart A of part 1944 of this chapter. 
It may contain a structure which would meet program standards, however 
is so remotely located it would not serve as an adequate residential 
unit or be an older house which is excessively expensive to heat and/or 
maintain for a very-low or low-income homeowner.
    Nonprogram (NP) terms. Credit terms for SFH or MFH property sales, 
offered for the convenience of the Government to facilitate sales; more 
stringent than terms offered under FmHA or its successor agency under 
Public Law 103-354's loan programs. Applicable when the purchaser does 
not meet program eligibility requirements or when the property is 
classified as nonprogram (NP). Loans made on NP terms are classified as 
NP loans and are serviced accordingly. For property other than SFH and 
MFH, see the definition of ``Ineligible terms.''
    Organization property. Property for which the following loans were 
made is considered organization property. Community Facility (CF); Water 
and Waste Disposal (WWD); Association Recreation; Watershed (WS); 
Resource Conservation and Development (RC&D); loans to associations for 
Shift-In-Land Use (Grazing Association); loans to associations for 
Irrigation and Drainage and other soil and water conservation measures; 
loans to Indian Tribes and Tribal corporations; Rural Rental Housing 
(RRH) to both groups and individuals; Rural Cooperative Housing (RCH); 
Rural Housing Site (RHS); Labor Housing (LH) to both groups and 
individuals; Business and Industry (B&I) to both individuals and groups 
or corporations; Rural Development Loan Fund (RDLF); Intermediary 
Relending Program (IRP); Nonprofit National Corporations (NNC); and 
Economic Opportunity Cooperative (EOC). Housing-type (RHS, RCH, RRH and 
LH) organization property is referred to collectively in this subpart as 
Multiple Family Housing (MFH) property.
    Owner. An individual or an entity which owned the farm but who may 
or may not have been operating the farm at the time the farm was taken 
into inventory.
    Participating broker. A duly licensed real estate broker who has 
executed a listing agreement with FmHA or its successor agency under 
Public Law 103-354.
    Program property. SFH and MFH inventory property that can be used to 
effectively carry out the objectives of their respective loan programs 
with financing through that program. Inventory property located in an 
area where the designation has been changed from rural to nonrural will 
be considered as if it were still in a rural area.
    Program terms. Credit terms for SFH or MFH property sales, 
prescribed in FmHA or its successor agency under Public Law 103-354 
program regulations for its various loan programs; available

[[Page 208]]

only to persons/entities meeting eligibility requirements set forth for 
the respective loan program. For property sales other than SFH and MFH, 
see the definition of ``Eligible terms.''
    Regular FmHA or its successor agency under Public Law 103-354 sale. 
Sale made by other than sealed bid, auction, or negotiation by FmHA or 
its successor agency under Public Law 103-354 employees or real estate 
brokers.
    Regular sale. Sale by FmHA or its successor agency under Public Law 
103-354 employees or real estate brokers other than by sealed bid, 
auction or negotiation.
    Safe. No hazard exists on property which would likely endanger the 
health or safety of occupants or users.
    Sealed bid sale. A public sale in which property is offered to the 
highest bidder by prior written bid submitted in a sealed envelope.
    Servicing official. For loans to individuals, as defined in Sec. 
1955.53 of subpart B of part 1955 of this chapter, the servicing 
official is the County Supervisor. For all other loans, excluding 
insured B&I, the servicing official is the District Director. For 
insured B&I loans, the servicing official is the State Director.
    Socially disadvantaged applicant (SDA). An applicant who is a member 
of a socially disadvantaged group whose members have been subjected to 
racial, ethnic, or gender prejudice because of their identity as a 
member of a group, without regard to their individual qualities. For 
entity SDA applicants, the majority interest in the entity must be held 
by socially disadvantaged individuals. The Agency has identified 
socially disadvantaged groups as Women, Blacks, American Indians, 
Alaskan Natives, Hispanics, Asians, and Pacific Islanders.
    Suitable property. For FSA inventory property, real property that 
can be used for agricultural purposes, including those farm properties 
that may be used as a start-up or add-on parcel of farmland. It would 
also include a residence or other off-farm site that could be used as a 
basis for a farming operation. For Agencies other than FSA, real 
property that could be used to carry out the objectives of the Agency's 
loan programs with financing provided through that program.
    Surplus property. For FSA inventory property, real property that 
cannot be used for agricultural purposes including nonfarm properties. 
For other agencies, property that cannot be used to carry out the 
objectives of financing available through the applicable loan program.

[50 FR 23904, June 7, 1985, as amended at 50 FR 45783, Nov. 1, 1985; 51 
FR 18436, May 20, 1986; 53 FR 27830, July 25, 1988; 53 FR 30664, Aug. 
15, 1988; 53 FR 35776, Sept. 14, 1988; 56 FR 29403, June 27, 1991; 56 FR 
67484, Dec. 31, 1991; 57 FR 19525, 19528, May 7, 1992; 57 FR 31642, July 
17, 1992; 58 FR 44752, Aug. 25, 1993; 58 FR 48290, Sept. 15, 1993; 58 FR 
58649, Nov. 3, 1993; 62 FR 44399, Aug. 21, 1997; 68 FR 62224, Nov. 3, 
2003]



Sec. 1955.104  Authorities and responsibilities.

    (a) Redelegation of authority. FmHA or its successor agency under 
Public Law 103-354 officials will redelegate authorities to the maximum 
extent possible, consistent with program objectives and available 
resources.
    (1) Any authority in this subpart which is specifically provided to 
the Administrator or to an Assistant Administrator may only be delegated 
to a State Director. The State Director cannot redelegate such 
authority.
    (2) Except as provided in paragraph (a)(1) of this section, the 
State Director may redelegate, in writing, any authority delegated to 
the State Director in this subpart, unless specifically excluded, to a 
Program Chief, Program Specialist, or Property Management Specialist on 
the State Office staff.
    (3) The District Director may redelegate, in writing, any authority 
delegated to the District Director in this subpart to an Assistant 
District Director or District Loan Specialist. Authority of District 
Directors in this subpart applies to Area Loan Specialists in Alaska and 
the Director for the Western Pacific Territories.
    (4) The County Supervisor may redelegate, in writing, any authority 
delegated to the County Supervisor in this subpart to an Assistant 
County Supervisor, GS-7 or above, who is determined by the County 
Supervisor to be qualified. Authority of County Supervisors in this 
subpart applies to Area Loan

[[Page 209]]

Specialists in Alaska, Island Directors in Hawaii, the Director for the 
Western Pacific Territories, and Area Supervisors in the Western Pacific 
Territories and American Samoa.
    (b) Responsibility. (1) National Office program directors are 
responsible for reviewing and providing guidance to State, District and 
County Offices in disposing of inventory property.
    (2) The State Director is responsible for establishing an effective 
program and insuring compliance with FmHA or its successor agency under 
Public Law 103-354 regulations.
    (3) District Directors are responsible for disposal actions for 
programs under their supervision and for monitoring County Office 
compliance with FmHA or its successor agency under Public Law 103-354 
regulations and State Supplements.
    (4) County Supervisors are responsible for timely disposal of 
inventory property for programs under their supervision.

[53 FR 27830, July 25, 1988, as amended at 66 FR 7568, Jan. 24, 2001]

   Consolidated Farm and Rural Development Act (CONACT) Real Property



Sec. 1955.105  Real property affected (CONACT).

    (a) Loan types. Sections 1955.106-1955.109 of this subpart prescribe 
procedures for the sale of inventory real property which secured any of 
the following type of loans (referred to as CONACT property in this 
subpart): Farm Ownership (FO); Recreation (RL); Soil and Water (SW); 
Operating (OL); Emergency (EM); Economic Opportunity (EO); Economic 
Emergency (EE); Softwood Timber (ST); Community Facility (CF); Water and 
Waste Disposal (WWD); Reserve Conservation and Development (RC&D); 
Watershed (WS); Association Recreation; EOC: Rural Renewal; Water 
Facility; Business and Industry (B&I); Rural Development Loan Fund 
(RDLF); Intermediary Relending Program (IRP); Nonprofit National 
Corporation (NNC); Irrigation and Drainage; Shift-in-Land Use (Grazing 
Association); and loans to Indian Tribes and Tribal Corporations. 
Homestead Protection, as set forth in Subpart S of Part 1951 of this 
chapter, is only applicable to Farmer Program loans as defined in Sec. 
1955.103 of this subpart.
    (b) Controlled substance conviction. In accordance with the Food 
Security Act of 1985 (Pub. L. 99-198), after December 23, 1985, if an 
individual or any member, stockholder, partner, or joint operator of an 
entity is convicted under Federal or State law of planting, cultivating, 
growing, producing, harvesting, or storing a controlled substance (see 
21 CFR Part 1308, which is Exhibit C to Subpart A of Part 1941 of this 
chapter and is available in any FmHA or its successor agency under 
Public Law 103-354 office, for the definition of ``controlled 
substance'') prior to a credit sale approval in any crop year, the 
individual or entity shall be ineligible for a credit sale for the crop 
year in which the individual or member, stockholder, partner, or joint 
operator of the entity was convicted and the four succeeding crop years. 
Applicants will attest on Form FmHA or its successor agency under Public 
Law 103-354 410-1, ``Application for FmHA or its successor agency under 
Public Law 103-354 Services,'' that as individuals or that its members, 
if an entity, have not been convicted of such crime after December 23, 
1985.
    (c) Effects of farm property sales on farm values. State Directors 
will analyze farm real estate market conditions within the geographic 
areas of their jurisdiction and determine whether or not the sale of the 
FmHA or its successor agency under Public Law 103-354 farm inventory 
properties will have a detrimental effect on the value of farms within 
these areas. Such analysis will be carried out in January of each year 
and as often throughout the year as necessary to reflect changing farm 
real estate conditions. If the analyses of farm real estate conditions 
indicate that such sales would put downward pressure on farm real estate 
values in any area, all farm properties within the area affected will be 
withheld from the market and managed in accordance with the provisions 
of Subpart B of this Part until such time that a subsequent analysis 
indicates otherwise. The State Director will notify, in

[[Page 210]]

writing, the County Supervisor(s) servicing those areas that are 
restricted from selling farm inventory property. State Directors in 
consultation with other lenders, real estate agents, auctioneers, and 
others in the community will analyze all available information such as:
    (1) The number of farms and acres that FmHA or its successor agency 
under Public Law 103-354 expects to acquire in inventory.
    (2) The number of farms and acres other lenders expect to acquire in 
inventory.
    (3) The number of farms and acres that FmHA or its successor agency 
under Public Law 103-354 currently has in inventory.
    (4) The number of farms and acres other lenders currently have in 
inventory.
    (5) The number of farms not included in paragraphs (c)(3) and (c)(4) 
of this section which are currently listed for sale.
    (6) Published real estate values and trend reports such as those 
available from the Economic Research Service or professional appraisal 
organizations.
    (d) Highly erodible land. If farm inventory property contains 
``highly erodible land,'' as determined by the SCS, the lease must 
include conservation practices specified by the SCS and approved by FmHA 
or its successor agency under Public Law 103-354 as a condition for 
leasing. Refer to Sec. 1955.137(d) of this subpart for implementation 
requirements.

[53 FR 35777, Sept. 14, 1988, as amended at 57 FR 19528, May 7, 1992; 58 
FR 58649, Nov. 3, 1993; 62 FR 44399, Aug. 21, 1997]



Sec. 1955.106  Disposition of farm property.

    (a) Rights of previous owner and notification. Before property which 
secured a Farm Credit Programs loan is taken into inventory, the FSA 
county official will advise the borrower-owner of Homestead Protection 
rights (see subpart S of part 1951 of this chapter.)
    (b) Racial, ethnic, and gender consideration. The County Supervisor 
will make a special effort to insure that prospective purchasers, who 
traditionally would not be expected to apply for farm ownership loan 
assistance because of existing racial, ethnic, or gender prejudice, are 
informed of the availability of the Socially Disadvantaged Program. 
Emphasis will be placed on providing assistance to such socially 
disadvantaged applicants in accordance with the applicable sections of 
subpart A of part 1943 of this chapter.
    (c) Nonprogram (NP) borrowers. Nonprogram (NP) borrowers are not 
eligible for Homestead Protection provisions as set forth in subpart S 
of part 1951 of this chapter. When it is determined that all conditions 
of Sec. 1951.558(b) of subpart L of part 1951 of this chapter have been 
met, loans for unauthorized assistance will be treated as authorized 
loans and will be eligible for homestead protection.

[53 FR 35777, Sept. 14, 1988, as amended at 58 FR 58649, Nov. 3, 1993; 
62 FR 44399, Aug. 21, 1997]



Sec. 1955.107  Sale of FSA property (CONACT).

    FSA inventory property will be advertised for sale in accordance 
with the provisions of this subpart. If a request is received from a 
Federal or State agency for transfer of a property for conservation 
purposes, the advertisement should be conditional on that possibility. 
Real property will be managed in accordance with the provisions of 
subpart B of this part until sold.
    (a) Suitable Property. Not later than 15 days from the date of 
acquisition, the Agency will advertise suitable property for sale. For 
properties currently under a lease, except leases to beginning farmers 
and ranchers under Sec. 1955.66(a)(2)(iii) of subpart B of this part, 
the property will be advertised for sale not later than 60 days after 
the lease expires or is terminated. There will be a preference for 
beginning farmers or ranchers. The advertisement will contain a 
provision to lease the property to a beginning farmer or rancher for up 
to 18 months should FSA credit assistance not be available at the time 
of sale. The first advertisement will not be required to contain the 
sales price but it should inform potential beginning farmer or rancher 
applicants that applications will be accepted pending completion of the 
advertisement process. When possible, the sale of suitable FSA property 
should be

[[Page 211]]

handled by county officials. Farm property will be advertised for sale 
by publishing, as a minimum, two weekly advertisements in at least two 
newspapers that are widely circulated in the area in which the farm is 
located. Consideration will be given to advertising inventory properties 
in major farm publications. Either Form RD 1955-40 or Form RD 1955-41, 
``Notice of Sale,'' will be posted in a prominent place in the county. 
Maximum publicity should be given to the sale under guidance provided by 
Sec. 1955.146 of this subpart and care should be taken to spell out 
eligibility criteria. Tribal Councils or other recognized Indian 
governing bodies having jurisdiction over Indian reservations (see Sec. 
1955.103 of this subpart) shall be responsible for notifying those 
parties in Sec. 1955.66(d)(2) of subpart B of this part.
    (1) Price. Property will be advertised for sale for its appraised 
market value based on the condition of the property at the time it is 
made available for sale. The market value will be determined by an 
appraisal made in accordance with Sec. 761.7 of this title. Property 
contaminated with hazardous waste will be appraised ``as improved'' 
which will be used as the sale price for advertisement to beginning 
farmers or ranchers.
    (2) Selection of purchaser. After homestead protection rights have 
expired, suitable farmland must be sold in the priority outlined in this 
paragraph. When farm inventory property is larger than family size, the 
property will be subdivided into suitable family size farms pursuant to 
Sec. 1955.140 of this subpart.
    (i) Sale to beginning farmers/ranchers. Not later than 135 days from 
the date of acquisition, FSA will sell suitable farm property, with a 
priority given to applicants who are classified as beginning farmers or 
ranchers, as defined in Sec. 1955.103, as of the time of sale.
    (ii) Random selection. The county official will first determine 
whether applicants meet the eligibility requirements of a beginning 
farmer or rancher. For applicants who are not determined to be beginning 
farmers or ranchers, they may request that the State Executive Director 
provide an expedited review and determination of whether the applicant 
is a beginning farmer or rancher for the purpose of acquiring inventory 
property. This review shall take place not later than 30 days after 
denial of the application. The State Executive Director's review 
decision shall be final and is not administratively appealable. When 
there is more than one beginning farmer or rancher applicant, the Agency 
will select by lot by placing the names in a receptacle and drawing 
names sequentially. Drawn offers will be numbered and those drawn after 
the first drawn name will be held in suspense pending sale to the 
successful applicant. The random selection drawing will be open to the 
public, and applicants will be advised of the time and place.
    (iii) Notification of applicants not selected to purchase suitable 
farmland. When the Agency selects an applicant to purchase suitable 
farmland, in accordance with this paragraph, all applicants not selected 
will be notified in writing that they were not selected. The outcome of 
the random selection by lot is not appealable if such selection is 
conducted in accordance with this subpart.
    (3) Credit sale procedure. Subject to the availability of funds, 
credit sale to program applicants will be processed as follows:
    (i) The interest rate charged by the Agency will be the lower of the 
interest rates in effect at the time of loan approval or closing.
    (ii) The loan limits for the requested type of assistance are 
applicable to a credit sale to an eligible applicant.
    (iii) Title clearance and loan closing for a credit sale and any 
subsequent loan to be closed simultaneously must be the same as for an 
initial loan except that:
    (A) Form RD 1955-49, ``Quitclaim Deed,'' or other form of 
nonwarranty deed approved by the Office of the General Counsel (OGC) 
will be used.
    (B) The buyer will pay attorney's fees and title insurance costs, 
recording fees, and other customary fees unless they are included in a 
subsequent loan. A subsequent loan may not be made for the primary 
purpose of paying closing costs and fees.
    (iv) Property sold on credit sale may not be used for any purpose 
that will

[[Page 212]]

contribute to excessive erosion of highly erodible land or to the 
conversion of wetlands to produce an agricultural commodity, see Exhibit 
M of subpart G of part 1940 of this chapter. All prospective buyers will 
be notified in writing as a part of the property advertisement of the 
presence of highly erodible land and wetlands on inventory property.
    (b) Surplus property and suitable property not sold to a beginning 
farmer or rancher. Except where a lessee is exercising the option to 
purchase under the Homestead Protection provision of subpart S of part 
1951 of this chapter, surplus property will be offered for public sale 
by sealed bid or auction within 15 days from the date of acquisition in 
accordance with Sec. 1955.147 or Sec. 1955.148. Suitable farm property 
which has been advertised for sale to a beginning farmer or rancher in 
accordance with paragraph (a) of this section, but has not sold within 
135 days from the date of acquisition will be offered for public sale by 
sealed bid or auction to the highest bidder as provided in paragraph 
(b)(1) of this section. All prospective buyers will be notified in 
writing as part of the property advertisement of the presence of any 
highly erodible land, converted wetlands, floodplains, wetlands, or 
other special characteristics of the property that may limit its use or 
cause an easement to be placed on the property.
    (1) Advertising surplus property. FSA will advertise surplus 
property for sale by sealed bid or auction within 15 days from the date 
of acquisition or, for those suitable properties not sold to beginning 
farmers or ranchers in accordance with this section, within 135 days of 
the date of acquisition.
    (2) Sale by sealed bid or auction. Surplus real estate must be 
offered for public sale by sealed bid or auction and must be sold no 
later than 165 days from the date of acquisition to the highest bidder. 
Preference will be given to a cash offer which is at least *percent of 
the highest offer requiring credit. (*Refer to Exhibit B of RD 
Instruction 440.1 (available in any Agency office) for the current 
percentage.) Equally acceptable sealed bid offers will be decided by 
lot.
    (3) Negotiated sale. If no acceptable bid is received through the 
sealed bid or auction process, the State Executive Director will sell 
surplus property at the maximum price obtainable without further public 
notice by negotiation with interested parties, including all previous 
bidders. The rates and terms offered for a credit sale through 
negotiation will be within the limitations established in paragraph (b) 
(4) of this section. A sale made through negotiation will require a bid 
deposit of not less than 10 percent of the negotiated price in the form 
of a cashier's check, certified check, postal or bank money order, or 
bank draft payable to FSA. Preference will be given to a cash offer 
which is at least * percent of the highest offer requiring credit. 
[*Refer to Exhibit B of RD Instruction 440.1 (available in any Agency 
office) for the current percentage.] Equally acceptable offers will be 
decided by lot.
    (4) Rates and terms. Subject to the availability of funds, rates and 
terms for Homestead Protection will be in accordance with subpart S of 
part 1951 of this chapter. Sales of suitable property offered to program 
eligible applicants will be on rates and terms provided in subpart A of 
part 1943 of this chapter. Surplus property and suitable property which 
has not been sold to program eligible applicants will be offered for 
cash or on ineligible terms in accordance with subpart J of part 1951 of 
this chapter. The State Executive Director will determine the loan terms 
for surplus property within these limitations. A credit sale made on 
ineligible terms will be closed at the interest rate in effect at the 
time the credit sale was approved. After extensive sales efforts where 
no acceptable offer has been received, the State Executive Director may 
request the Administrator to permit offering surplus property for sale 
on more favorable rates and terms; however, the terms may not be more 
favorable than those legally permissible for eligible borrowers. Surplus 
property will be offered for sale for cash or terms that will provide 
the best net return for the Government. The term of financing extended 
may not be longer than the period for which the

[[Page 213]]

property will serve as adequate security. All credit sales on ineligible 
terms will be identified as NP loans.

[62 FR 44399, Aug. 21, 1997, as amended at 64 FR 62569, Nov. 17, 1999; 
68 FR 7700, Feb. 18, 2003]



Sec. 1955.108  Sale of (CONACT) property other than FSA property.

    Program officials will immediately contact the National Office 
whenever they acquire real property to obtain further instructions on 
the time frames and procedures for advertising and disposing of such 
property.

[62 FR 44401, Aug. 21, 1997]



Sec. 1955.109  Processing and closing (CONACT).

    (a) Determining repayment ability and creditworthiness. If a credit 
sale is involved, the applicant must furnish necessary financial 
information to assist in determining repayment ability and 
creditworthiness. Form FmHA or its successor agency under Public Law 
103-354 431-2, ``Farm and Home Plan,'' should be used for all eligible 
FSA applicants unless the applicant has furnished all required 
information in another acceptable format. Information regarding 
eligibility, planned development and total operations will be provided 
the same as for the respective type of FSA loan. Purchasers requesting 
credit on ineligible terms, except for C&BP, will be handled in 
accordance with subpart J of part 1951 of this chapter. For C&BP, 
information will be provided which is similar to an application 
including financial information required for the respective loan program 
to establish financial stability, creditworthiness and repayment 
ability.
    (b) [Reserved]
    (c) Form of payment. Payments at closing will be in the form of 
cash, cashier's check, certified check, postal or bank money order, or 
bank draft made payable to the Agency.
    (d)-(e) [Reserved]
    (f) Earnest money. Earnest money, if any, will be used to pay 
purchaser's closing costs with any balance of the costs being paid by 
the purchaser. Any excess earnest money will be credited to the purchase 
price or recognized as a part of the purchaser's downpayment.
    (g) Closing and reporting sales. Title clearance, loan closing and 
property insurance requirements for a credit sale will be the same as 
for a program loan, except the property will be conveyed by Form FmHA or 
its successor agency under Public Law 103-354 1955-49, in accordance 
with Sec. 1955.141(a) of this subpart.
    (h) Classification. Credit sales on ineligible terms for C&BP will 
be classified as NP loans and serviced accordingly.
    (i) [Reserved]
    (j) Form FmHA or its successor agency under Public Law 103-354 1910-
11, ``Applicant Certification, Federal Collection Policies for Consumer 
or Commercial Debts.'' The County Supervisor or District Director must 
review Form FmHA or its successor agency under Public Law 103-354 1910-
11 ``Applicant Certification, Federal Collection Policies for Consumer 
or Commercial Debts,'' with the applicant, and the form must be signed 
by the applicant.

[53 FR 35780, Sept. 14, 1988, as amended at 54 FR 29333, July 12, 1989; 
58 FR 52652, Oct. 12, 1993; 60 FR 34455, July 3, 1995; 62 FR 44401, Aug. 
21, 1997; 68 FR 61332, Oct. 28, 2003]

                    Rural Housing (RH) Real Property



Sec. 1955.110  [Reserved]



Sec. 1955.111  Sale of real estate for RH purposes (housing).

    Sections 1955.112 through 1955.120 of this subpart pertain to the 
sale of acquired property pursuant to the Housing Act of 1949, as 
amended, (RH property). Single family units (generally which secured 
loans made under section 502 or 504 of the Housing Act of 1949, as 
amended) are referred to as SFH property. All other property is referred 
to as MFH property. Notwithstanding the provisions of Sec. Sec. 
1955.112 through 1955.118 of this subpart, Sec. 1955.119 is the 
governing section for the sale of SFH inventory property to a public 
body or nonprofit organization to use for transitional housing for the 
homeless.

[55 FR 3942, Feb. 6, 1990]



Sec. 1955.112  Method of sale (housing).

    (a) Sales by FmHA or its successor agency under Public Law 103-354. 
Sales

[[Page 214]]

customarily will be made by FmHA or its successor agency under Public 
Law 103-354 personnel in accordance with Sec. Sec. 1955.114 and 
1955.115 of this subpart (as appropriate) when staffing and workload 
permit and inventory levels do not exceed those outlined in paragraph 
(b) of this section. Adequate and timely advertising in accordance with 
Sec. 1955.146 of this subpart is of utmost importance when this method 
is used. No earnest money will be collected in connection with sales by 
FmHA or its successor agency under Public Law 103-354. For MFH, this 
method will always be used unless another method is authorized by the 
Assistant Administrator, Housing.
    (b) Real estate brokers. The County Office will utilize the services 
of real estate brokers for regular sales when there are five or more 
properties in inventory at any one time during the calendar year. When 
real estate brokers are used, first consideration will be given to 
utilizing such services under an exclusive broker contract as provided 
for in Sec. 1955.130 of this subpart. Only when it is determined that 
an exclusive broker contract is not practicable, will the services of 
real estate brokers under an open listing agreement be utilized. The use 
of real estatebrokers in offices having less than five properties in 
inventory at any one time during the calendar year is optional provided 
staffing and workload permit diligent and timely sales by FmHA or its 
successor agency under Public Law 103-354. When broker services for SFH 
are utilized, the FmHA or its successor agency under Public Law 103-354 
office will not conduct direct sales, but will refer inquiries to the 
broker or list of participating brokers. However, if FmHA or its 
successor agency under Public Law 103-354 has been approached by a 
potential buyer desiring to purchase a specific property and a sales 
contract has been accepted, the property will not be listed for sale 
with real estate brokers. Earnest money held by real estate brokers will 
be used to pay the purchaser's closing costs with any balance of the 
costs to be paid by the purchaser. Any required earnest money deposit is 
exclusive of any required credit report fee. Brokers may only be used 
for MFH with authorization of the Assistant Administrator, Housing.
    (c) Sealed bid or auction. The use of sealed bids or auctions is an 
effective method by which to sell inventory property. If the State 
Director determines that NP SFH property has been given adequate market 
exposure and that diligent sales efforts have not produced buyers, or 
under unusual circumstances as outlined in Sec. 1955.115(a)(1) of this 
subpart, he/she will authorize sale by sealed bid or auction unless 
additional sales methods appear more prudent. Program SFH property will 
be sold by regular sale only, unless the Assistant Administrator, 
Housing, authorizes sale by sealed bid or auction. The State Director 
will request such authorization when all reasonable marketing efforts 
fail to produce buyers and the conditions of Sec. 1955.114(a)(6) of 
this subpart have been met. The case file, including documentation of 
all marketing efforts, will be forwarded to the Assistant Administrator, 
Housing, ATTN: Single Family Housing Servicing and Property Management 
(SFH/SPM) Division, to request authority to sell program property by 
sealed bid or auction. The decision to utilize a sealed bid or auction 
must be carefully weighed when the property is located in a subdivision, 
since the resultant sale may have an adverse effect on surrounding 
property values. Detailed guidance for conducting sealed bid sales is 
provided in Sec. 1955.147 of this subpart and for conducting auction 
sales in Sec. Sec. 1955.131 and 1955.148 of this subpart.

[53 FR 27831, July 25, 1988]



Sec. 1955.113  Price (housing).

    Real property will be offered or listed for its present market 
value, as adjusted by any administrative price reductions provided for 
in this section. Market value will be based upon the condition of the 
property at the time it is made available for sale. However, when a 
section 515 RRH credit sale is being made to a nonprofit organization or 
public body to utilize former single family dwellings as a rental or 
cooperative project for very-low-income residents, the price will be the 
lesser of the Government's investment or market

[[Page 215]]

value, less administrative price reductions, if any. Market value for 
multi-family housing projects will be determined through an appraisal 
conducted in accordance with subpart B to part 1922 of this chapter. 
Multi-family housing appraisals conducted shall reflect the impact of 
any restrictive-use provisions attached to the project as part of the 
credit sale.
    (a) SFH price reduction. SFH property will be appraised at any time 
additional market data indicates this action is warranted. If SFH 
inventory has not sold after being actively marketed, the price will be 
administratively reduced. An administrative price reduction will be made 
without changing the SFH appraisal. For ease in computing dates for 
administrative price reductions, each month is assumed to have thirty 
days. The following schedule of administrative price reductions will be 
followed:
    (1) Program property. If program property has not sold after being 
actively marketed at the current appraised value for 45 days during 
which time program applicants have exclusive rights to purchase the 
property, plus an additional 30 days to any offeror, the price will be 
administratively reduced by 10 percent of the appraised value. During 
the first 45 days after the price reduction, the property will be 
actively marketed with program applicants having exclusive rights to 
purchase the property, and at the expiration of this 45-day period, the 
property may be sold to any offeror. If at the end of this 75-day period 
the property remains unsold, a second price reduction of 10 percent of 
the appraised value will be made. During the first 45 days after the 
second price reduction, the property will be actively marketed with 
program applicants having exclusive rights to purchase the property, and 
at the expiration of this 45-day period, the property may be sold to any 
offeror. If the property does not sell within 75 days of the second 
price reduction, further guidance is provided in Sec. 1955.114(a)(6) 
and Exhibit D (available in any FmHA or its successor agency under 
Public Law 103-354 office) of this subpart.
    (2) Nonprogram (NP) property. If NP property has not been sold after 
being actively marketed for 45 days, the price will be administratively 
reduced by 10 percent of the appraised value. If the property remains 
unsold after an additional 45-day period of active marketing, one 
further price reduction of 10 percent of the appraised value will be 
made. If the property does not sell within 45 days of the second price 
reduction, further guidance is provided in Sec. 1955.115(a)(1) and 
Exhibit D (available in any FmHA or its successor agency under Public 
Law 103-354 office) of this subpart.
    (b) MFH price reduction. For multiple-family property, the sale 
price will only be reduced to the extent that the market value has 
decreased as shown in a current market appraisal. The District Director 
will not reduce the price without the prior written approval of the 
State Director. The State Director must request National Office 
authorization on reductions in price for multiple-family property if the 
inventory value at the time of acquisition exceeded the State Director's 
loan approval authority.

[53 FR 27831, July 25, 1988; 54 FR 6875, Feb. 15, 1989, as amended at 58 
FR 38927, July 21, 1993]



Sec. 1955.114  Sales steps for program property (housing).

    Program property will be sold by regular sale unless the Assistant 
Administrator, Housing, authorizes another method. If the State Director 
determines that program property has been given adequate market exposure 
and that diligent sales efforts including the use of real estate brokers 
has not produced purchasers, the State Director may request the 
Assistant Administrator, Housing, to authorize sale by sealed bid or 
public auction as specified in Sec. 1955.112(c) of this subpart.
    (a) Single family housing (SFH). Sale prices will be established in 
accordance with Sec. 1955.113 of this subpart. The County Supervisor 
will either offer the property or list it with real estate brokers for 
regular sale under the provisions of Sec. 1955.112 of this subpart. See 
Exhibit D of this subpart (available in any FmHA or its successor agency 
under Public Law 103-354 office) which outlines chronologically the 
sales steps for program property.

[[Page 216]]

    (1) The following provisions apply to all offers to purchase SFH 
inventory property:
    (i) Program property will be available for purchase only by program 
applicants for the first 45 days from the date of the initial offering 
or listing, and for the first 45 days following the date of any 
reduction in price. During these 45-day period(s), offers from others 
may be received and held until the first business day following the 45-
day period (the 46th day) when any such offer(s) will be considered as 
received on the 46th day along with offers received on that same (46th) 
day. After the expiration of each 45-day exclusive period for program 
applicants, program property may be purchased by offerors requesting 
credit on program terms, nonprogram (NP) terms or for cash in the order 
of priority set forth in paragraph (a)(3) of this section.
    (ii) In regular sales, an acceptable offer must be for at least the 
sale price. No offer for less than the sale price will be considered, 
accepted or held. Offers will be considered as acceptable or 
unacceptable independent of any accompanying credit request (on program 
or NP terms).
    (iii) All offers will be date-stamped when received. Selection of 
equally acceptable offers, considering offers in the category order 
outlined in paragraph (a)(3) of this section, received on the same 
business day will be made by lot by placing the names in a receptacle 
and drawing names sequentially. Drawn offers will be numbered and those 
drawn after the first drawn offer will be held as back-up offers pending 
sale to the successful offeror, unless the offeror has specifically 
noted on the offer that it may not be held as a back-up offer.
    (iv) An offer may be submitted any time after the effective date the 
property is available for sale or any price reduction; however, it is 
not considered until five business days after the effective date. An 
offer received during the five business day period is considered on the 
6th day, at the same time as any offer received on the 6th day.
    (v) If an offer subject to FmHA or its successor agency under Public 
Law 103-354 financing is accepted, and the offeror's credit request is 
later denied, the next offer (if any) will be accepted regardless of 
whether the rejected applicant appeals the adverse decision (NP 
applicants do not receive appeal rights). In cases involving program 
property, if no back-up offers are on hand, the property will be 
reoffered/relisted for sale utilizing the balance of any outstanding 
retention period. Property will not be held off the market pending the 
outcome of an appeal.
    (2) Effective date and method of offering. When ready for sale, each 
property will be offered for sale by use of Form FmHA or its successor 
agency under Public Law 103-354 1955-43 unless FmHA or its successor 
agency under Public Law 103-354 has on hand a signed offer from a 
program applicant to purchase a specific program property or an offer 
from any offeror to purchase a specific NP property. The date the form 
is posted or mailed to real estate brokers is the effective date the 
offer for sale has begun.
    Listings will provide for sales on program and NP terms, as 
appropriate.
    (3) Priority of offers. For program properties, acceptable offers 
received after the 45-day retention period specified in paragraph 
(a)(1)(i) of this section have priority in the order given in paragraphs 
(a)(3) (i), (ii), (iii) and (iv) of this section. For NP properties, 
acceptable offers have priority in the order given in paragraphs (a)(3) 
(ii), (iii) and (iv) of this section. Program applicants may purchase NP 
property, however, credit may only be extended on NP terms.
    (i) Offers with requests for credit on program terms. An offer from 
an applicant requesting credit on program terms in excess of the sale 
price will be considered as equally acceptable with other acceptable 
offers from program applicants and will be sold for the sale price.
    (ii) Cash offers, in descending order from highest to lowest, 
provided the cash offer is higher than any other offer which falls into 
the parameters of paragraph (a)(3)(iii) of this section multiplied by 
the current cash preference percentage listed in exhibit B of FmHA or 
its successor agency under Public Law 103-354 Instruction 440.1

[[Page 217]]

(available in any FmHA or its successor agency under Public Law 103-354 
office).
    (iii) Offers with requests for credit on NP terms in descending 
order from highest to lowest, for more than the sale price. An offer 
with a request for credit in excess of the market value of the property 
will not be accepted. If an offer of this type is received, the offeror 
will be given the opportunity to reduce the credit request to the market 
value (or lower) with no change to be made in the offered price.
    (iv) Offers with requests for credit on NP terms for the sale price.
    (4) Back-up offers and notification to offerors. Back-up offers will 
be taken in accordance with paragraph (a)(1)(iii) of this section. 
County offices utilizing the services of real estate brokers will advise 
the brokers of changes in the status of the property. County offices not 
utilizing real estate brokers will advise offerors of changes in the 
status of the property utilizing exhibit E of this subpart (available in 
any FmHA or its successor agency under Public Law 103-354 office) or 
similar format. Use of exhibit E is optional in offices utilizing real 
estate brokers.
    (5) Finalizing sales. Credit sales on program terms will be made in 
accordance with Sec. 1955.117 of this subpart and 7 CFR part 3550. Cash 
sales will be handled in accordance with Sec. 1955.118 of this subpart 
and credit sales on NP terms will be made in accordance with subpart J 
of part 1951 of this chapter.
    (6) Unsold property. If program property remains unsold after eight 
months of active marketing, the case file, with documentation of all 
marketing efforts, will be forwarded to the State Office for review with 
a recommendation of future sales efforts. The State Director will 
determine whether a request should be made to the Assistant 
Administrator, Housing, to sell the property by sealed bid or auction, 
or whether additional guidance such as, but not limited to advertising, 
reappraisal, offering a special effort sales bonus, or 20-year 
amortization factor (with balloon after 10 years) on NP financing may 
facilitate a sale.
    (b) Multiple family housing. The sale price will be established in 
accordance with Sec. 1955.113 of this subpart. Notification of known 
interested prospective offerors and advertising should be handled as set 
forth in Sec. 1955.146 of this subpart. The sale information will 
include a sale price, any restrictive-use provisions the project will be 
subject to and made part of the title, a date/time/location when offers 
will be drawn, and require all offerors to submit an application package 
comparable to that required by the respective loan program, which will 
be reviewed by the State Director or designee. The sale/time/location 
will be established by the District Director and will allow adequate 
time for advertising and review of applications to determine eligibility 
in accordance with MFH program requirements. Offerors whose applications 
are rejected by FmHA or its successor agency under Public Law 103-354 
will be notified in writing by the approval official, and for program 
applicants, given appeal rights in accordance with subpart B of part 
1900 of this chapter. If an application is rejected, the sale will 
continue regardless of whether the rejected applicant appeals the 
adverse decision. Property will not be held pending the outcome of an 
appeal. An offeror may withdraw an offer prior to the sale date, but not 
on the sale date. All offers from applicants determined eligible for the 
type loan being offered will be considered. The District Director, or 
delegate, and one other FmHA or its successor agency under Public Law 
103-354 employee will conduct the drawing at which time the public may 
be present. Offers will be placed in a receptacle and drawn 
sequentially. Drawn offers will be numbered and those drawn after the 
first drawn will be held as back-up offers, unless the offeror has 
indicated that the offer may not be held as back-up. Award will be made 
to the first offer drawn provided the offer is acceptable as to the 
terms and conditions set forth in the sale notice. The successful 
offeror will be notified immediately in writing by theapproval official, 
return receipt requested, that the successful offeror's offer has been 
accepted even if the successful offeror was present at the sale. The 
remaining offerors will each be notified by letter, return receipt 
requested, that their offer was not successful, but will be held as a 
back-up

[[Page 218]]

offer. The selection of the offeror was by lot and is therefore not 
appealable. If an unsuccessful offeror was not present at the sale and 
requests the name of the successful offeror, the name may be released. 
If the MFH property has been listed with real estate brokers after 
receiving authorization from the Assistant Administrator, Housing, Form 
FmHA or its successor agency under Public Law 103-354 1955-40, or 
another appropriate form designated for MFH property, will be used and 
the property sold to the first eligible program applicant. Any other 
method of sale must receive prior written authorization from the 
Assistant Administrator, Housing. Cash sales of program property will 
remain subject to restrictive-use provisions determined needed and 
included in the advertisement. The deed will contain the applicable 
restrictive-use provisions. Tenants and prospective tenants will receive 
the applicable protections for the specific restrictive-use provision 
contained in subpart E of part 1965 of this chapter.
    (c) Single family inventory converted to MFH. Written offers by 
nonprofit organizations, public bodies or for-profit entities, which 
have good records of providing low income housing under section 515, 
will be considered by FmHA or its successor agency under Public Law 103-
354 for the purchase of multiple SFH units for conversion to MFH. 
Section 514 credit sale mortgages may contain repayment terms up to 33 
years and section 515 credit sale mortgage terms may be up to 50 years.
    (1) The price provisions of Sec. 1955.113 and the processing 
provisions for MFH in Sec. 1955.117 of this subpart apply to such a 
conversion.
    (2) The provisions of Sec. 1955.130 of this subpart pertaining to 
real estate brokers apply, as applicable, and a commission will be due 
in the normal manner on units which were listed with the broker(s).
    (3) Prior approval of the National Office is required before 
issuance of Form AD-622, ``Notice of Preapplication Review Action.'' A 
preapplication with the information outlined in Exhibit A-7 of subpart E 
of part 1944 of this chapter, along with the State Director's 
recommendation, will be forwarded to the National Office, Attention: 
Assistant Administrator, Housing, for a determination and further 
guidance.
    (4) A credit sale for this purpose will be made according to the 
provisions of subpart E of part 1944 of this chapter, as modified by 
Sec. 1955.117 of this subpart, except the units need not be contiguous, 
but they must be located in close enough proximity so that management 
costs are not increased nor management capabilities diminished because 
of distance.
    (5) An additional loan may be made simultaneously with the credit 
sale, or later, only when the property involved meets the definition of 
``project'' set forth in subpart E of part 1944 of this chapter.
    (d) CONACT residential property suitable for the SFH program. When a 
single family house acquired under the CONACT is determined to be suited 
for the SFH program, it may be offered for sale as a SHF unit as though 
it had been acquired under the SFH program. It may, however, be sold in 
this manner to a program RH applicant on program terms only--not for 
cash or on NP terms. When a house is offered for sale under this 
paragraph, the listing notices and any advertising (whether being sold 
by FmHA or its successor agency under Public Law 103-354 or through real 
estate brokers) must state this restriction.

[53 FR 27832, July 25, 1988, as amended at 55 FR 3942, Feb. 6, 1990; 56 
FR 2257, Jan. 22, 1991; 58 FR 38927, July 21, 1993; 58 FR 38949, July 
21, 1993; 58 FR 52652, Oct. 12, 1993; 67 FR 78329, Dec. 24, 2002]



Sec. 1955.115  Sales steps for nonprogram (NP) property (housing).

    The appropriate FmHA or its successor agency under Public Law 103-
354 office will take the following steps after repairs, if economically 
feasible, are completed. The appraisal will be updated to reflect 
changes in market conditions, repairs and improvements, if any. Form 
FmHA or its successor agency under Public Law 103-354 1955-43 for SFH 
and 1955-40 for MFH will be completed to offer the property for sale. 
The advertising requirements and deed restrictions in Sec. 1955.116 of 
this subpart apply if the property does not meet FmHA or its successor 
agency

[[Page 219]]

under Public Law 103-354 DSS standards.
    (a) Single Family Housing. Sales steps will be the same as for 
program properties as provided in Sec. 1955.114(a) of this subpart, 
except that sales must be for cash in accordance with Sec. 1955.118 or 
credit on NP terms as provided in subpart J of part 1951 of this 
chapter. See exhibit D of this subpart (available in any FmHA or its 
successor agency under Public Law 103-354 office) which outlines 
chronologically the sales steps for NP properties.
    (1) Sale by sealed bid or auction. If a NP property has not sold 
within 150 days after being offered for sale, the inventory case file 
with documentation of marketing efforts will be submitted to the State 
Director. The State Director will authorize sale by sealed bid or 
auction in accordance with Sec. 1955.112(c) of this subpart unless 
additional sales methods appear more prudent. Use of the sealed bid or 
auction method may be considered as an initial sales effort under 
special or unusual circumstances such as, but not limited to, structures 
which have been substantially destroyed by fire or other causes.
    (2) Sale as chattel. If efforts to sell NP property by sealed bid or 
auction prove unsuccessful, the structure(s) may be sold as chattel (for 
chattel or salvage value, as appropriate) when authorized by the State 
Director. When the structure is to be sold as chattel (exclusive of 
land) further guidance is provided in Sec. Sec. 1955.121, 1955.122 and 
1955.141(b) of this subpart. If no offer is received, the structure(s) 
may be demolished and removed from the site and then the site offered 
for sale. If this method is utilized, FmHA or its successor agency under 
Public Law 103-354 will attempt to have the structure removed in 
exchange for the salvageable materials by contract, otherwise, will 
solicit for contracts to have the structure removed in accordance with 
FmHA or its successor agency under Public Law 103-354 Instruction 2024-A 
(available in any FmHA or its successor agency under Public Law 103-354 
office).
    (3) Sale of vacant land. When FmHA or its successor agency under 
Public Law 103-354 has vacant land in inventory which was security for 
an SFH loan, the land will be sold in accordance with this subparagraph. 
When the lot meets the requirements of 7 CFR part 3550, and a program 
applicant desires to purchase the lot and construct a dwelling, a credit 
sale will not be made. Instead, one section 502 loan will be made which 
will include funds for the purchase of the lot and construction of a 
dwelling. Otherwise, the lot will be sold for cash or on NP terms with a 
loan not to exceed ten years in term and amortization.
    (b) Multiple family housing. Sales steps will be the same as for 
program MFH property as provided in Sec. 1955.114(b) of this subpart 
except that sales must be for cash or on NP terms as set forth in Sec. 
1955.118 of this subpart. Additionally, if cash offers are received, 
they will be given first preference by drawing from the cash offers 
only. If the State Director determines an auction sale should be used to 
sell NP MFH property, authority to use that method of sale must be 
requested from the Assistant Administrator, Housing. Inventory files, 
including information on the acquisition, marketing efforts made, 
management of the property, other pertinent information, a memorandum 
covering the facts of the case, and recommendations of the State 
Director must be submitted for review. If the housing is sold out of the 
FmHA or its successor agency under Public Law 103-354 program as NP 
property, the closing of the sale may not take place until tenants have 
received all notifications and benefits afforded to tenants in prepaying 
projects in accordance with subpart E of part 1965 of this chapter.

[53 FR 27833, July 25, 1988, as amended at 58 FR 38928, July 21, 1993; 
58 FR 52652, Oct. 12, 1993; 67 FR 78329, Dec. 24, 2002]



Sec. 1955.116  Requirements for sale of property not meeting decent, 
safe and sanitary (DSS) standards (housing).

    For real property (exclusive of improvements) which is unsafe, refer 
to Sec. 1955.137(e) of this subpart for further guidance. For all other 
housing inventory property which does not meet decent, safe and sanitary 
(DSS) standards, the provisions of this section apply.

[[Page 220]]

    (a) Notices and advertising. If the inventory property has a single 
family dwelling or MFH unit thereon which does not meet DSS standards as 
defined in Sec. 1955.103 of this subpart, but which could meet such 
standards through the repair or renovation activities of the future 
owner, any ``Notice of Real Property For Sale,'' ``Notice of Sale,'' or 
other advertisement used in conjunction with advertising the property 
for sale must include the following language which is contained in Form 
FmHA or its successor agency under Public Law 103-354 1955-44, ``Notice 
of Residential Occupancy Restriction'':

    This property contains a dwelling unit or units which FmHA or its 
successor agency under Public Law 103-354 has deemed to be inadequate 
for residential occupancy. The Quitclaim Deed by which this property 
will be conveyed will contain a covenant restricting the residential 
unit(s) on the property from being used for residential occupancy until 
the dwelling unit(s) is repaired, renovated or razed. This restriction 
is imposed pursuant to section 510(e) of the Housing Act of 1949, as 
amended, 42 U.S.C. 1480. The property must be repaired and/or renovated 
as follows:*.
    * For advertisements, the sentence preceding the asterisk may be 
deleted and replaced with the following, or similar sentence: ``Contact 
FmHA or its successor agency under Public Law 103-354 (or any real 
estate broker/name of exclusive broker) for a list of items which must 
be repaired/renovated.'' For notices other than advertising, insert 
those items which are necessary to make the dwelling unit(s) meet DSS 
standards. Examples are:
    --Replace flooring and floor joists in kitchen and bathroom.
    --Drill new well to provide for an adequate and potable water 
supply.
    --Hook-up to community water and sewage system now being installed.
    --Provide a functionally adequate, safe and operable * system. * 
Insert heating, plumbing, electrical and/or sewage disposal, etc., as 
appropriate.
    --Install *. * Insert new roof, foundation, sump pump, bathroom 
fixtures, etc., as appropriate.
    --Install R-* insulation in basement walls or ceiling, R-* 
insulation in attic, and storm windows/doors throughout. * Insert 
appropriate R-Values to meet Thermal Performance Standards.

    (b) Sale agreements. If a housing structure in inventory does not 
meet DSS standards, Form FmHA or its successor agency under Public Law 
103-354 1955-44 must be attached to Forms FmHA or its successor agency 
under Public Law 103-354 1955-45 or FmHA or its successor agency under 
Public Law 103-354 1955-46, as appropriate, to provide notification of 
the deed restriction and required repairs/renovations before the 
dwelling can be used for residential purposes.
    (c) Quitclaim Deed. The following, the original of Form FmHA or its 
successor agency under Public Law 103-354 1955-44, or similar 
restrictive clause adapted for use in an individual State pursuant to a 
State Supplement approved by OGC must be added to the Quitclaim Deed for 
properties which do not meet DSS standards at the time of sale but which 
could through the repair/renovation activities of the future owner:

    Pursuant to section 510(e) of the Housing Act of 1949, as amended, 
42 U.S.C. 1480(e), the purchaser (``Grantee'' herein) of the above-
described real property (the ``subject property'' herein) covenants and 
agrees with the United States acting by and through Farmers Home 
Administration or its successor agency under Public Law 103-354 (the 
``Grantor'' herein) that the dwelling unit(s) located on the subject 
property as of the date of this Quitclaim Deed will not be occupied or 
used for residential purposes until the item(s) listed at the end of 
this paragraph have been accomplished. This covenant shall be binding on 
Grantee and Grantee's heirs, assigns and successors and will be 
construed as both a covenant running with the subject property and as 
equitable servitude. This covenant will be enforceable by the United 
States in any court of competent jurisdiction. When the existing 
dwelling unit(s) on the subject property complies with the 
aforementioned standards of the Farmers Home Administration or its 
successor agency under Public Law 103-354 or the unit(s) has been 
completely razed, upon application to the Farmers Home Administration or 
its successor agency under Public Law 103-354 in accordance with its 
regulations, the subject property may be released from the effect of 
this covenant and the covenant will thereafter be of no further force or 
effect. The property must be repaired and/or renovated as follows: *.'' 
* Insert the same items referenced in the listing notice(s) and sale 
agreement which are necessary to make the dwelling unit(s) meet DSS 
standards.

    (d) Release of restrictive covenant. Upon request of the property 
owner for a release of the restrictive covenant,

[[Page 221]]

FmHA or its successor agency under Public Law 103-354 will inspect the 
property to ensure that the repairs/renovations outlined in the 
restrictive covenant have been properly completed or the structure(s) 
razed. A State Supplement outlining the procedure for releasing the 
restrictive covenant will be issued with the advice of OGC.

[53 FR 27834, July 25, 1988]



Sec. 1955.117  Processing credit sales on program terms (housing).

    The following provisions apply to all credit sales on program terms:
    (a) Offers. Form FmHA or its successor agency under Public Law 103-
354 1955-45 will be used to document the offer and acceptance for 
regular FmHA or its successor agency under Public Law 103-354 sales. The 
contract is accepted prior to processing Form FmHA or its successor 
agency under Public Law 103-354 410-4, ``Application for Rural Housing 
Assistance (Non-Farm Tract),'' for SFH property with the provision that 
acceptance is subject to program approval. MFH property sales require an 
application package comparable to that submitted for the respective loan 
program application.
    (b) Processing. The FmHA or its successor agency under Public Law 
103-354 regulations pertaining to the type of credit being extended will 
be followed in making credit sales on program terms except as modified 
by the provisions of this section. All MFH credit sales may be made for 
up to 100 percent of the current market value of the security, less any 
prior lien. However, if a profit or limited profit applicant desires to 
earn a return, the applicant will be required to contribute at least 3 
percent of the purchase price as a cash downpayment. All credit sales of 
RRH, RCH, and LH properties will be subject to prepayment and 
restrictive-use provisions specified by the respective program 
requirements.
    (c) Approval. Forms FmHA or its successor agency under Public Law 
103-354 1940-1 or FmHA or its successor agency under Public Law 103-354 
1944-51, as appropriate, will be used to approve a credit sale even 
though no obligation of funds is required.
    (d) Downpayment. When a downpayment is made, it will be collected at 
closing.
    (e) Interest rate. Upon request of the applicant, the interest rate 
charged by FmHA or its successor agency under Public Law 103-354 will be 
the lower of the interest rate in effect at the time of loan approval or 
closing. If the applicant does not indicate a choice, the loan will be 
closed at the rate in effect at the time of loan approval.
    (f) Closing costs. MFH purchasers will pay closing costs from their 
own funds. Where necessary, SFH purchasers who qualify may be made a 
subsequent loan to pay closing costs in an amount not to exceed 1 
percent of the sale price of the dwelling. Any closing costs which are 
legally or customarily paid by the seller will be paid by FmHA or its 
successor agency under Public Law 103-354 and charged to the inventory 
account as a nonrecoverable cost items.
    (g) Closing sale. Title clearance, loan closing and property 
insurance requirements for a credit sale, and any loan closed 
simultaneously with the credit sale, are the same as for a program loan 
of the same type except:
    (1) The property will be conveyed in accordance with Sec. 
1955.141(a) of this subpart.
    (2) Earnest money, if any, will be used to pay purchaser's closing 
costs with any balance of closing costs being paid from the purchaser's 
personal funds except as provided in paragraph (f) of this section. For 
SFH credit sales and MFH credit sales to nonprofit organizations or 
public bodies, any excess deposit will be refunded to the purchaser. For 
MFH credit sales to profit or limited profit buyers, any excess earnest 
money deposit will be credited to the purchase price and recognized as a 
part of the purchaser's initial investment.
    (3) The County Supervisor or District Director will provide the 
closing agent with the necessary information for closing the sale. The 
assistance of OGC will be requested to provide closing instructions in 
exceptional or complex cases and for all MFH sales.

[[Page 222]]

    (h) Reporting. After the sale is closed, it will be reported 
according to Sec. 1955.142 of this subpart.

[53 FR 27834, July 25, 1988; 54 FR 6875, Feb. 15, 1989, as amended at 58 
FR 38928, July 21, 1993; 68 FR 61332, Oct. 28, 2003]



Sec. 1955.118  Processing cash sales or MFH credit sales on NP terms.

    (a) Cash sales. Cash sales will be closed by the servicing official 
collecting the purchase price (less any earnest money deposit or bid 
deposit) and delivering the deed to the purchaser.
    (b) Credit sales. The following provisions apply to MFH credit sales 
on NP terms:
    (1) Offers. Form FmHA or its successor agency under Public Law 103-
354 1955-45 or FmHA or its successor agency under Public Law 103-354 
1955-46, as appropriate, will be used to document the offer and 
acceptance. Contract acceptance is made prior to processing a request 
for credit on NP terms.
    (2) Processing. Purchasers requesting credit on NP terms will be 
required to submit documentation to establish financial stability, 
repayment ability, and creditworthiness. Standard forms used to process 
program applications may be utilized or comparable documentation may be 
accepted from the purchaser with the servicing official having the 
discretion to determine what information is required to support loan 
approval for the type property involved. Individual credit reports will 
be ordered for each individual applicant and each principal within an 
applicant entity in accordance with subpart B of part 1910 of this 
chapter. Commercial credit reports will be ordered for profit 
corporations and partnerships, and organizations with a substantial 
interest in the applicant entity in accordance with subpart C of part 
1910 of this chapter.
    (3) Approval. Form FmHA or its successor agency under Public Law 
103-354 1944-51 will be used to approve a credit sale even though no 
obligation of funds is involved. Special instructions on the FMI 
pertaining to NP credit sales will be followed.
    (4) Downpayment. A downpayment of not less than 10 percent of the 
purchase price is required at closing.
    (5) Interest rate. The Section 515 RRH interest rate plus \1/2\ 
percent will be charged on all types of housing credit sales, except 
SFH. Refer to exhibit B of FmHA or its successor agency under Public Law 
103-354 Instruction 440.1 (available in any FmHA or its successor agency 
under Public Law 103-354 office) for interest rates. Loans made on NP 
terms will be closed at the interest rate which was in effect at the 
time the loan was approved.
    (6) Term of note. The note amount will be amortized over a period 
not to exceed 10 years. If the State Director determines more favorable 
terms are necessary to facilitate the sale, the note amount may be 
amortized using a 30-year factor with payment in full (balloon payment) 
due not later than 10 years from the date of closing. In no case will 
the term be longer than the period for which the property will serve as 
adequate security.
    (7) Modification of security instruments. If applicable to the type 
property being sold, modification of security instruments may be made. 
On the promissory note and/or security instrument (mortgage or deed of 
trust) any covenants relating to graduation to other credit, 
restrictive-use provisions on MFH projects, personal occupancy, 
inability to secure other financing, and restrictions on leasing may be 
deleted. Deletions are made by lining through only the specific 
inapplicable language with both the NP borrower and FmHA or its 
successor agency under Public Law 103-354 initialing the changes.
    (8) Closing sale. Title clearance, loan closing and property 
insurance requirements for a credit sale are the same as for a program 
loan except:
    (i) The property will be conveyed in accordance with Sec. 
1955.141(a) of this subpart.
    (ii) The purchaser will pay his/her own closing costs. Earnest 
money, if any, will be used to pay purchaser's closing costs with any 
balance of closing costs being paid by the purchaser. Any closing costs 
which are legally or customarily paid by the seller will be paid by FmHA 
or its successor agency under Public Law 103-354 from the downpayment.
    (iii) The County Supervisor or District Director will provide the 
closing

[[Page 223]]

agent with the necessary information for closing the sale. The 
assistance of OGC will be requested to provide closing instructions for 
all MFH sales.
    (iv) When more than one property is bought by the same buyer and the 
transactions are closed at the same time, a separate promissory note 
will be prepared for each property, but one mortgage will cover all the 
properties.
    (9) Reporting. After the sale is closed, it will be reported 
according to Sec. 1955.142 of this subpart.
    (10) Classification. MFH credit sales on NP terms will be classified 
as NP loans and serviced accordingly.
    (11) Form FmHA or its successor agency under Public Law 103-354 
1910-11, ``Applicant Certification, Federal Collection Policies for 
Consumer or Commercial Debts.'' The County Supervisor or District 
Director must review Form FmHA or its successor agency under Public Law 
103-354 1910-11, ``Applicant Certification, Federal Collection Policies 
for Consumer or Commercial Debts,'' with the applicant, and the form 
must be signed by the applicant.

[53 FR 27835, July 25, 1988, as amended at 54 FR 29333, July 12, 1989; 
55 FR 3942, Feb. 6, 1990; 58 FR 38928, July 21, 1993; 58 FR 52653, Oct. 
12, 1993; 68 FR 61332, Oct. 28, 2003]



Sec. 1955.119  Sale of SFH inventory property to a public body or 
nonprofit organization.

    Notwithstanding the provisions of Sec. 1955.111 through Sec. 
1955.118 of this subpart, this section contains provisions for the sale 
of SFH inventory property to a public body or nonprofit organization to 
use for transitional housing for the homeless. A public body or 
nonprofit organization is a nonprogram applicant. All other SFH credit 
sales on nonprogram terms will be handled in accordance with subpart J 
of part 1951 of this chapter.
    (a) Method of sale. The method of sale is according to Sec. 
1955.112 of this subpart. Upon request from a public body or nonprofit 
organization, FmHA or its successor agency under Public Law 103-354 will 
provide a list of all SFH inventory property, regardless of whether it 
is listed for sale with real estate brokers. The list will indicate 
whether the property is program or nonprogram. Upon written notice of 
the organization's intent to buy a specific property, if it is not under 
a sale contract, FmHA or its successor agency under Public Law 103-354 
will withdraw the property from the market for a period not to exceed 30 
days to provide the organization sufficient time to execute Form FmHA or 
its successor agency under Public Law 103-354 1955-45.
    (b) Price. The price of the property will be established according 
to Sec. 1955.113 of this subpart; however, a 10 percent discount of the 
listed price is authorized on nonprogram property. No discount is 
authorized on program property.
    (c) Decent, safe and sanitary (DSS) standards. If an organization 
wants to buy a property which does not meet DSS standards, FmHA or its 
successor agency under Public Law 103-354 will repair it to meet those 
standards, including thermal performance standards, unless FmHA or its 
successor agency under Public Law 103-354 determines it is not feasible 
to do so according to Sec. 1955.64(a)(1)(ii) of subpart B of part 1955 
of this chapter. The price will be adjusted to reflect any resulting 
change in value. Cosmetic repairs, if needed, such as painting, floor 
covering, landscaping, etc., are the responsibility of the organization. 
Form FmHA or its successor agency under Public Law 103-354 1955-44, 
itemizing the required repairs and FmHA or its successor agency under 
Public Law 103-354's agreement to complete them before closing will be 
made a part of Form FmHA or its successor agency under Public Law 103-
354 1955-45, the sales contract, before it is signed. Required repairs 
must be completed before closing so DSS restrictions will not be 
required in the deed.
    (d) Approval and closing. Processing cash sales or MFH credit sales 
on nonprogram terms is according to Sec. 1955.118 of this subpart, 
except as follows:
    (1) Earnest money deposit. No earnest money deposit is required.
    (2) Downpayment. No downpayment is required.
    (3) Term of note. The term of the note may not exceed 30 years.

[55 FR 3942, Feb. 6, 1990, as amended at 58 FR 52653, Oct. 12, 1993]

[[Page 224]]



Sec. 1955.120  Payment of points (housing).

    To effect regular sale of inventory SFH property to a purchaser who 
is financing the purchase of the property with a non-FmHA or its 
successor agency under Public Law 103-354 loan, the County Supervisor 
may authorize the payment by FmHA or its successor agency under Public 
Law 103-354 of not more than three points. The payment must be a 
customary requirement of the lender for the seller within the community 
where the property is located. Terms of payment will be incorporated in 
Form FmHA or its successor agency under Public Law 103-354 1955-45 and 
will be fixed as of the date the form is signed by the appropriate FmHA 
or its successor agency under Public Law 103-354 official. Points will 
not be paid to reduce the purchaser's interest rate. The payment will be 
deducted from the funds to be received by FmHA or its successor agency 
under Public Law 103-354 at closing.

[53 FR 27836, July 25, 1988. Redesignated at 55 FR 3942, Feb. 6, 1990, 
as amended at 58 FR 52653, Oct. 12, 1993; 68 FR 61332, Oct. 28, 2003]

                            Chattel Property



Sec. 1955.121  Sale of acquired chattels (chattel).

    Sections 1955.122 through 1955.124 of this subpart prescribe 
procedures for the sale of all acquired chattel property except real 
property rights. The State Director is authorized to sell acquired 
chattels by auction, sealed bid, regular sale or, for perishable items 
and crops, by negotiated sale. The State Director may redelegate 
authority to any qualified FmHA or its successor agency under Public Law 
103-354 employee.



Sec. 1955.122  Method of sale (chattel).

    Acquired chattels will be sold as expeditiously as possible using 
the method(s) considered most appropriate. If the chattel is not sold 
within 180 days after acquisition, assistance will be requested as 
outlined in Sec. 1955.143 of this subpart.
    (a) Sale to beginning farmers or ranchers. Beginning farmers or 
ranchers obtaining special OL loan assistance under Sec. 1941.15 of 
subpart A of part 1941 of this chapter will receive priority in the 
purchase of farm equipment held in government inventory during the 
commitment period. The County Supervisor will notify such applicants/
borrowers of any farm equipment held in government inventory within the 
service area of the FmHA or its successor agency under Public Law 103-
354 County Office. These applicants/borrowers will be given 10 working 
days to respond that they are interested in purchasing any or all items 
of equipment at the appraised fair market value established by FmHA or 
its successor agency under Public Law 103-354. FmHA or its successor 
agency under Public Law 103-354 Form Letter 1955-C-1 will be used to 
notify applicants/borrowers of the availability of farm equipment in 
FmHA or its successor agency under Public Law 103-354 inventory. The 
equipment must be essential to the success of the operation described in 
the loan application in order for the applicant to have an opportunity 
to purchase such equipment. The County Supervisor will determine what 
equipment is essential.
    (b) Regular sale. Chattels will be sold by FmHA or its successor 
agency under Public Law 103-354 employees at market value to program 
applicants. Form FmHA or its successor agency under Public Law 103-354 
440-21, ``Appraisal of Chattel Property,'' will be used when appraising 
chattels for regular sale.
    (c) Auctions. Section 1955.148 of this subpart provides detailed 
guidance on auctions applicable to the sale of chattels, as supplemented 
by this section.
    (1) Established public auction. An established public auction is an 
auction that is widely advertised and held on a regularly scheduled 
basis at the same facility. This method of sale is particularly suited 
for the sale of commodities, farm machinery and livestock. No additional 
public notice of sale is required other than that commonly used by the 
facility. This is the preferred method of disposal.
    (2) Other auctions. Other auctions, whether conducted by FmHA or its 
successor agency under Public Law 103-354 employees or fee auctioneers, 
are suitable for on-premises sales, for sale of dissimilar chattels, and 
for the sale of chattels in conjunction with the

[[Page 225]]

auction of real property. A minimum of 5 days public notice will be 
given prior to the date of auction.
    (d) Sealed bid sales. Section 1955.147 of this subpart provides 
detailed guidance on sealed bid sales applicable to the sale of 
chattels. When it is believed that financing will have to be provided 
through a credit sale, this method has advantages over auction sales. It 
requires, however, additional steps in the event any established minimum 
price is not obtained. Preference will be given to a cash offer which is 
at least ----* percent of the highest offer requiring credit.

    [* Refer to exhibit B of FmHA or its successor agency under Public 
Law 103-354 Instruction 440.1 (available in any FmHA or its successor 
agency under Public Law 103-354 office) for the current percentage.]

    (e) Negotiated sale. Perishable acquired items and crops (except 
timber) and chattels for which no acceptable bid was received from 
auction or sealed bid methods may be sold by direct negotiation for the 
best price obtainable. No public notice is required to negotiate with 
interested parties including prior bidders. Justification for the use of 
this method of sale will be documented.
    (f) Notification. In many States the original owner of the chattel 
property must personally be notified of the sale date and method of sale 
within a certain time prior to the sale. The State Director then will 
issue a State supplement clearly stating what notices are to be sent, if 
any. County Supervisor will review State supplements to determine what 
notices must be sent to the previous owner of the chattel property prior 
to FmHA or its successor agency under Public Law 103-354 taking action 
to sell the property.

No public notice is required to negotiate with interested parties 
including prior bidders. Justification for the use of this method of 
sale will be documented. A copy of the sale instrument (Form FmHA or its 
successor agency under Public Law 103-354 1955-47, ``Bill of Sale `A'--
Sale of Government Property'') will be kept in the County or District 
Office inventory file. Sale proceeds will be remitted according to FmHA 
or its successor agency under Public Law 103-354 Instruction 1951-B 
(available in any FmHA or its successor agency under Public Law 103-354 
office). A State Supplement, when needed, will be prepared with the 
assistance of OGC to provide additional guidance on negotiated sales and 
to insure compliance with State laws.

[50 FR 23904, June 7, 1985, as amended at 53 FR 35780, Sept. 14, 1988; 
58 FR 48290, Sept. 15, 1993; 58 FR 58650, Nov. 3, 1993; 62 FR 44401, 
Aug. 21, 1997; 68 FR 61332, Oct. 28, 2003]



Sec. 1955.123  Sale procedures (chattel).

    (a) Sales. Although cash sales are preferred in the sale of 
chattels, credit sales may be used advantageously in the sale of 
chattels to eligible purchasers and to facilitate sales of high-priced 
chattels. Chattel sales will be made to eligible purchasers in 
accordance with the provisions of this chapter. Preference will be given 
to a cash offer which is at least * percent of the highest offer 
requiring credit. (*Refer to exhibit B of FmHA or its successor agency 
under Public Law 103-354 Instruction 440.1 (available in any FmHA or its 
successor agency under Public Law 103-354 office) for the current 
percentage.) Credit sales made to ineligible purchasers will require not 
less than a 10 percent downpayment with the remaining balance amortized 
over a period not to exceed 5 years. The interest rate for ineligible 
purchasers will be the current ineligible interest rate for Farmer 
Programs property set forth in exhibit B of FmHA or its successor agency 
under Public Law 103-354 Instruction 440.1 (available in any FmHA or its 
successor agency under Public Law 103-354 office). Form FmHA or its 
successor agency under Public Law 103-354 431-2, in conjunction with 
Form FmHA or its successor agency under Public Law 103-354 440-32, 
``Request for Statement of Debts and Collateral,'' may be used to show 
financial capability. For Farmer Programs, County Supervisors, District 
Directors, and State Directors are authorized to approve or disapprove 
chattel sales on eligible terms in accordance with the respective loan 
approval authorities in exhibit C of FmHA or its successor agency under 
Public Law 103-354 Instruction 1901-A (available in any FmHA or its 
successor agency under Public Law 103-354 office). Applicants

[[Page 226]]

who have been determined ineligible, and eligible applicants who have 
their application disapproved, will be notified of the opportunity to 
appeal in accordance with subpart B of part 1900 of this chapter. County 
Supervisors, District Directors, and State Directors are authorized to 
approve or disapprove chattel sales on ineligible terms in accordance 
with the respective type of program approval authorities in exhibit E of 
FmHA or its successor agency under Public Law 103-354 Instruction 1901-A 
(available in any FmHA or its successor agency under Public Law 103-354 
office.)
    (b) Receipt of payment. Payment will be by cashier's check, 
certified check, postal or bank money order or personal check (not in 
excess of $500) made payable to the agency. Cash may be accepted if it 
is not possible for one of these forms of payment to be used. Third 
party checks are not acceptable. If full payment is not received at the 
time of sale, the offer will be documented by Form RD 1955-45 or Form RD 
1955-46 where the chattel is sold jointly with real estate by regular 
sale.
    (c) Transfer of title. Title will be transferred to a purchaser in 
accordance with Sec. 1955.141(b) of this subpart.
    (d) Reporting sale. Sales will be reported in accordance with Sec. 
1955.142 of this subpart.
    (e) Reporting and disposal of inventory property not sold. Refer to 
Sec. Sec. 1955.143 and 1955.144 of this subpart for additional guidance 
in disposing of problem property.

[50 FR 23904, June 7, 1985, as amended at 58 FR 52653, Oct. 12, 1993; 58 
FR 58650, Nov. 3, 1993; 68 FR 61332, Oct. 28, 2003]



Sec. 1955.124  Sale with inventory real estate (chattel).

    Inventory chattel property may be sold with inventory real estate if 
a higher aggregate price can be obtained. Proceeds from a joint sale 
will be applied to the respective inventory accounts based on the value 
of the property sold. Form FmHA or its successor agency under Public Law 
103-354 440-21 will be used to determine the value of the chattel 
property. The offer for the sale of the chattels will be documented by 
incorporating the terms and conditions of the sale of Form FmHA or its 
successor agency under Public Law 103-354 1955-45 or Form FmHA or its 
successor agency under Public Law 103-354 1955-46, and may be accepted 
by the appropriate approval official based upon the combined final sale 
price.



Sec. Sec. 1955.125-1955.126  [Reserved]

           Use of Contractors To Dispose of Inventory Property



Sec. 1955.127  Selection and use of contractors to dispose of inventory property.

    Sections 1955.128 through 1955.131 prescribe procedures for 
contracting for services to facilitate disposal of inventory property. 
FmHA or its successor agency under Public Law 103-354 Instruction 2024-A 
(available in any FmHA or its successor agency under Public Law 103-354 
office) is applicable for procurement of nonpersonal services.

[53 FR 27836, July 25, 1988]



Sec. 1955.128  Appraisers.

    (a) Real property. The State Director may authorize the County 
Supervisor or District Director to procure fee appraisals of inventory 
property, except MFH properties, to expedite the sale of inventory real 
or chattel property. (Fee appraisals of MFH properties will only be 
authorized by the Assistant Administrator, Housing, when unusual 
circumstances preclude the use of a qualified FmHA or its successor 
agency under Public Law 103-354 MFH appraiser.) The decision will be 
based on the availability of comparables, the capability and 
availability of personnel, and the number and type of properties (such 
as large farms and business property) requiring valuation. For Farmer 
Programs real estate properties, all contract (fee) appraisers should 
include the sales comparison, income (when applicable), and the cost 
approach to value. All FmHA or its successor agency under Public Law 
103-354 real estate contract appraisers must be certified as State-
Certified General Appraisers.
    (b) Chattel property. For Farmer Programs chattel appraisals, the 
contractor/appraiser completing the report must meet at least one of the 
following qualifications:

[[Page 227]]

    (1) Certification by a National or State appraisal society.
    (2) If the contractor is not a certified appraiser and a certified 
appraiser is not available, the contractor may qualify or may use other 
qualified appraisers, if the contractor can establish that he/she or 
that the appraiser meets the criteria for a certification in a National 
or State appraisal society.
    (3) The appraiser has recent, relevant, documented appraisal 
experience or training, or other factors clearly establish the 
appraiser's qualifications.

[58 FR 58650, Nov. 3, 1993]



Sec. 1955.129  Business brokers.

    The services of business brokers or business opportunity brokers may 
be authorized by the appropriate Assistant Administrator in lieu of or 
in addition to real estate brokers for the sale of businesses as a 
whole, including goodwill and chattel, when:
    (a) The primary use of the structure included in the sale is other 
than residential;
    (b) The business broker is duly licensed by the respective state; 
and
    (c) The primary function of the business is other than farming or 
ranching.



Sec. 1955.130  Real estate brokers.

    Contracting authority for the use of real estate brokers is 
prescribed in Exhibit D of FmHA or its successor agency under Public Law 
103-354 Instruction 2024-A (available in any FmHA or its successor 
agency under Public Law 103-354 office). Brokers who are managing 
custodial or inventory property may also participate in sales activities 
under the same conditions offered other brokers. Brokers must be 
properly licensed in the State in which they do business.
    (a) Type of listings. The State Director may authorize use of 
exclusive listings during any calendar year. Since the Agency receives 
many more marketing services for its commission dollar and saves time 
listing the property with only one broker, it is strongly recommended 
that all County Offices be authorized the use of exclusive brokers.
    (1) Exclusive broker contract. An exclusive broker contract provides 
for the selection of one broker by competitive negotiation who will be 
the only authorized broker for the FmHA or its successor agency under 
Public Law 103-354 office awarding the contract within a defined area 
and for specific property or type of property. Criteria will be 
specified in the solicitation together with a numerical weighting system 
to be used (usually 1--100). Responses will be calculated on the basis 
of the criteria such as personal qualifications, membership in Multiple 
Listing Service (MLS), previous experience with FmHA or its successor 
agency under Public Law 103-354 sales, advertising plans, proposed 
innovative promotion methods, and financial capability. The 
responsibilities of the broker under an exclusive broker contract exceed 
those of the open listing agreement and therefore, an exclusive broker 
contract is the preferred method of listing properties.
    (2) Open listing. Open listing agreements provide for any licensed 
real estate broker to provide sales services for any property listed 
under the terms and conditions of Form FmHA or its successor agency 
under Public Law 103-354 1955-42, ``Open Real Property Master Listing 
Agreement.'' If this method is used, a newspaper advertisement will be 
published at least once yearly, or a notice sent to all real estate 
brokers in the counties served by the FmHA or its successor agency under 
Public Law 103-354 office, informing brokers that sales services are 
being requested. The advertising will be substantially similar to the 
example given in Exhibit B of this subpart (available in any FmHA or its 
successor agency under Public Law 103-354 office). An open listing 
agreement may be executed at any time during the year, but must be 
effective prior to the broker showing the property. When this method is 
used, the FmHA or its successor agency under Public Law 103-354 office 
is responsible for ensuring that adequate advertising is performed to 
effectively market the property.
    (b) Listing notices. Forms FmHA or its successor agency under Public 
Law 103-354 1955-40 or FmHA or its successor agency under Public Law 
103-354 1955-

[[Page 228]]

43, as appropriate, will be used to provide brokers with notice of 
initial listing, withdrawal, price change, terms change, relisting, sale 
cancellation, restrictions on sale, etc.
    (c) Priority of offers. All offers received during the same business 
day will be considered as having been received at the same time. The 
successful offer from among equally acceptable offers within each 
category will be determined by lot by FmHA or its successor agency under 
Public Law 103-354. Priority rules for specific categories of property 
are:
    (1) Program SFH. See Sec. 1955.114(a) of this subpart.
    (2) Program MFH. Offers will be considered from program applicants 
only.
    (3) NP SFH. See Sec. 1955.115(a) of this subpart.
    (4) NP MFH. See Sec. 1955.115(b) of this subpart.
    (5) Suitable and surplus FSA CONACT. See Sec. 1955.107 of this 
subpart.
    (6) Suitable and Surplus Non-FSA CONACT. See Sec. 1955.108 of this 
subpart.
    (d) Price. No offer for less than the listed price will be accepted 
during the period of regular sale.
    (e) Earnest money. The broker will collect earnest money in the 
amount specified in paragraph (e)(1) of this section when a sale 
contract is executed. The earnest money will be retained by the broker 
until contract closing, withdrawal, cancellation, or rejection by FmHA 
or its successor agency under Public Law 103-354. When a contract is 
cancelled because FmHA or its successor agency under Public Law 103-354 
rejects the offeror's application for credit, the earnest money will be 
returned to the offeror. When a contract closes, the broker will make 
the earnest money available to be used toward closing costs, or in the 
case of a cash sale it may be returned to the purchaser. For MFH sales 
to profit or limited profit buyers, any excess earnest money deposit 
will be credited to the purchaser's initial investment.
    (1) Amount. The amount of earnest money collected will be:
    (i) For single family properties or MFH projects of 2 to 5 units, 
$50.
    (ii) For all property other than that covered in paragraph (e)(1)(i) 
of this section, the greater of the estimated closing costs shown on the 
notice of listing (Form FmHA or its successor agency under Public Law 
103-354 1955-40) or \1/2\ of 1 percent of the purchase price.
    (2) Offeror default. When a contract is cancelled due to offeror 
default, the earnest money will be delivered to and retained by the 
agency as full liquidated damages.
    (f) Commission--(1) Amount--(i) Exclusive broker contract. FmHA or 
its successor agency under Public Law 103-354 may not set the commission 
rate in an exclusive broker solicitation/contract. The rate of 
commission will be one of the evaluation criteria in the solicitation. 
However, any broker who submits an offer with a commission rate lower 
than the typical rate for such services in the area must provide 
documentation that they have successfully sold properties at the lower 
rate with no compromise in services. The solicitation/contract will 
explicitly detail this policy.
    (ii) Open listing agreement. A uniform fee or commission schedule, 
by property type, will be established by the servicing official within a 
given sales area. The commission rate to be paid will be the typical 
rate for such services in the sales area and will not exceed or be lower 
than commissions paid for similar types of services provided by the 
broker to other sellers of similar property.
    (2) Special effort sales bonuses. The servicing official may request 
authorization from the State Director to pay fixed amount bonuses for 
special effort property, such as a property with a value so low that the 
commission alone does not warrant broker interest or property that has 
been held in inventory for an extended period of time where it is 
believed that an added bonus will create additional efforts by the 
broker to sell the property. The State Director may authorize use of 
short-term (not to exceed three months) special effort sales bonuses on 
a group, county, district or state-wide basis, if it appears necessary 
to facilitate the sale of nonprogram property.
    (3) Payment of commission. Payment of a broker's commission is 
contingent on the closing of the sale and will not be paid until the 
sale has closed and title

[[Page 229]]

has passed to the purchaser. No commission will be paid where the sale 
is to the broker, broker's salesperson(s), to persons living in his/her 
or salesperson(s) immediate household or to legal entities in which the 
broker or salesperson(s) have an interest if the sale is contingent upon 
receiving FmHA or its successor agency under Public Law 103-354 credit. 
If credit is not being extended in these instances (a cash sale), a 
commission will be paid. Under an exclusive broker contract, if a 
cooperating broker purchases the property and is receiving FmHA or its 
successor agency under Public Law 103-354 credit, one-half the 
respective commission will be paid to the exclusive broker. Commissions 
will be paid at closing if sufficient cash to cover the commission is 
paid by the purchaser. Otherwise, the commission will be paid by the 
appropriate FmHA or its successor agency under Public Law 103-354 
official by completing Form AD-838 and processing Form FmHA or its 
successor agency under Public Law 103-354 838-B for payment in 
accordance with the respective FMI's, and charged to the inventory 
account as a nonrecoverable cost.
    (g) Nondiscrimination. Brokers who execute listing agreements with 
FmHA or its successor agency under Public Law 103-354 shall certify to 
nondiscrimination practices as provided in Form FmHA or its successor 
agency under Public Law 103-354 1955-42. In addition, all brokers 
participating in the sale of property shall sign the nondiscrimination 
certification on Form FmHA or its successor agency under Public Law 103-
354 1955-45.

[53 FR 27836, July 25, 1988, as amended at 55 FR 3943, Feb. 6, 1990; 62 
FR 44401, Aug. 21, 1997; 68 FR 61332, Oct. 28, 2003]



Sec. 1955.131  Auctioneers.

    The services of licensed auctioneers, if required, may be used to 
conduct auction sales as described in Sec. 1955.148 of this subpart and 
procured by competitive negotiation under the contracting authority of 
Exhibit C to FmHA or its successor agency under Public Law 103-354 
Instruction 2024-A (available in any FmHA or its successor agency under 
Public Law 103-354 office).
    (a) Selection criteria. The auctioneer should be selected by 
evaluating criteria such as proposed sales dates, location, advertising, 
broker cooperation, innovations, mechanics of sale, sample advertising, 
personal qualifications, financial capability, private sector financing 
and license/bonding.
    (b) Commission. FmHA or its successor agency under Public Law 103-
354 may not set the commission rate in an auctioneer solicitation/
contract. The rate of commission will be one of the evaluation criteria 
in the solicitation. However, any offeror that submits an offer with a 
commission rate lower than the typical rate for such services in the 
area must include documentation that they have successfully sold 
properties at the lower rate with no compromise in services. The 
solicitation/contract will explicitly detail this policy. Commissions 
will be paid at closing if sufficient cash to cover the commission is 
paid by the purchaser. Otherwise, the commission will be paid by the 
appropriate FmHA or its successor agency under Public Law 103-354 
official completing Form AD-838 and processing Form FmHA or its 
successor agency under Public Law 103-354 838-B for payment in 
accordance with the respective FMI's, and charged to the inventory 
account as a nonrecoverable cost.
    (c) Auctioneer restriction. The auctioneer, his/her sales agents, 
cooperating brokers or persons living in his, her or their immediate 
household are restricted from bidding or from subsequent purchase of any 
property sold or offered at the auctioneer's sale for a period of one 
year from the auction date.

[50 FR 23904, June 7, 1985, as amended at 53 FR 27837, July 25, 1988]

                                 General



Sec. 1955.132  Pilot projects.

    FmHA or its successor agency under Public Law 103-354 may conduct 
pilot projects to test policies and procedures for the management and 
disposition of inventory property which deviate from the provisions of 
this subpart, but are not inconsistent with the provisions of

[[Page 230]]

the authorizing statute or other applicable Acts. A pilot project may be 
conducted by FmHA or its successor agency under Public Law 103-354 
employees or by contract with individuals, organizations or other 
entities. Prior to initiation of a pilot project, FmHA or its successor 
agency under Public Law 103-354 will publish notice in the Federal 
Register of its nature, scope, and duration.

[55 FR 3943, Feb. 6, 1990]



Sec. 1955.133  Nondiscrimination.

    (a) Title VI provisions. If the inventory real property to be sold 
secured a loan that was subject to Title VI of the Civil Rights Act of 
1964, and the property will be used for its original or similar purpose, 
or if FmHA or its successor agency under Public Law 103-354 extends 
credit and the property then becomes subject to Title VI, the buyer will 
sign Form FmHA or its successor agency under Public Law 103-354 400-4. 
``Assurance Agreement.'' The instrument of conveyance will contain the 
following statement:

    The property described herein was obtained or improved through 
Federal financial assistance. This property is subject to the provisions 
of Title VI of the Civil Rights Act of 1964 and the regulations issued 
pursuant thereto for so long as the property continues to be used for 
the same or similar purposes for which the Federal financial assistance 
was extended.

    (b) Affirmative Fair Housing Marketing Plan. Exclusive listing 
brokers or auctioneers selling SFH properties having 5 or more 
properties in the same subdivision listed or offered for sale at the 
same time will prepare and submit to FmHA or its successor agency under 
Public Law 103-354 an acceptable Form HUD 935.2, ``Affirmative Fair 
Housing Marketing Plan,'' for each such subdivision in accordance with 
Sec. 1901.203(c) of Subpart E of Part 1901 of this chapter.
    (c) Equal Housing Opportunity logo. All FmHA or its successor agency 
under Public Law 103-354 and contractor sale advertisements will contain 
the Equal Housing Opportunity logo.



Sec. 1955.134  Loss, damage, or existing defects in inventory real property.

    (a) Property under contract. If a bid or offer has been accepted by 
the FmHA or its successor agency under Public Law 103-354 and through no 
fault of either party, the property is lost or damaged as a result of 
fire, vandalism, or an act of God between the time of acceptance of the 
bid or offer and the time the title of the property is conveyed by FmHA 
or its successor agency under Public Law 103-354, FmHA or its successor 
agency under Public Law 103-354 will reappraise the property. The 
reappraised value of the property will serve as the amount FmHA or its 
successor agency under Public Law 103-354 will accept from the 
purchaser. However, if the actual loss based on the reduction in market 
value of the property as determined by FmHA or its successor agency 
under Public Law 103-354 is less than $500, payment of the full purchase 
price is required. In the event the two parties cannot agree upon an 
adjusted price, either party, by mailing notice in writing to the other, 
may terminate the contract of sale, and the bid deposit or earnest 
money, if any, will be returned to the offeror.
    (b) Existing defects. FmHA or its successor agency under Public Law 
103-354 does not provide any warranty on property sold from inventory. 
Subsequent loans may be made, in accordance with applicable loan making 
regulations for the respective loan program, to correct defects.

[50 FR 23904, June 7, 1985, as amended at 53 FR 27837, July 25, 1988]



Sec. 1955.135  Taxes on inventory real property.

    Where FmHA or its successor agency under Public Law 103-354 owned 
property is subject to taxation, taxes and assessment installments will 
be prorated between FmHA or its successor agency under Public Law 103-
354 and the purchaser as of the date the title is conveyed in accordance 
with the conditions of Forms FmHA or its successor agency under Public 
Law 103-354 1955-45 or FmHA or its successor agency under Public Law 
103-354 1955-46. The purchaser will be responsible for paying all taxes 
and assessment installments accruing after the title is conveyed.

[[Page 231]]

The County Supervisor or District Director will advise the taxing 
authority of the sale, the purchaser's name, and the description of the 
property sold. Only the prorata share of assessment installments for 
property improvements (water, sewer, curb and gutter, etc.) accrued as 
of the date property is sold will be paid by FmHA or its successor 
agency under Public Law 103-354 for inventory property. At the closing, 
payment of taxes and assessment installments due to be paid by FmHA or 
its successor agency under Public Law 103-354 will be paid from cash 
proceeds FmHA or its successor agency under Public Law 103-354 is to 
receive as a result of the sale or by voucher and will be accomplished 
by one of the following:
    (a) For purchasers receiving FmHA or its successor agency under 
Public Law 103-354 credit and required to escrow, FmHA or its successor 
agency under Public Law 103-354's share of accrued taxes and assessment 
installments will be deposited in the purchaser's escrow account.
    (b) For purchasers not required to escrow, accrued taxes and 
assessment installments may be:
    (i) Paid to the local taxing authority if they will accept payment 
at that time; or
    (ii) Paid to the purchaser. If appropriate, for program purchasers, 
the funds can be deposited in a supervised bank account until the taxes 
can be paid.
    (c) Except for SFH, deducted from the sale price (which may result 
in a promissory note less than the sale price), if acceptable to the 
purchaser.

[56 FR 6953, Feb. 21, 1991]



Sec. 1955.136  Environmental Assessment (EA) and Environmental Impact Statement (EIS).

    (a) Prior to a final decision on some disposal actions, an 
environmental assessment must be made and when necessary, an 
enviornmental impact statement. Detailed guidance on when and how to 
prepare an EA or an EIS is found in Subpart G of Part 1940 of this 
Chapter. Assessments must be made for those proposed conveyances that 
meet one of the following criteria:
    (1) The conveyance is controversial for environmental reasons and/or 
is qualified within those categories described in Sec. 1955.137 of this 
subpart.
    (2) The FmHA or its successor agency under Public Law 103-354 
approval official has reason to believe that conveyance would result in 
a change in use of the real property. For example, farmland would be 
converted to a nonfarm use; or an industrial facility would be changed 
to a different industrial use that would produce increased gaseous, 
liquid or solid wastes over the former use or changes in the type or 
contents of such wastes. Assessments are not required for conveyance 
where the real property would be retained in its former use within the 
reasonably foreseeable future.
    (b) When an EA or EIS is prepared it shall address the requirements 
of Departmental Regulation 9500-3, ``Land Use Policy,'' in connection 
with the conversion to other uses of prime and unique farmlands, 
farmlands of statewide or local importance, prime forest and prime 
rangelands, the alteration of wetlands or flood plains, or the creation 
of nonfarm uses beyond the boundaries of existing settlements.



Sec. 1955.137  Real property located in special areas or having special 
characteristics.

    (a) Real property located in flood, mudslide hazard, wetland or 
Coastal Barrier Resources System (CBRS)-- (1) Use restrictions. 
Executive Order 11988, ``Floodplain Management,'' and Executive Order 
11990, ``Protection of Wetlands,'' require the conveyance instrument for 
inventory property containing floodplains or wetlands which is proposed 
for lease or sale to specify those uses that are restricted under 
identified Federal, State and local floodplains or wetlands regulations 
as well as other appropriate restrictions. The restrictions shall be to 
the uses of the property by the lessee or purchaser and any successors, 
except where prohibited by law. Applicable restrictions will be 
incorporated into quitclaim deeds in a format similar to that contained 
in Exhibits H and I of RD Instruction 1955-C (available in any

[[Page 232]]

Agency office). A listing of all restrictions will be included in the 
notices required in paragraph (a)(2) of this section.
    (2) Notice of hazards. Acquired real property located in an 
identified special flood or mudslide hazard area as defined in, subpart 
B of part 1806 of this chapter will not be sold for residential purposes 
unless determined by the county official or district director to be safe 
(that is, any hazard that exists would not likely endanger the safety of 
dwelling occupants).
    (3) Limitations placed on financial assistance. (i) Financial 
assistance is limited to property located in areas where flood insurance 
is available. Flood insurance must be provided at closing of loans on 
program-eligible and nonprogram (NP)-ineligible terms. Appraisals of 
property in flood or mudslide hazard areas will reflect this condition 
and any restrictions on use. Financial assistance for substantial 
improvement or repair of property located in a flood or mudslide hazard 
area is subject to the limitations outlined in, paragraph 3b (1) and (2) 
of Exhibit C of subpart G of part 1940.
    (ii) Pursuant to the requirements of the Coastal Barrier Resources 
Act (CBRA) and except as specified in paragraph (a)(3)(v) of this 
section, no credit sales will be provided for property located within a 
CBRS where:
    (A) It is known that the purchaser plans to further develop the 
property;
    (B) A subsequent loan or any other type of Federal financial 
assistance as defined by the CBRA has been requested for additional 
development of the property;
    (C) The sale is inconsistent with the purpose of the CBRA; or
    (D) The property to be sold was the subject of a previous financial 
transaction that violated the CBRA.
    (iii) For purposes of this section, additional development means the 
expansion, but not maintenance, replacement-in-kind, reconstruction, or 
repair of any roads, structures or facilities. Water and waste disposal 
facilities as well as community facilities may be repaired to the extent 
required to meet health and safety requirements, but may not be improved 
or expanded to serve new users, patients or residents.
    (iv) A sale which is not in conflict with the limitations in 
paragraph (a)(3)(ii) of this section shall not be completed until the 
approval official has consulted with the appropriate Regional Director 
of the U.S. Fish and Wildlife Service and the Regional Director concurs 
that the proposed sale does not violate the provisions of the CBRA.
    (v) Any proposed sale that does not conform to the requirements of 
paragraph (a)(3)(ii) of this section must be forwarded to the 
Administrator for review. Approval will not be granted unless the 
Administrator determines, through consultation with the Department of 
Interior, that the proposed sale does not violate the provisions of the 
CBRA.
    (b) Wetlands located on FSA inventory property. Perpetual wetland 
conservation easements (encumbrances in deeds) to protect and restore 
wetlands or converted wetlands that exist on suitable or surplus 
inventory property will be established prior to sale of such property. 
The provisions of paragraphs (a) (2) and (3) of this section also apply, 
as does paragraph (a)(1) of this section insofar as floodplains are 
concerned. This requirement applies to either cash or credit sales. 
Similar restrictions will be included in leases of inventory properties 
to beginning farmers or ranchers. Wetland conservation easements will be 
established as follows:
    (1) All wetlands or converted wetlands located on FSA inventory 
property which were not considered cropland on the date the property was 
acquired and were not used for farming at any time during the period 
beginning on the date 5 years before the property was acquired and 
ending on the date the property was acquired will receive a wetland 
conservation easement.
    (2) All wetlands or converted wetlands located on FSA inventory 
property that were considered cropland on the date the property was 
acquired or were used for farming at any time during the period 
beginning on the date 5 years before the property was acquired and 
ending on the date the property was acquired will not receive a wetland 
conservation easement.
    (3) The following steps should be taken in determining if 
conservation

[[Page 233]]

easements are necessary for the protection of wetlands or converted 
wetland on inventory property:
    (i) NRCS will be contacted first to identify the wetlands or 
converted wetlands and wetland boundaries of each wetland or converted 
wetland on inventory property.
    (ii) After receiving the wetland determination from NRCS, FSA will 
review the determination for each inventory property and determine if 
any of the wetlands or converted wetlands identified by NRCS were 
considered cropland on the date the property was acquired or were used 
for farming at any time during the period beginning on the date 5 years 
before the property was acquired and ending on the date the property was 
acquired. Property will be considered to have been used for farming if 
it was primarily used for agricultural purposes including but not 
limited to such uses as cropland, pasture, hayland, orchards, vineyards 
and tree farming.
    (iii) After FSA has completed the determination of whether the 
wetlands or converted wetlands located on an inventory property were 
used for cropland or farming, the U.S. Fish and Wildlife Service (FWS) 
will be contacted. Based on the technical considerations of the 
potential functions and values of the wetlands on the property, FWS will 
identify those wetlands or converted wetlands that require protection 
with a wetland conservation easement along with the boundaries of the 
required wetland conservation easement. FWS may also make other 
recommendations if needed for the protection of important resources such 
as threatened or endangered species during this review.
    (4) The wetland conservation easement will provide for access to 
other portions of the property as necessary for farming and other uses.
    (5) The appraisal of the property must be updated to reflect the 
value of the land due to the conservation easement on the property.
    (6) Easement areas shall be described in accordance with State or 
local laws. If State or local law does not require a survey, the 
easement area can be described by rectangular survey, plat map, or other 
recordable methods.
    (7) In most cases the FWS shall be responsible for easement 
management and administration responsibilities for such areas unless the 
wetland easement area is an inholding in Federal or State property and 
that entity agrees to assume such responsibility, or a State fish and 
wildlife agency having counterpart responsibilities to the FWS is 
willing to assume easement management and administration 
responsibilities. The costs associated with such easement management 
responsibilities shall be the responsibility of the agency that assumes 
easement management and administration.
    (8) County officials are encouraged to begin the easement process 
before the property is taken into inventory, if possible, in order to 
have the program completed before the statutory time requirement for 
sale.
    (c) Historic preservation. (1) Pursuant to the requirements of the 
National Historic Preservation Act and Executive Order 11593, 
``Protection and Enhancement of the Cultural Environment,'' the Agency 
official responsible for the conveyance must determine if the property 
is listed on or eligible for listing on the National Register of 
Historic Places. (See subpart F of part 1901 of this chapter for 
additional guidance.) The State Historic Preservation Officer (SHPO) 
must be consulted whenever one of the following criteria are met:
    (i) The property includes a structure that is more than 50 years 
old.
    (ii) Regardless of age, the property is known to be of historical or 
archaeological importance; has apparent significant architectural 
features; or is similar to other Agency properties that have been 
determined to be eligible.
    (iii) An environmental assessment is required prior to a decision on 
the conveyance.
    (2) If the result of the consultations with the SHPO is that a 
property may be eligible or that it is questionable, an official 
determination must be obtained from the Secretary of the Interior.
    (3) If a property is listed on the National Register or is 
determined eligible for listing by the Secretary of Interior, the Agency 
official responsible for the conveyance must consult with the

[[Page 234]]

SHPO in order to develop any necessary restrictions on the use of the 
property so that the future use will be compatible with preservation 
objectives and which does not result in an unreasonable economic burden 
to public or private interest. The Advisory Council on Historic 
Preservation must be consulted by the State Director or State Executive 
Director after the discussions with the SHPO are concluded regardless of 
whether or not an agreement is reached.
    (4) Any restrictions that are developed on the use of the property 
as a result of the above consultations must be made known to a potential 
bidder or purchaser through a notice procedure similar to that in 
Sec. 1955.13(a)(2) of this subpart.
    (d) Highly erodible farmland. (1) The FSA county official will 
determine if any inventory property contains highly erodible land as 
defined by the NRCS and, if so, what specific conservation practices 
will be made a condition of a sale of the property.
    (2) If the county official does not concur in the need for a 
conservation practice recommended by NRCS, any differences shall be 
discussed with the recommending NRCS office. Failure to reach an 
agreement at that level shall require the State Executive Director to 
make a final decision after consultation with the NRCS State 
Conservationist.
    (3) Whenever NRCS technical assistance is requested in implementing 
these requirements and NRCS responds that it cannot provide such 
assistance within a time frame compatible with the proposed sale, the 
sale arrangements will go forward. The sale will proceed, conditioned on 
the requirement that a purchaser will immediately contact (NRCS) have a 
conservation plan developed and comply with this plan. The county 
official will monitor the borrower's compliance with the recommendations 
in the conservation plan. If problems occur in obtaining NRCS 
assistance, the State Executive Director should consult with the NRCS 
State Conservationist.
    (e) Notification to purchasers of inventory property with reportable 
underground storage tanks. If the Agency is selling inventory property 
containing a storage tank which was reported to the Environmental 
Protection Agency (EPA) pursuant to the provisions of Sec. 1955.57 of 
subpart B of this part, the potential purchaser will be informed of the 
reporting requirement and provided a copy of the report filed by the 
Agency.
    (f) Real property that is unsafe. If the Agency has in inventory, 
real property, exclusive of any improvements, that is unsafe, that is it 
does not meet the definition of ``safe'' as contained in Sec. 1955.103 
of this subpart and which cannot be feasibly made safe, the State 
Director or State Executive Director will submit the case file, together 
with documentation of the hazard and a recommended course of action to 
the National Office, ATTN: appropriate Deputy Administrator, for review 
and guidance.
    (g) Real property containing hazardous waste contamination. All 
inventory property must be inspected for hazardous waste contamination 
either through the use of a preliminary hazardous waste site survey or 
Transaction Screen Questionnaire. If possible contamination is noted, a 
Phase I or II environmental assessment will be completed per the advice 
of the State Environmental Coordinator.

[62 FR 44401, Aug. 21, 1997, as amended at 68 FR 7700, Feb. 18, 2003]



Sec. 1955.138  Property subject to redemption rights.

    If, under State law, FmHA or its successor agency under Public Law 
103-354's interest may be sold subject to redemption rights, the 
property may be sold provided there is no apparent likelihood of its 
being redeemed.
    (a) A credit sale of a program or suitable property subject to 
redemption rights may be made to a program applicant when the property 
meets the standards for the respective loan program. In areas where 
State law does not provide for full recovery of the cost of repairs 
during the redemption period, a program sale is generally precluded 
unless the property already meets program standards.
    (b) Each purchaser will sign a statement acknowledging that:
    (1) The property is subject to redemption rights according to State 
law, and

[[Page 235]]

    (2) If the property is redeemed, ownership and possession of the 
property would revert to the previous owner and likely result in loss of 
any additional investment in the property not recoverable under the 
State's provisions of redemption.
    (c) The signed original statement will be filed in the purchaser's 
County or District Office case file.
    (d) If real estate brokers or auctioneers are engaged to sell the 
property, the County Supervisor or District Director will inform them of 
the redemption rights of the borrower and the conditions under which the 
property may be sold.
    (e) The State Director, with prior approval of OGC, will issue a 
State supplement incorporating the requirements of this section and 
providing additional guidance appropriate for the State.

[50 FR 23904, June 7, 1985, as amended at 53 FR 27837, July 25, 1988]



Sec. 1955.139  Disposition of real property rights and title to real property.

    (a) Easements, rights-of-way, development rights, restrictions or 
the equivalent thereof. The State Director is authorized to convey these 
rights for conservation purposes, roads, utilities, and other purposes 
as follows:
    (1) Except as provided in paragraph (a)(3) of this section, 
easements or rights-of-way may be conveyed to public bodies or utilities 
if the conveyance is in the public interest and will not adversely 
affect the value of the real estate. The consideration must be adequate 
for the inventory property being released or for a purpose which will 
enhance the value of the real estate. If there is to be an assessment as 
a result of the conveyance, relative values must be considered, 
including any appropriate adjustment to the property's market value, and 
adequate consideration must be received for any reduction in value.
    (2) Except as provided in paragraph (a)(3) of this section easements 
or rights-of-way may be sold by negotiation for market value to any 
purchaser for cash without giving public notice if the conveyance would 
not change the classification from program/suitable to NP or surplus, 
nor decrease the value by more than the price received.
    (3) For FSA properties only, easements, restrictions, development 
rights or similar legal rights may be granted or sold separately from 
the underlying fee or sum of all other rights possessed by the 
Government if such conveyances are for conservation purposes and are 
transferred to a State, a political subdivision of a State, or a private 
nonprofit organization. Easements may be granted or sold to a Federal 
agency for conservation purposes as long as the requirements of 
Sec. 1955.139(c)(2) of this subpart are followed. If FSA has an 
affirmative responsibility such as protecting an endangered species as 
provided for in paragraph (a)(3(v) of this section, the requirements in 
Sec. 1955.139(c) of this subpart do not apply.
    (i) Conservation purposes include but are not limited to protecting 
or conserving the following environmental resources or land uses:
    (A) Fish and wildlife habitats of local, regional, State, or Federal 
importance,
    (B) Floodplain and wetland areas as defined in Executive Orders 
11988 and 11990,
    (C) Highly erodible land as defined by SCS,
    (D) Important farmland, prime forest land, or prime rangeland as 
defined in Departmental Regulation 9500-3, Land Use Policy,
    (E) Aquifer recharge areas of local, regional or State importance,
    (F) Areas of high water quality or scenic value, and
    (G) Historic and cultural properties.
    (ii) Development rights may be sold for conservation purposes for 
their market value directly to a unit of local or State governmental or 
a private nonprofit organization by negotiation.
    (iii) An easement, restriction or the equivalent thereof may be 
granted or sold for less than market value to a unit of local, State, 
Federal government or a private nonprofit organization for conservation 
purposes. If such a conveyance will adversely affect the FmHA or its 
successor agency under Public Law 103-354 financial interest, the State 
Director will submit the proposal to the Administrator for approval

[[Page 236]]

unless the State Director has been delegated approval authority in 
writing from the Administrator to approve such transactions based upon 
demonstrated capability and experience in processing such conveyances. 
Factors to be addressed in formulating such a request include the 
intended conservation purpose(s) and the environmental importance of the 
affected property, the impact to the Government's financial interest, 
the financial resources of the potential purchaser or grantee and its 
normal method of acquiring similar property rights, the likely impact to 
environment should the property interest not be sold or granted and any 
other relevant factors or concerns prompting the State Director's 
request.
    (iv) Property interests under this paragraph may be conveyed by 
negotiation with any eligible recipient without giving public notice if 
the conveyance would not change program/suitable property to NP or 
surplus. Conveyances shall include terms and conditions which clearly 
specify the property interest(s) being conveyed as well as all 
appropriate restrictions and allowable uses. The conveyances shall also 
require the owner of such interest to permit the FmHA or its successor 
agency under Public Law 103-354, and any person or government entity 
designated by the FmHA or its successor agency under Public Law 103-354, 
to have access to the affected property for the purpose of monitoring 
compliance with terms and conditions of the conveyance. To the maximum 
extent possible, the conveyance should designate an organization or 
government entity for monitoring purposes. In developing the conveyance, 
the approval official shall consult with any State or Federal agency 
having special expertise regarding the environmental resource(s) or land 
uses to be protected.
    (v) For FP cases except when FmHA or its successor agency under 
Public Law 103-354 has an affirmative responsibility to place a 
conservation easement upon a farm property, easements under the 
authority of this paragraph will not be established unless either the 
rights of all prior owner(s) have been met or the prior owner(s) 
consents to the easement. Examples of instances where an affirmative 
responsibility exists to place an easement on a farm property include 
wetland and floodplain conservation easements required by Sec. 1955.137 
of this subpart or easements designed as environmental mitigation 
measures and required in the implementation of Subpart G of Part 1940 of 
this chapter for the purpose of protecting federally designated 
important environmental resources. These resources include: Listed or 
proposed endangered or threatened species, listed or proposed critical 
habitats, designated or proposed wilderness areas, designated or 
proposed wild or scenic rivers, historic or archaeological sites listed 
or eligible for listing on the National Register of Historic Places, 
coastal barriers included in Coastal Barrier Resource Systems, natural 
landmarks listed on national Registry of Natural Landmarks, and sole 
source aquifer recharge as designated by the Environmental Protection 
Agency.
    (vi) For FP cases whenever a request is made for an easement under 
the authority of this paragraph and such request overlaps an area upon 
which FmHA or its successor agency under Public Law 103-354 has an 
affirmative responsibility to place an easement, that required portion 
of the easement, either in terms of geographical extent or content, will 
not be considered to adversely impact the value of the farm property.
    (4) A copy of the conveyance instrument will be retained in the 
County or District Office inventory file. The grantee is responsible for 
recording the instrument.
    (b) Mineral and water rights, mineral lease interests, air rights, 
and agricultural or other leases. (1) Mineral and water rights, mineral 
lease interests, mineral royalty interests, air rights, and agricultural 
and other lease interests will be sold with the surface land and will 
not be sold separately, except as provided in paragrah (a) of this 
section and in Sec. 1955.66(a)(2)(iii) of Subpart B of Part 1955 of 
this chapter. If the land is to be sold in separate parcels, any rights 
or interests that apply to each parcel will be included with the sale.
    (2) Lease or royalty interests not passing by deed will be assigned 
to the purchaser when property is sold. The

[[Page 237]]

County Supervisor or District Director, as applicable, will notify the 
lessee or payor of the assignment. A copy of this notice will be 
furnished to the purchaser.
    (3) The value of such rights, interests or leases will be considered 
when the property is appraised.
    (c) Transfer of FSA inventory property for conservation purposes. 
(1) In accordance with the provisions of this paragraph, FSA may 
transfer, to a Federal or State agency for conservation purposes (as 
defined in paragraph (a)(3)(i) of this section), inventory property, or 
an interest therein, meeting any one of the following three criteria and 
subject only to the homestead protection rights of all previous owners 
having been met.
    (i) A predominance of the land being transferred has marginal value 
for agricultural production. This is land that NRCS has determined to be 
either highly erodible or generally not used for cultivation, such as 
soils in classes IV, V, VII or VIII of NRCS's Land Capability 
Classification, or
    (ii) A predominance of land is environmentally sensitive. This is 
land that meets any of the following criteria:
    (A) Wetlands, as defined in Executive Order 11990 and USDA 
Regulation 9500.
    (B) Riparian zones and floodplains as they pertain to Executive 
Order 11988.
    (C) Coastal barriers and zones as they pertain to the Coastal 
Barrier Resources Act or Coastal Zone Management Act.
    (D) Areas supporting endangered and threatened wildlife and plants 
(including proposed and candidate species), critical habitat, or 
potential habitat for recovery pertaining to the Endangered Species Act.
    (E) Fish and wildlife habitats of local, regional, State or Federal 
importance on lands that provide or have the potential to provide 
habitat value to species of Federal trust responsibility (e.g., 
Migratory Bird Treaty Act, Anadromous Fish Conservation Act).
    (F) Aquifer recharges areas of local, regional, State or Federal 
importance.
    (G) Areas of high water quality or scenic value.
    (H) Areas containing historic or cultural property; or
    (iii) A predominance of land with special management importance. 
This is land that meets the following criteria:
    (A) Lands that are in holdings, lie adjacent to, or occur in 
proximity to, Federally or State-owned lands or interest in lands.
    (B) Lands that would contribute to the regulation of ingress or 
egress of persons or equipment to existing Federally or State-owned 
conservation lands.
    (C) Lands that would provide a necessary buffer to development if 
such development would adversely affect the existing Federally or State-
owned lands.
    (D) Lands that would contribute to boundary identification and 
control of existing conservation lands.
    (2) When a State or Federal agency requests title to inventory 
property, the State Executive Director will make a preliminary 
determination as to whether the property can be transferred.
    (3) If a decision is made by the State Executive Director to deny a 
transfer request by a Federal or State agency, the requesting agency 
will be informed of the decision in writing and informed that they may 
request a review of the decision by the FSA Administrator.
    (4) When a State or Federal agency requests title to inventory 
property and the State Executive Director determines that the property 
is suited for transfer, the following actions must be taken prior to 
approval of the transfer:
    (i) At least two public notices must be provided. These notices will 
be published in a newspaper with a wide circulation in the area in which 
the requested property is located. The notice will provide information 
on the proposed use of the property by the requesting agency and request 
any comments concerning the negative or positive aspects of the request. 
A 30-day comment period should be established for the receipt of 
comments.
    (ii) If requested, at least one public meeting must be held to 
discuss the request. A representative of the requesting agency should be 
present at the meeting in order to answer questions concerning the 
proposed conservation use of the property. The date and time

[[Page 238]]

for a public meeting should be advertised.
    (iii) Written notice must be provided to the Governor of the State 
in which the property is located as well as at least one elected 
official of the county in which the property is located. The 
notification should provide information on the request and solicit any 
comments regarding the proposed transfer. All procedural requirements in 
paragraph (c) (3) of this section must be completed in 75 days.
    (5) Determining priorities for transfer or inventory lands.
    (i) A Federal entity will be selected over a State entity.
    (ii) If two Federal agencies request the same land tract, priority 
will be given to the Federal agency that owns or controls property 
adjacent to the property in question or if this is not the case, to the 
Federal agency whose mission or expertise best matches the conservation 
purposes for which the transfer would be established.
    (iii) In selecting between State agencies, priority will be given to 
the State agency that owns or controls property adjacent to the property 
in question or if that is not the case, to the State agency whose 
mission or expertise best matches the conservation purpose(s) for which 
the transfer would be established.
    (6) In cases where land transfer is requested for conservation 
purposes that would contribute directly to the furtherance of 
International Treaties or Plans (e.g., Migratory Bird Treaty Act or 
North American Waterfowl Management Plan), to the recovery of a listed 
endangered species, or to a habitat of National importance (e.g., 
wetlands as addressed in the Emergency Wetlands Resources Act), priority 
consideration will be given to land transfer for conservation purposes, 
without reimbursement, over other land disposal alternatives.
    (7) An individual property may be subdivided into parcels and a 
parcel can be transferred under the requirements of this paragraph as 
long as the remaining parcels to be sold make up a viable sales unit, 
suitable or surplus.

[50 FR 23904, June 7, 1985, as amended at 51 FR 13479, Apr. 21, 1986; 53 
FR 27838, July 25, 1988; 53 FR 35781, Sept. 14, 1988; 57 FR 36592, Aug. 
14, 1992; 62 FR 44403, Aug. 21, 1997; 68 FR 61332, Oct. 28, 2003]



Sec. 1955.140  Sale in parcels.

    (a) Individual property subdivided. An individual property, other 
than Farm Credit Programs property, may be offered for sale as a whole 
or subdivided into parcels as determined by the State Director. For MFH 
property, guidance will be requested from the National Office for all 
properties other than RHS projects. When farm inventory property is 
larger than a family-size farm, the county official will subdivide the 
property into one or more tracts to be sold in accordance with 
Sec. 1955.107 of this subpart. Division of the land or separate sales of 
portions of the property, such as timber, growing crops, inventory for 
small business enterprises, buildings, facilities, and similar items may 
be permitted if a better total price for the property can be obtained in 
this manner. Environmental effects should also be considered pursuant to 
subpart G of part 1940 of this chapter. Any applicable State laws will 
be set forth in a State supplement and will be complied with in 
connection with the division of land. Subdivision of acquired property 
will be reported on Form RD 1955-3C, ``Acquired Property--Subdivision,'' 
in accordance with the FMI.
    (b) Grouping of individual properties. The county official for FCP 
cases, and the State Director for all other cases, may authorize the 
combining of two or more individual properties into a single parcel for 
sale as a suitable program property.

[62 FR 44403, Aug. 21, 1997]



Sec. 1955.141  Transferring title.

    (a)-(c) [Reserved]
    (d) Rent increases for MFH property. After approval of a credit sale 
for an occupied MFH project, but prior to closing, the purchaser will 
prepare a realistic budget for project operation (and a utility 
allowance, if applicable)

[[Page 239]]

to determine if a rent increase may be needed to continue or place 
project operations on a sound basis. Exhibit C of Subpart C of Part 1930 
of this chapter will be followed in processing the request for a rent 
increase. In processing the rent increase, the purchaser will have the 
same status as a borrower. An approved rent increase will be effective 
on or after the date of closing.
    (e) Interest credit and rental assistance for MFH property. Interest 
credit and rental assistance may be granted to program applicants 
purchasing MFH properties in accordance with the provisions of Exhibit E 
of subpart C of part 1930 of this chapter.

[53 FR 27838, July 25, 1988, as amended at 56 FR 2257, Jan. 22, 1991; 57 
FR 36592, Aug. 14, 1992; 60 FR 34455, July 3, 1995]



Sec. Sec. 1955.142-1955.143  [Reserved]



Sec. 1955.144  Disposal of NP or surplus property to, through, or 
acquisition from other agencies.

    (a) Property which cannot be sold. If NP or surplus real or chattel 
property cannot be sold (or only token offers are received for it), the 
appropriate Assistant Administrator shall give consideration to 
disposing of the property to other Federal Agencies or State or local 
governmental entities through the General Services Administration (GSA). 
Chattel property will be reported to GSA using Standard Form 120, 
``Report of Excess Personal Property,'' with transfer documented by 
Standard Form 122, ``Transfer Order Excess Personal Property.'' Real 
property will be reported to GSA using Standard Form 118, ``Report of 
Excess Real Property,'' Standard Form 118A, ``Buildings, Structures, 
Utilities and Miscellaneous Facilities (Schedule A),'' Standard Form 
118B, ``Land (Schedule B)'' and Standard Form 118C, ``Related Personal 
Property (Schedule B), '' with final disposition documented by a 
``Receiving Report,'' executed by the recipient with original forwarded 
to the Finance Office and a copy retained in the inventory file. Forms 
and preparation instructions will be obtained from the appropriate GSA 
Regional Office by the State Office.
    (b) Urban Homesteading Program (UH). Section 810 of the Housing and 
Community Development Act of 1979, as amended, authorizes the Secretary 
of Housing and Urban Development (HUD) to pay for acquired FmHA or its 
successor agency under Public Law 103-354 single family residential 
properties sold through the HUD-UH Program. Local governmental units may 
make application through HUD to participate in the UH Program. State 
Directors will be notified by the Assistant Administrator for Housing, 
when local governmental units in their States have obtained funding for 
the UH Program. The notification will provide specific guidance in 
accordance with the ``Memorandum of Agreement between the Farmers Home 
Administration or its successor agency under Public Law 103-354 and the 
Secretary of Housing and Urban Development'' dated October 2, 1981. (See 
Exhibit C of this subpart.) A Local Urban Homesteading Agency (LUHA) is 
authorized a 10 percent discount of the listed price on any SFH 
nonprogram property for the UH Program. No discount is authorized on 
program property.

[50 FR 23904, June 7, 1985, as amended at 53 FR 27839, July 25, 1988; 55 
FR 3943, Feb. 6, 1990]

    Editorial Note: At 60 FR 34455, July 3, 1995, Sec. 1955.144 was 
amended by removing the second through the fourth sentences. However, 
there are no undesignated paragraphs in the 1995 edition of this volume.



Sec. 1955.145  Land acquisition to effect sale.

    The State Director is authorized to acquire land which is necessary 
to effect sale of inventory real property. This action must be 
considered only on a case-by-case basis and may not be undertaken 
primarily to increase the financial return to the Government through 
speculation. The State Director's authority under this section may not 
be redelegated. For MFH and other organization-type loans, prior 
approval must be obtained from the appropriate Assistant Administrator 
prior to land acquisition.
    (a) Alternate site. Where real property has been determined to be NP 
due to location and where it is economically feasible to relocate the 
structure thereby making it a program property, the State Director may 
authorize the

[[Page 240]]

acquisition of a suitable parcel of land to relocate the structure if 
economically feasible. The remaining NP parcel of land will be sold for 
its market value.
    (b) Additional land. Where real property has been determined NP for 
reasons that may be cured by the acquisition of adjacent land or an 
alternate site, in order to cure title defects or encroachments or where 
structures have been built on the wrong land and where it is 
economically feasible, the State Director may authorize the acquisition 
of additional land at a price not in excess of its market value.
    (c) Easements or rights-of-way. The State Director may authorize the 
acquisition of easements, rights-of-way or other interests in land to 
cure title defects, encroachments or in order to make NP property a 
program property, if economically feasible.

[53 FR 27839, July 25, 1988]



Sec. 1955.146  Advertising.

    (a) General. When property is being sold by FmHA or its successor 
agency under Public Law 103-354 or through real estate brokers, it is 
the servicing official's responsibility to ensure adequate advertising 
of property to achieve a timely sale. The primary means of 
advertisements are newspaper advertisements in accordance with FmHA or 
its successor agency under Public Law 103-354 Instruction 2024-F 
(available in any FmHA or its successor agency under Public Law 103-354 
office), public notice using Form FmHA or its successor agency under 
Public Law 103-354 1955-41, ``Notice of Sale,'' and notification of 
known interested parties. Other innovative means are encouraged, such as 
the use of a bulletin board to display photographs of inventory 
properties for sale with a brief synopsis of the property attached; 
posting Forms FmHA or its successor agency under Public Law 103-354 
1955-40 or FmHA or its successor agency under Public Law 103-354 1955-
43, as appropriate, in the reception area to attract applicant and 
broker interest; posting notices of sale at employment centers; door-to-
door distribution of sales notices at apartment complexes; radio and/or 
television spots; group meetings with potential applicants/investors/
real estate brokers; and advertisements in magazines and other 
periodicals. If FmHA or its successor agency under Public Law 103-354 
personnel are not available to perform these services, FmHA or its 
successor agency under Public Law 103-354 may contract for such services 
in accordance with FmHA or its successor agency under Public Law 103-354 
Instruction 2024-A (available in any FmHA or its successor agency under 
Public Law 103-354 office).
    (b) Large-value and complex properties. Advertising for MFH, B&I and 
other large-value or complex properties should also be placed in 
appropriate newspapers and publications designed to reach the type of 
particular purchasers most likely to be interested in the inventory 
property. The State Director will assist the District Director in 
determining the scope of advertising necessary to adequately market 
these properties. Advertising for MFH and other complex properties must 
also include appropriate language stressing the need to obtain and 
submit complete application materials for the type program involved.
    (c) MFH restrictive-use provisions. Advertisements for multi-family 
housing projects will advise prospective purchasers of any restrictive-
use requirements that will be attached to the project and added to the 
title of the property.
    (d) Racial and socio-economic considerations. In accordance with the 
policies set forth in Sec. 1901.203(c) of subpart E of part 1901 of 
this chapter, the approval official will make a special effort to insure 
that those prospective purchasers in the marketing area who 
traditionally would not be expected to apply for housing assistance 
because of existing racial or socio-economic patterns are reached.
    (e) Rejected application for SFH loan. If an application for a SFH 
loan is being rejected because income is too high, a statement should be 
included in the rejection letter that inventory properties may be 
available for which they may apply.

[50 FR 23904, June 7, 1985, as amended at 53 FR 27839, July 25, 1988; 58 
FR 38928, July 21, 1993]

[[Page 241]]



Sec. 1955.147  Sealed bid sales.

    This section provides guidance on the sale of all FmHA or its 
successor agency under Public Law 103-354 inventory property, except 
suitable FP real property which will not be sold by sealed bid. Before a 
sealed bid sale, the State Director will determine and document the 
minimum sale price acceptable. In determining a minimum sale price, the 
State Director will consider the length of time the property has been in 
inventory, previous marketing efforts, the type property involved, and 
potential purchasers. Program financing will be offered on sales of 
program and suitable property. For NP or surplus property, credit may be 
extended to facilitate the sale. When a group of properties is to be 
sold at one time, advertising may indicate that FmHA or its successor 
agency under Public Law 103-354 will consider bids on an individual 
property or a group of properties and FmHA or its successor agency under 
Public Law 103-354 will accept the bid or bids which are in the best 
financial interest of the Government. Credit, however, may not exceed 
the market value of the property nor may the term exceed the period for 
which the property will serve as adequate security. Sealed bids will be 
made on Form FmHA or its successor agency under Public Law 103-354 1955-
46 with any accompanying deposit in the form ofcashier's check, 
certified check, postal or bank money order or bank draft payable to 
FmHA or its successor agency under Public Law 103-354. For program and 
suitable property, the minimum deposit will be the same as outlined in 
Sec. 1955.130(e)(1) of this subpart. For NP or surplus property, the 
minimum deposit will be ten percent (10%). The bid will be considered 
delivered when actually received at the FmHA or its successor agency 
under Public Law 103-354 office. All bids will be date and time stamped. 
Advertisements and notices will request bidders to submit their bid in a 
sealed envelope marked as follows:

SEALED BID OFFER ----------*----------.'' (*Insert ``PROPERTY 
IDENTIFICATION NUMBER ----------).

    (a) Opening bids. Sealed bids will be held in a secured file before 
bid opening which will be at the place and time specified in the notice. 
The bid opening will be public and usually held at the FmHA or its 
successor agency under Public Law 103-354 office. The County Supervisor, 
District Director, or State Director or his/her designee will open the 
bids with at least one other FmHA or its successor agency under Public 
Law 103-354 employee present. Each bid received will be tabulated 
showing the name and address of the bidder, the amount of the bid, the 
amount and form of the deposit, and any conditions of the bid. The 
tabulation will be signed by the County Supervisor, District Director or 
State Director or his/her designee and retained in the inventory file.
    (b) Successful bids. The highest complying bid meeting the minimum 
established price will be accepted by the approval official; however, it 
will be subject to loan approval by the appropriate official when a 
credit sale is involved. For SFH and FP (surplus property) sales, 
preference will be given to a cash offer on NP or surplus property sales 
which is at least ----*---- percent of the highest offer requiring 
credit [*Refer to Exhibit B of FmHA or its successor agency under Public 
Law 103-354 Instruction 440.1 (available in any FmHA or its successor 
agency under Public Law 103-354 office) for the current percentage.] 
Otherwise, equal bids will be accepted by public lot drawing. For 
program or suitable property sales, no preference will be given to 
program purchasers unless two identical high bids are received, in which 
case the bid from the program purchaser will receive preference. If a 
bid is received from any purchaser with a request for credit that 
(considering any deposit) exceeds the market value of the property or 
requests a term which exceeds the period for which the property will 
serve as adequate security, the bidder will be given the opportunity to 
reduce the credit request and/or term with no accompanying change in the 
offered price.
    (c) Unsuccessful bids. Deposits of unsuccessful bidders will be 
returned by certified mail with letter of explanation, return receipt 
requested. If

[[Page 242]]

there were no acceptable bids, the letter will advise each bidder of any 
anticipated negotiations for the sale of the property and deposits will 
be returned.
    (d) Disqualified bids. Any bid that does not comply with the terms 
of the offer will be disqualified. Minor deviations and defects in bid 
submission may be waived by the FmHA or its successor agency under 
Public Law 103-354 official approving the sale.
    (e) Failure to close. If a successful bidder fails to perform under 
the terms of the offer, the bid deposit will be retained as full 
liquidated damages. However, if a credit sale complying with the FmHA or 
its successor agency under Public Law 103-354 notice is an element of 
the offer and FmHA or its successor agency under Public Law 103-354 
disapproves the credit application, then the bid deposit will be 
returned to the otherwise successful bidder. Upon determination that the 
successful bidder will not close, the State Director may authorize 
either another sealed bid or auction sale of direct negotiations with 
the next highest bidder, all available unsuccessful bidders, or other 
interested parties.
    (f) No acceptable bid. Where no acceptable bid is received although 
adequate competition is evident, the State Director may authorize a 
negotiated sale in accordance with Sec. 1955.108(d) of this subpart.

[50 FR 23904, June 7, 1985, as amended at 53 FR 27839, July 25, 1988; 54 
FR 6875, Feb. 15, 1989; 55 FR 3943, Feb. 6, 1990; 68 FR 61332, Oct. 28, 
2003]



Sec. 1955.148  Auction sales.

    This section provides guidance on the sale of all inventory property 
by auction, except FSA real property. Before an auction, the State 
Director, with the advice of the National Office for organizational 
property, will determine and document the minimum sale price acceptable. 
In determining a minimum sale price, the State Director will consider 
the length of time the property has been in inventory, previous 
marketing efforts, the type property involved, and potential purchasers. 
Program financing will be offered on sales of program and property. For 
NP property, credit may be offered to facilitate the sale. Credit, 
however, may not exceed the market value of the property nor may the 
term exceed the period for which the property will serve as adequate 
security. For program property sales, no preference will be given to 
program purchasers. The State Director will also consider whether an 
Agency employee will conduct an auction or whether the services of a 
professional auctioneer are necessary due to the complexity of the sale. 
When the services of a professional auctioneer are advisable, the 
services will be procured by contract in accordance with RD Instruction 
2024-A (available in any Agency Office). Chattel property may be sold at 
public auction that is widely advertised and held on a regularly 
scheduled basis without solicitation. Form RD 1955-46 will be used for 
auction sales. At the auction, successful bidders will be required to 
make a bid deposit. For program and suitable property, the bid deposit 
will be the same as outlined in Sec. 1955.130(e)(1) of this subpart. For 
NP property sales, a bid deposit of 10 percent is required. Deposits 
will be in the form of cashier's check, certified check, postal or bank 
money order or bank draft payable to the Agency, cash or personal checks 
may be accepted when deemed necessary for a successful auction by the 
person conducting the auction. Where credit sales are authorized, all 
notices and publicity should provide for a method of prior approval of 
credit and the credit limit for potential purchasers. This may include 
submission of letters of credit or financial statements prior to the 
auction. The auctioneer should not accept a bid which requests credit in 
excess of the market value. When the highest bid is lower than the 
minimum amount acceptable to the Agency, negotiations should be 
conducted with the highest bidder or in turn, the next highest bidder or 
other persons to obtain an executed bid at the predetermined minimum.

[62 FR 44404, Aug. 21, 1997, as amended at 68 FR 61332, Oct. 28, 2003]



Sec. 1955.149  Exception authority.

    (a) The Administrator may, in individual cases, make an exception to 
any requirement or provision of this subpart or address any omission of 
this

[[Page 243]]

subpart which is not inconsistent with the authorizing statute or other 
applicable law if the Administrator determines that the Government's 
interest would be adversely affected or the immediate health and/or 
safety of tenants or the community are endangered if there is no adverse 
effect on the Government's interest. The Administrator will exercise 
this authority upon request of the State Director with recommendation of 
the appropriate program Assistant Administrator or upon request 
initiated by the appropriate program Assistant Administrator. Requests 
for exceptions must be made in writing and supported with documentation 
to explain the adverse effect, propose alternative courses of action, 
and show how the adverse effect will be eliminated or minimized if the 
exception is granted.
    (b) The Administrator may authorize withholding sale of surplus farm 
inventory property temporarily upon making a determination that sales 
would likely depress real estate market and preclude obtaining at that 
time the best price for such land.



Sec. 1955.150  State supplements.

    State Supplements will be prepared with the assistance of OGC as 
necessary to comply with State laws or only as specifically authorized 
in this Instruction to provide guidance to FmHA or its successor agency 
under Public Law 103-354 officials. State Supplements applicable to MFH, 
B&I, and CP must have prior approval of the National Office. Request for 
approval for those affecting MFH must include complete justification, 
citations of State law, and an opinion from OGC.

Exhibit A to Subpart C of Part 1955--Notice of Flood, Mudslide Hazard or 
                              Wetland Area

TO:--------
DATE:--------
    This is to notify you that the real property located at ------------ 
is in a floodplain, wetland or area identified by the Federal Insurance 
Administration of the Federal Emergency Management Agency as having 
special flood or mudslide hazards. This identification means that the 
area has at least one percent chance of being flooded or affected by 
mudslide in any given year. For floodplains and wetlands on the 
property, restrictions are being imposed. Specific designation(s) of 
this property is(are) (special flood) (mudslide hazard) (wetland)*. The 
following restriction(s) on the use of the property will be included in 
the conveyance and shall apply to the purchasers, purchaser's heirs, 
assigns and successors and shall be construed as both a covenant running 
with the property and as equitable servitude subject to release by the 
Farmers Home Administration or its successor agency under Public Law 
103-354 (FmHA or its successor agency under Public Law 103-354) when/if 
no longer applicable:

(INSERT RESTRICTIONS)

    The FmHA or its successor agency under Public Law 103-354 will 
increase the number of acres placed under easement, if requested in 
writing, provided that the request is supported by a technical 
recommendation of the U.S. Fish and Wildlife Service. Where additional 
acreage is accepted by FmHA or its successor agency under Public Law 
103-354 for conservation easement, the purchase price of the inventory 
farm will be adjusted accordingly.
________________________________________________________________________
(County Supervisor, District Director or Real Estate Broker)
ACKNOWLEDGEMENT--------
DATE:--------
    I hereby acknowledge receipt of the notice that the above stated 
real property is in a (special flood) (mudslide hazard) (wetland) * area 
and is subject to use restrictions as above cited. [Also, if I purchase 
the property through a credit sale, I agree to insure the property 
against loss from (floods) (mudslide) * in accordance with requirements 
of the FmHA or its successor agency under Public Law 103-354.]
________________________________________________________________________
(Prospective Purchaser)

* Delete the hazard that does not apply.

[57 FR 31644, July 17, 1992]



PART 1956_DEBT SETTLEMENT--Table of Contents




Subpart A [Reserved]

  Subpart B_Debt Settlement_Farm Loan Programs and Multi-Family Housing

Sec.
1956.51 Purpose.
1956.52-1956.53 [Reserved]
1956.54 Definitions.
1956.55-1956.56 [Reserved]
1956.57 General provisions.
1956.58-1956.65 [Reserved]
1956.66 Compromise and adjustment of nonjudgment debts.
1956.67 Debts which the debtor is able to pay in full but refuses to do 
          so.

[[Page 244]]

1956.68 Compromise or adjustment without debtor's signature.
1956.69 [Reserved]
1956.70 Cancellation.
1956.71 Settling uncollectible recapture receivables.
1956.72-1956.74 [Reserved]
1956.75 Chargeoff.
1956.76-1956.83 [Reserved]
1956.84 Approval or rejection.
1956.85 Payments and receipts.
1956.86-1956.95 [Reserved]
1956.96 Delinquent adjustment agreements.
1956.97 Disposition of promissory notes.
1956.98 [Reserved]
1956.99 Exception authority.
1956.100 OMB control number.

        Subpart C_Debt Settlement_Community and Business Programs

1956.101 Purposes.
1956.102 Application of policies.
1956.103-1956.104 [Reserved]
1956.105 Definitions.
1956.106-1956.108 [Reserved]
1956.109 General requirements for debt settlement.
1956.110 Joint debtors.
1956.111 Debtors in bankruptcy.
1956.112 Debts ineligible for settlement.
1956.113-1956.117 [Reserved]
1956.118 Approval authority.
1956.119-1956.123 [Reserved]
1956.124 Compromise and adjustment.
1956.125-1956.129 [Reserved]
1956.130 Cancellation.
1956.131-1956.135 [Reserved]
1956.136 Chargeoff.
1956.137 [Reserved]
1956.138 Processing.
1956.139 Collections.
1956.140-1956.141 [Reserved]
1956.142 Delinquent adjustment agreements.
1956.143 Debt restructuring--hospitals and health care facilities.
1956.144 [Reserved]
1956.145 Disposition of essential FmHA or its successor agency under 
          Public Law 103-354 records.
1956.146 [Reserved]
1956.147 Debt settlement under the Federal Claims Collection Act.
1956.148 Exception authority.
1956.149 [Reserved]
1956.150 OMB control number.

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 31 U.S.C. 3711; 42 U.S.C. 
1480.

    Source: 51 FR 45434, Dec. 18, 1986, unless otherwise noted.

Subpart A [Reserved]



  Subpart B_Debt Settlement_Farm Loan Programs and Multi-Family Housing

    Source: 56 FR 10147, Mar. 11, 1991, unless otherwise noted.



Sec. 1956.51  Purpose.

    This subpart delegates authority and prescribes policy and 
procedures for settlement of debts owed to the United States under the 
Farm Credit loan programs of the Farm Service Agency (FSA) and the 
Multi-Family Housing (MFH) program of the Rural Housing Service (RHS). 
It also applies to Nonprogram (NP) loans secured by MFH property of the 
RHS. Settlement of claims against recipients of grant funds for reasons 
such as the use of funds for improper purposes is also covered by this 
subpart. Settlement of claims against third party converters, and 
Economic Opportunity (EO) loans is authorized under the Federal Claims 
Collection Standards, 4 CFR parts 101-105. This subpart does not apply 
to RHS direct Single Family Housing (SFH) loans or RHS NP loans secured 
by SFH property.

[61 FR 59779, Nov. 22, 1996]



Sec. Sec. 1956.52-1956.53  [Reserved]



Sec. 1956.54  Definitions.

    Adjustment. The reduction of a debt or claim conditioned upon 
completion of payment of the adjusted amount at a specific future time 
or times, with or without the payment of any consideration when the 
adjustment offer is approved. An adjustment is not a final settlement 
until all payments under the adjustment agreement(s) have been made.
    Amount of debt. The outstanding balance of the amount loaned 
including principal and interest plus any outstanding advances, 
including interest, and subsidy to be recaptured made by the Government 
on behalf of the borrower.
    Cancellation. The final discharge of a debt without any payment on 
it.
    Chargeoff. The writing off of a debt and termination of collection 
activity without release of personal liability.

[[Page 245]]

    Compromise. The satisfaction of a debt or claim by the acceptance of 
a lump-sum payment of less than the total amount owed on the debt or 
claim.
    Debt forgiveness. For the purposes of servicing Farm Loan Programs 
loans, debt forgiveness is defined as a reduction or termination of a 
direct FLP loan in a manner that results in a loss to the Government. 
Included, but not limited to, are losses from a writedown or writeoff 
under subpart S of part 1951 of this chapter, debt settlement, after 
discharge under the provisions of the bankruptcy code, and associated 
with release of liability. Debt cancellation through conservation 
easements or contracts is not considered debt forgiveness for loan 
servicing purposes.
    Debtor. The borrower of funds under any of the FmHA or its successor 
agency under Public Law 103-354 programs. This includes co-signors, 
guarantors and persons or entities that initially obtained or assumed a 
loan. Debtor also includes grant recipients.
    Farm Loan Programs (FLP) loans. Farm Ownership (FO), Operating (OL), 
Soil and Water (SW), Economic Emergency (EE), Emergency (EM), Recreation 
(RL), Special Livestock (SL), Softwood Timber (ST) loans, and/or Rural 
Housing Loans for farm services buildings (RHF).
    Housing programs. All programs and claims arising under programs 
administered by FmHA or its successor agency under Public Law 103-354 
under title V of the Housing Act of 1949.
    Servicing office. The FmHA or its successor agency under Public Law 
103-354 office that is responsible for the account.
    Settlement. The compromise, adjustment, cancellation, or chargeoff 
of a debt owed to FmHA or its successor agency under Public Law 103-354. 
The term ``Settlement'' is used for convenience in referring to 
compromise, adjustment, cancellation, or chargeoff actions, individually 
or collectively.
    United States Attorney. An attorney for the United States Department 
of Justice.

[56 FR 10147, Mar. 11, 1991, as amended at 58 FR 21344, Apr. 21, 1993; 
62 FR 10157, Mar. 5, 1997]



Sec. Sec. 1956.55-1956.56  [Reserved]



Sec. 1956.57  General provisions.

    (a) Application of policies. All debtors are entitled to impartial 
treatment and uniform consideration under this subpart. Accordingly. 
FmHA or its successor agency under Public Law 103-354 personnel charged 
with any responsibility in connection with debt settlement will adhere 
strictly to the authorizations, requirements, and limitations in this 
subpart, and will not substitute individual feelings or sympathies in 
connection with any settlement.
    (b) Information needed for debt settlement. A debtor requesting debt 
settlement must submit complete and accurate information from which a 
full determination of his/her financial condition can be made. This 
should include, where applicable, but is not limited to, obtaining 
verification of employment, providing expense verification, verifying 
farm program benefits (e.g., Farm Service Agency/Commodity Credit 
Corporation payments), and examining county records to determine what 
other assets the debtor has or recently disposed of. When a FLP debtor 
is continuing to farm, a farm operating plan must be obtained. Also, 
where a spouse is not a co-debtor the spouse's income will be considered 
in meeting family living expenses. If it appears that a debtor will not 
be able to pay in full and the indebtedness is eligible for settlement 
under this subpart, action should be taken, if possible, to avoid 
unnecessary litigation to enforce collection. If the debt is eligible 
for settlement, the debt settlement authorities of FmHA or its successor 
agency under Public Law 103-354 should be explained and the privileges 
thereof extended to the debtor. The information obtained from the debtor 
should be documented on a debt settlement form.
    (c) Negotiating a settlement. County Supervisors may approve or 
reject compromises, adjustments, cancellations, or chargeoffs of SFH 
debts (to include recapture receivables), regardless of the amount. 
District Directors and County Supervisors cannot approve other debt 
settlement actions; therefore, other than SFH debt settlements, they 
will make no statements to a

[[Page 246]]

debtor concerning the action that may be taken upon a debtor's 
application. In negotiating a settlement, all of the factors which are 
pertinent to determining ability to pay will be discussed to assist the 
debtor in arriving at the proper type and terms of a settlement. The 
present and future repayment ability of a debtor, the factors mentioned 
in this subpart, and any other pertinent information will be the basis 
of determining whether the debt should be collected in full, 
compromised, adjusted, canceled, or charged off. It is impossible in 
cases eligible for debt settlement to forecast accurately the debtor's 
future repayment ability over a long period of time; consequently, the 
period of time during which payments on settlement offers are to be made 
should not exceed five years. Debtors have the right to make voluntary 
settlement offers in any amount should they elect to do so. Adjustment 
offers will not be approved in any case unless there is reasonable 
assurance that the debtor will be able to make the payments as they 
become due.
    (d) Disposition of property. Security may be retained by the debtor 
only under the conditions specified in Sec. 1956.66 of this subpart.
    (e) Proceeds from the disposal of security prior to approval of a 
debt settlement offer. A debtor is not required to have disposed of the 
security prior to application for debt settlement for a loan to be 
settled. However, if a debtor has disposed of security prior to applying 
for debt settlement, proceeds from the disposed security must first be 
applied on the debtor's account, irrespective of an application for debt 
settlement unless the conditions specified in Sec. 1956.66 of this 
subpart are met.
    (f) [Reserved]
    (g) Settlement when legal or investigative action has been taken, 
recommended, or is contemplated. (1) Debts cannot be settled:
    (i) If the matter has been referred either to the Office of the 
Inspector General (OIG) under Sec. 1962.49(a) of subpart A of part 1962 
of this chapter or to Office of the General Counsel (OGC) because of 
suspected criminal violation, or criminal prosecution is pending because 
of an illegal act(s) committed by the debtor in connection with the debt 
or the security for that debt, the procedure outlined in paragraph 
(g)(3) of this section will be followed, unless, the OIG has declined to 
investigate the matter or, OGC has advised otherwise, or the case is in 
the hands of the United States Attorney.
    (ii) If a request for referral to the United States Attorney to 
institute a civil action to protect the interest of the Government has 
been made by FmHA or its successor agency under Public Law 103-354.
    (iii) Except as provided in paragraph (g)(3) of this section, if the 
case has been referred to the United States Attorney and is not closed.
    (2) If a debtor's account is involved in a fiscal irregularity 
investigation in which final action has not been taken or the account 
shows evidence that a shortage may exist and an investigation will be 
requested, the account will not be approved for settlement.
    (3) When a claim has been referred to, or a judgment has been 
obtained by the United States Attorney, and the debtor requests 
settlement, the employee in charge of the account will explain to the 
debtor that the United States Attorney has exclusive jurisdiction over 
the claim or judgment, that FmHA or its successor agency under Public 
Law 103-354 has no authority to agree to a settlement offer when the 
United States Attorney's file is not closed, and that if the debtor 
wishes to make a compromise or adjustment offer when the United States 
Attorney's file is not closed, if will be submitted with any related 
payment directly to the United States Attorney for a decision on the 
settlement offer.
    (h) Advice from OGC. State Directors will obtain, when necessary, 
advice from the OGC in handling proposed debt settlement actions which 
involve legal problems.
    (i) Settlement of claims against estates. Settlement of a claim 
against an estate under the provisions of this subpart will be based on 
the recovery that may reasonably be expected, taking into consideration 
such items as the security, costs of administration, allowances of minor 
children and surviving spouse, allowable funeral expenses, and dower and 
courtesy rights,

[[Page 247]]

and specific encumbrances on the property having priority over claims of 
the Government.
    (j) Joint debtors. Settlement may not be approved for one joint 
debtor unless approved for all debtors. ``Joint debtors'' includes all 
parties (individuals, partnerships, joint operators, cooperatives, 
corporations, estates) who are legally liable for payment of the debt.
    (1) Separate and individual adjustment offers from joint debtors 
must be accepted and processed only as a joint offer. Joint debtors must 
be advised that all debtors will remain liable for the balance of the 
debt until all payments due under the joint offer have been made.
    (2) A separate Form FmHA or its successor agency under Public Law 
103-354 1956-1 will be completed by each debtor, unless the debtors are 
members of the same family and all necessary financial information on 
each debtor can be shown clearly on a single application. Separate 
applications will be sent to the State Office as a unit.
    (3) If one debtor applies for compromise, adjustment, or 
cancellation, or if the debt is to be charged off, and the other 
debtor(s) is deceased or has received a discharge of the debt in 
bankruptcy, or the whereabouts of the other debtor(s) is unknown, or it 
is impossible or impracticable to obtain the signature of the other 
debtor(s), Form FmHA or its successor agency under Public Law 103-354 
1956-1 or Form FmHA or its successor agency under Public Law 103-354 
1956-2 (for housing loans) ``Cancellation or Charge-off of FmHA or its 
successor agency under Public Law 103-354 Indebtedness,'' will be 
prepared by showing at the top of the form the name of the debtor 
requesting settlement, following by the name of the other debtor.
    For example, ``John Doe, joint debtor with Bill Doe, deceased,'' 
``John Doe, joint debtor with Sam Doe, discharged in bankruptcy,'' 
``John Doe, joint debtor with Mary Doe, impossible or impracticable to 
obtain signature,'' as appropriate. In addition to the information 
concerning settlement of the debt by the applicant, information which 
justifies settlement of the debt as to the debtor(s) not joining in the 
application will be shown on Form FmHA or its successor agency under 
Public Law 103-354 1956-1, or 1956-2 for housing loans.
    (k) Settlement where debtor owes more than one type of Agency loan. 
It is not the policy to settle any loan indebtedness of a debtor who is 
also indebted on another agency loan and who will continue as an active 
borrower. In such case, the facts will be fully documented in part VIII 
of Form RD 1956-1.
    (l) No previous debt forgiveness. Debt settlement may not be 
approved for any direct Farm Loan Programs loan if the borrower has 
received debt forgiveness on any other direct loan as defined in Sec. 
1956.54 of this subpart.

[56 FR 10147, Mar. 11, 1991, as amended at 58 FR 21344, Apr. 21, 1993; 
62 FR 10157, Mar. 5, 1997; 68 FR 7700, Feb. 18, 2003]



Sec. Sec. 1956.58-1956.65  [Reserved]



Sec. 1956.66  Compromise and adjustment of nonjudgment debts.

    Nonjudgment debts which the debtor is unable to pay may be 
compromised or adjusted in accordance with applicable provisions of this 
section, and the debtor may retain the security property, if any. 
Application will be made on Form RD 1956-1 by the debtor; or if the 
debtor is unable to act, by another party having legal authority to act 
for the debtor. Collection of a lump sum offer may be deferred until the 
debtor is advised that the offer is approved. Upon full payment of the 
approved compromise or adjustment amount, the Agency will release the 
debtor from liability by delivering the note(s) to the debtor stamped 
``Satisfied by compromise or adjustment.''
    (a) FLP debts. The debt or any extension thereof on which compromise 
or adjustment is requested does not have to be due and payable under the 
terms of the note or other instrument, or because of acceleration by 
written notice prior to the date of application. Nonjudgment secured FLP 
debts may be compromised or adjusted in accordance with the following 
conditions:
    (1) Security may be retained by the debtor if the debtor offers an 
amount at least equal to the current fair market value (including any 
crop security)

[[Page 248]]

less any prior lien amounts. Any remaining unsecured debt may be debt 
settled.
    (2) Where the debtor is able to pay an amount in excess of the lump 
sum compromise offer, an adjustment offer must call for a lump sum 
payment as set out in paragraph (a)(1) of this section, plus any 
additional amounts the Agency determines the debtor is able to pay over 
a period of time not to exceed 5 years.
    (3) The acceptability of a compromise or adjustment offer will be 
arrived at by determining and evaluating:
    (i) Statement of indebtedness owed on any prior liens. Statements 
will be retained in the debtor's file.
    (ii) Value of existing security as determined by a current appraisal 
made or obtained by the Agency. The appraisal will be retained in the 
debtor's file.
    (iii) Debtor's total present income and probable sources, amount and 
stability of income over the next 5 years. Old age pensions, other 
public assistance, and veteran's disability pensions will not be 
considered as sources of funds for making compromise and adjustment 
offers.
    (iv) Amount of debtor's other debts.
    (v) Amount of debtor's essential family living expenses, and farm or 
business operation expenses necessary to continue the operation, if 
applicable.
    (vi) Age and health when the debtor is largely depending on income 
from an occupation where manual labor is required.
    (vii) Size of debtor's family, their ages and health.
    (viii) Value of debtor's assets in relation to debts and liens of 
third parties. Reasonable equity in a modest nonsecurity homestead 
occupied by the debtor will not be considered as available for 
settlement. Nonsecurity property in excess of minimum family living 
needs which is not exempt from levy and execution should be considered 
in determining the debtor's ability to pay.
    (b) Housing debts (both Single-family and Multi-family). Nonjudgment 
secured debts may be compromised or adjusted as follows:
    (1) The debt is fully matured under the terms of the note or other 
instrument; or has been accelerated by written notice prior to the date 
of the settlement application.
    (2) A compromise offer must at least equal the value of the security 
as determined by FmHA or its successor agency under Public Law 103-354 
(less any prior liens) plus any additional amount FmHA or its successor 
agency under Public Law 103-354 determines the debtor is able to pay 
based on a current financial statement.
    (3) An adjustment offer must meet the requirements of paragraph 
(b)(2) of this section, except the debt (or the amount offered) is to be 
scheduled for payment over the shortest period FmHA or its successor 
agency under Public Law 103-354 determines is feasible based on the 
debtor's financial resources, but not to exceed 5 years.
    (c) Unsecured debts. Unsecured debts considered under this paragraph 
(c) are most frequently account balances remaining after the debtor has 
sold security property to another party/entity, the security has been 
liquidated through foreclosure, or FmHA or its successor agency under 
Public Law 103-354 has accepted a deed in lieu of foreclosure and the 
borrower was not released from liability. An offer to compromise or 
adjust an unsecured debt must represent the maximum amount FmHA or its 
successor agency under Public Law 103-354 determines the debtor can pay 
based on a current financial statement and other information available 
to FmHA or its successor agency under Public Law 103-354. An adjustment 
offer is to be scheduled for payment over the shortest period FmHA or 
its successor agency under Public Law 103-354 determines is feasible, 
but not to exceed 5 years.

[56 FR 10147, Mar. 11, 1991, as amended at 58 FR 21345, Apr. 21, 1993; 
62 FR 10157, Mar. 5, 1997]



Sec. 1956.67  Debts which the debtor is able to pay in full but refuses to do so.

    Debts which the debtor may have the ability to pay in full but has 
refused to do so may be compromised or adjusted in the following 
situations on Form FmHA or its successor agency under Public Law 103-354 
1956-1:

[[Page 249]]

    (a) When the full amount cannot be collected because of the refusal 
of the debtor to pay the debt in full and the OGC advises that the 
Government is unable to enforce collection in full within a reasonable 
time by enforced collection proceedings, the debt may be compromised. In 
determining inability to collect, the following factors will be 
considered:
    (1) Availability of assets or income which may be realized by 
enforced collection proceedings, considering the applicable exemptions 
available to the debtor under State and Federal law.
    (2) Inheritance prospects within 5 years.
    (3) Likelihood of debtor obtaining nonexempt property or income 
within 5 years, out of which there could be collected a substantially 
larger sum than the amount of the present offer.
    (4) Uncertainty as to price the security or other property will 
bring at forced sale.
    (b) The debt may be compromised or adjusted when the OGC has advised 
in writing that:
    (1) There is a real doubt concerning the Government's ability to 
prove its case in court for the full amount of the debt, and
    (2) The amount offered represents a reasonable settlement 
considering:
    (i) The probability of prevailing on the legal issues involved.
    (ii) The probability of proving facts to establish full or partial 
recovery, with due regard to the availability of witnesses and other 
pertinent factors.
    (iii) The probable amount of court costs and attorney's fees which 
may be assessed against the Government if it is unsuccessful in 
litigation.
    (c) When the cost of collecting the debt does not justify enforced 
collection of the full amount, the amount accepted in compromise or 
adjustment may reflect an appropriate discount for administrative and 
litigation costs of collection. Such discount will not exceed $2,000 
unless the OGC advises that in the particular case a larger discount is 
appropriate. The cost of collecting may be a substantial factor in 
settling small debts but normally will not carry great weight in 
settling large debts.



Sec. 1956.68  Compromise or adjustment without debtor's signature.

    Debts of a living debtor may be compromised or adjusted if it is 
impossible or impracticable to obtain a signed application and all other 
requirements of this section applicable to compromise or adjustment with 
a signed application have been met. Form FmHA or its successor agency 
under Public Law 103-354 1956-1 will show:
    (a) The sources from which the information was obtained.
    (b) That a current effort was made to obtain the debtor's signature 
and the date(s) of such effort.
    (c) The specific reasons why it was impossible or impracticable to 
obtain the signature of the debtor and, if the debtor refused to sign, 
the reason(s) given.



Sec. 1956.69  [Reserved]



Sec. 1956.70  Cancellation.

    Nonjudgment debts may be canceled in the following instances:
    (a) With application. The debt or any extension thereof on Farmer 
Programs debts do not have to be due and payable under the terms of the 
note or other instrument, or because of acceleration by written notice 
prior to the date of application. Debts due the FmHA or its successor 
agency under Public Law 103-354 may be canceled upon application of the 
debtor, or if a debtor is unable to act, upon application of a guardian, 
executor, or administrator, subject to the following conditions:
    (1) The FmHA or its successor agency under Public Law 103-354 
employee in charge of the account furnishes a report and favorable 
recommendation concerning the cancellation.
    (2) There is no known security for the debt and the debtor has no 
other assets from which the debt could be collected.
    (3) The debtor is unable to pay any part of the debt and has no 
reasonable prospect of being able to do so.
    (b) Without application. Debts due the FmHA or its successor agency 
under Public Law 103-354 may be canceled upon a report and the favorable 
recommendation of the employee in charge of the account in the following 
instances:

[[Page 250]]

    (1) Deceased debtors. The following conditions must exist:
    (i) There is no known security; and
    (ii) An administrator or executor has not been appointed to settle 
the debtor's estate and the financial condition of the estate has been 
investigated and it has been established that there is no reasonable 
prospect of recovery; or
    (iii) An administrator or executor has been appointed to settle the 
estate of the debtor; and
    (A) A final settlement has been made and confirmed by the probate 
court and the Government's claim was recognized properly and the 
Government has received all funds it was entitled to, or
    (B) A final settlement has not been made and confirmed by the 
probate court but there are no assets in the estate from which there is 
any reasonable prospect of recovery, or
    (C) Regardless of whether a final settlement has been made, there 
were assets in the estate from which recovery might have been affected 
but such assets have been disposed of or lost in a manner which OGC 
advises will preclude any reasonable prospect of recovery by the 
Government.
    (2) Disappeared debtors. The debt may be canceled without 
application where the debtor has no known assets or future debt-paying 
ability, has disappeared and cannot be found without undue expense, and 
there is no existing security for the debt. Reasonable efforts will be 
made to locate the debtor. These efforts will generally include 
contacts, either in person or in writing, with postmasters, motor 
vehicle licensing and title authorities, telephone directories, city 
directories, utility companies, State and local governmental agencies, 
other Federal agencies, employees, friends, and credit agency skip 
locate reports, known relatives, neighbors and County Committee members. 
Also, the debtor's loan file should be reviewed carefully for possible 
leads that may be of assistance in locating the debtor. The efforts made 
to locate the debtor, including the names and dates of contacts, and the 
information furnished by each person, will be fully documented in the 
appropriate space on Form FmHA or its successor agency under Public Law 
103-354 1956-1 or Form FmHA or its successor agency under Public Law 
103-354 1956-2 for housing loans.
    (3) Debtors discharged in bankruptcy. If there is no security for 
the debt, debts discharged in bankruptcy shall be cancelled by use of 
the appropriate Agency form with the attachments noted below. No attempt 
will be made to obtain the debtor's signature. If the debtor has 
executed a new promise to pay prior to discharge and has otherwise 
accomplished a valid reaffirmation of the debt in accordance with advice 
from OGC, the debt is not discharged.
    (i) Chapter 7 Bankruptcy cases will be documented with a copy of the 
``Discharge of Debtor'' order(s) by the court for all obligors.
    (ii) For debts identified as being part of an unsecured claim under 
Chapter 11, the cancellation will be documented with a copy of the 
organization plan, copy of the order by the court confirming the plan, a 
copy of the order completing the plan (a similar order), and an opinion 
by OGC that the confirming order has discharged the obligor(s) of 
liability to that part of the debt.
    (iii) For debts identified as being part of an unsecured claim under 
chapters 12 or 13, the cancellation will be documented with a copy of 
the reorganization plan and confirmation order, as above, a copy of the 
order completing the plan and closing the case, and an opinion by OGC 
that the completion order has discharged the obligor(s) of liability to 
that portion of the debt.
    (c) Signature of debtor cannot be obtained. Debts of a living debtor 
may be canceled if it is impossible or impracticable to obtain a signed 
application and the requirements in paragraph (a) of this section 
concerning cancellation with application have been met or if the debt 
has been discharged in bankruptcy and there is no security. Form FmHA or 
its successor agency under Public Law 103-354 1956-1 will state:
    (1) The sources of information obtained.
    (2) That a current effort was made to obtain the debtor's 
application and the date of such effort.
    (3) The specific reasons why it was impossible or impracticable to 
obtain the signature of the debtor and, if the

[[Page 251]]

debtor refused to sign, the reason(s) given.

[56 FR 10147, Mar. 11, 1991, as amended at 68 FR 7700, Feb. 18, 2003]



Sec. 1956.71  Settling uncollectible recapture receivables.

    The settlement of uncollectible recapture receivables will be fully 
documented on a debt settlement form and retained in the case file.

[58 FR 21345, Apr. 21, 1993]



Sec. Sec. 1956.72-1956.74  [Reserved]



Sec. 1956.75  Chargeoff.

    (a) Judgment debts. Subject to the provisions of Sec. 
1956.57(g)(3), judgment debts may be charged off by use of Form FmHA or 
its successor agency under Public Law 103-354 1956-1 or Form FmHA or its 
successor agency under Public Law 103-354 1956-2 for housing upon a 
report and favorable recommendation of the employee in charge of the 
account provided:
    (1) The United States Attorney's file is closed, and
    (2) The requirements of Sec. 1956.70(b)(2) have been met, or two 
years have elapsed since any collections were made on the judgment and 
the debtor(s) has no equity in property on which the judgment is a lien 
or on which it can presently be made a lien.
    (b) Nonjudgment debts. Debts which cannot be settled under other 
sections of this subpart may be charged off using Form FmHA or its 
successor agency under Public Law 103-354 1956-1 or Form FmHA or its 
successor agency under Public Law 103-354 1956-2 for housing loans 
without the debtor's signature subject to the following provisions:
    (1) When the principal balance is $2,000 or less and efforts to 
collect have been unsuccessful or it is apparent that further collection 
efforts would be ineffectual or uneconomical,
    (2) When the OGC advises in writing that the claim is legally 
without merit.
    (3) Even though FmHA or its successor agency under Public Law 103-
354 considers the claim to be valid, when efforts to induce voluntary 
payments are unsuccessful and the OGC advises in writing that evidence 
necessary to prove the claim in court cannot be produced, or
    (4) When the employee in charge of the account recommends the 
chargeoff and has made the following determinations on the basis of 
information in FmHA or its successor agency under Public Law 103-354's 
official files or from other informed reliable sources:
    (i) That the debtor is:
    (A) Unable to pay any part of the debt and has no apparent future 
debt repayment ability as specified in Sec. 1956.66(a); or
    (B) Able to pay part or all of the debt but is unwilling to do so, 
it is clear that the Government cannot enforce collection of a 
significant amount from assets or income, and an opinion is received 
from OGC to that effect; and
    (ii) There is no security for the debt.
    (c) For debts identified as being part of an unsecured claim under a 
confirmed Chapter 11 plan, the chargeoff will be documented with a copy 
of the organization plan, a copy of the court order confirming the plan, 
an opinion by OGC that the order confirming the plan has discharged the 
debtor(s) of liability on the unsecured part of the debt.



Sec. Sec. 1956.76-1956.83  [Reserved]



Sec. 1956.84  Approval or rejection.

    (a)-(d) [Reserved]
    (e) Appeal rights. A debtor whose debt settlement offer is rejected 
will be notified of appeal rights pursuant to 7 CFR part 11.

[58 FR 21345, Apr. 21, 1993, as amended at 68 FR 7700, Feb. 18, 2003]



Sec. 1956.85  Payments and receipts.

    (a) Servicing office handling. (1) An application with which the 
debtor offers a lump-sum payment in compromise, or with which the debtor 
offers an initial payment on an adjustment offer, will be accompanied by 
the payments required at the time such application is filed in the 
servicing office.
    (2) [Reserved]
    (3) Checks or check transmittal letter containing restrictive 
notations such as ``Settlement in full'' or ``Payment in full,'' or in 
those exceptional instances when the debtor refuses to sign the Form 
FmHA or its successor

[[Page 252]]

agency under Public Law 103-354 1956-1 in connection with a compromise 
offer, will be forwarded to the State Office where they will be retained 
until approval or rejection of the offer. The use of restrictive 
notations will be discouraged to the fullest extent possible.
    (b) Finance Office handling. (1) All payments evidenced by Form FmHA 
or its successor agency under Public Law 103-354 451-2, ``Schedule of 
Remittances,'' on Form FmHA or its successor agency under Public Law 
103-354 1944-9, ``Multiple Family Housing Payment Transmittal,'' bearing 
the legend ``Compromise Offer--FmHA or its successor agency under Public 
Law 103-354'' or ``Adjustment Offer--FmHA or its successor agency under 
Public Law 103-354,'' will be held in the Deposits FundAccount by the 
Finance Office until notification is received from the State Office of 
the approval or rejection of the offer. In cases of approved offers, 
remittances will be applied in accordance with established policies, 
beginning with the oldest loan included in the settlement, except that 
when the request for settlement includes loans made from different 
revolving funds the Finance Office will prorate the amount received, on 
the basis of the total principal balance due the respective revolving 
funds. Upon notification of a rejection of a debtor's offer and receipt 
of a request from the State Director for a refund, the Finance Office 
will refund to the debtor, in care of the employee in charge of the 
account, the amount held in the Deposits Fund Account representing a 
rejected compromise or adjustment offer.
    (2) When a debtor's adjustment offer is approved, the accounts 
involved will not be adjusted in the records of the Finance Office until 
all payments have been made. Form FmHA or its successor agency under 
Public Law 103-354 1956-1 will be held in a suspense file pending 
payment of the full amount of the approved offer. The original Form FmHA 
or its successor agency under Public Law 103-354 1956-1 in approved 
cases will be retained in the Finance Office.

[56 FR 10147, Mar. 11, 1991, as amended at 58 FR 21345, Apr. 21, 1993; 
68 FR 61332, Oct. 28, 2003]



Sec. Sec. 1956.86-1956.95  [Reserved]



Sec. 1956.96  Delinquent adjustment agreements.

    A 90-day extension for making the payments may be given by the 
Agency when the circumstances of the case justify an extension. A 
decision not to extend the time for making payments is not appealable. 
If the debtor is delinquent under the terms of the adjustment agreement 
and is likely to be financially unable to meet the terms of the 
agreement, the Agency may cancel the existing agreement and process a 
different type of settlement more consistent with the debtor's repayment 
ability, provided the facts in the case justify such action. The 
cancellation of an adjustment agreement is appealable. If an agreement 
is cancelled, any payments received shall be retained as payments on the 
debt owed at the time of the adjustment agreement.

[68 FR 7700, Feb. 18, 2003]



Sec. 1956.97  Disposition of promissory notes.

    (a) Notes evidencing debts settled by completed adjustments, 
completed compromise with or without signature, or canceled with 
signature will be returned to the debtor or to the debtor's legal 
representative. The original and copies of notes will be stamped 
``Satisfied by Approved Compromise,'' ``Satisfied by Approved 
Cancellation,'' or ``Satisfied by Completed Adjustment Offer.'' In such 
cases, the security instrument(s) will be released of record according 
to State law.
    (b) Notes evidencing debts canceled without application will be 
placed in the debtor's case folder and disposed of pursant to FmHA or 
its successor agency under Public Law 103-354 Instruction 2033-A 
(available in any FmHA or its successor agency under Public Law 103-354 
office). However, if the debtor requests the notes, they may be stamped 
``Satisfied By Approved Cancellation'' and returned.
    (c) Notes evidencing charged off debts will be retained in the 
servicing office and will not be stamped or returned to the debtor. They 
will be destroyed six years after charged off pursuant to FmHA or its 
successor agency under Public Law 103-354 Instruction

[[Page 253]]

2033-A (available in any FmHA or its successor agency under Public Law 
103-354 office).
    (d) In case of a transfer of security with assumption for less than 
the debt, the promissory note will be attached to the assumption 
agreement covered by the note and kept in the transferee's file.

[56 FR 10147, Mar. 11, 1991. Redesignated and amended at 58 FR 21346, 
Apr. 21, 1993]



Sec. 1956.98  [Reserved]



Sec. 1956.99  Exception authority.

    The Administrator may, in individual cases, make an exception to any 
requirement or provision of this subpart which is not inconsistent with 
the authorizing statute or other applicable law if the Administrator 
determines that application of the requirement or provision would 
adversely affect the Government's interest. The Administrator will 
exercise this authority only at the request of the State Director and on 
the recommendation of the appropriate program Assistant Administrator. 
Requests for exceptions must be made in writing by the State Director 
and supported with documentation to explain the adverse affect on the 
Government's interest, propose alternative courses of action, and show 
how the adverse affect will be eliminated or minimized if the exception 
is granted. Any settlement actions approved by the Administrator under 
this section will be documented on Form FmHA or its successor agency 
under Public Law 103-354 1956-1 and returned to the State Office for 
submission to the Finance Office.



Sec. 1956.100  OMB control number.

    The collection of information requirements in this regulation have 
been approved by the Office of Management and Budget and assigned OMB 
control number 0575-0118. Public reporting burden for this collection of 
information is estimated to vary from 15 to 20 minutes per response, 
with an average of 20 minutes per response including time for reviewing 
instructions, searching existing data sources, gathering and maintaining 
the data needed, and completing and reviewing the collection of 
information. Send comments regarding this estimate or any other aspect 
of this collection of information, including suggestions for reducing 
this burden, to Department of Agriculture, Clearance Officer, OIRM, Room 
404-W, Washington, DC 20250; and to the Office of Information and 
Regulatory Affairs, Office of Management and Budget, Washington, DC 
20503.



        Subpart C_Debt Settlement_Community and Business Programs

    Source: 53 FR 13100, Apr. 21, 1988, unless otherwise noted.



Sec. 1956.101  Purposes.

    This subpart delegates authority and prescribes policies and 
procedures for debt settlement of Water and Waste Disposal System loans; 
Community Facility loans; Association Recreation loans; Watershed loans 
and advances; Resource, Conservation and Development loans; Rural 
Renewal loans; direct Business and Industry loans; Irrigation and 
Drainage loans; Shift-in-land-use loans; and Section 306C WWD loans. 
Settlement of Economic Opportunity Cooperative loans, Claims Against 
Third Party Converters, Nonprogram loans, Rural Business Enterprise/
Television Demonstration Grants, Rural Development Loan Fund loans, 
Intermediary Relending Program loans, Nonprofit National Corporations 
Loans and Grants, and 601 Energy Impact Assistance Grants, is not 
authorized under independent statutory authority and settlement under 
these programs is handled pursuant to the Federal Claims Collection 
Joint Standards, 4 CFR parts 101-105 as described in Sec. 1956.147 of 
this subpart.

[62 FR 33511, June 19, 1997, as amended at 66 FR 1569, Jan. 9, 2001]



Sec. 1956.102  Application of policies.

    (a) General. If a debt is eligible for settlement, the debt 
settlement authorities of the Farmers Home Administration or its 
successor agency under Public Law 103-354 (FmHA or its successor agency 
under Public Law 103-354) should be explained and the privileges thereof 
extended to the debtor. All debtors are entitled to impartial treatment 
and uniform consideration

[[Page 254]]

under this subpart. Accordingly, FmHA or its successor agency under 
Public Law 103-354 personnel charged with any responsibility in 
connection with debt settlement will adhere strictly to the 
authorizations, requirements, and limitations in this subpart.
    (b) For hospitals and health care facilities only. Loan servicing 
and debt restructuring options according to Sec. 1956.143 of this 
subpart must be exhausted before the other settlement authorities of 
this subpart are applicable.

[53 FR 13100, Apr. 21, 1988, as amended at 59 FR 46160, Sept. 7, 1994]



Sec. Sec. 1956.103-1956.104  [Reserved]



Sec. 1956.105  Definitions.

    (a) Settlement. The compromise, adjustment, cancellation, or 
chargeoff of a debt owed to FmHA or its successor agency under Public 
Law 103-354. The term ``settlement'' is used for convenience in 
referring to compromise, adjustment, cancellation, or chargeoff actions, 
individually or collectively.
    (b) Compromise. The satisfaction of a debt, including a release of 
liability, by the acceptance of a lump-sum payment of less than the 
total amount owed on the debt.
    (c) Adjustment. The satisfaction of a debt, including a release of 
liability, when acceptance is conditioned upon completion of payment of 
the adjusted amount at a specific future time or times, with or without 
the payment of any consideration when the adjustment offer is approved. 
An adjustment is not a final settlement until all payments under the 
adjustment agreement have been made.
    (d) Cancellation. The final discharge of a debt with a release of 
liability.
    (e) Chargeoff. To write off a debt and terminate all servicing 
activity without a release of liability. This is not a final discharge 
of the debt, but rather a decision upon the part of the agency to remove 
the debt from agency receivables.
    (f) Debtor. The borrower of loan funds under any of the FmHA or its 
successor agency under Public Law 103-354 programs specified in Sec. 
1956.101 of this subpart.
    (g) Security. All that serves as collateral for the FmHA or its 
successor agency under Public Law 103-354 loan(s), including, but not 
limited to, revenues, tax levies, municipal bonds, and real and chattel 
property.
    (h) Servicing official. The FmHA or its successor agency under 
Public Law 103-354 official who is primarily responsible for servicing 
the account.
    (i) United States Attorney. An attorney for the United States 
Department of Justice.
    (j) Independent Qualified Fee Appraiser. An individual who is a 
designated member of the American Institute of Real Estate Appraisers, 
Society of Real Estate Appraisers, or an equivalent organization, 
requiring appraisal education, testing, and experience.

[53 FR 13100, Apr. 21, 1988, as amended at 54 FR 47510, Nov. 15, 1989; 
66 FR 1569, Jan. 9, 2001]



Sec. Sec. 1956.106-1956.108  [Reserved]



Sec. 1956.109  General requirements for debt settlement.

    (a) Debt due and payable. The debt or any extension thereof on which 
settlement is requested must be due and payable under the terms of the 
note or other instrument, or because of acceleration by written notice 
prior to the date of application for settlement, unless the debt is to 
be cancelled without application under Sec. 1956.130(b) or charged off 
under Sec. 1956.136 of this subpart.
    (b) Disposition of security. Ordinarily, all security will be 
disposed of prior to the date of application for settlement. There are 
exceptions:
    (1) It may be necessary to abandon security through the debt 
settlement process. For example, a community may be rendered 
uninhabitable by a toxic or hazardous substance. In such cases, debt 
settlement may proceed provided the servicing official determines:
    (i) That further collection efforts with respect to the security in 
question would be ineffective or uneconomical,
    (ii) That it is in the best interests of the Government to proceed 
with debt settlement,
    (iii) That the proposal otherwise meets the requirements appropriate 
to the type of settlement under consideration, and

[[Page 255]]

    (iv) The approval of the Administrator is obtained.
    (2) A servicing action may have been carried out which resulted in a 
less than complete disposition of security. For example, the Government 
may have consented to a voluntary sale of a debtor's real and chattel 
property without reference to other security, which might include, but 
is not limited to: an additional lien on revenue, a third party pledge 
of security, or a pledge of personal liability. In such cases, debt 
settlement may proceed provided the requirements of Sec. 1956.109(b)(1) 
of this subpart are met.
    (3) Security can be retained under the compromise and adjustment 
offers as specified in Sec. 1956.124 of this subpart.
    (4) Settlement of a claim against an estate will be based on the 
recovery that may reasonably be expected, taking into consideration such 
items as the security, costs of administration, allowances of minor 
children and surviving spouse, allowable funeral expenses, dower and 
curtesy rights, and specific encumbrances on the property having 
priority over claims of the Government.
    (c) Proceeds from the sale of security. Proceeds from the sale of 
security must be applied on the debtor's account, taking into 
consideration the disposition requirements of any grant agreement, prior 
to the date of application for settlement, except when security is 
retained as provided for in Sec. 1956.109(b) of this subpart. Debtors 
will not be allowed to sell security and use the proceeds as part or all 
of the debt settlement offer.
    (d) County Committee review. Proposed settlement actions will be 
reviewed by the County Committee except for the cancellation of debts 
discharged in bankruptcy under Sec. 1956.130(b)(1) of this subpart or 
when a claim has been referred to a United States Attorney under Sec. 
1956.112(d) of this subpart. No settlement shall be approved if it is 
more favorable to the debtor than recommended by the County Committee.
    (e) Assistance from Office of General Counsel (OGC). When necessary, 
State Directors will obtain advice from OGC in handling proposed debt 
settlement actions.
    (f) Format. Form FmHA or its successor agency under Public Law 103-
354 1956-1, ``Application for Settlement of Indebtedness,'' will be 
utilized for all settlement actions under this subpart.



Sec. 1956.110  Joint debtors.

    Settlements may not be approved for one joint debtor unless approved 
for all debtors. Joint debtors includes all parties, individuals, and 
organizations, who are legally liable for payment of the debt.
    (a) Individual settlement offers from joint debtors can be accepted 
and processed only as a joint offer. A separate Form FmHA or its 
successor agency under Public Law 103-354 1956-1 will be completed by 
each debtor unless the debtors are members of the same family and all 
necessary financial information on each debtor can be shown clearly on a 
single application.
    (b) If one of the joint debtors is deceased or has received a 
discharge of the debt in bankruptcy, or if the whereabouts of one of the 
debtors is unknown, or it is otherwise impossible or impractical to 
obtain the signature of the debtor, the application for settlement may 
be accepted without that debtor's signature if it contains adequate 
information on each of the debtors to justify settlement of the debt as 
to each of the debtors. The name of the debtor requesting settlement 
will be shown at the top of Form FmHA or its successor agency under 
Public Law 103-354 1956-1 followed by name and status of the other 
debtor. For example, ``John Doe, joint debtor with Jane Doe, deceased.''
    (c) Joint debtors must be advised in writing that all debtors will 
remain liable for the balance of the debt until any payment(s) due under 
the joint offer have been made.



Sec. 1956.111  Debtors in bankruptcy.

    FmHA or its successor agency under Public Law 103-354 personnel will 
process reorganization plans of debtors filing under Chapter 9, Chapter 
11, or Chapter 13 as follows:
    (a) Plans submitted by debtors under Chapters 9, 11, and 13 must be 
sent by the servicing official to the State Director who will recommend 
either acceptance or rejection of the plans and

[[Page 256]]

refer them to the United States Attorney through OGC. When the plan 
calls for the adjustment of a debt to FmHA or its successor agency under 
Public Law 103-354, the State Director will obtain the advice of the 
Administrator before providing OGC with a recommendation on acceptance 
or rejection of this plan.
    (b) The United States Attorney will advise the State Director, 
through OGC, as to approval or rejection of the debtor's reorganization 
plan. The State Director will then notify the Finance Office by 
memorandum of the terms and conditions of the bankruptcy reorganization 
plan, including any adjustment of the debt.



Sec. 1956.112  Debts ineligible for settlement.

    Debts will not be settled:
    (a) If referral to the Office of Inspector General (OIG) and/or to 
the OGC is contemplated or pending because of suspected criminal 
violation, or
    (b) If civil action to protect the interests of the Government is 
contemplated or pending, or
    (c) If an investigation for suspected fiscal irregularity is 
contemplated or pending, or
    (d) When a claim has been referred to or a judgment has been 
obtained by the United States Attorney and the debtor requests 
settlement, the servicing official will explain to the debtor that the 
United States Attorney has exclusive jurisdiction over the claim or 
judgment, and therefore, FmHA or its successor agency under Public Law 
103-354 has no authority to agree to a settlement offer. If the debtor 
wishes to make a settlement offer, it must be submitted with any related 
payment directly to the United States Attorney for consideration.



Sec. Sec. 1956.113-1956.117  [Reserved]



Sec. 1956.118  Approval authority.

    District Directors cannot approve debt settlement actions. 
Therefore, they will make no statements to a debtor concerning the 
action that may be taken upon a debtor's application. Subject to this 
subpart, the compromise, adjustment, cancellation, or chargeoff of debts 
will be approved or rejected:
    (a) By the State Director when the outstanding balance of the 
indebtedness involved in the settlement is less then $50,000, including 
principal, interest, and other charges.
    (b) By the Administrator or his designee when the outstanding 
balance of the indebtedness involved in the settlement is $50,000 or 
more, including principal, interest, and other charges.



Sec. Sec. 1956.119-1956.123  [Reserved]



Sec. 1956.124  Compromise and adjustment.

    Nonjudgment debts may be compromised or adjusted upon application of 
the debtor(s), or if the debtor is an individual and unable to act, upon 
application of the guardian, executor, or administrator of the debtor's 
estate.
    (a) General provisions. Debts, regardless of the amount, may be 
compromised or adjusted subject to the following:
    (1) The debt or any extension thereof on which compromise or 
adjustment is requested is due and payable under the terms of the note 
or other instrument, or because of acceleration by written notice, prior 
to the date of application for settlement.
    (2) The period of time during which payments on adjustment offers 
are to be made cannot exceed five years without the approval of the 
Administrator.
    (3) Efforts will be made to avoid applications for settlement in 
which debtors offer a specified amount payable upon notice of approval 
of the proposed settlement.
    (b) Debtor's ability to pay. In evaluating the debtor's settlement 
application, it is essential that reliable information be obtained in 
sufficient detail to assure that the offer accurately reflects the 
debtor's ability to pay. The debtor's income, expenses, and nonsecurity 
assets are critical factors in determining the type of settlement and 
the amount which the debtor can reasonably be expected to offer. 
Critical information should include the following:
    (1) The debtor's total present income from all sources will be 
determined. In addition, careful consideration will be

[[Page 257]]

given to the probable sources, amount, and stability of income to be 
received over a reasonable period of years. For individuals, public 
welfare assistance and pensions, including old age pensions and pensions 
received by veterans for pensionable disabilities will not be considered 
as sources of funds with which to make compromise and adjustment offers.
    (2) The debtor's operation and maintenance expenses, and, in the 
case of individuals, probable living expenses.
    (3) The priority of payments on debts to third parties.
    (4) When the debtor is largely dependent on income from an 
occupation in which manual labor is required, age and health of the 
individual are vital factors in determining the ability to pay. The 
number in the debtor's family, their ages and condition of health, will 
also be weighed in determining the ability to pay. However, when the 
debtor's income is from investments, business enterprises, or management 
efforts, age and health of both individual and family are of less 
importance.
    (5) The value of the debtor's assets in relation to debts and liens 
of third parties is important in determining the debtor's ability to 
pay. It is recognized that debtors must retain a reasonable equity in 
essential nonsecurity property in order to continue normal operations 
and, in the case of an individual, to meet family living expenses over a 
period of years. Under this policy a reasonable equity in a modest 
nonsecurity homestead occupied by the debtor, whether or not exempt from 
levy and execution will not be considered as available for offer in 
settlement. Nonsecurity property which is in excess of minimum business 
and/or family living needs and which is not exempt from levy and 
execution should be considered when determining the debtor's ability to 
pay.
    (c) Debtor unable to pay in full. Debts may be compromised or 
adjusted and security property retained by the debtor, provided:
    (1) The debtor is unable to pay the indebtedness in full, and
    (2) The debtor has offered an amount equal to the present fair 
market value of all security or facility financed, and
    (3) The debtor has offered any additional amount which the debtor is 
able to pay, and
    (4) The total amount offered represents a reasonable determination 
of the debtor's ability to pay.
    (d) Debtor able to pay in full but refuses to do so. If the debtor 
has the ability to pay in full but refuses to do so, debts may be 
compromised or adjusted and security property retained by the debtor 
under certain conditions:
    (1) The OGC advises that the Government is unable to enforce 
collection in full within a reasonable time by enforced collection 
proceedings, and the amount offered represents a reasonable settlement 
considering:
    (i) Availability of assets or income which may be realized by 
enforced collection proceedings, considering the applicable exemptions 
available to the debtor under State and Federal law, and
    (ii) Inheritance prospects within 5 years, and
    (iii) Likelihood of debtor obtaining nonexempt property or income 
within 5 years out of which there could be collected a substantially 
larger sum than the amount of the present offer, and
    (iv) Uncertainty as to the price that the security or other property 
will bring at forced sale, or
    (2) The OGC advises that there is a real doubt concerning the 
Government's ability to prove its case in court for the full amount of 
the debt, and the amount offered represents a reasonable settlement 
considering:
    (i) The probability of prevailing on the legal issues involved, and
    (ii) The probability of proving facts to establish full or partial 
recovery, with due regard to the availability of witnesses and other 
pertinent factors, and
    (iii) The probable amount of court costs and attorney's fees which 
may be assessed against the Government if it is unsuccessful in 
litigation, or
    (3) When the cost of collecting the debt does not justify enforced 
collection of the full amount. In such cases, the amount accepted in 
compromise or adjustment may reflect an appropriate discount for 
administrative and litigious costs of collection. Such discount

[[Page 258]]

will not exceed $600 unless the OGC advises that in the particular case 
a larger discount is appropriate. The cost of collecting may be a 
substantial factor in settling small debts but normally will not carry 
great weight in settling large debts.



Sec. Sec. 1956.125-1956.129  [Reserved]



Sec. 1956.130  Cancellation.

    Nonjudgment debts, regardless of the amount, may be cancelled with 
or without application by the debtor.
    (a) With application by debtor. Debts may be cancelled upon 
application of the debtor(s), or if the debtor is an individual and 
unable to act, upon application of the guardian, executor, or 
administrator of the debtor's estate. The following conditions apply:
    (1) The servicing official furnishes a favorable recommendation 
concerning the cancellation, and
    (2) There is no known security for the debt and the debtor has no 
other assets from which the debt could be collected, and
    (3) The debtor is unable to pay any part of the debt and has no 
reasonable prospect of being able to do so, and
    (4) The debt or any extension thereof is due and payable under the 
terms of the note or other instrument, or because of acceleration by 
written notice prior to the date of application.
    (b) Without application by debtor. Debts may be cancelled upon a 
favorable recommendation of the servicing official in the following 
instances:
    (1) Debtors discharged in bankruptcy. If there is no security for 
the debt, debts discharged in bankruptcy shall be cancelled by the use 
of Form FmHA or its successor agency under Public Law 103-354 1956-1 
with a copy of the Bankruptcy Court's Discharge Order attached. No 
attempt will be made to obtain the debtor's signature and County 
Committee review is unnecessary. If the debtor has executed a new 
promise to pay prior to discharge and has otherwise accomplished a valid 
reaffirmation of the debt in accordance with advice from OGC, the debt 
is not discharged.
    (2) Impossible or impractical to obtain a debtor's signature. Debts 
may be cancelled if it is impossible or impractical to obtain a signed 
application and the requirements of Sec. 1956.130(a) (1), (2), and (3) 
only of this subpart are met. Form FmHA or its successor agency under 
Public Law 103-354 1956-1 will document:
    (i) The sources of information obtained.
    (ii) That a current effort was made to obtain the debtor's 
application and the date of such effort.
    (iii) The specific reasons why it was impossible or impracticable to 
obtain the signature of the debtor and, if the debtor refused to sign, 
the reason(s) given.
    (3) Deceased debtors (individuals only). The following conditions 
must exist:
    (i) There is no known security,
    (ii) An administrator or executor has not been appointed to settle 
the debtor's estate but the financial condition of the estate has been 
investigated and it has been established that there is no reasonable 
prospect of recovery, or
    (iii) An administrator or executor has been appointed to settle the 
estate of the debtor, and
    (A) A final settlement has been made and confirmed by the probate 
court and the Government's claim was recognized properly and the 
Government has received all funds it was entitled to, or
    (B) A final settlement has not been made and confirmed by the 
probate court, but there are no assets in the estate from which there is 
any reasonable prospect of recovery, or
    (C) Regardless of whether a final settlement has been made, there 
were assets in the estate from which recovery might have been effected 
but such assets have been disposed of or lost in a manner which the OGC 
advises will preclude an reasonable prospect of recovery by the 
Government.
    (4) Disappeared debtor (individuals only). The following conditions 
must exist:
    (i) The debtor has disappeared and cannot be found without undue 
expense. Reasonable efforts either in person or in writing will be made 
to locate the debtor. These efforts, including the names and dates of 
contacts, and the information furnished by each person, will be fully 
documented on Form FmHA or its successor agency under Public Law 103-354 
1956-1,

[[Page 259]]

    (ii) There is no known security for the debt and the debtor has no 
other assets from which the debt could be collected, and
    (iii) The debtor is unable to pay any part of the debt and has no 
reasonable prospect of being able to do so.



Sec. Sec. 1956.131-1956.135  [Reserved]



Sec. 1956.136  Chargeoff.

    (a) Judgment debts. Subject to the provisions of Sec. 1956.112(d) 
of this subpart, judgment debts, regardless of the amount, may be 
charged off without the debtor's signature upon a favorable 
recommendation of the servicing official provided:
    (1) The United States Attorney's file is closed, and
    (2) The requirements of Sec. 1956.130(b)(1), (2), (3), or (4) of 
this subpart have been met, as appropriate, or two years have elapsed 
since any collections were made on the judgment and the debtor(s) has no 
equity in property on which the judgment is a lien or on which it can 
presently be made a lien.
    (b) Nonjudgment debts. Debts which cannot be settled under other 
sections of this subpart may be charged off without the debtor's 
signature upon a favorable recommendation of the servicing official in 
the following instances:
    (1) When the OGC advises in writing that the claim is legally 
without merit, or that evidence necessary to prove the claim in court 
cannout be produced.
    (2) When there is no known security for the debt, the debtor has no 
other assets from which the debt could be collected, and the debtor:
    (i) Is unable to pay any party of the debt and has no reasonable 
prospect of being able to do so, or
    (ii) Is able to pay part or all of the debt but refuses to do so, 
and an opinion is received from OGC to the effect that the Government 
cannot enforce collection of a significant amount from assets or income.
    (3) When the debtor is deceased (individuals only), disappeared 
(individuals only), or when it is impossible or impractical to obtain 
the debtor's signature, and the conditions of Sec. 1956.136(b)(2) of 
this subpart are met.



Sec. 1956.137  [Reserved]



Sec. 1956.138  Processing.

    (a) Approval. When a debt settlement application is approved, the 
State Director will:
    (1) Send the original approved Form FmHA or its successor agency 
under Public Law 103-354 1956-1 to the Finance Office.
    (2) Notify debtors in writing of settlement approval, including the 
specific amount and terms of the offer that were accepted, for 
compromise and adjustment offers under Sec. 1956.124 and cancellations 
with application under Sec. 1956.130(a) of this subpart.
    (3) Not be required to notify debtors of settlement approval when 
debts are cancelled without application under Sec. 1956.130(b) or 
charged off under Sec. 1956.136 of this subpart.
    (b) Requesting additional information. When rejection appears to be 
necessary either because of lack of information or because the amount of 
a compromise or adjustment offer is inadequate, the State Director may 
request the servicing official to obtain the additional information or 
make an effort to obtain a more acceptable offer, as the circumstances 
justify. Notice of rejection of an offer will be withheld in such cases 
until sufficient time has elapsed to enable the debtor to present 
further information or a new offer.
    (c) Rejection. When a debt settlement application is rejected, the 
State Director will:
    (1) Insert the reasons for rejection on the Form FmHA or its 
successor agency under Public Law 103-354 1956-1.
    (2) Retain the original Form FmHA or its successor agency under 
Public Law 103-354 1956-1 in the State Office and return case files and 
copies of Form FmHA or its successor agency under Public Law 103-354 
1956-1 to the servicing official.
    (3) Request the Finance Office to return any adjustment or 
compromise payment held by the Finance Office to the borrower, in care 
of the servicing official.
    (4) Return any adjustment or compromise payment held by the State 
Office to the borrower, in care of the servicing official.

[[Page 260]]

    (5) Notify the debtor in writing of the reasons for the rejection 
for compromise and adjustment offers under Sec. 1956.124 and 
cancellations with application under Sec. 1956.130(a) of this subpart.
    (d) Appeal rights. In accordance with Subpart B of Part 1900 of this 
chapter, the debtor will be given the right to appeal the rejection of 
any debt settlement offer made by the debtor under this subpart.



Sec. 1956.139  Collections.

    (a) When the debtor offers a lump-sum payment in compromise or an 
initial payment on an adjustment offer, that payment will accompany the 
settlement application at the time the application is filed with the 
servicing official.
    (b) [Reserved]
    (c) Checks or check transmittal letters containing restrictive 
notations such as ``Settlement in full'' or ``Payment in full,'' will be 
forwarded to the State Office where they will be retained until approval 
or rejection of the offer. The use of restrictive notations will be 
discouraged to the fullest extent possible.
    (d) All payments evidenced by Form FmHA or its successor agency 
under Public Law 103-354 451-2, ``Schedule of Remittances,'' bearing the 
legend ``Compromise Offer--FmHA or its successor agency under Public Law 
103-354'' or ``Adjustment Offer--FmHA or its successor agency under 
Public Law 103-354,'' will be held in the Deposits Fund Account by the 
Finance Office until notification is received from the State Office of 
the approval or rejection of the offer.
    (1) Upon receipt of an approved Form FmHA or its successor agency 
under Public Law 103-354 1956-1, remittances will be applied in 
accordance with established policies, beginning with the oldest loan 
included in the settlement, except that when the request for settlement 
includes loans made from different revolving funds, the Finance Office 
will prorate the amount received on the basis of the total principal 
balance due the respective revolving funds.
    (2) Upon notification of a rejection of a debtor's offer and receipt 
of a request from the State Director for a refund, the Finance Office 
will refund to the debtor, in care of the servicing official, the amount 
held in the Deposits Fund Account.
    (e) When a debtor's adjustment offer is approved, the accounts 
involved will not be adjusted in the records of the Finance Office until 
all payments have been made. Form FmHA or its successor agency under 
Public Law 103-354 1956-1 will be held in a suspense file pending 
payment of the full amount of the approved offer.
    (f) If an approved debt settlement agreement is later voided by the 
State Director in accordance with Sec. 1956.142(e) of this subpart, any 
payments which have been received shall be retained as payments on the 
debt owed at the time the compromise or adjustment offer was approved.

[53 FR 13100, Apr. 21, 1988, as amended at 68 FR 61332, Oct. 28, 2003]



Sec. Sec. 1956.140-1956.141  [Reserved]



Sec. 1956.142  Delinquent adjustment agreements.

    (a) The servicing official is responsible for notifying debtors in 
advance of the due dates of payments on debt settlement agreements and 
for monitoring compliance with the terms of settlement agreements. If a 
payment is delinquent, the servicing official should contact the debtor 
promptly to determine the reason for the delinquency and the debtor's 
plan for completing the agreement.
    (b) Delinquencies of 30 days or more will be reported to the State 
Director along with other pertinent information and the recommendation 
of the servicing official regarding further handling of the case.
    (c) The State Director may extend, for ninety days, the time for 
making the payments when the circumstances of the case justify an 
extension. Extensions for a greater period of time may be made by the 
State Director upon the recommendation of the County Committee and the 
servicing official.
    (d) When the debtor is financially unable to meet the terms of the 
debt settlement agreement, the State Director may void the existing 
agreement and

[[Page 261]]

process a new settlement more consistent with the debtor's repayment 
ability, provided the facts in the case justify such action.
    (e) If the State Director determines that the debtor cannot or will 
not meet the terms of the settlement agreement and if the facts do not 
justify approval of a new settlement agreement, the State Director will 
void the existing agreement and direct the servicing official to take 
other servicing actions appropriate to the circumstances of the case.
    (f) When an adjustment agreement is voided, the State Director will 
notify the debtor giving the reasons in writing, with a copy to the 
Finance Office and to the servicing official. Upon receipt, the Finance 
Office will return the original Form FmHA or its successor agency under 
Public Law 103-354 1956-1 to the State Office.



Sec. 1956.143  Debt restructuring--hospitals and health care facilities.

    This section pertains exclusively to delinquent Community Facility 
hospital and health care facility loans. Those facilities which are 
nonprogram (NP) loans as defined in Sec. 1951.203 (f) of subpart E of 
part 1951 of this chapter are excluded. The purpose of debt 
restructuring is to keep the hospital or health care facility in 
operation with manageable debt.
    (a) Definitions. As used in this section, the following definitions 
apply:
    Consolidation. The combining of two or more debt instruments into 
one instrument, normally accompanied by reamortization.
    Debt writedown. A one-time reduction of the debt owed to FmHA or its 
successor agency under Public Law 103-354 including principal and 
interest. This reduction will be the minimum amount necessary to meet 
the level of the facility's ability to service the debt. The writedown 
will be applied first to interest and then principal.
    Delinquency due to circumstances beyond the control of the debtor. 
Includes situations such as: The debtor has less money than planned due 
to unexpected and uncontrollable events such as unexpected loss of 
service area population, unforeseeable costs incurred for compliance 
with State or Federal regulatory requirements, or the loss of key 
personnel.
    Delinquent debtor. For purposes of this section, delinquency is 
defined as being 180 days behind schedule on the FmHA or its successor 
agency under Public Law 103-354 payments. That is, one full annual 
installment or the equivalent for monthly, quarterly, or semiannual 
installments.
    Eligibility. Applicants must be delinquent due to circumstances 
beyond their control and have acted in good faith by trying to fulfill 
the agreements with FmHA or its successor agency under Public Law 103-
354 in connection with the delinquent loans.
    Interest rate reduction. Reduction of the interest rate on the 
restructured loan to as low as the poverty line interest rate in effect 
on community and business programs loans.
    Loan deferral. The temporary delay of principal and interest 
payments for up to 6 months. The debtor must be able to demonstrate the 
ability to pay the debt, as restructured, at the end of this delay 
period.
    Net recovery value. A calculation of the net value of the collateral 
and other assets held by the debtor. This value would be determined by 
adding the fair market value of FmHA or its successor agency under 
Public Law 103-354's interest in any real property pledged as collateral 
for the loan, plus the value of any other assets pledged or otherwise 
available for the repayment of the debt, minus the anticipated 
administrative and legal expenses that would be incurred in connection 
with the liquidation of the loan. This value of the assets should be 
calculated based upon the facility continuing to operate as a going 
concern. Therefore, the facility should be valued not merely as an empty 
building but as a facility continuing to offer health care services 
which may, or may not, be similar to those offered by the current 
operators.
    Operations review. A study of management and business operations of 
the facility by an independent expert. For example, a study of a 
hospital and nursing home would include such areas as: general and 
administrative, dietary, housekeeping, laundry, nursing, physical plant, 
social services, income potential, Federal, State, and insurance

[[Page 262]]

payments, and rate analysis. Also, recommendations and conclusions are 
to be included in the study which would indicate the creditworthiness of 
the facility and its ability to continue as a going concern. In 
analyzing a debtor's proposed restructuring plan, FmHA or its successor 
agency under Public Law 103-354 may contract for the completion of an 
operations review. These reviews will be developed by individuals and 
entities who have demonstrated an expertise in the analysis of health 
care facilities from an operational and administrative standpoint. FmHA 
or its successor agency under Public Law 103-354 will consider the 
following criteria for selection: past experience in health care 
facility analysis, a familiarity with the problems of rural health care 
facilities, a knowledge of the particular area currently served by the 
facility in question, and a willingness to work with both FmHA or its 
successor agency under Public Law 103-354 and the debtor in developing a 
final plan for restructuring.
    Restructured loan. A revision of the debt instruments including any 
combination of the following: writing down of accumulated interest 
charges and principal, deferral, consolidation, and adjustment of the 
interest rates and terms, usually followed by reamortization.
    (b) Debtor notification. All servicing actions permitted under 
subpart E of part 1951 of this chapter are to be exhausted prior to 
consideration for debt restructuring under this section. To this end, 
the servicing official must ensure that the casefile clearly documents 
that all servicing actions under subpart E of part 1951 of this chapter 
have been exhausted and that the debtor is at least 1 full year's debt 
service behind schedule for a minimum of 180 days. The debtor then 
should be informed of the debt restructuring available under this 
section by using language similar to that provided in Guide 1 of this 
subpart (available in any FmHA or its successor agency under Public Law 
103-354 Office) as follows:
    (1) Any introductory paragraph;
    (2) A paragraph concerning prior servicing attempts;
    (3) A discussion of eligibility, as defined in this section, 
including the provision that the debtor acted in good faith in 
connection with their FmHA or its successor agency under Public Law 103-
354 loan and that the delinquency was caused by circumstances beyond 
their control;
    (4) Two paragraphs that explain the goal of the debt restructuring 
program;
    (5) A paragraph stating that debt restructuring may include a 
combination of servicing actions listed in paragraph (a) of this 
section;
    (6) Information that details what the debtor must do to apply for 
restructuring. A response must be received within 45 days of receipt of 
this letter to request consideration for debt restructuring and the 
request must include projected balance sheets, budgets, and cash-flow 
statements which include and clearly identify funding of the FmHA or its 
successor agency under Public Law 103-354 reserve account for the next 3 
years;
    (7) A discussion of FmHA or its successor agency under Public Law 
103-354's analysis and calculation process; and
    (8) A paragraph identifying the FmHA or its successor agency under 
Public Law 103-354 official who may be contacted for assistance.
    (c) State Director's restructuring determination. Upon receipt of 
the delinquent debtor's request for debt restructuring consideration, 
the State Director will:
    (1) Within 15 days of receipt of debtor's request, if an operations 
review is deemed necessary, send a memorandum to the Administrator 
asking for program authority to contract for the review in accordance 
with Exhibit D of FmHA or its successor agency under Public Law 103-354 
Instruction 2024-A (available in any FmHA or its successor agency under 
Public Law 103-354 Office). The name of the debtor involved and the 
projected amount of funds anticipated to be spent for the contract 
should also be provided. It is anticipated that an operations review 
will be necessary in most cases and that the only exceptions would be 
for smaller health care facilities or facilities that have developed a 
proposed

[[Page 263]]

plan that is comprehensive and realistic. Upon receipt of the 
Administrator's program contracting approval authority, a contract is to 
be awarded to an organization qualified to perform an operations review 
as defined in paragraph (a) of this section. The operations review 
normally will be completed and delivered to FmHA or its successor agency 
under Public Law 103-354 within 60 days of the award date.
    (2) Contract for an appraisal to be performed by an independent, 
qualified fee appraiser. Note: To the extent possible, the appraisal 
should be scheduled for completion no later than the completion date of 
the operations review.
    (3) Complete an analysis of the operations review, appraisal, and 
other documented information, and make an eligibility determination.
    (i) Eligibility determination. The State Director must conclude that 
the debtor is eligible for debt restructuring consideration. This 
conclusion will be clearly documented in the casefile based on a review 
of the following:
    (A) The debtor acted in good faith with regard to the delinquent 
loan. The casefile must reflect the debtor's cooperation in exploring 
servicing alternatives. The casefile should contain no evidence of 
fraud, waste, or conversion by the debtor, and no evidence that the 
debtor violated the loan agreement or FmHA or its successor agency under 
Public Law 103-354 regulations.
    (B) The delinquency was caused by circumstances beyond the control 
of the debtor. This determination will be based on the debtor's 
narrative on this issue, which is a required part of the application for 
debt restructuring, and a separate review of the debtor's casefile and 
operations.
    (C) As part of the application for debt restructuring, the debtor 
submitted a proposed operating plan that presents feasible alternatives 
for addressing the delinquency.
    (ii) Debtor determined eligible. If the debtor is determined to be 
eligible for debt restructuring, a determination of a net recovery value 
and level of debt the facility will support will be made. It is 
anticipated that meetings with the debtor, the contractor who performed 
the operations review, and others, as appropriate, could be necessary to 
develop these values; although it should be emphasized throughout these 
meetings that any calculations and conclusions reached are preliminary 
in nature, pending final review by the Administrator. For debt 
restructuring calculations and computing a feasible cash-flow 
projection, the following order and combinations of loan servicing 
actions will be followed:
    (A) Loan deferral for up to 6 months.
    (B) Interest rate reduction to not less than the poverty line rate 
as determined by FmHA or its successor agency under Public Law 103-354 
Instruction 440.1, exhibit B (available in any FmHA or its successor 
agency under Public Law 103-354 Office). Interest rate reduction will be 
considered only in conjunction with an extension of the term of the loan 
to the remaining useful life of the facility or 40 years, whichever is 
less.
    (C) Debt writedown. Other creditors of the debtor, representing a 
substantial portion of the total debt, are expected to participate in 
the development of a restructuring plan which includes debt writedown. 
Debt writedown participation by other creditors should be on a pro rata 
basis with the FmHA or its successor agency under Public Law 103-354 
writedown. However, failure of these creditors to agree to participate 
in the plan shall not preclude the use of principal and interest 
writedown by FmHA or its successor agency under Public Law 103-354 if it 
is determined that this option results in the least cost to the Federal 
Government.
    (iii) Debtor determined ineligible. If the State Director concludes 
that the debtor is not eligible for debt restructuring consideration for 
any of the reasons listed in paragraph (c)(3)(i) of this section, then 
the debtor will be notified by a letter that includes the following 
information:
    (A) The basis for the determination;
    (B) The next step in servicing the loan: possible acceleration if 
the delinquency is not cured; and
    (C) The debtor may appeal this determination in accordance with 
subpart B of part 1900 of this chapter.
    (iv) State Director's recommendation. Upon completion of the 
determination of net recovery value and restructured

[[Page 264]]

debt in accordance with paragraph (c)(3)(ii) of this section, and prior 
to formal presentation to the borrower, the State Director will forward 
a recommendation to the National Office with the following 
documentation:
    (A) That all other servicing efforts have been exhausted as required 
in paragraph (b) of this section.
    (B) Financial statements including balance sheets, income and 
expense, cash-flows for the most recent actual year, and projections for 
the next 3 years. The amount of FmHA or its successor agency under 
Public Law 103-354's restructured debt and reserve account requirements 
are to be clearly indicated on the projected statements. Also, operating 
statistics including number of beds, patient days of care, outpatient 
visits, occupancy percentage, etc., for the same periods of time must be 
included.
    (C) Copies of the operations review, developed for the particular 
loan, and appraisal.
    (D) Calculations of the net recovery value.(E) Debt restructuring 
calculations including a listing of the various servicing combinations 
used in these calculations as contained in paragraph (c)(3)(ii) of this 
section. For example:
    (1) Interest rate reduced from the applicant's current rate on all 
loans to the poverty line rate as determined by FmHA or its successor 
agency under Public Law 103-354 instruction 440.1, exhibit B (available 
in any FmHA or its successor agency under Public Law 103-354 Office); 
and
    (2) Extension of the terms from 25 to 30 years.
    (F) Information concerning discussions with the debtor and their 
agreement or disagreement with the calculations and recommendations.
    (G) If debt restructuring is proposed:
    (1) A draft of Form FmHA or its successor agency under Public Law 
103-354 1951-33, if applicable, and any other necessary comments or 
requirements that may be required by OGC and Bond Counsel in Sec. 
1951.223 (c)(3) and (4) of subpart E of part 1951 of this chapter.
    (2) A draft of Form FmHA or its successor agency under Public Law 
103-354 1956-1, if applicable. Complete only parts I, II, VI, and VIII. 
Part VI, ``Debtor's Offer and Certification,'' will be in a separate 
attachment and contain the adjusted unpaid principal amount for which 
FmHA or its successor agency under Public Law 103-354 approval is 
requested. In Part VI of the form, type ``see attached.''
    (H) If the proposed restructured debt will not cash-flow or is less 
than the net recovery value, omit the items in paragraph (c)(3)(iv)(G) 
of this section.
    (d) National Office processing of State Director's request.
    (1) After reviewing the recommendation to either debt restructure or 
liquidate for the net recovery value, the Administrator, after 
concurring, modifying, or not concurring in the recommendation, will 
return the submission for further processing.
    (2) If a debt writedown is used in the restructuring process, the 
amount will be included in the National Office transmittal memorandum. 
The draft Form FmHA or its successor agency under Public Law 103-354 
1956-1 will not need to be finalized and returned to the Administrator 
for signature. The State Director's signature on the final copy will be 
sufficient. However, a copy of the National Office memorandum is to be 
attached to the form when completed.
    (e) Debtor notification of debt restructuring and net recovery value 
calculations. The State Director will provide a copy of the basis for 
the debt restructuring or net recovery determination to the debtor.
    (1) If the value of the restructured loan is equal to, or greater 
than, the recovery value, the debtor will be made an offer to accept the 
restructured debt by using language similar to that provided in Guide 2 
of this subpart (available in any FmHA or its successor agency under 
Public Law 103-354 Office) and including the following paragraphs:
    (i) An introductory paragraph indicating that FmHA or its successor 
agency under Public Law 103-354 has concluded its consideration of the 
debtor's request;
    (ii) A paragraph indicating FmHA or its successor agency under 
Public Law 103-354's approval of the debt restructuring request and that 
acceptance must be received by FmHA or its successor agency under Public 
Law 103-354

[[Page 265]]

within 45 days from receipt of this letter; and
    (iii) That the debtor's acceptance will require the execution of a 
Shared Appreciation Agreement similar to Guide 4 of this subpart 
(available in any FmHA or its successor agency under Public Law 103-354 
Office) and possible new debt instruments accompanied by Bond Counsel 
opinions.
    (2) If the debt analysis calculations indicate that a restructured 
debt would be less than the net recovery value of the security, a letter 
using language similar to that provided in Guide 3 of this subpart 
(available in any FmHA or its successor agency under Public Law 103-354 
Office), will be sent to the debtor that includes the following 
paragraphs:
    (i) An introductory paragraph indicating that FmHA or its successor 
agency under Public Law 103-354 has concluded its consideration of the 
debtor's request;
    (ii) Paragraphs indicating that:
    (A) The debtor may pay FmHA or its successor agency under Public Law 
103-354 the net recovery value of the loan. The debtor will be given 30 
days from receipt of this letter to inform FmHA or its successor agency 
under Public Law 103-354 of its intent, 90 days to finalize the payoff, 
and will be notified that an election to pay off FmHA or its successor 
agency under Public Law 103-354 would require the execution of a Net 
Recovery Buy Out Recapture Agreement, similar to that provided in Guide 
5 of this subpart (available in any FmHA or its successor agency under 
Public Law 103-354 Office); or
    (B) If the debt is not paid off at the net recovery value, FmHA or 
its successor agency under Public Law 103-354 will proceed to liquidate 
the loan.
    (f) Debtor responses to debt restructuring and net recovery value 
calculations. Responses from the debtor will be handled as follows:
    (1) Acceptance of FmHA or its successor agency under Public Law 103-
354's restructured debt offer. When a debtor accepts the offer for debt 
restructuring, processing will be in accordance with Sec. 1951.223 (c) 
of subpart E of part 1951 of this chapter using the adjusted unpaid 
principal and outstanding accrued interest at the Administrator's 
approved interest rate and terms. The debtor will be required to execute 
a Shared Appreciation Agreement which will provide that, should the 
debtor sell or transfer title to the facility within the next 10 years, 
FmHA or its successor agency under Public Law 103-354 is entitled to a 
portion of any gain realized. This agreement will include language 
similar to that found in Guide 4 of this subpart (available in any FmHA 
or its successor agency under Public Law 103-354 Office). The original 
of Form FmHA or its successor agency under Public Law 103-354 1956-1, 
with appropriate attachments signed by the State Director, and a copy of 
the Shared Appreciation Agreement will be sent to the Finance Office. 
Note: All documents pertaining to this transaction will be sent to the 
Finance Office in one single complete package; and
    (2) Acceptance by debtor to pay off loan at the recovery value. 
Processing of this transaction will be in accordance with Sec. 1956.124 
of this subpart. However, the account does not need to be accelerated. 
The debtor will be required to execute a Net Recovery Buy Out Recapture 
Agreement, similar to that found in Guide 5 of this subpart (available 
in any FmHA or its successor agency under Public Law 103-354 Office). 
The original of Form FmHA or its successor agency under Public Law 103-
354 1956-1, with appropriate attachments signed by the State Director, 
and a copy of the recorded Net Recovery Buy Out Recapture Agreement will 
be sent to the Finance Office. The executed Net Recovery Buy Out 
Recapture Agreement will be recorded in the county in which the facility 
is located. The Finance Office will credit the accounts of debtors who 
entered into Net Recovery Buy Out Recapture Agreements with the amount 
paid by the debtor (net recovery value). Note: All documents pertaining 
to this transaction will be sent to the Finance Office in one single 
complete package.
    (g) Collection and processing of recapture. (1) When FmHA or its 
successor agency under Public Law 103-354 becomes aware of the sale or 
transfer of title to the facility on which there is an effective Net 
Recovery Buy Out Recapture Agreement (Guide 5 of this subpart available 
in any FmHA or its

[[Page 266]]

successor agency under Public Law 103-354 Office) or a Shared 
Appreciation Agreement (Guide 4 of this subpart available in any FmHA or 
its successor agency under Public Law 103-354 Office) outstanding and a 
determination is made that a recapture is appropriate, FmHA or its 
successor agency under Public Law 103-354 will notify the debtor of the 
following:
    (i) Date and amount of recapture due; and
    (ii) FmHA or its successor agency under Public Law 103-354 action to 
be taken if debtor does not respond within the designated timeframe with 
the amount of recapture due.
    (2) [Reserved]
    (3) When the amount of the recapture has been paid and credited to 
the debtor's account, the debtor will be released from liability by 
using Form FmHA or its successor agency under Public Law 103-354 1965-8, 
``Release from Personal Liability,'' modified as appropriate.
    (h) No recapture due. If FmHA or its successor agency under Public 
Law 103-354 determines there is no recapture due, the Net Recovery Buy 
Out Recapture Agreement (Guide 5 of this subpart available in any FmHA 
or its successor agency under Public Law 103-354 Office) or Shared 
Appreciation Agreement (Guide 4 of this subpart available in any FmHA or 
its successor agency under Public Law 103-354 Office) will be 
appropriately annotated, the Recapture Agreement released from the 
record, and the Agreement returned to the debtor.

[59 FR 46160, Sept. 7, 1994, as amended at 68 FR 61332, Oct. 28, 2003]



Sec. 1956.144  [Reserved]



Sec. 1956.145  Disposition of essential FmHA or its successor agency 
under Public Law 103-354 records.

    FmHA or its successor agency under Public Law 103-354 Instruction 
2033-A (available in any FmHA or its successor agency under Public Law 
103-354 office) identifies an ``essential FmHA or its successor agency 
under Public Law 103-354 record'' as the original of any document or 
record which provides evidence of indebtedness or obligation to FmHA or 
its successor agency under Public Law 103-354 and includes, but is not 
limited to: promissory notes, assumption agreements and valuable 
documents, such as bonds fully registered as to principal and interest.
    (a) Essential FmHA or its successor agency under Public Law 103-354 
records evidencing debts settled by compromise, completed adjustment or 
cancelled with application will be returned to the debtor or to the 
debtors' legal representative. The appropriate legend, such as 
``Satisfied by Approved Compromise,'' and the date of the final action 
will be stamped or typed on the original document. This same information 
plus the date the original document is returned to the debtor will be 
shown on a copy to be placed in the debtor's case folder.
    (b) Essential FmHA or its successor agency under Public Law 103-354 
records evidencing debts cancelled without application will be placed in 
the debtor's case folder and disposed of pursuant to FmHA or its 
successor agency under Public Law 103-354 Instruction 2033-A (available 
in any FmHA or its successor agency under Public Law 103-354 office). 
However, if the debtor requests the document(s), they must be stamped 
``Satisfied by Approved Cancellation'' and returned.
    (c) Essential FmHA or its successor agency under Public Law 103-354 
records evidencing charged off debts will be retained in the servicing 
office and will not be stamped or returned to the debtor. They will be 
destroyed six years after chargeoff pursuant to FmHA or its successor 
agency under Public Law 103-354 Instruction 2033-A (available in any 
FmHA or its successor agency under Public Law 103-354 office).

[53 FR 13100, Apr. 21, 1988, as amended at 58 FR 21346, Apr. 21, 1993]



Sec. 1956.146  [Reserved]



Sec. 1956.147  Debt settlement under the Federal Claims Collection Act.

    The U.S. Department of Justice (DOJ) and the General Accounting 
Office are charged with the responsibility for implementing the Federal 
Claims Collection Act and have promulgated the Federal Claims Collection 
Act Joint Standards (FCCAJS) (4 CFR

[[Page 267]]

parts 101-105) to inform Government Agencies on how to settle debts and 
claims which the Agency does not have independent statutory authority to 
settle. With the exception of loans and claims with outstanding balances 
of $20,000 or less, exclusive of interest, penalties, and administrative 
costs, settlements must be submitted to and approved by the United 
States Attorney or the DOJ. Debt Settlement of Economic Opportunity 
Cooperative loans, Claims Against Third Party Converters, Nonprogram 
loans, Industrial Development Grants, Rural Development Loan Fund loans, 
Intermediary Relending Program loans, Nonprofit National Corporations 
Loans and Grants, Indian Tribal Land Acquisition Loans (to the extent 
settlement cannot be effected pursuant to Sec. 1956.137), and 601 
Energy Impact Assistance Grants are programs that must be settled under 
the FCCAJS.
    (a) Debt settlement of the subject loans and claims falls in the 
following categories:
    (1) Settlement of loans and claims may be approved by the 
Administrator when the outstanding balance of the indebtedness involved 
in the settlement in $20,000 or less, exclusive of interest, penalties, 
and administrative costs. These loans and claims will be submitted to 
the National Office on Form FmHA or its successor agency under Public 
Law 103-354 1956-1, ``Application for Settlement of Indebtedness,'' for 
debt settlement. Subsequent to approval, Form FmHA or its successor 
agency under Public Law 103-354 1956-1 will be distributed in accordance 
with the Forms Manual Insert (FMI).
    (2) Loans and claims with an outstanding balance of $200,000 or less 
inclusive of interest, penalties, and administrative costs, but with an 
outstanding balance greater than $20,000, exclusive of interest, 
penalties, and administrative costs, after approval by the State 
Director will be referred to your Regional Office of the General Counsel 
(OGC) for referral to the United States Attorney in whose judicial 
district the debtor can be found. The form to be used is the Claims 
Collection Litigation Report (CCLR). This form should be available 
through the U.S. Attorney. A memorandum from the State Director should 
be attached to the CCLR recommending acceptance of the debt settlement. 
If the State Director after reviewing the CCLR does not recommend 
acceptance, the State Director has the authority to reject the debt 
settlement.
    (3) Loans and claims with an outstanding balance over $200,000, 
inclusive of interest, penalties, and administrative costs, will be 
referred to the Administrator and will include the following:
    (i) The case file(s).
    (ii) A completed CCLR.
    (iii) Copies of the notes, security agreements, and mortgages.
    (iv) A current appraisal of any security owned by the debtor.
    (v) A narrative which will include:
    (A) Recommendation for the acceptance of the debt settlement.
    (B) The type of loan involved, a short history of the loan, and why 
the debtor failed.
    (C) Steps taken to collect the loan(s).
    (D) An analysis of the debtor's future repayment ability. This 
should discuss if the debtor has any other assets or has concealed or 
improperly transferred assets, if known. If the debtor is an individual, 
this should include consideration of the debtor's present and potential 
income and inheritance prospects.
    (E) Why acceptance of the debt settlement offer is in the best 
interest of the Government.
    (4) If the Administrator concurs with the recommendation for the 
debt settlement, it will be referred by the FmHA or its successor agency 
under Public Law 103-354 National Office to OGC for referral to the 
Commercial Litigation Branch, Civil Division, U.S. Department of 
Justice, Washington, DC 20530.
    (b) When a debtor has a Community Programs or Business and Industry 
loans(s) and defined in this subpart, these loan(s) will be debt settled 
under the authority of the Consolidated Farm and Rural Development Act. 
In such cases, the subject loans and claims should be listed under part 
II(B) on Form FmHA or its successor agency under Public Law 103-354 
1956-1, as other debts owed FmHA or its successor agency under Public 
Law 103-

[[Page 268]]

354. Normally, all the security for the subject loans and claims should 
be disposed of prior to the submission for debt settlement.
    (c) It is not necessary to obtain approval of the United States 
Attorney or the DOJ (as the case may be) in cases where FmHA or its 
successor agency under Public Law 103-354 decides not to settle a loan 
or claim.

[55 FR 30197, July 25, 1990, as amended at 59 FR 46162, Sept. 7, 1994]



Sec. 1956.148  Exception authority.

    The Administrator may make an exception to any requirement or 
provision of this subpart which is not inconsistent with the authorizing 
statute or other applicable law if the Administrator determines that 
application of the requirement or provision would adversely affect the 
Government's interest. Requests for exceptions must be made in writing 
by the State Director and supported with documentation to explain the 
adverse effect on the Government's interest, propose alternative courses 
of action, and show how the adverse effect will be eliminated or 
minimized if the exception is granted. Any settlement actions approved 
by the Administrator under this section will be documented on Form FmHA 
or its successor agency under Public Law 103-354 1956-1 and returned to 
the State Office for submission to the Finance Office.



Sec. 1956.149  [Reserved]



Sec. 1956.150  OMB control number.

    The reporting requirements contained in this regulation have been 
approved by the Office of Management and Budget and assigned OMB control 
number 0575-0124. Public reporting burden for this collection of 
information is estimated to vary from \1/2\ hour to 30 hours per 
response with an average of 8.14 hours per response, including the time 
for reviewing instructions, searching existing data sources, gathering 
and maintaining the data needed, and completing and reviewing the 
collection of information. Send comments regarding this burden estimate 
or any other aspect of this collection of information, including 
suggestions for reducing this burden, to Department of Agriculture, 
Clearance Officer, OIRM, Ag Box 7630, Washington, D.C. 20250; and to the 
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Washington, DC 20503.

[59 FR 46162, Sept. 7, 1994]



PART 1957_ASSET SALES--Table of Contents




                   Subpart A_Rural Housing Asset Sales

Sec.
1957.1 General.
1957.2 Transfer with assumptions.
1957.3 [Reserved]
1957.4 Graduation.
1957.5 [Reserved]
1957.6 Appeal reviews.
1957.7-1957.50 [Reserved]

    Authority: Pub. L. 99-509, sec 2001(b)(1).

    Source: 54 FR 47958, Nov. 20, 1989, unless otherwise noted.



                   Subpart A_Rural Housing Asset Sales



Sec. 1957.1  General.

    Pursuant to the Omnibus Budget Reconciliation Act of 1986, Public 
Law 99-509, the Farmers Home Administration or its successor agency 
under Public Law 103-354 sold certain of the portfolio of loans made 
under section 502 of the Housing Act of 1949 to the Rural Housing Trust, 
1987-1. The sale was without recourse to FmHA or its successor agency 
under Public Law 103-354 except for certain provisions providing for 
FmHA or its successor agency under Public Law 103-354's payment of 
interest credit amounts and agreement to compensate the Rural Housing 
Trust 1987-1 for future cash flow changes due to revised borrowers 
rights as set forth in FmHA or its successor agency under Public Law 
103-354 regulations. The sale documents to Rural Housing Trust 1987-1 
recognize that the FmHA or its successor agency under Public Law 103-354 
loans were assigned subject to rights provided to theseborrowers under 
documentation to recognize the rights of FmHA or its successor agency 
under Public Law 103-354 borrowers under regulations of FmHA or its 
successor agency under Public Law 103-354 as they may exist from time to 
time and to service the loans in accordance

[[Page 269]]

with then current FmHA or its successor agency under Public Law 103-354 
regulations. In addition, as provided in Sec. 1957.6 of this subpart, 
FmHA or its successor agency under Public Law 103-354 has retained 
review, but not hearing authority under the FmHA or its successor agency 
under Public Law 103-354 Appeal Procedure, 7 CFR part 1900, Subpart B. 
Failure of private servicers to comply with FmHA or its successor agency 
under Public Law 103-354 regulations in servicing loans sold to the 
Rural Housing Trust 1987-1 may be redressed in the review process under 
the Appeal Procedure.



Sec. 1957.2  Transfer with assumptions.

    FmHA or its successor agency under Public Law 103-354 regulations 
governing transfers and assumptions will not apply to these loans. 
Individuals who what to purchase property securing a loan held by the 
Rural Housing Trust 1987-1, and who are eligible for an FmHA or its 
successor agency under Public Law 103-354 Sec. 502 loan will be given 
the same priority by FmHA or its successor agency under Public Law 103-
354 as a transferee of a Sec. 502 loan if the property is then suitable 
for the FmHA or its successor agency under Public Law 103-354 RH program 
and is located in an eligible area. The Master Servicer of the Rural 
Housing Trust, 1987-1, may permit an assumption if it is deemed by the 
Master Servicer to be in the financial interest of the Trust, but in 
such case the transferee would not be eligible for FmHA or its successor 
agency under Public Law 103-354 loan servicing benefits under FmHA or 
its successor agency under Public Law 103-354 regulations.



Sec. 1957.3  [Reserved]



Sec. 1957.4  Graduation.

    Borrowers will not be required to graduate to other credit.



Sec. 1957.5  [Reserved]



Sec. 1957.6  Appeal reviews.

    The Master Servicer, acting through its subservicer, will have the 
responsibility to conduct hearings under the appeal process. Final 
review of an adverse decision upheld under the appeal process will 
remain with FmHA or its successor agency under Public Law 103-354 and be 
conducted by the Agency's National Appeal Staff, Washington, DC, under 
the FmHA or its successor agency under Public Law 103-354 Appeal 
Procedures, 7 CFR part 1900, subpart B. This review is final and will 
conclude the appellant's administrative appeal process.



Sec. Sec. 1957.7-1957.50  [Reserved]



PART 1962_PERSONAL PROPERTY--Table of Contents




         Subpart A_Servicing and Liquidation of Chattel Security

Sec.
1962.1 Purpose.
1962.2 Policy.
1962.3 Authorities and responsibilities.
1962.4 Definitions.
1962.5 [Reserved]
1962.6 Liens and assignments on chattel property.
1962.7 Securing unpaid balances on unsecured loans.
1962.8 Liens on real estate for additional security.
1962.9-1962.12 [Reserved]
1962.13 Notification to potential purchasers.
1962.14 Account and security information in UCC cases.
1962.15 [Reserved]
1962.16 Accounting by County Supervisor.
1962.17 Disposal of chattel security, use of proceeds and release of 
          lien.
1962.18 Unapproved disposition of chattel security.
1962.19 Claims against Commodity Credit Corporation (CCC).
1962.20-1962.25 [Reserved]
1962.26 Correcting errors in security instruments.
1962.27 Termination or satisfaction of chattel security instruments.
1962.28 [Reserved]
1962.29 Payment of fees and insurance premiums.
1962.30 Subordination and waiver of liens of chattel security.
1962.31-962.33 [Reserved]
1962.34 Transfer of chattel security and EO property and assumption of 
          debts.
1962.35-1962.39 [Reserved]
1962.40 Liquidation.
1962.41 Sale of chattel security or EO property by borrowers.
1962.42 Repossession, care, and sale of chattel security or EO property 
          by the County Supervisor.
1962.43 [Reserved]
1962.44 Distribution of liquidation sale proceeds.

[[Page 270]]

1962.45 Reporting sales.
1962.46 Deceased borrowers.
1962.47 Bankruptcy and insolvency.
1962.48 [Reserved]
1962.49 Civil and criminal cases.
1962.50 [Reserved]

Exhibits to Subpart A
Exhibit A--Memorandum of Understanding Between Commodity Credit 
          Corporation and Farmers Home Administration or its successor 
          agency under Public Law 103-354
Appendix 1--Furnishing Notice or Information to Commodity Credit 
          Corporation
Exhibit B--Memorandum of Understanding and Blanket Commodity Lien Waiver
Exhibit C--Memorandum of Understanding Between Farmers Home 
          Administration or its successor agency under Public Law 103-
          354 and Commodity Credit Corporation
Exhibits D--D-1 [Reserved]
Exhibit E--Releasing Security Sales Proceeds and Determining 
          ``Essential'' Family Living and Farm Operating Expenses
Exhibit F [Reserved]

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

    Source: 50 FR 45783, Nov. 1, 1985, unless otherwise noted.



         Subpart A_Servicing and Liquidation of Chattel Security



Sec. 1962.1  Purpose.

    This subpart delegates authorities and gives procedures for 
servicing, care, and liquidation of Farmers Home Administration or its 
successor agency under Public Law 103-354 (FmHA or its successor agency 
under Public Law 103-354) chattel security, Economic Opportunity (EO) 
loan property, and note only loans. Security servicing for Nonprogram 
(NP) loans on farm property will be according to subpart J of part 1951 
of this chapter.

[50 FR 45783, Nov. 1, 1985, as amended at 58 FR 52654, Oct. 12, 1993]



Sec. 1962.2  Policy.

    Chattel security, EO property and note only loans will be serviced 
to accomplish the loan objectives and protect FmHA or its successor 
agency under Public Law 103-354's financial interest. To accomplish 
these objectives, security will be serviced in accordance with the 
security instruments and related agreements, including any authorized 
modifications, provided the borrower has reasonable prospects of 
accomplishing the loan objectives, properly maintains and accounts for 
the security, and otherwise satisfactorily meets the loan obligations 
including repayment.



Sec. 1962.3  Authorities and responsibilities.

    (a) Redelegation of authority. Authority will be redelegated to the 
maximum extent possible consistent with program requirements and 
available resources. The State Director, District Director and County 
Supervisor are authorized to redelegate, in writing, any authority 
delegated to them in this subpart to any employee determined by them to 
be qualified.
    (b) Responsibilities--(1) FmHA or its successor agency under Public 
Law 103-354 personnel. The State Director, District Director and County 
Supervisor are responsible for carrying out the policies and procedures 
in this subpart.
    (2) Borrower. The borrower is responsible for repaying the loans, 
maintaining, protecting, and accounting to FmHA or its successor agency 
under Public Law 103-354 for all chattel security, and complying with 
all other requirements specified in promissory notes, security 
instruments, and related documents.
    (c) Exception authority. The Administrator may, in individual cases, 
make an exception to any requirement or provision of this subpart which 
is not inconsistent with the authorizing statute or other applicable law 
if the Administrator determines that application of the requirement or 
provision would adversely affect the Government's interest. The 
Administrator will exercise this auhority only at the request of the 
State Director and on the recommendation of the appropriate program 
Assistant Administrator. Requests for exceptions must be made in writing 
by the State Director and supported with documentation to explain the 
adverse effect on the Government's interest, propose alternative courses 
of action, and show how the adverse effect will be eliminated or 
minimized if the exception is granted.
    (d) Farms in more than one jurisdiction. If the farm is situated in 
more than

[[Page 271]]

one State, County, or Parish, the loan will be serviced by the County 
Office serving the County in which the borrower's residence is located. 
If the borrower is a corporation, cooperative, partnership or joint 
operation is the borrower's residence is not on the farm, the loan will 
be serviced by the County Office serving the County in which the farm or 
a major portion of the farm is located.

[50 FR 45783, Nov. 1, 1985, as amended at 51 FR 13480, Apr. 21, 1986]



Sec. 1962.4  Definitions.

    As used in this subpart, the following definitions apply:
    Abandonment. Voluntary relinquishment by the borrower of control of 
security or EO property without providing for its care.
    Acquired chattel property. Former security or EO property of which 
FmHA or its successor agency under Public Law 103-354 has become the 
owner (See Sec. 1955.20 of Subpart A of Part 1955 of this chapter).
    Basic security. Consists of all equipment serving as security for 
FmHA or its successor agency under Public Law 103-354 loans. It also 
consists of real estate and all foundation herds and flocks, including 
replacements, which serve as a basis for the farming operation outlined 
in the Farm and Home Plan or yearly budget which serve as security for 
FmHA or its successor agency under Public Law 103-354 loans. With 
respect to livestock herds and flocks, animals that are sold as a result 
of the normal culling process are basic security unless the borrower has 
replacements that will keep numbers and production up to planned levels. 
However, if a borrower plans to make a significant reduction in his 
basic livestock herd or flocks, the animals or birds that are sold in 
making this reduction will be considered basic security.
    Borrower. When a loan is made to an individual, the individual is 
the borrower. When a loan is made to an entity, the cooperative, 
corporation, partnership or joint operation is the borrower.
    Chattel security. Chattel property which may consist of, but is not 
limited to, inventory; accounts; contract rights; general intangibles; 
crops; livestock; fish; farm, business, and recreational equipment; and 
supplies, and which is covered by financing statements and security 
agreements, chattel mortgages, and other security instruments.
    Civil action. Court proceedings to protect FmHA or its successor 
agency under Public Law 103-354's financial interests such as obtaining 
possession of property from borrowers or third parties, judgments on 
indebtedness evidenced by notes or other contracts or judgments for the 
value of converted property, or judicial foreclosure. Bankruptcy and 
similar proceedings to impound and distribute the bankrupt's assets to 
creditors and probate and similar proceedings to settle and distribute 
estates of incompetents or of decendents under a will, or otherwise, and 
pay claims of creditors are not included.
    Criminal action. Prosecution by the United States to exact 
punishment in the form of fines or imprisonment for alleged violations 
of criminal statutes. These include but are not limited to violations 
such as:
    Unauthorized sale of security.
    Purchase of security with intent to defraud and without payment of 
the purchase price to FmHA or its successor agency under Public Law 103-
354;
    Falsification of assets or liabilities in loan applications;
    Application for a loan for an authorized purpose with intent to use 
and use of loan funds for an unauthorized purpose;
    Decision after obtaining a loan to use and using the funds for an 
unauthorized purpose and then making false statements regarding their 
use;
    By scheme, trick, or other device, covering up or concealing misuse 
of funds or authorized dispositions of security or EO property or other 
illegal action; or
    Any other false statements or representations relating to FmHA or 
its successor agency under Public Law 103-354 matters. To establish that 
a criminal act was committed by selling EO property, it is necessary to 
show that the borrower, at the time the loan

[[Page 272]]

agreement or the check on the supervised bank account was signed, 
intended to sell the property in violation of the loan agreement. The 
Federal criminal statute of limitations bars institution of criminal 
action 5 years after the date the act was committed. Unauthorized 
disposition of even minor items by the borrower will be considered 
criminal violations.
    Default. Failure of the borrower to observe the agreements with FmHA 
or its successor agency under Public Law 103-354 as contained in notes, 
security instruments, and similar or related instruments. Some examples 
of default or factors to consider in determining whether a borrower is 
in default are when a borrower:
    Is delinquent, and the borrower's refusal or inability to pay on 
schedule, or as agreed upon, is due to lack of diligence, lack of sound 
farming or other operation, or other circumstances within the borrower's 
control.
    Ceases to conduct farming or other operations for which the loan was 
made or to carry out approved changed operations.
    Has disposed of security or EO property without FmHA or its 
successor agency under Public Law 103-354 approval, has not cared 
properly for such property, has not accounted properly for such property 
or the proceeds from its sale, or taken some action which resulted in 
bad faith or other violations in connection with the loan.
    Has progressed to the point to be able to obtain credit from other 
sources, and has agreed in the note or other instrument to do so but 
refuses to comply with that agreement.
    EO property. Nonsecurity chattel property purchased, refinanced, or 
improved with EO loan funds.
    EO property essential for minimum family living needs. Nonsecurity 
chattel or real property required to provide food, shelter, or other 
necessities for the family or to produce income without which the family 
would not have such necessities. This includes livestock, poultry, or 
other animals used as food or to produce food for the family or to 
produce income for minimum essential family living needs; modest amounts 
of real property needed for family shelter or to produce food or income 
for minimum essential family living needs, and items such as equipment, 
tools, and motor vehicles, which are of minimum value and are essential 
for family living needs or to produce income for that purpose. Any such 
item of a value in excess of the minimum need may be sold and a portion 
of the sale proceeds used to purchase a similar item of less value to 
meet such need. The remainder of the proceeds will be paid on the EO 
loan.
    Farm income. Proceeds from the sale of chattel security which is 
normally sold annually during the regular course of business such as 
crops, feeder livestock and other farm products.
    Farmer Program loans. These loans and Farm Ownership (FO), Operating 
(OL), Soil and Water (SW), Recreation (RL), Economic Emergency (EE), 
Emergency (EM), Economic Opportunity (EO) and Special Livestock (SL) 
loans and Rural Housing loans made for farm service buildings (RHF).
    FmHA or its successor agency under Public Law 103-354. The United 
States of America, acting through the Farmers Home Administration or its 
successor agency under Public Law 103-354 and its predecessor 
administrative agencies.
    Foreclosure sale. Act of selling security either under the ``Power 
of Sale'' in the security instrument or through court proceedings.
    Liquidation. The act of selling security or EO property to close the 
loan when no further assistance will be given; or instituting civil suit 
against a borrower to recover security or EO property or against third 
parties to recover security or its value or to recover amounts owed to 
FmHA or its successor agency under Public Law 103-354; or filing claims 
in bankruptcy or similar proceedings or in probate or administrative 
proceedings to close the loan.
    Normal income security. All security not considered basic security, 
including crops, livestock, poultry products, Agricultural Stabilization 
and Conservation Service payments and Commodity Credit Corporation 
payments, and other property covered by Farmers Home Administration or 
its successor agency under Public Law 103-354 liens

[[Page 273]]

that is sold in conjunction with the operation of a farm or other 
business, but shall not include any equipment (including fixtures in 
States that have adopted the Uniform Commercial Code), or foundation 
herd or flock. that is the basis of the farming or other operation, and 
is the basic security for a Farmers Home Administration or its successor 
agency under Public Law 103-354 farmer program loan.
    Office of the General Counsel (OGC). The Regional Attorneys, 
Attorneys-in-Charge, and National Office staff of the Office of the 
General Counsel of the United States Department of Agriculture.
    Purchase money security interest. Special type of security interest 
which, if properly perfected, takes priority over an earlier-perfected 
security interest. A security interest is a purchase money security 
interest to the extent that it is taken by the seller of the collateral 
to secure all or part of its purchase price or by a lender who makes 
loans or is obligated to make loans or otherwise gives value to enable 
the debtor to acquire the particular collateral or obtain rights in it. 
Such value must be given not later than the time the debtor acquires the 
collateral or obtains rights in it.
    Repossessed property. Security or EO property in FmHA or its 
successor agency under Public Law 103-354's custody, but still owned by 
the borrower.
    Security. Also means ``Chattel security'' when appropriate.

[50 FR 45783, Nov. 1, 1985, as amended at 51 FR 13481, Apr. 21, 1986; 53 
FR 35783, Sept. 14, 1988]



Sec. 1962.5  [Reserved]



Sec. 1962.6  Liens and assignments on chattel property.

    (a) Chattel property not covered by Agency lien. (1) When additional 
chattel property not presently covered by an Agency lien is available 
and needed to protect the Government's interest, the County Supervisor 
will obtain one or more of the following:
    (i) A lien on such property.
    (ii) An assignment of the proceeds from the sale of agricultural 
products when such products are not covered by the lien instruments.
    (iii) An assignment of other income, including FSA Farm Programs 
(formerly ASCS) payments.
    (2) When a current loan is not being made to a borrower, a crop lien 
will be taken as additional security when the County Supervisor 
determines in individual cases that it is needed to protect the 
Government's interests. However, a crop lien will not be taken as 
additional security for Farm Ownership (FO), Rural Housing (RH), Labor 
Housing (LH), and Soil and Water (SW) loans. When a new security 
agreement or chattel mortgage is taken, all existing security items will 
be described on it.
    (b) [Reserved]
    (c) Assignments of upland cotton, rice, wheat and feed grain 
payments. Borrowers may assign FSA Farm Programs (formerly ASCS) 
payments under upland cotton, rice, wheat and feed grain programs.
    (1) Obtaining assignments. Assignments will be obtained as follows:
    (i) Only when it appears necessary to collect operating-type loans.
    (ii) Only for the crop year for which operating-type loans are made, 
and
    (iii) For only the amount anticipated for payments as indicated on 
Form FmHA 1962-1, ``Agreement for the Use of Proceeds/Release of Chattel 
Security,'' of the applicable upland cotton, rice, wheat and feed grain 
programs.
    (2) Selecting counties. The County Supervisor then will:
    (i) Determine, at the time of loan processing for indebted borrowers 
and new applicants, who must give assignments and obtain them no later 
than loan closing. Special efforts will be made to obtain the bulk of 
assignments before the sign-up period for enrolling in the annual Feed 
Grain and Wheat set aside programs.
    (ii) Obtain assignments from selected borrowers on Form ASCS-36, 
``Assignments of Payment,'' which will be obtained from FSA Farm 
Programs.
    (3) Releasing assignments and handling checks. (i) The County 
Supervisor will inform FSA Farm Programs that releasing its assignment 
whenever a borrower pays the amount due for the year on the operating-
type loan debt or pays the debt in full.

[[Page 274]]

    (ii) Checks obtained as a result of an assignment will be made only 
to the Agency, and the proceeds used as indicated on Form FmHA 1962-1.

[61 FR 35929, July 9, 1996]



Sec. 1962.7  Securing unpaid balances on unsecured loans.

    The County Supervisor will take a lien on a borrower's chattel 
property in accordance with Sec. 1962.6 of this subpart if it is 
necessary to rely on such property for the collection of the borrower's 
unsecured indebtedness, or if it will assist in accomplishing loan 
objectives.



Sec. 1962.8  Liens on real estate for additional security.

    The County Supervisor may take the best lien obtainable on any real 
estate owned by the borrower, including any real estate which already 
serves as security for another loan. Additional liens will be taken only 
when the borrower is delinquent, the existing security is not adequate 
to protect FmHA or its successor agency under Public Law 103-354 
interests, and the borrower has substantial equity in the real estate to 
be mortgaged, and taking such mortgage will not prevent making an FmHA 
or its successor agency under Public Law 103-354 real estate loan, if 
needed, later.
    (a)-(b) [Reserved]

[50 FR 45783, Nov. 1, 1985, as amended at 53 FR 35783, Sept. 14, 1988; 
56 FR 15824, Apr. 18, 1991; 61 FR 35930, July 9, 1996]



Sec. Sec. 1962.9-1962.12  [Reserved]



Sec. 1962.13  Notification to potential purchasers.

    (a) In States without a Central Filing System (CFS), all Farm Credit 
Programs borrowers prior to loan closing or prior to any servicing 
actions which require taking a lien on farm products, such as crops or 
livestock, must provide the names and addresses of potential purchasers. 
A written notice will be sent by the Agency, certified mail, return 
receipt requested, to these potential purchasers to protect the 
Government's security interest.
    (1) The name and address of the debtor.
    (2) The name and address of any secured party.
    (3) The Social Security number or tax ID number of the debtor.
    (4) A description of the farm products given as security by the 
debtor, including the amount of such products where applicable, the crop 
year, the county in which the products are located, and a reasonable 
description of the farm products.
    (5) Any payment obligation imposed on the potential purchaser by the 
secured party as a condition for waiver or release of lien. The original 
or a copy of the written notice also must be sent to the purchaser 
within 1 year before the sale of the farm products. The written notice 
will lapse on either the expiration period of the Financing Statement or 
the transmission of a letter signed by the County Supervisor and showing 
that the statement has lapsed or the borrower has performed all 
obligations to the Agency.
    (b) Lists of borrowers whose chattels or crops are subject to an 
Agency lien may be made available, upon request, to business firms in a 
trade area, such as sale barns and warehouses, that buy chattels or 
crops or sell them for a commission. These lists will exclude those 
borrowers whose only crops for sale require FSA Farm Programs (formerly 
ASCS) marketing cards. The list is furnished only as a convenience and 
may be incomplete or inaccurate as of any particular date.
    (1)-(2) [Reserved]

[61 FR 35930, July 9, 1996, as amended at 62 FR 10157, Mar. 5, 1997]



Sec. 1962.14  Account and security information in UCC cases.

    Within 2 weeks after receipt of a written request from the borrower, 
the Agency must inform the borrower of the security and the total unpaid 
balance of the the Agency indebtedness covered by the Financing 
Statement.
    (a) If the Agency fails to provide the information, it may be liable 
for any loss caused the borrower and, in some States, other parties, and 
also may lose some of its security rights. The UCC provides that the 
borrower is entitled to such information once every 6 months without 
charge, and the the Agency may charge up to $10 for each

[[Page 275]]

additional statement. However, the Agency provides them without charge.
    (b) Although the UCC only requires the Agency to give information 
pursuant to the borrower's written request, the Agency will also answer 
oral requests. Furthermore, the UCC does not prohibit giving this 
information to others who have a proper need for it, such as a bank or 
another creditor contemplating advancing additional credit to the 
borrower.

[50 FR 45783, Nov. 1, 1985, as amended at 54 FR 47960, Nov. 20, 1989; 61 
FR 35930, July 9, 1996]



Sec. 1962.15  [Reserved]



Sec. 1962.16  Accounting by County Supervisor.

    The Agency will maintain a current record of each borrower's 
security. Whenever an inspection is performed, the borrower must advise 
the Agency of any changes in the security and will complete and sign 
Form FmHA 1962-1 in accordance with Sec. 1924.56 if it has not been 
previously completed for the year.
    (a) Agency responsibilities. Chattel security will be inspected 
annually except in cases where the Agency official has justified in 
assessment or analysis review that no undue risk exists. An FO borrower 
who has been current with the Agency and who has provided chattels as 
additional security is an example of a case where an inspection may not 
be needed. All inspections will be recorded in the running record of the 
borrower's file. More frequent inspections should be made for delinquent 
borrowers or borrowers that have been indebted for less then 1 full crop 
year. The Agency official will discuss the provisions of Sec. Sec. 
1962.17 and 1962.18 and assist the borrower in completing the form. If a 
borrower does not plan to dispose of any chattel security, the form 
should be completed to show this and should be signed. When the Agency 
official has other contacts with the borrower, the official should also 
check for dispositions and acquisitions of security. Changes will be 
recorded on the form, dated and initialed by the borrower and the agency 
official. The purpose of all inspections is to:
    (1) Verify that the borrower possesses all the security,
    (2) Determine security is properly maintained, and
    (3) Supplement security instruments.
    (b) Dispositions. The County Supervisor will record all dispositions 
of chattel security on Form FmHA or its successor agency under Public 
Law 103-354 1962-1, and on the file copy of the security agreement or 
chattel mortgage. The original security instrument must not be altered. 
Additional acquired chattel security should be entered on the file copy 
of the security agreement or chattel mortgage and must be described on 
subsequent security instruments.
    (c) Unapproved dispositions. Unapproved dispositions of security 
will be handled in accordance with Sec. Sec. 1962.18 and 1962.49 of 
this subpart.

[50 FR 45783, Nov. 1, 1985, as amended at 58 FR 46075, Sept. 1, 1993; 61 
FR 35930, July 9, 1996]



Sec. 1962.17  Disposal of chattel security, use of proceeds and release of lien.

    (a) General. (1) The borrower must account for all security. When 
the borrower sells security, the property and proceeds remain subject to 
the Agency's lien until the lien is released. All checks, drafts, or 
money orders which the borrower receives for the sale of collateral 
listed on Form FmHA 1962-1 (available in any Agency office) must be 
payable to both the borrower and the Agency unless all Agency loan 
installments for the period of the form have been paid including any 
past-due installments. If the borrower disposes of collateral or uses 
the proceeds in a way not listed on Form FmHA 1962-1, the borrower will 
have violated the loan agreement, and the Government will not release 
its security interest in the collateral. Releases of sales proceeds will 
be terminated when the borrower's accounts are accelerated.
    (2) Section 1924.56 requires that there must always be a current 
Form FmHA 1962-1 in the file of a borrower with a loan secured by 
chattels. If a borrower asks the Agency to release proceeds from the 
sale of chattels and there is a current Form FmHA 1962-1 in the file, 
the request will be approved or disapproved in accordance with paragraph

[[Page 276]]

(b) of this section. If the borrower's request for release is denied, 
the borrower must be given attachment 1 of exhibit A of subpart S of 
part 1951 of this chapter, a written explanation of the reasons for the 
denial, and the opportunity for an appeal in accordance with 7 CFR part 
780. Immediately upon determining that the borrower does not have a 
current Form FmHA 1962-1 in the file, the County Supervisor will 
immediately contact the borrower to develop one.
    (3) If the borrower requests a change(s) to Form FmHA 1962-1, and 
the County Supervisor can approve the change(s), the borrower and the 
County Supervisor will initial and date each change in accordance with 
item (6) in the Forms Manual Insert (FMI) for Form FmHA 1962-1. The form 
will be marked ``Revised'' and the borrower will be notified in writing 
confirming that the change(s) has been approved.
    (b) Use of Form FmHA 1962-1. (1) County Supervisors are authorized 
to approve or disapprove dispositions of Agency chattel security in 
accordance with this subpart. The County Supervisor, with the assistance 
of the borrower, will complete Form FmHA 1962-1 in accordance with the 
FMI (available in any Agency office) to show how, when, and to whom the 
borrower will sell, exchange, or consume security and use sale proceeds 
(include milk sale proceeds). Government payments, crop insurance and 
insurance proceeds derived from the loss of security will also be 
accounted for on Form FmHA 1962-1. This includes, for example, sale 
proceeds on hand and crops in storage. Only the proceeds from the sale 
of normal income security can be used to pay essential family and farm 
operation expenses. Proceeds from the sale of basic security will not be 
used for essential family living and farm operatingexpenses. In addition 
to payment of prior liens, basic security can only be released for the 
purposes listed in paragraphs (b)(2)(iv) through (b)(2)(vii). When 
proceeds from the disposition of normal income security are to be used 
to pay essential family living or farm operating expenses, County 
Supervisors must approve the disposition. Any disposition of basic or 
normal income security must be recorded on Form FmHA 1962-1. However, 
the borrower is responsible for providing the County Supervisor with the 
necessary information to update the Farm and Home Plan and Form FmHA 
1962-1.
    (2) Under all circumstances, sales proceeds must be remitted to 
creditors with liens on the proceeds, in order of priority of those 
liens. Proceeds which are released by a prior lienholder or which are in 
excess of the amount due to prior lienholder and which come to the 
Agency can be used as follows:
    (i) The Form FmHA 1962-1 must provide for releases of normal income 
security so that the borrower can pay essential family living and farm 
operating expenses. However, proceeds from the sale of basic security 
will not be used to pay essential family living or farm operating 
expenses.
    (ii) Essential expenses are those which are basic, crucial or 
indispensable. The following items are guidelines of what normally may 
be considered essential family living and farm operating expenses:

Household operating
Food, including lunches
Clothing and personal care
Health and medical expenses, including medical insurance
House repair and sanitation
School, church, recreation
Personal insurance
Transportation
Furniture
Hired labor
Machinery repair
Farm building and fence repair
Interest on loans and credit or purchase agreement
Rent on equipment, land, and buildings
Feed for animals
Seed
Fertilizer
Pesticides, herbicides, and spray materials
Farm supplies not included above
Livestock expenses, including medical supplies, artificial insemination, 
and veterinarian bills
Machinery hire
Fuel and oil
Personal property tax
Real estate taxes
Water charges
Property and crop insurance
Auto and truck expenses
Utilities payments
Payments on contracts or loans secured by farmland, necessary farm 
equipment, livestock, or other chattels

[[Page 277]]

Essential farm machinery. An item of essential farm machinery which is 
beyond repair may be replaced when the County Supervisor determines that 
replacement is a better choice than alternatives such as the lease of a 
similar piece of machinery or the hiring of the service.

    (iii) All of the items in paragraph (b)(2)(ii) of this section may 
not always be considered essential for every family and farming 
operation. County Supervisors must consider the individual borrower's 
operation, what is typical for that type of operation in the area 
administered by the County Supervisor, and what would be an efficient 
method of production considering the borrower's resources. County 
Supervisors will refer to exhibit E of this subpart for guidance in 
determining whether an expense will be considered essential and the 
amount of proceeds which should be released. When the borrower and 
County Supervisor cannot agree that an expense is essential, the County 
Supervisor will notify the borrower, in writing, of why the requested 
release was denied, including why it is not basic, crucial or 
indispensable to the family and/or the farming operation and will give 
the borrower an opportunity to appeal in accordance with subpart B of 
part 1900 of this chapter and paragraphs (a)(2) and (b)(5) of this 
section.
    (iv) Proceeds can be applied to the Agency debt.
    (v) Proceeds can be used to purchase property better suited to the 
borrower's need if the Agency will acquire a lien on the new property. 
The new property, together with any proceeds applied to the the Agency 
indebtedness, will have a value to the Agency at least equal to the 
value of the lien formerly held by the Agency on the old security.
    (vi) Proceeds can be used to preserve the security because of a 
natural disaster or other severe catastrophe, when the need for funds 
cannot be met by other means or with an Agency loan or an Agency loan 
cannot be made in time to prevent the borrower and Agency from suffering 
a substantial loss.
    (vii) Property can be exchanged, with prior Agency approval and in 
accordance with paragraph (b)(5) of this section, for property which is 
better suited to the borrower's needs if the Agency will acquire a lien 
on the new property, at least equal in value to the lien held on the 
property exchanged.
    (viii) Property can be consumed by the borrower as follows:
    (A) Livestock can be used by the borrower's family for subsistence.
    (B) If crops serve as security and usually would be marketed, the 
County Supervisor can allow such crops to be fed to livestock, provided, 
this is preferable to direct marketing and also provided that the Agency 
obtains a lien (or assignment) on the livestock and livestock products 
at least equal to the lien on the crops.
    (3) The borrower must maintain records of dispositions of property 
and the actual use of proceeds and must make these records available to 
the Agency at the end of the period covered by the Form FmHA 1962-1, or 
when requested by the Agency. The County Supervisor will complete the 
``Actual'' columns on that form, indicating approval or disapproval, 
making sure that the dispositions of property and uses of proceeds were 
as agreed upon. If they were not, the County Supervisor will take the 
actions required by Sec. 1962.18 of this subpart. On the form, the 
County Supervisor will note approval or disapproval of each disposition.
    (4) If, for any sale, the amount of proceeds actually received is 
above or below the amount of proceeds planned to be received as shown on 
Form FmHA 1962-1, the borrower will immediately notify the County 
Supervisor. If the borrower sells security to a purchaser not listed on 
the Form FmHA 1962-1, the borrower must immediately notify the County 
Supervisor of what property has been sold and of the name and business 
address of the purchaser. Such notification may be by telephone to the 
County Office, by letter, by visit to the County Office, or any other 
method the borrower chooses.
    (5) If a borrower wants to dispose of chattel security which is not 
listed on Form FmHA 1962-1 or wants to dispose of chattel security in a 
way not listed in the ``How'' section or wants to use proceeds in a way 
not listed in the ``Use of Proceeds'' section on Form FmHA 1962-1, the 
borrower must obtain

[[Page 278]]

the Agency consent before the disposition or before the proceeds are 
used. The Agency must give consent for the release of normal income 
security if the change is necessary for the borrower to meet essential 
family living and farm operating expenses. The Agency must also give 
consent if the conditions set out on the form and in paragraph (b)(2) of 
this section are met. The borrower may obtain prior consent by 
telephoning the county office, by letter, by visiting the county office, 
or by any other method the borrower chooses. When revisions are agreed 
to over the telephone, the County Supervisor must revise the Form FmHA 
1962-1 contained in the borrower's case file, initial and date the 
change, and mark the form ``Revised.'' The County Supervisor will then 
either write to the borrower and send a copy of the ``Revised'' form to 
the borrower asking the borrower to date and initial the change and 
return the form to the county office, or the County Supervisor will ask 
the borrower to date and initial the change the next time the borrower 
is in the county office. Changes that would result in a major change 
(examples of major changes are: Feeder pig to sow operation, cow/calf to 
feeder steer operation, dairy to row crop, etc.) in a borrower's 
operation will always require a visit to the county office so that the 
County Supervisor and the borrower can complete a new farm and home plan 
and revise Form FmHA 1962-1. The County Supervisor will be responsible 
for determining if the requested change is major or not. If a revision 
cannot be agreed upon, see Sec. 1924.56 of subpart B of part 1924 of 
this chapter.
    (c) Release of liens. (1) Liens will be released by the County 
Supervisor when security is sold, exchanged or consumed, provided the 
conditions set out on Form FmHA 1962-1 and in this subpart are met.
    (2) Junior Agency liens on chattels and crops serving as security 
for Agency loans can be released when such property has no present or 
prospective security value or enforcement of the Agency lien would be 
ineffectual or uneconomical. The following information will be 
documented in the running case record:
    (i) The present market value of the chattels or crops, as determined 
by the County Supervisor, on which the Agency has a valueless junior 
lien.
    (ii) The names of the prior lienholders, amount secured by each 
prior lien, and the present market value of any property which serves as 
security for the amount. The value of all property which serves as 
security for amounts owed to prior lienholders must be considered to 
determine whether the junior Agency lien has any present or prospective 
value.
    (3) Liens obtained through a mutual mistake can be released. The 
reasons for the release must be documented in the running case record.
    (4) Liens can be released when there is no evidence of an existing 
indebtedness secured by the lien in the records of the Agency, County, 
State, or Finance Office.
    (5) Liens on separate items of chattels can be released to another 
creditor for any authorized Farm Credit Programs loan purpose when it 
has been determined by a current appraisal that the value of the 
remaining security is substantially greater than the remaining Agency 
debt.
    (d) Processing the release of chattel security. (1) If the borrower 
or an interested third party requests a release of specific items which 
must be recorded under the UCC or chattel mortgage laws, Form FmHA 462-
12, ``Statements of Continuation, Partial Release, Assignments, etc.,'' 
Form FmHA 460-1, ``Partial Release,'' or other Forms approved by OGC and 
required by State statute will be used. Care must be used to be sure 
that only specific items are released; for example, if a borrower 
requests a release of five cows, make sure that not all the cattle are 
released from the Agency lien. When specific items are listed on the 
security agreement, the County Supervisor should record the disposition 
on the work copy of the security agreement and on Form FmHA 1962-1.
    (2) Assignments and consent to payment of proceeds will be processed 
under subpart A of part 1941 of this chapter and recorded on Form FmHA 
1962-1.
    (i) When it is necessary to temporarily amend Form FmHA 441-18,

[[Page 279]]

``Consent to Payment of Proceeds From Sale of Farm Products,'' or Form 
FmHA 441-25, ``Assignment of Proceeds From the Sale of Dairy Products 
and Release of Security Interest,'' Form FmHA 462-9, ``Temporary 
Amendment of Consent to Payment of Proceeds From Sale of Farm 
Products,'' will be used. All amendments of assignment agreements will 
be made on forms approved by OGC. The State Director will issue a State 
Supplement with the advice of OGC and prior approval of the National 
Office on the use of other forms. The original form after completion 
will be forwarded directly to the person or firm making the payment 
against which the assignment is effective, and a copy will be kept in 
the borrower's case file. All amendments of assignment agreements will 
be approved and recorded on Form FmHA 1962-1. Conditions of this section 
must be met. The County Supervisor will see that payments are made in 
accordance with the original consent when the amendment period expires. 
Normally, a temporary amendment will not exceed a six month period.
    (ii) When the Agency is not expecting payment from the proceeds of a 
product on which it has a lien but the purchaser of the product inquires 
about payment, a letter should be written to the purchaser as follows:

    The FmHA has a security interest in the (name of product) being sold 
to you by (name and address of borrower), but at the present time is not 
looking to the proceeds from the sale of that product for payment on the 
debt owned to this agency. Therefore, until further notice, it will not 
be necessary for you to make payment to the Agency for such product.

    (e) Releases of liens on wool and mohair marketed by consignment--
(1) Conditions. Liens on wool and mohair may be released when the 
security is marketed by consignment, provided all the following 
conditions are met:
    (i) The producer assigns to the Agency the proceeds of any advances 
made, or to be made, on the wool or mohair by the broker, less shipping, 
handling, processing, and marketing costs.
    (ii) The producer assigns to the Agency the proceeds of the sale of 
the wool or mohair, less any remaining costs in shipping, handling, 
processing, and marketing, and less the amount of any advance (including 
any interest which may have accrued on the advance) made by the broker 
against the wool or mohair.
    (iii) The producer and broker agree that the net proceeds of any 
advances on, or sale of, the wool or mohair will be paid by checks made 
payable jointly to the producer and the Agency.
    (2) Authority. The County Supervisor may execute releases of the 
Government's lien on wool and mohair on Form FmHA 462-4, ``Assignment, 
Acceptance, and Release.'' Since Form FmHA 462-4 is not a binding 
agreement until executed by all parties in interest, including the 
producer, the broker and the Government, the County Supervisor may 
execute it before other parties sign it.
    (f) Notice of termination of security interest to purchasers of farm 
products under consents or assignments upon payment in full. County 
Supervisors will notify purchasers of farm products as soon as the 
Agency has received payment in full of indebtedness for collection of 
which it has accepted assignments or consents to payment of proceeds 
from the sale of the farm products. When Form FmHA 441-18 is in effect 
under the UCC, the notice to the purchaser will be made on Form FmHA 
460-8, ``Notice of Termination of Security Interest in Farm Products.'' 
When assignments have been used, the notice to the purchaser will be by 
letter or by forms prescribed by State Supplements.
    (g) Release of Agency interest in insurance policies. When an Agency 
lien on property covered by insurance has been released, the County 
Supervisor is authorized to notify the insurance company of the release.

[50 FR 45783, Nov. 1, 1985, as amended at 51 FR 13481, Apr. 21, 1986; 52 
FR 32121, Aug. 26, 1987; 53 FR 35784, Sept. 14, 1988; 56 FR 15824, Apr. 
18, 1991; 57 FR 18680, Apr. 30, 1992; 57 FR 60085, Dec. 18, 1992; 58 FR 
46075, Sept. 1, 1993; 61 FR 35930, 35931, July 9, 1996]



Sec. 1962.18  Unapproved disposition of chattel security.

    (a) General. When the County Supervisor learns that a borrower has 
made a disposition of chattel security in a manner not provided for on 
Form

[[Page 280]]

FmHA or its successor agency under Public Law 103-354 1962.1 or becomes 
aware of the misuse of proceeds by a borrower, corrective action must be 
taken to protect the Government's interest.
    (b) Notice to borrowers. When a borrower has not properly accounted 
for the use of proceeds from the sale of chattel security, the County 
Supervisor must request restitution by use of a letter similar to Guide 
Letter 1962-A-5.
    (1) If the borrower makes restitution or provides suffficient 
information to enable the County Supervisor to post-approve the 
transaction on Form FmHA or its successor agency under Public Law 103-
354 1962-1, no further action will be taken against the borrower. Post-
approval can only be given under the conditions set out in 1962.17(b) of 
this subpart. Only one such transgression can be allowed in any period 
covered by the Form FmHA or its successor agency under Public Law 103-
354 431-2, or other similar plan of operation acceptable to FmHA or its 
successor agency under Public Law 103-354, between annual security 
inspections, whichever is appropriate, and this must be made clear to 
the borrower.
    (2) If the borrower does not make restitution, if the County 
Supervisor cannot post-approve the transaction, or if the borrower makes 
a second unauthorized disposition of security or a misuse of proceeds 
after settling the first offense as provided in paragraphs (a) and (b) 
of this section, the County Supervisor will proceed in accordance with 
Sec. 1962.49 of this subpart.

[54 FR 14791, Apr. 13, 1989]



Sec. 1962.19  Claims against Commodity Credit Corporation (CCC).

    This section is based on a Memorandum of Understanding between CCC 
and FmHA or its successor agency under Public Law 103-354 (see Exhibit A 
of this subpart). The memorandum sets forth the procedure to follow when 
producers sell or pledge to CCC as loan collateral under the Price 
Support Program, commodities on which FmHA or its successor agency under 
Public Law 103-354 holds a prior lien, and when the proceeds, or an 
agreed amount from them, are not remitted to FmHA or its successor 
agency under Public Law 103-354 to apply against the producer's 
indebtedness to FmHA or its successor agency under Public Law 103-354. 
In addition to the procedures outlined in Exhibit A, the following 
apply:
    (a) County Office action. (1) Claims will not be filed with CCC 
until it is determined that the amount involved cannot be collected from 
the borrower. Therefore, after preliminary notice is given of this fact 
to CCC by the State Director, the County Supervisor will make immediate 
demand on the borrower for the amount of the CCC loan or the portion of 
it which should have been applied to the borrower's account. If payment 
is made, the State Director will be notified.
    (i) If payment is not made, the County Supervisor will determine 
whether or not the case should be liquidated in accordance with Sec. 
1962.40 of this subpart. Any liquidation action will be taken 
immediately. If the borrower has no property from which recovery can be 
made through liquidation or, if after liquidation, an unpaid balance 
remains on the indebtedness secured by the commodity pledged or sold to 
CCC, the County Supervisor will make a full report to the State Director 
on Form FmHA or its successor agency under Public Law 103-354 455-1, 
``Request for Legal Action,'' with a recommendation that a claim be 
filed againt CCC. However, if the indebtedness is paid through 
liquidation action, the State Director will be notified by memorandum.
    (ii) If the facts do not warrant liquidation action, the State 
Director will be notified, and a recommendation will be made that no 
claim be filed against CCC.
    (2) On receiving information from the State Director that CCC has 
called the borrower's loan, the County Supervisor will act to protect 
FmHA or its successor agency under Public Law 103-354's interest with 
respect to the commodity if CCC is repaid.
    (b) State Office action. (1) The State Director, on receipt of 
reports and recommendations from the County Supervisor, will:
    (i) If in agreement with the County Supervisor's recommendation not 
to

[[Page 281]]

file a claim against CCC or if notice is received that the indebtedness 
has been paid, forward notice to CCC.
    (ii) If in agreement with the County Supervisor's recommendation to 
file a claim against CCC, refer the case to OGC with a statement of 
facts.
    (iii) If OGC determines that FmHA or its successor agency under 
Public Law 103-354 holds a prior lien on the commodity and the amount 
due on its loan is not collectible from the borrower, send CCC a copy of 
the OGC memorandum with a complete statement of facts supporting the 
claim through the applicable ASCS office or notify CCC if the OGC 
memorandum does not support FmHA or its successor agency under Public 
Law 103-354's claim.
    (2) The State Director will notify the County Supervisor promptly on 
receiving information from CCC that the borrower's loan is being called.
    (3) If collection cannot be made from the borrower or other party 
(see paragraph 5 of Exhibit A of this Subpart), the State Director will 
give CCC the reasons, FmHA or its successor agency under Public Law 103-
354 will then be paid by CCC through the applicable ASCS office.



Sec. Sec. 1962.20-1952.25  [Reserved]



Sec. 1962.26  Correcting errors in security instruments.

    The County Supervisor may use Form FMHA 462-12, to correct minor 
errors in a financing statement when the errors are not serious (i.e., a 
slightly misspelled name). OGC will be asked to determine whether or not 
such errors are in fact minor. The County Supervisor may also use Form 
FmHA or its successor agency under Public Law 103-354 462-12 to add 
chattel property to the financing statement (i.e., a new type or item of 
chattel or crops on land not previously described).



Sec. 1962.27  Termination or satisfaction of chattel security instruments.

    (a) Conditions. The County Supervisor may terminate financing 
statements and satisfy chattel mortgages, chattel deeds of trust, 
assignments, severence agreements and other security instruments when:
    (1) Payment in full of all debts secured by collateral covered by 
the security instruments has been received; or
    (2) All security has been liquidated or released and the proceeds 
properly accounted for, including collection or settlement of all claims 
against third party converters of security, even though the secured 
debts are not paid in full. This includes collection-only and debt 
settlement cases; or
    (3) The U.S. Attorney has accepted a compromise offer in full 
settlement of the indebtedness and has asked that action be taken to 
satisfy or terminate such instruments; or
    (4) FmHA or its successor agency under Public Law 103-354 has a 
financing statement or other lien instrument which describes the real 
estate upon which crops are located but neither the borrower non FmHA or 
its successor agency under Public Law 103-354 has an interest in the 
crops because the borrower no longer occupies or farms the premises 
described in the lien instrument. Such action will only relate to the 
crops.
    (b) Form of payment. (1) Security instruments may be satisfied or 
the financing statements may be terminated on receipt of final payment 
in currency, coin, U.S. Treasury check, cashier's or certified check, 
bank draft, postal or bank money order, or a check issued by a party 
known to be financially responsible.
    (2) When the final payment is tendered in a form other than those 
mentioned above, the security instruments will not be satisfied until 15 
days after the date of the final payment. However, in UCC States the 
termination statement will be signed and sent to the borrower within 10 
days after receipt of the borrower's written request but not until the 
10th day unless it previously has been ascertained that the payment 
check or other instrument has been paid by the bank on which it was 
drawn. (See subsection (c) of this section for the reason for the 10-day 
requirement.)
    (c) Filing or recording termination statements. Financing statements 
will be terminated by use of Form FmHA or its successor agency under 
Public Law 103-354 462-12 if provided by a State

[[Page 282]]

supplement. (1) Under UCC provisions if FmHA or its successor agency 
under Public Law 103-354 fails to give a termination statement to the 
borrower within 10 days after written demand, it will be liable to the 
borrower for $100 and, in addition, for any loss caused to the borrower 
by such failure unless otherwise provided by a State supplement. In the 
absence of demand for a termination statement by the borrower, a 
termination statement will be delivered to the borrower when the notes 
have been paid in full.
    (2) However, if FmHA or its successor agency under Public Law 103-
354 has been meeting the borrower's annual operating credit needs in the 
past and expects to do so the next year, the financing statements need 
not be terminated in the absence of such demand unless a loan for the 
succeeding year will not be made or earlier termination is required by a 
State supplement.
    (d) Filing or recording satisfactions. Satisfactions of chattel 
mortgages and similar instruments will be made on Form FmHA or its 
successor agency under Public Law 103-354 460-4, ``Satisfaction,'' or 
other form approved by the State Director. The original of the 
satisfaction form will be delivered to the borrower for recording or 
filing and the copy will be retained in the borrower's case file. 
However, if the State supplement based on State law requires recording 
or filing by the mortgagee, a second copy will be prepared for the 
borrower and the original will be recorded or filed by the County 
Supervisor. When State statutes provide that satisfactions may be 
accomplished by marginal entry on the records of the recording office, 
or when Form FmHA or its successor agency under Public Law 103-354 460-4 
is not legally sufficient because special circumstances require some 
other form of satisfaction, County Supervisors are authorized to make 
such satisfactions according to Statesupplements. In such cases, Form 
FmHA or its successor agency under Public Law 103-354 460-4 will not be 
prepared but a notation of the satisfaction will be made on the copy of 
Form FmHA or its successor agency under Public Law 103-354 451-1, 
``Acknowledgment of Cash Payment,'' or Form FmHA or its successor agency 
under Public Law 103-354 456-3, ``Journal Voucher for Write-Off or 
Judgment,'' which will be retained in the borrower's case folder.
    (e) Satisfaction or termination of lien when old loans cannot be 
identified. When a request is received for the satisfaction of a crop or 
chattel lien, or for the termination of a financing statement and the 
status of the account secured by the lien cannot be ascertained from 
County Office records, the County Supervisor will prepare a letter to 
the Finance Office reflecting all the pertinent information available in 
the County Office regarding the account. The letter will request the 
Finance Office to tell the County Supervisor whether the borrower is 
still indebted to FmHA or its successor agency under Public Law 103-354 
and, if so, the status of the account. If the Finance Office reports to 
the County Supervisor that the account has been paid in full or 
otherwise satisfied or that there is no record of an indebtedness in the 
name of the borrower, the County Supervisor is authorized to issue a 
satisfaction of the security instruments on Form FmHA or its successor 
agency under Public Law 103-354 460-4 or other approved form or to 
effect the satisfaction by marginal release, or a termination on Form 
FmHA or its successor agency under Public Law 103-354 462-12 as 
appropriate.



Sec. 1962.28  [Reserved]



Sec. 1962.29  Payment of fees and insurance premiums.

    (a) Fees. (1) Security instruments. Borrowers must pay statutory 
fees for filing or recording financing statements or other security 
instruments (including Form FmHA or its successor agency under Public 
Law 103-354 462-12, or other renewal statements) and any notary fees for 
executing these instruments. They also must pay costs of obtaining lien 
search reports needed in properly servicing security as outlined in this 
subpart. Whenever possible, borrowers should pay these fees directly to 
the officials giving the service. When cash is accepted by FmHA or its 
successor agency under Public Law 103-354 employees to pay these fees, 
Form FmHA or its successor agency under

[[Page 283]]

Public Law 103-354 440-12, ``Acknowledgment of Payment for Recording, 
Lien Search and Releasing Fees,'' will be executed. If the borrower 
cannot pay the fees, or if there are fees referred to in paragraphs (a) 
(2) and (3) of this section that must be paid by FmHA or its successor 
agency under Public Law 103-354, the County Supervisor may pay them as a 
petty purchase or as the bill of a creditor of FmHA or its successor 
agency under Public Law 103-354 in accordance with FmHA or its successor 
agency under Public Law 103-354 Instructions 2024-E, copies of which are 
available in any FmHA or its successor agency under Public Law 103-354 
office.
    (2) Satisfactions. The borrower must pay fees for filing or 
recording satisfactions or termination statements unless a State 
supplement based on State law requires FmHA or its successor agency 
under Public Law 103-354 to pay them.
    (3) Notary fees. FmHA or its successor agency under Public Law 103-
354 will pay fees for notary service for executing releases, 
subordinations, and related documents for and on behalf of FmHA or its 
successor agency under Public Law 103-354 if the service cannot be 
obtained without cost.
    (b) Insurance premiums. County Supervisors are authorized to voucher 
for the payment of bills for insurance premiums on chattel security, in 
accordance with FmHA or its successor agency under Public Law 103-354 
Instruction 2024-A (available in any FmHA or its successor agency under 
Public Law 103-354 Office). Bills may be paid when:
    (1) A borrower cannot pay the premiums from the borrower's own 
resources at the time due;
    (2) Anticipated crop income does not materialize which would 
normally be released for the payment of crop insurance.
    (3) It is not pratical to process a loan for that purpose;
    (4) It is necessary to protect FmHA or its successor agency under 
Public Law 103-354's interests; and
    (5) The amount advanced can be charged to the borrower under the 
provisions of the security instrument.

[50 FR 45783, Nov. 1, 1985, as amended at 53 FR 35785, Sept. 14, 1988; 
56 FR 15825, Apr. 18, 1991; 57 FR 36592, Aug. 14, 1992]



Sec. 1962.30  Subordination and waiver of liens on chattel security.

    (a) Purposes. Subject to the limitations set out in paragraph (b) of 
this section, the Agency chattel liens may be subordinated to a lien of 
another creditor in either of the following situations:
    (1) The prior lien will soon mature or has matured and the prior 
lienholder desires to extend or renew the obligation, or the obligation 
can be refinanced. The relative lien position of the Agency must be 
maintained; and
    (2) The subordination will permit another creditor to refinance 
other debt or lend for an authorized direct loan purpose.
    (b) Conditions. Agency chattel liens may be subordinated to a lien 
of another creditor if all of the following conditions are met:
    (1) If the lien is on basic chattel security, the amount of 
subordination is necessary to provide the lender with the security it 
requires to make the loan;
    (2) Approval of a subordination is limited to a specific amount and 
the loan to be secured by the subordination is closed within a 
reasonable time;
    (3) Only one subordination to one creditor may be outstanding at any 
one time in connection with the same security;
    (4) The borrower has not been convicted of planting, cultivating, 
growing, producing, harvesting or storing a controlled substance under 
Federal or state law. ``Borrower'' for purposes of this provision, 
specifically includes an individual or entity borrower and any member 
stockholder, partner, or joint operator, of an entity borrower and any 
member, stockholder, partner, or joint operator of an entity borrower. 
``Controlled substance'' is defined at 21 CFR part 1308. The borrower 
will be ineligible for a subordination for the crop year in which the 
conviction occurred and the four succeeding crop years. Applicants must 
attest on the Agency application form that it and its members, if an 
entity, have not been convicted of such a crime;
    (5) The loan funds will not be used in such a way that will 
contribute to erosion of highly erodible land or conversion of wetlands 
for the production of

[[Page 284]]

an agricultural commodity according to subpart G of part 1940 of this 
chapter;
    (6) The borrower can document the ability to repay the total amount 
due under the subordination and pay all other debt payments scheduled 
for the subject operating cycle; and
    (7) The Agency loan is still adequately secured after the 
subordination, or the value of the loan security will be increased by at 
least the amount of the advances to be made under the terms of the 
subordination.
    (c) Subordination to make a guaranteed loan. In addition to the 
requirements of this section, subordinations on chattel security to make 
a guaranteed loan will be approved in accordance with Sec. 1980.108 of 
subpart B of part 1980 of this chapter.
    (d) Forms. Subordinations will be requested and executed on Agency 
forms available in any Agency office or on any other form approved by 
the Agency.
    (e) Rescheduling of existing Agency debts. The Agency may consent to 
rescheduling of an existing Agency debt when a subordination is granted 
to the debt of another lender. The rescheduling will be allowed only 
when the borrower cannot reasonably be expected to meet all currently 
scheduled installments when due and the conditions of subpart S of part 
1951 of this chapter are met.
    (f) Appraisal. The Agency will prepare a chattel appraisal report 
when the existing appraisal report is more than 2 years old or is 
inadequate to make the determination in this section. The Agency may use 
an appraisal submitted by the borrower if it is substantially similar to 
Form RD 440-21, ``Appraisal of Chattel Property,'' and prepared by a 
licensed appraiser.

[63 FR 20297, Apr. 24, 1998]



Sec. Sec. 1962.31-1962.33  [Reserved]



Sec. 1962.34  Transfer of chattel security and EO property and assumption of debts.

    Chattel and EO property may be transferred to eligible or ineligible 
transferees who agree to assume the outstanding loan, subject to the 
provisions set out in this section. A transfer and assumption may also 
be made when one or more of the borrowers or the former spouse and co-
obligor of a divorced borrower withdraws from the operation or dies. The 
transfer of accounts secured by real estate or both real estate and 
chattels will be processed under Subpart A of Part 1965 of this chapter. 
The transferor (borrower) must be sent Attachment 1 of exhibit A of 
subpart S of part 1951 of this chapter as soon as the borrower contacts 
the County Supervisor inquiring about a transfer. In accordance with the 
Food Security Act of 1985 (Pub. L. 99-198) after December 23, 1985, if a 
loan is being transferred and assumed by an eligible or ineligible 
transferee, and if an individual or any member, stockholder, partner, or 
joint operator of an entity transferee is convicted under Federal or 
State law of planting, cultivating, growing, producing, harvesting or 
storing a controlled substance (see 21 CFR Part 1308, which is Exhibit C 
of Subpart A of Part 1941of this chapter and is available in any FmHA or 
its successor agency under Public Law 103-354 office, for the definition 
of ``controlled substance'') prior to the approval of the transfer and 
assumption in any crop year, the individual or entity shall be 
ineligible for a transfer and assumption of a loan for the crop year in 
which the individual or member, stockholder, partner, or joint operator 
of the entity was convicted and the four succeeding crop years. 
Transferee applicants will attest on Form FmHA or its successor agency 
under Public Law 103-354 410-1, ``Application for FmHA or its successor 
agency under Public Law 103-354 Services,'' that as individuals or that 
its members, if an entity, have not been convicted of such crime after 
December 23, 1985. A decision to reject an application for transfer and 
assumption for this reason is not appealable.
    (a) Transfer to eligibles. Transfers of chattel security and EO 
property to a transferee who is eligible for the kind of loan being 
assumed or who will become eligible after the transfer may be approved, 
provided:
    (1) The transferee assumes the total outstanding balance of the FmHA 
or its successor agency under Public Law

[[Page 285]]

103-354 debts or that portion of the outstanding balance equal to the 
present market value of the chattel security or EO property, less any 
prior liens, if the property is worth less than the entire debt.
    (2) Generally the debts assumed will be paid in accordance with the 
rates and terms of the existing notes or assumption agreements. Form 
FmHA or its successor agency under Public Law 103-354 460-9, 
``Assumption Agreement (Same Terms-Eligible Transferee),'' will be used. 
Any delinquency and any deferred interest outstanding will be scheduled 
for payment on or before the date the transfer is closed. If the 
existing loan repayment period is extended, the debt being assumed may 
be rescheduled using Form FmHA or its successor agency under Public Law 
103-354 1965-13, ``Assumption Agreement (Farmer Programs Loans).'' The 
new repayment period may not exceed that for a new loan of the same type 
and the current interest rate for such loans will be charged. If any 
deferred interest is not paid by the time the transfer takes place, it 
must be added tothe principal balance and the loan must be assumed at 
new rates and terms. Upon request of an applicant assuming a loan at new 
rates and terms and and/or an applicant eligible to receive limited 
resource rates and terms, the interest rate charged by FmHA or its 
successor agency under Public Law 103-354 will be the lower of the 
interest rates in effect at the time of loan approval or loan closing. 
If the applicant does not indicate a choice, the loan will be closed at 
the rate in effect at the time of loan approval. Interest rates are 
specified in Exhibit B of FmHA or its successor agency under Public Law 
103-354 Instruction 440.1 (available in any FmHA or its successor agency 
under Public Law 103-354 office) for the type assistance involved.
    (3) The transfer of EM actual loss loans, or EM loans made before 
September 12, 1975, will be made as provided under paragraph (b) of this 
section. However, when one or more of the borrowers or jointly obligated 
partners or joint operators withdraw from the operation and those 
remaining desire to assume the total indebtedness and continue the 
operation, a transfer to the remaining borrowers, partners, or joint 
operators may be made as an eligible transferee.
    (4) The requirements found in Exhibit M to Subpart G of Part 1940 of 
this chapter are met.
    (b) Transfer to ineligibles. Transfer of the chattel security and EO 
property to a transferee who is not eligible for the kind of loan being 
assumed may be approved, provided:
    (1) It is in the Agency's financial interest to approve the transfer 
of security or EO property and assumption of the debts rather than to 
liquidate the security or EO property immediately.
    (2) The transferee assumes the total outstanding balance of the 
Agency debt, or an amount equal to the present market value of the 
security or EO property as determined by the County Supervisor, less any 
prior liens, if the value is less than the entire debts.
    (3) Agency debts assumed will be repaid in amortized installments 
not to exceed 5 years using Form FmHA 1965-13. The Farm Credit Programs 
NP interest rate for chattel property set forth in a National Office 
issuance, in effect at the time of loan approval, will be charged. Any 
deferred interest not paid by the time the transfer takes place must be 
added to the principal balance. The transferred property, including EO 
property, will be subject to any existing Agency lien. In the absence of 
an existing Agency lien, new lien instruments will be executed.
    (4) The transferee can repay the Agency in accordance with the 
assumption agreement and can legally enter into the contract.
    (5) The requirements found in Exhibit M to Subpart G of Part 1940 of 
this chapter are met.
    (6) The transferee has never been liable for a previous Farm Loan 
Programs (FLP) loan or loan guarantee which was reduced or terminated in 
a manner that resulted in a loss to the Government.
    (c) Effect of signature. In all cases the purpose and effect of 
signing an assumption agreement or other evidence of indebtedness is to 
engage separate and individual personal liability, regardless of any 
State law to the contrary.

[[Page 286]]

    (d) Release of transferor from liability. The borrower and any 
cosigner may be released from personal liability to Agency when all the 
chattel security or EO property is transferred to an eligible or 
ineligible applicant and the total outstanding debt or that portion of 
the debt equal to the present market value of the security is assumed. 
However, no such release will be granted to any borrower who was liable 
for any direct FLP loan which was reduced or terminated in a manner that 
resulted in a loss to the Government. The appropriate official is 
authorized to approve releases from liability in accordance with Sec. 
1962.34(h) of this subpart. When there will be no release from 
liability, the transferor and co-signer of a Farm Credit Programs loan 
must be sent a letter similar to exhibit F of subpart A of part 1955 of 
this chapter (available in any Agency office).
    (e) Agency actions--(1) Transfer to eligible applicant. The Agency 
will determine the transferee's eligibility for the type of loan to be 
assumed.
    (2) Release from liability. If the total outstanding debt is not 
assumed, the Agency must make the following determinations before it 
releases the transferor from personal liability:
    (i) The transferor and any cosigner do not have reasonable ability 
to pay all or a substantial part of the balance of the debt not assumed 
after considering their assets and income at the time of transfer,
    (ii) The transferor and any cosigner have cooperated in good faith, 
used due diligence to maintain the security against loss, and have 
otherwise fulfilled the covenants incident to the loan to the best of 
their ability, and
    (iii) The transferee will assume a portion of the indebtedness at 
least equal to the present market value of the security.

[50 FR 45783, Nov. 1, 1985, as amended at 51 FR 4139, Feb. 3, 1986; 51 
FR 6734, Feb. 26, 1986; 51 FR 13482, Apr. 21, 1986; 51 FR 40786, Nov. 
10, 1986; 51 FR 45439, Dec. 18, 1986; 53 FR 7338, Mar. 8, 1988; 53 FR 
10358, Mar. 31, 1988; 53 FR 17688, May 18, 1988; 53 FR 35785, Sept. 14, 
1988; 56 FR 3396, Jan. 30, 1991; 56 FR 12646, Mar. 27, 1991; 56 FR 
15825, Apr. 18, 1991; 58 FR 52654, Oct. 12, 1993; 60 FR 28321, May 31, 
1995; 61 FR 35931, July 9, 1996; 62 FR 10157, Mar. 5, 1997]



Sec. Sec. 1962.35-1962.39  [Reserved]



Sec. 1962.40  Liquidation.

    (a) Voluntary liquidation--(1) General. When a borrower contacts the 
agency and asks about voluntarily liquidating security, the borrower 
will be sent attachments 1 and 2 of exhibit A of subpart S of part 1951 
of this chapter or attachments 1, 3 and 4, and the preliminary 
application forms by certified mail, or the forms will be hand delivered 
at the County Office. The servicing notices which provide possible 
alternatives to liquidation provide a maximum of 60 days for the 
borrower to apply for servicing. Therefore, the agency will not discuss 
liquidation or methods of liquidation until 60 days after the borrower 
receives the notices except in serious situations which are documented 
in detail in the case file. During the 60-day time period the County 
Supervisor may answer questions regarding the servicing notices. After 
60 days, the borrower will be told that liquidation can be accomplished 
by:
    (i) Selling the security under Sec. 1962.41 of this subpart,
    (ii) Transferring the security under Sec. 1962.34 of this subpart,
    (iii) Conveying the security to the agency under Subpart A of Part 
1955 of this chapter, or
    (iv) Refinancing the debt with another lender.

The provisions of these regulations will be explained to the borrower.
    (2) Lien search. The County Supervisor will obtain a current lien 
search report to determine the effect that liens of other parties will 
have on liquidation, the record lienholders to whom notices of sale will 
be given, and the distribution that will be made of the sales proceeds. 
Normally, lien searches should be obtained from the same source as is 
used when making a loan. If obtaining the searches from third party 
sources causes undue delay which interferes with orderly liquidation, 
searches may be made by the County Supervisor. If the lien search is 
made by third parties, the borrower will pay the cost from personal 
funds or if the borrower refuses, the agency will pay the cost and 
charge it to the borrower's account in accordance with

[[Page 287]]

the security instrument or EO Loan Agreement. The records to be searched 
and the period covered by the search will be in accordance with a State 
supplement.
    (b) Involuntary liquidation--(1) General. When a borrower makes an 
unapproved disposition of security, the directions in Sec. Sec. 1962.18 
and 1962.49 of this subpart will be followed. In all other cases, when 
the County Supervisor, with the advice of the District Director, 
determines that continued servicing of the loan will not accomplish the 
objectives of the loan, or that further servicing cannot be justified 
under the policy stated in Sec. 1962.2 of this subpart, liquidation of 
the account(s) will be accomplished as quickly as possible under this 
section and subpart A of part 1955 of this chapter. When liquidation is 
begun, it is the agency policy to liquidate all security and EO 
property, except EO property that the County Supervisor determines is 
essential for minimum family living needs. The present market value of 
security that may be retained by the borrower for minimum family living 
needs will not exceed $600. However, only so much of the security and EO 
property will be liquidated as necessary to pay the indebtedness.
    (2) Farm Loan Programs loan cases. In Farm Loan Programs loan cases, 
borrowers who are 90 days past due (60 days delinquent) on their 
payments must receive exhibit A with attachments 1 and 2 or attachments 
1, 3, and 4 of exhibit A of subpart S of part 1951 of this chapter in 
cases involving nonmonetary default. The County Supervisor will send 
these forms to the borrower as soon as a decision is made to liquidate. 
The procedures set out in subpart S of part 1951 of this chapter shall 
be followed and any appeal must be concluded before any liquidation 
action (including termination of releases of sales proceeds) is taken. 
If the borrower fails to return attachment 2 of exhibit A of subpart S 
of part 1951 of this chapter and a preliminary application within 60 
days, the County Supervisor will send attachments 9 and 10 or 9-A and 
10-A, as appropriate, of exhibit A of subpart S of part 1951 of this 
chapter. If the borrower fails to return attachments 4, 6, 6-A, 10, or 
10-A of exhibit A of subpart S of part 1951 of this chapter within 60 
days, the borrower's account will be accelerated in accordance with 
Sec. 1955.15(d)(2) of subpart A of part 1955 of this chapter and 
paragraphs (b)(2) (i) and (ii) of this section. The County Supervisor 
will then attempt to repossess the security in accordance with Sec. 
1962.42 of this subpart. If this is not possible, the case will be 
referred for civil action in accordance with Sec. 1962.49 of this 
subpart. Unmatured installments will be accelerated as follows:
    (i) The District Director will accelerate all unmatured installments 
by using exhibits D, E, or E-1 of subpart A of part 1955 of this chapter 
except in cases referred to OGC for civil action, if the notice has 
previously been given.
    (ii) Exhibits D, E, or E-1 of subpart A of part 1955 of this chapter 
will be sent to the last known address of each obligor, with a copy to 
the Finance Office in those cases referred to OGC for civil action. 
County Office and Finance Office loan records will be adjusted to mature 
the entire indebtedness only.
    (3) Lien search. The County Supervisor will follow the directions 
set out in paragraph (a)(2) of this section.
    (c) Multiple loans and loans secured by both real estate and 
chattels. Follow the provisions of Sec. 1965.26(c) of subpart A of part 
1965 of this chapter for liquidating these loans.
    (d) Assignment of direct loans. When liquidation of a direct loan is 
approved, the State Director will be asked by the official who approved 
the liquidation to immediately obtain an assignment of the loan to if 
the promissory note is not held in the County Office. Pending the 
assignment, preliminary steps to effect liquidation should be taken, but 
civil or other court action will not be started and claims will not be 
filed in bankruptcy or similar proceedings or in probate or 
administration proceedings with respect to the insured loan claim, 
unless essential to protect Government's interests and OGC recommends 
such action. However, other steps need not be held up pending 
assignment. If any problems are encountered in obtaining the assignment, 
OGC may be contacted for advice.

[[Page 288]]

    (e) Protective advances. (1) After attachments 1 and 2 or 1, 3, and 
4 of exhibit A of subpart S of part 1951 of this chapter have been sent 
and if security is in danger of loss or deterioration, the State 
Director will protect Government's interest and approve protective 
advances in payment of:
    (i) Delinquent taxes or assessments that constitute prior liens 
which would be paid ahead of the Agency under Sec. 1962.44(a) of this 
subpart.
    (ii) Premiums on insurance essential to protect FmHA or its 
successor agency under Public Law 103-354's interest, and
    (iii) Other costs including transportation necessary to protect or 
preserve the security.
    (2) However, such advances may not be made unless the amount 
advanced becomes a part of the debt secured by the Agency's lien, or is 
for expenses of administration of estates or for litigation. If a case 
is in the hands of the U.S. Attorney, such advances may not be made 
without the U.S. Attorney's concurrence. Moreover, such advances may not 
be made in any case to pay expenses incurred by a U.S. Marshal or other 
similar official such as a local sheriff. However, if the official 
seizes the property and delivers it to the Agency for sale by the 
Agency, costs incurred by the Agency after delivery to the Agency will 
be paid.
    (3) The County Supervisor will submit a report on the need for such 
advances to the State Director, including:
    (i) Borrower's County Office case file;
    (ii) Current lien search report;
    (iii) Statement of the type and value of the property and of the 
circumstances which may result in the loss or deterioration of such 
property; and
    (iv) A recommendation as to whether or not the advance should be 
approved.
    (4) [Reserved]
    (f) When a borrower's security property is liquidated voluntarily or 
involuntarily and there is an unpaid balance on the account, the County 
Supervisor will meet with the borrower within 30 days to assist the 
borrower in developing a debt settlement offer in accordance with 
subpart B of part 1956 of this chapter.

[50 FR 45783, Nov. 1, 1985, as amended at 51 FR 4139, Feb. 3, 1986; 53 
FR 35785, Sept. 14, 1988; 56 FR 15825, Apr. 18, 1991; 57 FR 36592, Aug. 
14, 1992; 57 FR 60085, Dec. 18, 1992; 61 FR 35931, July 9, 1996; 62 FR 
10157, Mar. 5, 1997]



Sec. 1962.41  Sale of chattel security or EO property by borrowers.

    Borrowers who are liquidating voluntarily and who have not been sent 
exhibit A and attachments 1 and 2 or 1, 3 and 4 of subpart S of part 
1951 of this chapter will be processed in accordance with paragraph 
(a)(1) of Sec. 1962.40 of this subpart before any sale occurs.
    (a) Public sale. A borrower may voluntarily liquidate chattels by 
selling the property at auction in the borrower's own name. RD 455-3, 
``Agreement for Sale by Borrower (Chattels and/or Real Estate)'', will 
be executed by the borrower, all lienholders, and the clerk of the sale 
or other person who will receive the sale proceeds before execution by 
the County Supervisor. When EO property is involved delete from the 
Agency lien wherever it appears on the forms. No Agency official is 
authorized to bid at such sales. The County Supervisor will arrange to 
promptly receive the proceeds of the sale due the Agency for application 
on the borrower's indebtedness.
    (b) Private sale. The borrower may sell chattel security or EO 
property at a private sale if:
    (1)(i) The borrower has ready purchasers and can sell all of the 
property for its present market value; or
    (ii) The property is perishable; or
    (iii) The property is of a type customarily sold on a recognized 
market; or
    (iv) The property consists of items of small value or a limited 
number of items which do not justify public sale.
    (2) Form FmHA or its successor agency under Public Law 103-354 1962-
1 may be used to approve liquidation of such security. The County 
Supervisor will document in the running case record the reasons that a 
public sale was not justified.
    (3) Form FmHA or its successor agency under Public Law 103-354 455-3 
is completed before the sale.
    (c) Government takes possession. The borrower may also turn over 
possession

[[Page 289]]

of the chattels to the agency by signing Form RD 455-4, ``Agreement for 
Voluntary Liquidation of Chattel Security.'' This form authorizes the 
agency to sell the security at either public or private sale. If the 
agency hires a caretaker, services should be obtained by use of Form AD-
838, ``Purchase Order.''
    (d) Record of Sale. The sale will be recorded on Form FmHA 1962-1.
    (e) Unpaid debt. If the sale of all security results in less than 
full payment of the debt, the borrower may request debt settlement of 
the remaining debt. The servicing official will consult with the County 
Committee before determining if the borrower's account can be debt 
settled in accordance with subpart B of part 1956 of this chapter.

[50 FR 45783, Nov. 1, 1985, as amended at 51 FR 13482, Apr. 21, 1986; 53 
FR 35785, Sept. 14, 1988; 56 FR 15825, Apr. 18, 1991; 57 FR 60085, Dec. 
18, 1992; 62 FR 10157, Mar. 5, 1997; 68 FR 7701, Feb. 18, 2003]



Sec. 1962.42  Repossession, care, and sale of chattel security or EO 
property by the County Supervisor.

    (a) Repossession. Except as provided in paragraph (d) of this 
section, prior to any repossession of agency security a borrower and all 
cosigners on the note must receive exhibit A and attachments 1 and 2, or 
1, 3 and 4 of subpart S of part 1951 of this chapter and the application 
forms. The appropriate procedures of subpart S of part 1951 of this 
chapter must be followed and any appeal must be concluded. The County 
Supervisor will take possession of security or EO property when the 
value of the property, based on appraisal, is substantially more than 
the estimated sale expenses and the amount of any prior lien, and if the 
prior lienholder does not intend to enforce the lien. See Sec. 1955.20 
of subpart A of part 1955 of this chapter.
    (1) Conditions. The County Supervisor will take possession under any 
of the following conditions:
    (i) When RD 455-4 has been executed. For EO property this form will 
be revised by placing a period after ``interest'' in the first sentence 
beginning ``The Debtor'' and deleting the remainder of that clause; 
deleting the words ``collateral covered by the security instruments'' in 
the second part of the sentence and inserting instead ``property covered 
by the debtor's loan agreement which is referred to as the collateral.''
    (ii) When the borrower has abandoned the property.
    (iii) When peaceable possession can be obtained, but the borrower 
has not executed RD 455-4.
    (iv) When the property is delivered to the agency as a result of 
court action.
    (v) When Form RD 455-5, ``Agreement of Secured Parties to Sale of 
SecurityProperty,'' is executed by all prior lienholders. If prior 
lienholders will not agree to liquidate the property, their liens may be 
paid if their notes and liens are assigned to the agency on forms 
prepared or approved by OGC. When prior liens are paid, the payment will 
be made in accordance with RD Instruction 2024-A (available in any 
agency office) and charged to the borrower's account.
    (vi) When arrangements cannot be made with the borrower or a member 
of the borrower's family to sell EO property in accordance with the loan 
agreement.
    (2) Recording. A list, dated and signed by the servicing official, 
of all security or EO property repossessed except for those items on 
Form RD 455-4, will be maintained in the borrower's case file. Whenever 
the servicing official is transferred to another position or leaves the 
agency or there is a change in jurisdiction, the District Director will 
give the succeeding servicing official in writing, the names of such 
borrowers and a list of the property repossessed in the custody of the 
servicing official and caretakers, its location, and the names and 
addresses of the caretakers.
    (b) Care. The County Supervisor will arrange for the custody and 
care of repossessed property as follows:
    (1) Livestock. Care and feeding of livestock will be obtained by 
contract pursuant to subpart B of part 1955 of this chapter. The value 
of animal products (such as milk) may constitute all or part of the 
contractor's quotation, and if this is desired, such a statement should 
be included in the solicitation. Possession of the livestock will be 
turned over to the contractor only after the contract is awarded using

[[Page 290]]

Form AD-838, ``Purchase Order.'' If a contractor's services are needed 
for a longer period than is authorized in paragraph (c)(4)(i) of this 
section, the State Director may authorize the County Supervisor to 
continue obtaining the necessary services for the time needed.
    (2) Machinery, equipment, tools, harvested crops, and other 
chattels. Property will be stored and cared for pending sale. Storage 
and necessary services may be obtained by contract using Form FmHA or 
its successor agency under Public Law 103-354 AD-838. Use of property by 
the contractor is not authorized.
    (3) Crops. Form FmHA or its successor agency under Public Law 103-
354 AD-838 will be used for obtaining services for the custody, care, 
and disposition of growing crops and for unharvested matured crops 
unless the crops are to be sold in place. Where a loanlord is involved, 
written consent of the landlord should be obtained. If landlord consent 
cannot be obtained, where applicable, the circumstances should be 
reported to the State Director for advice.
    (c) Sale. Repossessed property may be sold by FmHA or its successor 
agency under Public Law 103-354 at public or private sale for cash under 
Form FmHA or its successor agency under Public Law 103-354 455-4, 
``Agreement for Voluntary Liquidation of Chattel Security,'' Form FmHA 
or its successor agency under Public Law 103-354 1955-41, ``Notice of 
Sale,'' the power of sale in security agreements under the UCC, or in 
crop and chattel mortgages and similar instruments if authorized by a 
State supplement. Also, repossessed property may be sold at private sale 
when the borrower executes Form FmHA or its successor agency under 
Public Law 103-354 455-11, ``Bill of Sale `B' (Sale by Private Party).''
    (1) Tests and inspections of livestock. If required by State law as 
a condition of sale, livestock will be tested or inspected before sale. 
A State supplement will be issued for those States.
    (2) Public sales. Such sales will be made to the highest bidder. 
They may be held on the borrower's farm or other premises, at public 
sale barns, pavilions, or at other advantageous sales locations. No FmHA 
or its successor agency under Public Law 103-354 employee will bid on or 
acquire property at public sales except on behalf of FmHA or its 
successor agency under Public Law 103-354 in accordance with Sec. 
1955.20 of subpart A of part 1955 of this chapter. The County Supervisor 
will attend all public sales of repossessed property.
    (3) Private sales. FmHA or its successor agency under Public Law 
103-354 will sell perishable property such as fresh fruits and 
vegetables for the best price obtainable. FmHA or its successor agency 
under Public Law 103-354 will sell staple crops such as when, rye, oats, 
corn, cotton, and tobacco for a price in line with current market 
quotations for products of similar grade, type, or other recognized 
classification. Chattel property sold under Form FmHA or its successor 
agency under Public Law 103-354 455-4, other than perishable property 
and staple crops, will not be sold for less than the minimum price in 
the agreement. FmHA or its successor agency under Public Law 103-354 
will sell other property, including that sold when the borrower executes 
Form FmHA or its successor agency under Public Law 103-354 455-11, for 
its present market value.
    (4) Selling period. Repossessed property will be sold as soon as 
possible. However, when notice is required by paragraph (c)(5) of this 
section, the sale will not be held until the notice period has expired.
    (i) The sale will be made within 60 days, unless a shorter period is 
indicated by a State supplement because of State law. Crops will be sold 
when the maximum return can be realized but not later than 60 days after 
harvesting, or the normal marketing time for such crops. The State 
Director may extend the sale time within State law limits.
    (ii) These requirements do not apply to irrigation or other 
equipment and fixtures which, together with real estate, serve as 
security for FmHA or its successor agency under Public Law 103-354 real 
state loans and will be sold or transferred with the real estate. 
However, a State Supplement will be issued for any State having a time 
limit within which such items must be sold along with or as a part of 
the real estate.

[[Page 291]]

    (5) Notice. (i) Notice of public or private sale of repossessed 
property when required will be given to the borrower and to any party 
who has filed a financing statement or who is known by the County 
Supervisor to have a security interest in the property, except as set 
forth below. The notice will be delivered or mailed so that it will 
reach the borrower and any lienholder at least 5 days (or longer time if 
specified by a State supplement) before the time of any public sale or 
the time after which any private sale will be held. Form FmHA or its 
successor agency under Public Law 103-354 1955-41, ``Notice of Sale,'' 
may be used for public or private sales.
    (A) Notice of the borrower or lienholder is not required when the 
property is sold under Form FmHA or its successor agency under Public 
Law 103-354 455-4 because the parties are placed on notice when they 
execute the form. When the sale involves only collateral which is 
perishable, will decline quickly in value, or is a type customarily sold 
on a recognized market, notice is not required but may be given if time 
permits to maintain good public relations.
    (B) Notice only to lienholder is required when repossessed property 
is sold at private sale and the borrower executes Form FmHA or its 
successor agency under Public Law 103-354 455-11.
    (C) If the property is to be sold under a chattel mortgage, the 
manner of notice will be set forth in a State supplement or on an 
individual case basis.
    (ii) Notice of Internal Revenue Service (IRS). If a Federal tax lien 
notice has been filed in the local records more than 30 days before the 
sale of the repossessed security, notice to the District Director of IRS 
must be given at least 25 days before the sale. It should be given by 
sending a copy of Form FmHA or its successor agency under Public Law 
103-354 1955-41 and a copy of the filed Notice of Federal Tax Lien (Form 
IRS 668). If the security is perishable, the full 25 days' notice must 
be given to the District Director by registered or certified mail or by 
personal service before the sale. Also, the sale proceeds must be held 
for 30 days after the sale so that they may be claimed by IRS on the 
basis of its tax lien priority. In such perishable property cases, the 
proceeds or an amount large enough to pay the IRS tax lien will be 
forwarded to the Finance Office with a notation ``Hold in suspense 30 
days because of Federal Tax Lien.'' OGC will advise the Finance Office 
about disposing of the funds.
    (6) Advertising. (i) Private sales and sales at established public 
auctions will be advertised by FmHA or its successor agency under Public 
Law 103-354 only if required by a State supplement based on State law.
    (ii) Other public sales, whether under power of sale in the lien 
instrument or under Form FmHA or its successor agency under Public Law 
103-354 455-4, will be widely publicized to assure large attendance and 
a fair sale by one or more of the following methods customarily used in 
the area.
    (A) The sale may be advertised by posting or distributing handbills, 
posting Form FmHA or its successor agency under Public Law 103-354 1955-
41, or a revision of it approved by OGC to meet State law requirements, 
or by a combination of these methods. The length of time and place of 
giving notice will be covered by a State supplement.
    (B) Advertising in newspapers or spot advertisting on local radio or 
TV stations may be used depending on the amount of property to be sold 
and the cost in relation to the value of the property, the customs in 
the area, and State law requirements. When newspaper advertising is 
required, a State supplement will indicate the types of newspapers to be 
used, the number and times of insertions of the advertisement, and the 
form of notice of sale. All advertising must contain non-discrimination 
clauses.
    (7) Payment of costs and prior lienholders. If expenses must be paid 
before the sale or if cash proceeds are not available from the sale of 
the property to pay costs referred to in Sec. 1962.44(b) of this 
subpart or to pay lienholders, such costs or prior liens will be paid in 
accordance with FmHA or its successor agency under Public Law 103-354 
Instruction 2024-A (available in any FmHA or its successor agency under 
Public Law 103-354 office). The amount of the voucher will be charged to 
the

[[Page 292]]

borrower's account, except as limited by State law in a State 
Supplement. No costs in the repossession and sale of security should be 
incurred unless they can be charged to the borrower's account, and in no 
event will the Government pay them. However, if costs are legally 
chargeable to the borrower, they may be paid as provided in this 
subpart, and charged to an account set up for the officials or other 
persons found responsible for them.
    (8) Bill of sale or transfer of title. If a purchaser requests a 
written conveyance of repossessed property sold by FmHA or its successor 
agency under Public Law 103-354 at public or private sale, the County 
Supervisior will execute and deliver to the purchaser Form FmHA or its 
successor agency under Public Law 103-354 455-12, ``Bill of Sale `C' 
(Sale Through Government as Liquidating Agent),'' or other necessary 
instruments to convey all the rights, title, and interests of the 
borrower and FmHA or its successor agency under Public Law 103-354. A 
State supplement will be issued as necessary for conveying title to 
motor vehicles and boats.
    (d) Risk of injury. If a farmer program loan borrower has abandoned 
security and the security is in danger of being substantially harmed or 
damaged, the County Supervisor will attempt to repossess the security as 
explained in paragraph (a) of this section. Then the County Supervisor 
will send the borrower and all cosigners on the note attachments 1, 3 
and 4 of exhibit A of subpart S of part 1951 of this chapter. The 
security will be cared for as explained in paragraph (b) of this section 
until all appeal rights have been given and any appeal has been 
concluded. When the appeal process is concluded, the security will be 
returned to the borrower or sold in accordance with paragraph (c) of 
this section, depending on the outcome of any appeal. The County 
Supervisor will document the abandonment and the danger of substantial 
damage in the borrower's case file. In the case of livestock, 
abandonment occurs if a borrower stops caring for the animals, as 
determined by the County Supervisor. However, an independent third party 
(not an FmHA or its successor agency under Public Law 103-354 employee) 
must determine that livestock is in danger of substantial damage. 
Protective advances may be made in accordance with Sec. 1962.40(e) of 
this subpart.

[50 FR 45783, Nov. 1, 1985, as amended at 51 FR 13482, Apr. 21, 1986; 53 
FR 35786, Sept. 14, 1988; 56 FR 15825, Apr. 18, 1991; 57 FR 36592, Aug. 
14, 1992; 62 FR 10158, Mar. 5, 1997]



Sec. 1962.43  [Reserved]



Sec. 1962.44  Distribution of liquidation sale proceeds.

    This section applies to proceeds of nonjudicial liquidation sales 
conducted under the power of sale in lien instruments or under Form FmHA 
or its successor agency under Public Law 103-354 455-4, Form FmHA or its 
successor agency under Public Law 103-354 455-3, or Form FmHA or its 
successor agency under Public Law 103-354 462-2.
    (a) [Reserved]
    (b) Order of payment. Sales proceeds will be distributed in the 
following order of priority.
    (1) To pay expenses of sale including advertising, lien searches, 
tests and inspection of livestock, and transportation, custody, care, 
storage, harvesting, marketing, and other expenses chargeable to the 
borrower, including reimbursement of amounts already paid by the Agency 
and charged to the borrower's account. Bills can be paid, after 
liquidation has been approved, for essential repairs and parts for 
machinery and equipment to place it in reasonable condition for sale, 
provided written agreements from any holders of liens which are prior to 
those of the Agency state that such bills may be paid from the sales 
proceeds ahead of their liens.
    (i) However, any such expenses incurred by the U.S. Marshal or other 
similar official such as a local sheriff may not be paid from sale 
proceeds turned over to the Agency.
    (ii) On the other hand, if the U.S. Marshal or other similar 
official such as a local sheriff has taken possession of the property 
and delivered it to the Agency for sale, such costs incurred by the 
Agency after delivery of the property to it may be paid from the 
proceeds of the sale.

[[Page 293]]

    (2) To pay liens which are prior to the Agency liens provided that:
    (i) State and local tax liens on security or EO property which are 
prior to the liens of the Agency will be paid only when demand is made 
by tax collecting officials before distributing the sale proceeds. The 
sale proceeds will not be used to pay real estate, income, or other 
taxes which are not a lien against the security, or to pay substantial 
amounts of personal property taxes on nonsecurity personal property.
    (ii) If action is threatened or taken by the sheriff or other 
official to collect taxes not authorized in suparagraph (b)(2)(i) of 
this section to be paid out of the security or the sale proceeds, the 
sale will be postponed unless an arrangement can be made to deposit in 
escrow with a responsible, disinterested party an amount equal to the 
tax claim, pending determination of priority rights. When the sale is 
postponed, or an escrow arrangement is made, the matter will be reported 
promptly to the State Director for referral to OGC.
    (iii) If the Agency subordinations have been approved, their intent 
will be recognized in the use of sale proceeds even though the creditor 
in whose favor the the Agency lien was subordinated did not obtain a 
lien. If there are other third party liens on the property, however, the 
lien-holders must agree to the use of the sale proceeds to pay such 
creditor first.
    (3) To pay rent for the current crop year from the sale proceeds of 
other than basic security or EO property. However, there must be no 
liens junior to the Agency other than the landlord's lien, if any, and 
the borrower must consent in writing to the payment.
    (4) To pay debts owed the Agency which are secured by liens on the 
property sold.
    (5) To pay liens junior to those of the Agency in accordance with 
their priorities on the property sold, including any landlord's liens 
for rent unless such liens already have been paid. Junior liens will not 
be paid unless, on request, the lienholder gives proof of the existence 
and the amount of his or her lien.
    (6) To pay on any EO unsecured debt.
    (7) To pay rent for the current crop year if the borrower consents 
in writing to payment and if such rent has not already been paid as 
provided in paragraph (b) (2), (3), or (5) of this section.
    (8) To pay on any other the Agency debts, either unsecured or 
secured by liens on property which is not being sold. However, in 
justifiable circumstances, the State Director may approve the use of a 
part or all of the remainder of such sale proceeds by the borrower for 
other purposes, provided the other the Agency debts are adequately 
secured, or the borrower arranges to pay the other debts from income or 
other sources and these payments can be depended upon.
    (9) To pay the remainder to the borrower.
    (c) [Reserved]

[50 FR 45783, Nov. 1, 1985, as amended at 61 FR 35931, July 9, 1996]



Sec. 1962.45  Reporting sales.

    Form FmHA or its successor agency under Public Law 103-354 1955-3, 
``Advice of Property Acquired,'' will be prepared and distributed 
according to the FMI when property is acquired by FmHA or its successor 
agency under Public Law 103-354.



Sec. 1962.46  Deceased borrowers.

    Immediately on learning of the death of any person liable to the 
Agency, the County Supervisor will prepare Form FmHA 455-17, ``Report on 
Deceased Borrower,'' to determine whether any special servicing action 
is necessary unless the County Supervisor recommends settlement of the 
indebtedness under Subpart B of Part 1956 of this chapter. If a survivor 
will not continue with the loan, it may be necessary to make immediate 
arrangements with a survivor, executor, administrator, or other 
interested parties to complete the year's operations or to otherwise 
protect or preserve the security.
    (a) Reporting. The borrower's case files including Form 455-17 will 
be forwarded promptly to the State Director for use in deciding the 
action to take if any of the following conditions exist (When it is 
necessary to send an incomplete Form FmHA 455-17, any additional 
information which may affect

[[Page 294]]

the State Director's decision will be sent as soon as available on a 
supplemental Form FmHA 455-17 or in a memorandum.):
    (1) Probate or other administration proceedings have been started or 
are contemplated.
    (2) The debts owed to the Agency are inadequately secured and the 
state has other assets from which collection could be made.
    (3) The Agency's security has a value in excess of the indebtedness 
it secures and the deceased obligor owes other debts to the Agency which 
are unsecured or inadequately secured.
    (4) The County Supervisor recommends continuation with a survivor 
who is not liable for the indebtedness or recommends transfer to, and 
assumption by, another party.
    (5) The County Supervisor recommends, but does not have authority to 
approve liquidation.
    (6) The County Supervisor wants advice on servicing the case.
    (b) Probate or administration proceedings. Generally, probate or 
administration proceedings are started by relatives or heirs of the 
deceased or by other creditors. Ordinarily, the Agency will not start 
these proceedings because of the problems of designating an 
administrator or other similar official, posting bond, and paying costs. 
If probate or administration proceedings are started by other parties or 
at the Agency's request, and any security is to be liquidated by the 
Agency instead of by the administrator or executor or other similar 
official, it will be liquidated in accordance with the advice of OGC. 
The State Director may request OGC to recommend that the U.S. Attorney 
bring probate or administration proceedings when it appears that:
    (1) Such proceedings will not be started by other parties;
    (2) The Agency's interests could best be protected by filing a proof 
of claim in such proceedings, and
    (3) Public administrators or other similar officials or private 
parties, including banks and trust companies, are eligible to, and will 
serve as administrator or other similar official and will provide the 
required bond.
    (c) Filing proof of claim. When a proof of claim is to be filed, it 
will be prepared on a form approved by OGC, executed by the State 
Director, and transmitted to OGC. It will be filed by OGC or by an the 
Agency official as directed by OGC or it will be referred by OGC to the 
U.S. Attorney for filing if representation of the Agency by counsel may 
be required. If a judgment claim is involved, the notification to the 
U.S. Attorney will be the same as for judgment claims in bankruptcy. If 
a direct loan is involved, the proof of claim will not be prepared until 
the note has been assigned to the Government. A proof of claim will be 
filed when probate or administration proceedings are started, unless:
    (1) After considering liens and priority rights of the Agency and 
other parties, costs of administration, and charges against the estate, 
the Agency cannot reach the assets in the estate except for the Agency's 
own security and the Agency will liquidate the security by foreclosure 
or otherwise if necessary to collect its claim, or
    (2) Continuation with an individual or transfer to and assumption by 
another party is approved, and either the debt owed to the Agency is 
fully secured, or the amount of the debt in excess of the value of the 
security which could be collected by filing a claim is obtained in cash 
or additional security, or
    (3) The debt owed to the Agency by the estate is settled under 
Subpart B of Part 1956 of this chapter, well ahead of the deadline for 
filing proof of claim.
    (d) Priority of claims. (1) Each secured claim will take its 
relative lien priority to the extent of the value of the property 
serving as security for it. These claims include those secured by 
mortgages, deeds of trust, landlord's contractual liens, and other 
contractual liens or security instruments executed by the borrower or 
real or personal property. However, tax, judgment, attachment, 
garnishment, laborer's, mechanic's, materialmen's, landlord's statutory 
liens, and other noncontractual lien claims may or may not be secured 
claims. Therefore, if any noncontractual claims are allowed as secured 
claims and the the Agency claim is not paid in full, the advice of OGC 
will be obtained as to whether

[[Page 295]]

they constitute secured claims and as to their relative priorities.
    (2) Unsecured claims will be handled as follows:
    (i) The remaining assets of the estate, including any value of 
security for more than the amount of the secured claims against it, are 
to be applied first to payment of administration costs and charges 
against the estate and second to unsecured debts of the deceased.
    (ii) If the total of the remaining assets in the estate being 
administered is not enough to pay all administration costs, charges 
against the estate, and unsecured debts of the deceased, the 
Government's unsecured claims against the remaining assets will have 
priority over all other unsecured claims, except the costs of 
administration and charges against the estate. Under such circumstances 
unsecured claims are payable in the following order of priority:
    (A) Costs of administration and charges against the estate unless 
under State law they are payable after the Government's unsecured 
claims. Such costs and charges include costs of administration of the 
estate, allowable funeral expenses, allowances of minor children and 
surviving spouse, and dower and curtesy rights.
    (B) The Government's unsecured claims.
    (3) A State supplement will be issued as needed taking into 
consideration 31 U.S.C. Sec. 3713 lien waivers and subordinations, and 
notice and other statutory provisions which affect lien priorities.
    (e) Withdrawal of claim. It may not be necessary to withdraw a claim 
when it is paid in full by someone other than the estate or when 
compromised. However, when it is necessary to permit closing of an 
estate, compromise of a claim, or for other justifiable reasons, the 
State Director will recommend to OGC that the claim be withdrawn on 
receipt of cash or security, or both, of a value at least equal to the 
amount that could be recovered under the claim against the estate. When 
the Agency keeps existing security, arrangements must be made to assure 
that withdrawal of the claim will not affect the Agency's rights under 
the existing notes or security instruments with respect to the retained 
security. In some cases, with OGC's advice, the claim may be properly 
handled without filing a formal petition for withdrawal of the claim. 
However, if the claim has been referred to the U.S. Attorney, or if a 
formal withdrawal of the claim is necessary, the matter will be referred 
by OGC to the U.S. Attorney.
    (f) Liquidation of security. When the County Supervisor determines 
that the account of a deceased borrower is in monetary or nonmonetary 
default, and liquidation is necessary because no survivor or third party 
has applied to assume the borrower's the Agency loan, chattel security 
and real estate security will be liquidated promptly in accordance with 
this subpart and subpart A of part 1965 of this chapter. Before 
liquidation, the notices required by subpart S of part 1951 of this 
chapter will be sent to the executor of the estate and/or other 
appropriate person(s) or entity(ies) as advised by OGC. If a suvivor(s) 
or heir(s) who will continue with the borrower's operation applies for 
servicing, the Agency will determine whether these individuals meet the 
requirements of paragraph (g) of this section. If a third party who will 
not continue with the borrower's operation applies for servicing, the 
requirements of Sec. 1962.34 of this subpart, or Sec. 1965.47 of 
subpart A of part 1965 of this chapter, as applicable, must be met. To 
qualify for servicing, the eligibility and feasibilityrequirements in 
Sec. 1951.909 of subpart S of part 1951 of this chapter must also be 
met. However, the borrower's estate is not eligible for servicing. After 
the provisions of subpart S of part 1951 of this chapter have been 
complied with, and the opportunity to appeal has expired, the State 
Director will request OGC to effect collection if the proceeds from the 
sale of security are insufficient to pay in full the indebtedness owed 
to the Agency and other assets are available in the estate or in the 
hands of heirs.
    (g) Continuation of secured debt and transfer or security. When a 
surviving member of a deceased borrower's family or other person is 
interested in continuing the loan and taking over the security for the 
benefit of all or a part of the deceased borrower's family who

[[Page 296]]

were directly dependent on the borrower for their support at the time of 
the borrower's death, continuation may be approved subject to the 
following:
    (1) Any individual who is liable for the indebtedness of the 
deceased borrower may continue with the loan provided that individual 
can comply with the obligations of the notes or other evidence of debt 
and chattel or real estate security instruments and so long as 
liquidation is not necessary to protect the interest of the Agency. When 
an individual who is liable for the indebtedness is to continue with the 
account, Form 450-10, ``Advice of Borrower's Change of Address or 
Name,'' will be sent to the Finance Office to change the account to that 
individual's name. A new case number will be assigned or, if the 
continuing individual already has a case number, that number will be 
used regardless of whether that individual assumed all or a portion of 
the amount of the debt owed by the estate of the deceased.
    (2) When a surviving member of a deceased borrower's family, a 
relative or other individual who is not liable for the indebtedness 
desires to continue with the farming or other operations and the loan, 
the State Director may approve the transfer of chattel or real estate 
security or both to the individual and the assumption of the debt 
secured by such property without regard to whether the transferee is 
eligible for the type of loan being assumed, subject to the following 
conditions:
    (i) The transferee will continue the farming or other operations for 
the benefit of all or a part of the deceased borrower's family who were 
directly dependent on the borrower for their support at the time of 
death.
    (ii) The amount to be assumed and the repayment rates and terms will 
be the same as provided in Sec. 1962.34(a) of this Subpart.
    (iii) The State Director determines that the continuation will not 
adversely affect repayment of the loan.
    (iv) The transferee has never been liable for a previous Farm Loan 
Programs direct farm loan or loan guarantee which was reduced or 
terminated in a manner that resulted in a loss to the Government.
    (3) In determining whether to continue with individuals, whether 
they are already liable or assume the indebtedness, all pertinent 
factors will be considered including whether:
    (i) Probate or administration proceedings have been or will be 
started and, with OGC's advice, whether the filing of a claim on the 
debt owed to the Agency in such proceedings is necessary to protect the 
Agency's interests.
    (ii) Arrangements can be made with the heirs, creditors, executors, 
administrators, and other interested parties to transfer title to the 
security to the continuing individual and to avoid liquidating the 
assets so that the individual can continue with the loan on a feasible 
basis.
    (4) If continuation is approved, all reasonable and practical steps, 
short of foreclosure or other litigation, will be taken to vest title to 
the security in the joint debtor or transferee.
    (5) The deceased borrower's estate may be released from liability 
for the the Agency indebtedness if title to the security is vested in 
the joint debtor or transferee, and:
    (i) The full amount of the debt is assumed, or
    (ii) If only a portion of the debt is assumed, the amount assumed 
equals the amount as determined by OGC which could be collected from the 
assets of the estate of the deceased borrower, including the value of 
any security or EO property.
    (h) Special servicing of deceased EO borrower cases. If the EO loan 
is secured, all paragraphs in this section will be followed. If the EO 
loan is unsecured, paragraphs (a), (b), (c), (d), and (e) of this 
section will be followed along with the following requirements.
    (1) An individual who is liable for the indebtedness of the deceased 
borrower and wishes to continue with the EO debt and the EO property, 
may do so in accordance with paragraph (g)(1) of this section.
    (2) A surviving member of the deceased borrower's family, a joint 
operator with the deceased borrower, a relative, or other individual who 
is not liable for the EO debt who desires to continue with the farming 
or other operation may do so in accordance with

[[Page 297]]

paragraph (g)(2) of this section. This individual must execute a loan 
agreement in addition to the assumption agreement and secure the EO debt 
with a lien on the remaining EO property when title to the property is 
vested in the individual and the County Supervisor determines that 
security is necessary to protect the interests of the deceased 
borrower's family or the Agency.
    (3) If no individual listed in paragraphs (h) (1) and (2) of this 
section wishes to continue, but a member of the borrower's family turns 
over to the Agency the EO property in which the estate has an interest 
and which is not essential for minimum family living needs, the County 
Supervisor will take possession of EO property and sell it in accordance 
with Sec. 1962.42 of this Subpart. If this cannot be done, or if real 
property is involved, the case will be referred to OGC. If the property 
is sold, notice will be delivered to any of the borrower's heirs who are 
in possession of the property and to any administrator or executor of 
the borrower's estate.

[50 FR 45783, Nov. 1, 1985, as amended at 51 FR 4140, Feb. 3, 1986; 51 
FR 45439, Dec. 18, 1986; 56 FR 15826, Apr. 18, 1991; 61 FR 35931, July 
9, 1996; 62 FR 10158, Mar. 5, 1997; 68 FR 7701, Feb. 18, 2003]



Sec. 1962.47  Bankruptcy and insolvency.

    (a) Borrower files bankruptcy. When the Agency becomes aware that a 
Farm Loan Programs borrower has filed for protection under Title 11 of 
the United States Code (bankruptcy), the borrower and the borrower's 
attorney, if any, will be notified in writing of the borrower's 
remaining servicing options.
    (1) If the borrower wishes to apply for servicing options remaining, 
the borrower, or the borrower's attorney on behalf of the borrower, must 
sign and return the appropriate response form, or similar written 
request for servicing, and any forms or information as requested by the 
Agency, within 60 days from the date the borrower or the borrower's 
attorney received the notification, or the time remaining from a 
previous notification that was suspended when the borrower filed 
bankruptcy, whichever is greater.
    (2) The Agency will consider a request for servicing options to be 
an acknowledgment that the Agency will not be interfering with any 
rights or protections under the Bankruptcy Code and its automatic stay 
provisions.
    (3) The Agency's processing of any request for servicing may include 
consideration of primary and preservation loan servicing options, 
notification of the Agency's decision on the request or application for 
servicing, mediation, and holding of any meetings or appeals requested 
by the borrower.
    (4) If court approval is required for the borrower to exercise these 
servicing rights, it will be the borrower or the borrower's attorney's 
responsibility to obtain that approval.
    (5) If a plan is confirmed before servicing and any appeal is 
completed under 7 CFR part 11, the Agency will complete the servicing or 
appeals process and may consent to a post-confirmation modification of 
the plan if it is consistent with the Bankruptcy Code and 7 CFR part 
1951, subpart S, as appropriate.
    (6) In chapter 7 cases, the Agency will not provide primary loan 
servicing to a borrower discharged in bankruptcy unless the borrower 
reaffirms the entire Agency debt. If the chapter 7 debtor obtains the 
permission of the court and reaffirms the debt, the loan servicing 
application will be processed in accordance with 7 CFR part 1951, 
subpart S. If the borrower reaffirms the Agency debt in order to be 
considered for restructuring but is later denied restructuring, the 
borrower may revoke the reaffirmation subject to the provisions of the 
Bankruptcy Code. No reaffirmation is necessary for any discharged 
chapter 7 borrower to be eligible for preservation loan servicing in 
accordance with 7 CFR part 1951, subpart S.
    (b) Borrower defaults on plan or bankruptcy is dismissed--(1) 90 
days past due on a reorganization plan while still under court 
jurisdiction.(i) If allowed by the Bankruptcy Code or court, the 
borrower and the borrower's attorney, if any, will be notified of any 
remaining servicing options under 7 CFR part 1951, subpart S, that were 
not exhausted prior to filing bankruptcy or

[[Page 298]]

during the bankruptcy proceedings according to paragraph (a) of this 
section.
    (ii) No notices will be sent if the account was previously 
accelerated, such action is inconsistent with the provisions of the 
confirmed bankruptcy plan or the Bankruptcy Code, or the case has been 
referred to the Department of Justice.
    (iii) If a borrower operating under a confirmed bankruptcy plan 
desires to apply for loan servicing and qualifies for servicing under 7 
CFR part 1951, subpart S, the borrower must also comply with Bankruptcy 
Code rules and requirements concerning modification of the plan.
    (2) Bankruptcy is dismissed without a confirmed plan. If the 
borrower's bankruptcy is dismissed without a confirmed plan, and the 
borrower is in default on Farm Loan Programs loans, the borrower's 
account will be liquidated after all remaining servicing options under 7 
CFR part 1951, subpart S are exhausted. The borrower will be notified of 
any servicing options remaining according to 7 CFR part 1951, subpart S. 
Notwithstanding the previous sentence, no notices will be sent if the 
account was previously accelerated, the Agency is advised that such an 
act is inconsistent with the confirmed bankruptcy plan or the Bankruptcy 
Code, or the account has been referred to the Department of Justice.
    (3) Bankruptcy is dismissed after a confirmed reorganization plan. 
If a bankruptcy is dismissed after a reorganization plan was confirmed, 
the account will be serviced as follows:
    (i) If the borrower has substantially complied with the plan, but 
later defaults for reasons beyond the borrower's control, (see 7 CFR 
1951.909(c)), the borrower will be notified of loan servicing in 
accordance with 7 CFR 1951.907. No notices will be sent if the account 
was previously accelerated; such action is inconsistent with the 
provisions of the confirmed bankruptcy plan or the Bankruptcy Code; or 
the case has been referred to the Department of Justice.
    (ii) If the borrower failed to make one full payment under the plan, 
or did not comply with the plan for reasons not beyond the borrower's 
control, the borrower will be serviced according to paragraph (b)(2) of 
this section.
    (c) Servicing of bankruptcy loans after the case is closed. In 
chapter 11, 12, or 13 cases after the case is closed and the discharge 
order is issued by the court, if the borrower becomes delinquent after 
performing as agreed under the plan, the borrower will be sent a notice 
explaining the loan servicing options available under 7 CFR part 1951, 
subpart S. The borrower's attorney of record will be sent a courtesy 
copy if the bankruptcy has not been closed for at least 2 years. No 
notices will be sent if the account has been accelerated, such act is 
inconsistent with the provisions of a confirmed bankruptcy plan or other 
provisions of the Bankruptcy Code, or the account has been referred to 
the Department of Justice.
    (d) Liquidation. The account will be liquidated after obtaining any 
necessary relief, if required, from the automatic stay. In chapter 7 
cases after discharge, the account can be liquidated if the debt has not 
been reaffirmed and the property is no longer part of the estate. 
Liquidation can proceed prior to discharge if allowed by the court.
    (1) If the borrower or borrower's attorney was not previously 
notified of any remaining servicing options available under 7 CFR part 
1951, subpart S before or during the course of the bankruptcy 
proceedings, the borrower and the borrower's attorney will be sent the 
notices referenced in paragraph (c) of this section prior to liquidating 
any security property.
    (2) If the borrower or the borrower's attorney had been previously 
notified of loan servicing options remaining, the account will be 
liquidated.

[63 FR 29341, May 29, 1998]



Sec. 1962.48  [Reserved]



Sec. 1962.49  Civil and criminal cases.

    All cases in which court actions to effect collection or to enforce 
FmHA or its successor agency under Public Law 103-354 rights are 
recommended, as well as actions relating to apparent violations of 
Federal criminal statutes, will be handled under this section.

[[Page 299]]

    (a) Criminal action. When facts or circumstances indicate that 
criminal violations may have been committed by an applicant, a borrower, 
or third party purchaser, the State Director will refer the case to the 
appropriate Regional Inspector General for Investigations, Office of 
Inspector General (OIG), USDA, in accordance with FmHA or its successor 
agency under Public Law 103-354 Instruction 2012-B (available in any 
FmHA or its successor agency under Public Law 103-354 office) for 
criminal investigation. Any questions as to whether a matter should be 
referred will be resolved through consultation with OIG for 
Investigations and the State Director and confirmed in writing. In order 
to assure protection of the financial and other interest of the 
government, a duplicate of the notification will be sent to the Office 
of General Counsel (OGC). After OIG has accepted any matter for 
investigation, FmHA or its successor agency under Public Law 103-354 
staff must coordinate with OIG in advance regarding any administrative 
action on the matter/borrower other than routine servicing actions on 
existing loans. Cases requiring further action by OGC will be handled in 
accordance with paragraph (c) of this section.
    (b) Civil action. Court action or other judicial process will be 
recommended to OGC when all other reasonable and proper efforts and 
methods to obtain payment, to remove other defaults, and to protect FmHA 
or its successor agency under Public Law 103-354's property/financial 
interests have been exhausted. However, if an emergency situation exists 
or criminal action is to be recommended, the case will be submitted to 
OGC without taking the action necessary to report the information 
required by Part II of Form FmHA or its successor agency under Public 
Law 103-354 455-22, ``Information for Litigation.'' This is because 
delay in submitting cases in emergency situations may affect the 
financial interests of FmHA or its successor agency under Public Law 
103-354 and collection efforts may adversely affect the criminal 
investigation and/or criminal prosecution.
    (1) Civil action will be recommended when one or more of the 
following conditions exists:
    (i) There is a need to repossess security or EO property or to 
foreclose a lien and such action cannot be accomplished by other means 
authorized in this subpart.
    (ii) There is a need for filing claims against third parties because 
of a conversion of security or other action.
    (iii) Payment due on debts are not made in accordance with the 
borrower's ability to pay, and the borrower has assets or income from 
which collection can be made.
    (iv) The borrower has progressed to the point that credit can be 
obtained from other sources, has agreed in the note or other instrument 
to do so, but refuses to comply with that agreement.
    (v) FmHA or its successor agency under Public Law 103-354 or its 
security becomes involved in court action through foreclosure by a 
third-party lienholder or through some other action.
    (vi) Other conditions exist which indicate that court action may be 
necessary to protect FmHA or its successor agency under Public Law 103-
354's interests.
    (2) Claims of less than $600 principal will not be referred to OGC 
for court action unless:
    (i) A statement of facts is submitted as to the exact manner in 
which the interest of FmHA or its successor agency under Public Law 103-
354, other than recovery of the amount involved, would be adversely 
affected if suit were not filed; and
    (ii) Collection of a substantial part of the claim can be made from 
assets and income that are not exempt under State or Federal law. A 
State supplement will be issued to set forth such exemptions or a 
summary of those exemptions with respect to property to which FmHA or 
its successor agency under Public Law 103-354 normally would look for 
payment such as real estate, livestock, equipment, and income.
    (3) When a borrower has not properly accounted for the proceeds of 
the sale of security, it is the general policy to

[[Page 300]]

look first to the borrower for restitution rather than to third-party 
purchasers. In line with this policy the remaining chattel security on 
which FmHA or its successor agency under Public Law 103-354 holds a 
first lien usually will be liquidated before demand is made, or civil 
action to recover from third-party purchasers.
    (i) When the County Supervisor determines that full collection 
cannot be made from the borrower and that it will be necessary to 
collect the full value of the security purchased by a converter, a 
demand (see Guide Letter 1962-A-1, a copy of which is available in any 
FmHA or its successor agency under Public Law 103-354 county office) 
will be sent to the purchaser at the same time that Exhibit D or E of 
Subpart A of Part 1955 of this chapter, is sent to the borrower.
    (ii) When the County Supervisor determines that it is likely that 
action will have to be taken to collect from third-party pruchasers, the 
County Supervisor will notify such purchasers by letter (see Guide 
Letter 1962-A-2, a copy of which is available in any FmHA or its 
successor agency under Public Law 103-354 county office) that FmHA or 
its successor agency under Public Law 103-354 security has been 
purchased by them and that they may be called upon to return the 
property or pay the value thereof in the event restitution is not made 
by the borrower. If it later becomes necessary to make demand on such 
third-party purchasers, FmHA or its successor agency under Public Law 
103-354 will do so unless the case already has been referred to OGC or 
the U.S. Attorney, in which event the demand will be made by one of 
those offices.
    (iii) When restitution is made by the borrower, or a determination 
is made, with the advice of OGC, that the facts in the case do not 
support the claim against the third-party purchaser, the third-party 
purchaser will be informed by the County Supervisor that FmHA or its 
successor agency under Public Law 103-354 will take no adverse action 
(see Guide Letter 1962-A-3, a copy of which is available in any FmHA or 
its successor agency under Public Law 103-354 county office). 
Ordinarily, it will not be necessary to inform the third-party purchaser 
of OGC's decision when OGC determines that the facts support the claim 
against the third-party purchaser but no substantial part of the claim 
can be collected. If OGC makes such a determination and the third-party 
purchaser asks what determination has been made, the County Supervisor 
will say that no further action is to be taken on the claim ``at this 
time.''
    (iv) In addition, unless personal contacts with the third-party 
purchaser, or other efforts to collect demonstrate that further demand 
would be futile, and a satisfactory compromise offer has not been 
received, a follow-up letter (see Guide Letter 1962-A-4, a copy of which 
is available in any FmHA or its successor agency under Public Law 103-
354 county office) will be sent by the State Director as soon as 
possible after the 15-day period set forth in the demand letter has 
expired. Unless response to the State Director's followup letter or 
personal contacts or other efforts indicate that further demand would be 
futile, an additional follow-up letter will be sent to the third-party 
purchaser by OGC after the case has been referred to that office.
    (c) Handling civil and criminal cases. All cases in which court 
actions to effect collection or to enforce the rights of FmHA or its 
successor agency under Public Law 103-354 are recommended, will be 
forwarded to OGC by the State Director in accordance with paragraph 
(c)(3) of this section.
    (1) County Office actions. Forms FmHA or its successor agency under 
Public Law 103-354 455-1, ``Request for Legal Action,'' and FmHA or its 
successor agency under Public Law 103-354 455-22 will be prepared. Form 
FmHA or its successor agency under Public Law 103-354 455-2, ``Evidence 
of Conversion,'' will be prepared for each unauthorized disposal. The 
original and two copies of Forms FmHA or its successor agency under 
Public Law 103-354 455-1 and FmHA or its successor agency under Public 
Law 103-354 455-22 and, wh=n applicable, FmHA or its successor agency 
under Public Law 103-354 455-2 together with the borrower's case file, 
will be submitted to the State Office. Signed statements should be 
obtained, if possible, from the borrower, any third

[[Page 301]]

party purchasers, or others to support the information contained on Form 
FmHA or its successor agency under Public Law 103-354 455-1. Appropriate 
recommendations regarding civil actions will be made on Forms FmHA or 
its successor agency under Public Law 103-354 455-1 and FmHA or its 
successor agency under Public Law 103-354 455-22 against the borrower or 
others. When a case is referred to the State Office the County 
Supervisor will keep that office informed of any future developments in 
the case. If Attachments l, 2 and other appropriate attachments to 
Exhibit A of Subpart S of Part 1951 of this chapter have not been sent, 
they will now be sent to the borrower and any other obligor(s) on the 
note. Any appeal must be concluded before a civil action can be filed.
    (2) District Office actions. Exhibits D, E, or E-1 of subpart A of 
part 1955 of this chapter will be prepared and sent after any appeal is 
concluded.
    (3) State Office actions. (i) upon receipt of Form FmHA or its 
successor agency under Public Law 103-354 455-1 and, when applicable, 
Form FmHA or its successor agency under Public Law 103-354 455-2, the 
State Director will analyze each form to determine if all of the 
necessary information is documented and, if not, whether an appropriate 
effort was made to obtain the information. If all the necessary 
information is not documented, the State Director will return the case 
and request the County Supervisor to obtain the information to complete 
Forms FmHA or its successor agency under Public Law 103-354 455-1 and 
455-2. The State Director may assign any qualified FmHA or its successor 
agency under Public Law 103-354 employee to help a County Supervisor 
obtain the information necessary to complete the reports. After diligent 
efforts, if FmHA or its successor agency under Public Law 103-354 
employees are unable to obtain the additional information, the case will 
be returned to the State Office with an explanation of why the 
information is unavailable.
    (ii) After all of the pertinent information available has been 
obtained, the State Director will refer the case to OGC for civil 
action, if referral is required under the policy expressed in this 
section. If such referral is not required, the State Director will set 
forth in Item 19 of Form FmHA or its successor agency under Public Law 
103-354 455-1 the basis for the determination not to refer the case and 
instructions for follow-up servicing action. The State Director will not 
recommend a third-party conversion claim to the OGC if more than one 
year has run from the date of the annual accounting following the 
disposition of security, unless the Administrator or delegate determines 
a longer period of time should be applied either because of compelling 
circumstances such as the case has been referred to and accepted by OIG 
for criminal or civil investigation. The period of time during which a 
suit may be filed is set by federal statute and is not changed by this 
section. Demands on third-party purchasers will be made in accordance 
with paragraph (b) of this section. In cases referred to OGC, the State 
Director will make comments and recommendations regarding the civil 
aspects of the case on Form FmHA or its successor agency under Public 
Law 103-354 455-1.
    (A) When cases are referred to OGC, the County Office case file, 
Form FmHA or its successor agency under Public Law 103-354 455-1, and, 
when appropriate, Form FmHA or its successor agency under Public Law 
103-354 455-2 will be transmitted. In addition, when the institution of 
civil court proceedings by FmHA or its successor agency under Public Law 
103-354 is recommended, the notes, financing statements, security 
agreements, loan agreements, other legal instruments and copies thereof, 
as required by OGC, and Form FmHA or its successor agency under Public 
Law 103-354 451-11, ``Statement of Account,'' and Form FmHA or its 
successor agency under Public Law 103-354 455-22 will be submitted to 
OGC. The State Director, with the advice of OGC, will determine the 
number of copies of such instruments needed and the information required 
on the certified statement of account. Each request for a certified 
statement of account will specify the type of information needed.
    (B) Notes, statements of account, files, or other documents and 
copies thereof needed in referring cases to

[[Page 302]]

OGC for civil court or other action will be obtained from the Finance 
Office, or County Office, by the State Director. When the time required 
for obtaining the above material or documents may jeopardize FmHA or its 
successor agency under Public Law 103-354's interest by permitting the 
diversion or dissipation of assets which otherwise could be expected as 
a source of payment, the Finance Office, upon the request of the State 
Director, will forward such material or documents directly to OGC or (at 
the State Director's direction) to the U.S. Attorney.
    (d) Actions on cases referred to OGC. When a civil case is referred 
to OGC, the State Director will notify the County Supervisor of the 
referral and will return the County Office case file when it is no 
longer needed. The State Director will also prepare and distribute Form 
FmHA or its successor agency under Public Law 103-354 1951-6 according 
to the FMI. The FmHA or its successor agency under Public Law 103-354 
field office will process the descriptive code via the FmHA or its 
successor agency under Public Law 103-354 field office terminal system. 
This will flag the borrower's account indicating court action is pending 
(CAP). After notice of the referral is received by the County 
Supervisor, no collection or servicing action will be taken except upon 
specific instructions from the State Director or OGC. However, when a 
borrower voluntarily proposes to make a payment on an account, the 
County Supervisor will accept the collection unless notice has been 
received that the case has been referred to the U.S. Attorney for civil 
action. The County Supervisor will immediately notify OGC directly by 
memorandum, with a copy sent to the State Director, of any collections 
received. The County Supervisor also will notify the State Director and 
OGC of any developments which may affect a case which has been referred 
to OGC.
    (e) Actions on cases referred to the U.S. Attorney and on judgement 
cases (including third-party judgements). OGC will notify the State 
Director, the Finance Office, and the County Supervisor when a case is 
referred to the U.S. Attorney or is otherwise closed. When a case is 
referred to the U.S. Attorney, the Finance Office will discontinue 
mailing Form FmHA or its successor agency under Public Law 103-354 1951-
9, Annual ``Statement of Loan Account,'' to such borrowers. OGC will 
also notify the State Director when a judgement (including third-party) 
is obtained.
    (1) When the County Supervisor receives notice from OGC that a 
judgment (including third-party) has been obtained, the County 
Supervisor will establish a judgment account by completing Form FmHA or 
its successor agency under Public Law 103-354 1962-20, ``Notice of 
Judgment,'' in accordance with the FMI. The FmHA or its successor agency 
under Public Law 103-354 field office will process the judgment or the 
third party judgment via the FmHA or its successor agency under Public 
Law 103-354 field office terminal.
    (2) After notice has been received that a case has been referred to 
the U.S. Attorney or a judgment has been obtained and has not been 
returned to FmHA or its successor agency under Public Law 103-354 5by 
the U.S. Attorney, no action will be taken by the County Supervisor 
except upon specific instructions from the State Director, OGC, or the 
U.S. Attorney. However, the County Supervisor will keep the State 
Director informed of any developments which may affect the FmHA or its 
successor agency under Public Law 103-354 security interest or any 
pending court action to enforce collection. If information is obtained 
indicating that such debtors have assets or income not previously 
reported by the County Supervisor to the State Director from which 
collection of such judgment accounts can be obtained, the facts will be 
reported to the State Director. The State Director immediately will 
notify OGC of any developments which might have a bearing on cases 
referred to the U.S. Attorney, including such judgment cases.
    (i) If the debtor proposes to make a payment, FmHA or its successor 
agency under Public Law 103-354 employees will not accept such payment 
but will offer to assist in preparing a letter for the debtor's 
signature to be used in transmitting the payment to the U.S. Attorney. 
In such case, the debtor will

[[Page 303]]

be advised to make payment by check or money order payable to the 
Treasurer of the United States.
    (ii) Collection items received through the mail from the debtor or 
from other sources by the County Office to be applied to such accounts 
will be forwarded by the County Supervisor through OGC to the 
appropriate U.S. Attorney. Likewise, collections received by the 
District Director or the State Office will be forwarded through OGC to 
the appropriate U.S. Attorney. Such items will be forwarded in the form 
received except that cash will be converted into money orders made 
payable to the Treasurer of the United States. The money order receipts 
will remain attached to the money orders. Form FmHA or its successor 
agency under Public Law 103-354 451-1 will not be issued in any such 
case. The debtor will be informed in writing by the County Supervisor of 
the disposition of the amount received.
    (3) When the U.S. Attorney has returned a judgment case to FmHA or 
its successor agency under Public Law 103-354, the County Supervisor is 
responsible for servicing it as follows:
    (i) When the judgment debtor has the ability to make periodic 
payments, action will be taken by the County Supervisor to make 
arrangements for the judgment debtor to do so.
    (ii) [Reserved]
    (iii) At the time of the annual review of collection-only or 
delinquent and problem cases, the County Supervisor will determine 
whether such judgment debtors, whose judgments have not been charged off 
and who are not making regular and satisfactory payments, have assets or 
income from which the judgment can be collected. If such debtors have 
either assets or income from which collection can be made and they have 
declined to make satisfactory arrangements for payment, the facts will 
be reported by the County Supervisor to the State Director. The State 
Director will notify OGC of developments when it appears that 
collections can be enforced out of income or assets.
    (iv) Such judgments will not be renewed or revived unless there is a 
reason to believe that substantial assets have or may become subject 
thereto.
    (v) Such judgments may be released only by the U.S. Attorney when 
they are paid in full or compromised.
    (4) In all judgment cases, any proposed compromise or adjustment 
will be handled in accordance with Subpart B of Part 1956 of this 
chapter.
    (5) If the debtor requests information as to the amount of 
outstanding indebtedness, such information, including court costs, 
should be obtained from the Finance Office if the County Supervisor does 
not have that information. If questions arise as to the payment of court 
costs, information as to such costs will be obtained through the State 
Office from OGC.

[50 FR 45783, Nov. 1, 1985, as amended at 51 FR 45439, Dec. 18, 1986; 53 
FR 35787, Sept. 14, 1988; 54 FR 42799, Oct. 18, 1989; 55 FR 35296, Aug. 
29, 1990; 57 FR 60085, Dec. 18, 1992; 68 FR 61332, Oct. 28, 2003]



Sec. 1962.50  [Reserved]

Exhibit A to Subpart A of Part 1962--Memorandum of Understanding Between 
  Commodity Credit Corporation and Farmers Home Administration or its 
                successor agency under Public Law 103-354

    IT IS HEREBY AGREED by and between the Farmers Home Administration 
or its successor agency under Public Law 103-354 (hereinafter referred 
to as ``FHA'') and the Commodity Credit Corporation (hereinafter 
referred to as ``CCC'') that the following procedure will be observed in 
those cases where producers sell to CCC or pledge to CCC as loan 
collateral under the Price Support Program, agricultural commodities 
such as, but not limited to, cotton, tobacco, peanuts, rice, soybeans, 
grains, on which FHA holds a prior lien and the proceeds from such sales 
or loans are not remitted to FHA for application against the loan(s) 
secured by such lien:
    1. When an FHA County Supervisor learns that an FHA borrower has 
obtained a loan from CCC on a commodity or sold a commodity to CCC under 
such circumstances, he shall immediately notify his State Director. The 
State Director, immediately upon receipt of the notice, shall furnish 
CCC (see Appendix 1) with the name and address of such borrower, the 
county of his location at the time the commodity was placed under loan 
or sold, and the amount of the FHA loan secured by the lien.
    2. When CCC receives such a notice from FHA, CCC shall take steps to 
prevent the making of any further loans on or purchases of the commodity 
of the borrower. If the CCC loan is still outstanding and CCC calls the

[[Page 304]]

loan, CCC shall notify the FHA State director of the demand.
    3. If the CCC loan is repaid, whether prior to or after the receipt 
by CCC of the notice from FHA, the FHA State Director shall be notified 
immediately, at which time CCC will have discharged its responsibility 
under this agreement.
    4. FHA shall, in each case in which the CCC loan is not repaid or 
the commodity has been sold to CCC, endeavor to collect from the 
borrower the amount due on the FHA loan. Such collection efforts shall 
include the making of demand on the borrower and the following of FHA's 
normal administrative policies with respect to the collection of debts, 
but shall not include the making of demand for payment upon the area 
peanut producer cooperative marketing associations through which CCC 
makes price support available to producers. If collection efforts are 
not successful, the FHA County Supervisor shall make a complete report 
on the matter to his State Director. If the State Director determines 
that the amount due on the FHA lien is not collectable by administrative 
action, he shall refer the matter to the appropriate local office of the 
General Counsel, with a full statement of the facts, for a determination 
of the validity of the FHA lien. If it is determined by the General 
Counsel's Office that FHA holds a valid prior lien on the commodity, the 
State Director shall furnish CCC with a copy of such determination, 
together with all other pertinent information, and shall request payment 
to FHA of the lesser of (1) the amount due on its loan, or (2) the value 
of the commodity at the time the CCC loan or purchase was made (based on 
the market value of the commodity on the local market nearest to the 
place where the commodity was stored). The information to be furnished 
CCC shall include (a) the principal balance plus interest due FHA on the 
date of the request, (b) the amount due on the FHA loan at the time the 
CCC loan or purchase was made, and (c) the amount of the CCC loan or 
purchase proceeds, if any, applied by the producer against the FHA loan. 
FHA shall continue to make collection efforts and shall notify CCC of 
any amount collected from the producer or any other party.
    5. Upon receipt of evidence, including a copy of the determination 
of the Office of the General Counsel, from the State Director of FHA 
that the proceeds from the CCC loan or purchase have not been received 
by FHA from the borrower, and that collection cannot be made by FHA, CCC 
will if the CCC loan has not been repaid or if CCC has purchased the 
commodity, pay FHA the amount specified in paragraph 4 above or deliver 
the commodity (or warehouse receipts representing the commodity) to FHA: 
Provided, That if CCC has any information indicating that collection may 
be made by FHA from the borrower or any other party, it may notify FHA 
and delay payment pending additional collection efforts by FHA.
    6. It is the desire of both FHA and CCC that claims to be processed 
under this agreement receive prompt attention by both parties and be 
disposed of as soon as possible. Instructions for the implementation of 
these procedures at the field office level will be developed and issued 
by the Washington offices of FHA and CCC.
    7. Any question with regard to the handling of any claim hereunder 
shall be reported by the applicable ASCS office to ASCS in Washington 
and by the FHA State Director to the National Office of FHA.
    This Memorandum of Understanding supersedes the agreement entered 
into between FmHA or its successor agency under Public Law 103-354 and 
CCC on November 5, 1951.
    Entered into as of this 29th day of May, 1973.

    Farmers Home Administration or its successor agency under Public Law 
103-354, 

                                                      Frank B. Elliott, 
                                                   Acting Administrator.

    Commodity Credit Corporation, 

                                                      Kenneth E. Frick, 
                                               Executive-Vice President.

    Appendix 1--furnishing notice or information to commodity credit
                               corporation
------------------------------------------------------------------------
                Commodity                            Direct to
------------------------------------------------------------------------
Cotton...................................  Prairie Village, Kansas, ASCS
                                            Commodity Office.
Tobacco..................................  Applicable tobacco
                                            association.
Peanuts..................................  Applicable peanut
                                            association.
All other commodities....................  Applicable State ASCS office.
------------------------------------------------------------------------


[44 FR 4437, Jan. 22, 1979]

  Exhibit B to Subpart A of Part 1962--Memorandum of Understanding and 
                      Blanket Commodity Lien Waiver

    The Farmers Home Administration or its successor agency under Public 
Law 103-354 (FmHA or its successor agency under Public Law 103-354) 
sometimes makes loans to farmers on the security of agricultural 
commodities that are eligible for price support under loan and purchase 
programs conducted by the Commodity Credit Corporation (CCC). FmHA or 
its successor agency under Public Law 103-354 and CCC desire that price 
support be made available to farmers without unnecessarily impairing or 
undermining the respective security interests of FmHA or its successor 
agency under Public Law 103-354 and CCC in and without undue 
inconvenience to producers and FmHA or its successor

[[Page 305]]

agency under Public Law 103-354 and CCC in securing lien waivers on such 
commodities.
    Now, therefore, it is agreed as follows:
    (1) Upon request of an official of a State ASCS office, the FmHA or 
its successor agency under Public Law 103-354 State Director in such 
State shall furnish designated county ASCS offices with the names of 
producers in the trade area from whom FmHA or its successor agency under 
Public Law 103-354 holds currently effective liens on commodities with 
respect to which CCC conducts price support programs. FmHA or its 
successor agency under Public Law 103-354 will try to furnish a complete 
and current list of the names of such producers; however, FmHA or its 
successor agency under Public Law 103-354's liens with respect to any 
commodity will not be affected by an error in or omission from such 
lists.
    (2) For a loan disbursed by a county ASCS office, CCC will issue a 
draft in the amount (Iess fees and charges due under CCC program 
regulations) of the loan on, or purchase price of, the commodity payable 
jointly to FmHA or its successor agency under Public Law 103-354 and the 
producer if (a) his name is on the Iist furnished by FmHA or its 
successor agency under Public Law 103-354, or (b) he names FmHA or its 
successor agency under Public Law 103-354 as lienholder. The draft will 
indicate the commodity covered by the loan or purchase.
    (3) On issuance of the draft, the security interest of FmHA or its 
successor agency under Public Law 103-354 shall be subordinated to the 
rights of CCC in the commodity with respect to which the loan or 
purchase is made. The word ``subordinated'' means that, in the case of a 
loan, CCC's security interest in the commodity shall be superior and 
prior in right to that of FmHA or its successor agency under Public Law 
103-354 and that, on purchase of a commodity by CCC or its acquisition 
by CCC in satisfaction of a loan, the security interest of FmHA or its 
successor agency under Public Law 103-354 in such commodity shall 
terminate.
    (4) Nothing contained in this Memorandum of Understanding shall be 
construed to affect the rights and obligations of the parties except as 
specifically provided herein.
    (5) This agreement may be terminated by either party on 30 days' 
written notice to the other party.

    Dated: July 20, 1980.


                                                     Ray V. Fitzzerald, 
                                         Executive Vice President. CCC. 

    Dated: July 14, 1980.

                                                      Gordon Cavanaugh, 
  Administrator, FmHA or its successor agency under Public Law 103-354. 

[53 FR 35787, Sept. 14, 1988]

Exhibit C to Subpart A of Part 1962--Memorandum of Understanding Between 
  Farmers Home Administration or its successor agency under Public Law 
                103-354 and Commodity Credit Corporation

                         Rotation of Grain Crops

    Under the Commodity Credit Corporation (CCC) Farmer-Owned Grain 
Reserve Program, a producer may request to rotate or exchange new crop 
grain for the original crop grain that is in the Farmer-Owned Grain 
Reserve Program and already encumbered by CCC. The Farmers Home 
Administration or its successor agency under Public Law 103-354 (FmHA or 
its successor agency under Public Law 103-354) may have subordinated 
their first lien position to CCC on the original grain placed in reserve 
and/or may have a first lien on the new crop. FmHA or its successor 
agency under Public Law 103-354 and CCC desire to devise a mechanism 
whereby the CCC can relinquish its first lien position on the original 
grain reserve crop to FmHA or its successor agency under Public Law 103-
354 and in turn the FmHA or its successor agency under Public Law 103-
354 can relinquish its first lien position to CCC on the replacement 
grain reserve crop.
    Now, therefore, it is agreed as follows:
    (1) Upon receipt of a memorandum from an Agricultural Stabilization 
and Conservation Service (ASCS) County Executive Director or other 
designated county office official requesting the rotation of a grain 
reserve crop for a producer borrower(s), the FmHA or its successor 
agency under Public Law 103-354 County Supervisor and the ASCS county 
office official will jointly indicate approval or rejection of the 
request on the bottom of the original and a copy of the memorandum 
(Approval Memorandum) as follows:
    ``We hereby agree to and authorize the rotation of the subject 
producer's grain crops in accordance with the provisions of the 
Memorandum of Understanding between Farmers Home Administration or its 
successor agency under Public Law 103-354 and Commodity Credit 
Corporation dated--------.''
FmHA or its successor agency under Public Law 103-354___________________
ASCS____________________________________________________________________
    In the memorandum, ASCS will include the name(s) of the producer(s) 
desiring to rotate the grain crops, the approximate number of bushels 
being rotated, the type of crop, years' crop being rotated and the 
location of the original grain reserve crop (approximate land and 
facility description).
    (2) Upon execution of the Approval Memorandum by both ASCS and FmHA 
or its successor agency under Public Law 103-354, the security interest 
of FmHA or its successor agency under Public Law 103-354 in the new

[[Page 306]]

crop grain shall be subordinated to the security interest of CCC in such 
grain and the security interest of CCC in the original crop grain shall 
be subordinated to the security interest of FmHA or its successor agency 
under Public Law 103-354 in such grain. At that point in time it will be 
the responsibility of each agency and the borrower to account for their 
respective interests in the grain crops and/or proceeds from the sale of 
the grain. The crop rotation and subordination of liens will only 
involve the amount of grain that has been specifically provided for in 
the memorandum from ASCS.
    (3) If there is an intervening third party lien and it is impossible 
for FmHA or its successor agency under Public Law 103-354 or CCC to have 
a first lien on their respective grain crops, the request of the 
producer to rotate crops will not be granted.
    (4) Nothing contained in this Memorandum of Understanding shall be 
construed to affect the rights and obligations of the parties except as 
specifically provided herein.
    (5) This agreement may be terminated by either party on 30 days 
written notice to the other party.

[44 FR 4437, Jan. 22, 1979]

          Exhibits D--D-1 to Subpart A of Part 1962 [Reserved]

 Exhibit E to Subpart A of Part 1962--Releasing Security Sales Proceeds 
 and Determining ``Essential'' Family Living and Farm Operating Expenses

                         Family Living Expenses

    Expenses for household operating, food, clothing, medical care, 
house repair, transportation, insurance and household appliances, i.e., 
stove, refrigerator, etc., are essential family living expenses. We do 
not expect there will be any disagreements over this. However, when 
proceeds are less than expenses, there might be disagreements about the 
amounts FmHA or its successor agency under Public Law 103-354 should 
release to pay for particular items within these broad categories. For 
example, FmHA or its successor agency under Public Law 103-354 has to 
release for transportation expenses, but should FmHA or its successor 
agency under Public Law 103-354 release so that a borrower can buy a new 
car? If at planning time or during the crop year it appears that there 
will be sales proceeds available to pay for the borrower's operating and 
living expenses, including the expense of a new car, the Form FmHA or 
its successor agency under Public Law 103-354 1962-1 can be completed to 
show that FmHA or its successor agency under Public Law 103-354 plans to 
release for a new car. On the other hand, it would also be proper to 
complete the Form FmHA or its successor agency under Public Law 103-354 
1962-1 to release for a used car or for gas and repairs to the 
borrower's present car. Since it is necessary for FmHA or its successor 
agency under Public Law 103-354 to release for essential family living 
expenses and because transportation is an essential family living 
expense, some proceeds must be released for transportation. However, 
nothing requires FmHA or its successor agency under Public Law 103-354 
to release for a specific expense; usually, there will be several ways 
to use proceeds to provide for essential family living expenses. We must 
provide the borrower with a written decision and an opportunity to 
appeal whenever there is a disagreement over the use of proceeds or 
whenever we reject a request for a release.

                         Farm Operating Expenses

    We would expect farm operating expenses to present more of a problem 
than family living expenses. There will probably be a few disagreements 
over whether an expense is an operating expense (as opposed to a capital 
expense), but it is more likely that there will be disagreements over 
the amount FmHA or its successor agency under Public Law 103-354 should 
release for operating expenses and whether a particular farm operating 
expense is ``essential.'' As is the case with family living expenses, 
disagreements will most likely arise when proceeds are less than 
expenses.
    To resolve disputes over the amount to be released, remember that we 
must be reasonable and release enough to pay for essential farm 
operating expenses. Although a borrower might not always agree that 
enough money is being released, if the borrower's essential farm 
operating expenses are being paid, we are fulfilling the requirements of 
the statute. We must provide the borrower with an opportunity to appeal 
when there is a disagreement over the use of proceeds or when we reject 
a request for a release.
    Section 1962.17 of this subpart states that essential expenses are 
those which are ``basic, crucial or indispensable.'' Whether an expense 
is basic, crucial or indispensable depends on the circumstances. For 
example, feed is a farm operating expense, but it is not always an 
essential expense. If adequate pasture is available to meet the needs of 
the borrower's animals, feed is not essential. Feed is essential if 
animals are confined in lots. Hiring a custom harvester is a farm 
operating expense, but is not an essential expense if the farmer has the 
equipment and labor to harvest the crop just as well as a custom 
harvester. Hired labor is an operating expense which might be essential 
in a dairy operation but not in a beef cattle operation. Payments to 
creditors are essential if the creditor is unable to restructure the 
debt or to carry the debt delinquent. Renting land

[[Page 307]]

is not essential if the borrower plans to use it to grow corn which can 
be purchased for less than the cost of production. Paying outstanding 
bills is essential if a supplier is refusing to provide additional 
credit but not if the supplier is willing to carry a balance due. Of 
course, the long term goal of any farming operation is to pay all of its 
expenses, but when this is not possible, FmHA or its successor agency 
under Public Law 103-354 and the borrower must work together to decide 
which farm operating expenses are essential and demand immediate 
attention and cannot be neglected. These are the essential expenses.
    We absolutely must release to pay for essential family living and 
farm operating expenses; there are no exceptions to this. When deciding 
whether an expense is essential and when deciding how much to release, 
the choices we make must be rational, reasonable, fair and not extreme. 
They must be based on sound judgment, supported by facts, and explained 
to the borrower. Following these rules will help us avoid disagreements 
with borrowers.

[56 FR 15829, Apr. 18, 1991]

             Exhibit F to Subpart A of Part 1962 [Reserved]



PART 1965_REAL PROPERTY--Table of Contents




Subpart A_Servicing of Real Estate Security For Farm Loan Programs Loans 
                       and Certain Note	Only Cases

Sec.
1965.1 Purpose.
1965.2 General policies.
1965.3 Borrower's responsibilities.
1965.4 FmHA or its successor agency under Public Law 103-354's 
          responsibility.
1965.5 Servicing certain insured Farm Ownership (FO) loans.
1965.6 Consent of lienholders.
1965.7 Definitions.
1965.8-1965.10 [Reserved]
1965.11 Preservation of security and protection of liens.
1965.12 Subordination of an Agency mortgage.
1965.13 Consent by partial release or otherwise to sale, exchange or 
          other disposition of a portion of or interest in security, 
          except leases.
1965.14 Subordination of FmHA or its successor agency under Public Law 
          103-354 real estate mortgages to easements to the U.S. Fish 
          and Wildlife Service (formerly the Bureau of Sport Fisheries 
          and Wildlife).
1965.15 Subordination of FmHA or its successor agency under Public Law 
          103-354's lien to the Commodity Credit Corporation's (CCC) 
          security interest taken for loans made for farm storage and 
          drying equipment.
1965.16 Consent to junior liens.
1965.17 Lease of security.
1965.18 Transfer of upland cotton, peanut, or tobacco allotments.
1965.19 Severance agreement.
1965.20 [Reserved]
1965.21 Assignment and release of Soil Conservation or similar program 
          payments.
1965.22 Deceased borrower.
1965.23 Bankruptcy and insolvency.
1965.24 Servicing note-only cases.
1965.25 Release of FmHA or its successor agency under Public Law 103-354 
          mortgage without monetary consideration in certain cases.
1965.26 Liquidation action.
1965.27 Transfer of real estate security.
1965.28-1965.30 [Reserved]
1965.31 Taking liens on real estate as additional security in servicing 
          FmHA or its successor agency under Public Law 103-354 loans.
1965.32 [Reserved]
1965.33 Cosigners--SFH loans.
1965.34 [Reserved]
1965.35 Exception authority.
1965.36 State Supplements and reference to the OGC.
1965.37 Redelegation of authority.
1965.38-1965.49 [Reserved]
1965.50 OMB control number.

Exhibit A to Subpart A--Memorandum of Understanding Between Bureau of 
          Sport Fisheries and Wildlife and the Farmers Home 
          Administration or its successor agency under Public Law 103-
          354 [Note]
Exhibit B to Subpart A--Notification of Other Lienholders Intent to 
          Foreclose [Note]
Exhibit C to Subpart A--Processing Guide [Note]
Exhibit D to Subpart A--Equity Recapture Agreement [Note]

         Subpart B_Security Servicing for Multiple Housing Loans

1965.51 General.
1965.52 Definitions.
1965.53-1965.54 [Reserved]
1965.55 Authority of State Director.
1965.56-1965.57 [Reserved]
1965.58 Responsibilities.
1965.59-1965.60 [Reserved]
1965.61 General loan servicing requirements.
1965.62 [Reserved]
1965.63 Issuance or transfer of stock, or change in membership, or 
          membership interests in organizations indebted to FmHA or its 
          successor agency under Public Law 103-354.
1965.64 [Reserved]

[[Page 308]]

1965.65 Transfer of real estate security and assumption of loans.
1965.66-1965.67 [Reserved]
1965.68 Consolidation.
1965.69 [Reserved]
1965.70 Reamortization.
1965.71 [Reserved]
1965.72 Deceased borrower.
1965.73 Bankruptcy and insolvency.
1965.74 Divorce actions.
1965.75 Abandonment.
1965.76 [Reserved]
1965.77 Consent to sale or other disposition of security property.
1965.78 [Reserved]
1965.79 Subordination.
1965.80 [Reserved]
1965.81 Severance agreements.
1965.82 [Reserved]
1965.83 Consent to junior liens.
1965.84 [Reserved]
1965.85 Default and liquidation.
1965.86 [Reserved]
1965.87 Miscellaneous security.
1965.88 Obtaining additional security for inadequately secured loans.
1965.89 Equity take-out for loans made after December 15, 1989.
1965.90 Payment in full.
1965.91 Servicing loans in formerly eligible areas.
1965.92 Information to be provided to IRS on RRH transfers, voluntary 
          conveyances, foreclosures, and 100% membership changes.
1965.93 [Reserved]
1965.94 State supplements.
1965.95 [Reserved]
1965.96 Nondiscrimination.
1965.97 Exception authority.
1965.98-1965.99 [Reserved]
1965.100 OMB control number.

Subparts C-D [Reserved]

Subpart E_Prepayment and Displacement Prevention of Multi-Family Housing 
                                  Loans

1965.201 General.
1965.202 Definitions.
1965.203 Nonprofit organization and public agency interest lists.
1965.204 Processing prepayment requests and related rent increases.
1965.205 Borrower request to prepay.
1965.206 Review of borrower prepayment request by Servicing Office.
1965.207 Prohibition on prepayment for loans made on or after December 
          15, 1989, to build or acquire new units.
1965.208 Restrictive-use provisions related to LH projects with grants.
1965.209 Restrictive-use provisions after prepayment.
1965.210 Loans approved prior to December 14, 1989--RHS actions when 
          processing prepayment requests.
1965.211 Evaluation of the borrower's ability to prepay the loan.
1965.212 Appraisals.
1965.213 Offer of incentives to borrowers.
1965.214 Offering and processing of incentives.
1965.215 Borrower rejection of incentive offer--approving/disapproving 
          prepayment.
1965.216 Borrower not subject to restrictive-use provisions nor 
          prohibition on prepayment, no incentive agreement is reached 
          and prepayment cannot be accepted.
1965.217 Processing applications for transfers to nonprofit corporations 
          or public agencies.
1965.218 Accepting prepayment when nonprofit organizations do not apply 
          to purchase or funds are not available.
1965.219 FmHA or its successor agency under Public Law 103-354 
          processing of prepayment.
1965.220-1965.221 [Reserved]
1965.222 Violations of restrictive-use provisions.
1965.223 Relationship with acceleration of accounts, bankruptcy, 
          foreclosure, or inventory properties.
1965.224 Prepayment of loans caused by advance payments on the account.
1965.225-1965.248 [Reserved]
1965.249 Exception authority.
1965.250 OMB control number.
Exhibit A-1 to Subpart E--Required Clauses for Active Borrowers With 
          Projects Subject to Restrictive-Use Provisions as a Result of 
          Specific Loan Making or Loan Servicing Actions
Exhibit A-2 to Subpart E--Required Clauses for Projects Made Subject to 
          Restrictive-Use Provisions When a Loan is Transferred to a 
          Nonprofit Organization or Public Agency to Avert Prepayment
Exhibit A-3 to Subpart E--Required Clauses for Prepaid Projects Which 
          Were Subject to Restrictive-Use Provisions Prior to the 
          Prepayment
Exhibit A-4 to Subpart E--Required Clauses for Prepaid Projects Which 
          Became Subject to Restrictive-Use Provisions at the Time of 
          Prepayment
Exhibit B to Subpart E--Report on Prepayment [Reserved]
Exhibit C to Subpart E--Checklist for Reporting Prepayment [Reserved]
Exhibit D to Subpart E--Methodology for Determining Prepayment 
          Incentives [Reserved]
Exhibit D-1 to Subpart E--Worksheet for Incentive Calculations 
          [Reserved]
Exhibit E to Subpart E--Administration Guidance for Making Prepayment 
          Determinations [Reserved]

[[Page 309]]

Exhibit F to Subpart E--Prepayment and Displacement Prevention Grant 
          Agreement
Exhibit G-1 to Subpart E--Restrictive-Use Agreement
(To be used with exhibit A-3 of this subpart)
Exhibit G-2 to Subpart E--Restrictive-Use Agreement
(To be used with paragraph (A) to exhibit A-4 of this subpart)
Exhibit G-3 to Subpart E--Restrictive-Use Agreement
(To be used with paragraph (B) to exhibit A-4 to this subpart)
Exhibit G-4 to Subpart E--Restrictive-Use Agreement
(To be used with paragraph (C) to exhibit A-4 to this subpart)

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



Subpart A_Servicing of Real Estate Security for Farm Loan Programs Loans 
                       and Certain Note	Only Cases

    Source: 51 FR 4140, Feb. 3, 1986, unless otherwise noted.



Sec. 1965.1  Purpose.

    This subpart delegates authority and prescribes policies and 
procedures for servicing real estate, leasehold interests, and certain 
note-only cases for Farmers Home Administration or its successor agency 
under Public Law 103-354 (FmHA or its successor agency under Public Law 
103-354) Farmer Program (FP) loans. Security servicing for borrowers who 
have both FmHA or its successor agency under Public Law 103-354 FP and 
Single Family Housing (SFH) loans, (excluding Technical Assistance 
Grants and Site loans), will be according to this subpart. Security 
servicing for borrowers who are indebted for SFH loans only, will be 
according to subpart C of part 1965 of this chapter. Security servicing 
for Nonprogram (NP) loan(s) on farm real estate and chattel property 
will be according to subpart J of part 1951 of this chapter. For 
borrowers who have both a FP and NP loan, security servicing will be in 
accordance with the applicable FP regulations and subpart J of part 1951 
of this chapter. This subpart does not apply to FmHA or its successor 
agency under Public Law 103-354 guaranteed loans, Rural Rental Housing 
(RRH) loans, Labor Housing (LH) loans, Business and Industrial (B&I) 
loans, Community Programs (CP) loans, Shift-in-Land-Use (Grazing 
Association) loans, Irrigation and Drainage (I&D) loans, or Indian 
Tribal Land Acquisition loans.

[58 FR 52654, Oct. 12, 1993]



Sec. 1965.2  General policies.

    (a) The terms ``nonprogram (NP)'' and ``ineligible'' may be used 
interchangeably throughout this subpart but are identical in their 
meaning.
    (b) FmHA or its successor agency under Public Law 103-354 will 
service real estate security in a manner that best accomplishes the loan 
objectives and protects the Government's financial interest. To 
accomplish this, FmHA or its successor agency under Public Law 103-354 
will service the real estate security in accordance with the security 
instruments and related agreements, including any authorized 
modifications and the provisions of this subpart.
    (c) The Federal Equal Credit Opportunity Act prohibits creditors 
from discriminating against credit applicants on the basis of race, 
color, religion, national origin, sex, marital status, age (provided 
that the applicant has the capacity to enter into a binding contract); 
because all or part of the applicant's income is derived from any public 
assistance, program; or because the applicant has in good faith 
exercised any right under the Consumer Credit Protection Act. The 
Federal agency that administers compliance with this law is the Federal 
Trade Commission, Equal Credit Opportunity, Washington, DC 20580.
    (d) If the farm is situated in more than one State, county or 
parish, the loan will be serviced by the County Office servicing the 
county in which the borrower's residence is located. If the borrower is 
a corporaton, cooperative, partnership or joint operation or if the 
borrower's residence is not on the farm, the loan will be serviced by 
the County Office servicing the county in which the farm or a major 
portion of the farm is located.

[51 FR 13482, Apr. 21, 1986, as amended at 58 FR 52654, Oct. 12, 1993]

[[Page 310]]



Sec. 1965.3  Borrower's responsibilities.

    Each borrower is responsible for repaying principal and interest on 
a timely basis pursuant to the loan documents, paying real estate taxes 
in accordance with subpart A of part 1925 of this chapter, providing 
adequate property insurance in accordance with subpart A of part 1806 of 
this chapter (FmHA or its successor agency under Public Law 103-354 
Instruction 426.1), maintaining, protecting, and accounting to the FmHA 
or its successor agency under Public Law 103-354 for all real estate 
security, and complying with other loan requirements.

[51 FR 4140, Feb. 3, 1986, as amended at 57 FR 36592, Aug. 14, 1992]



Sec. 1965.4  FmHA or its successor agency under Public Law 103-354's responsibility.

    The County Supervisor, District Director or other servicing official 
is responsible for informing borrowers of their responsibilities in 
connection with the loan, seeing that the security is being properly 
maintained and accounted for, and servicing the account and security in 
accordance with this subpart. When a borrower fails to maintain, 
protect, or account for the security, as required by the loan documents, 
or makes unauthorized disposition or use of any security, FmHA or its 
successor agency under Public Law 103-354 will institute prompt action 
to protect FmHA or its successor agency under Public Law 103-354's 
interest. The County Supervisor, District Director or other servicing 
official will obtain any needed legal advice from the Office of the 
General Counsel (OGC) through the State Director. Once a case has been 
referred to the OGC for legal action, no further action will be taken by 
the County Supervisor, District Director or other servicing official 
without prior clearance from OGC. If the case has been referred to the 
U.S. Attorney, clearance with the U.S. Attorney will be obtained through 
the OGC. All FmHA or its successor agency under Public Law 103-354 
employees will document actions taken to service a loan in the running 
case record in the borrower's FmHA or its successor agency under Public 
Law 103-354 file(s). When a servicing action affects a borrower's 
account (e.g., a foreclosure action is pending), the appropriate FmHA or 
its successor agency under Public Law 103-354 servicing official will 
notify the Finance Office.



Sec. 1965.5  Servicing certain insured Farm Ownership (FO) loans.

    (a) Servicing actions. When an insured FO mortgage running to the 
lender as mortgagee is not held by the FmHA or its successor agency 
under Public Law 103-354 under trust assignment, or declaration of 
trust, or in the insurance fund (called insured FO mortgage held by the 
lender in this subpart) and a written subordination or partial release 
or other servicing document is requested, the document will be executed 
by the holder on a form prepared or approved by OGC. In those cases, 
execution of the document will constitute consent.
    (b) Execution of documents. The County Supervisor is authorized to 
execute on behalf of the Government, all necessary forms, 
statisfactions, releases, and other documents required to complete any 
transactions in this subpart after the transaction has been approved by 
the appropriate approving official. The documents will be executed on 
behalf of the United States in the following form:
    (1) ``United States of America,'' when the mortgage names the United 
States as mortgagee, or when a mortgage running to the lender is not 
under a trust or declaration of trust and the note is held by the 
insurance fund.
    (2) ``United States of America, for Itself and as Trustee,'' when an 
FO mortgage is held by the FmHA or its successor agency under Public Law 
103-354 under a trust assignment or declaration of trust, regardless of 
whether the note is held by a lender or by the insurance fund.



Sec. 1965.6  Consent of lienholders.

    When this subpart requires the consent of other lienholders, consent 
will be obtained and furnished in writing to the FmHA or its successor 
agency under Public Law 103-354 by the borrower before the FmHA or its 
successor agency under Public Law 103-354 enters

[[Page 311]]

into a transaction which affects its security or its lien. This consent 
will, unless otherwise provided in a State Supplement, include an 
agreement as to the disposition of any funds involved in the 
transaction.



Sec. 1965.7  Definitions.

    As used in this subpart, the following definitions apply:
    (a) Borrower. When a loan is made to an individual, the individual 
is the borrower. When a loan is made to an entity, the cooperative, 
corporation, partnership, or joint operation is the borrower.
    (b) County Supervisor also includes Assistant County Supervisor who 
has written delegated authority to carry out purposes of this subpart.
    (c) District Director also includes Assistant District Director who 
has written delegated authority to carry out purposes of this subpart.
    (d) FmHA or its successor agency under Public Law 103-354 loans, 
FmHA or its successor agency under Public Law 103-354 accounts, FmHA or 
its successor agency under Public Law 103-354 interests, FmHA or its 
successor agency under Public Law 103-354 security, FmHA or its 
successor agency under Public Law 103-354 debts and similar terms apply 
to indebtedness owed to, or insured by, the United States of America 
acting through the FmHA or its successor agency under Public Law 103-
354, and to related security instruments.
    (e) Farmer Program loan includes only Farm Ownership (FO), Operating 
(OL), Soil and Water (SW), Economic Emergency (EE), Emergency (EM), 
Recreation (RL), Economic Opportunity (EO), Softwood Timber (ST) and 
Special Livestock (SL) loans, and/or Rural Housing Loans for farm 
service buildings (RHF).
    (f) Foreclosure sale. The act of selling security either under the 
``Power of Sale'' in the security instrument or through court 
proceedings.
    (g) Leasehold. A right to use farm property for a specific period of 
time under conditions provided for a lease agreement.
    (h) Mortgage. Any form of security interest or lien upon any rights 
or interest in real property of any kind. In Louisiana and Puerto Rico 
the term ``mortgage'' also refers to any security interest in chattel 
property.
    (i) Non-Program (NP) Loan. An NP loan results when credits are 
extended to ineligible applicants and/or transferees in connection with 
loan assumptions and sale of inventory properties.
    (j) Note includes any note, bond, assumption agreement or other 
evidence of indebtedness.
    (k) Security. Property of any kind subject to a real or personal 
property lien including, among other things, appurtenant rights of 
development, leasehold, grazing or other use privileges.
    (l) Servicing action includes, among other things, the cash sale or 
transfer of real estate and chattel property and the assumption of 
loans.

[51 FR 4140, Feb. 3, 1986, as amended at 52 FR 26138, July 13, 1987; 53 
FR 35794, Sept. 14, 1988]



Sec. Sec. 1965.8-1965.10  [Reserved]



Sec. 1965.11  Preservation of security and protection of liens.

    (a) Inspection of security. The County Supervisor will inspect farm 
real estate security a minimum of one time every 3 years for accounts 
that are current. More frequent inspections will be made when a borrower 
is delinquent or otherwise in default or when problems exist involving 
the security. If all or part of the security is located in another 
County Office area, the County Supervisor for that area may be requested 
to inspect the property. Security on non-farm tracts will be inspected 
when:
    (1) Liquidation action is likely to be taken;
    (2) The property has been abandoned;
    (3) Necessary to protect the interest of the Government; or
    (4) Requested by the borrower.
    (b) Action by FmHA or its successor agency under Public Law 103-354 
for account of borrower. When necessary to protect the interest of the 
Government, actions will be taken by FmHA or its successor agency under 
Public Law 103-354 for the account of the borrower as provided below. 
Any advances made for the following purposes will be considered 
protective advances and will be paid in accordance with FmHA or its 
successor agency under Public

[[Page 312]]

Law 103-354 Instruction 2024-A (available in any FmHA or its successor 
agency under Public Law 103-354 office). Loans may be reamortized 
without regard to loan limits to include protective advances when 
authorized on an individual case basis by the State Director.
    (1) Abandoned and Custodial Property. Determinations of abandonment 
will be made according to Sec. 1955.55 of Subpart B of Part 1955 of 
this chapter. Services for the management, care, and maintenance of 
custodial property will be obtained according to Sec. 1955.55 of 
Subpart B of Part 1955 of this chapter. Custodial property may be leased 
according to the provisions of Sec. 1955.66(a)(1) of Subpart B of Part 
1955 of this chapter.
    (2) Maintenance. Complete information concerning the borrower's 
failure to adequately maintain the security will be documented in the 
case file. If there is a prior lien, expenditures for maintenance will 
not be made unless the prior lienholder refuses to make them. Evidence 
of this unwillingness to do so should be included in the case file.
    (3) Taxes and assessments. Real estate taxes and assessments will be 
handled in accordance with subpart A of part 1925 of this chapter.
    (4) Insurance. For FmHA or its successor agency under Public Law 
103-354 loans secured by liens on real estate, property insurance will 
be obtained and serviced in accordance with requirements for the kind of 
loan involved, and in accordance with Subpart A of part 1806 of this 
chapter (FmHA or its successor agency under Public Law 103-354 
Instruction 426.1), and when appropriate, Subpart B of Part 1806 of this 
chapter (FmHA or its successor agency under Public Law 103-354 
Instruction 426.2).
    (c) Actions by third parties which affect security--(1) General 
provisions. When third parties bring suit or take any other action which 
could affect property servicing as security, borrowers are expected to 
protect their own interests in the property. A few examples of actions 
by third parties are: condemnation proceedings, foreclosure, trespass 
suits, and actions to quiet title.
    (i) County Supervisor's responsibility. When the County Supervisor 
learns about a third party action which could jeopardize the 
Government's interest in the security or when the County Supervisor or 
the Government is made a party to a court proceeding, the County 
Supervisor will immediately send the borrower exhibit B of this subpart 
(available in any FmHA or its successor agency under Public Law 103-354 
office) if another lienholder is foreclosing, and attachments 1, 3 and 4 
of exhibit A of subpart S of part 1951 of this chapter. Then the County 
Supervisor will send the following documents to the State Director: the 
County Office case file, complete with information concerning the 
action; recommendations for FmHA or its successor agency under Public 
Law 103-354 servicing action; a copy of any petition or complaint, as 
soon as available; current account balances; a current appraisal report; 
the name and address of the borrower's attorney, if any; and other 
information which the County Supervisor believes important such as 
unpaid taxes, judgments, or other liens.
    (ii) State Director's responsibility. The State Director will 
consult OGC about all lawsuits involving the property and any other 
third party actions when OGC's advice would be helpful. The State 
Director will then advise the County Supervisor of the actions to be 
taken to protect the Government's interest in the property. The payment 
of other liens by FmHA or its successor agency under Public Law 103-354 
will be authorized by the State Director only to protect the 
Government's interest, not for the protection of the borrower's interest 
or the interest of any third party. When foreclosure by another creditor 
or any other action which would cause the borrower to lose possession of 
the property is imminent, the State Director may consider making a 
subsequent loan or guaranteed loan, or approving a subordination to 
permit another lender to make a loan, provided:
    (A) The requirements for the primary servicing program(s), a 
subsequent loan, guaranteed loan or subordination are met, and such 
assistance is necessary to enable the borrower to retain the property, 
and

[[Page 313]]

    (B) The borrower has the ability and resources necessary to overcome 
the problems that caused the foreclosure or other action, and
    (C) The third party agrees to postpone further action pending the 
processing of the primary servicing programs, a subsequent loan, 
guaranteed loan or subordination.
    (iii) Other actions. The State Director may also approve a transfer 
and assumption under this subpart provided the action will adequately 
protect the Government's interest and the third party agrees to delay 
further action pending processing of the transfer and assumption. The 
State Director will notify the County Supervisor of the actions to be 
taken to protect the Government's interest.
    (2) Sale by a prior lien foreclosure. When FmHA or its successor 
agency under Public Law 103-354 learns that a prior lienholder is 
contemplating foreclosure, the prior lienholder will be contacted to 
determine the amount of the prior lien indebtedness and the estimated 
cost of a foreclosure sale. An insured note which is not held by the 
insurance fund will, whenever possible, be assigned to the insurance 
fund before a foreclosure sale. Otherwise, the assignment will be 
completed as soon as feasible after the foreclosure sale.
    (i) Decision to pay off the prior lien. When, under State law, it is 
necessary prior to foreclosure to acquire the prior lienholder's rights 
to protect the Government's junior lien interest, title evidence will be 
obtained. Information clearly supporting the need to acquire the prior 
lienholder's rights must be documented and made a part of the file. 
Payment of the prior lien and required costs may be made with the advice 
of OGC, provided:
    (A) The Government will obtain a greater recovery of the secured 
debt (not an inventory profit) than it could by bidding at the 
foreclosure sale, and
    (B) After acquisition of the prior lien and completion of any 
appeals in favor of FmHA or its successor agency under Public Law 103-
354, the account will be accelerated and liquidated in accordance with 
Sec. 1965.26(b) of this subpart. No exception will be made to this 
provision.
    (ii) Decision not to pay off the prior lien. If FmHA or its 
successor agency under Public Law 103-354 decides not to pay off the 
prior lien, one of the following actions will be taken.
    (A) Making a bid. Bidding will be completed in accordance with Sec. 
1955.15(f) (6) and (7) of subpart A of part 1955 of this chapter. 
Information clearly supporting the bid as being to the Government's 
financial advantage must be documented and made a part of the file. When 
FmHA or its successor agency under Public Law 103-354 enters a bid, 
actions will be taken in accordance with Sec. Sec. 1955.15(g) and 
1955.18 of subpart A of part 1955 of this chapter.
    (B) Making no bid. When the State Director determines that no bid 
will be entered by FmHA or its successor agency under Public Law 103-
354, the County Supervisor will, at the discretion of the State 
Director, attend the sale and make a narrative report to the State 
Director outlining the results of the foreclosure sale and plans for 
future servicing of the account. If the Government is to rely on its 
redemption rights, that fact will be indicated in the report. 
Unsatisfied farmer program loan accounts will be handled in accordance 
with Sec. 1955.18 (f) of subpart A of part 1955 of this chapter.
    (iii) Acquisition of property by exercise of Government redemption 
rights. If the Government for any reason did not protect its interest at 
the time of the foreclosure sale and if the Government has any 
redemption rights, the State Director will determine whether to redeem 
the property in accordance with Sec. 1955.13 of subpart A of part 1955 
of this chapter.
    (3) Foreclosure sale subject to FmHA or its successor agency under 
Public Law 103-354 mortgage. When FmHA or its successor agency under 
Public Law 103-354 learns that a junior lienholder is foreclosing, the 
County Supervisor will send the borrower attachments 1 and 3 and 4 of 
exhibit A of subpart S of part 1951 of this chapter and exhibit B of 
this subpart. If the borrower contacts FmHA or its successor agency 
under Public Law 103-354 and wants to apply for servicing relief, the 
request will be processed in accordance with subpart S

[[Page 314]]

of part 1951 of this chapter. If the junior lienholder forecloses and 
the property is sold subject to the FmHA or its successor agency under 
Public Law 103-354 mortgage, following the resolution of any appeal in 
favor of FmHA or its successor agency under Public Law 103-354, the 
borrower's account will be accelerated and liquidated in accordance with 
the applicable portion of Sec. 1955.15 of subpart A of part 1955 of 
this chapter.
    (d) Divorce actions. See Sec. 1965.27 (b)(5)(iii) of this subpart 
for directions on servicing security after divorce. A subsequent loan 
made as a result of a divorce action will be handled in accordance with 
Sec. 1965.27(b)(13) of this subpart.

[51 FR 4140, Feb. 3, 1986, as amended at 53 FR 35794, Sept. 14, 1988; 56 
FR 15829 Apr. 18, 1991; 57 FR 20741, May 15, 1992; 57 FR 36592, Aug. 14, 
1992; 58 FR 38928, July 21, 1993]



Sec. 1965.12  Subordination of an Agency mortgage.

    (a) Conditions. A subordination may be granted if all of the 
following conditions are met:
    (1) The subordination is to refinance debt or for an authorized 
direct loan purpose;
    (2) The Agency debt cannot be refinanced without a subordination;
    (3) The borrower can document the ability to repay the total amount 
due under subordination and pay all other debt payments scheduled for 
the subject operating cycle;
    (4) The loan funds will not be used in such a way that will 
contribute to erosion of highly erodible land or conversion of wetlands 
for the production of an agricultural commodity according to subpart G 
of part 1940 of this chapter;
    (5) Any planned development is performed in a manner directed by the 
creditor and agreed to by the Agency and reasonably attains the 
objectives of subpart A of part 1924 of this chapter;
    (6) Funds to be used to develop or to acquire land will be deposited 
in a supervised bank account that is subject to signature by the Agency 
and the borrower, or in a similar arrangement, to ensure that funds will 
be spent for the planned purposes;
    (7) In cases of land purchase or exchange of property, the Agency 
will obtain a valid mortgage on the acquired land. Title clearance and 
loan closing will be required as for an initial or subsequent FO loan, 
as appropriate;
    (8) The borrower has not been convicted of planting, cultivating, 
growing, producing, harvesting or storing a controlled substance under 
Federal or state law. ``Borrower'' for purposes of this provision, 
specifically includes an individual or entity borrower and any member 
stockholder, partner, or joint operator, of an entity borrower and any 
member, stockholder, partner, or joint operator of an entity borrower. 
``Controlled substance'' is defined at 21 CFR part 1308. The borrower 
will be ineligible for a subordination for the crop year in which the 
conviction occurred and the four succeeding crop years. An applicant 
must attest on the Agency application form that it and its members, if 
an entity, have not been convicted of such a crime;
    (9) The Agency loan is still adequately secured after the 
subordination, or the value of the loan security will be increased by at 
least the amount of the advances to be made under the terms of the 
subordination;
    (10) The subordination is limited to a specific amount and the loan 
to be secured by the subordination is closed within a reasonable time; 
and
    (11) Only one subordination to one creditor may be outstanding at 
any one time in connection with the same security.
    (b) Subordination on real estate owned by an entity member. 
Notwithstanding the provisions of paragraph (a) of this section, when 
the borrower is an entity and the Agency has taken real estate as 
additional security on property owned by an entity member, a 
subordination for any authorized Farm Loan Programs loan purpose may be 
approved when it is needed for the entity member to finance a separate 
operation. The subordination, however, may be approved only if it does 
not cause the unpaid principal and accrued interest balance of the 
Agency loan to exceed the value of the loan security or otherwise 
adversely affect the security.
    (c) Request for subordination. A borrower must complete an 
application

[[Page 315]]

provided by the Agency to receive consideration for a subordination.
    (d) Notice of foreclosure. The lienholder requesting the 
subordination will agree to give notice of foreclosure as required by 
the Agency.
    (e) Appraisal. The Agency will prepare a current appraisal report in 
accordance with Sec. 761.7 of this title when property is to be 
purchased or exchanged, or when the existing appraisal report is more 
than 1 year old or is inadequate to make the determination required in 
this section. The Agency may use the appraisal report prepared for 
another lender if it complies with the requirements of Sec. 761.7 of 
this title.
    (f) Reamortizing existing Agency debts. The Agency may consent to a 
reamortization of an existing Agency debt when a subordination is 
granted to the debt of another lender. The reamortization will be 
allowed only when the borrower cannot reasonably be expected to meet all 
currently scheduled installments when due and the conditions of subpart 
S of part 1951 of this chapter are met.
    (g) Subordination to make a guaranteed loan. In addition to the 
requirements of this section, subordinations of liens on real estate 
security to make a guaranteed loan will be approved in accordance with 
Sec. 1980.108 of this chapter.

[63 FR 20297, Apr. 24, 1998, as amended at 64 FR 62569, Nov. 17, 1999]



Sec. 1965.13  Consent by partial release or otherwise to sale, exchange 
or other disposition of a portion of or interest in security, except leases.

    See subpart S of part 1951 of this chapter when a combination of NP, 
ST and other FP loans are involved. If a FP loan is being deferred and 
reamortized as an ST loan, partial releases are authorized as provided 
in Subpart S of Part 1951 of this chapter. However, there is no 
authority for FmHA or its successor agency under Public Law 103-354 
employees to consent to partial release or sale, exchange or other 
disposition of a portion of the security for an existing ST loan.
    (a) Provisions of FmHA or its successor agency under Public Law 103-
354 mortgages. In all FmHA or its successor agency under Public Law 103-
354 mortgages except SFH loan mortgages prepared before October 1, 1950, 
and a few OL, EM, Special Livestock (SL), and Water Facilities (WF) loan 
mortgages, the borrower has agreed not to sell, transfer, assign, 
mortgage, or otherwise encumber the security or any portion of or 
interest in it without the prior written consent of the mortgagee. 
Furthermore, in the case of the few SFH, OL, EM, SL, and WF loan 
mortgages not requiring FmHA or its successor agency under Public Law 
103-354 consent, any property, or any part of it or interest in it, 
which is subject to the FmHA or its successor agency under Public Law 
103-354 mortgage and which is disposed of by the borrower without 
consent remains subject to the mortgage lien. In all FmHA or its 
successor agency under Public Law 103-354 mortgages theborrower 
expressly agrees not to engage, without prior consent, in certain 
specified transactions, including the cutting or removal of timber, or 
mining or removal of gravel, oil, gas, coal, or other minerals, except 
small amounts used by the borrower for ordinary domestic purposes. The 
sale of timber (other than harvests for thinning purposes approved by 
FmHA or its successor agency under Public Law 103-354 on a farm plan), 
mining products, removal of gravel, oil, gas, coal, or other minerals by 
unit or lump sum payments will be considered as disposition of a portion 
of the security, except: For Farmer Program loans approved after 
December 23, 1985, the sale of such products, other than timber, will be 
considered a disposition of a portion of the security only if the rights 
to the products were specifically included as a part of the appraisal 
value of the real estate securing the loan; if the rights were not 
included in the appraisal, then FmHA or its successor agency under 
Public Law 103-354 has no lien on the rights to oil, gas or other 
minerals located under the real estate. Any payment or other 
compensation the borrower may receive for damages to the surface of the 
collateral real estate resulting from exploration for or recovery of 
minerals will be assigned to FmHA or its successor agency under Public 
Law 103-354 and will be used to repair the damage or used as authorized 
in Sec. 1965.13(f) of this subpart. This section explains how and

[[Page 316]]

under what circumstances FmHA or its successor agency under Public Law 
103-354 will grant partial releases, and give its consent to certain 
transactions affecting the security. Subordinations, transfers, consents 
to junior liens, leases and severance agreements are discussed 
individually in other sections of this subpart. Releases granted in 
connection with a final payment on real estate will be handled in 
accordance with subpart D of part 1951 of this chapter.
    (b) Conditions of FmHA or its successor agency under Public Law 103-
354 consent. A State Supplement will be developed, with guidance of OGC, 
and issued to provide guidance for handling of easements or rights-of-
way in connection with the development, extension, construction or 
modification of community based programs, such as rural water districts, 
drainage, and irrigation districts, without requiring monetary 
consideration or detailed appraisals. Otherwise, FmHA or its successor 
agency under Public Law 103-354 may consent to certain transactions 
affecting the security (for example, a sale or an exchange of security 
or granting a right-of-way across security) and/or grant a partial 
release if:
    (1) The transaction will further the objectives for which the FmHA 
or its successor agency under Public Law 103-354 loan or loans were 
made;
    (2) The proposed use of the funds including the payment of 
reasonable costs and expenses incident to the transaction will improve 
the borrower's ability to repay the FmHA or its successor agency under 
Public Law 103-354 loan(s) or is necessary to place the borrower's 
operation on a sound basis;
    (3) The consideration is adequate for the security being disposed of 
or the rights granted (see paragraph (c) of this section);
    (4) Orderly repayment of the FmHA or its successor agency under 
Public Law 103-354 indebtedness will not be impaired (does not apply in 
condemnation cases after final judgment or award which is not appealed);
    (5) The transaction will not interfere with successful operation of 
any farming or other enterprise providing the borrower with repayment 
ability (does not apply in condemntation cases after final judgment or 
award which is not appealed);
    (6) The market value of the remaining security is adequate to secure 
the unpaid balance of the FmHA or its successor agency under Public Law 
103-354 debts, or if the market value of the security before the 
transaction was inadequate to fully secure the FmHA or its successor 
agency under Public Law 103-354 debts, the FmHA or its successor agency 
under Public Law 103-354's security interest is not adversely affected;
    (7) The requirements of Sec. 1965.6 of this subpart are met; and
    (8) The borrower cannot graduate to other credit.
    (c) Exchange of property. When an exchange of property serving as 
security for an FmHA or its successor agency under Public Law 103-354 
loan results in a balance owing to the FmHA or its successor agency 
under Public Law 103-354 borrower, the provisions of this section 
applicable to a sale of a portion of the security will apply as to 
disposition of proceeds. When property is exchanged, the property 
acquired by the FmHA or its successor agency under Public Law 103-354 
borrower must meet requirements of the program objectives, purposes and 
limitations outlined in this subpart relating to the type of loan 
involved as well as respective requirements for appraisal, title 
clearance and security. Requests for exchange of property which cannot 
be approved under this section may be submitted to the National Office 
for consideration, provided the request meets conditions in Sec. 
1965.35 of this subpart.
    (d) Appraisals. When the official authorized to approve the 
transaction is uncertain whether the proposed consideration is adequate, 
or for any other reason considers an appraisal necessary to complete 
Form FmHA or its successor agency under Public Law 103-354 465-1, or 
when the transaction involves more than $10,000, a new appraisal report 
will be obtained in accordance with Sec. 761.7 of this title. However, 
a new appraisal report need not be obtained if there is an appraisal 
report not over 1 year old in the case file which will permit the 
official authorized to approve

[[Page 317]]

the transaction to make the proper determination of the market value of 
the property being retained and the market value of the portion to be 
released. When a new appraisal is not required, the appraiser will 
indicate the estimate of values and the basis for it in the comments 
section of the existing appraisal report. The notation will be initialed 
and dated. When a new appraisal report is required, it will be completed 
to show the present market value of the property being retained. The 
rights to mining products, gravel, oil, gas, coal or other minerals will 
be specifically included as a part of the appraised value of the real 
estate securing the loans. Also, the present market value of the 
property being released will be shown under the comments section of the 
same appraisal report. Information regarding sales of comparable 
properties used in arriving at the present market value of the property 
being released will be shown in the comments section or on an attached 
sheet.
    (1) Stationary units. If timber or minerals, including sand, gravel, 
and stone which appear to be worth more than $2,000 are to be sold on 
the basis of the timber stand or the mineral deposit rather than the 
units to be removed, the borrower will be encouraged to obtain the 
assistance of a qualified technician other than an FmHA or its successor 
agency under Public Law 103-354 employee to provide advice on the 
quality or value of the timber or minerals, and the manner in which they 
should be sold. Generally, assistance can be obtained from State or 
Federal employees who are located in the area, such as U.S. Department 
of Agriculture Forest Service employees.
    (2) Units removed. When timber or minerals including sand, gravel, 
or stone, are to be sold on the basis of the units to be removed, or 
when an easement or a right-of-way is to be sold or granted, the 
employee authorized to make the appraisal may insert the date, and 
initial a notation on the existing appraisal report instead of making a 
new appraisal report. The notation should show (i) the unit value of 
timber or minerals, or the value of the easement or right-of-way, based 
on the consideration being paid for similar items in the area; and (ii) 
the manner in which the remaining property will be affected. If the 
market value of the remaining property is significantly decreased, a 
market value appraisal of the remaining property usually will be 
required.
    (e) Authority of the County Supervisor and District Director--(1) 
Forest products. County Supervisors and District Directors can approve 
most applications for consent or release involving the harvest or sale 
of forest products. In the case of 3 percent loans for forestry 
purposes, applications for consent or release will be forwarded to the 
State Director for approval if:
    (i) The harvest or sale is not in accordance with strict provisions 
of the initially approval forestry plan,
    (ii) Future repayments on the 3 percent advance are scheduled on any 
basis other than equal annual installments,
    (iii) There is a lien on the forest land prior to the lien of the 
FmHA or its successor agency under Public Law 103-354, or
    (iv) There is a delinquency on any FmHA or its successor agency 
under Public Law 103-354 real estate loan.
    (2) Terms of a sale. County Supervisors and District Directors may 
approve sales made on the following terms.
    (i) Sale of a portion of the security for its market value on the 
following terms:
    (A) For SFH loans, refer to Sec. 1965.110 of subpart C of part 1965 
of this chapter.
    (B) For all other loans, not less than 10 percent (of the purchase 
price) down and payments not to exceed ten annual installments of 
principal plus interest at not less than the current rate being charged 
on regular FO loans plus 1 percent or the rate on the borrower's 
note(s), whichever is greater. Payments may be in equal or unequal 
installments with a balloon final installment. For farmer program loans 
approved after December 23, 1985, the sale of mining products gravel, 
oil, gas, coal, or other minerals will be considered a sale of security 
only if the rights to such products were specifically included as a part 
of the appraised value of the real estate securing the loan; if

[[Page 318]]

the rights were not included in the appraisal, then FmHA or its 
successor agency under Public Law 103-354 has no lien on the rights to 
such products located under the real estate.
    (ii) In each case it must be determined that:
    (A) The government's security rights, including the right to 
foreclose on either the portion being sold or retained, are not 
impaired,
    (B) The down payment and any subsequent payments are applied to the 
FmHA or its successor agency under Public Law 103-354 debt(s), prior 
lien(s), or otherwise used as authorized in this section under paragraph 
(f) of this section, and
    (C) If applicable, the requirements of subpart G of part 1940 of 
this chapter must be met.
    (iii) In each case the following conditions must be met:
    (A) Any amount to be paid FmHA or its successor agency under Public 
Law 103-354 from the down payment and subsequent payments must be 
assigned to FmHA or its successor agency under Public Law 103-354,
    (B) The property sold will not be released prior to either full 
payment of the borrower's account or receipt of full amount of sale 
proceeds with proper application or release of the proceeds, and
    (C) The borrower must agree in writing that the sale proceeds will 
not affect the borrower's primary and continued obligation for making 
payments under terms of the note or any other agreements approved by 
FmHA or its successor agency under Public Law 103-354.
    (f) Use of proceeds. County Supervisors or District Directors may 
approve transactions if the proceeds will be used in one of the 
following ways.
    (1) Proceeds may be applied on liens in order of priority. Written 
consent of any prior or junior lienholder will be obtained by the 
borrower and delivered to the FmHA or its successor agency under Public 
Law 103-354 if any proceeds are not to be applied in accordance with 
lien priorities.
    (2) The borrower may use a portion of any proceeds to pay customary 
incidental costs appropriate to the transaction and reasonable in amount 
which the borrower cannot arrange to pay for personal funds or cannot 
have the purchaser pay. The costs may, for example include real estate 
taxes which must be paid to consummate the transaction; cost of title 
examination, surveys, abstracts, title insurance, reasonable attorney's 
fees, real estate broker's commissions and judgment liens. In any State 
in which it is necessary to obtain the insured note from the lender to 
present to the recorder before a release of a portion of the land from 
the mortgage, the borrower must pay any cost for postage and insurance 
of the note while in transit. The County Supervisor will advise the 
borrower when requesting a partial release that the borrower must pay 
the cost. If the borrower is unable to pay the costs from personal 
funds, they may be deducted from the sale proceeds. The amount of the 
charge will be based on the statement of actual cost furnished by the 
payee.
    (3) Proceeds may be used for development of land owned by the 
borrower or for enlargement, if development or enlargement is necessary 
to improve the borrower's debt-payment ability and to place the 
borrower's operation on a sound basis, or to otherwise further the 
objectives of the loan. The use of proceeds for these purposes will not 
conflict with the loan purposes, restrictions or requirements of the 
type loan(s) involved. Any proposed development work will be in 
accordance with subpart A of part 1924 of this chapter. Funds to be used 
for development or enlargement will be handled under subpart A of part 
1902 of this chapter.
    (4) When FmHA or its successor agency under Public Law 103-354 loans 
secured by a lien on real estate will be adequately secured after a 
transaction affecting the real estate takes place, proceeds may, with 
the consent of the State Director and other lienholders on the real 
estate, be used as follows:
    (i) Applied to delinquent or unmatured FmHA or its successor agency 
under Public Law 103-354 loan installments when the borrower is 
otherwise unable to meet the installments.
    (ii) For other than SFH loans, applied on debts owed creditors other 
than FSA Farm Credit Programs to the

[[Page 319]]

extent needed to establish a basis for continuation of the other 
creditor's account, if the following requirements are met:
    (A) A feasible farm and home plan will be developed in accordance 
with Sec. 1924.56 of subpart B of part 1924 of this chapter. Voluntary 
debt adjustment will be utilized, as appropriate, in accordance with 
subpart A of part 1903 of this chapter.
    (B) Proceeds will not be used to pay current crop/operating year 
family living and/or operating expenses, as developed in the Annual Plan 
in accordance with Sec. 1924.56 of subpart B of part 1924 of this 
chapter.
    (iii) Develop land not owned by the borrower which is essential to 
the borrower's operation in an amount not to exceed $10,000, provided: 
the improvements are needed to improve the borrower's repayment ability 
and the borrower has tenure arrangements which justify the use of the 
proceeds on the land not owned by the borrower. Development work 
performed will be in accordance with subpart A of part 1924 of this 
chapter. Funds will be handled under subpart A of part 1902 of this 
chapter.
    (5) When liquidation action is pending in accordance with Sec. 
1965.26 of this subpart, the County Supervisor or District Director is 
authorized to approve transactions only when all the proceeds (other 
than costs authorized in paragraph (f)(2) of this section) will be 
applied to the liens against the security in the order of their 
priority.
    (g) Authority of the State Director. The State Director is 
authorized to approve transactions that exceed the approval authority 
granted in paragraph (e) of this section to the County Supervisor and 
District Director, or that involve an easement or right-of-way granted 
or conveyed without monetary compensation or for a token consideration. 
When approving these transactions, the State Director must determine 
that the requirements of paragraph (b) of this section are met.
    (h) Processing. FmHA or its successor agency under Public Law 103-
354's consent will be given by approving a completed Form FmHA or its 
successor agency under Public Law 103-354 465-1 if the transaction meets 
the conditions of paragraph (b) of this section. Also, when requested, 
FmHA or its successor agency under Public Law 103-354 will give a 
written partial release on Form FmHA or its successor agency under 
Public Law 103-354 460-1, ``Partial Release,'' or other form approved by 
OGC. A formal release may not be delivered for 15 days after the payment 
is received unless payment is made in the form of cash, money order, 
certified check, or check from a reputable lending agency. Releases not 
delivered will usually be voided 30 days after notification to the 
requesting party that the release is available. When an insured FO 
mortgage is held by the lender, the holder's consent will be obtained 
only if a written partial release or other written servicing document is 
requested by the borrower. When the approval of a transaction by the 
State Director is required, or when the County Supervisor or District 
Director desires advice in connection with approval of a transaction, 
the borrower's case folder, Form FmHA or its successor agency under 
Public Law 103-354 465-1, and any other information pertinent to the 
transaction will be sent to the State Office.
    (i) Liquidation. If FmHA or its successor agency under Public Law 
103-354 is unable to approve a partial sale, the partial sale cannot be 
used as the basis for liquidation in the following circumstances:
    (1) The spouse or children of the borrower become the owner of the 
property.
    (2) The sale results from a divorce or legal separation and the 
spouse of the borrower becomes the owner of the property.
    (3) An intervivos trust becomes the owner of the property so long as 
the borrower is a beneficiary of the trust and there is no change in 
occupancy of the property.

[51 FR 4140, Feb. 3, 1986, as amended at 52 FR 26139, July 13, 1987; 53 
FR 35795, Sept. 14, 1988; 56 FR 10154, Mar. 11, 1991; 57 FR 775, Jan. 9, 
1992; 58 FR 44752, Aug. 25, 1993; 58 FR 52654, Oct. 12, 1993; 61 FR 
35931, July 9, 1996; 64 FR 62569, Nov. 17, 1999; 66 FR 7568, Jan. 24, 
2001]

[[Page 320]]



Sec. 1965.14  Subordination of FmHA or its successor agency under Public 

Law 103-354 real estate mortgages to easements to the U.S. Fish and 
Wildlife Service, (formerly the Bureau of Sport Fisheries and Wildlife).

    Exhibit A (available in any FmHA or its successor agency under 
Public Law 103-354 office) of this subpart, ``Memorandum of 
Understanding between Bureau of Sport Fisheries and Wildlife (now the 
U.S. Fish and Wildlife Service) and the Farmers Home Administration or 
its successor agency under Public Law 103-354,'' outlines the procedure 
to follow in processing a subordination of an FmHA or its successor 
agency under Public Law 103-354 mortgage on wetlands on which the Bureau 
of Sport Fisheries and Wildlife requests an easement for waterfowl 
habitats. The County Supervisor will handle the request in accordance 
with the steps outlined in Exhibit A and applicable processing portions 
of Sec. 1965.12 of this subpart.



Sec. 1965.15  Subordination of FmHA or its successor agency under Public 

Law 103-354's lien to the Commodity Credit Corporation's (CCC) security 
interest taken for loans made for farm storage and drying equipment.

    The CCC makes loans under its Farm Storage and Drying Equipment Loan 
Program for the purchase, construction, erection, remodeling, or 
installment of either farm storage or drying equipment or both and 
requires that any loan at the discretion of the approving committee, be 
secured by a lien on the real estate. When the CCC proposes to make a 
loan to an FmHA or its successor agency under Public Law 103-354 
borrower and requests a subordination of the FmHA or its successor 
agency under Public Law 103-354 real estate lien, the request will be 
handled on an individual case basis under Sec. 1965.12 of this subpart. 
A borrower's request for the FmHA or its successor agency under Public 
Law 103-354's consent to a severance agreement or other similar 
instrument for an item or items to be acquired with a CCC loan will be 
handled under Sec. 1965.19 of this subpart.



Sec. 1965.16  Consent to junior liens.

    As a general policy, FmHA or its successor agency under Public Law 
103-354 borrowers will be discouraged from giving other creditors junior 
liens on real estate securing an FmHA or its successor agency under 
Public Law 103-354 loan. (For Sections 502 and 504 loans, see Sec. 
1965.111 of Subpart C of Part 1965 of this chapter).
    (a) Processing request. When consent to a junior lien is requested 
by a borrower, the County Supervisor may consent by executing Form FmHA 
or its successor agency under Public Law 103-354 465-1 or other form 
approved by OGC for use in the state provided:
    (1) The terms of the junior lien debt are such that repayment is not 
likely to jeopardize payment of the FmHA or its successor agency under 
Public Law 103-354 loan;
    (2) Operating plans made with the junior lienholder are consistent 
with plans made with FmHA or its successor agency under Public Law 103-
354;
    (3) Total debt against the security will not exceed its market 
value; and
    (4) The junior lienholder agrees in writing not to foreclose the 
mortgage before a discussion with the County Supervisor and after giving 
a reasonable specified period of written notice to FmHA or its successor 
agency under Public Law 103-354.
    (b) Consent not requested or granted. When a junior lien is placed 
on any property without FmHA or its successor agency under Public Law 
103-354 consent and consent cannot be granted under this section, FmHA 
or its successor agency under Public Law 103-354 may continue with the 
loan as long as the borrower pays FmHA or its successor agency under 
Public Law 103-354 loans as agreed, maintains the security, and meets 
all other conditions of the loan. The existence of a junior lien cannot 
be treated as a default. The County Supervisor will continue to service 
the loan to protect the Government's security interest.



Sec. 1965.17  Lease of security.

    (a) General provisions. When the County Supervisor learns that a 
borrower is leasing or intends to lease all or a portion of the 
security, the County Supervisor will ask the borrower for a copy

[[Page 321]]

of the lease, if it is written. If the borrower leases or proposes to 
lease the real estate security for a term of more than 3 years or with 
an option to purchase, the County Supervisor will normally initiate 
liquidation action in accordance with Sec. 1965.26(b) of this subpart. 
However, if under unusual circumstances the County Supervisor believes 
FmHA or its successor agency under Public Law 103-354 should consent to 
such a lease arrangement, prior approval of the Assistant Administrator, 
Farmer Programs, or the Administrator, if a SFH loan is secured by the 
same security, is required. The State Director should forward such a 
request, along with a justification to the National Office. No action 
will be taken to disapprove or to approve a lease if the lease is for 
less than three years and contains no option to purchase; however, if 
under the lease of security, the borrower ceases to operate the farm, 
action will be taken in accordance with Sec. 1965.26(d) of this 
subpart.
    (b) Liquidation. No action to initiate liquidation based on the 
lease will be taken unless the borrower:
    (1) Enters into a lease for a term of more than 3 years; or
    (2) Enters into a lease for any term containing an option to 
purchase.
    (c) Mineral leases. When a borrower requests consent to lease the 
mineral rights to security, the County Supervisor may consent provided 
the proposed use of the leased rights will not result in the 
Government's security interest being adversely affected. If applicable, 
the requirements of Subpart G of Part 1940 of this chapter must be met. 
A borrower does not need FmHA or its successor agency under Public Law 
103-354's consent to lease the mineral rights securing a Farmer Program 
loan approved after December 23, 1985, unless the oil, gas or other 
minerals were included on FmHA or its successor agency under Public Law 
103-354's real estate appraisal. If FmHA or its successor agency under 
Public Law 103-354 consent is needed and consent is given, lease 
payments can be used for prospective payments on FmHA or its successor 
agency under Public Law 103-354 loans. Any payment or other compensation 
the borrower may receive for damages to the surface of the collateral 
real estate resulting from exploration for or recovery of minerals will 
be assigned to FmHA or its successor agency under Public Law 103-354 and 
will be used to repair the damage or used as authorized in Sec. 
1965.13(f) of this Subpart. Form FmHA or its successor agency under 
Public Law 103-354 465-1 will be used to process requests under this 
section. The County Supervisor should carefully document the facts to 
support the determinations reached concerning the effects of a mineral 
lease on the Government security. Assignment of income will be taken by 
use of Form FmHA or its successor agency under Public Law 103-354 443-
16, ``Assignment of Income from Real Estate Security,'' or other form 
approved by OGC which is necessary to comply with State law.

[51 FR 4140, Feb. 3, 1986, as amended at 53 FR 35795, Sept. 14, 1988; 58 
FR 52654, Oct. 12, 1993]



Sec. 1965.18  Transfer of upland cotton, peanut, or tobacco allotments.

    (a) General. Agriculture Stabilization and Conservation Service 
(ASCS) regulations, pursuant to approved legislation, permit the 
transfer of upland cotton, peanut, or tobacco allotments by one or more 
of the following transactions: (1) Sale, (2) lease, or (3) transfer by 
the owner to another farm owned or controlled by the owner. These 
regulations require, among other things, that no allotment be 
transferred from a farm which is subject to a mortgage or other lien, 
unless the transfer is agreed to by the lienholders. It is FmHA or its 
successor agency under Public Law 103-354's policy to approve the 
transfer of any crop allotments permitted by the ASCS regulations if the 
conditions and requirements of this subpart can be met. FmHA or its 
successor agency under Public Law 103-354 personnel should familiarize 
themselves with the States ASCS policies and requirements concerning the 
sale, lease, or transfer of allotments to assure compliance with 
established FmHA or its successor agency under Public Law 103-354 
policies and servicing of security.
    (b) Authorization. County Supervisors are authorized to approve a 
transfer of

[[Page 322]]

upland cotton, peanut, or tobacco allotment by execution of a completed 
Form FmHA or its successor agency under Public Law 103-354 465-1. County 
Supervisors are also authorized to execute the lienholder or mortgagee 
agreement on appropriate ASCS forms provided by ASCS for those cases in 
which a transfer is approved.
    (c) Transfer by sale. Crop allotments enhance the value of a farm 
mortgaged to the FmHA or its successor agency under Public Law 103-354 
and constitute security for the FmHA or its successor agency under 
Public Law 103-354 loan. Accordingly, when a borrower whose farm is 
mortgaged to the FmHA or its successor agency under Public Law 103-354 
inquires about the sale of any of the allotted acres or requests the 
FmHA or its successor agency under Public Law 103-354 to sign the 
required lienholder or mortgagee agreement, the request will be treated 
the same as for a sale of a portion of the security and approval of the 
sale can be granted only in accordance with the applicable conditions 
and requirements of Sec. 1965.13 of this subpart. The sale proceeds may 
be used as authorized in Sec. 1965.13(f) of this subpart.
    (d) Transfer of allotment by lease. The County Supervisor has the 
authority to approve a lease of all or a portion of an allotment for a 1 
year period, provided the lease or its terms will not adversely affect 
the repayment of the loan; leasing is not an alternative to or means of 
delaying liquidation; and the lease and use of proceeds will further the 
objectives of the loan. If a 1 year lease is approved, the lease 
proceeds may be used as farm income as outlined in Sec. 1962.17(b) of 
Subpart A of Part 1962 of this chapter. Leases for a period of more than 
1 year will be granted only with the concurrence of the District 
Director. When a lease is for more than 1 year, an assignment of the 
rental proceeds should be obtained.
    (e) Transfer of allotment by owner to other land owned or controlled 
by the owner. A transfer by an owner to other land owned or controlled 
by the owner is normally interpreted by the ASCS as a permanent transfer 
and can be avoided only by stipulating in the mortgage approval that the 
transfer is to be considered as a lease for the appropriate number of 
years. This type of transfer will be approved only as a lease under 
conditions in paragraph (d) of this section to assure that the crop 
allotment on the security is not adversely affected.



Sec. 1965.19  Severance agreement.

    Form FmHA or its successor agency under Public Law 103-354 440-26, 
``Consent and Subordination Agreement,'' will be completed when a 
borrower requests FmHA or its successor agency under Public Law 103-
354's consent to a severance agreement, or other instrument of similar 
effect, so that items to be acquired by the borrower through other 
credit and subject to a chattel lien will not become a part of the real 
estate securing the FmHA or its successor agency under Public Law 103-
354 debt. Some examples of items which may be acquired subject to a 
chattel lien are silos, storage bins, bulk milk tanks, irrigation or 
income producing facilities, non-farm enterprise facilities, and 
recreational equipment. County Supervisors are authorized to give FmHA 
or its successor agency under Public Law 103-354 consent by executing 
Form FmHA or its successor agency under Public Law 103-354 440-26 and 
any necessary severance agreements, provided that the following 
determinations are made:
    (a) The financing arrangements are in the best interest of the 
Government and the borrower.
    (b) The transaction will not adversely affect FmHA or its successor 
agency under Public Law 103-354's security position and will be within 
the borrower's debt-paying ability, and
    (c) The facility does not exceed the borrower's needs, is modest in 
cost and design; and is otherwise in line with FmHA or its successor 
agency under Public Law 103-354 financing policies. OGC will be 
requested to approve any severance agreement submitted by a borrower 
that is of a type not previously approved for use in the State and, when 
necessary, to issue closing instructions. The State Director may request 
the OGC to prepare a severance agreement instrument for use in the 
State.

[[Page 323]]



Sec. 1965.20  [Reserved]



Sec. 1965.21  Assignment and release of Soil Conservation or similar 
program payments.

    The County Supervisor may take an assignment on income to be 
received under USDA Programs or similar contracts to protect the 
financial interest of the Government or to facilitate loan servicing. 
The assignments of all or a portion of the income from the assignment 
may be released to the borrower by the County Supervisor when not to the 
financial detriment of the Government, and when payments due on all FmHA 
or its successor agency under Public Law 103-354 loans have been made 
from other income or the assigned income is needed for family living and 
farm operating expenses. This income will not be shown on Form FmHA or 
its successor agency under Public Law 103-354 1962-1, ``Agreement for 
the Use of Proceeds/ Release of Chattel Security.'' The receipt of these 
proceeds and their planned use will be clearly identified on the current 
farm pan.



Sec. 1965.22  Deceased borrower.

    Deceased borrower cases will be handled under Sec. 1962.46 of 
subpart A of part 1962 of this chapter.



Sec. 1965.23  Bankruptcy and insolvency.

    Bankruptcy and insolvency cases will be handled under Sec. 1962.47 
of subpart A of part 1962 of this chapter. For SFH loans, refer to 
subpart C of part 1965 of this chapter.



Sec. 1965.24  Servicing note-only cases.

    Each loan made on a note-only basis without real estate security 
will be serviced in a manner consistent with the best interests of the 
FmHA or its successor agency under Public Law 103-354.
    (a) Sale of real property on which improvements were made with note-
only FmHA or its successor agency under Public Law 103-354 funds. Any 
loan evidenced only by an unsecured note will be collected by voluntary 
means at the time of the sale of the property, if possible. If 
collection is not possible, the loan may be assumed by the purchaser of 
the property on the terms of the note if the assumption is determined to 
be in the FmHA or its successor agency under Public Law 103-354's best 
financial interest. If collection or assumption cannot be effected, 
consideration should be given to settling the account in accordance with 
Subpart B of Part 1956 of this chapter, if it is eligible, obtaining 
judgment, or classifying it as collection-only. In case of a judgment 
sale, the State Director with the advice of OGC and the U.S. Attorney, 
will authorize an employee to attend the sale and if appropriate, enter 
a bid on behalf of the Government under Subpart A of Part 1955 of this 
chapter.
    (b) Assumption of note-only when real property securing another FmHA 
or its successor agency under Public Law 103-354 loan is involved. When 
a borrower has an FmHA or its successor agency under Public Law 103-354 
loan secured by real estate and another FmHA or its successor agency 
under Public Law 103-354 loan evidenced only by a note and the real 
estate is to be transferred and the entire secured real estate debt is 
to be assumed, all or a part of the unsecured note up to the present 
market value of the property in excess of existing liens must also be 
assumed.

[51 FR 4140, Feb. 3, 1986, as amended at 51 FR 45439, Dec. 18, 1986]



Sec. 1965.25  Release of FmHA or its successor agency under Public 
Law 103-354 mortgage without monetary consideration in certain cases.

    (a) Additional real estate security owned by an entity member(s). 
Real estate owned by a member(s) of an entity-borrower, which was taken 
as additional security for a loan secured by real estate, may be 
released if it is needed for the entity member(s) to finance a separate 
operation and the remaining real estate adequately secures the entity 
loan(s). A release will not be considered if a subordination can be 
approved for the same purpose. The County Supervisor will document in 
the case file why a subordination is not feasible.
    (b) Release of real estate from mortgage because of mutual mistake. 
Land or buildings included in the mortgage through mutual mistake, when 
substantiated by the facts of the situation,

[[Page 324]]

may be released from the mortgage by the State Director. The release is 
contingent on a determination of the State Director, with the advice of 
the OGC, that a mutual error existed at the time such property was 
included in the Government's mortgage.
    (c) No evidence of indebtedness. The FmHA or its successor agency 
under Public Law 103-354 mortgage may be released by the County 
Supervisor in situations where there is no evidence of an existing 
indebtedness secured by the mortgage in the records of the FmHA or its 
successor agency under Public Law 103-354 County, State, and Finance 
Offices.
    (d) Release of valueless liens. State Directors are authorized to 
release FmHA or its successor agency under Public Law 103-354 mortgages 
or other liens when the mortgages or liens have no present or 
prospective value or when their enforcement would likely be ineffectual 
or uneconomical. This includes release of a junior lien on the 
borrower's dwelling financed with an SFH loan and located on a nonfarm 
tract when the junior lien was taken as additional security for a Farmer 
Program loan(s). This authority does not extend to valueless judgment 
liens or valueless statutory redemption rights except with the consent 
of the OGC. The following information will be obtained in determining 
present or prospective value:
    (1) Appraisal report. A market value appraisal report on the 
security prepared by an FmHA or its successor agency under Public Law 
103-354 employee authorized to appraise under Sec. 761.7 of this title.
    (2) Lienholders. The names of the holders of prior liens on the 
property, the amount secured by each lien which is prior to the FmHA or 
its successor agency under Public Law 103-354, the amount of taxes or 
assessments, and other items which might constitute a prior claim. This 
information will be recorded in the running case record of the 
borrower's County Office case folder and submitted to the State Director 
for review.

[51 FR 4140, Feb. 3, 1986, as amended at 53 FR 35795, Sept. 14, 1988; 56 
FR 15830, Apr. 18, 1991; 57 FR 18681, Apr. 30, 1992; 58 FR 44752, Aug. 
25, 1993; 64 FR 62569, Nov. 17, 1999]



Sec. 1965.26  Liquidation action.

    (a) Voluntary liquidation--(1) General. When a borrower contacts 
FmHA or its successor agency under Public Law 103-354 and asks about 
voluntarily liquidating security, the borrower will be sent attachments 
1 and 2 of exhibit A of subpart S of part 1951 of this chapter or 
attachments 1, and 3, and 4 and the preliminary application forms by 
certified mail, or the forms will be hand delivered at the County 
Office. The servicing notices which provide possible alternatives to 
liquidation provide a maximum of 60 days for the borrower to apply for 
servicing. Therefore, FmHA or its successor agency under Public Law 103-
354 will not discuss liquidation or methods of liquidation until 60 days 
after the borrower receives the notices except in serious situations 
which are documented in detail in the case file. During the 60-day time 
period the County Supervisor may answer questions regarding the 
servicing notices. After 60 days, the borrower will be told that 
liquidation can be accomplished by:
    (i) Selling the security under paragraph (f) of this section.
    (ii) Transferring the security under Sec. 1965.27 of this subpart.
    (iii) Conveying all security to FmHA or its successor agency under 
Public Law 103-354 as outlined in subpart A of part 1955 of this 
chapter.
    (iv) Refinancing the Farm Loan Programs debt with another lender. 
The servicing official will explain the provisions of these regulations 
to the borrower.
    (2) Sale or transfer for less than secured debt. If the property is 
to be sold or transferred for less than the total secured debts against 
it, the property will be appraised immediately to determine its present 
market value. The appraisal will be completed by an authorized agency 
employee in accordance with Sec. 761.7 of this title and placed in the 
borrower's case file. If a qualified agency appraiser is not available, 
the State Executive Director may contract for an appraisal in accordance 
with RD Instruction 2024-A (available in any agency office).
    (b) Involuntary liquidation--(1) General. When the servicing 
official, with

[[Page 325]]

the advice of the District Director, determines that continued servicing 
of the loan will not accomplish the objectives of the loan, or that 
further servicing cannot be justified under the policy stated in Sec. 
1965.2 of this subpart, liquidation of the account will be accomplished 
as quickly as possible under this section and subpart A of part 1955 of 
this chapter.
    (2) Farm Loan Programs loan cases. In Farm Loan Programs loan cases, 
borrowers who are 90 days past due (60 days delinquent) on their 
payments, must receive Exhibit A with attachments 1 and 2, or 
attachments 1, 3, and 4 of exhibit A of subpart S of part 1951 of this 
chapter in cases involving nonmonetary default. The servicing official 
will send these forms to the borrower as soon as a decision is made to 
liquidate. The procedures set out in subpart S of part 1951 of this 
chapter shall be followed and any appeal must be concluded before any 
liquidation action, including termination of releases of sales proceeds, 
is taken. If the borrower fails to return attachment 2 of exhibit A of 
subpart S of part 1951 of this chapter and a complete application within 
60 days, the servicing official will send attachments 9 and 10 or 9-A 
and 10-A of exhibit A of subpart S of part 1951 of this chapter. If the 
borrower fails to return attachment 4, 6, 6-A, 10, or 10-A of exhibit A 
of subpart S of part 1951 of this chapter within 60 days, the servicing 
official will submit the case to the District Director in accordance 
with the provisions of Sec. 1955.15 of subpart A of part 1955 of this 
chapter.
    (3) [Reserved]
    (4) Acceleration of account. When foreclosure is approved, 
acceleration of the account and demand for payment will be accomplished 
according to the applicable paragraphs of Sec. 1955.15 of subpart A of 
part 1955 of this chapter.
    (c) Multiple loans and loans secured by both real estate and 
chattels.(1) When a borrower is indebted to the agency for more than one 
type of FLP loan, a thorough study should be made of each loan and the 
effect liquidation of one or more of the loans would have on any and all 
other loans. When liquidation of one or more FLP loans secured by real 
estate and chattels is necessary, and it will jeopardize the repayment 
of or the accomplishment of the purpose of the other loans, liquidation 
of all real estate and all chattel security for all loans will be 
started at the same time. Chattel security will be liquidated under 
subpart A of part 1962 of this chapter, except when real estate is 
transferred in accordance with Sec. 1965.27 of this subpart.
    (2) SFH loans on nonfarm tracts should not be routinely liquidated 
because the borrower could not be successful in the farming operation. 
If the nonfarm property secures only a SFH loan(s), it will not be 
liquidated unless the appropriate provisions of subpart G of part 1951 
of this chapter have been met, including the offering of payment 
assistance and/or moratorium, if eligible. When the nonfarm security is 
also additional security for a farmer program loan(s), consideration 
will be given to continuing with the SFH loan after the other security 
for the farmer program loan is liquidated provided:
    (i) The borrower has acted in good faith, has satisfactorily 
accounted for all security, and has met loan obligations to the best of 
the borrower's ability;
    (ii) All security for loans other than the SFH nonfarm security is 
liquidated either voluntarily or through foreclosure;
    (iii) The borrower wishes to retain the dwelling and will likely 
have repayment ability to continue repaying the housing loan;
    (iv) The Agency approves the compromise or adjustment offer in 
accordance with subpart B to part 1956 of this chapter and the borrower 
makes a settlement offer according to the following:
    (A) When the market value of the nonfarm SFH property is greater 
than the amount of the SFH debt (including total subsidy granted if 
subject to recapture of subsidy), the borrower will make a cash payment 
equal to his/her equity in the SFH property, and any additional amount 
he/she is able to pay, on the farmer program debt.
    (B) When the market value of the nonfarm SFH property is less than 
the amount of the SFH total debt, the borrower will make a cash payment 
of any amount he/she is able to pay, and the

[[Page 326]]

lien to secure the FP debt will be released as a valueless lien.
    (C) If the borrower cannot make a cash payment as outlined in 
paragraph (c)(2)(iv)(A) of this section, the County Supervisor will have 
the borrower execute an Equity Recapture Agreement similar to exhibit D 
of this subpart, (available in any RHS office), pledging to pay to RHS 
an amount equal to the difference between the SFH debt and the market 
value of the SFH security as of the date of acceleration of the FP 
loan(s). The amount will be based on a current appraisal of the SFH 
security property. The County Supervisor will notify the Finance Office 
in accordance with the Automated Data Processing Systems (ADPS) Manual 
when an Equity Recapture Agreement is executed. The original signed 
Agreement will be attached to the original SFH promissory note and a 
copy to the borrower's RHS County Office file. The borrower's file will 
be retained in the RHS County Office until the equity is paid pursuant 
to the Agreement. The noncash credit will be applied as of the date the 
Agreement was executed. Under such an Agreement, the payment will be due 
when the borrower sells the SFH property, ceases to occupy it, or 
graduates to another lender. After the borrower executes the Agreement, 
the remaining FP debt may be settled as appropriate. An equity 
receivable account will be established by the Finance Office in the 
amount of the Equity Recapture Agreement, and the County Office will 
remit collection under the Agreement, in the same manner as an SFH 
subsidy recapture receivable. In addition, the following statement 
should be recorded in the body of Form RHS 451-2, ``Schedule of 
Remittance:'' Equity Receivable Payment.
    (v) In some States FmHA or its successor agency under Public Law 
103-354 is prohibited by State law from foreclosing the SFH loan when 
the nonfarm security is merely additional security for the farmer 
program loan(s). In this case, the Farmer Program real estate mortgage 
on the SFH property cannot be released and the Farmer Program debt 
cannot be settled unless the conditions set forth in paragraph (c)(2) 
(i), (iii), and (iv) of this section are complied with.
    (3) RHS SFH loans on farm tracts must be considered for payment 
assistance and/or moratorium at the time servicing options are being 
considered for the FLP loan(s) prior to acceleration. The RHS county 
office file will be documented to show that payment assistance and 
moratorium were considered. When the Notice of Intent notices, set forth 
in subpart S of part 1951 of this chapter are sent to a borrower who 
also has an RHS loan, and the dwelling is security for the farm loan(s) 
and is located on the farm tract, it will not be necessary for RHS to 
meet the additional requirements of subpart G of part 1951 of this 
chapter prior to accelerating the RHS loan accounts. The RHS accounts 
will be accelerated at the same time the Notice of Intent notices, set 
forth in subpart S of part 1951 of this chapter are sent to the 
borrower. If it is later determined that the FLP loan(s) is to receive 
additional servicing in lieu of liquidation, the RHS loan will be 
reinstated simultaneously with the FLP servicing actions and may be 
reamortized in accordance with Sec. 1951.315 of subpart G of part 1951 
of this chapter.
    (d) Operation of the security. A borrower with farmer program 
loan(s) who without FmHA or its successor agency under Public Law 103-
354 consent does not operate the farm or recreational facility is 
violating agreements with FmHA or its successor agency under Public Law 
103-354. If the borrower requests consent to cease operating the farm, 
or the County Supervisor becomes aware of a failure to operate after the 
fact, the County Supervisor will fully develop the facts, and:
    (1) If the borrower is not the farm operator, but is involved in the 
farming operation, i.e., management (Example: sharing in day-to-day 
activities and management decisions as well as the costs and returns of 
the operation), and will continue to occupy the security, the County 
Supervisor can give consent with concurrence of the District Director. 
For inoperative entities, at least one partner of the partnership, one 
joint operator of the joint operation, one stockholder of the 
corporation or one member of the cooperative must meet the involvement/
occupancy criteria.

[[Page 327]]

    (2) If the failure to operate the security is due to old age, poor 
health, or death in the family and the borrower or the borrower's family 
will continue to occupy the security, the District Director can give 
consent. For inoperative entities, at least one partner (or family) of 
the partnership, one joint operator (or family) of the joint operation, 
one stockholder (or family) of a corporation or one member (or family) 
of a cooperative must meet the occupancy criteria.
    (3) If the failure to operate the security will be compounded by the 
borrower or the borrower's family not occupying the security and the 
failure to occupy is due to conditions beyond the borrower's control, 
the State Director can give consent if it is determined that the 
borrower will reoccupy the property within a reasonable period of time, 
not to exceed five years, and the conditions of paragraph (d)(1) or 
(d)(2) could then be met.
    (4) If consent cannot be given after complying with the requirements 
of Sec. 1965.26(b) of this section pertaining to notice and appeals, 
such a borrower's accounts will be accelerated immediately in accordance 
with Sec. 1955.15(d)(2) of subpart A of part 1955 of this chapter, 
based on the failure to operate.
    (5) When liquidation of an account is necessary because of failure 
to operate, the State Director may, in lieu of foreclosure, permit the 
borrower to pay the account under an accelerated repayment agreement, in 
accordance with Sec. 1965.26(e) of this subpart.
    (e) Accelerated repayment agreement. When liquidation of an account 
is necessary because of failure to graduate to other credit or for 
failure to operate, the State Director may, in lieu of foreclosure, 
permit the borrower to pay the account under an accelerated repayment 
agreement. The State Director will determine that:
    (1) Authorization for repayment of the debt under an accelerated 
repayment agreement is necessary to protect the Government's financial 
interest,
    (2) The borrower can reasonably be expected to meet the accelerated 
payments, and
    (3) The borrower will continue to comply with other requirements of 
the loans and security instruments.
    (4) When an understanding is reached with the borrower, Form FmHA or 
its successor agency under Public Law 103-354 1965-11, ``Accelerated 
Repayment Agreement,'' will be prepared and executed in accordance with 
the Forms Manual Insert (FMI) for each note accelerated. Accounts 
rescheduled under Form FmHA or its successor agency under Public Law 
103-354 1965-11 will be reclassified as NP loans. The balance of the 
debt will be scheduled for repayment in annual or monthly amortized 
installments. If the borrower has monthly income, monthly payments will 
be scheduled. If annual payments are scheduled, the first installment 
may be less than an equal amortized installment if it is due less than a 
full year after the date the agreement is executed and the borrower will 
not be able to pay the first full amortized installment. If the borrower 
fails to meet any installment when due as provided in the agreement, 
foreclosure action will be initiated. Rates and terms authorized are:
    (i) For real estate purpose loans secured by real estate when the 
remaining repayment period exceeds 10 years, the term generally will not 
exceed 10 years. In justified cases, the term may be up to 15 years. In 
no case may the term exceed the final due date of the note. An 
amortization factor for 20 to 25 years may be used, with a balloon 
installment due on the final due date. The interest rate will be that in 
effect for regular FO loans on the date the agreement is executed plus 1 
percent or the interest rate of the note, whichever is greater.
    (ii) For loans for operating purposes secured by real estate when 
the remaining repayment period exceeds 2 years, the term may not exceed 
5 years and in no case may the term exceed the final due date of the 
note. The interest rate will be that in effect for regular OL loans on 
the date the agreement is executed plus 1 percent or the interest rate 
of the note, whichever is greater.
    (iii) For loans for either real estate or operating purposes when 
the remaining repayment period is less than 10 years or 2 years, 
respectively, the

[[Page 328]]

State Director may authorize a shorter term. For loans made for a 
combination of loan purposes, the State Director may authorize an 
accelerated repayment term of up to 10 years, not to exceed the final 
due date of the note. The interest rate will be as specified in 
(e)(4)(i) or (ii) of this section.
    (f) Cash sales. This paragraph applies to a sale of all real estate 
security. Before any cash sale, farmer program borrowers must be sent 
Attachment l of exhibit A of subpart S of part 1951 of this chapter. 
When a cash sale of mortgaged real estate will not result in the secured 
debts being paid in full, the County Supervisor is authorized to approve 
the sale for an amount not less than the present market value of the 
property and release the Government's liens, provided:
    (1) A substantial recovery can be made on the FmHA or its successor 
agency under Public Law 103-354 secured indebtedness based on the recent 
appraisal report required by paragraph (a)(2) of this section.
    (2) All the proceeds are applied on the mortgage debts in accordance 
with their respective priorities except authorized costs as specified in 
Sec. 1965.13(f)(2) of this subpart.
    (3) Any applicable requirements of subpart G of part 1940 of this 
chapter must be met.
    (4) The agency's liens against the security property are not 
released until the appropriate sale proceeds for application on the 
Government's claim are received. The release will be made on forms 
approved or prepared by OGC.
    (5) If the sale of all security results in less than full payment of 
the debt, the borrower may submit a request for debt settlement. The 
servicing official will consult with the County Committee before 
determining if the borrower's account can be debt settled in accordance 
with subpart B of part 1956 of this chapter.

[51 FR 4140, Feb. 3, 1986, as amended at 51 FR 13482, Apr. 21, 1986; 51 
FR 45440, Dec. 18, 1986; 53 FR 35795, Sept. 14, 1988; 56 FR 6954, Feb. 
21, 1991; 56 FR 12646, Mar. 27, 1991; 56 FR 15830, Apr. 18, 1991; 58 FR 
44752, Aug. 25, 1993; 58 FR 52654, Oct. 12, 1993; 60 FR 28321, May 31, 
1995; 60 FR 55122, 55147, Oct. 27, 1995; 62 FR 10158, Mar. 5, 1997; 64 
FR 62569, Nov. 17, 1999; 68 FR 7701, Feb. 18, 2003]



Sec. 1965.27  Transfer of real estate security.

    When the mortgage requires the consent of the Agency to any proposed 
sale or other transfer of real estate security, the borrower should be 
reminded that before firm agreements have been reached with a purchaser 
of all or a portion of the security, the borrower and purchaser should 
contact the County Supervisor concerning the proposed sale. Farm Loan 
Programs (FLP) loan borrowers must be sent attachment 1 of exhibit A of 
subpart S of part 1951 of this chapter within 3 working days after the 
borrower contacts the County Supervisor inquiring about a transfer. If a 
proposed sale would not result in the FLP accounts being paid in full at 
the time of sale, the County Supervisor should explain thoroughly the 
requirements of this section and Sec. 1965.13 or Sec. 1965.26 of this 
subpart, as appropriate. When the transferor is receiving a substantial 
down payment from the sale of the property, the purchaser must be 
required to contact other sources of credit in an effort to secure a 
loan for repayment of the FLP loan(s) in full. Transfer with assumption 
of real estate security on NP terms will be in accordance with subpart J 
of part 1951 of this chapter. When real estate security, including 
water, access development or other rights is to be sold and the mortgage 
requires the Agency's consent to the sale and the transaction cannot be 
approved under the appropriate sections of this subpart, the account 
will be liquidated as required in Sec. 1965.26 of this subpart or will 
be handled in accordance with Sec. 1965.27 (g) of this subpart. In 
accordance with the Food Security Act of 1985 (Pub. L. 99-198) after 
December 23, 1985, if a loan is being transferred and assumed by an 
eligible or ineligible transferee, and if an individual or any member, 
stockholder, partner, or joint operator of an entity transferee is 
convicted under Federal or State law of planting, cultivating, growing, 
producing, harvesting, or storing a controlled substance (see 21 CFR 
part 1308, which is exhibit C to subpart A of part 1941 of this chapter 
and is available in any agency office, for the definition of 
``controlled substance'') prior to the

[[Page 329]]

approval of the transfer and assumption in any crop year, the individual 
or entity shall be ineligible for a transfer and assumption of a loan 
for the crop year in which the individual or member, stockholder, 
partner, or joint operator of the entity was convicted and the four 
succeeding crop years. Transferee applicants will attest on 410-1, 
``Application for Services,'' that as individuals or that its members, 
if an entity, have not been convicted of such crime after December 23, 
1985.
    (a) [Reserved]
    (b) General policies. The following general policies will be 
applicable when an FmHA or its successor agency under Public Law 103-354 
borrower transfers, or proposes to transfer, real estate which is 
security for an FmHA or its successor agency under Public Law 103-354 
loan(s). The loan account(s) will be assumed by use of Form FmHA or its 
successor agency under Public Law 103-354 1965-13, ``Assumption 
Agreement for Farmer Program Loans,'' Form FmHA or its successor agency 
under Public Law 103-354 460-9, ``Assumption Agreement (Same Terms--
Eligible Transferee),'' or Form FmHA or its successor agency under 
Public Law 103-354 1965-15, ``Assumption Agreement (Single Family 
Housing Loans),'' for SFH Loans.
    (1) Agreement. Form FmHA or its successor agency under Public Law 
103-354 465-5, ``Transfer of Real Estate Security,'' will be completed 
to reflect the agreement between the transferor and the transferees. 
This agreement will not be completed for farmer program loan borrowers 
until the borrower has received attachment l of exhibit A of subpart S 
of part 1951 of this chapter.
    (2) Assignment. If an insured loan is involved, the Finance Office 
will have the note assigned to the insurance fund when the assumption 
agreement changes the terms of the note.
    (3) Amount assumed. All transfers will be based on present market 
value. When the total secured FmHA or its successor agency under Public 
Law 103-354 debt(s) exceeds the present market value, the transferee 
will assume an amount of principal and interest equal to the present 
market value as determined under Sec. 1965.26 (a)(2) of this subpart, 
less prior liens and any authorized costs. Otherwise, the transferee 
will assume the total FmHA or its successor agency under Public Law 103-
354 secured debt(s). The unpaid principal balance and accrued interest 
will be shown in Table I of Form FmHA or its successor agency under 
Public Law 103-354 1965-13 and the accrued interest will be computed 
from Form FmHA or its successor agency under Public Law 103-354 451-26, 
``Transaction Record,'' or obtained from the monthly payment account 
Status Report. Balances may be confirmed through the field office 
terminal system. The transferee will be informed of the amount of the 
principal and interest owed, the total amount paid as of the closing 
date which has not been credited to the account, the amount that would 
be required to be paid to place the account on schedule as of the 
previous installment due date, the amount of interest, if any, that 
accrued during a deferral period, and any accounts that must be paid to 
bring any monthly payments up to date. Whenever reasonably possible, any 
delinquency should be paid at the time of assumption. However, this is 
not required if the total FmHA or its successor agency under Public Law 
103-354 debt to be assumed is within the debt paying ability of the 
transferee. If the transferor received a loan deferral under subpart S 
of part 1951 of this chapter, the interest that accrued during the 
deferral period must be paid by the time the transfer takes place, or 
such interest will be added to the loan principal and the loan must be 
assumed on ineligible terms.
    (4) Payment of costs. The payment of customary incidental costs 
appropriate to transfer of real estate will be the responsibility of the 
transferor and transferee. Costs may, for example, include real estate 
taxes, title examination, title insurance, abstracts, surveys, 
reasonable attorney's fees, real estate brokers fees and junior liens. 
State Directors may, in individual cases, approve the payment of 
transferor's costs by the transferee which are reasonable in amount and 
which the transferor cannot pay from personal funds provided:
    (i) Cash equity due the transferor (if any) is applied first to 
payment of

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costs and the transferor will not be receiving any cash payment above 
costs.
    (ii) Payment of any junior liens by the transferee does not exceed 
$5,000.
    (iii) Real estate commission does not exceed the customary rate for 
the type of property for the area.
    (iv) The transferee's personal funds equal to the transferee's 
costs, including the transferor's costs to be paid by the transferee, 
and transferor's equity (if any) will be held in escrow by an FmHA or 
its successor agency under Public Law 103-354 designated closing agent 
for disbursing at closing of the transfer.
    (v) The payment of the costs by the transferee is advantageous to 
the government. The probability of foreclosure, voluntary conveyance, 
maintenance and disposal of the security will be considered in making 
the determination.
    (5) Assumption on same terms. In the following situations only, the 
debt will be assumed on the same terms as in the original note. The 
interest rate, final due date, account status (current, delinquent, 
ahead of schedule) and repayment schedule will not be changed at the 
time of the assumption. The interest rate and repayment schedule may be 
changed after the assumption, in accordance with FmHA or its successor 
agency under Public Law 103-354 loan servicing regulations. Form FmHA or 
its successor agency under Public Law 103-354 1965-13 will be processed 
via the FmHA or its successor agency under Public Law 103-354 field 
office terminal system. Except as noted below, Form FmHA or its 
successor agency under Public Law 103-354 460-9, will be executed by the 
assuming parties. The name, case number, and address, as applicable, 
will be changed to that of the transferees on the Finance Office 
records. In each of the following situations, Forms FmHA or its 
successor agency under Public Law 103-354 465-5 and 460-9 must be 
prepared and distributed in accordance with the applicable FMI.
    (i) EM actual loss loans may be assumed on the same terms by those 
who were actually involved in the operation at time of the loss and meet 
one of the following requirements:
    (A) If an individual received the actual loss loan, the transferee 
must be either an individual who is an immediate family member of the 
borrower or an entity which is made up of only immediate family members 
of the borrower. Such a transferee can assume the entire amount of the 
actual loss loan on the same terms.
    (B) If a partnership on a joint operation received the actual loss 
loan, the transferee must be either a partner or a joint operator who 
was a partner or joint operator in the partnership or joint operation at 
the time the actual loss loan was made, or an entity which is made up of 
only those who were partners in the partnership or joint operators in 
the joint operation at the time the actual loss loan was made. Such 
transferees can assume the entire amount of the actual loss loan on the 
same terms.
    (C) If a corporation/cooperative received the actual loss loan, the 
transferee must be either a stockholder/member who was a stockholder/
member of the corporation/cooperative at the time the actual loss loan 
was made or an entity which is made up of only stockholders/members who 
were stockholders/members of the corporation/cooperative at the time the 
actual loss loan was made. Such transferees can assume on the same terms 
only that portion of the actual loss loan equal to the transferee's 
percentage of ownership in the corporation/cooperative (or, in the case 
of an entity transferee, the combined percentages of the individual 
stockholders/members).
    (ii) A deceased borrower's spouse, other relative or joint tenant 
who did not sign the note but who acquires title to the property will be 
allowed to assume the loan on the same terms. Form FmHA or its successor 
agency under Public Law 103-354 465-5 will not be completed.
    (iii) When one of the jointly liable individual borrowers withdraws 
from the operation and conveys his/her interest in the security to the 
remaining borrower, who will repay the total indebtedness, and 
assumption agreement is not required. This paragraph does not apply to 
partners in a partnership, joint operators in a joint operation,

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stockholders in a corporation or members of a cooperative. The previous 
joint owner will be released from liability for the indebtedness by 
completing Parts 1 and 3 of Form FmHA or its successor agency under 
Public Law 103-354 1965-8, ``Release from Personal Liability,'' 
provided:
    (A) A divorce decree or property settlement document did not make 
the withdrawing party responsible for loan payments;
    (B) The withdrawing party's interest in the security is conveyed to 
the person with whom the loan will be continued; and
    (C) The person with whom the loan will be continued has adequate 
repayment ability.
    (iv) As immediate family member of an individual borrower who wants 
to assume a debt with the existing borrower(s) may do so on the same 
terms. After the transfer, the assuming family member may own the 
property jointly with the existing borrower(s) or subject to a life 
estate of the existing borrower. Also, an entity which is made up of 
only the individual borrower and the borrower's immediate family members 
may assume on the same terms the entire amount of a loan received by the 
individual borrower. Title to the real estate security would have to be 
transferred to the entity.
    (v) If there is only one stockholder/member/partner/joint operator 
of a corporation/cooperative/partnership/joint operation who is 
personally liable on the note, and that stockholder/member/partner/joint 
operator withdraws from the operation or dies, all of the remaining 
individuals will be required to assume personal liability on the loan(s) 
or else the transfer will not be approved. A Form FmHA or its successor 
agency under Public Law 103-354 465-5 does not have to be processed 
unless title to the real estate is transferred.
    (vi) If a stockholder/member/partner/joint operator or another 
corporation/cooperative/partnership/joint operation buy out the 
ownership interest of the other stockholders/members/partners/joint 
operators and continues to operate the farm; and if the remaining 
stockholder(s)/member(s)/partner(s)/joint operator(s) is not personally 
liable on the note(s), that stockholder(s)/member(s)/partner(s)/joint 
operator(s) will be required to assume personal liability on the loan(s) 
or else the transfer will not be approved. A Form FmHA or its successor 
agency under Public Law 103-354 465-5 does not have to be processed 
unless title to the real estate is transferred.
    (vii) New stockholders/members/partners/joint operators entering the 
corporation/cooperative/partnership/joint operation will be required to 
assume personal liability on the loan or else the transfer will not be 
approved. A Form FmHA or its successor agency under Public Law 103-354 
465-5 does not have to be processed unless title to the real estate is 
transferred.
    (6) Loan type. The type(s) of loan will remain the same for all 
loans except that loans which are transferred to ineligible applicants 
will be classified as NP.
    (7) Transfer of a portion of the security. Generally, title to all 
FmHA or its successor agency under Public Law 103-354 real estate 
security, including any water, access, development or other rights, must 
be conveyed to the transferee not later than the date of closing of the 
transfer. However, a transfer of a portion of the FmHA or its successor 
agency under Public Law 103-354 real estate security with an assumption 
of the total indebtedness may be approved, provided:
    (i) The portion of the FmHA or its successor agency under Public Law 
103-354 security transferred has a present market value at least equal 
to the total indebtedness owed by the borrower or such indebtedness is 
reduced by a cash payment to the present market value of the property;
    (ii) The transaction is advantageous to the Government; and
    (iii) In cases of SFH loans, the portion of the property improved 
with SFH funds is conveyed to the person assuming the SFH loan.
    (iv) The security retained by the transferor will be released from 
the Government's lien. The transferor will be released from liability if 
the conditions of paragraph (f) of this section are met.
    (8) Partial transfer and assumption. When a request is made by a 
borrower to transfer a portion of the real estate

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security the transferee must assume an amount which meet the 
requirements of paragraph (b)(3) of this section. The considerations for 
approval will be as set forth in Sec. 1965.13(b) of this subpart. Whole 
notes must be assumed; notes cannot be split. The portion of the 
security transferred will be released from the transferor's mortgage by 
partial release. When the assumption is by an eligible transferee, or by 
an ineligible transferee on terms of 5 years or less, the transferor may 
be released of liability on the loans assumed. The transferor will not 
be released of liability when the transferee is ineligible and terms 
exceed 5 years. Before approving a partial transfer and assumption it 
must be determined that the transaction is necessary for the borrower to 
establish a debt structure compatible with repayment ability, management 
ability or other limiting factor such as health, labor or markets 
available.
    (9) Multiple sales and assumptions. When a request is made by a 
borrower to transfer the real estate security as parcels to two or more 
transferees with each assuming a portion of the debt, the County 
Supervisor may send the proposed action to the State Director for 
consideration if the County Supervisor recommends that the transaction 
would be advantageous to the Government. The total debt owed on all 
outstanding notes must be assumed by the transferees even though a 
portion of the security may be retained by the transferor. The County 
Supervisor will submit to the State Director the complete factual 
information concerning the transaction, including appraisal reports 
showing the present market value of each portion to be transferred; 
value of the total unit before subdivision; the amount of indebtedness 
to be assumed by each transferee; and the cases file with other 
pertinent information outlining the reasons for the proposed actions. If 
approved by the State Director, new security instruments will be 
required for each transferee at closing and any security retained by the 
transferor will be released from the Government lien. This policy is to 
permit transfer to two or more transferees when the transferor owes more 
than one note evidencing indebtedness or the indebtedness on one note is 
to be divided between transferees. OGC guidance will be requested in 
these case to ensure enforceable liens are obtained.
    (10) Dual security. When the account(s) is secured by both chattels 
and real estate, all the chattel security must be transferred, sold or 
liquidated by the time of the transfer of real estate, except that in 
cases of EM, EE, or SL security, the real estate security may be 
transferred without transfer or liquidation of the chattel security upon 
prior approval of the National Office.
    (11) Consent of other lienholders. Written consent to a proposed 
transfer and assumption must be obtained if required by any other 
lienholder(s).
    (12) Junior liens. When the full amount of the FmHA or its successor 
agency under Public Law 103-354 debt is assumed, there must be no liens, 
judgments, or other claims against the security which are junior to any 
FmHA or its successor agency under Public Law 103-354 liens being 
assumed unless the State Director determines that the liens, judgments, 
or claims will not adversely affect the Government's security interests 
and that the transferee's ability to pay the FmHA or its successor 
agency under Public Law 103-354 debt will not be impaired. When less 
than the full amount of the FmHA or its successor agency under Public 
Law 103-354 debt is being assumed, there must be no liens, judgments, or 
other claims against the security which are junior to any FmHA or its 
successor agency under Public Law 103-354 loans being assumed.
    (13) Loans. A loan for which the transferee is eligible may be made 
in connection with a transfer, subject to the policies and procedures 
governing the type of loan being made. When the transfer is being made 
to an eligible FO applicant, FO loan funds may be used to pay for the 
equity in the property being transferred. When real estate security for 
an SFH loan is transferred to a person eligible under subpart A of part 
1944 of this chapter for an SFH loan to purchase the real estate, SFH 
loan funds may be used to pay for the equity in the property being 
transferred other than income-producing land or buildings. In lieu of a 
subsequent loan of the kind involved, the

[[Page 333]]

Government's lien may be subordinated to enable the transferor to take a 
first mortgage, or permit another lender to take a first mortgage, in 
return for furnishing the funds needed in connection with the transfer. 
In these cases, the subordination will be processed in accordance with 
the applicable provisions of Sec. 1965.12 of this subpart. For other 
than SFH loans, the transferor may convey title to the property by 
warranty deed or by purchase contract or similar instrument which meets 
the conditions of Sec. 1943.16 (a)(3) of subpart A of part 1943 of this 
chapter. Prior lienholder's agreements will be obtained in accordance 
with subpart B of part 1927 of this chapter. When necessary to settle a 
divorce action, a subsequent loan may be made, or a subordination may be 
granted to permit the remaining borrower to obtain a loan in an amount 
not to exceed the equity in the property provided the purchase of land 
is an authorized loan purpose or the subordination is in accordance with 
Sec. 1965.12 of this subpart. (Also see Sec. 1965.11(d) of this 
subpart.)
    (14) Payments. When a payment is made to the transferor in 
connection with the transfer and assumption, and the full amount of the 
FmHA or its successor agency under Public Law 103-354 secured debt is 
not being assumed and other FmHA or its successor agency under Public 
Law 103-354 debts owed by the transferor are not adequately secured, the 
State Director may, as a condition of approving the transfer, require 
that all or a part of any payment be applied on the debts.
    (15) Down payment. An eligible transferee who is financially able, 
will be required to make a downpayment on the FmHA or its successor 
agency under Public Law 103-354 secured debts. When a downpayment is 
required it will be collected at closing.
    (16) Date. The effective date of the assumption will be the date on 
which Form FmHA or its successor agency under Public Law 103-354 1965-13 
is signed.
    (17) Nondiscrimination assurance. When the property transferred will 
continue to be used for the same or a similar purpose, and the 
assistance was subject to the Civil Rights Act of 1964 and subpart E of 
part 1901 of this chapter which prohibits discrimination on the basis of 
race, color, national origin, handicap, age, religion, marital status, 
or sex in programs or activities receiving Federal financial assistance, 
the transferees must agree to comply with requirements of the statute 
and the regulation. The transferee will be required to sign a Form 400-
4, ``Assurance Agreement.''
    (18) Recapture of subsidy. Recapture of SFH subsidy in connection 
with assumption will be as provided in subpart I of part 1951 of this 
chapter.
    (19) [Reserved]
    (20) Environmental requirements. Applicable provisions of subpart G 
of part 1940 of this chapter are met, as well as those requirements 
found in exhibit M to subpart G of part 1940.
    (21) Form FmHA or its successor agency under Public Law 103-354 
1910-11, ``Applicant Certification, Federal Collection Policies for 
Consumer or Commercial Debts.'' For all transfers, the County Supervisor 
must review Form FmHA or its successor agency under Public Law 103-354 
1910-11, ``Applicant Certification, Federal Collection Policies for 
Consumer or Commercial Debts,'' with the applicant. A copy of the signed 
and dated form will be given to the applicant and the original placed in 
the loan docket.
    (c) Assumption of loans by eligible transferees--(1) Eligibility. A 
loan may be assumed on eligible terms by an applicant (including an 
entity applicant) who meets all of the eligibility and loan purpose 
requirements for the type of loan being assumed or whose situation after 
the transfer of the real estate will satisfy the eligibility and loan 
purpose requirements. Eligibility and loan purpose requirements can be 
found in the loan making regulations applicable to the type of loan 
being assumed. (See paragraph (b)(5) of this section for a list of 
situations in which the debt can be assumed on the same terms as in the 
existing note.) Eligible applicants can assume loans so long as their 
FmHA or its successor agency under Public Law 103-354 principal and 
interest indebtedness after the assumption does not exceed the maximum 
loan limits for the type(s) of loan(s) involved. Loans may also be 
assumed on

[[Page 334]]

eligible terms under the following conditions:
    (i) SFH assumptions. An applicant who is eligible for SFH assistance 
under subpart A of part 1944 of this chapter may assume a low-or-
moderate, or an above-moderate income SFH loan. An above-moderate loan 
assumed by a low-or-moderate applicant will be reclassified and serviced 
as a low-or-moderate loan. Where a property securing an SFH loan is 
located in an area which has been redesignated from rural to nonrural, 
the loan may be transferred without regard to the nonrural designation.
    (ii) NP loan. An NP loan may be assumed by an applicant who is 
determined eligible for an FO loan if the property is a suitable farm 
tract, or an applicant eligible for an SFH loan if the property is a 
suitable dwelling on a farm or non-farm tract. When closing the 
assumption, the loan will be reclassified as ``FO'' or ``SFH'', as 
applicable. See subpart J of part 1951 of this chapter.
    (iii) EE, SL, and other type loans no longer being made. EE, SL, and 
other type loans no longer being made may be assumed:
    (A) Subject to the FO loan limitations and rates and terms set forth 
in subpart A of part 1943 of this chapter by an immediate family member 
of an individual borrower, an immediate family member of any partner of 
a partnership, joint operator of a joint operation, stockholder of a 
corporation or member of a cooperative, an entity which is made up of 
only immediate family members of an individual borrower, or an entity 
which is made up of only immediate family members of any partner(s), 
joint operator(s) stockholder(s) or member(s).
    (B) Subject to the FO loan limitations and rates and terms set forth 
in subpart A of part 1943 of this chapter by an applicant who is 
determined eligible for an FO loan if the property has a suitable farm 
tract, or by an applicant eligible for an SFH loan if the property has a 
suitable dwelling on a farm or non-farm tract. When closing an 
assumption under this paragraph or paragraph (A) above, the loan will be 
reclassified as ``FO'' or ``SFH,'' as applicable.
    (C) On ineligible rates and terms in accordance with paragraph (d) 
of this section for all other transferees. The ineligible term 
assumption(s) will be serviced in accordance with Sec. 1965.34 of this 
subpart.
    (iv) EM actual loss loans. See paragraph (b)(5)(i) of this section.
    (v) Other loan types currently being made--(A) Individual 
transferees. If real estate security is transferred to an individual who 
meets all of the eligibility requirements and loan purpose requirements 
for the type of loan being assumed, the loan may be assumed on eligible 
terms. This applies to transfers of real estate from individual 
borrowers and from entity borrowers, including entities in which the 
transferee had an interest.
    (B) Entity transferees. If real estate security is transferred to an 
entity which meets all of the eligibility requirements and loan purposes 
requirements for the type of loan being assumed, the loan may be assumed 
on eligible terms.
    (C) EM non-actual loss loans (if currently being made). These loans 
can be assumed on eligible terms. The loan making regulation requirement 
that an applicant must have suffered an actual loss in order to be 
eligible for a non-actual loss loan does not apply, for the purposes of 
this paragraph. If EM non-actual loss loans are not currently being 
made, refer to (c)(1)(iii) of this section.
    (2) Rates and terms. Except as provided in paragraph (b)(5) of this 
section and in this paragraph, an applicant may request the interest 
rate charged by the agency to be the lower of the rate in effect at 
either the time the assumption is approved or closed. If the applicant 
does not indicate a choice, the assumption will be closed at the rate in 
effect at the time of loan approval. Interest rates are specified in 
agency National Office issuances (available in any agency office) for 
the type loan involved. The approval official will approve the 
assumption by executing and delivering a copy of Form RD 1940-1, 
``Request for Obligation of Funds,'' to the assuming party. The field 
office will process the assumption via the field office terminal system 
in accordance with Form 1965-

[[Page 335]]

13. The repayment period will not exceed the repayment period for a new 
loan of the type involved; for example, FO--40 years, OL--7 years, EM--
depends on loan purpose and SFH--33 years. An NP loan will be considered 
an FO or SFH loan as appropriate, if the applicant and the property meet 
the requirements of paragraph (c)(1) of this section. Above-moderate 
loans assumed by low-or moderate-income applicants will be assumed at 
the current low- or moderate-income SFH interest rate. (See exhibit C to 
subpart A of part 1944 for income categories). See subparts A of parts 
1941 and 1943 of this chapter for the definition of a limited resource 
applicant and an explanation of limited resource eligibility criteria; 
FO and OL loans may be assumed at the current rate in effect for limited 
resource loans if the applicant is a limited resource applicant.
    (d) Assumption of loans by ineligible transferees. When a borrower 
sells or proposes to sell the real estate security to a person(s) or 
entity not eligible to assume the debt under paragraph (b)(5) or (c) of 
this section, the debt may be assumed on NP terms in accordance with 
subpart J of part 1951 of this chapter. No assumption can be approved if 
the transferee has been liable for any Farm Loan Program (FLP) loan or 
loan guarantee which was reduced or terminated in a manner resulting in 
a loss to the Government.
    (e) Consent of FmHA or its successor agency under Public Law 103-354 
not required to transfer. When the agency mortgage(s) does not require 
the Government's consent to the sale of the security and the borrower 
conveys or proposes to convey the security to a person who is ineligible 
or unwilling to assume the agency debt in accordance with paragraphs (c) 
or (d) of this section, the Government will not consent to the sale. 
However, the sale cannot be used as a reason for liquidation. In such 
cases involving SFH loans, the County Supervisor will advise the State 
Director of the sale. If the SFH loan account is delinquent or the loan 
is otherwise in default, the County Supervisor will also advise the 
State Director of the nature of the default and any specific plans that 
may have been made to correct the default. If the State Director decides 
to continue with the account, it will be serviced in the name of the 
original agency borrower, in the usual manner. In such cases involving 
farmer program loans, they will be serviced in accordance with the 
provisions of subpart S of part 1951 of this chapter.
    (f) Release of transferor from liability. The borrower may be 
released from personal liability when all of the real estate security is 
transferred under paragraph (c) or (d) of this section and the total 
outstanding debt or that portion of the debt equal to the present market 
value of the security is assumed. Release shall not be granted to any 
borrower or cosigner who was liable for any FLP direct loan which was 
reduced or terminated in a manner resulting in a loss to the Government. 
When the total outstanding debt is not assumed, any request for debt 
settlement will be processed in accordance with subpart B of part 1956.
    (g) Processing transfers and assumptions of indebtedness. When the 
transfer is not within the County Supervisor's approval authority, the 
docket with the transferor's case file will be sent to the District 
Director or the State Office, as appropriate, for approval or 
disapproval.
    (1) Refund of unused funds, loan funds not advanced, transaction 
record. Unexpended funds in the supervised bank account will be applied 
as a refund unless FO, SW, RL, or EM security is transferred to an 
eligible applicant and the funds are needed for completing planned 
development. Any obligations of or request for loan funds not yet 
advanced will be cancelled. Form FmHA or its successor agency under 
Public Law 103-354 451-26, or the monthly payment account Status Report 
will be used to compute the unpaid balance due on the effective date of 
the transfer.
    (2) Preparation and distribution of transfer docket. Loan docket 
processing and forms required will be the same as for an initial or 
subsequent loan of the type(s) involved.
    (i) Checking docket forms. When the transfer docket forms, including 
those applicable forms, shown in exhibit C (available in any FmHA or its 
successor agency under Public Law 103-354

[[Page 336]]

office) of this subpart have been completed, the approval official will 
determine that the proposed transfer conforms to the applicable 
procedural requirements, each form is prepared correctly in accordance 
with the FMI or other appropriate instructions, and items such as names, 
addresses, and the amount of the indebtedness to be assumed are the same 
on all forms in which the items appear.
    (ii) Information on the availability of other credit. An eligible 
transferee must meet the ``no credit elsewhere'' requirements for the 
type of loan being assumed. The County Supervisor will record in the 
running case record the pertinent information concerning the 
negotiations made by an eligible transferee and the discussion by FmHA 
or its successor agency under Public Law 103-354 personnel with the 
applicant's creditors and other lenders. The investigation and 
availability of other credit for eligible transferees will be documented 
as required for the kind of loan being assumed. This must be 
sufficiently clear and adequate to establish that other credit is not 
available to pay the debt in full, which would make the transfer 
unnecessary. Any letters from lenders or other evidence which may have 
been obtained indicating that the applicant is unable to obtain 
satisfactory credit elsewhere will be included in the loan docket.
    (iii) Transferor records. The transferor's copies of notes, 
mortgages and other instruments in connection with the security are to 
be made available to the transferee.
    (iv) Distribution of transfer docket forms. The necessary forms will 
be distributed in accordance with the appropriate loan processing 
regulation and the FMI for the form. See exhibit C (available in any 
FmHA or its successor agency under Public Law 103-354 office) of this 
subpart which identifies the FmHA or its successor agency under Public 
Law 103-354 forms that will be used as appropriate.
    (v) Other transfer docket items when applicable. Other transfer 
docket items may include a mortgage title policy, title evidence or 
report of lien search, foreclosure notice agreement, original or 
certified copy of deed to any property to be taken as additional 
security, purchase contract or other instrument of ownership, and 
information on prior mortgage(s) and cosigner(s). When the County 
Supervisor is the approval official, in lieu of including the document 
evidencing ownership, he or she may include a statement in the docket 
indicating that the document has been seen and reviewed. When less than 
the total amount of the indebtedness is assumed, the transferor's 
financial statement will be included. When an initial or subsequent loan 
is involved, include any additional forms required by the appropriate 
loan making regulation.
    (3) Collections and receipts. During the period that a transfer is 
pending in the County Office, payments received by the Finance Office 
will continue to be applied to the transferor's account and Form FmHA or 
its successor agency under Public Law 103-354 451-26 will be forwarded 
to the County Office. When the County Supervisor has received a payment 
on the account which is not included in the latest transaction record or 
monthly payment account Status Report, the amount will be deducted from 
the total amount of principal and interest only when received in the 
form of currency and coin, treasury check, cashier's check, certified 
check, postal or bank money order, or bank draft (this figure will be 
based on the latest information available) before completing the 
assumption agreement and having it signed. The following will also be 
done:
    (i) Transaction record. When the borrower has made a direct payment 
to the Finance Office and there is no record of the payment in the 
County Office, the account will be assumed on the basis of the latest 
record in the County Office. In those cases, the application of the 
direct payment will be reversed from the account and the assumption 
agreement will be processed in the Finance Office. The Finance Office 
will contact the County Supervisor to determine the disposition of the 
proceeds from the direct payment.
    (ii) Identification of payments. For payment received on the date of 
transfer, Form FmHA or its successor agency under Public Law 103-354 
451-2, ``Schedule of Remittances,'' will be prepared to show ``Transfer 
in process for account owed by (borrower's name

[[Page 337]]

and case number), to be transferred to (name of borrower and case 
number, if known).'' If the borrower number portion of the case number 
has not yet been assigned for a transferee, only the State and County 
portion of the case number will be shown. A statement for the 
information of the Finance Office will be attached to the assumption 
agreement showing the date of Form FmHA or its successor agency under 
Public Law 103-354 451-2 and the amount paid.
    (iii) Payment. When a payment is due on the assumption agreement 
shortly after the transfer is completed, the payment should, if 
possible, be collected at the time of transfer and remitted in the name 
of the transferee.
    (4) Farms and Home plans and financial statements. When an 
assumption will be for less than the amount of the indebtedness and a 
release of liability is involved, a current financial and income 
statement of the transferor will be obtained on Forms FmHA or its 
successor agency under Public Law 103-354 1944-3 or FmHA or its 
successor agency under Public Law 103-354 431-2 or other plan of 
operation acceptable to FmHA or its successor agency under Public Law 
103-354.
    (5) Appraisal report. Real estate appraisals meeting the 
requirements of 761.7 of this title will be obtained when the amount to 
be assumed is less than the full amount of the indebtedness, when 
required in connection with an initial or subsequent loan to be 
processed with the transfer, or when the loan approval official requests 
a current appraisal.
    (6) [Reserved]
    (7) Property insurance. The transferee will obtain property 
insurance in accordance with the property insurance requirement for the 
loan(s) involved. If insurance is required, it may be obtained either by 
transfer of the existing coverage by the transferor or by acquisition of 
new coverage by the transferee. The insurance company will be notified 
by the County Supervisor immediately after completion of the transfer. 
When the full amount of the FmHA or its successor agency under Public 
Law 103-354 indebtedness is being assumed and an insurance premium has 
been advanced to the account, the transfer will not be completed until 
the amount of the premium has been charged to the transferor's account.
    (8) Title clearance and legal services. Title clearance and legal 
services for closing transfers will be accomplished in accordance with 
subpart B of part 1927 of this chapter. When the original repayment 
terms are altered, it may be necessary to obtain a new mortgage from the 
transferee to continue FmHA or its successor agency under Public Law 
103-354's lien on the transferred real estate. The advice of OGC will be 
obtained on a state-by-state basis and implemented through State 
supplements to provide for new mortgages when required, and to further 
provide instructions on whether the original mortgage should be 
released. Title clearance and legal services for the above transfer(s) 
are not required when the interest of anyone liable on the note is 
conveyed to another liable on the note who assumes the total 
indebtedness on the same terms, provided a subsequent loan or 
subordination is not involved. For all other kinds of transfers, title 
clearance and loan closing services will not be required unless the 
approval official, with the advice of OGC, determines that the services 
are needed to maintain FmHA or its successor agency under Public Law 
103-354's security position or for other reasons. If another mortgagee's 
mortgage requires the mortgagee's consent to the transfer, consent will 
be obtained.
    (9) Assumption agreements, releases from personal liability, 
receipts. When the full amount of the debt is assumed or a release from 
personal liability is otherwise approved under this subpart and all of 
the security is being transferred, Forms FmHA or its successor agency 
under Public Law 103-354 1965-13; 460-9 (as applicable); 451-1, 
``Acknowledgment of Cash Payment;'' and 1965-8, will be prepared and 
distributed according to the FMI.
    (h) Transfer of security without FmHA or its successor agency under 
Public Law 103-354 consent or approval. When a borrower transfers or 
proposes to transfer real estate security to another party and FmHA or 
its successor agency under Public Law 103-354 is unable or unwilling to 
approve the transferee as

[[Page 338]]

either an eligible or ineligible applicant, the conveyance cannot be 
used as the basis for liquidation if the borrower's spouse or children 
become the owner of the property or if an intervivos trust becomes the 
owner of the property so long as the borrower is a trust beneficiary and 
there is no change in occupancy of the property. If the transfer is to 
someone other than a spouse, child or intervivos trust and the Agency 
determines that it is not in the best interest of FmHA or its successor 
agency under Public Law 103-354 to liquidate to the loan(s) in 
accordance with Sec. 1965.26 of this subpart, the following actions 
will be taken in order listed:
    (1) The Agency will advise the State Director of the transfer or 
proposed transfer of the security and reasons why FmHA or its successor 
agency under Public Law 103-354 cannot approve the transferee as 
eligible or ineligible. Complete details of the transfer conditions, 
terms and consideration will be submitted to the State Director with the 
borrower (transferor) file. Current information on status of the loan(s) 
owed FmHA or its successor agency under Public Law 103-354 and of any 
debts owed other lenders on the property will be included with a current 
appraisal of the FmHA or its successor agency under Public Law 103-354 
security and security equity position. The appraisal will be completed 
in accordance with Sec. 761.7 of this title. The Agency will consider 
the following:
    (i) Reasons why continuation of the loan would be in the best 
interest of the Government.
    (ii) The effect continuation of the account will have on the FmHA or 
its successor agency under Public Law 103-354 program in the area.
    (iii) Comments and opinion on adequacy of security and ability of 
transferor to pay the FmHA or its successor agency under Public Law 103-
354 debt.
    (2) The State Director will review all information submitted and 
request additional information needed to reach a decision. This includes 
advice of OGC. After deciding, the State Director will either:
    (i) Return the file to the Agency with instructions to proceed with 
liquidation of the account in accordance with Sec. 1965.26(b) of this 
subpart and state reasons for the decision; or
    (ii) Return the file to the Agency stating reasons for the decision 
and giving consent to continue the account as an NP loan with 
instructions for obtaining liability of the transferee, maintaining 
security position and future servicing. If FmHA or its successor agency 
under Public Law 103-354 is adequately secured and the entire FmHA or 
its successor agency under Public Law 103-354 debt will be paid in 5 
years or less from date of the transfer, the borrower-transferor can be 
released of liability under paragraph (f) of this section and the 
account serviced in the name of the transferee. If the entire FmHA or 
its successor agency under Public Law 103-354 debt will not be paid 
within 5 years from date of the transfer, the borrower will not be 
released of liability, the account will continue to be serviced in the 
borrower's name and the borrower will remain liable for the debt under 
the terms of the security instruments. Advice of OGC will be obtained as 
needed to determine the borrower's continued liability and adequacy of 
security.

[51 FR 4140, Feb. 3, 1986, as amended at 51 FR 6735, Feb. 26, 1986; 51 
FR 13483, Apr. 21, 1986; 51 FR 40787, Nov. 10, 1986; 51 FR 45440, Dec. 
18, 1986; 53 FR 7339, Mar. 8, 1988; 53 FR 35797, Sept. 14, 1988; 54 FR 
29333, July 12, 1989; 56 FR 3396, Jan. 30, 1991; 56 FR 12646, Mar. 27, 
1991; 56 FR 15831, Apr. 18, 1991; 56 FR 67484, Dec. 31, 1991; 58 FR 
44752, Aug. 25, 1993; 58 FR 52654, Oct. 12, 1993; 60 FR 28321, May 31, 
1995; 62 FR 10159, Mar. 5, 1997; 64 FR 62569, Nov. 17, 1999; 66 FR 7568, 
Jan. 24, 2001; 68 FR 7701, Feb. 18, 2003]



Sec. Sec. 1965.28-1965.30  [Reserved]



Sec. 1965.31  Taking liens or real estate as additional security in 
servicing FmHA or its successor agency under Public Law 103-354 loans.

    Additional liens will not be taken for other loans on marginal land 
used for the production of softwood timber if the land is presently 
securing an ST loan.
    (a) Liens. When taking real estate as additional security, the best 
lien obtainable will be taken on any real estate owned by the borrower, 
including any real estate which already serves as security for another 
loan. Normally,

[[Page 339]]

the prior concurrence of the District Director will be obtained. Liens 
will be taken only when:
    (1) Present security for the loan is not adequate to protect the 
interests of the FmHA or its successor agency under Public Law 103-354, 
and
    (2) The borrower is delinquent, has substantial equity in the real 
estate to be mortgaged and it is determined that the taking of the 
mortgage will not prevent the making of an FmHA or its successor agency 
under Public Law 103-354 real estate loan, which might be needed in the 
foreseeable future.
    (b) Real estate. Before taking real estate as additional security 
for an FmHA or its successor agency under Public Law 103-354 loan the 
following items will be documented in the running record:
    (1) The facts which justify taking the real estate lien;
    (2) A conservative estimate of the present market value of the real 
estate to be mortgaged. (It will not be necessary to submit an appraisal 
of the property to be mortgaged.);
    (3) A brief description of any existing liens on the property, and 
the repayment terms and the unpaid balance on the debts secured by 
existing liens, unless this is accurately reflected on a recent 
financial statement; and
    (4) The name of the title holder and how title of the property is 
held. (Title evidence need not be required.)
    (c) Forms. Each real estate lien taken as additional security for 
the FmHA or its successor agency under Public Law 103-354 loans will be 
taken on Form FmHA or its successor agency under Public Law 103-354 
1927-1 (state), ``Real Estate Mortgage or Deed of Trust for ------
(Insured Loans to Individuals)'' unless a State supplement requires the 
use of a form of mortgage comparable to that which secures the existing 
loan(s) to be additionally secured. The notes evidencing the FmHA or its 
successor agency under Public Law 103-354 loans for which the additional 
security will be taken will be described in the same mortgage.

[51 FR 4140, Feb. 3, 1986, as amended at 52 FR 26139, July 13, 1987; 53 
FR 35798, Sept. 14, 1988; 56 FR 67484, Dec. 31, 1991; 58 FR 52655, Oct. 
12, 1993]



Sec. 1965.32  [Reserved]



Sec. 1965.33  Cosigners--SFH loans.

    See Sec. 1965.129 of subpart C of this part for servicing SFH loans 
with cosigners.



Sec. 1965.34  [Reserved]



Sec. 1965.35  Exception authority.

    The Administrator or delegate may, in individual cases, make an 
exception to any requirement or provision of this subpart or address any 
omission of this subpart which is not inconsistent with the authorizing 
statute or other applicable law if the Administrator determines that the 
Government's interest would be adversely affected or the immediate 
health and/or safety of tenants or the community are endangered if there 
is no adverse effect on the Government's interest. The Administrator 
will exercise this authority upon the request of the State Director with 
recommendation of the appropriate program Assistant Administrator; or 
upon request initiated by the appropriate program Assistant 
Administrator. Requests for exceptions must be made in writing and 
supported with documentation to explain the adverse effect, propose 
alternative courses of action, and show how the adverse effect will be 
eliminated or minimized if the exception is granted.



Sec. 1965.36  State Supplements and reference to the OGC.

    State Supplements will be prepared, with the advice of the OGC, as 
necessary to carry out this subpart and forwarded to the National Office 
for prior or post approval.



Sec. 1965.37  Redelegation of authority.

    The State Director is authorized to redelegate in writing any 
authority delegated to the State Director in this subpart to one or more 
of the following State Office employees: Chief, Farmer Programs; Farmer 
Programs Specialist.



Sec. Sec. 1965.38-1965.49  [Reserved]



Sec. 1965.50  OMB control number.

    The collection of information requirements in this regulation have

[[Page 340]]

been approved by the Office of Management and Budget and have been 
assigned OMB control number 0575-0086.

                          Exhibits to Subpart A

    Note: The exhibits referenced in this subpart are available in any 
FmHA or its successor agency under Public Law 103-354 office.

Exhibit A--Memorandum of Understanding Between Bureau of Sport Fisheries 
and Wildlife and the Farmers Home Administration or its successor agency 
                        under Public Law 103-354

    Exhibit B--Notification of Other Lienholders Intent to Foreclose

                       Exhibit C--Processing Guide

                  Exhibit D--Equity Recapture Agreement



         Subpart B_Security Servicing for Multiple Housing Loans

    Source: 49 FR 49590, Dec. 21, 1984, unless otherwise noted.



Sec. 1965.51  General.

    This subpart prescribes the policies, procedures, and authorizations 
for servicing and liquidating all Farmers Home Administration or its 
successor agency under Public Law 103-354 (FmHA or its successor agency 
under Public Law 103-354) multiple housing type loans and labor housing 
grants. These loans include Rural Rental Housing (RRH), Rural 
Cooperative Housing (RCH), Rural Housing Site (RHS), and Farm Labor 
Housing (LH). The servicing functions described in this subpart are for 
the purpose of assisting the borrower in meeting the objectives of the 
loan, repaying loans on schedule, complying with FmHA or its successor 
agency under Public Law 103-354 agreements and regulations, protecting 
the interest of FmHA or its successor agency under Public Law 103-354, 
and maintaining the security property. Borrowers will be required to pay 
their debts to the FmHA or its successor agency under Public Law 103-354 
and other creditors according to their agreements. Borrowers shall be 
required to operate their facilities according to FmHA or its successor 
agency under Public Law 103-354 regulations and applicable State and 
local laws and regulations. State Directors with the assistance of the 
Office of General Counsel (OGC) should issue necessary State Supplements 
to assure compliance with State laws. After careful analysis, and 
borrower in default who does not evidence prospects of attaining 
successful operations within a reasonable time will have its loan(s) 
liquidated according to authorizations contained in this subpart and 
Subpart A of Part 1955 of this chapter.



Sec. 1965.52  Definitions.

    (a) Borrowers. ``Borrowers'' means all individuals, partnerships, 
cooperatives, trusts, public agencies, private or public corporations, 
and other organizations which have received a loan or grant from FmHA or 
its successor agency under Public Law 103-354 for LH, RRH, RCH, or RHS 
purposes.
    (b) Case file. ``Case file'' includes the total cumulative records 
concerning a borrower.
    (c) District Director. For the purpose of this subpart, the term 
also includes the Assistant District Director, and other qualified 
District Office staff who may be delegated responsibilities under this 
subpart according to the provisions of Subpart F or Part 2006 (available 
in an FmHA or its successor agency under Public Law 103-354 office). 
Area Loan Specialists and Island Directors, and other qualified members 
of their staff in Alaska and Hawaii, respectively, are included in this 
definition. In the case of LH loans still being serviced in the County 
Office, this definition also includes qualified County Office staff.
    (d) FmHA or its successor agency under Public Law 103-354. ``FmHA or 
its successor agency under Public Law 103-354'' means the United States 
of America acting through the Farmers Home Administration or its 
successor agency under Public Law 103-354 of the United States 
Department of Agriculture; it also includes FmHA or its successor agency 
under Public Law 103-354's predecessor agencies.
    (e) Governing body. ``Governing body'' means those elected or 
appointed officials of an organization or public agency type borrower 
responsible for compliance with the security instruments and the 
operations of the project.

[[Page 341]]

    (f) Mortgage. ``Mortgage'' also includes deeds of trust and similar 
real estate security instruments and, where appropriate, chattel 
security instruments.
    (g) Note. ``Note'' includes any note, bond, assumption agreement, or 
other evidence of indebtedness, including the obligations of LH grant 
only recipients operating under a grant agreement. All LH grant only 
recipients will be serviced in strict accordance with their grant 
agreement, appropriate program regulations, and this subpart.
    (h) OGC. ``OGC'' means the Regional Attorney or the Attorney in 
charge in the field office of the Office of General Counsel of the 
United States Department of Agriculture.
    (i) Servicing. ``Servicing'' includes the broad scope of activities 
undertaken by FmHA or its successor agency under Public Law 103-354 to 
see that the objectives of the loan are carried out; to assure 
compliance with the respective policies, procedures and authorizations 
set forth for each respective loan program; or to bring to a successful 
conclusion each loan or grant made by FmHA or its successor agency under 
Public Law 103-354 through transfer, sale, reamortization, payment or 
liquidation.



Sec. Sec. 1965.53-1965.54  [Reserved]



Sec. 1965.55  Authority of State Director.

    (a) Each State Director is authorized to perform the following 
functions upon determining that the action will not be to the financial 
detriment of FmHA or its successor agency under Public Law 103-354:
    (1) Require additional security in accordance with Sec. 1965.88 of 
this subpart.
    (2) Require borrowers to carry insurance of the types and amounts 
determined necessary on the real estate and chattel property mortgaged 
to the FmHA or its successor agency under Public Law 103-354. The 
borrower must carry adequate liability insurance as required by exhibit 
B, paragraph XV B 3 of subpart C of part 1930 of this chapter. Evidence 
of insurance is required for Multiple Housing loans according to the 
provisions of subpart A of part 1806 of this chapter (FmHA or its 
successor agency under Public Law 103-354 Instructions 426.1).
    (3) Approve the issuance of transfer of stock, change of beneficial 
interest, change of membership, admittance of new or substitute 
partners, or withdrawal of partners from a partnership; provided, the 
State Director determines that the requirements of Sec. 1965.63 of this 
subpart have been met, and that the change will not jeopardize the 
successful operation of the project, the soundness of the loan, or the 
eligibility of the borrower.
    (4) Approve transfers with assumption of FmHA or its successor 
agency under Public Law 103-354 loan accounts when all development has 
been completed and the unpaid principal balance and accrued interest 
does not exceed the State Director's loan approval authority as set 
forth in subpart A of part 1901 of this chapter for the type of loan(s) 
involved. Transfers will be processed according to Sec. 1965.65 of this 
subpart.
    (5) Approve the reamortization of FmHA or its successor agency under 
Public Law 103-354 indebtedness that is within the State Director's loan 
approval authority as set forth in subpart A of part 1901 of this 
chapter for the type of loan(s) involved according to the provisions of 
Sec. 1965.70 of this subpart.
    (6) Consent to the sale, exchange, or release of security property 
according to the applicable provisions of Sec. 1965.77 of this subpart.
    (7) Accept payment of RRH, RCH and LH loans subject to the 
provisions of subpart E of this part.
    (8) Approve subordination of FmHA or its successor agency under 
Public Law 103-354 lien position if the total debt against the security 
after the transaction is within the State Director's approval authority 
as set forth in subpart A of part 1901 of this chapter for the type of 
loan(s) involved according to the provisions of Sec. 1965.79 of this 
subpart.
    (9) Approve requests from borrowers for the creation of additional 
indebtedness on the security property. Such approvals must take into 
account the provisions of loan resolutions or other agreements with FmHA 
or its successor agency under Public Law 103-354

[[Page 342]]

and other existing creditors. If the proposed additional debt would make 
the total outstanding obligations of the borrower exceed the FmHA or its 
successor agency under Public Law 103-354 loan approval limit of the 
State Director as set forth in subpart A of part 1901 of this chapter, 
complete documentation and the State Director's recommendations must be 
sent to the National Office for prior review and authorization to 
approve.
    (10) Renew existing security instruments in accordance with FmHA or 
its successor agency under Public Law 103-354 State Supplements after 
consulting with OGC.
    (11) Approve, with the concurrence of OGC, changes in a borrower's 
legal organization such as revisions to certificates of limited 
partnership, partnership agreements, articles of incorporation or 
charter, bylaws, or trust agreements when the changes proposed will 
promote better borrower organization and business operation, and will 
not adversely affect the repayment of the loan, impair the security 
rights of the FmHA or its successor agency under Public Law 103-354, or 
make the borrower ineligible for the existing FmHA or its successor 
agency under Public Law 103-354 loan or grant assistance.
    (12) Approve the borrower's execution, extension, renewal, 
modification, or cancellation of contracts of types not covered 
elsewhere in this section when the State Director, with the advice of 
OGC, determines that the action is in the best interests of both the 
borrower and the FmHA or its successor agency under Public Law 103-354; 
and in the case of RRH, RCH, and LH projects, will not be detrimental to 
the tenants or members.
    (13) Approve the extension or expansion of facilities and services 
in accordance with the respective loan program regulations when the 
action will best serve the interest of both the borrower and the FmHA or 
its successor agency under Public Law 103-354.
    (14) Approve the lease of security property according to Sec. 
1965.61(e) of this subpart.
    (b) The State Director may reject any servicing request not in 
accordance with the guidelines of this subpart.
    (c) Any borrower directly and adversely affected by action under 
this subpart will be granted the appropriate appeal rights according to 
subpart B of part 1900 of this chapter.
    (d) The State Director may request from the National Office any 
authority not specifically delegated to the State Director. Written 
requests consistent with the intent and requirements of each respective 
loan program must be submitted to the National Office for prior 
authorization and must include the complete docket and the State 
Director's specific recommendations.

[49 FR 49590, Dec. 21, 1984, as amended at 55 FR 29564, July 20, 1990; 
56 FR 2257, Jan. 22, 1991; 58 FR 38928, July 21, 1993]



Sec. Sec. 1965.56-1965.57  [Reserved]



Sec. 1965.58  Responsibilities.

    (a) District Directors will: (1) Keep sufficiently informed of 
borrower operations to know whether they are operating successfully and 
complying with their obligations to the FmHA or its successor agency 
under Public Law 103-354,
    (2) Furnish borrowers with information, notices, reminders, fair 
housing posters, advice and assistance, and take other actions regarding 
the loan obligations and compliance therewith as considered necessary to 
determine whether borrowers are operating successfully, are complying 
with their loan obligations, and are likely to continue with compliance. 
This includes conducting all civil rights compliance reviews to 
determine compliance with all appropriate legislation regarding 
nondiscrimination in federally financed programs, in accordance with 
Subpart E of Part 1901 of this chapter,
    (3) Promptly report to the State Director the failure of any 
borrower to comply with the terms and conditions of its agreements with 
FmHA or its successor agency under Public Law 103-354 after 
noncompliance has been brought to the attention of the borrower and 
recommended corrective action has not been taken,
    (4) Furnish training and technical guidance not readily available 
through other sources to borrowers to protect the FmHA or its successor 
agency under Public Law 103-354's interests.

[[Page 343]]

This training and guidance may relate to business operations, project 
management, personnel training, membership activities, fair housing 
requirements and policy, or any other phase which vitally affects the 
borrower's operations,
    (5) Maintain the Management Card System according to FmHA or its 
successor agency under Public Law 103-354 Instruction 1905-A (available 
in any FmHA or its successor agency under Public Law 103-354 office) to 
assure prompt compliance by borrowers with FmHA or its successor agency 
under Public Law 103-354 requirements relating to repayments, budgets 
and reports, taxes, insurance and bond renewals, reports required by 
State law or regulations as indicated in State Supplements, security 
instrument expirations, and other items of loan and security servicing,
    (6) Maintain the official borrower case files according to the 
requirements of FmHA or its successor agency under Public Law 103-354 
Instruction 2033-A (available in FmHA or its successor agency under 
Public Law 103-354 State and District offices), and MISTR according to 
FmHA or its successor agency under Public Law 103-354 Instruction 2033, 
and
    (7) Promptly collect FmHA or its successor agency under Public Law 
103-354 loan payments and service security for the FmHA or its successor 
agency under Public Law 103-354 loans.
    (b) State Director will:
    (1) Coordinate and direct loan servicing activities relating to 
borrowers and perform other functions as prescribed by this subpart.
    (2) Delegate in writing any authority delegated to the State 
Director in this subpart unless otherwise restricted, to only those 
State Office staff members who, in the opinion of the State Director, 
have been adequately trained and who demonstrate their knowledge in 
understanding and administering the MFH policies and procedures of FmHA 
or its successor agency under Public Law 103-354. The individual 
delegation of responsibility and authority may be limited or expanded in 
scope, or revoked, as deemed appropriate by the State Director and will 
be prepared according to FmHA or its successor agency under Public Law 
103-354 Instruction 2006-F (available in any FmHA or its successor 
agency under Public Law 103-354 office). Unless specifically authorized 
elsewhere in this subpart, the authorities of the State Director may not 
be delegated below the State Office staff level. (The State Office staff 
does not include District Office staff for the purposes of this 
subpart.)
    (3) Ensure that District Directors carry out their responsibilities 
for loan servicing and provide the District Office with appropriate 
technical guidance, training and follow-up supervision to service loans.
    (4) Coordinate as appropriate with OGC.
    (5) Maintain necessary liaison with State and local officials.



Sec. Sec. 1965.59-1965.60  [Reserved]



Sec. 1965.61  General loan servicing requirements.

    (a) Payments. Payments will be handled in accordance with subpart A 
of part 1951 of this chapter, and subparts D and E of part 1944 of this 
chapter.
    (b) Borrower reports, audits, and analyses. Borrower reports, 
audits, and analyses, including the approval or disapproval of annual 
operating budgets, requests for rent and occupancy charge changes, and 
occupancy problems will be processed and handled according to subpart C 
of part 1930 of this chapter.
    (c) Maintenance. Project maintenance is of utmost importance. All 
projects must be adequately maintained by the borrower not only to 
protect the FmHA or its successor agency under Public Law 103-354's 
interest, but also to attract potential clients (tenants for rental 
projects, members for cooperative projects, purchasers for RHS). 
Maintenance should be reviewed during each supervisory visit and 
appropriate recommendations made to the borrower. The District Director 
will inspect the real estate security as required by subpart C of part 
1930 of this chapter.
    (d) Actions by third parties affecting FmHA or its successor agency 
under Public Law 103-354 security. Cases including third party action 
will be handled according to the provisions of 7 CFR part 3550, except 
that references to the

[[Page 344]]

County Supervisor shall be construed to mean District Director when 
applied to multiple housing type programs.
    (e) Lease of security property. The leasing of property (except to 
tenants for specific program purposes) serving as security for multiple 
housing loans and grants other than as indicated in this section is not 
authorized. Approval of leases by the State District is authorized in 
the following cases:
    (1) Leases to public housing authorities. RRH and RCH borrowers may 
be permitted to renew and continue leasing all or part of the housing 
facilities to a housing authority with the benefits of the HUD Section 
23 leasing program. No new leases will be entered into. The lease will 
be on a form provided by the housing authority and must be on terms that 
will enable the borrower to continue the objectives of the loan and make 
payments on schedule.
    (2) Lease of a portion of the security property. When the RRH or RCH 
or LH borrower will continue to operate the facilities for the purpose 
for which the loan or grant was made, the State Director or his/her 
designee may approve the leasing of related facilities such as kitchens, 
recreation facilities and community buildings, subject to the applicable 
provisions of Sec. 1944.212 of subpart E of part 1944 of this chapter 
for RRH and RCH and Sec. 1944.158 of subpart D of part 1944 of this 
chapter for LH and under the following conditions:
    (i) The lease is advantageous to the borrower and the tenants, and 
will not impair the FmHA or its successor agency under Public Law 103-
354's interest.
    (ii) The amount of the consideration is adequate. The consideration 
must be sufficient to pay all prorated operating and maintenance 
expenses, a prorated share of the annual reserve deposit, and the 
prorated part of the loan amortization at the note rate of interest.
    (iii) The lease should provide at its termination for the 
restoration of the leased space to its original condition or a condition 
acceptable to the owner and FmHA or its successor agency under Public 
Law 103-354.
    (iv) Consent to the lease shall not exceed 3 years at a time unless 
the State Director determines with the prior written concurrence of the 
National Office that a longer lease is clearly more advantageous to the 
borrower, the tenants, and the FmHA or its successor agency under Public 
Law 103-354.
    (v) If foreclosure action has been approved, consent to lease and 
use of proceeds will be granted only under directions from OGC or the 
U.S. Attorney, as appropriate.
    (vi) When another lienholder's mortgage requires consent of that 
lienholder to a lease, written consent will be obtained prior to FmHA or 
its successor agency under Public Law 103-354 approval of the lease.
    (vii) The authority to approve the lease of laundry facilities or 
commissary stores may be redelegated in writing to the District Director 
by the State Director.
    (3) Mineral leases. Mineral leases will be handled according to 7 
CFR part 3550 except that all references to County Supervisor will be 
construed to mean District Director when applied to the Multiple Housing 
Programs.
    (4) Processing. When a borrower requests consent to lease a portion 
of the security property or the District Director discovers that the 
borrower is leasing the security without consent, Form FmHA or its 
successor agency under Public Law 103-354 465-1, ``Application for 
Partial Release, Subordination or Consent,'' will be prepared.
    (i) The form will show the terms of the proposed lease and will 
specify the use of proceeds, including any proceeds to be released to 
the borrower.
    (ii) The form will be submitted through the District Director to the 
State Director, along with a copy of the lease, official borrower case 
files, the District Director's comments and recommendations, and any 
other information pertinent to the transaction.
    (iii) The State Director will review the material, obtain the 
guidance of OGC prior to indicating approval or disapproval on Form FmHA 
or its successor agency under Public Law 103-354 465-1, and provide 
additional servicing instructions to the District Director.
    (f) Consent of lienholders. Before FmHA or its successor agency 
under Public Law 103-354 consents to any transaction which affects its 
security or lien position, the written consent of

[[Page 345]]

any other lienholders must be obtained. The consent will include an 
agreement on the disposition of any funds resulting from the transaction 
and will be consistent with the respective loan program requirements.

[49 FR 49587, Dec. 21, 1984, as amended at 50 FR 39640, Sept. 30, 1985; 
56 FR 2257, Jan. 22, 1991; 58 FR 40956, July 30, 1993; 67 FR 78329, Dec. 
24, 2002; 68 FR 61332, Oct. 28, 2003]



Sec. 1965.62  [Reserved]



Sec. 1965.63  Issuance or transfer of stock, or change in membership, 

or membership interests in organizations indebted to FmHA or its 
successor agency under Public Law 103-354.

    Organizations which may be indebted to FmHA or its successor agency 
under Public Law 103-354 include, but are not limited to: public bodies, 
broadly-based nonprofit corporations, nonprofit organizations of 
farmworkers, associations of farmers, RCH consumer cooperatives, profit 
and limited profit corporations, trusts, profit and limited profit 
general partnerships, and limited partnerships. This section describes 
the policy of FmHA or its successor agency under Public Law 103-354 in 
approving changes of members, ownership interest, and transfer or 
issuance of stock in these organizations, to determine the continued 
eligibility of the borrower entity. It does not apply to the sale or 
exchange of title to the security property, or the conversion from one 
form of ownership to another such as changing a general partnership to a 
limited partnership. Stock, partnership, or membership changes which the 
State Director is not authorized to approve under the conditions of this 
section will be submitted to the National Office for handling.
    (a) Profit and limited profit corporations, general partnerships, 
limited partnerships, and trusts. Ownership changes within the existing 
borrower entity will be processed as follows:
    (1) Ownership changes totalling 100 percent of the ownership 
interests in a project within any consecutive 12-month period will be 
treated as transfers and processed under the provisions of Sec. 1965.65 
of this subpart.
    (2) Ownership changes in excess of 50% but less than 100% within the 
first five years of loan or assumption closing, will be subject to Sec. 
1965.65(a)(4) of this subpart which covers hardship provisions and the 
restrictions on subsequent changes. However, changes in only the limited 
partner interests in a limited partnership will not be subject to the 
restrictions of Sec. 1965.65(a)(4) of this subpart when completed in 
accordance with the approved partnership agreement.
    (3) Other ownership changes of 50% or less within any consecutive 12 
month period will be processed without restriction.
    (4) All changes of less than 100% will be processed according to 
paragraph (e) of this section.
    (b) Public bodies, broadly-based nonprofit corporations, or 
nonprofit organizations of farmworkers. FmHA or its successor agency 
under Public Law 103-354 consent will not be required for broadly-based 
nonprofit corporations or nonprofit organizations of farmworkers 
indebted to FmHA or its successor agency under Public Law 103-354 to 
change or transfer membership. Each organization, however, must maintain 
the number and type of members required by its Articles of Incorporation 
and Bylaws. Organizations will only permit membership changes as 
authorized by the organizational documents previously approved by FmHA 
or its successor agency under Public Law 103-354. Should the minimum 
number of required members in any organization fall below that 
prescribed by their organizational documents, the following actions will 
be taken:
    (1) The District Director will provide the State Director with a 
complete written report of the circumstances, including the 
organization's plan for obtaining additional membership, and the 
continued operation of the project. The District Director should submit 
this report only after he or she has personally met with the governing 
body and found that they will not be able or willing to comply with FmHA 
or its successor agency under Public Law 103-354 requirements. The 
report should be precise and include recommendations on further 
servicing actions.
    (2) The State Director will review the report and evaluate any 
adverse effect the noncompliance will have on the loan. If it appears 
that the interest of

[[Page 346]]

the United States will be adversely affected, the State Director will 
forward the material together with appropriate comments and 
recommendations, to the OGC for review and guidance in the continued 
servicing or liquidation of the account as appropriate. The State 
Director will provide the District Director with instructions for 
servicing the account.
    (c) Associations of farmers. Changes in membership will be governed 
by the organizational documents previously approved by FmHA or its 
successor agency under Public Law 103-354 and any eligibility 
requirements set forth in program regulations. (See subpart D of part 
1944 of this chapter.) In those cases where proposed membership changes 
are not covered in the documents or are in conflict with the provisions 
of subpart D of part 1944 of this chapter, case files will be submitted 
for National Office consideration.
    (d) RCH consumer cooperatives. Changes in the membership of RCH 
consumer cooperatives will be processed according to the provisions of 
subpart E of part 1944 of this chapter.
    (e) Processing organizational membership changes. Organizations are 
required by their loan agreement or resolution to obtain prior FmHA or 
its successor agency under Public Law 103-354 consent to transfer stock, 
or to transfer or change any interest in the borrower entity. (The 
admission or substitution of limited partners in a limited partnership 
does not require prior authorization. See paragraph (e)(3) of this 
section.) Therefore, when organizations request FmHA or its successor 
agency under Public Law 103-354 consent to: issue additional stock, 
transfer stock, change membership or membership interests other than 
limited partner interests in limited partnership, admit new or 
substitute general partners of any kind, withdraw general partners of 
any kind, alter the beneficiary of the trust, or when such a change has 
taken place without prior FmHA or its successor agency under Public Law 
103-354 consent, the District Director shall process and submit Form 
FmHA or its successor agency under Public Law 103-354 465-1 to the State 
Director. The State Director is authorized under Sec. 1965.55(a) of 
this subpart to approve or disapprove these transfers or changes on Form 
FmHA or its successor agency under Public Law 103-354 465-1. For 
approval, the State Director must determine that the following 
conditions have been met:
    (1) The borrower has provided a listing showing the name, address, 
Employer Indentification or Social Security number, and percent of 
ownership of each member, stockholder, general partner, or beneficiary 
of a trust that will have an interest in the organization.
    (2) All new or substitute general partners, and all new or 
substitute trustees, members, stockholders in privately held 
corporations, or beneficiaries that will hold an interest in the 
organization in excess of 10 percent have submitted a current, dated, 
and signed financial statement showing assets and liabilities, with 
information on the status and repayment schedule of each debt. (The 
admission of limited partner in a limited partnership is addressed in 
Sec. 1965.63(e)(3) of this subpart.) In cases involving publicly held 
corporation borrowers, borrowers will be required to notify FmHA or its 
successor agency under Public Law 103-354 of stockholders admitted to 
the organization in accordance with the approved articles of 
incorporated and bylaws. However, FmHA or its successor agency under 
Public Law 103-354 consent is required when there are changes in the 
overall corporate management or in the organizational documents. (All 
other changes in stockholders in publicly held corporations are subject 
to the requirements of this section.) All financial statements submitted 
must comply with the reporting requirements set forth in exhibit A-7 to 
subpart E of part 1944 of this chapter. A resume must also be submitted, 
together with a statement setting forth any identity of interest as 
described in exhibit A-7 to subpart E of part 1944 of this chapter. The 
resume should explain the past performance, experience, qualifications, 
and abilities of the individual or organization, who is obtaining an 
interest in the borrower organization. A determination must be made 
before approval that the incoming individual or organization described 
in this section will not adversely affect the

[[Page 347]]

borrower's continued eligibility under the requirements of subpart E of 
part 1944 of this chapter.
    (3) The admission of limited partners in a limited partnership on 
the basis of the limited partnership agreement previously approved by 
FmHA or its successor agency under Public Law 103-354 does not 
constitute a change requiring redetermination of eligibility. Borrowers 
admitting new or substitute limited partners are however required to 
notify FmHA or its successor agency under Public Law 103-354 at least 
annually with a listing showing the name, address, Taxpayer 
Identification number, and percent of ownership of each new or 
substitute limited partner. The borrower must also provide copies of any 
amendments to the organizational documents effecting such changes in the 
organization together with an opinion from the borrower's attorney 
certifying that the changes in limited partner interests have been 
completed in accordance with the approved partnership agreement.
    (4) The borrower is unable to provide the housing or other 
facilities from its own resources and is unable to obtain the necessary 
credit from private or cooperative sources on terms and conditions that 
would enable the borrower to refinance the FmHA or its successor agency 
under Public Law 103-354 indebtedness and operate the project for 
amounts within the payment ability of those eligible to occupy the 
housing or benefit from the project. When tenants are benefiting from 
any FmHA or its successor agency under Public Law 103-354 or other 
Government subsidy program, the continued availability of the subsidy 
will be considered in making this decision. For profit and limited 
profit organizations, the assets of the individual general partners, 
members or stockholders will also be considered.
    (5) The type of change must not adversely affect the operations of 
the project. Liens may not be taken against the FmHA or its successor 
agency under Public Law 103-354 security. Payments on any debt incurred 
for the purchase of the stock or interest in the organization will not 
be considered authorized debt payments and will not be included in 
project operations as a budgeted expense. In those cases where the 
withdrawing member or ownership interest proposes to use a security 
agreement or other document to secure an equity payment, the State 
Director must determine that:
    (i) The payment is not contingent on the planned sale of the project 
or additional owership interests;
    (ii) An assignment of interests to secure a promissory note, in the 
case of a limited partnership, is restricted to the limited partners 
interests only and not the general partner interest;
    (iii) In cases other than the limited partner's interest in a 
limited partnership, that there is no reversionary interest held in the 
entity; and
    (iv) Any security agreement or equity note, clearly indicates the 
necessity of FmHA or its successor agency under Public Law 103-354 
approval before any substitutions of interests take place, regardless of 
any default on the equity note.
    (6) In the case of the sale of the interest of a general partner, or 
the admission or substitution of any general partner, in either a 
limited partnership or a general partnership, the new or substitute 
general partner must agree to assume the responsibilities and 
obligations of the original general partner under the terms of the FmHA 
or its successor agency under Public Law 103-354 promissory note, 
mortgage, and the borrower's partnership agreements. The assumption of 
any personal liability of the transferring general partner by the 
assuming general partner in a limited partnership may be waived by the 
State Director with the advice of the OGC if the organizational papers 
require that liability be limited to the asssets of the partnership 
according to Sec. 1944.21(a)(2) of subpart E of part 1944 of this 
chapter. After consulting OGC, the State Director will require the new 
or substitute general partner to execute an agreement as follows for the 
inclusion in position 5 of the official case file:

       Assumption of Original or Withdrawing Partner's Obligations

    In consideration for being approved by the Farmers Home 
Administration or its successor agency under Public Law 103-354 (FmHA or 
its successor agency under Public

[[Page 348]]

Law 103-354) for admission as a general partner into ------------(the 
partnership), the undersigned hereby assumes all responsibilities and 
obligations of ------------ under the terms of the Partnership Agreement 
dated ------------, the terms of (a) (all) note(s) or assumption 
agreement(s) dated ------------ in the respective amount(s) of --------
----, and the terms of the FmHA or its successor agency under Public Law 
103-354 security instrument(s) taken on the partnership property dated 
------------ and filed for record in the ------------ office at

________________________________________________________________________

Document No. or Book and Page No.

________________________________________________________________________

Date

________________________________________________________________________

Signature of New or Substitute Partner

    (7) Any withdrawing stockholder, member, or partner personally 
liable for the FmHA or its successor agency under Public Law 103-354 
indebtedness will not be released of liability unless the new 
stockholder, member, or partner is made personally liable for the FmHA 
or its successor agency under Public Law 103-354 debt on an agreement 
approved by OGC, and the State Director determines that the assets and 
net worth of the new stockholder, member, or partner are substantially 
the same as, or greater than, that of the party to be released.
    (8) The State Director must determine that approval of the 
transaction will not adversely affect the FmHA or its successor agency 
under Public Law 103-354 program in the area, that the objectives of the 
loan will not be changed, and that the successful operation of the 
project will not be jeopardized. In making this determination, the State 
Director must consider the past performance, experience, qualifications 
and abilities of any individual or organization obtaining an interest in 
the borrower organization, other than a limited partner holding a 
minority interest in a limited partnership. Serious consideration must 
also be given to an individual having a record or reputation for 
discriminating against individuals because of their race, color, 
national origin, handicap or other prohibited basis.
    (9) Organizational papers must be amended to reflect the changes and 
a copy submitted to FmHA or its successor agency under Public Law 103-
354 to be retained in the case files. The amendment should specify that 
FmHA or its successor agency under Public Law 103-354 must approve all 
membership changes (except the admission of limited partners described 
in Sec. 1965.63(e)(3) of this subpart) or transfers, if they do not 
already do so. OGC will review any proposed changes of beneficial 
interests in a trust to determine that all applicable program 
requirements have been met.

[49 FR 49590, Dec. 21, 1984, as amended at 56 FR 2257, Jan. 22, 1991]



Sec. 1965.64  [Reserved]



Sec. 1965.65  Transfer of real estate security and assumption of loans.

    (a) General. The transfer may be approved only if it is determined 
that the transfer would ensure the further availability of the housing 
and related facilities for very-low, low, and moderate income families 
or persons and would be in the best interests of the residents and the 
Federal Government.
    (1) The requirements of this section apply when:
    (i) Title to the security property is transferred, either when the 
project is sold or through a change in the borrowing legal entity, such 
that the new entity is considered a distinct and separate legal entity 
from the original borrower;
    (ii) An unauthorized sale of a project has occurred or will occur 
through a land contract or similar contract;
    (iii) The liability for the FmHA or its successor agency under 
Public Law 103-354 indebtedness has been or will be assumed by an 
organization, entity or individual who is not presently liable for the 
debt;
    (iv) Membership interests within a borrower entity have been or will 
be changed 100 percent within any consecutive 12-month period as 
indicated by Sec. 1965.63(a) of this subpart.
    (2) When the mortgage or deed of trust requires FmHA or its 
successor agency under Public Law 103-354 consent to the sale or other 
transfer or real estate security, the borrower should be advised of its 
provisions. Before firm agreements are reached between the borrower and 
the proposed purchaser or transferee, the borrower should notify the 
District Director of the proposed sale or transfer. The District 
Director shall then explain the requirements of this subpart.
    (3) Proposed transfers must not be the detriment of the FmHA or its 
successor agency under Public Law 103-354 or the tenant. LH loans will 
only be transferred under this subpart when

[[Page 349]]

they will continue to be used to provide housing for farm laborers as 
defined in subpart D of part 1944 of this chapter. Cooperative loans 
will only be transferred when they will be used for the purpose of 
providing low income rental housing to promote the general welfare of 
the community.
    (4) The transfer of projects as defined in Sec. 1944.205 of subpart 
E of part 1944 of this chapter, in which the FmHA or its successor 
agency under Public Law 103-354 loan transfer is needed to remove a 
hardship which adversely impacts the present borrower and was caused by 
circumstances beyond the borrower's control, such as:
    (i) Illness or death of the principals;
    (ii) Court order requiring the division of security property;
    (iii) The individual borrower faces serious financial difficulties 
due to circumstances beyond the borrower's control, which will force 
him/her out of operation. These circumstances do not include 
transferring the property to obtain the equity needed to permit the 
borrower to apply for additional FmHA or its successor agency under 
Public Law 103-354 loans or to raise capital to support the borrower's 
other financial interests not including the FmHA or its successor agency 
under Public Law 103-354 financed project. Borrowers under this type of 
hardship must be able to show that they have acted in good faith, 
demonstrated their managerial skills and financial abilities; and 
otherwise complied with all other agreements made with FmHA or its 
successor agency under Public Law 103-354. Hardship transfers due to 
construction cost overruns will only be considered in the case of 
individual borrower accounts. (If additional funds are needed to cover 
cost overruns for any other type of borrower entity, consideration 
should be given to the admission of new partners, sale of stock, etc., 
under the provisions of Sec. 1965.63 of this subpart to continue 
ownership of the project.)
    (5) When the State Director determines that a hardship is present 
and the official case files have been adequately documented to clearly 
identify the hardship, a transfer may occur without penalty to the 
transferor. When a hardship is not present and the loan(s) are less than 
5 years old, transfer requests should be processed but the transferor 
(including principals) will be ineligible for further loans or 
participation in the transferee or other RRH applicant entities for the 
remainder of the 5-year period. The start of the 5-year period begins on 
the date of FmHA or its successor agency under Public Law 103-354 loan 
closing and/or any subsequent transfer.
    (6) Transfers of RRH projects with initial or subsequent loans 
(except loans for the purpose of repairs to existing units) that are at 
least 5 years old will be processed according to the provisions of this 
subpart without penalty to the transferor. The transferor (including the 
principals) may continue to participate in the RRH program through new 
and existing projects assuming he/she has performed satisfactorily and 
meets the eligibility criteria of Sec. 1944.211 of subpart E of part 
1944 of this chapter.
    (7) In all cases, the purchaser is required to provide evidence of 
its inability to obtain credit elsewhere on rates and term that will not 
cause rental rates in excess of what low- and moderate-income tenants 
could afford, considering the availability of any rent subsidies that 
may be available to the project.
    (8) All transfers are subject to the payment application system 
conversion requirements in subpart K of part 1951 of this chapter.
    (9) For all transfers, the District Director must review Form FmHA 
or its successor agency under Public Law 103-354 1910-11, ``Applicant 
Certification, Federal Collection Policies for Consumer or Commercial 
Debts,'' with the applicant. A copy of the signed and dated form will be 
given to the applicant and the original placed in the loan docket.
    (b) State Director authority. The State Director is authorized under 
Sec. 1965.55(a)(4) of this subpart to approve initial and subsequent 
transfers, with an appropriate assumption of the FmHA or its successor 
agency under Public Law 103-354 unpaid loan balance(s) when the 
principal amount (including any authorized junior liens) plus accrued 
interest is within the

[[Page 350]]

State Director's loan approval authority, subject to the following 
general conditions and requirements:
    (1) Transfers will be made to either eligible or ineligible 
applicants. Eligible applicants are those applicants meeting all of the 
eligibility criteria as defined by the appropriate loan program 
regulations. Ineligible applicants are those applicants failing to meet 
the eligibility requirements for the respective loan type. Transfers to 
eligible applicants will receive preference over transfers to ineligible 
applicants, provided recovery to FmHA or its successor agency under 
Public Law 103-354 is not less than it would be if the transfer were to 
an ineligible applicant.
    (i) Transfers to eligible applicants will generally be completed on 
the basis of the same terms if the loan account is current or can be 
brought current when the transfer and assumption is closed.
    (ii) Transfers to eligible applicants desiring to assume delinquent 
loans which cannot be brought current at the time of closing, and 
transfers to ineligible applicants, will be transferred on the basis of 
new terms.
    (2) The approval official must determine that the security is 
adequate for the FmHA or its successor agency under Public Law 103-354 
indebtedness being assumed. If the State Director determines that the 
total secured FmHA or its successor agency under Public Law 103-354 
debt(s) exceeds the present market value of the security, the transferee 
must assume an amount at least equal to the present market value less 
any prior liens. In those cases, the transferor will be released from 
liability and the remaining debt will also be processed according to the 
applicable provisions of subpart B of part 1956 of this chapter. When 
the present market value of the security equals or exceeds the debt the 
transferee will assume the total FmHA or its successor agency under 
Public Law 103-354 secured debt(s). Security will be upgraded if 
necessary to meet FmHA or its successor agency under Public Law 103-354 
standards.
    (3) The transferor shall not receive an equity payment as part of a 
transfer unless:
    (i) All unpaid FmHA or its successor agency under Public Law 103-354 
indebtedness against the property is assumed;
    (ii) All real estate and personal property taxes owned by the 
project are current;
    (iii) All FmHA or its successor agency under Public Law 103-354 loan 
payments on the project are current;
    (iv) The reserve account is at the authorized level at the time of 
the transfer;
    (v) The State Director receives National Office authorization to 
proceed, if the preceding requirements cannot be met and it can be 
demonstrated that no other alternative, including liquidation, would be 
in the best interests of FmHA or its successor agency under Public Law 
103-354 and the tenants; and
    (vi) When the transfer is NOT being made in connection with a 
request for prepayment of the FmHA or its successor agency under Public 
Law 103-354 loan;
    (A) Any equity payment paid to the transferor shall be paid in cash 
at the time of the transfer; or
    (B) If paid on terms;
    (1) The rates and terms are documented and the transferee is able to 
show that the obligation can be met from outside sources of income 
without jeopardizing the operation of the project. No rental or other 
project income (except authorized return to owner as specified in the 
loan agreement or resolution) shall be used to make payments on the 
obligation;
    (2) No present or future liens will be attached to the secured 
project real estate, personal property, accounts, or revenue from the 
operation of the project;
    (3) The equity payment to the seller will be provided from outside 
sources or from any authorized return to owner, and not from a planned 
sale of the project or additional membership interests beyond those 
identified in the transferee's organizational documents approved by FmHA 
or its successor agency under Public Law 103-354;
    (4) The seller does not and will not have a reversionary interest in 
the FmHA or its successor agency under Public Law 103-354 encumbered 
property;

[[Page 351]]

    (5) In the case of a limited partnership, the right of FmHA or its 
successor agency under Public Law 103-354 to approve or disapprove the 
substitution of general partners in accordance with Sec. 1965.63 of 
this subpart has not and will not be superseded by any agreement between 
the purchaser and seller which implies prior consent by FmHA or its 
successor agency under Public Law 103-354 for partner changes in the 
case of default; and the right to assign partnership interests is 
restricted to only the limited partners' interests and such right does 
not include the general partners' interests;
    (6) An opinion is provided from the transferee's legal counsel 
certifying that the financial and other arrangements comply with all 
FmHA or its successor agency under Public Law 103-354 requirements of 
this section; and
    (7) An assignment of project income will be taken by FmHA or its 
successor agency under Public Law 103-354 in accordance with the 
requirements of Sec. 1944.221(b) of subpart E of part 1944 of this 
chapter as additional security with the advice and guidance of OGC;
    (vii) When the transfer is being made to avert prepayment of the 
FmHA or its successor agency under Public Law 103-354 loan, an equity 
loan may be made in accordance with the provisions of subpart E of this 
part and subpart E of part 1944 of this chapter. If additional equity is 
to be paid by the purchaser to the seller above the amount of equity 
recognized by FmHA or its successor agency under Public Law 103-354 in 
the prepayment valuation of the project, the provisions of paragraph 
(b)(3)(vi) of this section will apply.
    (4) No payment will be received by the transferor for regular equity 
or equity in connection with a prepayment action unless all FmHA or its 
successor agency under Public Law 103-354 loans against the project are 
assumed in full or the payment to the transferor is applied in total 
against non-FmHA or its successor agency under Public Law 103-354 prior 
liens. The State Director may require that all or a part of any equity 
payment be applied against other FmHA or its successor agency under 
Public Law 103-354 loans owed by the borrower on other FmHA or its 
successor agency under Public Law 103-354 projects owned by the borrower 
that are not current, if the FmHA or its successor agency under Public 
Law 103-354 loans against the project being purchased are assumed in 
full and all prior liens paid in full.
    (5) Upon completion of the transfer there must be no liens, 
judgments, or other claims against the security being transferred other 
than those by FmHA or its successor agency under Public Law 103-354 and 
those authorized liens to which FmHA or its successor agency under 
Public Law 103-354 has previously agreed, unless prior written approval 
is obtained from the National Office.
    (6) When the loan(s) is secured by both chattel and real estate, all 
chattel security must be transferred, sold, or liquidated by the time of 
closing the transfer of the real estate.
    (7) The transferee must complete and submit Form HUD 935.2, 
``Affirmative Fair Housing Marketing Plan,'' for the State Director's 
approval as required by Sec. 1901.203 of subpart E of part 1901 of this 
chapter.
    (8) When the spouse of a deceased individual borrower is not 
currently liable for the indebtedness, a transfer and assumption to the 
spouse can be accomplished through use of Form FmHA or its successor 
agency under Public Law 103-354 1965-9, ``Multiple Family Housing 
Assumption Agreement and Form FmHA or its successor agency under Public 
Law 103-354 1965-10, `Information on Assumption of Multiple Family 
Housing Loans,'' on the same rates and terms if the account is current 
or new rates and terms if the account is not current. If the spouse is 
determined to be an eligible applicant according to applicable 
provisions of the respective loan program and this Subpart, the approval 
official may waive the submission by the assuming spouse of any form or 
material not required by OGC to complete the assumption, if the present 
forms and materials in the current casefile are otherwise acceptable.
    (9) The transfer must be completed with the advice and closing 
instructions of the OGC.

[[Page 352]]

    (10) The rents to the tenants can be increased only if the 
provisions of paragraph XI of exhibit B to subpart C of part 1930 of 
this chapter are met.
    (11) The transferee will be required to submit reports according to 
Sec. 1930.122 of subpart C of part 1930 of this chapter.
    (12) Forms FmHA or its successor agency under Public Law 103-354 
1944-50, ``Multiple Family Housing Borrower/Project Characteristics'' 
and 1944-51, ``Multiple Family Housing Obligation--Fund Analysis'' must 
be processed in accordance with their respective FMIs for all 
transferees to update the accounting system.
    (c) Transfers to eligible applicants. Transfers of security with an 
assumption of FmHA or its successor agency under Public Law 103-354 
debts by transferees who are eligible applicants for the type of loan 
being assumed may be approved subject to the general conditions 
contained in paragraph (b) of this section and the following:
    (1) All transfers to eligible borrowers will subject the borrower to 
the appropriate restrictive-use provisions contained in exhibits A-1 or 
A-2 of subpart E of this part.
    (2) All necessary repairs to assure that the housing will be decent, 
safe and sanitary should be made prior to the transfer whenever 
possible. When repairs cannot be completed prior to closing, the 
necessary funds will be escrowed and the repairs will be identified, 
agreed upon prior to closing and documented as specified in Sec. 1924.5 
of subpart A of part 1924 of this chapter. Also, any improvements 
required by FmHA or its successor agency under Public Law 103-354 to 
meet the accessibility requirements of section 15b.41 of subpart F of 
part 15b of subtitle A (see Sec. 1944.215(b)(6) of subpart E of part 
1944 of this chapter) should be considered part of any substantial 
rehabilitation work undertaken as part of the transfer. All repairs will 
be in accordance with the provisions of subpart A of part 1924 of this 
chapter. Funds for such improvements or repairs will be from sources in 
the following priority: Transferor's equity payment; contributions by 
the transferee; reserve account being transferred provided the amount 
remaining in the reserve account will be adequate to meet the repairs 
and expenses in the immediate or near future; if loan funds are 
available, from the use of an RRH or LH loan when appropriate.
    (3) For rental and RCH (as applicable) projects, the transferor's 
project operating accounts, reserve account, any tenant security 
deposits, any balance remaining in the transferor's supervised bank 
account which are needed to complete project development, and any 
equipment purchased with project funds will be transferred to the 
transferee. Any funds remaining in an RA contract not disbursed by the 
transferor will be assigned to the transferee, unless RA is not needed 
for current eligible residents or another form of subsidy is to be used. 
Any RA determined to not be needed will be reassigned in accordance with 
the provisions of paragraph XV of exhibit E to subpart C of part 1930 of 
this chapter.
    Funds in the reserve account should be at the scheduled level and 
transferred to the transferee at the time of transfer. If an equity loan 
is to be made by FmHA or its successor agency under Public Law 103-354, 
reserve and other accounts must be at the scheduled level at the time of 
transfer.
    (4) Any excess development funds held in a supervised bank account 
must be refunded to the respective loan account upon receipt of the 
transfer request.
    (5) A loan and/or grant may be made to the transferee in connection 
with a transfer subject to the policies and procedures governing the 
kind of loan and/or grant being made. Loan and/or grant funds may not be 
used, however, to pay equity to a transferor unless authorized in 
accordance with subpart E of this part to avert prepayment.
    (6) The transferees must prepare operating budgets, as required by 
the appropriate program regulations governing the kind of loan being 
transferred, covering the first partial year and the next full year's 
operation. The budgets must be realistic and reflect sufficient funds to 
pay operation and maintenance expenses, fund any required reserve, and 
keep the FmHA or its successor agency under Public Law 103-354 
account(s) current. The charges for the use of the facility or services 
must be within the payment ability of

[[Page 353]]

those it is intended to serve. A current utility allowance must also be 
prepared when required by program regulations.
    (7) For transfers of RRH and RCH loan accounts, current executed 
tenant and former member certifications using Form FmHA or its successor 
agency under Public Law 103-354 1944-8, ``Tenant Certification,'' or a 
HUD approved form of ``Certification or Recertification of Tenant 
Eligibility'' for any tenants receiving Section 8 subsidy, must be on 
file with FmHA or its successor agency under Public Law 103-354 or 
provided for each tenant, as required by Exhibit B to subpart C of part 
1930 of this chapter, evidencing that the units are or will be occupied 
by tenants meeting the FmHA or its successor agency under Public Law 
103-354 eligibility requirements when the transfer is closed.
    (8) For transfers of RRH and LH loan accounts, all leases should 
also be assigned to the transferee no later than the date of closing.
    (9) The proper type of loan agreement or loan resolution for the 
type of transferee involved must be in effect and secured in the 
mortgage or deed of trust at the time of transfer. If changes are needed 
in the exisiting loan agreement or loan resolution to accomplish this, 
amendments must be made to the existing loan agreement or resolution 
secured by the mortgage on the security property with the advice of the 
transferee's attorney and approval of OGC or by any other method 
acceptable to OGC. If the RRH transferee wishes to convert to the loan 
agreement/resolution format of Form 1944-33, ``Loan Agreement''; 1944-
34, ``Loan Agreement''; or 1944-35, ``Loan Resolution'', as appropriate, 
the transferee may accomplish this by amending the existing loan 
agreement/resolution with the advice of transferee's attorney and 
concurred in by OGC.
    (10) When the transfer is NOT being made in connection with a 
request for prepayment of the FmHA or its successor agency under Public 
Law 103-354 loan, a limited profit RRH transferee's initial investment 
and rate of return in the project will remain the same as that 
originally provided to the transferor. However, if a loan to a nonprofit 
or profit type borrower is being transferred to a limited profit type 
transferee, the initial investment to be shown in the loan resolution or 
agreement will be ``None'' unless an exception is made by the State 
Director. (The State Director's authority to establish initial 
investment will not be delegated to other State Office staff.) Any 
initial investment established by the State Director should not exceed 
the amount shown in the transferor's loan agreement/resolution with a 
rate of return which will not exceed the rate set forth in Sec. 
1944.215(n) of subpart E of part 1944 of this chapter when the transfer 
is approved. An exception will be considered when the following 
conditions are met and fully documented in the casefile:
    (i) The transferee contributes funds for repairs or authorized 
improvements beyond those which would have been paid from the 
transferor's equity as indicated in paragraph (c)(2) of this section, or
    (ii) The transferee contributed sufficient cash to reduce the loan 
principal being assumed to no more than 95% (97% for loan agreements 
dated on or after March 11, 1988) of the original development cost 
(unless an exception is made in writing by the National Office), or
    (iii) The transferee's total contributions for the repairs and debt 
reduction identified in paragraphs (c)(9) (i) and (ii) of this section, 
exceed 5% (3% for loans approved on or after March 11, 1988) of the 
purchase price, or
    (iv) The transfer is referred to the National Office with the 
appropriate recommendations and a request to establish an initial 
investment for the transferee for those cases in which the State 
Director requests advice and assistance.
    (11) When the transfer is being made to avert prepayment of the FmHA 
or its successor agency under Public Law 103-354 loan, the recognized 
equity and/or rate of return may be increased in connection with an 
incentive offer made under the provisions of subpart E of this part.
    (12) If the transfer involves an RRH or RCH loan using interest 
credit with a Form FmHA or its successor agency under Public Law 103-354 
1944-7, ``Multiple Family Housing Interest Credit

[[Page 354]]

and Rental Assistance Agreement,'' in effect, the transferee may also 
receive interest credit by executing a new Form FmHA or its successor 
agency under Public Law 103-354 1944-7 effective the date of transfer. 
RRH and RCH loans will not be converted from a subsidized (interest 
credit) basis to a nonsubsidized (full profit) basis as part of the 
transfer process. If the transfer is to be made on a nonprofit or 
limited profit basis, the transferee may receive interest credit if the 
loan is eligible for interest credit according to exhibit H to subpart C 
of part 1930 of this chapter. A new Form FmHA or its successor agency 
under Public Law 103-354 1944-7 will be executed by the transferee, 
attached to Form FmHA or its successor agency under Public Law 103-354 
1965-10, ``Information on Assumption of Multiple Family Housing Loans,'' 
and a copy of Form FmHA or its successor agency under Public Law 103-354 
1944-50, and forwarded to the Finance Office, MFH Unit, when the 
transfer is closed. The borrower project data on Form FmHA or its 
successor agency under Public Law 103-354 1944-50 should have been 
established when the transfer was approved.
    (13) A transferee may participate in the RA program if the 
transferor's project is an eligible project and the transferee is an 
eligible borrower according to exhibit E to subpart C of part 1930 of 
this chapter. If the transferor participates in the RA programs, the 
transferee may assume the remaining portion of the transferor's RA 
agreement when the transferee is eligible. When the transferee is 
assuming the transferor's RA agreement, Form FmHA or its successor 
agency under Public Law 103-354 1944-55, ``Multiple Family Housing 
Transfer of Rental Assistance,'' will be executed and attached to the 
new or existing Form FmHA or its successor agency under Public Law 103-
354 1944-27. A copy of Form FmHA or its successor agency under Public 
Law 103-354 1944-55 and a copy of Form FmHA or its successor agency 
under Public Law 103-354 1944-50 will be attached to Form FmHA or its 
successor agency under Public Law 103-354 1965-10 and forwarded to the 
Finance Office. If the transferee will not be assuming an existing RA 
agreement, the agreement will be suspended by memorandum to the Finance 
Office. Subsequently, the State Director must transfer the suspended RA 
unit(s) to another project(s), using Form FmHA or its successor agency 
under Public Law 103-354 1944-55, in accordance with exhibit E of 
subpart C of part 1930 of this chapter.
    (14) If a project operates under the HUD Section 8 program, the 
Housing Assistance Payment (HAP) contract must also be assigned to the 
transferee with prior approval from HUD. This approval must be obtained 
so that the assignment of the HAP contract occurs no later than the 
closing of the transfer.
    (15) The transferee must thoroughly understand all loan requirements 
including the tenant eligibility, management, reserve account, audit, 
and reporting requirements of applicable FmHA or its successor agency 
under Public Law 103-354 regulations; and the loan agreement or loan 
resolution and the content of the signed Form FmHA or its successor 
agency under Public Law 103-354 400-4, ``Assurance Agreement.'' Before 
the transfer is closed the District Director shall carefully review with 
the transferee subpart L of part 1944 of this chapter, subpart C of part 
1930 of this chapter, the applicable loan program regulations, and the 
loan agreement or resolution with the transferee.
    (16) Release of liability will be considered according to the 
following:
    (i) When all FmHA or its successor agency under Public Law 103-354 
security is transferred and the total outstanding debt is assumed, the 
transferor will be released from liability.
    (ii) In those cases where the value of the security transferred and 
debt assumed is less than the full amount of the FmHA or its successor 
agency under Public Law 103-354 debt, the transferor may be released 
from liability if the State Director determines that the transferor has 
no reasonable debt-paying ability considering assets and income at the 
time of the transfer, and certifies that the transferor has cooperated 
in good faith, has used due diligence to maintain the security property 
against loss, and has otherwise fulfilled the covenants incident to

[[Page 355]]

the loan to the best of the borrower's ability. The approval official 
must execute a memorandum containing the following statement for 
inclusion in the official case file.

    (Transferor's name), in our opinion, does not have reasonable debt-
paying ability to pay the balance of the debt not assumed after 
considering its assets and income at the time of the transfer. 
Transferors have cooperated in good faith, used due diligence to 
maintain the security against loss, and otherwise fulfilled the 
covenants incident to the loan to the best of its ability. Therefore, we 
recommend that the transferor be released of personal liability upon the 
transferee's assumption of that portion of the indebtedness equal to the 
present market value of the security property.

    (d) Transfers to ineligible applicants. The transfer of an FmHA or 
its successor agency under Public Law 103-354 loan account to a 
transferee who is an ineligible applicant for the type of loan involved 
will be considered only when the transfer is needed as a method for 
servicing a problem case in which the objectives of the original loan 
cannot be realized and an eligible transferee is not available. 
Transfers will not be considered when they basically serve as a method 
or provide a means by which members of a borrower-organization can 
obtain an equity payment, or when they serve basically as a method of 
providing a source of credit for purchasers. The State Director is 
authorized to approve transfers to ineligible applicants, subject to the 
general conditions of paragraph (b) of this section and the following:
    (1) Ineligible applicants can only be approved when a downpayment is 
made equivalent to a minimum of 10 percent of the remaining loan balance 
to be assumed. Each ineligible transferee will be encouraged to make as 
large a downpayment on the FmHA or its successor agency under Public Law 
103-354 secured indebtedness as the transferee is financially able.
    (2) The transferee must have the ability to pay the FmHA or its 
successor agency under Public Law 103-354 debt(s) according to the 
assumption agreement and must possess the legal capacity to enter into 
the contractual agreement.
    (3) The balance of the FmHA or its successor agency under Public Law 
103-354 indebtedness assumed must be scheduled for repayment in 2 years 
or less for RHS accounts, and usually 10 years or less for other types 
of multiple family loan accounts. If longer terms are needed for LH, 
RRH, or RCH projects with multiple unit structures, the State Director 
may authorize longer terms up to 20 years. (Single Family type 
structures may be sold on terms for 15 years or less.) Amortized monthly 
or annual installments will be charged with interest to the transferee 
at the rate currently applicable to above-moderate RH loans, including 
insurance charges, or at the rate of interest specified in the note(s) 
being assumed, whichever is greater. Form FmHA or its successor agency 
under Public Law 103-354 1965-9 will be executed by the transferee.
    (4) The State Director may release the transferor from liability 
under the same provisions as stated in paragraph (c)(14) of this section 
only when all of the real estate security for a loan is transferred, the 
total outstanding indebtedness or that portion of the debt equal to the 
present market value of the security is scheduled for repayment in five 
years or less from the date of the assumption agreement.
    (5) When an ineligible transferee assumes an FmHA or its successor 
agency under Public Law 103-354 loan where the present borrower has 
personal liability and it is scheduled for repayment in more than 5 
years from the date of the assumption agreement, the transferor must 
acknowledge their continued liability for the debt by signing an 
agreement as follows:

            Continued Liability Agreement of Present Debtors

    The undersigned hereby acknowledges the continued personal liability 
for the indebtedness owed to the FmHA or its successor agency under 
Public Law 103-354 and assured by ------------ (assuming parties) under 
assumption agreement dated ------------.

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

________________________________________________________________________

Date

    (The original of the signed agreement will be attached to the 
original assumption agreement, a copy filed in the transferee's

[[Page 356]]

District Office case folder, and a copy provided the transferor.)

    (6) Transfers to ineligible applicants of loans made on or after 
December 21, 1979, will not be authorized without the prior consent and 
authorization of the National Office. Authorization must be requested in 
writing and include all the information required in paragraph (e) of 
this section.
    (7) Transfers to ineligible applicants of projects subject to 
restrictive-use provisions will continue to retain the applicable 
restrictive-use provisions and cause the project to be operated in 
conformance with FmHA or its successor agency under Public Law 103-354 
instructions. If it is determined by FmHA or its successor agency under 
Public Law 103-354 that the housing is no longer needed to house 
eligible tenants in accordance with the provisions of subpart E of this 
part, the restrictive-use provisions may be released.
    (8) Those loans which are transferred to ineligible applicants will 
be classified as Nonprogram Property (NP) and serviced according to this 
subpart to the extent possible. Those cases which cannot be serviced 
according to this subpart will be forwarded to the National Office for 
advice and guidance.
    (e) Submission to National Office. In those cases where the proposed 
transfer cannot be made in compliance with paragraphs (a) and (b) or (c) 
of this section, the State Director may submit the entire proposal, 
complete with all the case files, the State Director's specific 
recommendations and justifications to the National Office for review, 
consideration, and any special instructions for handling the account(s). 
The State Director must have determined prior to submission however, 
that it is in the best interest of the FmHA or its successor agency 
under Public Law 103-354 to permit the transfer before submitting the 
proposal for consideration. All transfers where the total indebtedness 
(principal and interest) exceed the State Director's approval authority 
must be submitted to the National Office for prior review and 
authorization to approve the transfer request.
    (f) Processing transfers. (1) Form FmHA or its successor agency 
under Public Law 103-354 465-5, ``Transfer of Real Estate Security,'' 
must be completed to reflect the agreement between the transferor and 
transferee. The form will be prepared to show all agreements involved 
such as the proration of taxes and insurance, title, legal and filing 
fees, equity and method of payment, charges to the loan account other 
than principal and interest, future dated payments presently credited to 
the account, assignment of project accounts and leases, and other 
appropriate items. Additional information may also be attached to this 
form when necessary to fully describe the proposed transaction. The 
transfer will become effective the data Form FmHA or its successor 
agency under Public Law 103-354 1965-9 is executed.
    (2) Form FmHA or its successor agency under Public Law 103-354 1965-
9 will be executed according to the FMI. The unpaid principal balance 
and accrued interest to be shown on Form FmHA or its successor agency 
under Public Law 103-354 1965-9 and 1965-10 will be determined by 
accessing the project account record via field terminal. When this is 
not possible, the unpaid principal balance, accrued interest, and any 
other charges will be computed from Form FmHA or its successor agency 
under Public Law 103-354 1951-53, ``Multiple Family Housing Transaction 
Record'' or Form FmHA or its successor agency under Public Law 103-354 
451-11, ``Statement of Account.'' The transferee will be advised of the 
total amount paid as of the closing date which has not been credited to 
the account, the payment required to place the account on schedule as of 
the previous installment due date and, any payments required to bring 
any monthly or annual payments current, and the amount needed to bring 
the reserve account current less any authorized withdrawals. If the loan 
account or the reserve account cannot be brought current, or less than 
the total debt is assumed, the transfer will be closed on new terms and 
the interest rate charged by FmHA or its successor agency under Public 
Law 103-354 will be the current rate being charged for those loans at 
the time of loan closing, or the interest rate at the time of approval 
(the date Form FmHA or its successor agency under Public Law 103-

[[Page 357]]

354 1944-51 is approved), whichever is less.
    (3) When the property transferred will continue to be used for the 
same or a similar purpose for which Federal financial assistance was 
extended, the transferee must sign Form FmHA or its successor agency 
under Public Law 103-354 400-4.
    (4) An appraisal will be required for each transfer, except those 
completed on a same terms basis for which the State Director is 
satisfied that the security is adequate. (An appraisal will always be 
required for transfers on new terms.) An FmHA or its successor agency 
under Public Law 103-354 designated MFH appraiser will be responsible 
for preparing an appraisal report within 30 days of the District 
Director's receipt of the completed application when the total 
indebtedness will not be assumed, or the State Director may accept an 
independent appraisal provided by the transferor or transferee under the 
conditions later specified in this paragraph when the total debt is 
being assumed and the FmHA or its successor agency under Public Law 103-
354 designated MFH appraiser is unable to complete an appraisal within 
30 days of the District Office's receipt of the completed application. 
If the last appraisal is less than 1 year old and the transfer is within 
the State Director's authority, the FmHA or its successor agency under 
Public Law 103-354 designated appraiser may supplement the present 
appraisal report, in lieu of preparing a new appraisal by attaching 
information on the present market value. A new appraisal will be 
prepared according to the requirements of FmHA or its successor agency 
under Public Law 103-354 Instruction 1922-B (available in any FmHA or 
its successor agency under Public Law 103-354 office) when the current 
appraisal is over 1 year old, or when the State Director determines a 
new appraisal report is needed. An independent appraisal may NOT be 
accepted from the transferor or transferee for the initial appraisal 
required of FmHA or its successor agency under Public Law 103-354 under 
provisions of subpart E of this part. The conditions under which the 
State Director may accept an independent appraisal from the transferor 
or transferee in lieu of an FmHA or its successor agency under Public 
Law 103-354 prepared appraisal are:
    (i) The expense of the appraisal will be paid by the transferee or 
transferor without obligation to FmHA or its successor agency under 
Public Law 103-354,
    (ii) The appraisal will be prepared by an accredited Senior Real 
Property Appraiser (SRPA), Senior Real Estate Analyst (SREA) or Member, 
Appraisal Institute (MAI) real estate appraiser. The State Appraiser/
Trainer may accept an appraisal report from other than an accredited 
SPRA, SREA or MAI appraiser if he or she determines that:
    (A) There are no accredited appraisers within a reasonable distance 
from the project location, and
    (B) The individual preparing the appraisal has satisfactorily 
completed a minimum of 80 hours of accredited appraisal courses.
    (iii) The appraisal report form will be Form FmHA or its successor 
agency under Public Law 103-354 1922-7, ``Appraisal Report for Multi-
Unit Housing,'' or the Federal Home Loan Mortgage Corporation form, 
FHLMC Form 71A, and it will include adequate documentation to support 
the appraised value and the qualifications of the appraiser.
    (iv) The total FmHA or its successor agency under Public Law 103-354 
debt will be assumed by the transferee.
    (v) A review of the appraisal will be made by the State Appraiser/
Trainer according to FmHA or its successor agency under Public Law 103-
354 Instruction 1922-B (available in any FmHA or its successor agency 
under Public Law 103-354 office) using Form FmHA or its successor agency 
under Public Law 103-354 1922-13, ``Reviewer's Appraisal Analysis.''
    (vi) The appraised value of the property is sufficient to secure the 
existing FmHA or its successor agency under Public Law 103-354 debt, 
planned subsequent FmHA or its successor agency under Public Law 103-354 
loan(s), and any authorized junior liens.
    (5) Form FmHA or its successor agency under Public Law 103-354 1965-
9 will be executed according to the FMI when the full debt will be 
assumed at the

[[Page 358]]

same rate and terms. The loan account(s) must be current at the time of 
the transfer and the reserve account on schedule, less any authorized 
withdrawals, if the transfer is to be at the same rate and terms.
    (6) Form FmHA or its successor agency under Public Law 103-354 1965-
9 will be executed according to the FMI when an account cannot be 
brought current at the time of transfer or less than the full debt is 
assumed. The loan repayment period may be extended to the maximum term 
authorized by the appropriate loan program, considering the value and 
economic life of the security. Transfers on new terms are also subject 
to the following conditions:
    (i) The interest rate charged for all loans, except LH loans, will 
be the current rate being charged for those loans at the time of loan 
closing, or the interest rate at the time of approval (the date Form 
FmHA or its successor agency under Public Law 103-354 1944-51 is 
approved), whichever is less. The interest rate of LH loans will be the 
rate specified in the note, except that loans transferred to public 
bodies, nonprofit organizations of farmworkers, and broadly-based 
nonprofit corporations for LH purposes may be at a one percent interest 
rate regardless of the rate specified in the note if the State Director 
determines that the reduction is necessary in order to maintain rental 
rates at a level affordable to the tenants. If the State Director 
determines that the transfer at one percent is necessary for other types 
of LH transferees, the case should be submitted to the National Office, 
with the State Director's recommendations and justifications for 
consideration.
    (ii) Loans for RRH and RCH projects which are amortized on an annual 
payment basis and transferred through the use of Form FmHA or its 
successor agency under Public Law 103-354 1965-9 shall be converted to a 
monthly payment amortization and are subject to PASS.
    (iii) LH loans may continue to be transferred on a DIAS basis or may 
be converted to PASS when the approval official determines such a 
conversion will not be detrimental to the successful operation of the 
project.
    (7) The following paragraph is to be inserted in Form FmHA or its 
successor agency under Public Law 103-354 1965-9 whenever the full 
amount of equity has not been paid in cash or through an equity loan 
made by FmHA or its successor agency under Public Law 103-354 to avert 
prepayment:

    The assuming party covenants and agrees that irrespective of any 
other agreement to the contrary, (a) no present or future lien(s) have 
or will be attached to the partnership property encumbered by FmHA or 
its successor agency under Public Law 103-354 or the income therefrom, 
(b) the equity payable to the seller will be provided from outside 
sources or from any authorized return on investment and not from a 
planned sale of the project, (c) the right of FmHA or its successor 
agency under Public Law 103-354 to approve or disapprove the 
substitution of partners in a general or limited partnership transferee 
organization (this phrase may be stricken when the transferee is an 
individual) has not and will not be superseded by any agreement between 
the purchaser and seller that implies prior consent by FmHA or its 
successor agency under Public Law 103-354 on partner changes in the case 
of default, (d) the seller does not and will not have a reversionary 
interest in the FmHA or its successor agency under Public Law 103-354 
encumbered property, and (e) the requirements of Sec. 1965.65 of FmHA 
or its successor agency under Public Law 103-354 Instruction 1965-B (7 
CFR part 1965) have been met.

    (8) All RRH, RCH, and LH loans, including those approved prior to 
December 21, 1979, which are transferred to eligible applicants will 
become subject to the restrictive-use provisions of section 502(c) of 
title V, Housing Act of 1949, as amended. The restrictive-use language 
set forth in the appropriate exhibits A-1 or A-2 in accordance with 
Sec. Sec. 1965.214(g) and 1965.216(c)(3) of subpart E of this part must 
be added, with the advice of OGC, to the assumption agreement, security 
instruments, and loan agreement/resolution. The restrictive-use period 
will begin on the date the transfer and assumption is closed.
    (9) When the transfer docket forms are completed, the approval 
official must determine that:
    (i) The proposed transfer conforms to the applicable procedural 
requirements and that determinations of hardship status, eligibility, 
etc., are clearly documented in the casefile.

[[Page 359]]

    (ii) Each form is prepared correctly according to the FMI or other 
appropriate regulations, and
    (iii) Items such as names, addresses, and the amount of the 
indebtedness to be assumed are the same on all forms in which those 
items appear.
    (10) The District Director will record in the Running Case Record or 
in memo form, the pertinent information concerning the negotiations made 
between an eligible transferee, FmHA or its successor agency under 
Public Law 103-354 personnel, the applicant's creditors, and other 
lenders concerning the availability of other credit. The investigation 
on the availability of other credit for eligible transferees will be 
documented in the case file as required for the kind of loan being 
assumed. Any letters from lenders or other evidence which may have been 
obtained indicating that the applicant is unable to obtain credit 
elsewhere on rates and terms that would not cause rental rates to be in 
excess of what low and moderate income tenants could afford will be 
included in the docket.
    (11) A compliance review should be conducted as required by subpart 
E of part 1901 of this chapter, if a current one has not recently been 
completed.
    (12) The District Director will forward the transferee's application 
docket and the official case file, with any comments and recommendations 
to the State Office. The following table will be used as a guide in 
distributing the necessary forms for a transfer docket:

[[Page 360]]



--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                            Total
            Form No.                 Name of form or      number of         Signed by borrower            Number for loan docket       Copy for borrower
                                        document            copies
--------------------------------------------------------------------------------------------------------------------------------------------------------
*SF 424.2......................  Application for                   3  1.............................  2-O&1C........................  1-O.
                                  Federal Assistance
                                  (For Construction).
*HUD Form 2530/FmHA or its       Previous Participation            2  1.............................  2-O&1C........................  1-C.
 successor agency under Public    Certification.
 Law 103-354.
1944-37........................  *Information to be                2  0.............................  1-O...........................  1-C.
                                  Submitted with
                                  Preapplication for
                                  Loan as required by
                                  program regulations
                                  specifically related
                                  to applicant
                                  eligibility.
                                 *Letter of Application            2  1.............................  1-O...........................  ..................
                                  with applicable
                                  attachments as
                                  required in Subpart G
                                  of Part 1822 of this
                                  chapter or of Subpart
                                  D or E of Part 1944
                                  of this chapter.
                                 **Evidence of Legal               2  1.............................  1-O...........................  1-C.
                                  Authority (Copies of
                                  citation of specific
                                  provisions of State
                                  Constitution,
                                  statutory authority,
                                  etc.).
                                 **Proof of                        2  1.............................  1-O...........................  1-C.
                                  Organization
                                  (certified copy of
                                  Charter, Articles of
                                  Incorporation, or
                                  Certificate of
                                  Limited Partnership,
                                  etc.).
                                 **Certified copies of             2  1.............................  1-O...........................  1-C.
                                  bylaws, partnership
                                  agreement, or
                                  regulations.
                                 **List of names,                  2  1.............................  1-O...........................  1-C.
                                  addresses and social
                                  security or Tax
                                  Identification
                                  Numbers of officers,
                                  directors, and
                                  members, and
                                  ownership interest
                                  held by each.
                                 A current financial               2  1.............................  1-O...........................  1-C.
                                  statement from the
                                  transferee, and
                                  others, as required
                                  by appropriate
                                  program regulations.
                                 *Credit Report(s).....  ...........  ..............................  ..............................  ..................
FmHA or its successor agency     Transfer of Real                  3  1-O...........................  1-O...........................  1-C.
 under Public Law 103-354 465-5.  Estate Security\2\.
*FmHA or its successor agency    Statement of Budget               2  2-O&1C........................  1-O...........................  1-C.
 under Public Law 103-354 1930-   and Cash Flow
 7.                               (Excluding
                                  Depreciation)
                                  (Operating Budget--
                                  first year)
                                  (Operating Budget--
                                  typical year).
*Exhibit A-6 to Instruction      Housing Allowances for            3  2-O&1C........................  1-O...........................  1-C.
 1944-E.                          utilities and Other
                                  Public Services.
HUD 935.2......................  Affirmative Fair                  2  2-O&1C........................  1-O...........................  1-C.
                                  Housing Marketing
                                  Plan.
*FmHA or its successor agency    Equal Opportunity                 2  2-O&1C........................  1-O...........................  1-C.
 under Public Law 103-354 400-1.  Agreement.
*FmHA or its successor agency    Assurance Agreement...            2  2-O&1C........................  2-O&C.........................  1-C.
 under Public Law 103-354 400-4.
FmHA or its successor agency     Multiple Family                   3  ..............................  1.............................  ..................
 under Public Law 103-354 1944-   Housing Borrower/
 50.                              Project
                                  Characteristics.

[[Page 361]]

 
FmHA or its successor agency     Multiple Family                   3  2-O&1C........................  1-O...........................  1-C.
 under Public Law 103-354 1944-   Housing Obligation/
 51.                              Fund Analysis.
FmHA or its successor agency     Transaction Record                1  ..............................  1.............................  ..................
 under Public Law 103-354 451-    (most recent).
 26.
*FmHA or its successor agency    Request for Statement             2  ..............................  2-O&C.........................  ..................
 under Public Law 103-354 451-    of Account.
 10.
*FmHA or its successor agency    Statement of Account..            1  ..............................  1.............................  ..................
 under Public Law 103-354 451-
 11.
*FmHA or its successor agency    Status of Account.....            1  ..............................  1.............................  ..................
 under Public Law 103-354 451-
 25.
*FmHA or its successor agency    Appraisal Report for              1  ..............................  1-O...........................  ..................
 under Public Law 103-354 1922-   Multi-Unit Housing
 7.                               (see paragraph (f)(4)
                                  of this section.
*FmHA or its successor agency    Reviewer's Appraisal    ...........  ..............................  ..............................  ..................
 under Public Law 103-354 1922-   Analysis.
 13.
*FmHA or its successor agency    Uniform Residential               1  ..............................  1-0...........................  ..................
 under Public Law 103-354 1922-   Appraisal Report.
 8.
*FmHA or its successor agency    Valuation of Buildings            1  ..............................  1-O...........................  ..................
 under Public Law 103-354 426-1.
*FmHA or its successor agency    Development Plan......            2  1-O...........................  2-O&C.........................  1-C.
 under Public Law 103-354 424-1.
*FmHA or its successor agency    Multiple Family                   4  1-O...........................  1-O...........................  1-O.
 under Public Law 103-354 1965-   Housing Assumption
 9.                               Agreement.
*FmHA or its successor agency    Information on                    2  1.............................  1-O...........................  .
 under Public Law 103-354 1965-   Assumption of
 10.                              Multiple Family
                                  Housing Loans.
*FmHA or its successor agency    Multiple Family                   2  ..............................  1-C...........................  1-C.
 under Public Law 103-354 1965-   Housing Release from
 18.                              Personal Liability.
*FmHA or its successor agency    Supplementary Payment             3  1-O...........................  2-O&C.........................  1-C.
 under Public Law 103-354 440-9.  Agreement \1\.
*FmHA or its successor agency    Interest Credit and               3  1-O...........................  1-O...........................  1-C.
 under Public Law 103-354 1944-   Rental Assistance
 7.                               Agreement (RRH and
                                  RCH loans).\1\
*FmHA or its successor agency    Rental Assistance                 2  1-O...........................  1-O...........................  1-C.
 under Public Law 103-354 1944-   Agreement.
 27.

[[Page 362]]

 
                                 *Loan Agreement.......            2  1-O...........................  1-O...........................  1-C.
--------------------------------------------------------------------------------------------------------------------------------------------------------
O--Original; C--Copy.
*--When applicable.
**--When applicable is an organization.
 
\1\--The original Form will not be executed until date of closing the transfer.
\2\--When requested, prepare an additional copy for delivery to transferor.
\3\--Applicant must sign and date this form unless a similar certification is obtained on the application form. For ineligible transferees, delete the
  first sentence referring to other credit in item 42 of the form. The applicant must initial each deletion.


[[Page 363]]


Other transfer docket items may include a mortgagee title policy, title 
evidence or report of lien search, foreclosure notice agreement, 
original or certified copy of deed to any property, purchase contract or 
other instrument of ownership, assignment of HUD Section 8 Housing 
Assistance Payments contract, and information on prior or junior 
mortgage(s). When less than the total amount of the indebtedness is 
assumed, the transferor's financial statement will be included. When an 
initial or subsequent loan is involved, include any additional forms 
required by the appropriate loan making instruction. (Subsequent loans 
will not be made to pay equity unless authorized in accordance with 
subpart E of this part to avert prepayment.)
    (13) The following additional information is required for an equity 
loan to a nonprofit organization in conjunction with the transfer:
    (i) Identity of Interest statement between transferor and 
transferee,
    (ii) Statement of experience of organization and all principals,
    (iii) Management Plan and Agreement in accordance with exhibit B of 
subpart C of part 1930 of this chapter,
    (iv) Proposed Application for Occupancy, Lease, and Occupancy Rules 
and Regulations in accordance with exhibit B of subpart C of part 1930 
of this chapter.
    (v) Option or purchase agreement,
    (vi) Proposed budget showing anticipated rents with updated figures 
on required reserve contributions,
    (vii) Data on current tenants' incomes, rents and RA, and incomes of 
those on the waiting list to show amount of RA which will be needed for 
current tenants and other eligible occupants based on the proposed 
budget.
    (viii) If rehabilitation will be undertaken at the time of the loan, 
plans and specifications and method of construction must be outlined,
    (ix) A breakdown of packaging and administration costs to be paid 
with any advance to nonprofit organizations or public agencies 
purchasing a project to avert prepayment, if an advance has not 
previously been applied for.
    (x) If needed, a request for initial operating funds and a detailed 
breakdown of expenses anticipated to be paid from the funds, and
    (xi) District Office comments and recommendations and the State 
Office evaluation.
    (14) If the transfer is within the State Director's loan approval 
authority, the docket will be forwarded to OGC for review and necessary 
closing instructions. If the transfer is not within the State Director's 
loan approval authority, or all planned development is not complete; the 
complete transfer docket, borrower case file, OGC comments, and complete 
comments and recommendations of both the District and State Director 
will be forwarded to the National Office for review and approval 
authorization.
    (15) During the period that a transfer is pending in the District 
Office, payments received by the Finance Office will continue to be 
applied to the transferor's account. Those payments include any 
downpayments made in connection with the transfer for reducing the 
amount of the debt to be assumed. Any payment on the account not 
included in the latest transaction record will be deducted from the 
total amount of principal and interest calculated from the latest 
information available before the assumption agreement is completed and 
signed.
    (i) Identification. Payments received on the date of transfer will 
be remitted as Regular payments on Form FmHA or its successor agency 
under Public Law 103-354 1951-55 ``Collection Log.'' The payments will 
be credited to the transferor's borrower and project number when the 
payment should be credited prior to the transfer. The payments will be 
credited to the transferee's borrower and project number when the 
payment should be credited after the transfer.
    (ii) Payment. When a payment is due on the assumption agreement 
shortly after the transfer is completed, the payment should if possible, 
be collected at the time of transfer and remitted in the transferee's 
name.
    (g) Closing transfer cases. (1) Title clearance and legal services, 
including OGC closing instructions, will be obtained according to 
subpart B of part 1927 of this chapter.

[[Page 364]]

    (2) The parties to the transfer are responsible for obtaining legal 
services necessary to accomplish the transfer. A profit or limited 
profit organization transferee may use any designated attorney or title 
insurance company to close the transfer according to the applicable 
closing instructions. The attorney or the title insurance company and 
their principals or employees must not be members, officers, directors, 
trustees, stockholders or partners of the transferee or transferor 
entity. Nonprofit organization transferees may use a designated attorney 
who is a member of their organization if the cost is reasonable, typical 
for the area, and is earned.
    (3) The transferee will obtain fire and extended coverage insurance, 
and flood insurance when required, according to the appropriate program 
requirements for the outstanding loan(s) involved, unless the State 
Director requires additional insurance as a condition of approval after 
evaluating the potential for loss due to special hazards associated with 
the project. When insurance is required, it may be obtained either by 
transfer of the existing coverage by the transferor or by acquisition of 
a new policy by the transferee. When the full amount of the FmHA or its 
successor agency under Public Law 103-354 debt is being assumed and an 
amount has been advanced for insurance premiums or any other purposes, 
the transfer will not be completed until the Finance Office has charged 
the advance to the transferor's account.
    (4) The proper type of loan agreement or resolution for type of 
transferee involved must be in effect at the time of the transfer. If 
changes are needed in the existing loan agreement or resolution cited in 
the mortgage, the changes should be made by amending the existing loan 
agreement or resolution after obtaining the advice of OGC.
    (5) The restrictive language contained in Sec. 1944.176(d)(1) of 
subpart D of part 1944 of this chapter and Sec. 1944.236(b)(1) of 
subpart E of part 1944 of this chapter must be inserted in the deed of 
conveyance or other instruments as required by OGC for RRH, RCH, and LH 
loans.
    (6) At a time no later than the transfer closing, the transferee 
will be provided copies of the security instruments (promissory note, 
mortgage or deed of trust, rental assistance agreement, loan agreement 
of resolution, etc.) which were executed by the transferor or previous 
borrower to originally secure the loan being assumed.
    (7) A servicing visit should be scheduled within 90 days of closing 
to verify the transferee's compliance with program requirements.
    (h) Transfer not completed. If for any reason a transfer will not be 
completed after approval, the District Director will immediately notify 
the State Director.

[49 FR 49587, Dec. 21, 1984]

    Editorial Note: For Federal Register citations affecting Sec. 
1965.65, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and on GPO Access.



Sec. Sec. 1965.66-1965.67  [Reserved]



Sec. 1965.68  Consolidation.

    General. Loans and/or loan agreements/resolutions may be 
consolidated to reduce the administrative burden (recordkeeping, 
budgeting, etc.), to improve the cost effectiveness and efficiencies of 
project operations, and/or to effectively utilize the physical 
facilities common to projects. State Directors may approve the 
consolidations with the advice of OGC and when the following conditions 
are met:
    (a) Consolidation of loans.(1) The loans are being transferred under 
Sec. 1965.65(f)(6) of this subpart on new terms to the transferee, OR.
    (2) An initial and subsequent loan(s) under one project number were 
closed on the same date at the same rates and terms, i.e., same interest 
rate and final due date.
    (3) The promissory notes and the loan agreements/resolutions will be 
consolidated.
    (4) The conditions for consolidation of loan agreements/resolutions 
must be met.
    (5) The total indebtedness (principal plus accrued interest, overage 
and late fees) of all loans being consolidated does not exceed the State 
Director's approval authority.
    (6) If consolidation of loans is not possible on the Amortization 
Effective

[[Page 365]]

Date (AED) for the loans, consolidation should occur as soon as possible 
after the AED is established.
    (b) Processing consolidation of loans. (1) Form FmHA or its 
successor agency under Public Law 103-354 1944-52, ``Multiple Family 
Housing Promissory Note,'' will be prepared for the notes or assumption 
agreements being consolidated according to the FMI. If the District 
Office does not have possession of the original note or assumption 
agreement, the District Director will call the Finance Office to request 
the return of the original form so it is in the District Office before a 
new Form FmHA or its successor agency under Public Law 103-354 1944-52 
is processed, or as soon as possible thereafter. Promissory notes should 
be prepared on a monthly payment basis, as appropriate.
    (2) A new Form FmHA or its successor agency under Public Law 103-354 
1944-7, ``Interest Credit and Rental Assistance Agreement,'' will be 
prepared and signed by the borrower for the new consolidated promissory 
note and distributed according to the FMI. The Interest Credit Plan 
originally established for the project will apply to the consolidated 
note. If the Interest Credit Plan is changed with the new Form FmHA or 
its successor agency under Public Law 103-354 1944-7, the District 
Office will enter the new plan for the project through their field 
office terminal.
    (3) Form FmHA or its successor agency under Public Law 103-354 1965-
17, ``Multiple Family Housing Note Consolidation,'' will be completed to 
show all of the notes which have been consolidated in the new Form FmHA 
or its successor agency under Public Law 103-354 1944-52. A copy of the 
completed Form FmHA or its successor agency under Public Law 103-354 
1965-17 will be sent to the Finance Office for processing. The AMAS M5A 
screen for the project should be reviewed by the District Office and 
updated, as appropriate, when submitting Form FmHA or its successor 
agency under Public Law 103-354 1965-17 for processing.
    (4) The original and District Office copies of all notes or 
assumption agreements that are consolidated will be stamped 
``consolidated,'' by the District Office. The original instruments being 
consolidated will be stapled to the ``consolidated'' note and filed in 
the safe in the District Office. When the consolidated note has been 
paid in full or otherwise satisfied, it and all other instruments will 
be handled according to the provisions of Sec. 1951.15 of subpart A of 
part 1951.
    (5) A consolidated loan agreement or resolution using Forms FmHA or 
its successor agency under Public Law 103-354 1944-33A, ``Consolidated 
Loan Agreement RRH Insured Loan to an Individual Operating on a Profit 
Basis or RRH Loan to an Individual Operating on a Limited Profit 
Basis,'' FmHA or its successor agency under Public Law 103-354 1944-34A, 
``Consolidated RRH Loan Agreement To a Partnership Operating on a Profit 
Basis, To a Limited Partnership Operating on a Profit Basis, To a 
Partnership Operating on a Limited Profit Basis, To a Limited 
Partnership Operating on a Limited Profit Basis,'' or FmHA or its 
successor agency under Public Law 103-354 1944-35A, ``Consolidated Loan 
Resolution RRH Loan to a Broadly Based Nonprofit Corporation, RRH Loan 
to a Profit Type Corporation, RRH Loan to Profit Type Corporation 
Operating on a Limited Profit Basis,'' as appropriate, will be prepared 
for RRH loans to reflect current reporting requirements and the 
authorized initial investment attributable to the owner after the 
consolidation has occurred. A revised consolidated loan agreement or 
resolution will be prepared for LH loans containing the requirements of 
exhibit C, D, or E of subpart D of part 1944 of this chapter, as 
appropriate.
    (6) Consolidation of notes will only be accomplished with the 
guidance and assistance of OGC. Under no circumstances will promissory 
notes be consolidated if the security position of FmHA or its successor 
agency under Public Law 103-354 will be adversely affected.
    (7) New security instruments which describe the consolidated note 
will be filed to perfect the FmHA or its successor agency under Public 
Law 103-354 lien position. If the new lien position taken is junior only 
to the previous lien position securing the loans being

[[Page 366]]

consolidated, the previous security instruments may be released with the 
guidance and assistance of OGC.
    (c) Consolidation of loan agreements/resolutions (project 
consolidation). (1) The security for the loans must be on the total 
project, ``project'' being defined per subpart C of part 1930 of this 
chapter.
    (2) The State Director may approve the consolidation of loan 
agreements/resolutions irrespective of the total indebtedness 
represented by all loan agreements/resolutions being consolidated.
    (3) The loan agreements being consolidated are for loans made for 
the same purpose (for example, loans specifically made for senior 
citizen projects cannot be consolidated with loans for family projects, 
unless the consolidated project is redesignated ``mixed'' and the units 
previously designated ``senior citizen'' are restricted to tenants 
meeting the requirements for ``senior citizen'' as specified in exhibit 
B of subpart C of part 1930 of this chapter), to the same borrower 
entity and have the same plan of operation (nonprofit, limited profit or 
full profit), and are operating under the same type of Interest Credit, 
if applicable.
    (4) The requirements of subpart C of part 1930 of this chapter 
concerning reporting, accounting and project management will be 
fulfilled as a single project.
    (5) All project accounts being consolidated must be current after 
the consolidation processes, unless authorized by the National Office.
    (6) RA agreements will not be consolidated; each RA agreement will 
be tracked under a separate RA number through AMAS. The RA can be 
assigned to eligible tenants in the new ``project'' per assignment 
priorities. The waiting list(s) for the projects being consolidated will 
be combined.
    (7) For consolidation of loan agreements/resolutions of loans in 
which no loan to build or acquire new units was made on or after 
December 15, 1989, the restrictive-use provisions of section 502(c) of 
title V, Housing Act of 1949, as amended will apply. The appropriate 
restrictive-use language set forth in exhibit A-1 of subpart E of this 
part for RRH, RCH or LH loans will be added, with the advice of OGC, to 
the loan agreement/ resolution and security instruments as a condition 
of FmHA or its successor agency under Public Law 103-354 approval of the 
action. The restrictive-use period will begin on the date the 
consolidation is effective.
    (8) For consolidation of loan agreements/resolutions of loans for 
which a loan to build or acquire new units was made on or after December 
15, 1989, the consolidated loan may never be prepaid.
    (d) Processing loan agreement/resolution consolidations. (1) Form 
FmHA or its successor agency under Public Law 103-354 1965-17A will be 
completed to show all of the notes for the projects being consolidated. 
The AMAS M5A screen for all projects should be reviewed and updated 
before submitting Form FmHA or its successor agency under Public Law 
103-354 1965-17A.
    (2) A consolidated loan agreement or resolution using Form FmHA or 
its successor agency under Public Law 103-354 1944-33A, 1944-34A, or 
1944-35A, as appropriate, will be prepared for RRH loans to reflect 
current reporting requirements and the authorized initial investment 
attributable to the owner after the consolidation has occurred. A 
revised consolidated loan agreement or resolution will be prepared for 
LH loans containing the requirements of exhibit C, D, or E of subpart D 
of part 1944 of this chapter, as appropriate.
    (3) Consolidation of projects will only be accomplished with the 
guidance and assistance of OGC. Under no circumstances will projects be 
consolidated if the security position of FmHA or its successor agency 
under Public Law 103-354 will be adversely affected.
    (4) All of the general requirements of paragraph (c) of this section 
must be met.
    (5) Neither the terms nor the due date of the loan(s) involved are 
altered, and other security instruments remain unchanged, and are not 
released.
    (6) All of the loan agreements or loan resolutions being 
consolidated may be secured by one deed of trust or mortgage describing 
all of the loans for the projects if required by OGC.

[56 FR 25351, June 4, 1991, as amended at 56 FR 66964, Dec. 27, 1991; 58 
FR 38930, July 21, 1993; 62 FR 25070, May 7, 1997]

[[Page 367]]



Sec. 1965.69  [Reserved]



Sec. 1965.70  Reamortization.

    (a) General. State Directors may approve the reamortization of RRH, 
RCH, and LH loan accounts within their approval authority for the type 
of loan involved. RHS loans will not be reamortized and will be serviced 
according to program requirements. If an RHS loan becomes seriously 
delinquent and efforts to sell the lots are not successful, the account 
will be liquidated according to subpart A of part 1955 of this chapter. 
The reamortization of an account will make the borrower subject to the 
restrictive-use provisions contained in exhibit A-1 of subpart E of this 
part.
    (b) Conditions for reamortization. The conditions under which a 
reamortization will be considered are:
    (1) The borrower has made extra payments and/or refunds totaling 10 
percent or more of the original loan amounts being reamortized (from 
sources other than the sale of units within the LH, RRH, or RCH 
project), and the State Director determines that the borrower and the 
tenants cannot reasonably be expected to meet their obligations unless 
the account is reamortized to reduce substantially the FmHA or its 
successor agency under Public Law 103-354 installments and rental rates; 
or,
    (2) The borrower has a substantial delinquency which was caused by 
circumstances beyond the ultimate control of the borrower that cannot be 
cured within one year, and the borrower has acted in good faith and has 
complied with all applicable FmHA or its successor agency under Public 
Law 103-354 procedures and policies governing the particular program 
under which the loan is made; or
    (3) The borrower has received an equity loan as an incentive to 
avert prepayment, or a subsequent loan has been made to a nonprofit 
corporation or public agency to purchase a project to avert prepayment; 
or
    (4) And, all of the following conditions exist and are adequately 
documented in the official case file and on Form FmHA or its successor 
agency under Public Law 103-354 1951-33, ``Reamortization Request,'' as 
appropriate:
    (i) The reamortization will not operate to the financial detriment 
of the FmHA or its successor agency under Public Law 103-354 or impair 
the security rights of the FmHA or its successor agency under Public Law 
103-354.
    (ii) The budget or plan of operations for the borrower provides 
reasonable assurance that the newly scheduled payments will be made 
according to the terms of the proposed reamortization, and that the 
charges for the use of the facility or service are within the payment 
ability of those it is intended to serve and are comparable to other 
similar units in the area; and, the rent increase procedures set forth 
in exhibit C of subpart C of part 1930 of this chapter will be followed 
if any increase in rental rates is required.
    (iii) The Board of Directors and membership will retain, or have 
definite plans for obtaining, membership and community support; and, 
will provide competent management for the continued operation of the 
borrower entity and the facility financed with the loan.
    (iv) The State Director believes that reamortization will enable the 
borrower to operate successfully and carry out the purpose of the loan.
    (v) The FmHA or its successor agency under Public Law 103-354 lien 
position remains unchanged.
    (vi) The approval official must be satisfied that the security 
(including the potential income for debt service) will be adequate to 
protect the FmHA or its successor agency under Public Law 103-354's 
interests over the term of the reamortization. An appraisal as required 
by FmHA or its successor agency under Public Law 103-354 Instruction 
1922-B (available in any FmHA or its successor agency under Public Law 
103-354 office) must be made and must reflect that the security is 
adequate for the principal and interest being reamortized when the 
reamortization will extend the term of the repayment period more than 5 
years.
    (vii) The borrower has corrected any management deficiencies which 
may have contributed to the borrower's previous inability to generate 
sufficient income to bring or keep the account

[[Page 368]]

current. Such actions may include revision of the management plan or 
employment of professional management services.
    (viii) All MFH loans being reamortized must be closed on PASS, 
except LH loans specified in Sec. 1951.501(a)(2)(i) of subpart K of 
part 1951 of this chapter. All initial and subsequent loans must convert 
to PASS in connection with the reamortization.
    (ix) When recoverable cost items are involved, they are first 
capitalized by adding them to the principal loan balance outstanding on 
the oldest loan and then the entire indebtedness (principal plus 
outstanding interest, overage and late fees) is reamortized.
    (x) Audit receivables may not be reamortized.
    (c) Submission to National Office. When the unpaid indebtedness of 
the borrower's account(s) to be reamortized exceeds the State Director's 
approval authority and the State Director determines that the conditions 
of paragraph (b) of this section can be met, the request for 
reamortization, official case file and all other pertinent information, 
along with complete comments and recommendations by both the State and 
District Directors, will be sent to the National Office. The State 
Director shall submit all subsequent reamortization requests for the 
same project to the National Office for prior authorization.
    (d) Processing reamortizations. To reamortize the account, the 
following actions will be taken:
    (1) Form FmHA or its successor agency under Public Law 103-354 1965-
16, ``Multiple Family Housing Reamortization Agreement,'' will be 
completed according to the FMI. The effective date and the due date for 
all payments will be the first of the month, except for LH loans whose 
due date will be established in accordance with the FMI.
    (2) If the note or assumption agreement being reamortized is not 
held in the District Office, the District Director will obtain the 
promissory note and any assumption agreement from the Finance Office 
before processing the reamortization.
    (3) On the back of the original of the note or assumption agreement 
(new terms), below all signatures and endorsements, the District 
Director will insert the following: ``A reamortization agreement dated 
------ 19--, in the principal sum of $------, has been given to modify 
the payment schedule of the note.''
    (4) The end of the amortization period will be the final due date of 
the note being reamortized, unless the term is extended with the advice 
and guidance of OGC (and it is permissible according to State and local 
Statutes), and the FmHA or its successor agency under Public Law 103-354 
lien position is not altered. (Any extension of the final due date will 
not exceed the lesser of the remaining useful life of the security 
property or the maximum term authorized by the respective loan program 
authorizations.)
    (5) The interest rate for the account will be unchanged except when 
the final due date has been extended. The interest rate charged will be 
the rate at the time the Reamortization Request (Form FmHA or its 
successor agency under Public Law 103-354 1951-33) is approved, or the 
current interest rate at closing, whichever is less.
    (6) The reamortization will be processed with the guidance of OGC.
    (7) If the borrower is to receive interest credit benefits following 
the reamortization of the account, the current interest credit agreement 
will be cancelled and a new Form FmHA or its successor agency under 
Public Law 103-354 1944-7 will be prepared and attached to Form FmHA or 
its successor agency under Public Law 103-354 1965-16 for submission to 
the Finance Office.
    (8) The prepayment restrictive-use provisions of section 502(c) of 
title V, Housing Act of 1949, as amended will apply. The appropriate 
restrictive-use language set forth in exhibit A-1 of subpart E of this 
part for RRH, RCH or LH loans will be added with the advice of OGC, to 
the loan agreement/ resolution and security instruments, as a condition 
of FmHA or its successor agency under Public Law 103-354 approval of the 
action. The restrictive- use period will begin on the date the 
amortization agreement is effective.

[[Page 369]]

    (9) Reamortizations will always be closed the first day of the 
month. Unpaid interest to the date of closing may be capitalized.

[49 FR 49587, Dec. 21, 1984, as amended at 50 FR 8605, Mar. 4, 1985; 52 
FR 24288, June 30, 1987; 55 FR 25081, June 20, 1990; 56 FR 25352, June 
4, 1991; 56 FR 66964, Dec. 27, 1991; 58 FR 38930, July 21, 1993]



Sec. 1965.71  [Reserved]



Sec. 1965.72  Deceased borrower.

    Deceased borrower cases will be handled according to the policy 
outlined in Sec. 1962.46 of subpart A of part 1962 of this chapter 
except that all references to the County Supervisor are now construed to 
mean the District Director. The advice of OGC will be obtained as 
necessary.



Sec. 1965.73  Bankruptcy and insolvency.

    Bankruptcy and insolvency cases will be handled according to the 
policy outlined in Sec. 1962.47 of subpart A of part 1962 of this 
chapter except that all references to the County Supervisor now mean 
District Director. The handling of bankruptcy cases varies from state to 
state. Therefore, the State Director may issue State Supplements 
providing more specific guidance to expedite the handling of those 
cases. The advice of OGC will be obtained as necessary.



Sec. 1965.74  Divorce actions.

    When individual borrowers with loans are involved in a divorce 
action, the District Director will review the case after the final 
divorce decree has been granted to determine if any action is needed for 
the future servicing of the account. The District Office file will be 
submitted to the State Director for advice if the District Director is 
uncertain of the servicing actions needed to protect the FmHA or its 
successor agency under Public Law 103-354's interest or if continuation 
of the loan with the remaining borrower is not authorized. No subsequent 
loan will be made to pay any equity as a result of a divorce action.



Sec. 1965.75  Abandonment.

    When the District Director believes that the borrower has abandoned 
a project, an immediate check with the appropriate sources (for example: 
tenants, management agents, assessor's office, etc.) will be made to 
determine if the borrower has moved and, if so, whether a forwarding 
address can be determined so that further servicing actions can be 
taken.
    (a) A property is considered abandoned when any or all of the 
following conditions exist:
    (1) The borrower cannot be located after the District Director has 
made diligent efforts to contact the borrower. This condition also 
applies to those instances where the general partner(s) of a limited 
partnership cannot be located and the limited partners are unknown or 
cannot be located.
    (2) The project remains unoccupied for an extended period of time 
and the borrower makes no effort to maintain the security property, 
secure eligible occupants, and/or comply with the objectives of the loan 
within a reasonable period of time as specified by the District Director 
in a certified letter sent to the borrower requesting compliance.
    (b) If the property is not being maintained and the District 
Director determines that the borrower has abandoned the project, the 
District Director will attempt to contact any prior lienholders with a 
request that they take control of the property and make any emergency 
repairs necessary. If no prior lienholder is involved or the prior 
lienholder cannot immediately be contacted or refuses to make the 
emergency repair, the District Director will immediately notify the 
State Director and request permission to take possession of the property 
pending liquidation, make emergency repairs to prevent further 
deterioration of the security, and to enter into a lease with the 
individual tenants, or a management or caretaker's agreement, on behalf 
of the borrower.
    (c) A caretaker or management agent will normally be obtained when 
the borrower has abandoned the security property or has failed to 
maintain its operation and the State Director determines, with the 
advice of OGC, that the FmHA or its successor agency under Public Law 
103-354 should take possession of the property to best protect the 
interest of the Government subject to the following:

[[Page 370]]

    (1) Selection of a caretaker or management agent. Persons or firms 
chosen as caretakers or management agents should have experience in 
operating and managing similar properties or have business background or 
experience which qualifies them to perform the needed services. They 
must be located near the property to provide day-to-day supervision or 
appoint a qualified local person to meet this requirement. Caretakers 
will normally be selected for unoccupied projects or those not suitable 
for occupancy. Management agents will only be selected for projects 
which are occupied or suitable for occupancy. Selection procedures will 
be in accordance with Sec. 1955.63(a) of subpart B of part 1955 of this 
chapter, and will be appropriately documented. (No other actions 
specified in subpart B of part 1955 may be implemented until such time 
as liquidation action has been approved in writing by the appropriate 
FmHA or its successor agency under Public Law 103-354 official.)
    (2) Fees. The amount of the management agent or caretaker fee should 
be no more than the typical rate for similar services in the area. The 
amount may be based on a percentage of the income from the property or a 
flat fee amount. The fees will be considered a recoverable cost and 
charged to the borrower's account. The fees will be paid on a monthly 
basis in accordance with FmHA or its successor agency under Public Law 
103-354 Instruction 2024-A (available in any FmHA or its successor 
agency under Public Law 103-354 office).
    (3) Rental rates for abandoned projects. Rental rates will normally 
remain the same for eligible occupants as when the project was under the 
control of the borrower. Rental rates may be revised with the approval 
of the State Director under the following conditions:
    (i) The lease agreement between the borrower and tenant permits 
changing the rates.
    (ii) A change of rates is needed to provide income sufficient to pay 
operational and maintenance expenses, including the caretaker's fee, and 
to repay the loan on schedule.
    (iii) Any increase will not result in rental rates above the payment 
ability of eligible occupants, unless the State Director has given the 
authority to rent units to ineligible occupants.
    (d) All these actions shall be fully documented in the official case 
file. Liquidation will immediately be instituted according to subpart A 
of part 1955 of this chapter.
    (e) When the project is occupied but rent is not paid or collected, 
the eligibility of the occupants cannot be determined, and the borrower 
has failed to comply with the objectives of the loan within a reasonable 
period of time as specified by the District Director in a certified 
letter sent to the borrower requesting compliance, the State Director 
should refer the case to the Regional Attorney for guidance, including 
the possibility of having a receiver appointed.

[49 FR 49590, Dec. 21, 1984, as amended at 57 FR 36592, Aug. 14, 1992]



Sec. 1965.76  [Reserved]



Sec. 1965.77  Consent to sale or other disposition of security property.

    (a) General policies. The State Director may approve requests for 
and consent to:
    (1) Use of proceeds from the sale of a portion of or an interest in 
the security,
    (2) Exchange of all or a part of the undeveloped security for other 
real estate, or
    (3) Granting or conveyance of rights-of-way subject to the 
conditions and requirements of this section.
    (b) Processing requests. These requests will be made on Form FmHA or 
its successor agency under Public Law 103-354 465-1. The District 
Director will forward a properly completed and executed Form FmHA or its 
successor agency under Public Law 103-354 465-1, the proposed deed, 
easement, or other form of title conveyance, and the case file to the 
State Director with a memorandum containing additional information, as 
needed, to justify the approval or disapproval of the proposed 
transaction.
    (c) Conditions of approval. The State Director may grant consent 
provided:
    (1) The orderly payment of the FmHA or its successor agency under 
Public Law 103-354 indebtedness will not be impaired. Except that in 
condemnation

[[Page 371]]

case, after the final judgment or award has been granted and is not 
appealed, the necessary adjustments in project operation will be 
approved to comply with the court order.
    (2) The transaction will not interfere with the successful operation 
of the multiple housing project or prevent the borrower from carrying 
out the purpose for which the loan was made. This requirement will not 
apply in the case of a condemnation action in which a final judgment or 
award has been made and is not appealed.
    (3) The sale of individual units or developed portions of an RRH, 
RCH or LH project shall require the prior concurrence and authorization 
of the National Office.
    (4) If property to be sold or exchanged is to be used for the same 
or similar purpose for which the FmHA or its successor agency under 
Public Law 103-354 loan or grant was made, the purchaser shall execute 
Form FmHA or its successor agency under Public Law 103-354 400-4. The 
agreement will remain in effect as long as the property continues to be 
used for the same or similar purpose for which the FmHA or its successor 
agency under Public Law 103-354 loan or grant was made.
    (5) The consideration is at least equal to the market value of the 
security property disposed of or the rights being granted. However, 
right-of-way easements may be granted or conveyed without consideration 
or with only the minimal consideration being offered if the approval 
official determines: the value of the security property will not be 
reduced; its suitability for the intended purpose will not be impaired; 
and the easement is granted for the borrower to develop additional lots 
or units which will be integrated into the project or to a public body 
for enhancement of streets or utilities benefitting the project.
    (i) An FmHA or its successor agency under Public Law 103-354 
official authorized to appraise multi-unit housing properties shall 
either make a new appraisal as required by FmHA or its successor agency 
under Public Law 103-354 Instruction 1922-B (available in any FmHA or 
its successor agency under Public Law 103-354 office) if the current 
appraisal is more than one year old, or supplement the present appraisal 
report by inserting in or attaching to the ``Remarks'' section, 
information as to the market value of the security disposed; or
    (ii) The approval official may also accept a value determination for 
such easements which has been provided by other competent sources at no 
cost to the Government which is mutually acceptable to the borrower and 
FmHA or its successor agency under Public Law 103-354;
    (iii) However, if the proceeds are to be used for development or 
enlargement, a new appraisal reflecting the market value of the security 
property as improved or enlarged will be made in all cases.
    (iv) The State Director may request an appraisal for any transaction 
under this section involving security property whenever necessary.
    (6) The remaining property is adequate security for the unpaid 
balance of the FmHA or its successor agency under Public Law 103-354 
loan, or the transaction will not adversely affect FmHA or its successor 
agency under Public Law 103-354's security position or interfere with 
the successful operation of the security property.
    (7) The proceeds from the disposition of the security are used for 
one or more of the following purposes:
    (i) To pay the customary incidental closing costs such as title and 
recording fees appropriate to the transaction, including additional real 
estate tax the borrower is required to pay for the year for which 
arrangements to pay cannot otherwise be made.
    (ii) To pay debts owed to any prior lienholders.
    (iii) To make extra payments on the FmHA or its successor agency 
under Public Law 103-354 loan.
    (iv) To pay costs necessary to determine the reasonableness of an 
offer or asking price, such as fees for appraisal of minerals, land, or 
timber where the necessary appraisal cannot be obtained without costs.
    (v) To pay real estate brokers' commission if a borrower can 
reasonably expect to obtain proceeds in an amount at least equal to the 
commission in excess of what could otherwise be obtained had the sale 
been made without

[[Page 372]]

the assistance of the real estate broker.
    (vi) To develop or enlarge the borrower's facility for purposes for 
which a loan of the same type involved could be made, if the development 
or enlargement is necessary to improve the borrower's debt-paying 
ability, place the operation on a more sound basis, or otherwise further 
the objectives of the FmHA or its successor agency under Public Law 103-
354 loan. Any proposed development will be planned and performed 
according to subpart A of part 1924 of this chapter and funds to be used 
for development or enlargement will be handled according to subpart A of 
part 1902 of this chapter.
    (vii) To purchase or acquire property to be used for purposes for 
which a loan of the same type involved is authorized, if the FmHA or its 
successor agency under Public Law 103-354 debt will be as well secured 
after the transaction as before. FmHA or its successor agency under 
Public Law 103-354 will obtain a lien on the acquired property, and will 
obtain title evidence according to subpart B of part 1927 of this 
chapter.
    (viii) To pay any additional income tax which the borrower must pay 
for the year because of the capital gain or royalty tax attributable to 
the transactions. Funds for back taxes must be estimated and held in a 
supervised bank account until actual payment of the tax.
    (8) FmHA or its successor agency under Public Law 103-354 liens are 
not released until receipt of the appropriate sales proceeds for 
application on the Government's claim.
    (d) Releasing security. Security for FmHA or its successor agency 
under Public Law 103-354 loans addressed in this subpart will be 
released according to applicable program regulations and as follows:
    (1) Borrowers will be held strictly accountable to the FmHA or its 
successor agency under Public Law 103-354 for all proceeds derived from 
the sale of mortgaged property which the FmHA or its successor agency 
under Public Law 103-354 is entitled to receive under its lien.
    (2) Consent to disposition of part, or an interest in, security 
property as authorized in this subpart may be given by approving a 
completed Form FmHA or its successor agency under Public Law 103-354 
465-1 or other forms approved by OGC or prescribed in State Supplements. 
Upon request for consent, the District Director will forward Form FmHA 
or its successor agency under Public Law 103-354 465-1, the borrower's 
case folder, and any other pertinent information to the State Director.
    (i) Chattel security may be released from a chattel mortgage by use 
of Form FmHA or its successor agency under Public Law 103-354 460-1, 
``Partial Release,'' or other approved form, and from a security 
interest under the Uniform Commercial Code by use of Form FmHA or its 
successor agency under Public Law 103-354 462-12, ``Statements of 
Continuation, Partial Release, Assignment, Etc.'' Satisfaction or 
termination of chattel security instruments will be accomplished 
following the guidance of subpart A of part 1962 of this chapter.
    (ii) Real estate security may be released by use of Form FmHA or its 
successor agency under Public Law 103-354 460-1 or other form approved 
by OGC. Satisfaction or termination of real estate security instruments 
when the FmHA or its successor agency under Public Law 103-354 debt has 
been paid in full or satisfied by debt settlement action will be 
accomplished with the use of Form FmHA or its successor agency under 
Public Law 103-354 460-4, ``Satisfaction.''
    (iii) Any consent which would result in the FmHA or its successor 
agency under Public Law 103-354 loan account being paid in full will be 
subject to the prepayment provisions of Sec. 1965.90 of this subpart 
and subpart E of this part as applied to RRH, RCH, and LH loans.

[49 FR 49590, Dec. 21, 1984, as amended at 56 FR 67484, Dec. 31, 1991; 
58 FR 38930, July 21, 1993]



Sec. 1965.78  [Reserved]



Sec. 1965.79  Subordination.

    (a) General policies. The State Director is authorized to approve 
requests for subordination of LH, RRH or RCH loans according to this 
section, if the total debt against the security after the transaction 
does not exceed the

[[Page 373]]

State Director's loan approval authority for the type of loan involved. 
Subordination by the State Director will only be considered for 
individual LH borrowers on farm tracts, multiple housing loans on 
nonfarm tracts to obtain construction financing, and in those cases 
where FmHA or its successor agency under Public Law 103-354 loan funds 
are unavailable or the funds can be provided from the private sector at 
competitive or less costly rates than those offered by FmHA or its 
successor agency under Public Law 103-354. All other subordination 
requests, and those exceeding the State Director's approval authority 
limit must be submitted to the National Office for prior authorization 
to approve. Each request for subordination will be made on Form FmHA or 
its successor agency under Public Law 103-354 465-1. The District 
Director will forward a properly completed and executed copy of the form 
to the State Director with a memorandum containing any needed 
information to justify approval or disapproval of the request.
    (b) Conditions of approval. Subordination of the FmHA or its 
successor agency under Public Law 103-354 lien will only be authorized 
when it will enable the present borrower to permit another creditor to 
refinance, extend, reamortize, or increase the amount of a prior lien, 
or place a lien ahead of the FmHA or its successor agency under Public 
Law 103-354 lien. When the prior lien is being increased by an amount 
which exceeds normal transaction costs or a new prior lien is being 
placed against the security, an FmHA or its successor agency under 
Public Law 103-354 official authorized to make appraisals for the type 
of project involved will supplement the present appraisal report by 
inserting in the ``Remarks'' section information as to the market value 
of the security after the transaction if the appraisal is less than one 
year old. If the appraisal is more than one year old, a new appraisal as 
required by FmHA or its successor agency under Public Law 103-354 
Instruction 1922-B (available in any FmHA or its successor agency under 
Public Law 103-354 office) must be completed. The State Director may 
also request an appraisal at any time deemed appropriate. In all cases, 
the following conditions must be met:
    (1) The FmHA or its successor agency under Public Law 103-354 
multiple housing account must be current and the borrower must be 
capable of providing adequate management.
    (2) The transaction must further the objectives for which the FmHA 
or its successor agency under Public Law 103-354 loan or loans were made 
and FmHA or its successor agency under Public Law 103-354's debt must be 
adequately secured or will not be adversely affected.
    (3) The proposed use of the funds will improve the borrower's 
ability to repay the FmHA or its successor agency under Public Law 103-
354 loan(s) or is necessary to place the borrower's operation on a sound 
basis.
    (4) The borrower is unable to refinance the FmHA or its successor 
agency under Public Law 103-354 loan on terms which can reasonably be 
expected to be met yet still meet the original intent of the program.
    (5) The terms and conditions of the prior lien will be such that the 
borrower can reasonably be expected to meet them as well as all other 
debts.
    (6) The amount of the indebtedness against the security property, 
including the amount of the subordination, will not exceed its present 
market value.
    (7) When an increase in the amount of the prior lien or a new prior 
lien is involved, subordination will be granted only when the funds will 
be used for the same purposes for which the loan of the same type is 
authorized; except, all LH loans on a farm tract may be subordinated for 
essential farm improvements and any other purpose for which an FmHA or 
its successor agency under Public Law 103-354 Farm Ownership loan can be 
made as described in Sec. 1943.16 of subpart A of part 1943 of this 
chapter. LH loans will not be subordinated to provide operating capital 
or purchase chattels. If the LH loan is secured only by the LH units and 
the project site, the LH loan will only be subordinated for purposes for 
which an LH loan may be made.
    (8) Any proposed development will be planned and performed according 
to subpart A of part 1924 of this chapter or

[[Page 374]]

in a manner directed by the other creditor which reasonably attains the 
objectives of subpart A of part 1924 of this chapter and is concurred 
with by the State Director.
    (9) Funds to be used for development or enlargement of farm 
operations will be handled as prescribed for loan funds in subpart A of 
part 1902 of this chapter except that, if the creditor will not permit 
the use of a supervised bank account, arrangements should be made to 
assure that funds will be spent for planned purposes and should be 
approved by the District Director before being released.
    (10) In case of land purchase, FmHA or its successor agency under 
Public Law 103-354 will obtain the best lien obtainable on the land 
purchased.
    (11) Subordinations need not cover the entire site. If a 
subordination is requested to permit an interim lender to advance 
construction funds, only the portion of the site scheduled for 
construction will be subordinated. If the entire farm tract has been 
taken as security for a LH loan, subordination of the lien on all 
property except the minimum adequate site, including necessary ingress 
and egress, on which the LH units are situated, may be authorized for 
any purpose consistent with the LH program regulations and paragraph 
(b)(7) of this subpart. For RHS loans, the prorated portion of the lien 
for the individual lots may be subordinated to permit construction of 
dwelling units utilizing conditional commitments as authorized in the 
RHS program regulations.
    (12) All subordination requests will be forwarded to OGC for review. 
The guidance of OGC should be obtained in the preparation of the 
documents necessary to effect the subordination.
    (13) The subordination is for a specific amount.
    (14) The proposed action will not change the nature of the 
borrower's activities so as to make it ineligible for appropriate loan 
program assistance.
    (15) The subordination must not adversely impact the agency's 
ability to service the loan according to program regulations, and has 
been determined to be within the bounds of good judgment considering the 
intent, funding limitations, and respective program authorities.
    (16) An agreement to provide notice of foreclosure must be obtained 
from any new prior lienholder as required in subpart B of part 1927 of 
this chapter. As appropriate, any junior lienholders consent to the 
transaction and use of proceeds will be obtained prior to approval of 
the transaction.

[49 FR 49587, Dec. 21, 1984; 50 FR 21583, May 28, 1985, as amended at 56 
FR 67484, Dec. 31, 1991]



Sec. 1965.80  [Reserved]



Sec. 1965.81  Severance agreements.

    (a) General policies. Severance agreements or other instruments of 
similar effect under which a borrower may acquire through other credit, 
items such as laundry equipment, air conditioning units, and basic 
household furnishings that will not become part of real estate security, 
may be approved by the State Director, provided:
    (1) The transaction will not adversely effect the FmHA or its 
successor agency under Public Law 103-354's security position and any 
additional obligations incurred will be within the borrower's repayment 
ability.
    (2) The items covered by the severance agreement are needed in the 
successful operation of the security property.
    (3) The financing arrangements are otherwise sound and proper.
    (b) Handling requests. Requests will be made on Form FmHA or its 
successor agency under Public Law 103-354 465-1. The District Director 
will forward to the State Director a properly completed and executed 
Form FmHA or its successor agency under Public Law 103-354 465-1, any 
proposed severance agreement, the case file, and specific 
recommendations regarding the request.
    (c) Consent and approval. The State Director will indicate approval 
or disapproval on Form FmHA or its successor agency under Public Law 
103-354 465-1. The OGC will be requested to prepare or approve the form 
of severance agreement and issue any special instructions when 
necessary.

[[Page 375]]



Sec. 1965.82  [Reserved]



Sec. 1965.83  Consent to junior liens.

    (a) General policies. Borrowers will be strongly discouraged from 
giving junior liens to other creditors on the FmHA or its successor 
agency under Public Law 103-354 security property. Each request for 
consent to junior liens will be made on Form FmHA or its successor 
agency under Public Law 103-354 465-1.
    (b) Conditions of approval. The State Director may approve a junior 
lien if the request for the lien is authorized prior to the lien being 
placed against the property under the following conditions:
    (1) The junior lien will enable the borrower to obtain additional 
credit to make needed improvements or repairs on the security property 
for purposes for which a loan of the same type involved could be made 
and funds in the reserve account have been depleted. Except, zero 
interest loans available from other Federal, State or local agencies, 
authorities, or commissions; and those from utility companies regulated 
by such governmental bodies, may be secured by a junior lien when the 
State Director determines it is in the best interest of the FmHA or its 
successor agency under Public Law 103-354, borrower and tenants 
irrespective of the balance in the reserve account.
    (2) The junior lien will improve the borrower's total financial 
condition or debt-paying ability as it relates to the multiple family 
housing project.
    (3) The terms of the junior lien will not jeopardize the borrower's 
ability to repay the FmHA or its successor agency under Public Law 103-
354 indebtedness and, in the case of RRH, RCH, and LH loans, will not 
result in increased rental rates for the project unless authorized 
according to exhibit C to subpart C of part 1930 of this chapter.
    (4) The junior creditor agrees in writing that foreclosure action 
under their lien will not be initiated before holding a discussion with 
the District Director and after giving a reasonable period of notice to 
FmHA or its successor agency under Public Law 103-354, and any operating 
plans of the junior lien holder are consistent with FmHA or its 
successor agency under Public Law 103-354 requirements.
    (5) Security for the junior lien must not include project income or 
revenue.
    (6) No junior liens will be authorized in connection with a transfer 
of ownership.
    (7) The total debt (including the outstanding FmHA or its successor 
agency under Public Law 103-354 loan balance) is within the State 
Director's approval authority.
    (8) All other requests for consent to junior liens must be submitted 
to the National Office with complete comments and recommendations from 
both the District Director and State Director, and all of the borrower's 
case files. Such requests will be reviewed on a case-by-case basis and 
appropriate authorization given or withheld depending on the individual 
merits of the proposal and its compatibility with the respective loan 
program requirement.
    (9) When a junior lien is placed on any property without the prior 
consent of FmHA or its successor agency under Public Law 103-354, the 
account will be serviced for liquidation with the guidance of OGC 
according to the security instruments. However, the State Director may 
request permission to post approve the junior lien by submitting a 
formal request to the National Office provided he/she determines that 
all other conditions set forth in this section are met.



Sec. 1965.84  [Reserved]



Sec. 1965.85  Default and liquidation.

    (a) General. Liquidation will be recommended only after all efforts 
by FmHA or its successor agency under Public Law 103-354 officials have 
failed to effect a satisfactory solution whereby the borrower will 
comply with its obligations under the note, mortgage, loan agreements or 
resolution, and all related security agreements and other instruments. 
Liquidation, whether by voluntary conveyance or foreclosure, will be 
handled in strict accordance with the provisions of subpart A of part 
1955 of this chapter. FmHA or its successor agency under Public Law 103-
354 Form 1965-11, ``Accelerated Repayment Agreement,'' will not be used 
in lieu of foreclosure for RRH, LH, or RCH loans

[[Page 376]]

unless specific prior written authorization is received from the 
National Office.
    (b) Servicing delinquent accounts. Delinquent multiple housing 
accounts will be serviced according to the respective program 
requirements and the following:
    (1) The District Director will service delinquent accounts with 
guidance and assistance as necessary from the State Director. Every 
delinquent borrower will be serviced according to a routine established 
for the particular loan type by the State Director. The following 
sequential steps should be taken for each delinquent account:
    (i) Each quarterly delinquency Report Code 616 and 621 or other 
official FmHA or its successor agency under Public Law 103-354 Report 
will be reviewed for accuracy by the State Director. The following 
delinquency classification system for multi-housing accounts may be 
used. The District Director will classify each account on the Report 
Code 621, as follows:

D1--Delinquent; a servicing plan or action has not been formulated
D2--Audit trail has been completed to verify amount delinquent
D3--Agreement has been made with borrower to become current within a set 
period
D4--Transfer or substitution of membership interests is in process to 
correct the delinquency
D5--Reamortization is in process
D6--Account has been accelerated
D7--Borrower is in bankruptcy
D8--Voluntary conveyance is planned
D9--A subsequent loan is planned to correct delinquency
D10--Other (litigation, abandonment before action taken, etc.)
C1--Current (D/O records show the account current)
C2--Audit trail completed that shows D/O or F/O error (double 
maturities, misapplication, etc.) and action taken has been taken to 
correct the error
C3--Account paid current since latest Report Code 616 or 621
C4--Other
C5--Requesting an exception to the late fee charged to the account 
according to subpart K of part 1951 of this chapter, when appropriate.
X1--Property in inventory (from foreclosure, voluntary conveyance or 
bankruptcy)
X2--Credit Sale finalized
X3--Charge-off of account in process
X4--Transfer or reamortization closed; waiting for F/O to process
X5--Other

    (ii) if the report is in error, the District Director will 
immediately contact the Finance Office and provide any information 
necessary to correct the report and/or remove the account from the 
delinquent status. These communications with the Finance Office should 
be directed to the Multiple-Family Housing unit. Before contacting the 
Finance Office, the District Director must complete a field audit of the 
account to be submitted with the inquiry.
    (iii) If the report is accurate and a delinquency indeed exists, the 
District Director will immediately contact the borrower to determine the 
reason for the delinquency and will attempt to collect either in a lump 
sum or in additional monthly payments over a short period of time, 
usually not to exceed one year. This should include foregoing any cash 
return until the account is current.
    (iv) Within 30 days of receipt of the quarterly delinquency report, 
the District Director will submit to the State Director a detailed 
report with specific comments and recommendations for servicing each 
delinquent account. This report will classify the accounts and indicate 
which accounts are actually delinquent. Emphasis will be placed on 
performing delinquency servicing actions to reduce true delinquencies. 
The State Director will assist the District Director in developing a 
realistic servicing plan for each delinquent account. The State Director 
will prepare a statewide delinquency reduction plan annually and update 
it quarterly based on the delinquency reports and information provided 
by the District Directors. Appropriate consideration should be given to 
reamortizing, transferring, conveying or foreclosing accounts 
recognizing the willingness of the borrower to cooperate and comply with 
FmHA or its successor agency under Public Law 103-354 requirements and 
to meet the purposes for which the loan was made. Consideration should 
also be given to:
    (A) Adequate budgeting of project income and expenses.
    (B) Improving management and outreach.

[[Page 377]]

    (C) Implementing interest credit and/or rental assistance if the 
borrower and project qualify.
    (D) Participating in the HUD Section 8 program for existing housing 
through the local Public Housing Agency (PHA).
    (E) Effecting a justified rent increase according to applicable 
program requirements.
    (F) Obtaining an assignment of project income.
    (2) District Directors should be firm in dealing with the borrower 
or the borrower's representative. However, the management agent is not 
the party ultimately responsible for the loan, and it is therefore 
imperative that the borrower fully understand the consequences of the 
default. Courtesy, cooperation and sound judgment must be involved. If 
the delinquent account cannot be brought current within a reasonable 
period, steps should be taken according to subpart A of part 1955 of 
this chapter to protect the Government's interest.
    (c) Failure to maintain reserves. A borrower's failure to maintain 
adequate reserves should be treated in a manner similar to delinquent 
accounts. The District Director should carefully monitor the required 
transfers to the reserve account. Borrowers who fail to make the 
required transfers or use reserve funds without prior FmHA or its 
successor agency under Public Law 103-354 authorizations should be 
carefully counseled. Demand should be made upon borrowers misusing the 
reserve account to promptly correct any deficiency. As appropriate, the 
District Director may request assistance from the State Director. As 
necessary to protect the Government's interests, assistance from OGC 
should be requested through the State Office.
    (d) Nonmonetary defaults. Attempts to resolve nonmonetary defaults 
should be handled whenever possible at the District Office level with 
appropriate guidance and assistance from the State Office. The State 
Director should counsel with OGC, to determine the appropriate servicing 
actions in those cases where nonmonetary defaults cannot be resolved at 
the District Office level. These actions may include liquidation of the 
account.
    (e) Liquidation. Liquidation of all multiple-family type loans will 
be handled according to the applicable portions of subpart A of part 
1955 of this chapter. In cases of forced liquidation where the 
acceleration notice has been delivered and the borrower has willfully 
failed to make the required loan payments, eligible tenants are not 
occupying the units and/or the borrower is not collecting the approved 
rents or transmitting the required payments to FmHA or its successor 
agency under Public Law 103-354, any outstanding interest credit 
agreement will be cancelled after the appeal period prescribed in 
subpart B of part 1900 of this chapter has expired. However, the rental 
assistance agreement will not be cancelled until the foreclosure action 
has been completed and the redemption period has expired according to 
paragraph XIV B 5 of exhibit E of subpart C of part 1930 of this 
chapter. In no cases will RA be renewed during the redemption period. In 
all liquidation cases, the State Director will be responsible for the 
final decision to liquidate the account based upon an opinion from the 
OGC and the following information supplied by the District Director:
    (1) The specific recommendations of the District Director on the 
method of carrying out the liquidation,
    (2) The case file and any other pertinent information developed in 
support of the accusations,
    (3) A summary of FmHA or its successor agency under Public Law 103-
354 efforts to work out an acceptable solution short of liquidation,
    (4) A current appraisal of the security property as required by FmHA 
or its successor agency under Public Law 103-354 Instruction 1922-B 
(available in any FmHA or its successor agency under Public Law 103-354 
office) will be completed by an FmHA or its successor agency under 
Public Law 103-354 official authorized to make that particular type of 
appraisal and an estimate of the net amount that may be realized from 
the sale of the assets,
    (5) The most recent balance sheet or financial statement from the 
borrower,
    (6) A current statement of account from the Finance Office, and
    (7) A problem case report using Form FmHA or its successor agency 
under

[[Page 378]]

Public Law 103-354 465-7, ``Report on Real Estate Problem Case,'' or 
exhibit A to subpart A of part 1955 of this chapter as appropriate.

[49 FR 49587, Dec. 21, 1984, as amended at 50 FR 8605, Mar. 4, 1985; 51 
FR 11564, Apr. 4, 1986]



Sec. 1965.86  [Reserved]



Sec. 1965.87  Miscellaneous security.

    (a) Membership liability agreements. As a loan approval requirement, 
some borrowers may have special agreements with members of the 
organization for the purchase of shares of stock or for the payment of a 
pro rata share of the loan in the event of default, or they may have 
instruments which are commonly referred to as individual liability 
agreements which are usually assigned to and held by the FmHA or its 
successor agency under Public Law 103-354 as additional security for the 
loan. In other cases the borrower's note may be endorsed by individuals. 
These security and liability instruments will be serviced in a manner 
indicated by the agreements to adequately protect the interest of the 
FmHA or its successor agency under Public Law 103-354. The State 
Director will develop servicing actions with the assistance of OGC.
    (b) Other security. Other security such as collateral assignments, 
assignments of rents, Housing Assistance Payments Contracts, and notices 
of lienholder interest will be serviced according to acceptable 
practices in the respective states. The State Director should develop 
any special servicing actions with the assistance of OGC to protect the 
interest of FmHA or its successor agency under Public Law 103-354. 
Evidence of the security will be filed in the loan docket in the 
District Office. A notation will be made on the Management System Card 
showing that the security has been retained. When other security is 
taken, a plan for servicing it should be developed by the approval 
official and included as an approval condition at the outset.



Sec. 1965.88  Obtaining additional security for inadequately secured loans.

    (a) General policies. As a general policy, additional security for 
multiple housing loans should not be needed or taken to protect the 
interest of FmHA or its successor agency under Public Law 103-354. 
However, the State Director may authorize taking additional security in 
the form of real estate or other security as described in Sec. 
1965.87(b) of this subpart when the additional security is needed to 
enhance the chances that the FmHA or its successor agency under Public 
Law 103-354 will not suffer a loss and any of the following conditions 
exist:
    (1) The account is behind schedule.
    (2) The property has not been properly managed or maintained.
    (3) There is serious doubt that the borrower can carry out the 
objectives of the loan.
    (b) Conditions of approval. In cases where the District Director 
determines that the conditions as stated in paragraph (a) of this 
section exist, the borrower's case file will be forwarded to the State 
Director with a memorandum providing the following information:
    (1) The facts which justify the taking of additional security.
    (2) A conservative estimate of the market value of any real estate 
to be mortgaged; however, it will not be necessary to make a formal 
appraisal of the property to be mortgaged unless determined necessary by 
the State Director.
    (3) A brief description of any existing liens on the additional 
security including the repayment terms and the unpaid balance.
    (4) The name of the title holder and how title to the property is 
held. Title evidence need not be required.
    (5) A plan for servicing the additional security to be taken.
    (6) A description of the other servicing alternatives available to 
assure that the objectives of the loan will be met and to protect the 
Government from loss.
    (c) Processing. The guidance and assistance of OGC will be obtained 
whenever additional security is taken. The highest quality security 
available will be taken whenever additional security is considered.

[49 FR 49590, Dec. 21, 1984. Redesignated at 55 FR 29564, July 20, 1990]

[[Page 379]]



Sec. 1965.89  Equity take-out for loans made after December 15, 1989.

    For initial loans made or insured pursuant to contracts entered into 
on or after December 15, 1989, equity loans may be guaranteed by FmHA or 
its successor agency under Public Law 103-354 after a 20-year period, 
from the date of the loan, has elapsed. The following steps will be 
followed when a borrower wishes to receive this equity:
    (a) Borrower submits a plan requesting an equity loan which ensures 
that the cost of amortizing the loan doesn't result in the displacement 
of very low-income tenants or substantially alter the income mix of the 
tenants in the project.
    (b) FmHA or its successor agency under Public Law 103-354 will 
determine whether the housing will continue to remain decent, safe, and 
sanitary and that the local housing market is such that the housing will 
continue to meet the needs of eligible tenants for the remaining life of 
the initial loan.
    (c) In accordance with the conditions outlined in subpart E of this 
part, FmHA or its successor agency under Public Law 103-354 will offer 
to guarantee an equity loan to the borrower which may be repaid from an 
occupancy surcharge account in accordance with subpart K of part 1951 of 
this chapter. In addition it must be determined that such an equity loan 
would not impose undue hardship on tenants or unreasonable cost to the 
Federal Government. The guaranteed loan will not exceed the lesser of:
    (1) The amount determined and calculated in accordance with the 
equity loan instructions contained in subpart E of this part or (2) 30 
percent of the appraised value of the project at the time of the initial 
loan as shown on the appraisal for that loan.
    (d) If the borrower indicates preliminary acceptance of the equity 
loan, an application will be completed in accordance with subpart E of 
part 1944 of this chapter and two appraisals will be conducted in the 
manner outlined in subpart E of part for loans to nonprofit 
organizations.
    (e) When the actual amount of the guaranteed equity loan is 
determined, the borrower will indicate acceptance of the loan.

[55 FR 29564, July 20, 1990, as amended at 56 FR 66964, Dec. 27, 1991; 
58 FR 38930, July 21, 1993]



Sec. 1965.90  Payment in full.

    (a) Prepayment of multi-family housing loans. Subpart E of this part 
must be complied with for all multi-family housing loans that are 
planned to be prepaid prior to the scheduled final due date of the loan.
    (b) Borrower responsibility. Borrowers must advise the District 
Office servicing the account of any plan to pay the account in full 6 
months prior to the date of the planned payment in full.
    (c) FmHA or its successor agency under Public Law 103-354 
responsibility. The FmHA or its successor agency under Public Law 103-
354 District Office must ensure payments in full and releases of 
security are processed in accordance with subpart D of part 1951 of this 
chapter and other appropriate program requirements and regulations. FmHA 
or its successor agency under Public Law 103-354's interest in property 
insurance will be released in accordance with Sec. 1806.4 (a)(3) of 
subpart A of part 1806 of this chapter (paragraph IV A 3 of FmHA or its 
successor agency under Public Law 103-354 Instruction 426.1). In all 
cases, references to County Supervisors will be construed to mean 
District Directors when applied to multi-family housing borrowers.

[58 FR 38930, July 21, 1993]



Sec. 1965.91  Servicing loans in formerly eligible areas.

    All servicing actions contained in this subpart are authorized 
without regard to whether the area is no longer defined as an eligible 
area.



Sec. 1965.92  Information to be provided to IRS on RRH transfers, 
voluntary conveyances, foreclosures, and 100% membership changes.

    State Offices are to provide information to the National Office for 
submission to IRS at their request on RRH transfers, voluntary 
conveyances and foreclosures that were finalized (the deed recorded) 
subsequent to January 22, 1985. In addition, information is to

[[Page 380]]

be provided on changes of membership interests that are covered under 
Sec. 1965.63 of this subpart which result in a 100 percent change in 
the entity membership, such as, beneficial interests, partnership 
interests and stock transfers. Exhibit A to this subpart (available in 
any FmHA or its successor agency under Public Law 103-354 office) must 
be completed for each project affected with particular attention given 
to supplying the Employer Identification and/or the Social Security 
numbers of the parties involved. Field Offices should not contact the 
borrowers or transferees for information that is not otherwise available 
from the casefiles, except in the case of missing Taxpayer 
Identification numbers. Exhibit A available in any FmHA or its successor 
agency under Public Law 103-354 office will be prepared when the 
servicing action is completed and sent to the National Office within 30 
days of the servicing action.

[49 FR 49587, Dec. 21, 1984, as amended at 52 FR 24291, June 30, 1987; 
58 FR 38930, July 21, 1993]



Sec. 1965.93  [Reserved]



Sec. 1965.94  State supplements.

    State supplements will be prepared with the advice of OGC as 
necessary to comply with State laws and to provide guidance to the 
District Director in the servicing actions required. All State 
supplements, unless specifically authorized by particular subsections of 
this subpart must be submitted for prior National Office approval before 
implementation. Requests for approval must include complete 
justification, citations of State law, and appropriate legal opinions 
from the respective Regional Attorney.



Sec. 1965.95  [Reserved]



Sec. 1965.96  Nondiscrimination.

    Each instrument of conveyance for any transfer or foreclosure sale 
of real property subject to Title VI of the Civil Rights Act of 1964 
will contain the following convenant:

    The property described herein was obtained or improved through 
Federal financial assistance. This property is subject to the provisions 
of Title VI of the Civil Rights Act of 1964 and the Rehabilitation Act 
of 1973 and the regulations as issued pursuant thereto for so long as 
the property continues to be used for the same or similar purposes for 
which the Federal financial assistance was extended or for so long as 
the purchaser owns it, whichever is later.



Sec. 1965.97  Exception authority.

    The Administrator of the Farmers Home Administration or its 
successor agency under Public Law 103-354 may, in individual cases, make 
an exception to any requirement of this Subpart not inconsistent with 
the authorizing statute if the Administrator finds that application of 
the requirement would adversely affect the interest of the Government or 
the immediate health or safety of the tenants or the community. The 
Administrator will exercise the authority only at the request of the 
State Director. The State Director will submit the request supported by 
data which demonstrates the adverse impact, identifies the particular 
requirement involved, shows proper alternative courses of action, and 
identifies how the adverse impact will be eliminated.



Sec. Sec. 1965.98-1965.99  [Reserved]



Sec. 1965.100  OMB control number.

    The reporting and recordkeeping requirements contained in this 
regulation have been approved by the Office of Management and Budget and 
have been assigned OMB control number 0575-0100. Public reporting burden 
for this collection of information is estimated to vary from 10 minutes 
to 4.25 hours per response, with an average of 1.67 hours per response 
including time for reviewing instructions, searching existing data 
sources, gathering and maintaining the data needed, and completing and 
reviewing the collection of information. Send comments regarding this 
burden estimate or any other aspect of this collection of information, 
including suggestions for reducing this burden, to Department of 
Agriculture, Clearance Officer, OIRM, Room 404-W, Washington, DC 20250; 
and to the Office of Management and Budget, Paperwork Reduction Project 
(OMB 0575-0100), Washington, DC 20503.

[56 FR 28039, June 19, 1991, as amended at 58 FR 38930, July 21, 1993]

[[Page 381]]

Subparts C-D [Reserved]



Subpart E_Prepayment and Displacement Prevention of Multi-Family Housing 
                                  Loans

    Source: 58 FR 38931, July 21, 1993, unless otherwise noted.



Sec. 1965.201  General.

    Requests to pay Multi-Family Housing (MFH) loans in full require 
that certain actions be taken to ensure the affordability of housing for 
specified tenants for a guaranteed period of time. The requirement 
applies to all projects, whether or not they are subject to restrictive-
use provisions or prohibitions on prepayment. This subpart provides 
step-by-step guidance for use by Farmers Home Administration or its 
successor agency under Public Law 103-354 (FmHA or its successor agency 
under Public Law 103-354) and MFH borrowers when prepayment requests are 
made. The steps outlined are mandated by the Rural Rental Housing 
Displacement Prevention Provisions of the Housing and Community 
Development Act of 1987. When a MFH project is subject to multiple FmHA 
or its successor agency under Public Law 103-354 MFH loans, and the 
borrower offers prepayment or payment in full for one or more but not 
all of the MFH loans on the project, the borrower will not be allowed to 
pay off the most restrictive loan without invoking the prepayment 
provisions of this subpart, unless the borrower agrees to be bound by 
the more restrictive provisions for the balance of the time period 
remaining on the more restrictive loan being paid in full.



Sec. 1965.202  Definitions.

    Affordable housing. Housing with a rent rate which does not create 
new or increased rent overburden for tenants of prepaying projects.
    Displaced tenant. A displaced tenant is a tenant who is either 
forced to move from a project or a tenant who experiences new or 
increased rent overburden as a result of prepayment of a MFH loan. The 
new or increased rent overburden may occur at the time of prepayment or 
at any time in the future restrictive-use provisions are in force.
    Income limits. Very low, low, and moderate income are defined in 
accordance with Appendix 9 of HB-1-3550 (available in any Rural 
Development office).
    Letter of priority entitlement (LOPE). A letter issued by FmHA or 
its successor agency under Public Law 103-354 to a tenant displaced 
through a prepayment action that will give the tenant priority on 
waiting lists at any FmHA or its successor agency under Public Law 103-
354 project for which they may qualify.
    Local nonprofit corporation or public agency. A public agency or 
nonprofit corporation which operates primarily in the local community 
and its trade area. Local nonprofit corporations must have a broad based 
board reflecting various interests in the community or trade area. A 
public agency must be organized in accordance with State and local 
statutes. Either type of organization must include as one of its primary 
purposes developing or managing low-income housing or community 
development projects, which meet the requirements of Sec. 
1944.211(a)(10)(i) of subpart E of part 1944 of this chapter. County-
wide agencies/corporations may meet the definition of local organization 
if, in the judgment of the District Office, the community's trade area 
is county-wide. Tenant associations and cooperatives may meet the 
definition if they are organized as nonprofit organizations.
    Market Area. The market area is the community in which the project 
is located and those outlying rural areas which are impacted by the 
project (excluding all other established communities).
    Minorities. Individuals such as members of the following groups: 
African-American, not of Hispanic Origin; Hispanic; American Indian or 
Alaskan Native; and Asian or Pacific Islander. Refer to FmHA or its 
successor agency under Public Law 103-354 Instruction 1900-A (available 
in any FmHA or its successor agency under Public Law 103-354 office) for 
further clarification and a description of each group.
    Prepayment. A loan which has been paid by the borrower in full, 
before the

[[Page 382]]

loan maturity date. After a prepayment, no FmHA or its successor agency 
under Public Law 103-354 loan remains on the property and the property 
is removed from the FmHA or its successor agency under Public Law 103-
354 program, although restrictive-use provisions may remain.
    Prohibition on prepayment. Loans which may not be prepaid prior to 
the final amortization date as described in Sec. 1965.208 of this 
subpart.
    Protected population. Individuals or families, whether very low, 
low, or moderate income, who are current tenant or wish to occupy rural 
rental housing (RRH) or labor housing (LH), and who are protected by a 
particular restrictive-use provision.
    Regional or national nonprofit corporation or public agency. Any 
public agency or nonprofit corporation meeting the conditions in Sec. 
1965.216(c) of this subpart, which operates in an area larger than the 
local community and its trade area, or, if a nonprofit corporation, does 
not also have a broadly-based membership and board of directors 
reflecting various interests in the community or trade area, and does 
not have among its officers or directorate persons or parties with a 
material interest in (or persons or parties related to any person or 
party with such an interest) in loans financed under section 515 that 
have been prepaid. The primary purposes of the organization need not 
include developing or managing low-income housing or community 
development projects.
    Rent overburden. Shelter costs (rent and anticipated utility costs) 
exceeding 30 percent of a tenant's adjusted income, or the amount of 
payment designated by a third-party payor as shelter cost, whichever is 
greater.
    Restrictive-use provisions. Conditions restricting the use of the 
property to housing for very low-, low- and/or moderate-income tenants, 
whether or not the FmHA or its successor agency under Public Law 103-354 
loan is in force or has been paid in full as described in Sec. 1965.209 
of this subpart.
    Section 8. Tenant rental subsidies as provided under the Housing and 
Urban Development (HUD) section 8 Housing Assistance Payment Program.
    Unsubsidized conventional housing. Housing which receives no 
interest or project based rent subsidies, and which has no maximum 
income limits for its residents. When a borrower submits a request for 
prepayment of the FmHA or its successor agency under Public Law 103-354 
loan, the anticipated use of the project will be considered as 
unsubsidized conventional housing.

[58 FR 38931, July 21, 1993, as amended at 67 FR 78329, Dec. 24, 2002]



Sec. 1965.203  Nonprofit organization and public agency interest lists.

    Nonprofit organizations and public agencies interested in being 
notified of projects being offered for sale by FmHA or its successor 
agency under Public Law 103-354 borrowers wishing to prepay should 
contact FmHA or its successor agency under Public Law 103-354. Local 
nonprofit and public agencies wishing to purchase projects in one 
district need only contact the applicable FmHA or its successor agency 
under Public Law 103-354 District Office. Organizations or agencies 
interested in one state only should contact the FmHA or its successor 
agency under Public Law 103-354 State Office. National and regional 
nonprofit organizations interested in receiving multi-state 
notifications should contact the FmHA or its successor agency under 
Public Law 103-354 National Office. Interested organizations should 
submit their names, addresses, contact persons, and the areas in which 
they wish to purchase. The notification to FmHA or its successor agency 
under Public Law 103-354 must be updated annually if the organization 
wishes to continue to receive notifications of pending prepayments. FmHA 
or its successor agency under Public Law 103-354 will send notices 
requesting the update at least 30 days prior to removing the 
organization's name from the list. The National Office will not verify 
the eligibility of the organizations requesting notification, but will 
periodically forward the names of interested organizations to State 
Offices. The State Office will periodically compile a list of interested 
nonprofit organizations and public agencies and forward the list to its 
District Offices.

[[Page 383]]



Sec. 1965.204  Processing prepayment requests and related rent increases.

    (a) Chronological order of steps in processing prepayment requests. 
Prior to approving prepayment of an FmHA or its successor agency under 
Public Law 103-354 MFH loan, FmHA or its successor agency under Public 
Law 103-354 must determine the eligibility and ability of the borrower 
to prepay the loan; attempt to keep needed housing in the very low-, 
low-, and moderate-income market; and ease the transition of tenants 
that may be affected by the conversion of a federally-financed project 
to unsubsidized conventional housing. The remainder of this procedure 
provides the chronological order for the actions to be taken:
    (1) Borrower written request for prepayment (Sec. 1965.205 and 
exhibit C of this subpart).
    (2) Required notifications (Sec. 1965.206 of this subpart).
    (3) Evaluation of borrower ability to prepay (Sec. 1965.211 and 
exhibit E of this subpart).
    (4) FmHA or its successor agency under Public Law 103-354 incentive 
offer and borrower decision regarding incentives (Sec. Sec. 1965.213 
and 1965.214 and exhibits D and E of this subpart).
    (5) Evaluation of project need by FmHA or its successor agency under 
Public Law 103-354 (Sec. 1965.210 and exhibit E of this subpart).
    (6) Approval of prepayment under exception authority (Sec. 1965.215 
and exhibit E of this subpart).
    (7) Sale to nonprofit organizations or public agencies (Sec. Sec. 
1965.216 and 1965.217 of this subpart).
    (8) Approval of prepayment in the absence of interest in purchase by 
nonprofit organization of public agency (Sec. Sec. 1965.218 and 
1965.219 of this subpart).
    (9) Actions to be taken in the event of restrictive-use violations 
(Sec. 1965.222 of this subpart).
    (10) Relationship of these procedures to other servicing actions 
(Sec. 1965.223 of this subpart).
    (11) Prepayment of loans due to advance payments or completion of 
amortized payments (Sec. 1965.224 of this subpart).
    (b) Rent increases resulting from prepayment process. If rent 
increases are necessary due to the making of an equity loan to avert 
prepayment with or without a transfer, the procedures for tenant 
notifications and comment will be followed as set forth in paragraphs IV 
B of exhibit C to subpart C of part 1930 of this chapter. The reason for 
the rent increase will be shown as ``to meet the additional expense 
incurred in order to avert removal of (name of project) from the FmHA or 
its successor agency under Public Law 103-354 program.''

[58 FR 38931, July 21, 1993, as amended at 58 FR 40956, July 30, 1993]



Sec. 1965.205  Borrower request to prepay.

    (a) Prior to initiating a formal prepayment request, borrowers 
considering prepaying their loans should meet with the applicable FmHA 
or its successor agency under Public Law 103-354 Servicing Office to 
discuss the prepayment request and the requirements of this procedure. 
The borrower will be provided with exhibit C of this subpart, to aid in 
completing the prepayment request package.
    (b) At the meeting, the Servicing Office will inform the borrower 
that the project will be evaluated as unsubsidized conventional multi-
family housing for the purposes of determining eligibility for 
incentives. An appraisal will be completed to determine if any equity 
exists in the project when valued as unsubsidized conventional multi-
family housing. The components of the incentive offer, if any, will be 
dependent upon the amount of equity as follows:
    (1) If the project has equity in excess of the borrower's initial 
investment, an equity loan and a combination of additional incentives 
may be considered;
    (2) If no equity exists, but it can be shown that the project can be 
prepaid and operated successfully in the subject market, a combination 
of incentives not including an equity loan will be considered; or
    (3) If, based upon the Servicing Office's knowledge of the market it 
appears likely the project would not qualify for an equity loan, the 
Servicing Office should so inform the borrower during the meeting. 
However, in no instance will the Servicing Office personnel discourage 
eligible borrowers

[[Page 384]]

from submitting a prepayment request, should the borrower so desire.
    (c) Borrowers seeking to prepay MFH loans must submit a complete 
prepayment request to the Servicing Official at least 180 days in 
advance of the anticipated prepayment date (unless an exception is 
granted in accordance with Sec. 1965.215 (f)(2) of this subpart). A 
prepayment request will not be considered complete nor will the 180-day 
period begin until all of the following items have been submitted:
    (1) A written request to prepay the FmHA or its successor agency 
under Public Law 103-354 loan on a specified date;
    (2) Complete and documented information necessary to prepare the 
prepayment report as outlined in exhibit B of this subpart and to make 
the required determination needed to develop an incentive offer as 
outlined in exhibit D of this subpart. Exhibit C of this subpart should 
be used as guidance for the documentation necessary to complete the 
request;
    (3) Documentation of the borrower's ability to prepay under the 
conditions specified in the prepayment request. Exhibit C of this 
subpart should be used as guidance for the documentation necessary;
    (4) Certification that the housing will continue to be administered 
in accordance with Fair Housing Act policies;
    (5) A statement from the borrower accepting restrictive-use 
provisions in the release documents if the borrower wishes to prepay the 
loan subject to restrictions; and
    (6) Evidence that actions required by any applicable State laws 
related to prepayment have been met.



Sec. 1965.206  Review of borrower prepayment request by Servicing Office.

    The Servicing Office will determine whether the prepayment request 
is in conformance with Sec. 1965.205 of this subpart. Within 15 working 
days of receipt of a prepayment request, the Servicing Office will take 
the following actions:
    (a) Return of incomplete requests. If an incomplete request is 
submitted, the Servicing Official will return the request to the 
borrower specifying the additional information needed.
    (b) Receipt of complete requests. If a complete prepayment request 
is submitted, the Servicing Official will:
    (1) Acknowledge the request. Send an acknowledgment letter to the 
borrower specifying the date of receipt of the complete request and 
informing the borrower that prepayment commitments should not be 
finalized until FmHA or its successor agency under Public Law 103-354 
issues a letter of approval.
    (2) Notify current tenants. Notify each tenant household by 
Certified Mail, Return Receipt Requested, of the receipt of the 
prepayment request and prepare notices for the borrower to post in 
public areas of the project. The notices are to remain posted until a 
final determination is made on the prepayment request or the prepayment 
offer is withdrawn. The Servicing Official will not wait to determine if 
submitted information is accurate or if the prepayment will be accepted 
or denied before notifying tenants. FmHA or its successor agency under 
Public Law 103-354 Guide Letter 1965-E-2 (available in any FmHA or its 
successor agency under Public Law 103-354 office) may be used as a 
guide. The following issues are to be addressed in the letter:
    (i) The borrower proposes to prepay the FmHA or its successor agency 
under Public Law 103-354 loan and remove the housing from the FmHA or 
its successor agency under Public Law 103-354 program if all prepayment 
requirements imposed by FmHA or its successor agency under Public Law 
103-354 are met;
    (ii) FmHA or its successor agency under Public Law 103-354's 
preliminary determination that the borrower's request to prepay will/
will not be approved;
    (iii) The likely effect of the prepayment on tenants living at the 
project. Include:
    (A) The level at which rents at the project are projected to be set 
if prepayment is accepted;
    (B) Restrictive-use provisions the borrower has agreed to maintain 
and the terms of the restrictions;
    (C) Whether Section 8 or State or local subsidy will remain with the 
project; and

[[Page 385]]

    (D) Whether the borrower has the option to terminate section 8 
assistance at the next renewal period (opt-out), and if so, when.
    (iv) FmHA or its successor agency under Public Law 103-354 must make 
a determination as to whether tenants would be displaced due to 
increased rents, and whether there is alternative housing available in 
the community that is comparable in quality, size, location and rent 
structure before deciding to accept the prepayment;
    (v) Conditions under which prepayment will be accepted;
    (vi) A 30-day tenant comment period will be available for tenants to 
present comments concerning the proposed prepayment. Tenants will be 
allowed to review the information used by FmHA or its successor agency 
under Public Law 103-354 to make the determinations regarding 
prepayment;
    (vii) Tenants will be given immediate priority for other federally-
financed housing if there will be any displacement;
    (viii) Tenants will be kept apprised of all decisions reached 
regarding acceptance of the prepayment and action dates;
    (ix) Tenants will be given the opportunity to submit evidence at any 
appeal hearing the borrower may request;
    (x) If prepayment is accepted, tenants choosing to stay in their 
units and pay the higher rents, with or without Federal, State, or other 
subsidy, are entitled to do so, unless evicted for cause unrelated to 
prepayment; and
    (xi) Any other information relevant to the case.
    (3) Notify National Office. The Servicing Office is to notify the 
FmHA or its successor agency under Public Law 103-354 State Office, who 
will notify the Assistant Administrator, Housing, FmHA or its successor 
agency under Public Law 103-354 National Office, in writing using the 
format of FmHA or its successor agency under Public Law 103-354 Guide 
Letter 1965-E-1 (available in any FmHA or its successor agency under 
Public Law 103-354 office). National Office notification must be sent by 
the State Office within 20 working days of the receipt of a complete 
request by the Servicing Office.
    (4) Notify other agencies. The FmHA or its successor agency under 
Public Law 103-354 State and Servicing Offices, as appropriate, will 
notify other agencies of the borrower's intent to prepay the FmHA or its 
successor agency under Public Law 103-354 loan. The agencies contacted 
will include nonprofit organizations; local, State, and Federal 
agencies; and public organizations who have expressed an interest in 
purchasing a project and who provide housing assistance to low- and 
moderate-income people. The interest list, compiled in accordance with 
Sec. 1965.203 of this subpart, is to be used in notifying organizations 
of the borrower's intent to prepay. Letters sent to the agencies will 
inform the organizations of the offer to prepay, the extent of any 
anticipated displacement, and the possibility of transfer with 
incentives or sale to a nonprofit organization or public agency. 
Organizations contacted will be advised that an offer to sell may be 
forthcoming. Generally, the FmHA or its successor agency under Public 
Law 103-354 State Office will notify State and Federal agencies and the 
appropriate Servicing Office will notify local agencies.
    (5) New tenant notification. (i) The borrower will be required to 
submit for approval proposed language to be used as an addendum to 
leases for all tenants moving into the project while the prepayment 
request is pending. The language will specify the effect of the 
prepayment on the tenants if prepayment is accepted. The recommended 
language to be included in the leases is as follows:

    ``The mortgage on this project may be repaid to the Federal 
Government on or after (date). (At that time/ (date restrictive-use 
provisions expire)/ (other relevant date), your rent may be raised to --
----/ and/or you may be asked to move from this project.''

    (ii) The borrower will also be required to provide new tenants with 
copies of all letters sent to existing tenants advising them of the 
status of the prepayment. The Servicing Office will also send new 
tenants any additional correspondence sent to existing tenants, but will 
inform the new tenants that they will not be eligible for an LOPE.

[[Page 386]]

    (6) On-going tenant notification. The Servicing Office will 
periodically notify tenants of the status of the prepayment request and 
actions being taken. Tenant notifications are to continue until the loan 
is prepaid, an incentive or loan to a nonprofit is obligated, or the 
prepayment request is withdrawn. Notification will be sent to tenants as 
each decision is made or one year after the last notification, whichever 
is earlier.



Sec. 1965.207  Prohibition on prepayment for loans made on or after 
December 15, 1989, to build or acquire new units.

    Loans made on or after December 15, 1989, to build or acquire new 
RRH units may not be prepaid for the life of the loan, even if the 
borrower is willing to sign restrictions agreeing to operate the project 
for low- and moderate-income people after prepayment. The prohibition 
and conditions for use are described in subpart E of part 1944 of this 
chapter.



Sec. 1965.208  Restrictive-use provisions related to LH projects with 
grants.

    For LH projects with any size grant, no incentive will be offered 
since the grant agreement obligates the borrower to operate the housing 
for its intended use for a 50-year period.



Sec. 1965.209  Restrictive-use provisions after prepayment.

    (a) Restrictive-use provisions protect tenants in prepaid projects 
from future rent increases that would create new or increased rent 
overburden. Restrictive-use provisions apply to all loans approved 
between December 21, 1979, and December 14, 1989, all subsequent loans 
approved on or after December 15, 1989, and those loans approved prior 
to December 21, 1979, subsequently made subject to restrictive-use 
provisions as a result of:
    (1) A servicing action;
    (2) Acceptance of prepayment incentives; or
    (3) Restrictions accepted as a condition of prepayment as specified 
in this subpart and exhibits A-1 through A-4 of this subpart.
    (b) The restrictions mandate that conditions of occupancy, rent, and 
charges other than rent be maintained so that the housing will continue 
to be affordable to the protected population of tenants. Priority for 
tenants entering the project after prepayment must continue to be for 
those tenants in the lowest income category in the protected population, 
if determined eligible for the units. Borrower responsibilities under 
restrictive-use provisions are discussed in greater detail in Sec. 
1965.215 (e)(6) of this subpart.



Sec. 1965.210  Loans approved prior to December 15, 1989--RHS actions 
when processing prepayment requests.

    For loans approved prior to December 15, 1989, that have not 
subsequently accepted prepayment incentives, the Servicing Office or 
other designated office must evaluate the need for the housing to 
determine the level of incentives to be offered, including equity loans, 
and whether the prepayment may be legally accepted with or without 
restrictive-use provisions. A reasonable effort must be made to enter 
into an agreement with the borrower to maintain the housing for low-
income use that takes into consideration the economic loss the borrower 
may suffer by foregoing prepayment. When developing an incentive offer, 
the Servicing Office or other designated office must first offer 
incentives other than equity loans, unless it is determined that 
alternative incentives are not adequate to provide a fair return to the 
borrower, prevent prepayment of the loan, or prevent displacement of the 
tenants. The guidance provided in Sec. Sec. 1965.213 and 1965.214 and 
Exhibit E of this subpart (available in any Rural Development State or 
District Office) will be used to determine the appropriate incentive 
package. Once an incentive offer has been accepted on a project, the 
project will be considered ineligible for future incentive offers until 
such time as the restrictive-use period associated with the incentive 
offer has expired.

[62 FR 25070, May 7, 1997]



Sec. 1965.211  Evaluation of the borrower's ability to prepay the loan.

    The borrower's ability to prepay the loan will be evaluated in 
accordance with exhibit E of this subpart. If it is

[[Page 387]]

determined the borrower does not have the ability to finance the 
prepayment, the prepayment request will be denied. The borrower will be 
notified of the reasons for the decision and appeal rights will be 
given.



Sec. 1965.212  Appraisals.

    To determine the appropriate incentives to offer a borrower, an 
appraisal must be completed. The purpose of the appraisal is to 
determine if the borrower's current equity in the project exceeds the 
initial investment. The project will be appraised as unsubsidized 
conventional multi-family housing. The effect on value of any hard and 
soft costs of conversion of the project from subsidized housing to 
unsubsidized conventional housing will be considered. Additionally, 
project reserve accounts and the present worth of any unexpired non-FmHA 
or its successor agency under Public Law 103-354 project based tenant 
subsidies will be valued as assets of the project for inclusion in the 
appraisal. FmHA or its successor agency under Public Law 103-354 
Instruction 1922-B (available in any FmHA or its successor agency under 
Public Law 103-354 office) will be used for guidance in conducting 
multi-family housing appraisals. After receipt of the appraisal, the 
Servicing Official or other designated official will determine the 
amount of the equity loan, if any, the number of Rental Assistance (RA) 
units necessary, the amount of annual return on investment to be 
offered, and whether excess Section 8 rents may be released to the 
borrower, if applicable.



Sec. 1965.213  Offer of incentives to borrowers.

    The Servicing Official must offer an incentive package to the 
borrower as an inducement to not prepay if the borrower's loan(s) is not 
subject to prohibitions on prepayment or the borrower has not previously 
accepted incentive offers on the project for which the associated 
restrictive-use period has not expired. If a prepayment incentive offer 
which includes any equity loan is accepted, the equity loan may be 
processed and closed with the current borrower or any eligible 
transferee.
    (a) Availability of incentives. Incentives may be offered only if 
the restrictive period has expired for any RRH project loan.
    (b) Available incentives. One or more of the following incentives 
will be offered to the borrower. The amount of incentives will be 
determined in accordance with Exhibits D and E of this subpart 
(available in any Rural Development State or District Office).
    (1) Equity loans. In RRH projects, a subsequent loan may be offered 
for equity for the difference between the current unpaid loan balance 
and a maximum of 90 percent of the project's value appraised as 
unsubsidized conventional housing. Equity loans may not be offered 
unless the servicing official determines that other incentives offered 
under this paragraph are not adequate to provide a fair return on the 
investment of the borrower, to prevent prepayment of the loan, or to 
prevent the displacement of project tenants.
    (2) Rental assistance. Additional RA will be offered if needed by 
current tenants if found necessary by a market determination of need. 
The number of RA units offered will be based upon:
    (i) The increase in rent overburden that will be experienced by 
tenants, in the project as a result of the incentives offered. The 
Multiple Housing Tenant File System (MTFS) will be reviewed to determine 
the number of tenants that will be rent overburdened by the increase in 
rents resulting from any subsequent loan made for equity. The number of 
RA units offered will be equal to the number of tenants experiencing 
rent overburden; and/or
    (ii) A change in the market increasing the need for affordable 
housing. This criteria will usually be used when the project is 
experiencing substantial vacancies due to market factors. Generally, if 
the incentive offer contains a substantial equity loan, it would be 
unlikely that this provision would be consistent with the determination 
that the project is located in a strong unsubsidized market.
    (iii) Reamortizing the existing debt under the provisions of Sec. 
1965.70 of subpart B of this part should be examined to determine if 
reamortization will lower existing debt service, thereby reducing tenant 
rent overburden and the need for additional RA.

[[Page 388]]

    (3) Increase the maximum annual return on investment--(i) Borrower 
equity. The borrower's equity in the project may be increased. The new 
equity is the difference between the value of the project appraised as 
unsubsidized conventional housing in conjunction with the incentive loan 
(if offered) and the unpaid balances of all loans against the project, 
including the incentive loan. If no new appraisal is made, equity will 
be determined by subtracting the outstanding balances of all loans 
against the project from the value shown in the most recent FmHA or its 
successor agency under Public Law 103-354 appraisal completed for the 
project prior to receipt of the prepayment request.
    (ii) Rate of return. Borrowers not eligible to receive an equity 
loan but who are determined likely to prepay will be offered an 
incentive package which may include an increased rate of return. The 
rate to be offered will be the greater of the borrower's current rate 
established in the initial loan, or 2 percent above the 30-year Treasury 
Bond rate, rounded to the nearest \1/4\ percent. The appropriate 
Treasury Bond rate will be determined from newspapers or available 
financial publications and will be the rate published for the first day 
of the month following receipt of the complete prepayment request. The 
rate of return for borrowers receiving equity loans will remain at the 
rate currently established in the initial loan.
    (iii) Recept of increased return. Regardless of any increased return 
on investment agreed to as part of the incentive offer, the actual 
withdrawal of the return remains subject to conditions specified in 
paragraph XII B of exhibit B of subpart C of part 1930 of this chapter.
    (4) Excess section 8 rents. For projects with project-based section 
8 rents, the owner may be permitted to receive rents considered in 
excess of the amounts needed to meet annual project operating and 
maintenance, debt service, and reserve expenses. In conjunction with the 
acceptance of excess section 8 rents as an incentive, the reserve 
account will be adjusted to reflect adequate funding for long-term 
repair, replacement and maintenance costs.
    (5) Conversion or modification of interest credit. Convert full 
profit loans to limited profit Plan II loans or increase the interest 
subsidy for loans with section 8 assistance to make contract rents more 
financially feasible. The conversion would be accomplished by changing 
the designation of the project to Plan II.
    (c) Development of incentive package--(1) Borrowers requesting 
immediate conversion from low and moderate-income use. The required 
borrower information and criteria to be used in determining the 
incentives to offer, along with the steps to develop the incentive 
offer, are listed in exhibits D and E of this subpart.
    (2) Projects committed to low- and moderate-income use after 
prepayment by parties other than FmHA or its successor agency under 
Public Law 103-354. In accordance with exhibits D and E of this subpart, 
incentives will be reduced in proportion to the length of time a project 
is committed to low- and moderate-income use after prepayment through 
requirements of parties other than FmHA or its successor agency under 
Public Law 103-354. The commitment for extended use may be voluntary or 
required by legal restrictions on use. The effect on the value of the 
project will be taken into consideration during the appraisal process.
    (3) Adjustment of project reserve accounts. The reserve account must 
be maintained in conformance with the requirements of paragraph XIII B 2 
c of exhibit B of subpart C of part 1930 of this chapter. At the time an 
incentive offer is developed, the maximum reserve amount should be 
adjusted to include the costs of any deferred maintenance items or 
expected long-term repair or replacement costs of the project.
    (d) Letter offering incentives to borrowers. Within 20 days of the 
end of the tenant comment period, a letter will be sent to borrowers 
outlining the elements of the incentive offer developed in accordance 
with this section and exhibits D and E of this subpart. The letter will 
include the following:
    (1) A statement that the package is a one-time incentive being 
offered in return for the extension of the low and moderate income use 
of the housing.

[[Page 389]]

The letter will establish that, by accepting the incentives outlined in 
the letter, the borrower will be subject to a restrictive-use provision 
obligating the housing to low- and moderate-income use in the FmHA or 
its successor agency under Public Law 103-354 program for 20 years from 
the date the extended use agreement is executed, and prohibited from 
future incentive offers on the project so long as the restrictive-use 
provisions remain in effect.
    (2) The amount of the equity loan being offered (if any). Any offer 
of an equity loan will include a statement that the borrower is subject 
to:
    (i) A continued eligibility determination in accordance with subpart 
E of part 1944 of this chapter; and
    (ii) Appropriation limitations. When an incentive offer that 
includes an equity loan is accepted by a borrower, funding the 
components of the offer is considered binding on FmHA or its successor 
agency under Public Law 103-354. If funds are not immediately available 
to fund an incentive loan, the amount of the offer will be included on a 
funding waiting list maintained by the National Office. Priority for 
funding is based on the date of receipt of the original complete 
prepayment request, as specified in Sec. 1965.205 of this subpart.
    (3) The maximum amount of any increased return on investment 
offered.
    (4) The number of RA units that will be provided to protect existing 
tenants from rent overburden due to other incentives that may increase 
rental rates in the project.
    (5) Interest credit or additional interest credit if needed to 
protect existing tenants from rent overburden due to other incentives 
that may increase rental rates in the project.
    (6) The offer of borrower receipt of excess project-based section 8 
rents, if applicable.
    (7) The offer must be accepted or rejected in writing within 30 
days, or the prepayment request will be voided.
    (8) Appropriation limitations may restrict available incentives each 
year. The actual receipt of the preceding incentives may not be 
forthcoming in the near future. However, the offer is binding on FmHA or 
its successor agency under Public Law 103-354. Acceptance of the 
incentive offer by the borrower will cause the request to be maintained 
on the waiting list for funding until obligated.

[58 FR 38931, July 21, 1993, as amended at 62 FR 25071, May 7, 1997]



Sec. 1965.214  Offering and processing of incentives.

    (a) Borrower does not respond to incentive offer. If the borrower 
does not respond to the incentive offer within 30 calendar days of the 
date of the letter offering incentives, the State Office will advise the 
National Office by means of FmHA or its successor agency under Public 
Law 103-354 Guide Letter 1965-E-1 (available in any FmHA or its 
successor agency under Public Law 103-354 office) to remove the name 
from the waiting list. Tenants and any agencies notified in accordance 
with Sec. 1965.206 (b) of this subpart will be notified by the 
Servicing Office that the borrower has ceased to pursue the prepayment 
request and prepayment will not take place.
    (b) Borrower rejects the incentive offer. If the borrower rejects 
the incentive offer within 30 calendar days, a determination of the 
continued need for the housing as subsidized housing will be made in 
accordance with Sec. 1965.215 (b) and exhibit E of this subpart. 
Tenants will be notified that the borrower has rejected the incentive 
offer and that a decision will be made by FmHA or its successor agency 
under Public Law 103-354 whether to accept the prepayment. The tenants 
will be informed of the factors used in making the decision.
    (c) Borrower indicates acceptance of the incentive package. If the 
borrower indicates a willingness to accept an incentive package which 
includes an equity loan, a complete loan application in accordance with 
exhibit A-11 of subpart E of part 1944 of this chapter will be required. 
If an appraisal of the property has not been completed as required in 
Sec. 1965.212 of this subpart, one will be made at this time in 
accordance with FmHA or its successor agency under Public Law 103-354 
Instruction 1922-B (available in any FmHA or its successor agency under 
Public Law 103-354 office). The Servicing Official will determine the 
feasibility of the loan, including any needed reamortization of

[[Page 390]]

existing loans. No equity loan is to be made without sufficient RA to 
protect current tenants against new or increased rent overburden.
    (d) Application for transfer with incentives. If a transfer is to 
take place simultaneously with the incentive, a complete transfer 
application package, in accordance with Sec. 1965.65 of subpart B of 
part 1965 of this chapter, will be submitted. A completed application 
for an equity loan, if applicable, will be completed and submitted in 
accordance with paragraph (c) of this section. The determination of 
borrower eligibility, evaluation of the transfer and any equity loan 
will be made concurrently. If a proposed transferee is determined not to 
be eligible for the transfer and assumption, appeal rights concerning 
transferee eligibility will be provided to the proposed transferee. If 
the FmHA or its successor agency under Public Law 103-354 decision is 
upheld, the borrower will be given an additional 15 days to reconsider 
whether to accept the original incentive offer.
    (e) Notification that incentives are ready for funding. When the 
borrower indicates that the final incentive offer is acceptable, and the 
processing of the incentive application is complete, the Servicing 
Official will notify the State Office, which in turn will notify the 
National Office of all required information through use of FmHA or its 
successor agency under Public Law 103-354 Guide Letter 1965-E-1 
(available in any FmHA or its successor agency under Public Law 103-354 
office).
    (1) All interested agencies contacted in accordance with Sec. 
1965.206 (b) of this subpart and tenants will be advised that prepayment 
of the loan will not take place. If the ownership is to be transmitted, 
tenants will be so advised. Any rent increases resulting from acceptance 
of an incentive offer will be processed in accordance with Sec. 
1965.204(b) of this subpart.
    (2) The National Office will issue authorizations to obligate 
incentives to the extent possible, depending upon the availability of 
loan funds and RA. Authorizations will be issued in the order in which 
complete prepayment requests were received as set forth in Sec. 
1965.205 of the subpart. To fully utilize all available prepayment 
incentive loan funds and RA, projects with fully processed incentive 
packages may be authorized prior to authorizing packages with earlier 
receipt dates for which incentives have not been fully processed. Any 
other required National Office authorizations will be given at the same 
time.
    (f) Processing the incentives. When authorization to proceed is 
received, the Servicing Office will process the incentives, with or 
without a transfer and make the following amendments to the loan and RA 
agreements with the assistance of the Office of the General Counsel 
(OGC), as appropriate:

(Note: If the project is to be transferred at the time the incentive is 
processed, all obligations will be made to the transferee)

    (1) If the annual return on investment is increased, a statement 
will be added to the loan agreement specifying that, ``The maximum 
annual return on investment is being increased by $------ for a total 
maximum annual return of $------.'' No equity level or rate of return 
need be mentioned.
    (2) If a conversion of profit type is made, the procedures of 
paragraph IV A 2 d of exhibit B of subpart C of part 1930 of this 
chapter will be followed. If the interest subsidy is increased, a new 
Form FmHA or its successor agency under Public Law 103-354 1944-7, 
``Multiple Family Housing Interest Credit and Rental Assistance 
Agreement,'' will be executed.
    (3) Any change in the amount of RA will require the execution of a 
new RA agreement or a change in the existing RA agreement, as described 
in paragraph V C of exhibit E of subpart C of part 1930 of this chapter.
    (4) Loans for equity will be made in accordance with subpart E of 
part 1944 of this chapter. In accordance with Sec. 1951.517 (b)(1) of 
subpart K of part 1951 of this chapter, the equity loan will be 
established as a Predetermined Amortization Schedule System (PASS) loan 
and all existing loans on the project will be converted to PASS. All 
assumptions and transfers will be processed in accordance with Sec. 
1965.65 of subpart B of this part. All existing project loans may be 
consolidated and reamortized in accordance with Sec. Sec. 1965.68 and 
1965.70 of subpart B of this part, unless consolidation is not necessary 
to maintain

[[Page 391]]

feasibility of the project for the current tenants or reduce the level 
of monthly rental subsidies. All delinquent loans must be brought 
current, cost items paid in full, and project operating and reserve 
accounts brought current. All project operating and reserve accounts 
will remain at authorized levels during and after the closing of the 
incentive package, regardless of whether a transfer was included as part 
of the prepayment. All taxes, assessments and other liens must be 
prorated, brought current or paid in full as appropriate. Deferred 
maintenance identified in previous inspections must be performed before 
any equity may be received by the borrower or transferor, as applicable.
    (g) Restrictive-use provisions. The restrictive-use provisions 
contained in exhibit A-1 of this subpart will be inserted in the deed, 
security instruments, loan agreement/resolution, assumption agreement, 
and/or reamortization agreement, as appropriate with the advice of OGC.

[58 FR 38931, July 21, 1993, as amended at 58 FR 40956, July 30, 1993]



Sec. 1965.215  Borrower rejection of incentive offer--approving/disapproving 
prepayment.

    (a) Approving or disapproving prepayments. If the borrower rejects 
the incentive offer and indicates a preference to prepay, prepayment may 
be approved in accordance with paragraph (d) of this section within 180 
days of the decision that the prepayment can be accepted if the 
determinations required in paragraph (c) of this section can be made. 
Exhibit E of this subpart provides additional guidance for making the 
necessary determinations. The State Director or other designated 
official in the National Office, with the recommendation of the 
Servicing Official, will make the decision to either approve or 
disapprove the prepayment request.
    (b) Determining the need for housing. (1) The Servicing Office or 
other designated office will review the following, using exhibit E of 
this subpart as a guide:
    (i) Local market conditions;
    (ii) Information submitted as support for the prepayment request;
    (iii) Responses to the 30-day tenant comment period;
    (iv) the effect of the prepayment on minorities, handicapped 
individuals, and families with children; and
    (v) Any other relevant information.
    (2) The results of the determination of need will be documented in 
the case file.
    (c) Conditions under which prepayment may be approved. In certain 
instances, prepayment may be approved after a borrower has rejected the 
incentive offer. If the decision is made to approve a prepayment 
request, restrictive-use provisions will be inserted in the deed, deed 
of release or satisfaction, if the project is determined to be needed 
under the provisions of the following paragraphs (1)(i) and (ii) of this 
section. The borrower will also execute the applicable restrictive-use 
agreement. If the project has section 8 assistance, the local HUD Area 
Office must be notified. To determine whether a prepayment offer can be 
approved, the following decision steps must be followed by the Servicing 
Office:
    (1) The loan is not currently subject to restrictive-use provisions 
nor prohibition on prepayment. To determine whether a loan not subject 
to restrictive-use provisions or prohibition on prepayment may prepay, 
and if so, what restrictions must be inserted in the release documents, 
the following determinations must be made.
    (i) If the Servicing Office cannot make the determination that 
housing opportunities to minorities will not be materially affected as a 
result of the prepayment, the borrower may prepay if the borrower agrees 
to the following restrictions and inclusion of the applicable 
restrictive language found in paragraph (A) or (B) of exhibit A-4 of 
this subpart, and to execute the applicable Restrictive-Use Agreement 
found in exhibit G-2 or G-3 of this subpart;
    (A) Maintain the housing for low- and moderate-income people for a 
minimum period of 20 years from the date of the closing of the last loan 
or servicing action. At the end of the restrictive-use period, offer to 
sell the housing to a qualified nonprofit organization or public agency 
in accordance with paragraph (e)(9) of this section

[[Page 392]]

and paragraph (A) of exhibit A-4 of this subpart; or
    (B) If 20 years from the date of the closing of the last loan or 
servicing action has already lapsed, offer to sell the housing to a 
qualified nonprofit organization or public agency in accordance with 
paragraph (e)(9) of this section and paragraph (B) of exhibit A-4 of 
this subpart;
    (ii) If the Servicing Office determines that housing opportunities 
to minorities will not be materially affected as a result of prepayment, 
but that there is an inadequate supply of safe, decent, and affordable 
rental housing within the market area, the borrower may prepay if the 
borrower agrees to the following restrictions and inclusion of the 
applicable restrictive-use language found in paragraph (C) of exhibit A-
4 of this subpart and agrees to execute the Restrictive-Use Agreement 
found at exhibit G-4 of this subpart:

Maintain the housing for current eligible tenants in occupancy as of the 
date of the prepayment for the life of the project or until the current 
tenants are no longer eligible for the housing under FmHA or its 
successor agency under Public Law 103-354 regulations, or the tenants 
choose to vacate of their own will. The owner will ensure the tenants 
will not be displaced due to a change in the use of the housing, an 
increase in the rental or other charges as a result of the prepayment, 
or a decrease in income. Existing tenants are protected to ensure that 
none experience new or increased rent overburden until each voluntarily 
moves from the project.
    (iii) If the Servicing Office determines that housing opportunities 
to minorities will not be materially affected as a result of prepayment, 
and that there is an adequate supply of safe, decent, and affordable 
rental housing within the market area for the foreseeable future, the 
borrower may prepay without restrictions. The provisions of paragraph 
(c)(3) of this section will apply.
    (2) The loan is subject to restrictive-use provisions and the 
borrower agrees to continue to adhere to the provisions after 
prepayment. In accordance with exhibit A-3 of this subpart, the borrower 
agrees to continue to maintain the housing in accordance with the 
restrictions already in effect. The borrower must also agree to execute 
the Restrictive-Use Agreement found at exhibit G-1 to this subpart.
    (3) It is determined by FmHA or its successor agency under Public 
Law 103-354 that restrictions are not needed. If actions in accordance 
with Sec. 1965.206 (b)(2) of this subpart and paragraph (e)(3) of this 
section have been taken to ensure that alternative rental housing will 
be made available to each tenant upon displacement, the prepayment may 
be accepted without restrictions if:
    (i) For loans not subject to restrictive-use provisions nor 
prohibition on prepayment, it is determined by FmHA or its successor 
agency under Public Law 103-354 that housing opportunities for 
minorities will not be materially affected as a result of the 
prepayment. Exhibit E of this subpart will be used to assist in making 
this determination.
    (ii) For loans subject to restrictive-use provisions, it is 
determined Federal or other financial assistance provided to residents 
will no longer be provided, due to no fault, action or lack of action on 
the part of the borrower. If a borrower applies to have restrictions 
removed after prepayment because Federal or other financial assistance 
will no longer be provided, the restrictions will be released only if 
the loss of Federal or other financial assistance could not have been 
reasonably anticipated at the time of acceptance of the prepayment.
    (iii) Regardless of whether or not the loan is subject to 
restrictive-use provisions, a determination is made by FmHA or its 
successor agency under Public Law 103-354 that there is no longer a need 
for the housing (in accordance with exhibit E of this subpart).
    (4) Projects with both LH loans and grants. If a prepayment is 
accepted on an LH loan for a project which also has an LH grant, 
restrictive-use provisions for the project may be released only under 
the conditions specified in the Grant Agreement.
    (5) Documentation. Thorough documentation of the reasons and 
decision to approve prepayment will be entered

[[Page 393]]

in the casefile and appended to the prepayment report. Any additional 
materials used to reach the decision will be included in the casefile.
    (d) Borrower notification of approval or disapproval of prepayment. 
The Servicing Office or other designated office will notify the borrower 
as to whether the prepayment has been approved or disapproved within:
    (1) 15 days of the borrower's rejection of an incentive offer for 
loans not subject to restrictive-use provisions nor prohibited from 
prepayment; or
    (2) 60 days of a complete prepayment request by a borrower subject 
to restrictive-use provisions.
    (e) Processing acceptance of prepayment. After approval of a 
prepayment, the following actions must be taken:
    (1) Completion of the prepayment report and notification of the 
National Office. If prepayment is approved, the Servicing Office or 
other designated office will complete a prepayment report in the format 
of exhibit B of this subpart, and submit the report with all 
documentation on each prepaid loan to the State Director or other 
designated official for indefinite retention. Any information for the 
report supplied by the borrower must include documentation and 
verification by the Servicing Office. For prepayment of on-farm labor 
housing units, only items relevant to the on-farm units need be 
completed. The State Office will notify the National Office in the 
format of FmHA or its successor agency under Public Law 103-354 Guide 
Letter 1965-E-1 (available in any FmHA or its successor agency under 
Public Law 103-354 office) indicating that the prepayment has been 
accepted. A copy of the prepayment report will be included in the 
materials forwarded to the National Office.
    (2) Notify interested agencies. All interested agencies notified in 
accordance with Sec. 1965.206 (b)(4) of this subpart will be notified 
of the decision to accept the prepayment. Agencies which may aid 
displaced tenants will be advised of any anticipated displacement, the 
level at which post-prepayment rents will be set and any restrictive-use 
provisions which will remain in the deeds of release. Other agencies 
will be advised that no offer to sell will be made.
    (3) Notify tenants. The Servicing Office will send an additional 
notice to tenants at least 60 days prior to the prepayment. The 
prepayment may not take place less than 60 days from the tenant 
notification or 180 days from the initial notification unless an 
exception is allowed in accordance with paragraph (f)(2) of this 
section. Tenant notices will be sent certified mail to each tenant and 
also posted at the project in public areas. Copies of the notice will 
remain posted at the project until the prepayment is accepted and all 
existing tenants voluntarily vacate their units. The notice and 
attachments will contain all of the following information appropriate 
for the prepayment action and any other relevant information necessary 
to allow tenants to make informed choices (FmHA or its successor agency 
under Public Law 103-354 Guide Letter 1965-E-3 (available in any FmHA or 
its successor agency under Public Law 103-354 office) and attachments 
are provided as a guide for this purpose). The notice will contain the 
following applicable statements and information:
    (i) All relevant information concerning the prepayment has been 
reviewed and FmHA or its successor agency under Public Law 103-354 has 
decided to accept the prepayment on (date).
    (ii) Fully detailed reason(s) describing why the prepayment was 
approved. Also include the reasons for acceptance of the prepayment in 
less than 180 days (if applicable).
    (iii) At the time of prepayment, rents are expected to be $--------
----.
    (iv) The tenant will be affected by this change on (date the 
tenant's current lease expires, date of the prepayment or other mandated 
date, whichever is later.)
    (v) (The following statement should be included if the loan is being 
prepaid but will retain restrictive-use provisions.) All current 
eligible tenants may continue to occupy the housing until the tenants 
decide to voluntarily move, the tenants no longer meet eligibility 
requirements or the restrictive-use provisions expire on (insert 
expiration date), whichever is sooner. The rents of

[[Page 394]]

current eligible tenants may not be increased as a result of current 
owner actions to exceed levels which create new or increased rent 
overburden as established by FmHA or its successor agency under Public 
Law 103-354 regulations, in accordance with title V of the Housing Act 
of 1949, during the period of eligible tenant occupancy during the 
restricted period. However, declines in tenant income shall not require 
corresponding reductions in rent levels. A tenant, or those wishing to 
occupy the housing (if applicable), as well as the Government, may seek 
enforcement of the provisions. Annual income recertifications will 
continue to be required in order to protect eligible tenant rents. The 
preceding requirements are binding on the current owner and any 
successors in interest.
    (vi) (The following statement should be included if the project has 
project-based section 8 rents.) Eligible tenant rents will continue to 
be subsidized by the Department of Housing and Urban Development (HUD) 
until (insert the date the section 8 contract expires). (If applicable, 
include the following.) If section 8 subsidies are not continued after 
(insert the date the section 8 contract expires), the owner of the 
project will continue eligible tenant rents at levels that will not 
create or increase rent overburden until (insert date the restrictive-
use expires. However, declines in tenant income shall not require 
corresponding reductions in rent levels.
    (vii) (The following statement should be included if project-based 
HUD section 8 or other subsidies will expire prior to 2 years after the 
prepayment.) Eligible tenants currently residing in the project who may 
subsequently be displaced or experience rent overburden due to the 
prepayment may qualify for certain protections. The following 
protections are available to eligible tenants who believe they have 
experienced displacement or rent overburden:
    (A) Letters of Priority Entitlement (LOPE) to other FmHA or its 
successor agency under Public Law 103-354 housing. Tenants may apply for 
LOPEs up until the day the tenants' rents are scheduled to be increased. 
These letters will be valid for 60 days after issuance. All LOPEs will 
be issued in accordance with title VI of the Civil Rights Act of 1964, 
as codified in subpart E of part 1901 of this chapter.
    (B) Tenants currently receiving rental assistance (RA) will be able 
to continue to receive RA if they move to other FmHA or its successor 
agency under Public Law 103-354 financed housing in which they are 
eligible for RA.
    (C) Tenants choosing to stay in their units after prepayment and pay 
higher rents, with or without Federal, State or other subsidy, are 
entitled to do so, unless evicted for a cause unrelated to prepayment.
    (viii) Eligible tenants residing in prepaying projects will also be 
sent:
    (A) A list of project names, locations, number of apartments, senior 
citizen or family designation, and unit sizes of other FmHA or its 
successor agency under Public Law 103-354 projects in the market area.
    (B) The names and locations of other subsidized housing; and
    (C) Addresses and telephone numbers of the applicable HUD area 
office, and other agencies which administer housing subsidies or aid in 
relocation anywhere in the market area.
    (ix) Tenants will be allowed to review the information used to make 
any of the determinations regarding acceptance of the prepayment, 
prepayment rent increases and alternatives to prepayment.
    (4) Issue LOPEs. Upon request by a tenant for an LOPE, the Servicing 
Official will prepare the letter and forward the letter to the tenant 
(FmHA or its successor agency under Public Law 103-354 Guide Letter 
1965-E-4 (available in any FmHA or its successor agency under Public Law 
103-354 office) may be used as a guide). The LOPE, which is to be 
addressed to FmHA or its successor agency under Public Law 103-354 
borrowers, will include:
    (i) A tenant with an LOPE has 60 days to apply in writing to other 
FmHA or its successor agency under Public Law 103-354 projects in any 
location in the country.
    (ii) A tenant with an LOPE is to be placed at the top of all waiting 
lists in FmHA or its successor agency under Public Law 103-354 projects 
applied to,

[[Page 395]]

which have appropriate units the tenant qualifies for. Such tenants will 
follow only those tenants with LOPEs who were previously placed on the 
waiting list. Handicapped tenants on the list for handicapped units 
which have appropriate design features will maintain priority over non-
handicapped tenants with LOPEs.
    (iii) The tenant will not be removed from the priority position on 
the waiting list until the tenant moves to a unit utilizing an LOPE or 
is purged from the waiting list in accordance with exhibit B or subpart 
C of part 1930 of this chapter.
    (iv) If the tenant holding the LOPE is receiving RA in the prepaying 
project, and uses the LOPE to move to a Plan II project for which the 
tenant would qualify for RA, the RA will be transferred to the project 
to which the tenant moves. The RA will be reassigned to that tenant 
without competition. RA brought to a project by a tenant from a 
prepaying project will remain at the receiving project if the tenant 
subsequently moves to another FmHA or its successor agency under Public 
Law 103-354 project.
    (v) If the tenant's current security deposit of (a specified amount) 
has not been released by the prepaying project by the date a tenant 
moves, the new landlord will be encouraged to defer collection of the 
new security deposit until the tenant's current deposit is refunded, 
even if the date of release is after the date the tenant occupies the 
new unit.
    (5) Approval of tenant leases. Prior to accepting the prepayment, 
the Servicing Office will also review and approve a modified tenant 
lease to be used for all protected tenants during any applicable 
restrictive-use period. This lease will explain the restrictive-use 
provisions, who is protected, describe the limits on rents during the 
period of restrictions, explain that no tenant can have a lease renewal 
denied for other than ``good cause'' (which cannot include income 
level), that charges, rules and regulations, and services may not change 
substantially from those aplicable at present, and explain all other 
provisions necessary to protect affected tenants including Fair Housing 
Act Amendment provisions. The lease shall retain provisions for annual 
income certification. The approved lease, with signatures of both the 
borrower and FmHA or its successor agency under Public Law 103-354, will 
be maintained by the Servicing Office until expiration of the 
restrictive-use period, although FmHA or its successor agency under 
Public Law 103-354 will not be responsible for monitoring compliance. If 
the owner wishes to make subsequent modifications to the lease, FmHA or 
its successor agency under Public Law 103-354 will review the lease to 
ensure that none of the modifications are contrary to the intent of this 
regulation.
    (6) Borrower responsibilities after prepayment. Prior to accepting 
the prepayment, the Servicing Official will meet with the borrower to 
discuss borrower obligations under restrictive-use and fair housing 
provisions remaining in effect after the prepayment is accepted. The 
Servicing Official will review the applicable restrictive-use 
requirements, if any, in detail with the borrower. In particular, the 
Servicing Official will explain that the applicable provisions of 
subpart C of part 1930 of this chapter specific to tenant rights and 
relations shall remain in effect during the restrictive-use period. 
Owners of prepaid projects will be responsible for ensuring that rental 
procedures, verification and certification of income and/or employment, 
lease agreements, rent or occupancy charges, and termination and 
eviction remain consistent with the provisions set forthin subpart C of 
part 1930 of this chapter, and also adhere to applicable local, State, 
and Federal laws. The borrower will be informed that it is the 
borrower's responsibility to obtain FmHA or its successor agency under 
Public Law 103-354 concurrence with any changes to the preceding rental 
procedures that may deviate from those approved at the time of the 
prepayment prior to implementing the changes. Any changes proposed must 
be consistent with the objectives of the program and the regulations. 
Documentation, including annual income recertifications, shall be 
maintained to evidence compliance in the event there is a future 
complaint or audit. The

[[Page 396]]

former borrower must be able to document that acceptable waiting lists 
were maintained, units were rented to appropriate tenants, and rents 
were established at appropriate levels in accordance with the applicable 
restrictive-use provisions. The former borrower must also agree to make 
the documentation available for Government inspection upon request. The 
former borrower and any successors in interest will be required to 
provide the following signed and dated certification to the applicable 
Servicing Office or other designated office within 30 days of the 
beginning of each calendar year for the full period of the restrictive-
use provisions:

    (Name of owner) certifies that (name of project) is being operated 
in compliance with the restrictive-use provisions contained in 
(applicable release document) and the Restrictive-Use Agreement which 
set forth certain requirements for operation of the project for the 
benefit of low- and moderate-income people in conformance with 
applicable FmHA or its successor agency under Public Law 103-354 
regulations (Name of borrower) understands that failure to operate the 
project in conformance with the restrictive-use provisions may cause a 
tenant or the Government to seek enforcement of the provisions.
    The borrower must also agree to execute the applicable Restrictive-
Use Agreement found at exhibits G-1 thru 4 to this Subpart.

    (7) Servicing Office responsibilities after prepayment. Upon 
prepayment, the Servicing Office will send a notice to all tenants 
informing the tenants of the acceptance of the prepayment. The borrower 
will be notified that a copy of the notice must be posted and maintained 
in public areas in the project until all restrictive-use provisions 
expire. FmHA or its successor agency under Public Law 103-354 Guide 
Letter 1965-E-5 (available in any FmHA or its successor agency under 
Public Law 103-354 office) will be used for the notice. The Servicing 
Office or other designated office will monitor receipt of the 
certaification referred to in paragraph (e)(6) of this section and 
maintain case files on the prepaid project until such time as the 
restrictive-use provisions expire. The Servicing Office or other 
designated office will take such actions as necessary to follow-up on 
receipt of the annual certifications from each prepaid borrower. If the 
Servicing Office is unable to obtain borrower cooperation, the Servicing 
Office shall refer the case to the State Office for transmittal to the 
National Office for further servicing guidance and/or enforcement 
actions.
    (8) Payment in full and release of security. Prior to releasing 
security instruments, FmHA or its successor agency under Public Law 103-
354 must be certain that full payment has been received. Security 
instruments will be released in accordance with Sec. 1965.90 (b) of 
subpart B of part 1965 of this chapter.
    (9) Sale to nonprofit organization or public agency at end of 
restrictive-use period. Borrowers who are subject to the restrictive-use 
provisions contained in paragraph (A) or (B) of exhibit A-4 of this 
subpart are required to attempt to sell the project to a nonprofit 
organization or public agency at the end of the restrictive-use period. 
Advertising the project for sale will be carried out in the same manner 
and time period as required for sale to nonprofits or public agencies 
within the program as stated in Sec. 1965.216 (b), (c), and (d) of this 
subpart. Advertising will be conducted for a minimum of 180 days 
beginning at least 6 months prior to the expiration of the restrictive-
use period. If 6 months do not remain between the date of prepayment and 
the end of the restrictive-use period the project will be advertised for 
sale for a minimum of 180 days.
    (f) Denial, postponement, waiver, or withdrawal of prepayment 
request--(1) Denial of prepayment request. Borrowers for whom there is 
no prohibition on prepayment will be denied a request to prepay if the 
conditions required for prepayment stated in paragraph (c) of this 
section and exhibit E of this subpart cannot be met, or if information 
submitted with the prepayment request to prepay, the Servicing Official 
will send a letter to the borrower stating the reasons for the denial 
and the right to appeal the rejection, in accordance with subpart B of 
part 1900 of this chapter and Sec. Sec. 1965.213 and 1965.215 and 
exhibits D and E of this subpart. The letter denying the prepayment 
reuest may revise the original incentive offer if new information 
documenting the

[[Page 397]]

loss the borrower may suffer if not allosed to prepay has been brought 
to the attention of the Servicing Office. If a letter is sent offering a 
revised incentive, rights to appeal the denial will not be included.
    (2) Postponement of prepayment requests. Prepayment requests will be 
denied if the request was received less than 180 days in advance of the 
project prepayment date unless the Servicing Office determines that 
there is sufficient time to consider tenant comments, verify information 
submitted with the prepayment report, and verify that all tenant leases 
are extended for a 180-day period from the date of the prepayment 
request and include current rents and conditions. Prepayment will be 
postponed if necessary to allow sufficient time for the second tenant 
notification to be sent at least 60 days prior to the prepayment, unless 
all tenant leases are extended to the end of the 60 days, and at least 
30 days has passed since the first notification letters were sent. The 
extension of tenant leases does not substitute for the insertion of 
restrictive-use provisions in the release documents or for allowing 
sufficient time for tenant comments.
    (3) Withdrawal or cancellation of prepayment requests. Prepayment 
authorization will be cancelled if the prepayment is not received within 
180 days of the final approval of the prepayment.
    (g) Borrower appeals of prepayment disapproval. The borrower may 
appeal the decision to deny prepayment without restrictive-use 
provisions within 30 days of the receipt of the rejection, in accordance 
with subpart B of part 1900 of this chapter. The incentive offer may be 
appealed at the same time if the borrower chooses. Tenants will be 
notified if a borrower appeal is pending, given the right to send 
written testimony to the appeal officer, and have one representative at 
the appeal hearing. If the decision to deny prepayment is upheld or the 
incentive offer is modified, the borrower will be given an additional 30 
days to respond to the incentive offer. Based upon the borrower response 
and whether the loan is subject to restrictive-use provisions, the 
Servicing Office will act in accordance with appropriate sections of 
this subpart. Borrowers subject to restrictive-use provisions will not 
be granted appeal rights.



Sec. 1965.216  Borrower not subject to restrictive-use provisions nor 

prohibition on prepayment, no incentive agreement is reached and 
prepayment cannot be accepted.

    In instances where the borrower is not subject to restrictive-use 
provisions and no incentive agreement can be reached between FmHA or its 
successor agency under Public Law 103-354 and the borrower, and the 
prepayment cannot be accepted under Sec. 1965.215 and exhibit E of this 
subpart because a need remains for the housing, the borrower will be 
required to offer to sell the project to a nonprofit organization or 
public agency. The following steps will be taken:
    (a) Determination of fair market value. Within 60 days of the 
termination of any appeals or the decision to deny prepayment if no 
appeal was requested, the fair market value of the project as 
unsubsidized conventional housing will be determined. The value arrived 
at will result from two appraisals. One appraisal will be the appraisal 
contracted and paid for by FmHA or its successor agency under Public Law 
103-354 that was used to establish the incentives previously offered. 
The second appraisal will be obtained and paid for by the borrower. Both 
appraisals will be conducted by qualified independent appraisers in 
accordance with FmHA or its successor agency under Public Law 103-354 
Instruction 1922-B (available in any FmHA or its successor agency under 
Public Law 103-354 office). If the fair market values arrived at are 
within 10 percent of each other, the Servicing Office and the borrower 
will negotiate to arrive at a mutually acceptable value. If the values 
differ by more than 10 percent, the independent appraisers will be asked 
to review their appraisals to determine if the values can be reconciled 
to within 10 percent. If FmHA or its successor agency under Public Law 
103-354 and the borrower

[[Page 398]]

are unable to negotiate a mutually acceptable value or the appraisers 
are unable to reconcile their appraisals within 30 days of the 
completion of the appraisals, the State Office and the borrower will 
jointly select a third independent qualified appraiser whose appraisal 
will be binding on FmHA or its successor agency under Public Law 103-354 
and the borrower. The third appraisal will be completed within 60 days 
of selection of the appraiser. The cost of the third appraisal shall be 
divided evenly between FmHA or its successor agency under Public Law 
103-354 and the borrower.
    (b) Efforts to market and sell the project to nonprofit 
organizations or public agencies. Once the fair market value of the 
project has been established, the borrower is to attempt to market the 
project to nonprofit organizations and public agencies. The following 
actions are to take place:
    (1) The Servicing Official is to provide the borrower with a list of 
nonprofit organizations and public agencies which have notified FmHA or 
its successor agency under Public Law 103-354 of their interest in 
purchasing projects that are attempting to prepay. The list will include 
nonprofit organizations and public agencies that have notified the FmHA 
or its successor agency under Public Law 103-354 Servicing, State, and 
National Offices of their interest.
    (2) The Servicing Official will instruct the borrower to contact 
each nonprofit organization and public agency on the list within 10 days 
of establishing project fair market value. The sequence of contacting 
nonprofit organizations and public agencies is set forth in paragraphs 
(b)(3) (i) and (ii) of this section. Materials notifying nonprofit 
organizations and public agencies of the project's availability will 
include sufficient information regarding the project and its operation 
for interested purchasers to make an informed decision. If an interested 
purchaser requests additional information concerning the project, the 
borrower shall promptly provide the requested materials.
    (3) The borrower must advertise and offer to sell the project for a 
minimum of 180 days. The borrower may choose to suspend advertising and 
other sales efforts while eligibility of an interested purchaser is 
determined. However, if the purchaser is determined to be ineligible, 
the borrower must resume advertising until a minimum of 180 days has 
passed. The borrower may satisfy the 180-day requirement by continuing 
advertising and sales efforts during the eligibility review of an 
interested purchaser. If additional offers are received during this time 
period, the offers will be reserved as back-up offers until the 
eligibility determination of the initial purchaser is completed.
    (i) Sales preference to local nonprofit organizations or public 
agencies. The borrower will first advertise the project for sale to 
qualified local nonprofit organizations or public agencies as defined in 
Sec. 1965.202 of this subpart. The Servicing Official will be 
responsible for determining that all appropriate means for contacting 
such organizations have been utilized including local media, and all 
necessary information provided. Exclusive advertising to local nonprofit 
organizations and public agencies must continue for a minimum of 60 
days. If more than one qualified nonprofit corporation or public agency 
submits an offer to purchase the project, a local nonprofit organization 
or public agency must be given preference over a regional or nationwide 
organization, regardless of when offers to purchase are received.
    (ii) Advertising to regional or nationwide organizations. If no 
qualified local nonprofit organization or public agency is found to 
purchase the housing within the first 60 days, the Servicing Official 
will authorize the borrower to advertise for an existing qualified 
national or regional nonprofit organization to purchase the housing. 
Advertising must begin between 60 and 120 days after advertising to 
local organizations began. Advertisements will be placed, as 
appropriate, in national housing publications and other media determined 
appropriate by the State Office or other designated office, including 
those serving minority groups exclusively.
    (c) Qualifications of nonprofit borrower to purchase. 
Notwithstanding the requirements of Sec. 1944.211(a)(10) of subpart E 
of part 1944 of this chapter, nonprofit

[[Page 399]]

organizations for the purpose of this paragraph need not be broadly-
based (unless qualifying as a local nonprofit organization as defined in 
Sec. 1965.202 of this subpart) nor organized solely to provide housing. 
Nonprofit organizations determined qualified to buy the housing through 
this procedure must:
    (1) Be capable of managing the housing and related facilities for 
its remaining useful life, either by self management or through a 
management agent.
    (2) Agree that no subsequent transfer of the housing and related 
facilities will be permitted during the remaining useful life of the 
housing and related facilities unless the FmHA or its successor agency 
under Public Law 103-354 Administrator determines that the transfer will 
further the provision of housing and related facilities for low-income 
families or persons, or there is no longer a need for such housing and 
related facilities. Generally, transfers between qualified nonprofit 
organizations and/or public agencies will be acceptable. However, under 
no condition will a transfer be approved to an entity in which the 
nonprofit transferor or a member of the nonprofit entity holds an 
ownership interest.
    (3) Agree to obligate itself and successors in interest to maintain 
the housing for very low- and low-income families or persons for the 
remaining useful life of the project and related facilities, although no 
currently eligible moderate-income tenants will be required to move. The 
provision in exhibit A-2 of this subpart will be used and inserted in 
the deed, security instrument, loan agreement/resolution and/or 
assumption agreement, as appropriate.
    (4) Show financial feasibility of the project including anticipated 
funding to be authorized in accordance with Sec. 1965.217(d) of this 
subpart. Financial feasibility may also include any regular RA or debt 
forgiveness RA allocations which can reasonably be anticipated to be 
available for the project at the time of the transfer.
    (5) Have no identity of ownership or controlling interest, 
regardless of degree, except as management agent between:
    (i) Officers or directorate persons or parties with a material 
interest (or persons or parties related to any person or party with such 
interest) in loans financed under section 515 that have been prepaid; 
and
    (ii) Officers or directorate persons or parties with a material 
interest (or persons or parties related to any person or party with such 
an interest) in the purchasing entity.
    (6) Evidence compliance with paragraph (c)(5) of this section. An 
officer legally authorized to execute documents on behalf of the 
purchasing nonprofit entity shall execute the following statement:

    (Name of purchasing nonprofit entity) certifies that no officer or 
directorate of (name of purchasing nonprofit entity) has been a person 
or party with a material interest (or persons or parties related to any 
person or party with such interest) in any loans financed under section 
515 that have been prepaid.

    (d) Priority between nonprofit organizations and public agencies. If 
more than one qualified organization or public agency submits an offer 
to purchase the project, the following criteria, in descending order of 
importance, will be used to establish priority:
    (1) Local nonprofit organizations and public agencies have priority 
over regional and national nonprofit organizations and public agencies;
    (2) Nonprofit organizations and public agencies with the most 
successful experience in developing and managing subsidized housing; and
    (3) Nonprofit organizations and public agencies with the longest 
experience in developing and managing subsidized housing.



Sec. 1965.217  Processing applications for transfers to nonprofit 
corporations or public agencies.

    (a) Determining eligibility. After an option to purchase is signed 
between a borrower and nonprofit corporation or public agency, the 
purchasing organization will file a complete application in accordance 
with Sec. 1965.65 (f) of subpart B of this part. FmHA or its successor 
agency under Public Law 103-354 will make a determination of the 
eligibility of the borrower and feasibility of the proposed transfer and 
subsequent

[[Page 400]]

loan. Consolidation and reamortization of the loans will be considered 
when a transfer takes place.
    (b) Appeal rights when a purchaser is not selected. If a nonprofit 
organization or public agency is not accepted by FmHA or its successor 
agency under Public Law 103-354 to purchase the project because the 
purchaser is found to be ineligible, the transfer is found to be not 
feasible or because the organization has lower priority than another 
applicant in accordance with Sec. 1965.216 (b), (c), or (d) of this 
subpart, appeal rights will be given to the applicant organization in 
accordance with subpart B of part 1900 of this chapter.
    (c) Authorization for transfer. When the transfer and loan(s) are 
ready to be obligated, the National Office will be notified in the 
format of FmHA or its successor agency under Public Law 103-354 Guide 
Letter 1965-E-1 (available in any FmHA or its successor agency under 
Public Law 103-354 office). If the loan will exceed the State Director's 
approval authority, the entire case file shall be sent to the National 
Office for review. The National Office will give approval authority and 
authorize funding for purchase of projects which have complied with the 
provisions outlined in this section. Subject to the nationwide maximum 
funding allowed, the authorizations will be issued in date order the 
complete prepayment request was received by the Servicing Office.
    (d) Special loans and grants available to nonprofit organizations 
and public agencies. Loans and grants are available to nonprofit 
organizations and public agencies to purchase and assist in the purchase 
of prepaying projects and to pay first year operating expenses. Loans to 
nonprofit organizations and public agencies may not exceed 102 percent 
of the fair market value of the project. Grants for costs related to 
purchasing a project may not exceed $10,000.
    (1) Loans to nonprofit organizations and public agencies. Loans to 
nonprofit organizations or public agencies will be approved in 
accordance with subpart E of part 1944 of this chapter for the following 
purposes:
    (i) A loan sufficient to enable the nonprofit organization or public 
agency to purchase a project at the fair market value;
    (ii) With proper justification, first year operating expenses not to 
exceed 2 percent of the project's appraised fair market value if current 
operating funds are not sufficient.
    (2) Special advances to nonprofit organizations or public agencies 
to cover costs related to purchasing a project. A grant may be made to a 
nonprofit organization or public agency to cover any direct costs, other 
than the purchase price, incurred by the organization or agency in 
purchasing and assuming responsibility for a project and related 
facilities. To be eligible for grant funds, the organization or agency 
must be able to obtain an accepted purchase offer for a project offered 
for sale by a borrower under Sec. 1965.216 of this subpart.
    (i) Grant purposes. Eligible purposes of the grant include:
    (A) Direct costs to the organization or agency that are based on 
written estimates for legal fees for purchasing the project, 
architectural fees, and/or other expenses as described in Sec. 1944.222 
of subpart E of part 1944 of this chapter and as authorized by the State 
Director. Legal fees for organizing the entity are not an eligible cost;
    (B) Fees, for technical assistance received from a nonprofit 
organization, with housing and/or community development experience, to 
assist the organization or agency in the packaging of the loan docket 
and project as well as legal, technical, and professional fees incurred. 
Legal fees for organizing the entity are not an eligible cost. The 
Agency will allow payments to eligible organizations packaging 
applications without discrimination because of race, color, religion, 
sex, national origin, age, familial status, or handicap if such an 
organization has authority to contract. The packaging organization may 
not represent or be associated with anyone else, other than the 
purchasing nonprofit organization or public agency, who may benefit in 
any way in the proposed transaction.
    (ii) Administrative requirements. The following policies and 
regulations apply to grants made under this section:

[[Page 401]]

    (A) The policies and regulations contained in subpart Q of part 1940 
of this chapter apply to grantees under this subpart.
    (B) The grantee will retain records for three years from the date 
Standard Form (SF)-269A, ``Financial Status Report,'' is submitted. The 
records will be accessible to Agency; and other Federal officials in 
accordance with 7 CFR part 3015.
    (C) Annual audits will be required if the grantee has received more 
than $25,000 of Federal assistance in the year in which the grant funds 
were received. The audits will be due 13 months after the end of the 
fiscal year in which funds were received.
    (1) States, State agencies, or units of general local government 
will complete an audit in accordance with 7 CFR parts 3015, 3016 and 
3019; and OMB Circular A-128.
    (2) Nonprofit organizations will complete an audit in accordance 
with 7 CFR part 3015 and OMB Circular A-133.
    (iii) Obtaining payment for costs. To obtain advance funds or 
reimbursement of costs, the nonprofit organization or public agency 
must:
    (A) Submit to the appropriate Servicing Office SF-270, ``Request for 
Advance or Reimbursement,'' for an amount not to exceed $10,000;
    (B) Submit a copy of the accepted purchase offer or option to 
purchase and assume responsibility for a prepaying project and related 
facilities;
    (C) As soon as possible after obtaining an accepted purchase offer 
or option, submit a complete transfer and loan package (if applicable), 
as described in Sec. 1965.65 of subpart B of part 1965 of this chapter 
for transfers and subpart E of part 1944 of this chapter for loans to 
purchase the project;
    (D) If less than $10,000 is advanced or reimbursed at the time of 
submittal of the grant application package and the applicant expects 
that further advances or reimbursements may be needed, additional funds 
may be requested so long as the total advanced or reimbursed does not 
exceed $10,000. SF-270 will be used to request additional advances or 
requests for reimbursement. If advance funds are requested, the amount 
requested may not exceed the amount the grantee expects to use during 
the 30 days following receipt of the advance. The final draw advance or 
request for reimbursement shall not be later than the closing date of 
the transfer and loan and shall be submitted on SF-270;
    (E) Fully document all requests for advances with line item 
estimates on SF-270. Requests for reimbursement shall be documented with 
itemized bills or receipts for each item listed on SF-270;
    (F) Include SF-269A with the grant application if the entire amount 
of the grant is being requested at that time. If the grant will be 
advanced or reimbursed in more than one draw, SF-269A will be submitted 
with the final draw;
    (G) Include a signed statement for all grant applications which 
states, ``Neither the organization nor any of its employees are 
associated with or represent anyone in this transaction other than the 
applicant.''
    (iv) Processing grants. The following actions will be taken by FmHA 
or its successor agency under Public Law 103-354 when a grant 
application is received:
    (A) The FmHA or its successor agency under Public Law 103-354 
Approval Official will review each grant application package for the 
amount authorized. The FmHA or its successor agency under Public Law 
103-354 Approval Official will execute and distribute Form FmHA or its 
successor agency under Public Law 103-354 1944-51, ``Multiple Family 
Housing Obligation Fund Analysis,'' in accordance with the Forms Manual 
Insert;
    (B) The Servicing Official will be responsible for reviewing the 
eligibility of costs estimated to be incurred or submitted for 
reimbursement;
    (C) A grant agreement, prepared in substantially the same format as 
exhibit F of this subpart and authorized by grant resolution, will be 
dated and executed by the applicant on the date of grant closing. The 
executed agreement will be filed in the casefile.
    (D) A grant resolution authorizing the appropriate officers of the 
applicant to execute the grant agreement will be adopted by the 
applicant's board of directors or other form of governing body. A 
certified copy is to be submitted to FmHA or its successor

[[Page 402]]

agency under Public Law 103-354 for the file.
    (e) Servicing Office actions when a transfer and subsequent loan is 
authorized. When notified by the State Office that the National Office 
has authorized the transfer and subsequent loan, the Servicing Office 
will:
    (1) Submit the assumption to the State Office for approval in 
accordance with Sec. 1965.65 of subpart B of this chapter.
    (2) Transfer any RA associated with the project to the transferee in 
accordance with paragraph XV B 1 of exhibit E of subpart C of part 1930 
of this chapter unless debt forgiveness RA is used to replace current 
project RA.
    (3) Notify tenants that prepayment of the loan will not be taking 
place and to whom the ownership of the housing is being transferred. The 
notification should state that any rent increases resulting from the 
transfer and loan will be processed in accordance with Sec. 1965.204 
(b) of this subpart.
    (4) Transfer all existing loans in the project on new rates and 
terms and consolidate and reamortize, if necessary, to maintain project 
feasibility and reduce rental subsidy payments.
    (5) Ensure that all delinquent accounts are brought current, cost 
items paid in full, project accounts brought current and transferred 
with the project, and all taxes and liens paid or prorated at closing as 
applicable. Deferred maintenance identified in previous inspections must 
be acceptably completed before the transferor may retain any equity.
    (6) Insert the restrictive-use provisions contained in exhibit A-2 
of this subpart in the deed, security instruments, loan agreement/
resolution, assumption agreement, and/or reamortization agreement, as 
appropriate.
    (f) Rental subsidies. No transfer will be approved unless there is 
sufficient RA available for every tenant who would experience rent 
overburden after the transfer, assuming that all units vacated will 
continue to be filled by very low or low-income tenants. Sufficient debt 
forgiveness RA (DFRA), must be authorized for obligation in accordance 
with paragraph V C of exhibit E of subpart C of part 1930 of this 
chapter, when authorization to process the loan is given. The National 
Office will advise the State Office whether RA will be transferred with 
the project or if RA will be suspended and transferred to another 
project within the State when authorization to process the transfer is 
given. If the latter is chosen, all RA needs at the project will be met 
with DFRA.

[58 FR 38931, July 21, 1993, as amended at 61 FR 39852, July 31, 1996]



Sec. 1965.218  Accepting prepayment when nonprofit organizations do 
not apply to purchase or funds are not available.

    Borrowers not subject to restrictive-use provisions or prohibitions 
on prepayment may prepay without restrictions within 120 days of meeting 
either of the following requirements.
    (a) No offer to purchase.(1) At least 180 days have passed since the 
offer to sell to a local nonprofit organization or public agency began 
and the advertisement continued for the full 180 days;
    (2) The project has been offered to regional and national 
organizations for at least a 60-day period of the 180 days;
    (3) Documentation is provided showing that all organizations whose 
names were provided by the District or State Office were contacted in 
accordance with Sec. 1965.216 (b) of this subpart and offered the 
housing for purchase;
    (4) No qualified nonprofit organization has made a bona fide offer 
to purchase the property for the appraised fair market value. Note: (An 
offer will be considered to be bona fide if there is a written offer to 
purchase the project at fair market value, even if the offer is 
contingent on FmHA or its successor agency under Public Law 103-354 
funding when no funding is available.); and
    (5) Funds have been available for the purpose of carrying out a 
transfer/sale during this period.
    (b) Funds are not available. A borrower may be allowed to prepay 
even if an eligible nonprofit organization or public agency has offered 
to purchase the project if the following lack of funding exists. All 
funds for funding nonprofit organizations and public agencies for the 
purpose of purchasing any project in the country must have been 
exhausted for a period of 15

[[Page 403]]

months. This determination is not related to the length of time the 
particular project has been on the waiting list. The National Office 
will periodically advise State Offices of the status of the waiting list 
and the availability of funds.



Sec. 1965.219  FmHA or its successor agency under Public Law 103-354 
processing of prepayment.

    When a prepayment is accepted in accordance with Sec. 1965.218 of 
this subpart, the Servicing Office will process the prepayment in 
accordance with the applicable provisions of Sec. 1965.215 (e)(1), (2), 
(3), (4), and (8) of this subpart.



Sec. Sec. 1965.220-1965.221  [Reserved]



Sec. 1965.222  Violations of restrictive-use provisions.

    Should the Servicing Office receive a written complaint or become 
otherwise aware of a violation of the prepayment restrictive-use 
provisions set out in exhibit A-3 or A-4 of this subpart or the 
Restrictive-Use Agreements set out in exhibits G-1 thru 4 of this 
subpart by the owner of a previously FmHA or its successor agency under 
Public Law 103-354-financed project, the following actions will be 
taken:
    (a) The complainants will be informed that they may pursue 
enforcement through the courts.
    (b) The Servicing Office or other designated office will conduct a 
preliminary evaluation of the complaint. This evaluation may necessitate 
the gathering of additional information. Should the preliminary 
evaluation indicate the complaint is not valid, the complainant will be 
so informed. Should the preliminary evaluation indicate the complaint is 
or may be valid, then the complaint, all facts gathered, an evaluation 
report, and Servicing Office recommendation will be forwarded to the 
State Office or other designated office for review and action.
    (c) If the State Office or other designated office determines that a 
violation of the restrictive-use provisions has likely occurred, the 
Administrator will be notified. The State Office or other designated 
office will ask the OGC to provide advice in such cases and, if 
appropriate, refer the case to the Department of Justice or other 
appropriate agency for enforcement. A copy of any complaint requesting 
enforcement of the restrictive-use provisions submitted to the 
Department of Justice or other appropriate agency should also be 
forwarded to the Administrator.



Sec. 1965.223  Relationship with acceleration of accounts, bankruptcy, 
foreclosure, or inventory properties.

    (a) Acceleration of accounts. Accelerations of accounts will be 
prepared in accordance with FmHA or its successor agency under Public 
Law 103-354 Guide Letters 1955-A-1 or 1955-A-2 (available in any FmHA or 
its successor agency under Public Law 103-354 office). Any FmHA or its 
successor agency under Public Law 103-354 loan made after December 21, 
1979, prepaid in response to an acceleration of the account will be 
required to have the appropriate restrictive-use language inserted in 
the deed of release or satisfaction, as appropriate upon the advice of 
OGC. Any FmHA or its successor agency under Public Law 103-354 loan made 
on or before December 21, 1979, with payment-in-full made in response to 
an acceleration of the account, will be required to have the appropriate 
restrictive-use language inserted on the instrument recorded in the real 
estate records, as appropriate upon the advice of OGC, only if the 
payment occurs within 1 year after the borrower had initiated a request 
to prepay the loan(s). The restrictions used will be those contained in 
exhibit A-3 of this subpart for loans subject to restrictive-use 
provisions or prohibited from prepaying. The restrictive-use period will 
extend for the remaining term of the accelerated loan or length of the 
existing restrictive-use period, whichever is applicable.
    (b) Foreclosure. If a project is sold out of the program at a 
foreclosure sale, the restrictive-use provisions will be retained and 
added to the deed in accordance with exhibit A-3 or A-4 of this subpart 
and paragraph (a) of this section.
    (c) Inventory property. Restrictive-use provisions will be retained 
for projects taken into or sold out of FmHA or its successor agency 
under Public Law 103-354 inventory in accordance with exhibits A-1 
through A-4 of this subpart and

[[Page 404]]

paragraph (a) of this section, unless a determination is made in 
accordance with Sec. 1965.215 and exhibit E of this subpart that the 
restrictions may be released or that the property is determined non-
program property. Tenants will receive all appropriate notifications as 
they would for prepaying projects not being accelerated.
    (d) Bankruptcy. Bankruptcy proceedings will have no effect on 
contractual requirement for restrictive-use.



Sec. 1965.224  Prepayment of loans caused by advance payments on the account.

    If the loan on a project, in which the last loan to build or acquire 
new units was obligated prior to December 15, 1989, reaches or falls 
below six remaining payments due to borrower voluntary advance payments 
or mandatory extra payments required by FmHA or its successor agency 
under Public Law 103-354 regulation or law, the borrower will be 
notified that the final payment on the account cannot be accepted unless 
a prepayment request is made. FmHA or its successor agency under Public 
Law 103-354 will inform the borrower that, by law, prepayment 
regulations must be followed for all loans requesting prepayment 
subsequent to enactment of the law. The borrower will be required to 
submit all applicable information required by Sec. 1965.205 of this 
subpart and complete all applicable actions required by this subpart 
before a final payment can be accepted.



Sec. Sec. 1965.225-1965.248  [Reserved]



Sec. 1965.249  Exception authority.

    The Administrator may, in individual cases, make an exception to any 
requirements of this subpart not required by the authorizing statute if 
the Administrator finds that application of such requirement would 
adversely affect the interest of the Government, adversely affect the 
accomplishment of the purposes of the RRH or LH programs, or result in 
undue hardship on the tenants by applying the requirements. The 
Administrator may exercise the authority at the request of the State 
Director. The State Director will submit the request supported by data 
that demonstrates the adverse impact, citing the particular requirement 
involved and recommending proper alternative course(s) of action, and 
outlining how the adverse impact could be mitigated. Exception to any 
requirement may also be initiated by the Assistant Administrator for 
Housing.



Sec. 1965.250  OMB control number.

    The reporting and recordkeeping requirements contained in this 
regulation have been approved by the Office of Management and Budget and 
have been assigned OMB control number 0575-0155. Public reporting burden 
for this collection of information is estimated to vary from 5 minutes 
to 5 hours per response, with an average of 1.3 hours per response, 
including time for reviewing instructions, searching existing data 
sources, gathering and maintaining the data needed, and completing and 
reviewing the collection of information. Send comments regarding this 
burden estimate or any other aspect of this collection, including 
suggestions for reducing this burden, to Department of Agriculture, 
Clearance Officer, OIRM, room 404-W, Washington, DC 20250; and to the 
Office of Management and Budget, Paperwork Reduction Project (OMB 
control number 0575-0155), Washington, DC 20503.

   Exhibit A to Subpart E of Part 1965-1--Required Clauses for Active 
   Borrowers With Projects Subject to Restrictive-Use Provisions as a 
        Result of Specific Loan Making or Loan Servicing Actions

    The following Multi-Family Housing projects are subject to 
restrictive-use provisions as set forth in their loan documents or 
security instruments:
    (a) All loans approved between December 21, 1979, and December 15, 
1989;
    (b) Subsequent loans not made to build or acquire new units approved 
on or after December 15, 1989;
    (c) Any loans approved prior to December 21, 1979, and subsequently 
made subject to restrictive-use provisions due to a servicing action 
(e.g., transfer, reamortization, consolidation) as described in subpart 
B of part 1965 of this chapter, or an incentive to deter prepayment of 
the loan as described in this subpart.
    All loans or servicing actions meeting the above criteria with 
prepayment incentives

[[Page 405]]

obligated or approved after the effective date of this regulation, will 
be subject to the following restriction. The restriction will be 
inserted in the deed, conveyance instrument, loan agreement/resolution, 
assumption agreement, interest credit agreement, or reamortization 
agreement, as appropriate. The restrictions are applicable for a term of 
20 years from the date on which the last loan was closed or made subject 
to such restrictions as a result of a servicing action or incentive to 
not prepay.
    ``The borrower and any successors in interest agree to use the 
housing for the purpose of housing people eligible for occupancy as 
provided in section 514 or section 515 of title V of the Housing Act of 
1949, as amended, and FmHA or its successor agency under Public Law 103-
354 regulations then extant during this 20 year period beginning (the 
date the last loan on the project is obligated, or date the project was 
last made subject to the prepayment restrictive-use provisions as a 
result of servicing actions or incentive to not prepay the loan, 
authorized under this subpart or other subparts). Until (date), no 
eligible person occupying the housing shall be required to vacate, or 
any eligible person wishing to occupy shall be denied occupancy without 
cause. The borrower will be released from these obligations before that 
date only when the Government determines that there is no longer a need 
for such housing, or that such other financial assistance provided the 
residents of such housing will no longer be provided due to no fault, 
action or lack of action on the part of the borrower. A tenant or 
individual wishing to occupy the housing may seek enforcement of this 
provision, as well as the Government.''

  Exhibit A-2 to Subpart E of Part 1965--Required Clauses for Projects 
Made Subject to Restrictive-Use Provisions When a Loan is Transferred to 
      a Nonprofit Organization or Public Agency to Avert Prepayment

    Multi-Family Housing projects made subject to restrictive-use 
provisions because of a transfer and subsequent loan to a nonprofit 
organization or public agency in order to avert prepayment of the loan 
as described in this subpart are subject to restrictions which are set 
forth in the loan instruments or security agreements. Loans meeting the 
preceding conditions with prepayment incentives obligated after the 
effective date of this regulation will be required to have the following 
restriction inserted in the deed, conveyance instrument, loan 
resolution, and assumption agreement, as applicable:
    ``The borrower and any successors in interest agree to use the 
housing for the purpose of housing very low- and low-income people 
eligible for occupancy as provided in Farmers Home Administration or its 
successor agency under Public Law 103-354 regulations then extant during 
the remaining useful life of the project. A tenant or person wishing to 
occupy the housing may seek enforcement of this provision as well as the 
Government. Throughout the remaining useful life of this project, no 
eligible person occupying or wishing to occupy the housing shall be 
required to vacate or be denied occupancy without cause. Rents, other 
charges, and conditions of occupancy will be set to meet these 
conditions. The borrower will be released during such period from these 
obligations only when the Government determines that there is no longer 
a need for such housing, or that such other financial assistance 
provided to the residents of such housing will no longer be provided due 
to no fault, action or lack of action on the part of the borrower.''
    The restrictions are intended to protect only very low- and low-
income individuals and families for the remaining useful life of the 
project, unless the Government subsidy is removed without cause or it is 
determined there is no longer a need for the housing. These restrictions 
will not be superceded by new restrictions imposed by subsequent 
transfers. Eligible moderate-income tenants living at the project at the 
time of prepayment will not be required to move as a result of the 
restrictions. Moderate-income applicants for the housing will continue 
to retain priority over ineligible applicants for the housing.

  Exhibit A-3 to Subpart E of Part 1965--Required Clauses for Prepaid 
 Projects Which Were Subject to Restrictive-Use Provisions Prior to the 
                               Prepayment

    The required clauses contained in this exhibit pertain to the 
following multi-family projects, unless an exception to the restrictive-
use provisions have been granted in accordance with this subpart:
    (a) Any loan on the project obligated between December 21, 1979, and 
December 15, 1989, or subsequent loan not made to build or acquire new 
units approved on or after December 15, 1989;
    (b) Any loan made subject to restrictive-use provisions as a result 
of a transfer, consolidation, or reamortization as set forth in this 
subpart;
    (c) Any loan made subject to restricitive-use provisions as a result 
of accepting an incentive to not prepay as set forth in this subpart;
    (d) Any loan previously subject to restrictive-use provisions being 
accelerated.
    The preceding projects may only be prepaid if the title to the real 
property is made

[[Page 406]]

subject to the following restrictive-use provisions and incorporated in 
the security releases. The borrower will also be required to execute the 
Restrictive-Use Agreement found at exhibit G-1 to this subpart.
    ``The owner and any successors in interest agree that the housing 
located on this property will be used only as authorized under section 
514 or 515 of title V of the Housing Act of 1949, as amended, and 7 CFR 
part 1965, subpart E, or other regulations then extant until (insert 
date shown on existing restrictive-use provisions). A tenant or 
applicant for occupancy may seek enforcement of this provision as well 
as the Government. During the restricted period, no eligible person 
occupying or wishing to occupy the housing shall be required to vacate 
or be denied occupancy without cause. Rents, other charges, and 
conditions of occupying will be set so that the effect will not differ 
from what would have been, had the project remained in the FmHA or its 
successor agency under Public Law 103-354 program. The owner agrees to 
keep a notice posted at the project, and in a visible place available 
for tenant inspection, for the remainder of the restrictive-use period, 
stating that the project is to be used in accordance with the Housing 
Act, and that management practices and rental rates will be consistent 
with those necessary to maintain the project for (insert ``low- and 
moderate-income'' or ``very low- and low-income'' as shown on existing 
restrictive-use provisions) tenants for the remainder of the 
restrictive-use period.''
    The provisions provide protections to the same categories of tenants 
who were protected while the loan(s) were in effect, to the same extent 
that the tenants were protected prior to the prepayment and for the 
length of time remaining under the restrictions prior to the prepayment.

  Exhibit A-4 to Subpart E of Part 1965--Required Clauses for Prepaid 
Projects Which Became Subject to Restrictive-Use Provisions at the Time 
                              of Prepayment

    Multi-Family Housing projects which were not subject to restrictive-
use provisions prior to prepayment may, generally, only be prepaid if 
the title to the real property is made subject to one of the following 
restrictive-use provisions and the provisions are filed with the 
security releases. The restrictive-use provisions apply to all loans 
made prior to December 21, 1979, that were not subsequently made subject 
to restrictive-use provisions as a result of servicing actions after 
December 21, 1979. The restrictions will also be used for sales of 
projects at foreclosure for projects not previously subject to 
restrictive-use provisions. The conditions for which restrictive-use 
provisions are not required are set forth in Sec. 1965.215 of this 
subpart.
    (A) 20-year Restrictive-Use Provisions. These provisions are used 
when the owner agrees to restrictive-use provisions for a minimum of a 
20-year period, and agrees to offer to sell the assisted housing and 
related facilities to a qualified nonprofit organization or public 
agency in accordance with Farmers Home Administration or its successor 
agency under Public Law 103-354 (FmHA or its successor agency under 
Public Law 103-354) regulation upon termination of the 20-year period. 
The period is calculated from the date on which the last loan for the 
project was obligated or applicable servicing action taken. The borrower 
will also be required to execute the Restrictive-Use Agreement found at 
exhibit G-2 to this subpart.
    ``The owner and any successors in interest agree to use the housing 
as required in 7 CFR part 1965, subpart E or other regulations then 
extant during this 20-year period beginning (date of the last loan or 
servicing action) for the purpose of housing low- and moderate-income 
people eligible for occupancy. A tenant or applicant for housing may 
seek enforcement of this provision, as well as the Government. Prior to 
(date period ends) no eligible person occupying or wishing to occupy the 
housing shall be required to vacate or be denied occupancy without 
cause. Rents, other charges, and conditions of occupancy will be 
established to meet these conditions such that the effect will not 
differ from what would have been, had the project remained in the FmHA 
or its successor agency under Public Law 103-354 program. The owner also 
agrees to keep a notice posted as the project for the remainder of the 
restrictive-use period, in a visible place available for tenant 
inspection, stating that the project is to be used in accordance with 
the Housing Act, and that management practices and rental rates will be 
consistent with those necessary to maintain the project for the 
protected population for the remainder of the restrictive-use period. At 
the expiration of this period ending (date), the housing and related 
facilities will be offered for sale to a qualified nonprofit 
organization or public agency, as determined by FmHA or its successor 
agency under Public Law 103-354.''
    (B) Loans Over 20 Years Old. These provisions are used when all 
loans were obligated and applicable servicing actions took place for the 
project over 20 years prior to the prepayment, and the owner enters into 
an agreement to immediately attempt to offer the project for sale to a 
nonprofit organization or public agency in accordance with Sec. 
1965.216 of this subpart. The borrower will also be required to execute 
the Restrictive-Use Agreement found at exhibit G-3 of this subpart.

[[Page 407]]

    ``The owners and any successors in interest agree to immediately 
offer to sell the housing and related facilities to a qualified 
nonprofit organization or public agency, as determined by Farmers Home 
Administration or its successor agency under Public Law 103-354.''
    (C) Current Tenants Restrictive-Use Provisions. These provisions are 
used when the owner enters into an agreement that no current tenants 
will be displaced due to a change in the use of the housing or an 
increase in rental or other charges, as a result of the prepayment, for 
as long as the current tenants wish to remain at the project. The 
provisions may only be used if it is determined by FmHA or its successor 
agency under Public Law 103-354 that the conditions specified in this 
subpart, addressing the effect of prepayment on minorities, handicapped 
individuals, and families with children in the project and market area, 
can be met, allowing an exception from the requirement to offer the 
project to sale to a nonprofit organization or public body. The borrower 
will also be required to execute the Restrictive-Use Agreement found at 
exhibit G-4 to this subpart.
    ``The owner and any successors in interest agree to use the housing 
for the purpose of housing eligible low- and moderate-income people 
occupying the project at the time the prepayment was accepted, as 
provided in 7 CFR part 1965, subpart E, and other applicable regulations 
then extant. No eligible person currently occupying the housing shall be 
required to vacate prior to the end of the remaining useful life of the 
project without cause. Rents, other charges, and conditions of occupancy 
will be established to meet these conditions. Existing tenants are 
protected to ensure that none experience new or increased rent 
overburden until each voluntarily moves from the project. The owner also 
agrees to keep a notice posted at the project in a place available for 
tenant inspection, for the remaining useful life of the project or until 
the last existing tenant vacates, stating that the project is to be used 
in accordance with the Housing Act, and that management practices and 
rental rates for current tenants as of the date of the prepayment will 
be consistent with those necessary to maintain the project for low- and 
moderate-income tenants. A tenant may seek enforcement of this provision 
as well as the Government.''

  Exhibit B to Subpart E of Part 1965--Report on Prepayment [Reserved]

Exhibit C to Subpart E of Part 1965--Checklist for Reporting Prepayment 
                               [Reserved]

    Exhibit D to Subpart E of Part 1965--Methodology for Determining 
                    Prepayment Incentives [Reserved]

     Exhibit D-1 to Subpart E of Part 1965--Worksheet for Incentive 
                         Calculations [Reserved]

Exhibit E to Subpart E of Part 1965--Administration Guidance for Making 
                  Prepayment Determinations [Reserved]

    Exhibit F to Subpart E of Part 1965--Prepayment and Displacement 
                       Prevention Grant Agreement

    This agreement dated --------------

----------------, 19----, between --------------

which is organized and operating under
------------------------------------------------
------------------------------------------------

---------------- herein call ``Grantee,''

(Authorizing Statute)

and the United States of America acting through the Farmers Home 
Administration or its successor agency under Public Law 103-354, 
Department of Agriculture, herein called ``Grantor,'' Witnesseth:

                                Whereas:

    Grantee has determined to undertake a project of acquisition of a 
multi-family housing project financed by the Grantor to house rural 
residents and has duly authorized the undertaking of such a project.
    Grantee wishes to obtain grant funds to assist in the costs of 
acquisition of such project.
    Grantor has agreed to grant the Grantee a sum not to exceed $------
------------ subject to the terms and conditions established by the 
Grantor. Provided, however, that the proportionate share of any grant 
funds actually advanced and not needed for grant purposes shall be 
returned immediately to the Grantor. The Grantor may terminate the grant 
in whole, or in part, at any time it is

[[Page 408]]

determined that the Grantee has failed to comply with the conditions of 
the grant.
    Now, therefore, In consideration of said grant by Grantor to 
Grantee, to be made pursuant to section 502 of the Housing Act of 1949 
to cover any direct costs (other than the purchase price) incurred by 
the organization or agency in purchasing and assuming responsibility for 
the housing and related facilities involved, as defined by applicable 
Farmers Home Administration or its successor agency under Public Law 
103-354 (FmHA or its successor agency under Public Law 103-354) 
instructions.
    Grantee agrees that grantee will: A. Attempt to acquire said project 
in accordance with FmHA or its successor agency under Public Law 103-354 
regulations.
    B. If acquired, either directly or through contract, manage, operate 
and maintain the project continuously in an efficient and economic 
manner.
    C. Make services of said project available within its capacity to 
all eligible rural residents without discrimination because of race, 
color, religion, sex, age, handicap, marital or familial status, or 
national origin. For more specific requirements see 7 CFR part 15, 
subparts A and B.
    D. Provide Grantor with such periodic reports as it may require and 
permit periodic inspections of its operations by a representative of the 
Grantor.
    E. To execute Forms FmHA or its successor agency under Public Law 
103-354 400-1, ``Equal Opportunity Agreement,'' and FmHA or its 
successor agency under Public Law 103-354 400-4, ``Assurance 
Agreement,'' and to execute any other agreements required by Grantor 
which Grantee is legally authorized to execute. If any such form has 
been executed by Grantee as a result of a loan or transfer being made to 
Grantee by Grantor contemporaneously with the making of this grant, 
another form of the same type need not be executed in connection with 
this grant.
    F. Upon any default under its representations or agreements set 
forth in this instrument, Grantee, at the option and demand of Grantor, 
will repay to Grantor forthwith the original principal amount of the 
grant stated hereinabove, with interest at the rate of 5 percentum per 
annum from the date of the default. Default by the Grantee will 
constitute termination of the grant, thereby causing cancellation of 
Federal assistance under the grant. The provisions of this Grant 
Agreement may be enforced by Grantor, at its option and without regard 
to prior waivers by it of previous defaults of Grantee, by judicial 
proceedings to require specific performance of the terms of this Grant 
Agreement or by such other proceedings in law or equity, in either 
Federal or State courts, as may be deemed necessary by Grantor to assure 
compliance with the provisions of this Grant Agreement and the laws and 
regulations under which this grant is made. For further provisions 
regarding enforcement see 7 CFR 3016.43.
    G. Return immediately to Grantor, as required by the regulations of 
Grantor, any grant funds actually advanced and not needed by Grantee for 
approved purposes.
    H. Provide Financial Management Systems, as more specifically 
provided in 7 CFR 3016.20, which will include:
    1. Accurate, current and complete disclosure of the financial 
results of each grant. Financial reporting will be on an accrual basis.
    2. Records which identify adequately the source and application of 
funds for grant-supported activities. Those records shall contain 
information pertaining to grant awards and authorizations, obligations, 
unobligated balances, assets, liabilities, outlays, and income.
    3. Effective control over and accountability for all funds. Grantee 
shall adequately safeguard all such funds and shall assure that they are 
used solely for authorized purposes.
    4. accounting records supported by source documentation.
    I. Retain financial records, supporting documents, statistical 
records, and all other records pertinent to the grant for a period of at 
least 3 years after grant closing except that the records shall be 
retained beyond the 3-year period if audit findings have not been 
resolved. Microfilm copies may be substituted in lieu of original 
records. The Grantor and the Comptroller General of the United States, 
or any of their duly authorized representatives, shall have access to 
any books, documents, papers, and records of the Grantee's government 
which are pertinent to the specific grant program for the purpose of 
making audits, examinations, excerpts, and transcripts.
    J. Provide an audit report pursuant to 7 CFR part 3016 prepared in 
sufficient detail to allow the Grantor to determine that funds have been 
used in compliance with the proposal, any applicable laws and 
regulations and this Agreement.
    K. Agree to account for and to return to Grantor interest earned on 
grant funds pending that disbursements for program purposes when the 
Grantee is a unit of local government. States and agencies or 
instrumentalities of states shall not be held accountable for interest 
earned on grant funds pending their disbursement.
    L. Except as specifically provided in this agreement, comply with 
the applicable provisions of USDA's general grant regulations set out in 
7 CFR part 3016.
    M. Comply with the requirements of 7 CFR part 3017, subpart F, 
relating to drug-free workplace requirements and 7 CFR part 3018 
relating to restrictions on lobbying.

[[Page 409]]

    Grantor agrees that it: A. Will make available to Grantee for the 
purpose of this Agreement not to exceed $---------------------------- 
which it will advance to Grantee in accordance with the actual needs of 
Grantee as determined by Grantor.
    B. Will assist grantee with such assistance as Grantor deems 
appropriate in acquiring the project.
    C. At its sole discretion and at any time may give any consent, 
deferment, subordination, release, satisfaction, or termination of any 
or all of Grantee's grant obligations, with or without available 
consideration, upon such terms and conditions as Grantor may determine 
to be (1) advisable to further the purpose of the grant or to protect 
Grantor's financial interest therein and (2) consistent with both the 
statutory purposes of the grant and the limitations of the statutory 
authority under which it is made.
    Termination of This Agreement: This Agreement may be terminated for 
cause in the event of default on the part of the Grantee as provided in 
paragraph F of this exhibit or for convenience of the Grantor and 
Grantee prior to the date of completion of the grant purpose. 
Termination for convenience will occur when both the Grantee and Grantor 
agree that the continuation of the grant will not produce beneficial 
results commensurate with the further expenditure of funds.
    In Witness Whereof Grantee on the date first above written has 
caused these presence to be executed by its duly authorized ------------
-------- and attested and its corporated seal affixed by its duly 
authorized


________________________________________________________________________

Attest:_________________________________________________________________
By______________________________________________________________________
(Title)_________________________________________________________________

By______________________________________________________________________
(Title)_________________________________________________________________


United States of America Farmers Home Administration or its successor 
agency under Public Law 103-354.

By______________________________________________________________________
(Title)_________________________________________________________________

    Exhibit G-1 to Subpart E of Part 1965--Restrictive-Use Agreement

(To be used with exhibit A-3 to this subpart)
    (Name of Borrower), herein referred to as owner, and any successors 
in interest agree that the (Name of Project), herein referred to as 
housing, will be used only as authorized under section 514 or 515 of 
title V of the Housing Act of 1949, as amended, and 7 Code of Federal 
Regulations (CFR) part 1965, subpart E, or other Farmers Home 
Administration or its successor agency under Public Law 103-354 (FmHA or 
its successor agency under Public Law 103-354) regulations then in 
existence until (Date shown on existing restrictive-use provisions) for 
the purpose of housing low- and moderate-income people eligible for 
occupancy. A tenant or applicant for housing may seek enforcement of 
this provision, as well as the United States. During the restrictive 
period, no eligible person occupying or wishing to occupy the housing 
shall be required to vacate or be denied occupancy without cause. Rents, 
other charges, and conditions of occupancy will be set so that the 
effect will not differ from what would have been had the project 
remained in the FmHA or its successor agency under Public Law 103-354 
program. The owner also agrees to keep a notice posted at the project 
for the remainder of the restrictive-use period, in a visible place 
available for tenant inspection, stating that the project is to be used 
in accordance with the Housing Act, and that management practices and 
rental rates will be consistent with those necessary to maintain the 
project for the protected population for the remainder of the 
restrictive-use period.
    Furthermore, the owner agrees to be bound by the applicable 
provisions of 7 CFR part 1930, subpart C, specific to tenant rights and 
relations for the duration of the restrictive-use period. The owner 
agrees to be responsible for ensuring that rental procedures, 
verification and certification of income and/or employment, lease 
agreements, rent or occupancy charges, and termination and eviction 
remain consistent with the provisions set forth in 7 CFR part 1930, 
subpart C, and to adhere to applicable local, State, and Federal laws. 
The owner agrees to obtain FmHA or its successor agency under Public Law 
103-354 concurrence with any changes to the preceding rental procedures 
that may deviate from those approved at the time of the prepayment, 
prior to implementing the changes. Any changes proposed must be 
consistent with the objectives of the program and the regulations. 
Documentation, including annual income recertifications, shall be 
maintained to evidence compliance in the event there is a future 
complaint or audit. The owner must be able to document that acceptable 
waiting lists were maintained, units were rented to appropriate tenants, 
and rents were established at appropriate levels. The owner agrees to 
make the documentation available for Government inspection upon request. 
The owner and any successors in interest agree to provide the following 
signed and dated certification to the applicable FmHA or its successor 
agency under Public Law 103-354 Servicing Office or other designated 
office within 30 days of the beginning of each calendar year until (Date 
restrictive-use period ends):
    (Name of Owner) certifies that (Name of Project) is being operated 
in compliance with the restrictive-use provisions contained

[[Page 410]]

in (Applicable release document) and the Restrictive-Use Agreement which 
sets forth certain requirements for operation of the project for the 
benefit of low- and moderate-income people in conformance with 
applicable FmHA or its successor agency under Public Law 103-354 
regulations. (Name of Owner) understands that failure to operate the 
project in conformance with the restrictive-use provisions may cause a 
tenant or the United States to seek enforcement of the provisions.
Date:___________________________________________________________________
Owner:__________________________________________________________________
By:_____________________________________________________________________
(Title)_________________________________________________________________

           Exhibit G-2 to Subpart E--Restrictive-Use Agreement

(To be used with paragraph (A) to exhibit A-4 to this subpart)

    (Name of Borrower), herein referred to as owner, and any successors 
in interest agree to use the (Name of Project), herein referred to as 
housing, as required in 7 Code of Federal Regulations (CFR) part 1965, 
subpart E, or other Farmers Home Administration or its successor agency 
under Public Law 103-354 (FmHA or its successor agency under Public Law 
103-354) regulations then in existence during the 20-year period 
beginning (date of the last loan or servicing action) for the purpose of 
housing low- and moderate-income people eligible for occupancy. A tenant 
or applicant for housing may seek enforcement of this provision, as well 
as the United States. Prior to (date period ends) to eligible person 
occupying or wishing to occupy the housing shall be required to vacate 
or be denied occupancy without cause. Rents, other charges, and 
conditions or occupancy will be established to meet these conditions 
such that the effect will not differ from what would have been, had the 
project remained in the FmHA or its successor agency under Public Law 
103-354 program. The owner also agrees to keep a notice posted at the 
project for the remainder of the restrictive-use period, in a visible 
place available for tenant inspection, stating that the project is to be 
used in accordance with the Housing Act, and that management practices 
and rental rates will be consistent with those necessary to maintain the 
project for the protected population for the remainder of the 
restrictive-use period. At the expiration of this period ending (date) 
the housing and related facilities will be offered for sale to a 
qualified nonprofit organization or public agency, as determined by FmHA 
or its successor agency under Public Law 103-354.
    Furthermore, the owner agrees to be bound by the applicable 
provisions of 7 CFR part 1930, subpart C, specific to tenant rights and 
relations for the duration of the restrictive-use period. The owner 
agrees to be responsible for ensuring that rental procedures, 
verification and certification of income and/or employment, lease 
agreements, rent or occupancy charges, and termination and eviction 
remain consistent with the provisions set forth in 7 CFR part 1930, 
subpart C, and to adhere to applicable local, State, and Federal laws. 
The owner agrees to obtain FmHA or its successor agency under Public Law 
103-354 concurrence with any changes to the preceding rental procedures 
that may deviate from those approved at the time of the prepayment, 
prior to implementing the changes. Any changes proposed must be 
consistent with the objectives of the program and the regulations. 
Documentation, including annual income recertification, shall be 
maintained to evidence compliance in the event there is a future 
complaint or audit. The owner must be able to document that acceptable 
waiting lists were maintained, units were rented to appropriate tenants, 
and rents were established at appropriate levels. The owner agrees to 
make the documentation available for Government inspection upon request. 
The owner and any successors in interest agree to provide the following 
signed and dated certification to the applicable FmHA or its successor 
agency under Public Law 103-354 Servicing Office or other designated 
office within 30 days of the beginning of each calendar year until (date 
restrictive-use period ends):
    (Name of Owner) certifies that (Name of Project) is being operated 
in compliance with the restrictive-use provisions contained in 
(Applicable release document) and the Restrictive-Use Agreement which 
sets forth certain requirements for operation of the project for the 
benefit of low- and moderate-income people in conformance with 
applicable FmHA or its successor agency under Public Law 103-354 
regulations. (Name of Owner) understands that failure to operate the 
project in conformance with the restrictive-use provisions may cause a 
tenant or the United States to seek enforcement of the provisions.

Date:___________________________________________________________________
Owner:__________________________________________________________________
By:_____________________________________________________________________
(Title)_________________________________________________________________

    Exhibit G-3 to Subpart E of Part 1965--Restrictive-Use Agreement

(To be used with paragraph (B) to exhibit A-4 to this subpart)

    (Name of Borrower), herein referred to as owner, and any successors 
in interest agree to immediately attempt to sell the (Name of Project), 
herein referred to as housing and related facilities to a qualified 
nonprofit organization or public agency, as determined

[[Page 411]]

by Farmers Home Administration or its successor agency under Public Law 
103-354 (FmHA or its successor agency under Public Law 103-354) in 
accordance with the provisions of 7 Code of Federal Regulations (CFR) 
part 1965, subpart E. The owner agrees to use the housing as required in 
7 CFR part 1965, subpart E, or other regulations then in existence 
during the sales period for the purpose of housing low- and moderate-
income people eligible for occupancy. A tenant or applicant for housing 
may seek enforcement of this provision, as well as the United States. 
Prior to a sale to a nonprofit organization or public agency, no 
eligible person occupying or wishing to occupy the housing shall be 
required to vacate or be denied occupancy without cause. Rents, other 
charges, and conditions of occupancy will be established to meet these 
conditions such that the effect will not differ from what would have 
been, had the project remained in the FmHA or its successor agency under 
Public Law 103-354 program. The owner also agrees to keep a notice 
posted at the project for the remainder of the sales period, in a 
visible place available for tenant inspection, stating that the project 
is to be used in accordance with the Housing Act, and that management 
practices and rental rates will be consistent with those necessary to 
maintain the project for the protected population for the remainder of 
the sales period.
    Furthermore, the owner agrees to be bound by the applicable 
provisions of 7 CFR part 1930 C, specific to tenant rights and relations 
for the duration of the sales period. The owner agrees to be responsible 
for ensuring that rental procedures, verification and certification of 
income and/or employment, lease agreements, rent or occupancy charges, 
and termination and eviction remain consistent with the provisions set 
forth in 7 CFR part 1930, subpart C, and to adhere to applicable local, 
State, and Federal laws. The owner agrees to obtain FmHA or its 
successor agency under Public Law 103-354 concurrence with any changes 
to the preceding rental procedures that may deviate from those approved 
at the time of the prepayment, prior to implementing the changes. Any 
changes proposed must be consistent with the objectives of the program 
and the regulations. Documentation, including annual income 
recertifications, shall be maintained to evidence compliance in the 
event there is a future complaint or audit. The owner must be able to 
document that acceptable waiting lists were maintained, units were 
rented to appropriate tenants, and rents were established at appropriate 
levels. The owner agrees to make the documentation available for 
Government inspection upon request. The owner and any successors in 
interest agree to provide the following signed and dated certification 
to the applicable FmHA or its successor agency under Public Law 103-354 
Servicing Office or other designated office within 30 days of the 
beginning of each calendar year until a sale to nonprofit organization 
or public agency takes place:
    (Name of Owner) certifies that (Name of Project) is being operated 
in compliance with the restrictive-use provisions contained in 
(Applicable release document) and the Restrictive-Use Agreement which 
sets forth certain requirements for operation of the project for the 
benefit of low- and moderate-income people in conformance with 
applicable FmHA or its successor agency under Public Law 103-354 
regulations. (Name of Owner) understands that failure to operate the 
project in conformance with the restrictive-use provisions may cause a 
tenant or the United States to seek enforcement of the provisions.

Date:___________________________________________________________________
Owner:__________________________________________________________________
By:_____________________________________________________________________
(Title)_________________________________________________________________

    Exhibit G-4 to Subpart E of Part 1965--Restrictive-Use Agreement

(To be used with paragraph (C) to exhibit A-4 to this subpart)
    (Name of Borrower), herein referred to as owner, and any successors 
in interest agree to use the (Name of Project), herein referred to as 
housing, for the purpose of housing low- and moderate-income people 
occupying the project at the time the prepayment was accepted, as 
required 7 Code of Federal Regulations (CFR) part 1965, subpart E, and 
other applicable Farmers Home Administration or its successor agency 
under Public Law 103-354 (FmHA or its successor agency under Public Law 
103-354) regulations then in existence. No eligible person occupying the 
housing shall be required to vacate prior to the end of the remaining 
useful life of the project without cause. Rents, other charges, and 
conditions of occupancy will be established to meet these conditions for 
these tenants such that the effect will not differ from what would have 
been, had the project remained in the FmHA or its successor agency under 
Public Law 103-354 program. Existing tenants are protected to ensure 
that none experience new or increased rent overburden as a result of 
owner actions until each voluntarily moves from the project. The owner 
also agrees to keep a notice posted at the project in a visible place 
available for tenant inspection, for the remaining useful life of the 
project or until the last existing tenant voluntarily vacates, stating 
that the project is to be used in accordance with the Housing Act, and 
that management practices and rental rates will be consistent with those 
necessary to maintain the project for low- and moderate-income tenants. 
A tenant may

[[Page 412]]

seek enforcement of this provision, as well as the United States.
    Furthermore, the owner agrees to be bound by the applicable 
provisions of 7 CFR part 1930, subpart C, specific to tenant rights and 
relations for the remaining useful life of the project or until the last 
existing tenant voluntarily vacates. The owner agrees to be responsible 
for ensuring that rental procedures, verification and certification of 
income and/or employment, least agreements, rent or occupancy charges, 
and termination and eviction remain consistent with the provisions set 
forth in 7 CFR part 1930, subpart C, and to adhere to applicable local, 
State, and Federal laws. The owner agrees to obtain FmHA or its 
successor agency under Public Law 103-354 concurrence with any changes 
to the preceding rental procedures that may deviate from those approved 
at the time of the prepayment, prior to implementing the changes. Any 
changes proposed must be consistent with the objectives of the program 
and the regulations. Documentation, including annual income 
recertifications, shall be maintained to evidence compliance in the 
event there is a future complaint or audit. The owner must be able to 
document that rents were established at appropriate levels. The owner 
agrees to make the documentation available for Government inspection 
upon request. The owner and any successors in interest agree to provide 
the following signed and dated certification to the applicable FmHA or 
its successor agency under Public Law 103-354 Servicing Office or other 
designated office within 30 days of the beginning of each calendar year 
until the last existing tenant voluntarily vacates:
    (Name of Owner) certifies that (Name of Project) is being operated 
in compliance with the restrictive-use provisions contained in 
(Applicable release document) and the Restrictive-Use Agreement which 
sets forth certain requirements for operation of the project for the 
benefit of low- and moderate-income people in conformance with 
applicable FmHA or its successor agency under Public Law 103-354 
regulations. (Name of Owner) understands that failure to operate the 
project in conformance with the restrictive-use provisions may cause a 
tenant or the United States to seek enforcement of the provisions.

Date:___________________________________________________________________
Owner:__________________________________________________________________
By:_____________________________________________________________________
(Title)_________________________________________________________________



PART 1980_GENERAL--Table of Contents




Subparts A-C [Reserved]

                      Subpart D_Rural Housing Loans

Sec.
1980.301 Introduction.
1980.302 Definitions and abbreviations.
1980.303-1980.307 [Reserved]
1980.308 Full faith and credit.
1980.309 Lender participation in guaranteed RH loans.
1980.310 Loan purposes.
1980.311 Loan limitations and special provisions.
1980.312 Rural area designation.
1980.313 Site and building requirements.
1980.314 Loans on leasehold interests.
1980.315 Escrow accounts for exterior development.
1980.316 Environmental requirements.
1980.317 Equal opportunity and nondiscrimination requirements in use, 
          occupancy, rental, or sale of housing.
1980.318 Flood or mudslide hazard area precautions.
1980.319 Other Federal, State, and local requirements.
1980.320 Interest rate.
1980.321 Terms of loan repayment.
1980.322 Loan guarantee limits.
1980.323 Guarantee fee.
1980.324 Charges and fees by Lender.
1980.325 Transactions which will not be guaranteed.
1980.326-1980.329 [Reserved]
1980.330 Applicant equity requirements.
1980.331 Collateral.
1980.332 [Reserved]
1980.333 Promissory notes and security instruments.
1980.334 Appraisal of property serving as collateral.
1980.335-1980.339 [Reserved]
1980.340 Acquisition, construction, and development.
1980.341 Inspections of construction and compliance reviews.
1980.342-1980.344 [Reserved]
1980.345 Applicant eligibility requirements for a guaranteed loan.
1980.346 Other eligibility criteria.
1980.347 Annual income.
1980.348 Adjusted annual income.
1980.349-1980.350 [Reserved]
1980.351 Requests for reservation of funds.
1980.352 [Reserved]
1980.353 Filing and processing applications.
1980.354 [Reserved]
1980.355 Review of requirements.
1980.356-1980.359 [Reserved]
1980.360 Conditions precedent to issuance of the loan note guarantee.
1980.361 Issuance of loan note guarantee.
1980.362 [Reserved]
1980.363 Review of loan closing.
1980.364-1980.365 [Reserved]
1980.366 Transfer and assumption.
1980.367 Unauthorized sale or transfer of the property.

[[Page 413]]

1980.368-1980.369 [Reserved]
1980.370 Loan servicing.
1980.371 Defaults by the borrower.
1980.372 Protective advances.
1980.373 [Reserved]
1980.374 Liquidation.
1980.375 Reinstatement of the borrower's account.
1980.376 Loss payments.
1980.377 Future recovery.
1980.378-1980.389 [Reserved]
1980.390 Interest assistance.
1980.391 Equity sharing.
1980.392 Mortgage Credit Certificates (MCCs) and Funded Buydown 
          Accounts.
1980.393-1980.396 [Reserved]
1980.397 Exception authority.
1980.398 Unauthorized assistance and other deficiencies.
1980.399 Appeals.
1980.400 [Reserved]

             Subpart E_Business and Industrial Loan Program

1980.401 Introduction.
1980.402 Definitions.
1980.403 Citizenship of borrowers.
1980.404 [Reserved]
1980.405 Rural areas.
1980.406-1980.410 [Reserved]
1980.411 Loan purposes.
1980.412 Ineligible loan purposes.
1980.413 Transactions which will not be guaranteed.
1980.414 Fees and charges by lender and others.
1980.415-1980.418 [Reserved]
1980.419 Eligible lenders.
1980.420 Loan guarantee limits.
1980.421-1980.422 [Reserved]
1980.423 Interest rates.
1980.424 Term of loan repayment.
1980.425 Availability of credit from other sources.
1980.426-1980.431 [Reserved]
1980.432 Environmental requirements.
1980.433 Flood or mudslide hazard area precautions.
1980.434 Equal opportunity and nondiscrimination requirements.
1980.435-1980.440 [Reserved]
1980.441 Borrower equity requirements.
1980.442 Feasibility studies.
1980.443 Collateral, personal and corporate guarantees, and other 
          requirements.
1980.444 Appraisal of property serving as collateral.
1980.445 Periodic financial statements and audits.
1980.446-1980.450 [Reserved]
1980.451 Filing and processing applications.
1980.452 FmHA or its successor agency under Public Law 103-354 
          evaluation of application.
1980.453 Review of requirements.
1980.454 Conditions precedent to issuance of the Loan Note Guarantee.
1980.455-1980.468 [Reserved]
1980.469 Loan servicing.
1980.470 Defaults by borrower.
1980.471 Liquidation.
1980.472 Protective advances.
1980.473 Additional loans or advances.
1980.474 [Reserved]
1980.475 Bankruptcy.
1980.476 Transfer and assumptions.
1980.477-1980.480 [Reserved]
1980.481 Insured loans.
1980.482-1980.487 [Reserved]
1980.488 Guaranteed industrial development bond issues.
1980.489 [Reserved]
1980.490 Business and industry buydown loans.
1980.491-1980.494 [Reserved]
1980.495 FmHA or its successor agency under Public Law 103-354 forms and 
          guides.
1980.496 Exception authority.
1980.497 General administrative.
1980.498 Business and Industry Disaster Loans.
1980.499 [Reserved]
1980.500 OMB control number.

Appendix A to Subpart E--Form FmHA 449-1, Application for Loan and 
          Guarantee
Appendix B to Subpart E--Certificate of Incumbency and Signature
Appendix C to Subpart E--Guidelines for Loan Guarantees for Alcohol Fuel 
          Production Facilities
Appendix D to Subpart E--Alcohol Production Facilities Planning, 
          Performing, Development and Project Control
Appendix E to Subpart E--Environmental Assessment Guidelines
Appendix F to Subpart E--Conditional Commitment for Guarantee
Appendix G to Subpart E [Reserved]
Appendix H to Subpart E--Suggested Format for the Opinion of the 
          Lender's Legal Counsel
Appendix I to Subpart E--Instructions for Loan Guarantees for Drought 
          and Disaster Relief
Appendix J to Subpart E [Reserved]
Appendix K to Subpart E--Regulations for Loan Guarantees for Disaster 
          Assistance for Rural Business Enterprises

Exhibits to Subpart E
Exhibit G to Subpart E [Note]

Subparts F-I [Reserved]

    Authority: 7 U.S.C. 1989.

Subparts A-C [Reserved]

[[Page 414]]



                      Subpart D_Rural Housing Loans

    Source: 60 FR 26985, May 22, 1995, unless otherwise noted.



Sec. 1980.301  Introduction.

    (a) Policy. This subpart contains regulations for single family 
Rural Housing (RH) loan guarantees by the Rural Housing Service (RHS) 
and applies to lenders, borrowers, and other parties involved in making, 
guaranteeing, servicing, holding or liquidating such loans. Any 
processing or servicing activity conducted pursuant to this subpart 
involving authorized assistance to RHS employees, members of their 
families, known close relatives, or business or close personal 
associates is subject to the provisions of subpart D of part 1900. 
Applicants for this assistance are required to identify any known 
relationship or association with an RHS employee.
    (b) Program objective. The basic objective of the guaranteed RH loan 
program is to assist eligible households in obtaining adequate but 
modest, decent, safe, and sanitary dwellings and related facilities for 
their own use in rural areas by guaranteeing sound RH loans which 
otherwise would not be made without a guarantee. Guarantees issued under 
this subpart are limited to loans to applicants with incomes that do not 
exceed income limits as provided in exhibit C of FmHA Instruction 1980-D 
(available in any RHS office).
    (c) [Reserved]
    (d) Nondiscrimination. Loan guarantees and services provided under 
this subpart are subject to various civil rights statutes. Assistance 
shall not be denied to any person or applicant based on race, sex, 
national origin, color, familial status, religion, age, or physical or 
mental disability (the applicant must possess the capacity to enter into 
a legal contract for services). The Consumer Protection Act provides 
that the applicant may not be denied assistance based on receipt of 
income from public assistance or because the applicant has, in good 
faith, exercised any right provided under the Act.



Sec. 1980.302  Definitions and abbreviations.

    (a) The following definitions are applicable to RH loans:
    Agency: Rural Housing Service (RHS).
    Applicant. The party applying to a Lender for a loan.
    Approval official. An RHS employee with delegated loan approval 
authority under subpart A of part 1901 consistent with the amount and 
type of loan considered.
    Borrower. Collectively, all parties who applied for and received a 
specific guaranteed loan from an eligible Lender.
    Coapplicant. An adult member of the household who joins the 
applicant in applying to a lender for a loan.
    Conditional commitment. RHS's notice to the Lender that the material 
it has submitted is approved subject to the completion of all conditions 
and requirements set forth in the notice.
    Development standard. The current edition of any of the model 
building, plumbing, mechanical, and electrical codes listed in exhibit E 
to subpart A of part 1924 applicable to single family residential 
construction or other similar codes adopted by RHS for use in the state.
    Disabled person. A person who is unable to engage in any 
substantially gainful activity by reason of any medically determinable 
physical or mental impairment expected to result in death or which has 
lasted or is expected to last for a continuous period of not less than 
12 months. The disability is expected to be of long or indefinite 
duration; substantially impede the person's ability to live 
independently; and is of such a nature that the person's ability to live 
independently could be improved by more suitable housing conditions. In 
the case of an individual who has attained the age of 55 and is blind, 
disability is defined as inability by reason of such blindness to engage 
in substantially gainful activity requiring skills or abilities 
comparable to those of any gainful activity in which the individual has 
previously engaged with

[[Page 415]]

some regularity over a substantial period of time. Receipt of veteran's 
benefits for disability, whether service-oriented or otherwise, does not 
automatically establish disability. A disabled person also includes a 
person with a developmental disability. A developmental disability means 
a severe, chronic disability of a person which:
    (1) Is attributable to a mental or physical impairment or a 
combination of mental and physical impairments;
    (2) Is manifested before the person attains age 22;
    (3) Is likely to continue indefinitely;
    (4) Results in substantial functional limitations in one or more of 
the following areas of major life activity:
    (i) Self-care,
    (ii) Receptive and expressive language,
    (iii) Learning,
    (iv) Mobility,
    (v) Self-direction,
    (vi) Capacity for independent living, and
    (vii) Economic self-sufficiency; and
    (5) Reflects the person's need for a combination and sequence of 
special care, treatment, or other services which are of lifelong or 
extended duration and are individually planned and coordinated.
    Displaced homemaker. An individual who is an adult; has not worked 
full-time full-year (2,080 hours) in the labor force for a number of 
years but has during such years worked primarily without remuneration to 
care for the home and family; and is unemployed or underemployed and is 
experiencing difficulty in obtaining or upgrading employment.
    Elderly family. An elderly family consists of one of the following:
    (1) A person who is the head, spouse, or sole member of a household 
and who is 62 years of age or older, or who is disabled and is the 
applicant/borrower or the coapplicant/coborrower; or
    (2) Two or more unrelated elderly (age 62 or older), disabled 
persons who are living together, at least one of whom is the applicant/
borrower or coapplicant/coborrower; or
    (3) In the case of a family where a deceased borrower/coborrower or 
spouse was at least 62 years old or disabled, the surviving household 
members shall continue to be classified as an ``elderly family'' for the 
purpose of determining adjusted income even though the surviving members 
may not meet the definition of elderly family on their own, provided:
    (i) They occupied the dwelling with the deceased family member at 
the time of his/her death; and
    (ii) If one of the surviving members is the spouse of the deceased 
family member, the surviving family shall be classified as an elderly 
family only until the remarriage of the surviving spouse; and
    (iii) At the time of death, the dwelling of the deceased family 
member was financed under title V of the Housing Act of 1949, as 
amended.
    Eligible lender. A Lender meeting the criteria outlined in Sec. 
1980.309 who has requested and received RHS approval for participation 
in the program.
    Existing dwelling. A dwelling which has been completed for more than 
1 year as evidenced by an occupancy permit or a similar document.
    Extended family. A family unit comprised of adult relatives who live 
together with the other members of the household, for reasons of 
physical dependency, economics, and/or social custom, who, under other 
circumstances, could maintain separate households. A typical example is 
parents living with their adult children.
    Federal National Mortgage Association (Fannie Mae) rate. The rate 
authorized in exhibit B of FmHA Instruction 440.1 (available in any RHS 
office).
    Finance Office. The office which maintains RHS's financial records.
    First-time homebuyer. Any individual who (and whose spouse) has had 
no present ownership in a principal residence during the 3 year period 
ending on the date of purchase of the property acquired with a 
guaranteed loan under this subpart. A first-time homebuyer includes 
displaced homemakers and single parents even though they might have 
owned, or resided in, a dwelling with a spouse. This definition is used 
to determine RHS processing priority in accordance with Sec. 1980.353.
    Guaranteed loan. A loan made, held, and serviced by a Lender for 
which RHS has entered into an agreement

[[Page 416]]

with the Lender in accordance with this subpart.
    Household or family. The applicant, coapplicant, and all other 
persons who will make the applicant's dwelling their primary residence 
for all or part of the next 12 months. The temporary absence of a child 
from the home due to placement in foster care shall not be taken into 
account in considering family composition and size. Foster children 
placed in the borrower's home and live-in aides shall not be counted as 
members of the household.
    Interest assistance. Loan assistance payments made by RHS to the 
Lender on behalf of the borrower.
    Lender. The organization making, holding, and/or servicing the loan 
which is guaranteed under the provisions of this subpart. The Lender is 
also the party requesting the guarantee. The Lender includes an entity 
purchasing an RHS guaranteed loan. A purchasing Lender acquires all the 
privileges, duties, and responsibilities of the originating Lender. The 
Lender is primarily responsible for originating, underwriting, 
servicing, and, where necessary, liquidating the loan and disposing of 
the property in a manner consistent with maximizing the Government's 
interest.
    Lender agreement. The signed master agreement between RHS and the 
Lender setting forth the Lender's loan responsibilities for loan 
processing and servicing guaranteed RH loans.
    Lender record change. The Lender's notice to RHS of a change of 
Lender or a change of servicer.
    Liquidation. Liquidation of the loan occurs when the Lender acquires 
title to the security, a third party buys the property at the 
foreclosure sale, or the borrower sells the property to a third party in 
order to avoid or cure a default situation with the prior approval of 
the Lender and RHS. In states providing a redemption period, the Lender 
does not typically acquire title until after expiration of the 
redemption period.
    Liquidation expense. The Lender's cost of liquidation including 
those costs that do not qualify as a protective advance.
    Loan note guarantee. The signed commitment issued by RHS setting 
forth the terms and conditions of the guarantee.
    Manufactured home. A structure built to the Federal Manufactured 
Home Construction and Safety Standards and RHS thermal requirements.
    Master interest assistance agreement. The agreement among RHS, the 
borrower, and the Lender which provides the basis for payment of 
interest assistance and shared equity.
    Minor. A person under 18 years of age. Neither the applicant, 
coapplicant, or spouse may be counted as a minor. Foster children placed 
in the borrower's home are not counted as minors for the purpose of 
determination of annual or adjusted income.
    Net family assets. Include:
    (1) The value of equity in real property, savings, individual 
retirement accounts (IRA), demand deposits, and the market value of 
stocks, bonds, and other forms of capital investments, but exclude:
    (i) Interests in Indian Trust land,
    (ii) The value of the dwelling and a minimum adequate site,
    (iii) Cash on hand which will be used to reduce the amount of the 
loan,
    (iv) The value of necessary items of personal property such as 
furniture and automobiles and the debts against them,
    (v) The assets that are a part of the business, trade, or farming 
operation in the case of any member of the household who is actively 
engaged in such operation, and
    (vi) The value of a trust fund that has been established and the 
trust is not revocable by, or under the control of, any member of the 
household, so long as the funds continue to be held in trust.
    (2) The value of any business or household assets disposed of by a 
member of the household for less than fair market value (including 
disposition in trust, but not in a foreclosure or bankruptcy sale) 
during the 2 years preceding the date of application, in excess of the 
consideration received therefore. In the case of a disposition as part 
of a separation or divorce settlement, the disposition shall not be 
considered to be less than fair market value if the household member 
receives

[[Page 417]]

important consideration not measurable in dollar terms.
    Net proceeds. The proceeds remaining from the property after it is 
sold or its net value as determined in accordance with this subpart. The 
determination of net proceeds depends upon whether the property is sold 
or acquired by the Lender. Net proceeds may be determined using the 
appraised value and subtracting authorized deductions when the Lender 
acquires the property.
    Protective advance. Advances made by the Lender when the borrower is 
in liquidation or otherwise in default to protect or preserve the 
security from loss or destruction.
    Qualifying income. The amount of the applicant's income which the 
lender determines is adequate and dependable enough to consider for 
repayment ability. This figure may be different from the adjusted income 
which is used for RHS program eligibility. Qualifying income is 
typically less than adjusted income unless the applicant has income from 
the sources listed in Sec. 1980.347(e).
    Rural area. An area meeting the requirements of Sec. 1980.312. 
Rural areas are designated on maps available in the RHS office servicing 
that area.
    Single parent. An individual who is unmarried or legally separated 
from a spouse and has custody or joint custody of one or more minor 
children or is pregnant.
    State Director. Director of RHS programs within a state office area.
    Veteran. A veteran is a person who has been discharged or released 
from the active forces of the United States Army, Navy, Air Force, 
Marine Corps, or Coast Guard under conditions other than dishonorable 
discharge including ``clemency discharges'' and who served on active 
duty in such forces:
    (1) From April 6, 1917, through March 31, 1921;
    (2) From December 7, 1941, through December 31, 1946;
    (3) From June 27, 1950, through January 31, 1955; or
    (4) For more than 180 days, any part of which occurred after January 
31, 1955, but on or before May 7, 1975.
    (b) The following abbreviations are applicable to this subpart:
    Fannie Mae-- Federal National Mortgage Association.
    FCS-- Farm Credit Service.
    FHA-- Federal Housing Administration.
    Freddie Mac-- Federal Home Loan Mortgage Corporation.
    Ginnie Mae-- Government National Mortgage Association.
    HUD-- Department of Housing and Urban Development.
    IRS-- Internal Revenue Service.
    MCCs-- Mortgage Credit Certificates.
    PITI-- Principal, Interest, Taxes, and Insurance.
    RHS-- Rural Housing Service.
    URAR-- Uniform Residential Appraisal Report.
    VA-- Department of Veterans Affairs.



Sec. Sec. 1980.303-1980.307  [Reserved]



Sec. 1980.308  Full faith and credit.

    The loan note guarantee constitutes an obligation supported by the 
full faith and credit of the United States and is incontestable except 
for fraud or misrepresentation of which the Lender has actual knowledge 
at the time it becomes such Lender or which the Lender participates in 
or condones. Misrepresentation includes negligent misrepresentation. A 
note which provides for the payment of interest on interest shall not be 
guaranteed. Any guarantee or assignment of a guarantee attached to or 
relating to a note which provides for the payment of interest on 
interest is void. Notwithstanding the prohibition of interest on 
interest, interest may be capitalized in connection with reamortization 
over the remaining term with written concurrence of RHS. The loan note 
guarantee will be unenforceable to the extent any loss is occasioned by 
violation of usury laws, negligent servicing, or failure to obtain the 
required security regardless of the time at which RHS acquires knowledge 
of the foregoing. Negligent servicing is defined as servicing that is 
inconsistent with this subpart and includes the failure to perform those 
services which a reasonably prudent Lender would perform in servicing 
its own loan portfolio of loans that are not guaranteed. The term 
includes not only the concept of a failure to act, but also not acting 
in a timely manner or acting contrary to the manner in which a 
reasonably prudent Lender would act up

[[Page 418]]

to the time of loan maturity or until a final loss is paid. Any losses 
occasioned will be unenforceable to the extent that loan funds are used 
for purposes other than those authorized in this subpart. When the 
Lender conducts liquidation in an expeditious manner, in accordance with 
the provisions of Sec. 1980.374, the loan note guarantee shall cover 
interest until the claim is paid within the limit of the guarantee.



Sec. 1980.309  Lender participation in guaranteed RH loans.

    (a) Qualification. The following Lenders are eligible to participate 
in the RHS guaranteed RH loan program upon presentation of evidence of 
said approval and execution of the RHS Lender Agreement.
    (1) Any state housing agency;
    (2) Any Lender approved by HUD as a supervised or nonsupervised 
mortgagee for submission of one to four family housing applications for 
Federal Housing Mortgage Insurance or as an issuer of Ginnie Mae 
mortgage backed securities;
    (3) Any Lender approved as a supervised or nonsupervised mortgagee 
for the VA;
    (4) Any Lender approved by Fannie Mae for participation in one to 
four family mortgage loans;
    (5) Any Lender approved by Freddie Mac for participation in one to 
four family mortgage loans;
    (6) An FCS institution with direct lending authority; and
    (7) Any Lender participating in other RHS, Rural Business-
Cooperative Service, Rural Utilities Service, and/or Farm Service Agency 
guaranteed loan programs.
    (b) Lender approval. A Lender listed in paragraph (a) of this 
section must request a determination of eligibility in order to 
participate as an originating Lender in the program. Requests may be 
made to the state office serving the state jurisdiction or to the 
National office when multiple state jurisdictions are involved.
    (1) The Lender must provide the following information to RHS:
    (i) Evidence of approval, as appropriate, for the criteria under 
paragraph (a) of this section, which the Lender meets.
    (ii) The Lender's Tax Identification Number.
    (iii) The name of an official of the Lender who will serve as a 
contact for RHS regarding the Lender's guaranteed loans.
    (iv) A list of names, titles, and responsibilities of the Lender's 
principal officers.
    (v) An outline of the Lender's internal loan criteria for issues of 
credit history and repayment ability and a copy of the Lender's quality 
control plan for monitoring production and servicing activities.
    (vi) An executed certification regarding debarment, suspension, or 
other matters--primary covered transactions. The certification will be 
obtained using a form prescribed by RHS.
    (2) The Lender must agree to:
    (i) Obtain and keep itself informed of all program regulations and 
guidelines including all amendments and revisions of program 
requirements and policies.
    (ii) Process and service RHS guaranteed loans in accordance with 
Agency regulations.
    (iii) Permit RHS employees or its designated representatives to 
examine or audit all records and accounts related to any RHS loan 
guarantee.
    (iv) Be responsible for the servicing of the loan, or if the loan is 
to be sold, sell only to an entity which meets the provisions of 
paragraph (a) of this section.
    (v) Use forms which have been approved by FHA, Fannie Mae, Freddie 
Mac, or, for FCS Lenders, use the appropriate FCS forms.
    (vi) Maintain its approval if qualification as an RHS Lender was 
based on approval by HUD, VA, Fannie Mae, or Freddie Mac including 
maintaining the minimum allowable net capital, acceptable levels of 
liquidity, and any required fidelity bonding and/or mortgage servicing 
errors and omissions policies required by HUD, VA, Fannie Mae, or 
Freddie Mac, as appropriate.
    (vii) Operate its facilities in a prudent and business-like manner.
    (viii) Assure that its staff is well trained and experienced in loan 
origination and/or loan servicing functions, as necessary, to assure the 
capability

[[Page 419]]

of performing all of the necessary origination and servicing functions.
    (ix) Notify RHS in writing if the Lender:
    (A) Ceases to meet any financial requirements of the entity under 
which the Lender qualified for RHS eligibility;
    (B) Becomes insolvent;
    (C) Has filed for bankruptcy protection, has been forced into 
involuntary bankruptcy, or has requested an assignment for the benefit 
of creditors;
    (D) Has taken any action to cease operations or discontinue 
servicing or liquidating any or all of its portfolio of RHS guaranteed 
loans;
    (E) Has any change in the Lender name, location, address, or 
corporate structure;
    (F) Has become delinquent on any Federal debt or has been debarred, 
suspended, or sanctioned by any Federal agency or in accordance with any 
applicable state licensing or certification requirements.
    (c) [Reserved]
    (d) Handling applications for Lender eligibility. Upon determination 
of a Lender's eligibility to originate loans, RHS and the Lender will 
execute the RHS Lender Agreement. The Lender Agreement establishes the 
Lender's authorization for participation in the program as an 
originator, servicer, or holder of RHS single family mortgage loans. The 
Lender Agreement shall be in effect until terminated by either the 
Agency or the Lender in accordance with the terms of the Lender 
Agreement and this subpart.
    (e) Lender sale of guaranteed loans. Loans guaranteed under this 
subpart may be sold only to entities which meet the qualifications in 
paragraphs (a) and (b) of this section or directly to Fannie Mae or 
Freddie Mac. Such entities are referred to as a Lender and are to be 
treated as a Lender for all purposes under this subpart. The selling 
Lender shall provide the original loan note guarantee to the purchasing 
Lender. The selling Lender is responsible for reporting the sale of any 
loan to RHS within 30 days using a reporting form provided by RHS. The 
purchasing Lender must execute a Lender Agreement or have a valid Lender 
Agreement on file with RHS. The purchasing Lender shall succeed to all 
rights, title, and interest of the Lender under the loan note guarantee. 
Any necessary or convenient assignments or other instruments relating to 
the loan and any other actions necessary or convenient to perfect or 
record such transaction are the responsibility of the purchasing Lender. 
The purchasing Lender assumes the obligations of, and will be bound by 
and will comply with, all covenants, agreements, terms, and conditions 
contained in any note, security instrument, loan note guarantee, and of 
any outstanding agreements in connection with such loan purchased. The 
purchasing Lender shall be subject to any defenses, claims, or setoffs 
that RHS would have against the Lender if the Lender had continued to 
hold the loan.
    (f) Lender responsibility. The Lender will be responsible for the 
processing, servicing, and liquidation (if necessary) of the loan. The 
Lender may use agents, correspondents, branches, financial experts, or 
other institutions in carrying out its responsibilities. 
Lenders are fully responsible for their own actions and the actions of 
those acting on the Lender's behalf.
    (1) Processing. The Lender must abide by limitations on loan 
purposes, loan limitations, interest rates, and terms set forth in this 
subpart. The Lender will obtain, complete, and submit to RHS the items 
required in Sec. 1980.353(c). The Lender may utilize the services of a 
non-RHS approved lender for originating residential loans. The RHS 
approved lender is responsible for the loan underwriting and for 
obtaining the RHS conditional commitment. The agent may close the loan 
in its name provided the loan is immediately transferred to the approved 
lender to whom the guarantee will be issued.
    (2) Servicing. Lenders are fully responsible for servicing and 
protecting the security for all guaranteed loans. When servicing is 
carried out by a third party, the Lender will inform RHS of the name and 
address of the servicer.
    (3) Liquidation. The Lender will complete any liquidation of loans 
guaranteed under the provisions of the Lender Agreement. Loss claims 
will be submitted on the RHS Loss Report form.

[[Page 420]]

The loss report will be accompanied by supporting information to outline 
disposition of all security pledged to secure the loan. The Lender shall 
also effect collection of the debt from other assets of the borrower to 
the extent practicable.
    (4) Counseling. Lenders are encouraged to offer or provide for home 
ownership counseling. Lenders may require first-time homebuyers to 
undergo such counseling if it is reasonably available in the local area. 
When home ownership counseling is provided or sponsored by RHS or 
another Federal agency in the local area, the Lender must require the 
borrower to successfully complete the course.
    (g) Monitoring a Lender's processing and servicing of loans. If RHS 
determines that the Lender is not fulfilling the obligations of the 
Lender Agreement or that the Lender fails to maintain the required 
criteria, the Lender will be notified in writing of the deficiencies and 
allowed a maximum of 30 days to correct them. If the Lender fails to 
make the required corrections, RHS will proceed as provided in paragraph 
(h) of this section.
    (1) Loan processing review for new Lenders. RHS may review loans 
developed by an eligible Lender to assure compliance with, and 
understanding of, Agency regulations.
    (2)-(3) [Reserved]
    (h) Termination of Lender eligibility. The Lender remains eligible 
as long as the Lender meets the criteria in paragraph (a) of this 
section unless that Lender's status is revoked by RHS or by another 
Federal agency. RHS shall revoke the eligible Lender status of any 
Lender who fails to comply with requirements of paragraph (b) or (e) of 
this section. Status may also be revoked if the Lender violates the 
terms of the Lender Agreement, fails to properly service any guaranteed 
loan, or fails to adequately protect the interests of the Lender and the 
Government. If the Lender is determined to be no longer eligible, the 
Lender will continue to service any outstanding loans guaranteed under 
this subpart which are held by the Lender or RHS may require the Lender 
to transfer the servicing of the loan. In addition to revocation of 
eligible Lender status, the Lender may be debarred by RHS.



Sec. 1980.310  Loan purposes.

    The purpose of a loan guaranteed under this subpart must be to 
acquire a completed dwelling and related facilities to be used by the 
applicant as a primary residence. The loan may be to purchase a new 
dwelling or an existing dwelling. The guaranteed loan may be for ``take 
out'' financing for a loan to construct a new dwelling or improve an 
existing dwelling when the construction financing is arranged in 
connection with the loan package. The loan may include funds for the 
purchase and installation of necessary appliances, energy saving 
measures, and storm cellars. Incidental expenses for tax monitoring 
services, architectural, appraisal, survey, environmental, and other 
technical services may be included. Subject to Sec. 1980.311, eligible 
loan purposes also include:
    (a) Necessary related facilities such as a garage, storage shed, 
walks, driveway, and water and/or sewage facilities including reasonable 
connection fees for utilities which the buyer is required to pay.
    (b) Special design features or equipment necessary to accommodate a 
physically disabled member of the household.
    (c) The cost of establishing an escrow account for real estate taxes 
and/or insurance premiums.
    (d) Title clearance, title insurance, and loan closing; stock in a 
cooperative lending agency necessary to obtain the loan; and, for low-
income applicants only, loan discount points to reduce the note interest 
rate from the rate authorized in Sec. 1980.320 not exceeding the amount 
typical for the area.
    (e) Provide funds for seller equity and/or essential repairs when an 
existing guaranteed loan is to be assumed simultaneously.



Sec. 1980.311  Loan limitations and special provisions.

    (a) Prohibited loan purposes. Conditional commitments will not be 
issued if loan funds are to be used for:
    (1) Payment of construction draws.
    (2) The purchase of furniture or other personal property except for 
essential

[[Page 421]]

equipment and materials authorized in accordance with Sec. 1980.310.
    (3) Refinancing RHS debts, debts owed the Lender (other than 
construction/development, financing incurred in conjunction with the 
proposed loan), or debts on a manufactured home.
    (4) Purchase or improvement of income-producing land, or buildings 
to be used principally for income-producing purposes, or buildings not 
essential for RH purposes, or to buy or build buildings which are 
largely or in part specifically designed to accommodate a business or 
income-producing enterprise.
    (5) Payment of fees, charges, or commissions, such as finder's fees 
for packaging the applications or placement fees for the referral of a 
prospective applicant to RHS.
    (6) Improving the entry of a homestead entryman or desert entryman 
prior to receipt of patent.
    (7) Purchase a dwelling with an in-ground swimming pool.
    (b) Limitations. The principal purpose of the loan, except for a 
subsequent loan to an existing borrower, must be to buy or build a 
dwelling. The loan may include additional funds in accordance with Sec. 
1980.310. The amount of the loan may not exceed the maximum dollar 
limitation of section 203(b)(2) of the National Housing Act (12 U.S.C. 
1702).
    (1) A loan for the acquisition of a newly constructed dwelling that 
meets the requirements of Sec. 1980.341(b) of this subpart may be made 
for up to 100 percent of the appraised value or the cost of acquisition 
and any necessary development including those purposes in Sec. 
1980.310, whichever is less.
    (2) A loan for the acquisition of an existing dwelling and 
development, if any, in conjunction with the acquisition of an existing 
dwelling may be made for up to 100 percent of the appraised value or the 
cost of acquisition and necessary development including those purposes 
in Sec. 1980.310, whichever is less.
    (3) A loan for the acquisition of a newly constructed dwelling (a 
dwelling that does not meet the definition for an existing dwelling) 
that does not meet the requirements of Sec. 1980.341(b) is limited to 
90 percent of the present market value.
    (c) Subdivisions. Housing units may be financed in existing 
subdivisions approved by local, regional, state, or Federal government 
agencies before issuance of a conditional commitment. The subdivision 
must meet the requirements of Sec. 1901.203. An existing subdivision is 
one in which the local government has accepted the subdivision plan, its 
principal developments and right-of-ways, the construction of streets, 
water and water/waste disposal systems, and utilities; is at a point 
which precludes any major changes; and provisions are in place for 
continuous maintenance of the streets and the water and water/waste 
disposal systems. A dwelling served by a homeowners association (HOA) 
may be accepted when the project has been approved or accepted by HUD, 
VA, Fannie Mae, or Freddie Mac.



Sec. 1980.312  Rural area designation.

    A rural area is an area which is identified as rural by RHS in 
accordance with 7 CFR part 3550. Current county maps showing ineligible 
areas are available in RHS field offices.

[60 FR 26985, May 22, 1995, as amended at 67 FR 78329, Dec. 24, 2002]



Sec. 1980.313  Site and building requirements.

    (a) Rural area. The property on which the loan is made must be 
located in a designated rural area as identified in Sec. 1980.312. A 
nonfarm tract to be purchased or improved with loan funds must not be 
closely associated with farm service buildings.
    (b) Access. The property must be contiguous to and have direct 
access from a street, road, or driveway. Streets and roads must be hard 
surface or all-weather surface.
    (c) Water and water/waste disposal system. A nonfarm tract on which 
a loan is to be made must have an adequate water and water/waste 
disposal system and other related facilities. Water and water/waste 
disposal systems serving the site must be approved by a state or local 
government agency. When the site is served by a privately owned and 
centrally operated water and water/waste disposal system, the system

[[Page 422]]

must meet the design requirements of the State Department of Health or 
comparable reviewing and regulatory agency. Written verification must be 
obtained from the regulatory agency that the private water and water/
waste system complies with the Safe Drinking Water Act (42 U.S.C. 300F 
et seq.), and the Clean Water Act (33 U.S.C. 1251 et seq.), 
respectively. A system owned and/or operated by a private party must 
have a binding agreement which allows interested third parties, such as 
the Lender, to enforce the obligation of the operator to provide 
satisfactory service at reasonable rates.
    (d) [Reserved]
    (e) Modest house. Dwellings financed must provide decent, safe, and 
sanitary housing and be modest in cost. A dwelling that can be purchased 
with a loan not exceeding the maximum dollar limitation of section 
203(b)(2) of the National Housing Act (12 U.S.C. 1702) is considered 
modest. Generally, the value of the site must not exceed 30 percent of 
the total value of the property. When the value of the site is typical 
for the area, as evidenced by the appraisal, and the site cannot be 
subdivided into two or more sites, the 30 percent limitation may be 
exceeded.
    (f) Thermal standards. Dwellings financed shall meet the standards 
outlined in exhibit D of subpart A of part 1924 except for an existing 
dwelling, if documentation is provided to establish that the actual cost 
of heating and cooling is not significantly greater than those costs for 
a dwelling that meets RHS's thermal standards. If the dwelling is 
excepted, only the perimeter of the house at the band beam and the heat 
ducts in unheated basements or crawlspace must be insulated.
    (g) Existing dwelling. An existing dwelling financed must be cost 
effective to the applicant including reasonable costs of utilities and 
maintenance for the area. Loan guarantees may be made on an existing 
manufactured home when it meets the provisions of paragraph (i)(2)(i) of 
this section.
    (h) Repairs. Any dwelling financed with an RHS guarantee must be 
structurally sound, functionally adequate, and placed in good repair 
prior to issuance of the Loan Note Guarantee except as provided in Sec. 
1980.315.
    (i) Manufactured homes. New units that meet the requirements of 
exhibit J of subpart A of part 1924 and purchased through RHS approved 
dealer-contractors may be considered for a guaranteed loan under this 
subpart. The Lender may obtain a list of RHS approved models and dealer-
contractors from any RHS office in the area served.
    (1) Loans may be guaranteed for the following purposes when the 
security covers both the unit and the lot:
    (i) A new unit and related site development work on a site owned or 
purchased by the applicant which meets the requirements and limitations 
of this section or a leasehold meeting the provisions of Sec. 1980.314.
    (ii) Transportation and set-up costs for a new unit.
    (2) Loans may not be guaranteed for:
    (i) An existing unit and site unless it is already financed with a 
Section 502 RH direct or guaranteed loan, is being sold from RHS 
inventory, or is being sold from the Lender's inventory provided the 
Lender acquired possession of the unit through a loan guaranteed under 
this subpart.
    (ii) The purchase of a site without also financing the unit.
    (iii) Existing debts owed by the applicant/borrower.
    (iv) A unit without an affixed certification label indicating the 
unit was constructed in accordance with the Federal Manufactured Home 
Construction and Safety Standards.
    (v) Alteration or remodeling of the unit when the initial loan is 
made.
    (vi) Furniture, including movable articles of personal property such 
as drapes, beds, bedding, chairs, sofas, lamps, tables, televisions, 
radios, stereo sets, and similar items. Items such as wall-to-wall 
carpeting, refrigerators, ovens, ranges, clothes washers or dryers, 
heating or cooling equipment, or similar items may be financed.
    (vii) Any unit not constructed to the RHS thermal standards as 
identified by an affixed label for the winter degree day zone where the 
unit will be located.

[[Page 423]]



Sec. 1980.314  Loans on leasehold interests.

    A loan may be guaranteed if made on a leasehold owned or being 
acquired by the applicant when the Lender determines that long-term 
leasing of homesites is a well established practice and such leaseholds 
are freely marketable in the area provided the Lender determines and 
certifies to RHS that:
    (a) Unable to obtain fee title. The applicant is unable to obtain 
fee title to the property.
    (b) Unexpired term. The lease has an unexpired term (term plus 
option to renew) of at least 40 years from the date of approval.



Sec. 1980.315  Escrow accounts for exterior development.

    When proposed exterior development work cannot be completed because 
of weather and the work remaining to be done does not affect the 
livability of the dwelling, an escrow account for exterior development 
only may be established by the originating lender if the following 
conditions are met:
    (a) A signed contract and bid schedule is in effect for the proposed 
exterior development work.
    (b) The contract for development work must provide for completion 
within 120 days.
    (c) The Lender agrees to obtain a final inspection report and advise 
RHS when the work has been completed.
    (d) The escrow account must be funded in an amount sufficient to 
assure the completion of the remaining work. This figure should be 150 
percent of the cost of completion but may be higher if the Lender 
determines a higher amount is needed.



Sec. 1980.316  Environmental requirements.

    The requirements of subpart G of part 1940 apply to loan guarantees 
made under this subpart. Lenders and applicants must cooperate with RHS 
in the completion of these requirements. Lenders must become familiar 
with these requirements so that they can advise applicants and reduce 
the probability of unacceptable applications being submitted to RHS. RHS 
may require that Lenders and/or applicants obtain information for 
completing environmental assessments when necessary. The RHS approval 
official will utilize adequate, reliable information in completion of 
environmental review. Sources of information include, but are not 
limited to, the State Natural Resource Management Guide (available in 
any RHS office) and, as necessary, the technical expertise available 
within the Agency as well as other agencies and organizations to assist 
in the completion of the environmental review.



Sec. 1980.317  Equal opportunity and nondiscrimination requirements in 
use, occupancy, rental, or sale of housing.

    (a) Compliance. Loans guaranteed under this subpart are subject to 
the provisions of various civil rights statutes. RHS and the Lender may 
not discriminate against any person in making guaranteed housing loans 
available, or impose different terms and conditions for the availability 
of these loans based on a person's race, color, familial status, 
religion, sex, age, physical or mental disability, or national origin, 
provided the applicant possesses the capacity to enter into a legal 
contract for services. These requirements will be discussed with the 
applicant, builder, developer, and other parties involved as early in 
the negotiations as possible.
    (b) Reporting. If there is indication of noncompliance with these 
requirements, the matter will be reported by the borrower, Lender, or 
RHS personnel to the Administrator or the Director, Equal Opportunity 
Staff. Complaints and compliance will be handled by RHS in accordance 
with subpart E of part 1901.
    (c) Forms and requirements. In accordance with Executive Order 
11246, the following equal opportunity and nondiscrimination forms and 
requirements are applicable when the loan guarantee involves a 
construction contract between the borrower and the contractor that is 
more than $10,000. The Lender is responsible for seeing that the 
requirements of paragraphs (c)(1) through (c)(5) of this section are 
met:
    (1) Equal Opportunity Agreement. Before loan closing, each borrower 
whose loan involves a construction contract of more than $10,000 must 
execute the

[[Page 424]]

RHS Equal Opportunity Agreement or the equivalent HUD form.
    (2) Construction contract or subcontract in excess of $10,000. If 
the contract or a subcontract exceeds $10,000:
    (i) The contractor or subcontractor must submit the Agency 
Compliance Statement before or as a part of the bid or negotiation.
    (ii) An Equal Opportunity Clause must be part of each contract and 
subcontract.
    (iii) With notification of the contract award, the contractor must 
receive the Agency Notice to Contractors and Applicants signed by RHS, 
with an attached Equal Employment Opportunity poster. Posters in Spanish 
must be provided and displayed where a significant portion of the 
population is Spanish speaking.
    (iv) Under Executive Order 11246 and Executive Order 11375, the 
contractor or subcontractor, subject to the requirements of paragraph 
(c)(5) of this section, is prohibited from discriminating because of 
race, color, religion, sex, or national origin to ensure equality of 
opportunity in all aspects of employment.
    (3) One hundred or more employees and construction contract or 
subcontract exceeds $10,000. If the contractor or subcontractor has 100 
or more employees and the contract or subcontract is for more than 
$10,000, in addition to the requirements of paragraph (c)(2) of this 
section, a report must be filed annually on or before March 31. Failure 
to file timely, complete, and accurate reports constitutes noncompliance 
with the Equal Opportunity Clause. Report forms are distributed by the 
Joint Reporting Committee and any questions on this form should be 
addressed by the contractor or subcontractor to the Joint Reporting 
Committee, 1800 G Street, NW., Washington, D.C. 20006.
    (4) Fifty or more employees and construction contract or subcontract 
exceeds $50,000. If the contract or subcontract is more than $50,000 and 
the contractor or subcontractor has 50 or more employees, in addition to 
the requirements of paragraph (c)(2) of this section, each such 
contractor or subcontractor must be informed that the contractor or 
subcontractor must develop a written affirmative action compliance 
program for each of the contractor's or subcontractor's establishments 
and put it on file in each of the personnel offices within 120 days of 
the commencement of the contract or subcontract.
    (5) [Reserved]
    (6) Employee complaints. Any employee of or applicant for employment 
with such contractors or subcontractors may file a written complaint of 
discrimination with RHS.
    (i) A written complaint of alleged discrimination must be signed by 
the complainant and should include the following information:
    (A) The name and address (including telephone number, if any) of the 
complainant.
    (B) The name and address of the person committing the alleged 
discrimination.
    (C) A description of the acts considered to be discriminatory.
    (D) Any other pertinent information that will assist in the 
investigation and resolution of the complaint.
    (ii) Such complaint must be filed not later than 180 days from the 
date of the alleged discrimination, unless the time for filing is 
extended by RHS for good cause shown by the complainant.



Sec. 1980.318  Flood or mudslide hazard area precautions.

    RHS policy is to discourage lending in designated flood and mudslide 
hazard areas. Loan guarantees shall not be issued in designated flood/
mudslide hazard areas unless there is no practical alternative.
    (a) Dwelling location. Dwellings and building improvements located 
in special flood or mudslide hazard areas, as designated by the Federal 
Emergency Management Agency (FEMA) may be financed under this subpart 
only if:
    (1) The community, as a result of such designation by FEMA as a 
special flood or mudslide prone area, has an approved flood plain area 
management plan.
    (2) The dwelling location and construction plans and specifications 
for new buildings or improvements to existing buildings comply with an 
approved flood plain area management plan (see paragraph (a)(1) of this 
section).

[[Page 425]]

    (3) Potential environmental impacts and feasible alternatives have 
been fully considered by RHS in accordance with the requirements of 
subpart G of part 1940.
    (4) The first floor elevation is above the 100 year flood zone 
elevation.
    (b) Flood insurance. If the dwelling is located in a special flood 
or mudslide hazard area, flood insurance must be purchased by the 
borrower prior to loan closing and maintained thereafter. See subpart B 
of part 1806 (FmHA Instruction 426.2).



Sec. 1980.319  Other Federal, State, and local requirements.

    In addition to the specific requirements of this subpart, on all 
proposals financed with an RHS guarantee, Lenders and/or applicants must 
coordinate with all appropriate Federal, state, and local agencies. 
Applicants and/or Lenders will be required to comply with any Federal, 
state, or local laws, regulatory commission rules, ordinances, and 
regulations which exist at the time the loan guarantee is issued which 
affect the dwelling including, but not limited to:
    (a) Borrowing money and giving security therefore;
    (b) Land use zoning;
    (c) Health, safety, and sanitation standards; and
    (d) Protection of the environment and consumer affairs.



Sec. 1980.320  Interest rate.

    The interest rate must not exceed the established applicable usury 
rate. Loans guaranteed under this subpart must bear a fixed interest 
rate over the life of the loan. The rate shall be agreed upon by the 
borrower and the Lender and must not be more than the lender's published 
rate for VA first mortgage loans with no discount points or the current 
Fannie Mae rate as defined in Sec. 1980.302(a), whichever is higher. 
The lender must document the rate and the date it was determined.



Sec. 1980.321  Terms of loan repayment.

    (a) Note. Principal and interest shall be due and payable monthly.
    (b) Term. The term for final maturity shall be not less than 30 
years from the date of the note and not more than 30 years from the date 
of the first scheduled payment.



Sec. 1980.322  Loan guarantee limits.

    The amount of the loan guarantee is 90 percent of the principal 
amount of the loan.
    (a) The maximum loss payment under the guarantee of Single Family 
Housing loans is the lesser of:
    (1) Any loss of an amount equal to 90 percent of the principal 
amount actually advanced to the borrower, or
    (2) Any loss sustained by the Lender of an amount up to 35 percent 
of the principal amount actually advanced to the borrower, plus 85 
percent of any additional loss sustained by the Lender of an amount up 
to the remaining 65 percent of the principal amount actually advanced to 
the borrower.
    (b) Loss includes only:
    (1) Principal and interest evidenced by the guaranteed loan note;
    (2) Any loan subsidy due and owing; and
    (3) Any principal and interest indebtedness on RHS approved 
protective advances for protection and preservation of security.
    (c) Interest (including any subsidy) shall be covered by the loan 
note guarantee to the date of the final loss settlement when the Lender 
conducts liquidation in an expeditious manner in accordance with the 
provisions of Sec. 1980.376.



Sec. 1980.323  Guarantee fee.

    The Lender will pay a nonrefundable fee which may be passed on to 
the borrower. The amount of the fee is determined by multiplying the 
figure in exhibit K of FmHA Instruction 440.1 (available in any RHS 
office) times 90 percent of the principal amount of the loan.



Sec. 1980.324  Charges and fees by Lender.

    (a) Routine charges and fees. The Lender may establish the charges 
and fees for the loan, provided they are the same as those charged other 
applicants for similar types of transactions.
    (b) Late payment charges. Late payment charges will not be covered 
by the guarantee. Such charges may not be added to the principal and 
interest

[[Page 426]]

due under any guaranteed note. Late charges may be made only if:
    (1) Maximum amount. The maximum amount does not exceed the 
percentage of the payment due as prescribed by HUD or Fannie Mae or 
Freddie Mac.
    (2) Routine. They are routinely made by the Lender in similar types 
of loan transactions.
    (3) Payments received. Payments have not been received within the 
customary time frame allowed by the Lender. The term ``payment 
received'' means that the payment in cash, check, money order, or 
similar medium has been received by the Lender at its main office, 
branch office, or other designated place of payment.
    (4) Calculating charges. The Lender does not change the rate or 
method of calculating the late payment charges to increase charges while 
the loan note guarantee is in effect.
    (5) Interest-assisted loans. The Lender will not penalize or charge 
any fee to the borrower when the only delinquency is a loan subsidy 
payment, which the Lender is entitled to but has not received.



Sec. 1980.325  Transactions which will not be guaranteed.

    (a) Lease payments. Payments made on a lease will not be guaranteed.
    (b) Loans made by other Federal agencies. Loans made by other 
Federal agencies will not be guaranteed. This does not preclude 
guarantees of loans made by an FCS institution with direct lending 
authority. This also does not preclude loans made by state or local 
government agencies assisted by a Federal agency.



Sec. Sec. 1980.326-1980.329  [Reserved]



Sec. 1980.330  Applicant equity requirements.

    A loan to purchase a new or existing dwelling may be made up to the 
appraised market value of the security.



Sec. 1980.331  Collateral.

    (a) General. The entire loan must be secured by a first lien on the 
property being financed (second lien when the loan is for a subsequent 
loan to an existing borrower or there is a transfer and assumption of an 
existing loan) and the Lender will maintain this lien priority. The 
Lender is responsible for assurance that proper and adequate security 
interest is obtained, maintained in existence, and of record to protect 
the interests of the Lender and RHS.
    (b) Third party liens, suits pending, etc. Among other things in 
obtaining the required security, it is necessary to ascertain that there 
are no adverse claims or liens against the property or the borrower, and 
that there are no suits pending or anticipated that would affect the 
property or the borrower.
    (c) All collateral must secure the entire loan. The Lender will not 
take separate collateral, including but not limited to mortgage 
insurance, to secure that portion of the loss not covered by the 
guarantee.



Sec. 1980.332  [Reserved]



Sec. 1980.333  Promissory notes and security instruments.

    (a) Loan instruments. The Lender may use its own forms for 
promissory notes, real estate mortgages, including deeds of trust and 
similar instruments, and security agreements provided there are no 
provisions that are in conflict or otherwise inconsistent with the 
provisions of Sec. 1980.309(b)(2)(v). The Lender is responsible for 
determining that the security instruments are adequate and are properly 
maintained of record.
    (b) Interest assistance instruments. When the loan guarantee is 
authorized from interest assisted funds, RHS will provide the Lender 
with the necessary forms and security instruments related to the 
interest assistance. The Lender will complete the Master Interest 
Assistance Agreement, assure that the closing agent properly records a 
junior mortgage or deed of trust which grants RHS a lien on the property 
in order to protect RHS's equity share subject only to the first 
mortgage or deed of trust to the Lender or other authorized prior lien, 
and forward the agreements and recorded instruments to RHS.



Sec. 1980.334  Appraisal of property serving as collateral.

    An appraisal of all property serving as security for the proposed 
loan will be completed and submitted to RHS for

[[Page 427]]

review with the request for loan guarantee. The Lender may pass the cost 
of the appraisal on to the borrower. The appraisal must have been 
completed within 6 months of the date the request for a conditional 
commitment is submitted to RHS.
    (a) Qualified appraiser. The Lender will use an appraiser that is 
properly licensed or certified, as appropriate, to make residential real 
estate appraisals in accordance with the criteria set forth by the 
Appraiser Qualification Board (AQB) of the Appraisal Foundation 
regardless of the amount of the loan. Appraisers may not discriminate 
against any person in making or performing appraisal services because of 
race, color, familial status, religion, sex, age, disability, or 
national origin.
    (b) Appraisal report. Residential appraisals will be completed using 
the sales comparison (market) and cost approach to market value.
    (1) URAR. The appraiser will use the most recent revision of the 
URAR.
    (i) The ``Estimated Reproduction Cost-New of Improvements'' section 
of the form must be completed when the dwelling is less than 1 year old.
    (ii) Not less than three comparable sales, which are not more than 
12 months old, will be used unless the appraiser provides documentation 
that such comparables are not available in the area. Comparable sales 
should be located as close as possible to the subject dwelling. When the 
need arises to use a comparable sale that is a considerable distance 
from the subject, the appraiser must use his or her knowledge of the 
area and apply good judgment in selecting comparable sales that are the 
best indicators of value for the subject property.
    (2) Supporting documentation. A narrative explanation supporting 
unusual adjustments must be attached to the appraisal.
    (3) Photographs. The appraisal report must include photographs which 
clearly provide front, rear, and street scene views of the subject 
property, and a front view for each comparable sale used in the 
completion of the appraisal.
    (c) RHS acceptance. The Lender will be required to correct or 
complete any appraisal returned by RHS for corrective action.



Sec. Sec. 1980.335-1980.339  [Reserved]



Sec. 1980.340  Acquisition, construction, and development.

    (a) Acquisition of property. The Lender is responsible for seeing 
that the property to be acquired with loan funds is acquired as planned 
and that the required security interest is obtained.
    (b) New construction. A new dwelling financed with a guaranteed loan 
must:
    (1) Have been built in accordance with building plans and 
specifications that contain approved building code certifications 
(eligible certifiers are listed in Sec. 1924.5(f)(1)(iii)).
    (2) Conform to RHS thermal standards (exhibit D of subpart A of part 
1924).
    (i) The builder may certify conformance with RHS thermal standards 
contained in paragraph IV A of exhibit D of subpart A of part 1924.
    (ii) A qualified, registered architect or a qualified, registered 
engineer must certify conformance with RHS thermal standards contained 
in paragraph IV C of exhibit D of subpart A of part 1924.
    (c) Development. The Lender and borrower are responsible for seeing 
that the loan purposes are accomplished and loan funds are properly 
utilized. This includes, but is not limited to, seeing that:
    (1) The applicable development standards are adhered to;
    (2) Drawings and specifications are certified and complied with;
    (3) Adequate water, electric, heating, waste disposal, and other 
necessary utilities and facilities are obtained;
    (4) Equal opportunity and nondiscrimination requirements are met, 
(see Sec. 1980.317); and
    (5) A builder's warranty is issued when new construction, repair, or 
rehabilitation is involved, which provides for at least 1 year's 
warranty from the date of completion or acceptance of the work.



Sec. 1980.341  Inspections of construction and compliance reviews.

    (a) Qualified inspectors. Inspections will be made during 
construction by a construction inspector deemed qualified and approved 
by the Lender. A

[[Page 428]]

qualified inspector is one that a reasonable person would hire to 
perform an inspection of his/her own dwelling.
    (b) Inspections. Inspections shall be done by a party the Lender 
determines to be qualified, such as a HUD approved fee inspector. The 
sale agreement shall identify which party (i.e., purchaser or seller) is 
responsible to obtain and pay for required inspections and 
certifications. In connection with inspections involving construction 
contracts, equal opportunity and nondiscrimination compliance reviews 
must be made as required by Sec. 1980.317.
    (1) For existing dwellings, inspections must be made to determine 
that the dwelling:
    (i) Meets the current requirements of HUD Handbooks 4150.1 and 
4905.1 (available from the HUD Ordering Desk 1-800-767-7468).
    (ii) Meets the thermal standards per Sec. 1980.313(f).
    (2) For a newly constructed dwelling, when construction is planned, 
the Lender must see that the following inspections are made in addition 
to any additional inspections the Lender deems appropriate:
    (i) When footings and foundations are ready to be poured but prior 
to back-filling.
    (ii) When shell is closed in but plumbing, electrical, and 
mechanical work are still exposed.
    (iii) When construction is completed prior to occupancy.
    (iv) Inspections under paragraphs (b)(2) (i) and (ii) of this 
section are not required when the builder supplies an insured 10 year 
warranty plan acceptable under the requirements of exhibit L of subpart 
A of part 1924.
    (c) Water and water/waste disposal. The Lender will see that the 
water and water/waste disposal systems have been approved by a state or 
local government agency.



Sec. Sec. 1980.342-1980.344  [Reserved]



Sec. 1980.345  Applicant eligibility requirements for a guaranteed loan.

    Applicants who meet the requirements of this section are eligible 
for a loan guaranteed under this subpart. Applicants desiring loan 
assistance as provided in this subpart must file loan applications with 
a Lender that meets the requirements set forth in Sec. 1980.309. The 
Lender may accept applications filed through its agents, correspondents, 
branches, or other institutions. The Lender must have at least one 
personal interview with the applicant to verify the information on the 
application and to obtain a complete picture of the applicant's 
financial situation.
    (a) Eligible income. The applicant's adjusted annual income 
determined in accordance with Sec. 1980.348 may not exceed the 
applicable income limit contained in exhibit C of FmHA Instruction 1980-
D (available in any RHS office) at the time of issuance of the 
conditional commitment. Adjusted annual income is used to determine 
eligibility for the RHS loan guarantee.
    (b) Adequate and dependable income. The applicant (and coapplicant, 
if applicable) has adequate and dependably available income. The 
applicant's history of income and the history of the typical annual 
income of others in the area with similar types of employment will be 
considered in determining whether the applicant's income is adequate and 
dependable.
    (1) A farm or nonfarm business loss must be considered in 
determining repayment ability.
    (2) A loss may not be used to offset other income in order to 
qualify for or increase the amount of RHS assistance.
    (c) Determining repayment ability. In considering whether the 
applicant has adequate repayment ability, the Lender must calculate a 
total debt ratio. The applicant's total debt ratio is calculated by 
dividing the applicant's monthly obligations by gross monthly income.
    (1) Monthly obligation consists of the principal, interest, taxes, 
and insurance (PITI) for the proposed loan (less any interest assistance 
under this program or any other assistance from a state or county 
sponsored program when such payments are made directly to the Lender on 
the applicant's behalf), homeowner and other assessments, and the 
applicant's long term obligations. Long term obligations include those 
obligations such as alimony, child support, and other obligations with a 
remaining repayment period of more than 6 months and other shorter term 
debts that are considered

[[Page 429]]

to have a significant impact on repayment ability.
    (i) Cosigned obligations. Debts which have been cosigned by the 
applicant for another party must be considered unless the applicant 
provides evidence (usually canceled checks of the co-obligor or other 
third party) that it has not been necessary for the applicant to make 
any payments over the past 12 months.
    (ii) Liability on a previous mortgage. When the applicant has 
disposed of a property through a sale, trade, or transfer without a 
release of liability, the debt must be considered unless the applicant 
provides evidence (usually canceled checks of the new owners) that the 
new owners have successfully made all payments over the past 12 months.
    (2) Income, for the purpose of determining the total debt ratio, 
includes the total qualifying income of the applicant, coapplicant, and 
any other member of the household who will be a party to the note.
    (i) An applicant's qualifying income may be different than the 
``adjusted annual income'' which is used to determine program 
eligibility. In considering qualifying income, the Lender must determine 
whether there is a historical basis to conclude that the income is 
likely to continue. Typically, income of less than 24 months duration 
should not be included in qualifying income. If the applicant is 
obligated to pay child care costs, the amount of any Federal tax credit 
for which the applicant is eligible may be added to the applicant's 
qualifying income.
    (ii) In considering income that is not subject to Federal income 
tax, the amount of tax savings attributable to the nontaxable income may 
be added for use with the repayment ratios. Adjustments for other than 
the applicable tax rate are not authorized. The Lender must verify that 
the income is not subject to Federal income tax and that the income (and 
its nontax status) is likely to continue. The Lender must fully document 
and support any adjustment made.
    (3) The applicant meets RHS requirements for repayment ability when 
the applicant's total debt ratio is less than or equal to 41 percent and 
the ratio of the proposed PITI to income does not exceed 29 percent.
    (4) Applicants who do not meet the requirements of this section will 
be considered ineligible unless another adult in the household has 
adequate income and wishes to join in the application as a coapplicant. 
The combined incomes and debts then may be considered in determining 
repayment ability.
    (5) If the applicant's total debt ratio and/or PITI ratio exceed the 
maximum authorized ratio, the Lender may request RHS concurrence in 
allowing a higher ratio based on compensating factors. Acceptable 
compensating factors include but are not limited to the applicant having 
a history over the previous 12 month period of devoting a similar 
percentage of income to housing expense to that of the proposed loan, or 
accumulating savings which, when added to the applicant's housing 
expense and shows a capacity to make payments on the proposed loan. A 
low total debt ratio, by itself, does not compensate for a high PITI.
    (d) Credit history. The applicant must have a credit history which 
indicates a reasonable ability and willingness to meet obligations as 
they become due.
    (1) Any or all of the following are indicators of an unacceptable 
credit history unless the cause of the problem was beyond the 
applicant's control and the criteria in paragraph (d)(3) of this section 
are met:
    (i) Incidents of more than one debt payment being more than 30 days 
late if the incidents have occurred within the last 12 months. This 
includes more than one late payment on a single account.
    (ii) Loss of security due to a foreclosure if the foreclosure has 
occurred within the last 36 months.
    (iii) Outstanding tax liens or delinquent Government debts with no 
satisfactory arrangements for payments, no matter what their age as long 
as they are currently delinquent and/or due and payable.
    (iv) A court-created or affirmed obligation (judgment) caused by 
non-payment that is currently outstanding or has been outstanding within 
the last 12 months.

[[Page 430]]

    (v) Two or more rent payments paid 30 days or more past due within 
the last 3 years.
    (vi) Accounts which have been converted to collections within the 
last 12 months (utility bills, hospital bills, etc.).
    (vii) Collection accounts outstanding, with no satisfactory 
arrangements for payments, no matter what their age as long as they are 
currently delinquent and/or due and payable.
    (viii) Any debts written off within the last 36 months.
    (2) The following will not indicate an unacceptable credit history:
    (i) ``No history'' of credit transactions by the applicant.
    (ii) A bankruptcy in which applicant was discharged more than 36 
months before application.
    (iii) A satisfied judgment or foreclosure with no loss of security 
which was completed more than 12 months before the date of application.
    (3) The Lender may consider mitigating circumstances to establish 
the borrower's intent for good credit when the applicant provides 
documentation that:
    (i) The circumstances were of a temporary nature, were beyond the 
applicant's control, and have been removed (e.g., loss of job; delay or 
reduction in government benefits or other loss of income; increased 
expenses due to illness, death, etc.); or
    (ii) The adverse action or delinquency was the result of a refusal 
to make full payment because of defective goods or services or as a 
result of some other justifiable dispute relating to the goods or 
services purchased or contracted for.
    (e) Previous RHS loan. RHS shall determine whether the applicant has 
had a previous RHS debt which was settled, or is subject to settlement, 
or whether RHS otherwise suffered a loss on a loan to the applicant. If 
RHS suffered any loss related to a previous loan, a loan guarantee shall 
not be issued unless RHS determines the RHS loss was beyond the 
applicant's control, and any identifiable reasons for the loss no longer 
exist.
    (f) Other Federal debts. The loan approval official will check HUD's 
Credit Alert Interactive Voice Response System (CAIVRS) to determine if 
the applicant is delinquent on a Federal debt. The Lender will clearly 
document both its CAIVRS identifying number and the borrower and 
coborrower's CAIVRS access code near the signature line on the mortgage 
application form. No decision to deny credit can be based solely on the 
results of the CAIVRS inquiry. If CAIVRS identifies a delinquent Federal 
debt, the Lender will immediately suspend processing of the application. 
The applicant will be notified that processing has been suspended and 
will be asked to contact the appropriate Federal agency, at the 
telephone number provided by CAIVRS, to resolve the delinquency. When 
the applicant provides the Lender with official documentation that the 
delinquency has been paid in full or otherwise resolved, processing of 
the application will be continued. An outstanding judgment obtained by 
the United States in a Federal court (other than the United States Tax 
Court), which has been recorded, shall cause the applicant to be 
ineligible to receive a loan guarantee until the judgment is paid in 
full or otherwise satisfied. RHS loan guarantee funds may not be used to 
satisfy the judgment. If the judgment remains unsatisfied or if the 
applicant is delinquent on a Federal debt and is unable to resolve the 
delinquency, the Lender will reject the applicant.



Sec. 1980.346  Other eligibility criteria.

    The applicant must:
    (a) Be a person who does not own a dwelling in the local commuting 
area or owns a dwelling which is not structurally sound, functionally 
adequate;
    (b) Be without sufficient resources to provide the necessary housing 
and be unable to secure the necessary conventional credit without an RHS 
guarantee upon terms and conditions which the applicant could reasonably 
be expected to fulfill.
    (c) Be a natural person (individual) who resides as a citizen in any 
of the 50 States, the Commonwealth of Puerto Rico, the U.S. Virgin 
Islands, Guam, American Samoa, the Commonwealth of the Northern 
Marianas, Federated States of Micronesia, and the Republics of the 
Marshall Islands and Palau, or a noncitizen who resides in one of the

[[Page 431]]

foregoing areas after being legally admitted to the U.S. for permanent 
residence or on indefinite parole.
    (d) Possess legal capacity to incur the loan obligation and have 
reached the legal age of majority in the state or have had the 
disability of minority removed by court action.
    (e) Have the potential ability to personally occupy the home on a 
permanent basis. Because of the probability of their moving after 
graduation, full-time students will not be granted loans unless:
    (1) The applicant intends to make the home his or her permanent 
residence and there are reasonable prospects that employment will be 
available in the area after graduation, and
    (2) An adult member of the household will be available to make 
inspections if the home is being constructed.



Sec. 1980.347  Annual income.

    Annual income determinations will be thoroughly documented in the 
Lender's casefile. Historical data based on the past 12 months or 
previous fiscal year may be used if a determination cannot logically be 
made. Annual income to be considered includes:
    (a) Current verified income, either part-time or full-time, received 
by any applicant/borrower and all adult members of the household, 
including any coapplicant/coborrower.
    (b) If any other adult member of the household is not presently 
employed but there is a recent history of such employment, that person's 
income will be considered unless the applicant/borrower and the person 
involved sign a statement that the person is not presently employed and 
does not intend to resume employment in the foreseeable future, or if 
interest assistance is involved, during the term of the Interest 
Assistance Agreement.
    (c) Income from such sources as seasonal type work of less than 12 
months duration, commissions, overtime, bonuses, and unemployment 
compensation must be computed as the estimated annual amount of such 
income for the upcoming 12 months. Consideration should be given to 
whether the income is dependable based on verification by the employer 
and the applicant's history of such income over the previous 24 months.
    (d) The following are included in annual income:
    (1) The gross amount, before any payroll deductions, of wages and 
salaries, overtime pay, commissions, fees, tips, bonuses, and other 
compensation for personal services of all adult members of the 
household.
    (2) The net income from operation of a farm, business, or 
profession. Consider the following:
    (i) Expenditures for business or farm expansion and payments of 
principal on capital indebtedness shall not be used as deductions in 
determining income. A deduction is allowed in the manner prescribed by 
IRS regulations only for interest paid in amortizing capital 
indebtedness.
    (ii) Farm and nonfarm business losses are considered ``zero'' in 
determining annual income.
    (iii) A deduction, based on straight line depreciation, is allowed 
in the manner prescribed by IRS regulations for the exhaustion, wear and 
tear, and obsolescence of depreciable property used in the operation of 
a trade, farm, or business by a member of the household. The deduction 
must be based on an itemized schedule showing the amount of straight 
line depreciation that could be claimed for Federal income tax purposes.
    (iv) Any withdrawal of cash or assets from the operation of a farm, 
business, or profession will be included in income, except to the extent 
the withdrawal is reimbursement of cash or assets invested in the 
operation by a member of the household.
    (v) A deduction for verified business expenses, such as for lodging, 
meals, or fuel, for overnight business trips made by salaried employees, 
such as long-distance truck drivers, who must meet these expenses 
without reimbursement.
    (3) Interest, dividends, and other net income of any kind from real 
or personal property, including:
    (i) The share received by adult members of the household from income 
distributed from a trust fund.
    (ii) Any withdrawal of cash or assets from an investment except to 
the extent the withdrawal is reimbursement

[[Page 432]]

of cash or assets invested by a member of the household.
    (iii) Where the household has net family assets, as defined in Sec. 
1980.302(a), in excess of $5,000, the greater of the actual income 
derived from all net family assets or a percentage of the value of such 
assets based on the current passbook savings rate.
    (4) The full amount of periodic payments received from social 
security (including social security received by adults on behalf of 
minors or by minors intended for their own support), annuities, 
insurance policies, retirement funds, pensions, disability or death 
benefits, and other similar types of periodic receipts.
    (5) Payments in lieu of earnings; such as unemployment, disability 
and worker's compensation, and severance pay.
    (6) Public assistance except as indicated in paragraph (e)(2) of 
this section.
    (7) Periodic allowances, such as:
    (i) Alimony and/or child support awarded in a divorce decree or 
separation agreement, unless the payments are not received and a 
reasonable effort has been made to collect them through the official 
entity responsible for enforcing such payments and they are not received 
as ordered; or
    (ii) Recurring monetary gifts or contributions from someone who is 
not a member of the household.
    (8) Any amount of educational grants or scholarships or VA benefits 
available for subsistence after deducting expenses for tuition, fees, 
books, and equipment.
    (9) All regular pay, special pay (except for persons exposed to 
hostile fire), and allowances of a member of the armed forces who is the 
applicant/borrower or coapplicant/coborrower, whether or not that family 
member lives in the unit.
    (10) The income of an applicant's spouse, unless the spouse has been 
living apart from the applicant for at least 3 months (for reasons other 
than military or work assignment), or court proceedings for divorce or 
legal separation have been commenced.
    (e) The following are not included in annual income but may be 
considered in determining repayment ability:
    (1) Income from employment of minors (including foster children) 
under 18 years of age. The applicant and spouse are not considered 
minors.
    (2) The value of the allotment provided to an eligible household 
under the Food Stamp Act of 1977.
    (3) Payments received for the care of foster children.
    (4) Casual, sporadic, or irregular cash gifts.
    (5) Lump-sum additions to family assets such as inheritances; 
capital gains; insurance payments from health, accident, hazard, or 
worker's compensation policies; and settlements for personal or property 
losses (except as provided in paragraph (d)(5) of this section).
    (6) Amounts which are granted specifically for, or in reimbursement 
of, the cost of medical expenses.
    (7) Amounts of education scholarships paid directly to the student 
or to the educational institution and amounts paid by the Government to 
a veteran for use in meeting the costs of tuition, fees, books, and 
equipment. Any amounts of such scholarships or veteran's payments, which 
are not used for the aforementioned purposes and are available for 
subsistence, are considered to be income. Student loans are not 
considered income.
    (8) The hazardous duty pay to a service person applicant/borrower or 
spouse away from home and exposed to hostile fire.
    (9) Any funds that a Federal statute specifies must not be used as 
the basis for denying or reducing Federal financial assistance or 
benefits. (Listed in exhibit F of FmHA Instruction 1980-D, available in 
any RHS office.)
    (f) Income of live-in aides who are not relatives of the applicant 
or members of the household will not be counted in calculating annual 
income and will not be considered in determination of repayment ability.



Sec. 1980.348  Adjusted annual income.

    Adjusted annual income is annual income as determined in Sec. 
1980.347 less the following:
    (a) A deduction of $480 for each member of the family residing in 
the household, other than the applicant, spouse, or coapplicant, who is:
    (1) Under 18 years of age;

[[Page 433]]

    (2) Eighteen years of age or older and is disabled as defined in 
Sec. 1980.302(a); or
    (3) A full-time student aged 18 or older.
    (b) A deduction of $400 for any elderly family as defined in Sec. 
1980.302(a).
    (c) A deduction for the care of minors 12 years of age or under, to 
the extent necessary to enable a member of the applicant/borrower's 
family to be gainfully employed or to further his or her education. The 
deduction will be based only on monies reasonably anticipated to be paid 
for care services and, if caused by employment, must not exceed the 
amount of income received from such employment. Payments for these 
services may not be made to persons whom the applicant/borrower is 
entitled to claim as dependents for income tax purposes. Full 
justification for such deduction must be recorded in detail in the loan 
docket.
    (d) A deduction of the amount by which the aggregate of the 
following expenses of the household exceeds 3 percent of gross annual 
income:
    (1) Medical expenses for any elderly family (as defined in Sec. 
1980.302(a)). This includes medical expenses for any household member 
the applicant/borrower anticipates incurring over the ensuing 12 months 
and which are not covered by insurance (e.g., dental expenses, 
prescription medicines, medical insurance premiums, eyeglasses, hearing 
aids and batteries, home nursing care, monthly payments on accumulated 
major medical bills, and full-time nursing or institutional care which 
cannot be provided in the home for a member of the household); and
    (2) Reasonable attendant care and auxiliary apparatus expenses for 
each disabled member of any household to the extent necessary to enable 
any member of such household (including such disabled member) to be 
employed.



Sec. Sec. 1980.349-1980.350  [Reserved]



Sec. 1980.351  Requests for reservation of funds.

    Upon receipt of a viable loan application and prior to loan 
underwriting, the Lender may request a reservation of loan guarantee 
funds for the loan application. The request should be made as follows:
    (a) The Lender must have a complete application on file that clearly 
indicates the borrower has sufficient qualifying income and an adequate 
credit history.
    (b) The reservation shall be valid for 60 days. The Lender must 
submit a request for a loan guarantee on or before the expiration date 
of the reservation. Substitutions of borrowers or dwellings are not 
authorized.
    (c) Reservations may be granted only when adequate funding authority 
is available. Reservations are subject to the availability of funds. 
Reservations will not exceed 90 percent of the funds available during 
that quarter.
    (d) [Reserved]
    (e) All reservations will expire at the end of 60 days or no later 
than the pooling date published in subpart L of part 1940 whichever 
occurs first.
    (f) [Reserved]



Sec. 1980.352  [Reserved]



Sec. 1980.353  Filing and processing applications.

    (a) Loan priorities. Complete applications will be considered by RHS 
in the order received from Lenders authorized to participate in the 
program except as provided in paragraph (b) of this section.
    (b) Preference. Preference is considered when there is a shortage of 
funds and there is more than one request for a conditional commitment or 
reservation of funds ready for approval. Applications for guarantees on 
loans to first-time homebuyers or veterans, their spouses, or children 
of deceased servicemen who died during one of the periods described in 
the definition of ``Veteran'' in Sec. 1980.302(a) will be given 
preference by RHS. Displaced homemakers and single parents are first-
time homebuyers even though they previously owned or resided in a 
dwelling with a spouse.
    (c) Applications. If, upon completion of the loan underwriting 
process of an application, the Lender concludes that the application can 
be considered for an RHS guarantee, the Lender will provide written 
documentation addressing each of the loan eligibility requirements of 
this subpart and the basis for the conclusion in the applicant's file.

[[Page 434]]

The Lender will submit a request for the guarantee using a Form FmHA 
1980-21, ``Request for Single Family Housing Loan Guarantee.'' The form 
should contain or be supplemented with all of the following information:
    (1) Name, address, telephone number, social security number, age, 
citizenship status of the applicant, and number of persons in the 
household.
    (2) Amount of loan request and proposed use of loan funds.
    (3) Name, address, contact person, and telephone number of the 
proposed Lender.
    (4) Anticipated loan rates and terms, the date and amount of the 
Fannie Mae or VA rate used to determine the interest rate, and the 
Lender's certification that the proposed rate is in compliance with 
Sec. 1980.320.
    (5) Statement from the Lender that it will not make the loan as 
requested by the applicant without the proposed guarantee and that the 
applicant has been advised in writing that the applicant is subject to 
criminal action if he or she knowingly and willfully gives false 
information to obtain a federally guaranteed loan.
    (6) If the applicant is not a United States citizen, evidence of 
being legally admitted for permanent residence or indefinite parole.
    (7) The applicant's sex, race, and veteran status and whether 
applicant is a first-time homebuyer.
    (8) An appraisal report including information about the dwelling 
location with respect to neighborhood and community services and 
facilities, business and industrial enterprises, and streets or roads 
serving the housing.
    (9) Credit report obtained by the Lender.
    (10) An equal opportunity agreement supplied by RHS for construction 
contracts costing more than $10,000.
    (11) Evidence of compliance with the Privacy Act of 1974.
    (12) Lender's loan underwriting (repayment ability, 
creditworthiness, and security value).
    (13) A certification from the borrower regarding debarment, 
suspension, ineligibility, and voluntary exclusion from Federal programs 
using a form supplied by RHS.
    (14) A statement signed by the borrower acknowledging that the 
borrower understands that RHS approval of the guarantee is required and 
is subject to the availability of funds.
    (15) A copy of a valid verification of income for each adult member 
of the household.
    (16) A copy of the purchase agreement or bid for construction 
contract.
    (d) [Reserved]
    (e) Verifying information provided. Written documentation from third 
parties is the preferred method of verifying information. Verifications 
must pass directly from the source of information to the Lender and 
shall not pass through the hands of a third party or applicant.
    (1) Income verification. Employment verifications and other income 
verifications obtained in accordance with this paragraph are valid for 
120 days (180 days for proposed new construction). Income verifications 
must be valid at the time the conditional commitment is issued.
    (i) An RHS approved form or the equivalent HUD/FHA/VA or Fannie Mae 
form will be used to verify employment income of the loan applicant 
except when the applicant is self-employed. The form will be signed by 
the applicant or borrower or accompanied by an authorization for a 
release of information form signed by the applicant or borrower and sent 
directly to the employer by the Lender. The Lender should also obtain 
copies of the three most recent paycheck stubs. The information in the 
employer verification should be compared to the information in the 
paycheck stubs for consistency.
    (ii) Income information that cannot be obtained by use of this form 
will be obtained in writing from third parties to the extent possible.
    (iii) Alimony and/or child support payments will be verified by 
obtaining a copy of the divorce decree or other legal document 
indicating the amount of the payments. When the applicant states that 
less than the amount awarded is received, the Lender will request 
documentation from the official entity through which payments are 
received or other third party able to provide the verification when 
payment is

[[Page 435]]

not made through an official entity indicating the amounts and dates of 
payments to the applicant during the previous 12 months.
    (iv) When it is not feasible to verify income in paragraph 
(e)(1)(iii) of this section through third parties, the Lender is 
authorized to accept an affidavit from the applicant stating the effort 
made to collect the amount awarded and the amounts and dates of payments 
received during the previous 12 months.
    (v) Applicants and borrowers deriving their income from a farming or 
business enterprise will provide current documentation of the income and 
expenses of the operation. In addition, historic information from the 
previous fiscal year must be presented.
    (vi) Social Security, pension, and disability income may be verified 
by obtaining a copy of the most recent award or benefit letter prepared 
and signed by the authorizing agency. This verification will be 
considered valid only for 1 year from the date of the award or benefit 
letter.
    (2) Verification of disability. An RHS supplied form will be used to 
verify disability in cases where State Review Board or Social Security 
records are not available. Receipt of veteran's benefits for disability, 
whether service-oriented or otherwise, does not automatically establish 
disability.
    (3) Verification of alien status. Aliens are required to present 
acceptable documentation of their status.
    (4) Verification of credit history and current debt. The Lender 
shall determine all liabilities of all parties responsible for repayment 
of the proposed loan. Credit reporting information must pass directly 
between the Lender and the credit reporting agency or source.
    (i) Mortgage credit reports shall be used to determine 
creditworthiness unless the applicant resides in a remote rural area and 
conclusive or sufficient information would not be available. Information 
relative to judgments, garnishments, foreclosures, and bankruptcies must 
be obtained when a credit report is not obtained.
    (ii) The credit report must be the most recent revision of the 
Residential Mortgage Credit Report form and meet the standards 
prescribed by Fannie Mae, Freddie Mac, HUD, VA, or RHS.

[60 FR 26985, May 22, 1995, as amended at 67 FR 78329, Dec. 24, 2002]



Sec. 1980.354  [Reserved]



Sec. 1980.355  Review of requirements.

    Upon the Lender's review of the conditional commitment, the Lender 
may determine whether to accept the conditions outlined in it.
    (a) Accepting conditions. Immediately after reviewing the conditions 
and requirements in the conditional commitment and the options listed on 
the back of the form, the Lender may proceed with loan closing. If the 
conditions cannot be met, the Lender and borrower may propose alternate 
conditions to RHS.
    (b) Canceling commitment. If the Lender indicates in the acceptance 
or rejection of conditions that it desires to obtain a loan note 
guarantee and subsequently decides prior to loan closing that it no 
longer wants a loan note guarantee, the Lender should immediately advise 
the RHS approval official.



Sec. Sec. 1980.356-1980.359  [Reserved]



Sec. 1980.360  Conditions precedent to issuance of the loan note guarantee.

    (a) Lender certification. The Lender must certify to RHS that:
    (1) No major changes have been made in the Lender's loan conditions 
and requirements since the issuance of the conditional commitment, 
except those approved in writing by RHS. In the event the interest rate 
has not been fixed at the time the conditional commitment is issued, and 
the interest rate increases between the time of issuance of the 
conditional commitment and loan closing, the Lender should note the 
change when submitting the package to RHS for loan guarantee. If either 
or both of the underwriting ratios are exceeded as a result of the 
interest rate increase, the Lender should list the compensating factors 
that demonstrate that sufficient repayment ability still exists.
    (2) All planned property acquisition has been completed and:

[[Page 436]]

    (i) All development has been completed; or
    (ii) An escrow account has been established in accordance with Sec. 
1980.315.
    (3) Required insurance coverage is in effect and an escrow account 
has been established for the payment of taxes and insurance.
    (4) Truth-in-lending requirements have been met.
    (5) All equal employment opportunity and nondiscrimination 
requirements have been met.
    (6) The loan has been properly closed by a party skilled and 
experienced in conducting loan closings and the required security 
instruments, including any required shared equity instruments, have been 
obtained and recorded in the appropriate office in a timely and accurate 
manner.
    (7) The borrower has a marketable (clean and defensible) title to 
the property then owned by the borrower, subject to the instrument 
securing the loan to be guaranteed, and any other exceptions approved in 
writing by RHS.
    (8) Lien priorities are consistent with the requirements of the 
conditional commitment.
    (9) The loan proceeds have been disbursed for purposes and in 
amounts consistent with the conditional commitment.
    (10) There has been no adverse change in the borrower's situation 
since the conditional commitment was issued by RHS.
    (11) All other requirements of the conditional commitment have been 
met.
    (b) Inspections. The Lender will certify to RHS that inspections in 
accordance with Sec. 1980.341 have been completed.
    (c) Lender agreement. There must be a valid lender agreement on 
file.
    (d) Lender file. The Lender will maintain a file for each guaranteed 
RH loan containing originals or copies, as appropriate, of all documents 
pertaining to that loan.



Sec. 1980.361  Issuance of loan note guarantee.

    (a) When the Lender has certified that all requirements have been 
met, delivered a completed Loan Closing Report, and paid the guarantee 
fee, the RHS approval official will concurrently execute the loan note 
guarantee. The original will be provided to the Lender and be attached 
to the note.
    (b)-(c) [Reserved]



Sec. 1980.362  [Reserved]



Sec. 1980.363  Review of loan closing.

    The Lender must provide RHS with documentation that all of the 
closing conditions have been met within 10 days of issuance of the loan 
note guarantee. The Lender is responsible for deficiencies regardless of 
whether RHS discovers them in the loan closing review and/or notifies 
the Lender at that time. RHS reviews do not constitute any waiver of 
fraud, misrepresentation, or failure of judgment by the Lender.



Sec. Sec. 1980.364-1980.365  [Reserved]



Sec. 1980.366  Transfer and assumption.

    (a) General. Lenders may, but are not required to, permit a transfer 
to an eligible applicant. A transfer and assumption must be approved by 
RHS in writing. Transfers without assumption are not authorized. 
Transfers and assumptions under this subpart are subject to the RHS 
guarantee fee.
    (b) Eligible transferee. An eligible transferee is one who meets the 
eligibility requirements of this subpart and includes situations 
involving transfers of housing in an area that has ceased to be rural. 
Loans made and guaranteed under this subpart prior to March 29, 1989, 
may be transferred to an applicant meeting all eligibility requirements 
of this subpart except the applicant's adjusted annual income may exceed 
the maximum income for the area by not more than 10 percent.
    (c) Determinations by the Lender. Before the transfer and assumption 
can be approved with the guarantee remaining in force, the Lender must 
determine that all of the following conditions can be met:
    (1) The transferee is an eligible applicant.
    (2) The transferee will assume the total remaining debt and acquire 
all of the property securing the guaranteed loan balance.

[[Page 437]]

    (3) The transfer and assumption would not be made without the 
continuation of the loan guarantee.
    (4) The market value of the security being acquired by the 
transferee is at least equal to the secured indebtedness against it.
    (5) The priority of the existing lien securing the guaranteed loan 
will be maintained or improved.
    (6) Proper hazard insurance will be obtained.
    (7) The transfer and assumption can be properly closed and the 
conveyance instruments will be filed, registered, or recorded, as 
appropriate.
    (8) The transferor acknowledges continued liability for the debt in 
writing.
    (d) Changes in the promissory note or security instrument. If the 
assumption will result in changes in the repayment schedule or the 
interest rate, the changes must be approved by the present debtors since 
they will remain liable for the debt. Any changes in rates and terms 
must not exceed rates and terms allowed for new loans under this subpart 
and cannot exceed the interest rate on the initial loan. The debt must 
not exceed the amount remaining due on the original loan. The term of 
the loan may cover a period of up to 30 years from the date of transfer 
and assumption. The Lender's request for approval to RHS will be 
accompanied by:
    (1) An explanation of the reasons for the proposed change in the 
rates and terms.
    (2) A statement that the Lender's determinations required by 
paragraph (c) of this section can be made.
    (e) Release of liability. The Lender may not release the transferor 
of liability.
    (f) Forms and case numbers. The assumption may be made on the 
Lender's assumption agreement form. The assumption agreement must 
contain the RHS case numbers of the transferor and the transferee.
    (g) Lender's application to RHS. The Lender must submit the items 
outlined in Sec. 1980.353(e) of this subpart to RHS, in addition to 
items required in this section.
    (h) Notations and notices. The Lender must notify RHS whether the 
loan and security can be properly assumed and transferred. The Lender 
shall assure that the conveyance instruments are properly filed, 
registered, or recorded, as appropriate. Upon completion of the transfer 
and assumption, the Lender must provide RHS a copy of the transfer and 
assumption agreement. The Lender may present the loan note guarantee to 
RHS if it desires RHS to note the transfer and assumption on the loan 
note guarantee. If a new note is obtained, it will also be attached to 
the loan note guarantee.
    (i) Interest assistance. The original borrower's Master Interest 
Assistance Agreement may be transferred to an eligible transferee. 
Equity sharing, if any, owed by the transferor must be determined and 
collected at the time the loan is assumed and title to the property is 
transferred. See Sec. 1980.391.
    (j) Closing the transfer and assumption. As soon as the Lender has 
obtained RHS approval, the Lender may proceed with closing the 
transaction. The closing must include, but need not be limited to, the 
proper execution and delivery of the conveyance and assumption 
documents, compliance with any legal requirements, and actions necessary 
to perfect the transfer and the required lien priority.
    (k) Loan note guarantee. The existing loan note guarantee will 
continue to be in effect. RHS will note the transfer and assumption on 
the original loan note guarantee by completing the Assumption Agreement 
block by inserting the name of the assuming party.
    (l) Material furnished to RHS after closing. Immediately after 
closing, the Lender must furnish to RHS:
    (1) A conformed copy of the executed assumption agreement.
    (2) A statement showing:
    (i) Any changes made in the provisions of the promissory note or 
security instruments.
    (ii) That all conditions and requirements of paragraph (b) of this 
section have been met.
    (iii) That the required insertions have been made per paragraph (h) 
of this section.

[[Page 438]]

    (m) Notification of Lender. The RHS approval official will review 
the proposed transfer and assumption and notify the Lender of the 
decision in writing. The request for transfer and assumption will be 
treated as an application for guaranteed loan assistance and will be 
handled in accordance with Sec. 1980.353. The Lender may proceed with 
the transfer and assumption upon obtaining RHS approval.



Sec. 1980.367  Unauthorized sale or transfer of the property.

    RHS consent is required to continue with the RHS guarantee in the 
event of a sale or transfer of the property in accordance with Sec. 
1980.366. If the property is transferred without RHS consent, the Lender 
must take one of the following actions:
    (a) Obtain RHS consent if the conditions of Sec. 1980.366 can be 
met;
    (b) Satisfy the RHS guarantee and continue with the loan without the 
loan note guarantee; or
    (c) Notify the borrower and the transferee of the default and 
service the loan in accordance with Sec. 1980.371.



Sec. Sec. 1980.368-1980.369  [Reserved]



Sec. 1980.370  Loan servicing.

    RHS encourages Lenders to provide borrowers with the maximum 
opportunity to become successful homeowners. Lenders should provide 
sufficient servicing and counseling to meet the objectives of the loan. 
Loan servicing should be approached as a preventive action rather than a 
curative action. Prompt followup by the Lender on delinquent payments 
and early recognition and solution of problems are keys to resolving 
many delinquent loan cases. The Lender shall perform those services 
which a reasonable and prudent Lender would perform in servicing its own 
portfolio of loans that are not guaranteed.
    (a) Normal loan servicing. The Lender is responsible for servicing 
the loan under the Lender Agreement and this subpart even if the Lender 
has engaged a third party to service the loan on its behalf. Normal 
servicing includes:
    (1) Receiving all payments as they fall due and proper application 
of payments to principal and interest and escrow accounts for taxes 
(including special assessments) and insurance.
    (2) Establishment and maintenance of an escrow account to pay real 
estate taxes and assessments and required hazard and flood insurance on 
the security. All escrow accounts must be fully insured by the Federal 
Deposit Insurance Corporation (FDIC). The Lender is responsible for 
maintaining escrow funds in a reasonable and prudent manner and for 
assuring that real estate taxes and assessments and required hazard and 
flood insurance are paid in a timely manner even if it requires 
advancing the Lender's own funds. The monthly payment may be adjusted 
when it is not adequate to meet established charges of the escrow 
account for the coming year. Escrow funds may be used only for the 
purpose for which they were collected.
    (3) Obtaining compliance with the covenants, loan agreement (if 
any), security instruments, and any supplemental agreements and 
notifying the borrower in writing of any violations.
    (b) Other servicing requirements. Other servicing requirements 
include taking actions to offset the effects of liens, probate 
proceedings, and other legal actions. The Lender's responsibility 
includes assuring that:
    (1) Insurance loss payments, condemnation awards, or similar 
proceeds are applied on debts in accordance with lien priorities on 
which the guarantee was based, or to rebuild or otherwise acquire needed 
replacement collateral.
    (2) The borrower complies with laws and ordinances applicable to the 
loan and the collateral.
    (3) The borrower is not released of liability for the loan except as 
provided in Agency regulations.
    (c) Servicing options. The Lender should make every effort to assist 
borrowers who are cooperative and willing to make a good faith effort to 
cure the delinquency. The Lender should consider the borrower's 
financial condition in attempting to work out repayment agreements. The 
Lender may revise the payment schedule of the loan on a temporary basis 
with the written concurrence of the borrower. Changes in the loan 
repayment such as reamortization of the unpaid balance within the 
remaining term of the loan may be done

[[Page 439]]

with prior written RHS concurrence. Reamortization shall not change the 
amount of the loan guarantee.
    (d) Lender reporting to RHS. Reports on Lender servicing case loads 
and performance are required as follows:
    (1) Monthly report. The Lender must prepare and submit a report in a 
manner prescribed by RHS identifying each borrower with a loan that is 
more than 30 days delinquent.
    (2) Annual report. The Lender will submit an annual report 
indicating the status of each borrower account as of December 31 using 
the format prescribed by RHS.
    (e) [Reserved]



Sec. 1980.371  Defaults by the borrower.

    Default occurs when the borrower fails to perform under any covenant 
of the mortgage or Deed of Trust and the failure continues for 30 days. 
The Lender will negotiate in good faith in an attempt to resolve any 
problem. The borrower must be given a reasonable opportunity to bring 
the account current before any foreclosure proceedings are started.
    (a) The Lender must make a reasonable attempt to contact the 
borrower if the payment is not received by the 20th day after it is due.
    (b) The Lender must make a reasonable attempt to arrange and hold an 
interview with the borrower for the purpose of resolving the delinquent 
account before the loan becomes 60 days delinquent. Reasonable effort 
consists of not less than one letter sent to the borrower at the 
property address via certified mail or similar method which the borrower 
refuses to accept or fails to respond.
    (c) If the Lender is unable to make contact with the borrower, the 
Lender must determine whether the property has been abandoned and the 
value of the security is in jeopardy before the account becomes two 
payments delinquent.
    (d) When the loan becomes three payments delinquent, the Lender must 
report borrower delinquencies to credit repositories and make a decision 
with regard to liquidation of the account. The Lender may proceed with 
liquidation of the account unless there are extenuating circumstances.



Sec. 1980.372  Protective advances.

    Protective advances must constitute an indebtedness of the borrower 
to the Lender and be secured by the security instrument. Protective 
advances are advances made for expenses of an emergency nature necessary 
to preserve or protect the physical security. Attorney fees are not a 
protective advance. The Lender will not make protective advances in lieu 
of an additional loan. In order to assure that a protective advance over 
$500 will be included in the loss payment, Lenders are encouraged to 
obtain prior RHS approval.



Sec. 1980.373  [Reserved]



Sec. 1980.374  Liquidation.

    If the Lender concludes the liquidation of a guaranteed loan account 
is necessary because of one or more defaults or third party actions that 
the borrower cannot or will not cure or eliminate within a reasonable 
period of time, the Lender will notify RHS of the decision to liquidate. 
Initiation of foreclosure begins with the first public action required 
by law such as filing a complaint or petition, recording a notice of 
default, or publication of a notice of sale. Foreclosure must be 
initiated within 90 days of the date the decision to liquidate is made 
unless the foreclosure has been delayed by law. When there is a legal 
delay (such as bankruptcy), foreclosure must be started within 60 days 
after it becomes possible to do so.
    (a) Expeditious liquidation. Once the decision to liquidate has been 
made, the Lender must proceed in an expeditious manner. Lenders must 
exercise due diligence in completing the foreclosure process. Lenders 
are expected to complete foreclosure within the time frames that are 
reasonable for the state in which the property is located.
    (b) Maximum collection. The Lender is expected to make the maximum 
collection possible on the indebtedness. The Lender will consider the 
possibility of recovery of any deficiency apart from the acquisition or 
sale of collateral. The Lender will submit a recommendation on such 
recovery considering the borrower's assets and ability to pay, prospects 
of future recovery, the costs

[[Page 440]]

of pursuing such recovery, recommendation for obtaining a judgment, and 
the collectability of a judgment in view of the borrower's assets.
    (c) Allowable liquidation costs. Certain reasonable liquidation 
costs (costs similar to those charged for like services in the area) 
will be allowed during the liquidation process. No in-house expenses of 
the Lender will be allowed including, but not limited to, employee 
salaries, staff lawyers, travel, and overhead. Liquidation costs are 
deducted from the gross sales proceeds of the collateral when the Lender 
has conducted the liquidation.
    (d) Servicing plan. The Lender must submit a servicing plan to RHS 
when the account is 90 days delinquent and a method other than 
foreclosure is recommended to resolve delinquency. RHS encourages 
Lenders and delinquent borrowers to explore an acceptable alternative to 
foreclosure to reduce loss and expenses of foreclosure. Although prior 
approval is not required in all cases, the Agency may reject a plan that 
does not protect the Government's interest.
    (1) Continuation with the borrower. The Lender may continue with the 
borrower when a clear and realistic plan to eliminate the delinquency is 
presented. The Lender must fully document the borrower's prospects of 
success and make this information available to RHS upon request.
    (2) Voluntary liquidation. RHS may accept the Lender's plan to use 
voluntary liquidation when the plan clearly addresses the 
responsibilities of the parties, the Lender maintains oversight of the 
progress of the sale, the property is listed for sale at a price in line 
with its market value (if there is not already a bona fide purchaser for 
the dwelling), and the expected cost to the Government is the same as or 
less than the cost of foreclosure.
    (3) Deed-in-lieu of foreclosure. The Lender may take a deed-in-lieu 
of foreclosure from the borrower when it will not result in a cost to 
the Government in excess of that expected for foreclosure.
    (4) Other methods. RHS may accept a proposal submitted by the Lender 
that is not specifically addressed in but is consistent with the 
provisions of this subpart if the Lender fully documents how the 
proposal will result in a savings to the Government.
    (e) Handling shared equity. Interest assistance payments made under 
Sec. 1980.390 of this subpart will not be subject to shared equity if 
the loan is liquidated in accordance with the Lender Agreement unless:
    (1) The property is sold at or prior to foreclosure for an amount 
exceeding the Lender's unpaid balance and costs of foreclosure, or
    (2) A junior lienholder takes over the Lender's loan.



Sec. 1980.375  Reinstatement of the borrower's account.

    The Lender may reinstate an account when all delinquent payments and 
any funds that were advanced to pay authorized expenses are paid or as 
required under state law. When the Lender wishes to consider other 
offers by the borrower to bring the account current, the Lender must 
obtain RHS concurrence.



Sec. 1980.376  Loss payments.

    Settlement of the guarantee will be processed in accordance with 
this section.
    (a) Loss payment. Loss payments will be made within 60 days of the 
Lender's properly filed claim. The Lender must submit its loss claim 
within 30 calendar days of loan liquidation. The claim may include 
interest on the unpaid principal accrued to final loss settlement. RHS 
will pay interest within the limits of the guarantee to the date the 
claim is paid when the Lender promptly and properly files the claim.
    (1) Determination of loss payment. To calculate the loss payment, 
first determine the unpaid debt by adding the unpaid principal and 
interest on the loan and the unpaid balance for principal and interest 
on authorized protective advances. The net proceeds from the property 
will be first applied to the unpaid debt. Any other proceeds recovered 
by the Lender from other sources shall also be applied to the total 
unpaid debt. Determination of net proceeds will be different depending 
on which of the following circumstances are involved.

[[Page 441]]

    (i) If, at liquidation, title to the property is conveyed to a bona 
fide third-party purchaser, then final loss payment will be based on the 
net sales proceeds received for the property.
    (ii) If, at liquidation, title to the property is conveyed to the 
Lender, then the Lender must prepare and submit a property disposition 
plan to RHS for RHS concurrence. The plan will address the Lender's 
proposed method for sale of the property, the estimated value and 
minimum sale price, itemized estimated costs of the sale, and any other 
information that could impact the amount of loss on the loan. The Lender 
is allowed up to 6 months from the date the property is acquired to sell 
the property. Upon the Lender's written request, RHS will authorize one 
extension not to exceed 30 days to close the sale of a purchase offer 
accepted near the end of the 6-month period. Net proceeds will be based 
on the net proceeds received for the property when the sale is conducted 
in accordance with the plan as approved by RHS. If no sale offer is 
accepted within the 6-month period, then the RHS approval official will 
obtain and use a liquidation value appraisal of the property. When an 
appraisal is obtained, the amount of the net proceeds from the security 
is then determined by subtracting a cost factor, which is found in 
exhibit D of FmHA Instruction 1980-D (available in any RHS office), from 
the current market value.
    (iii) If a deficiency judgment is obtained, the Lender must enforce 
the judgment against the borrower before loss settlement if the current 
situation provides a reasonable prospect of recovery. A loss payment 
will be made when the Lender holds a deficiency judgment but there are 
not current prospects of collection, even if there may be in the future.
    (2) Payment procedure. RHS will pay losses on the loan according to 
the terms of the loan note guarantee unless RHS has determined there is 
cause for reduction of the loss amount. See Sec. 1980.377 for future 
recovery by the Lender.
    (i) If there is no dispute between RHS and the Lender regarding the 
amount of the loss and the Lender's eligibility for payment of loss, RHS 
will pay the loss within the limits of the guarantee.
    (ii) If RHS and the Lender do not agree on the amount of the loss, 
or RHS has determined that part of the loss is not payable to the Lender 
under the terms of the loan note guarantee, RHS will pay the undisputed 
portion. The disputed portion of the claim will be treated as an adverse 
decision and the Lender may appeal.
    (iii) When RHS has cause to believe that Lender fraud or other 
lender actions negating the guarantee exist, no loss payment may be made 
unless the situation is resolved.
    (3) The RHS approval official will conduct an audit of the account 
and review the loan in its entirety to determine why the loan failed and 
whether any reason exists for reducing or denying the loss claim. This 
information will be documented in the RHS casefile.
    (4) If a Lender's loss claim is denied or reduced, the RHS approval 
official will notify the Lender of all of the reasons for the action 
within 10 days of the decision and the Lender may appeal in accordance 
with Sec. 1980.399 and subpart B of part 1900.
    (5) The RHS approval official is authorized to approve loss payments 
in amounts of up to 50 percent of his/her delegated loan approval 
authority in accordance with exhibit D of FmHA Instruction 1901-A 
(available in any RHS office).
    (b) Denial or reduction of loss claims. The RHS approval official 
will fully document any loss claim which is denied or reduced including 
an analysis of how the amount of the reduction was determined. A 
connection must be made between the Lender's action or failure to act 
and the loss amount on the loan. The amount of loss occasioned by such 
action will be established. This information will be made available to 
the Lender upon request. A Lender's loss claim may be denied or reduced 
by RHS when:
    (1) The Lender has committed fraud. (Denial of claim.)
    (2) The Lender claims items not authorized under RHS regulations. 
(Reduced by amount of unauthorized claim.)

[[Page 442]]

    (3) The Lender violated usury laws. (Reduction for amount of loss 
caused by the violation.)
    (4) The Lender failed to obtain required security or maintain the 
security position. (Reduction for loss attributed to failure.)
    (5) Loan funds were used for unauthorized purposes. (Reduction by 
unauthorized amount.)
    (6) The Lender was negligent in loan servicing. Negligent servicing 
is a failure to perform those services which a reasonably prudent Lender 
would perform in servicing its own portfolio of loans that are not 
guaranteed. The term includes a failure to act, a failure to act in a 
timely manner, or acting in a manner contrary to that in which a 
reasonably prudent Lender would act. (Reduction for loss amount 
attributable to Lender negligence.) Examples of negligent servicing 
include:
    (i) A failure to contact the borrower in a timely manner when the 
borrower's account goes into default.
    (ii) A failure to pay real estate taxes or hazard insurance when 
due.
    (iii) A failure to notify RHS within required time limits when the 
borrower defaults on the loan.
    (iv) A failure to request loan subsidy when the borrower was 
eligible for loan subsidy and loan subsidy was available (subsidized 
loans only).
    (v) A failure to protect security during the liquidation phase.
    (7) The Lender delayed filing the loss claim. (Reduction in claim 
for interest accrued because the claim was not filed.)



Sec. 1980.377  Future recovery.

    The proceeds of any amounts recovered shall be shared in proportion 
to the amount of loss borne between RHS and the Lender. Although the 
Lender's actual loss may be different than the amount on which loss 
settlement was based, the proportion of recovery sharing must be based 
on the loss percentage upon which the loss payment calculation was 
based.



Sec. Sec. 1980.378-1980.389  [Reserved]



Sec. 1980.390  Interest assistance.

    In order to assist low-income borrowers in the repayment of the 
loan, RHS is authorized to provide interest assistance payments subject 
to the availability of funds. Regardless of what date a borrower's loan 
payment is due each month, interest assistance payments will be made by 
RHS directly to the Lender on or before the 15th day of the month in 
which the borrower's payment is due.
    (a) Policy. It is the policy of RHS to grant interest assistance on 
guaranteed loans to low-income borrowers to assist them in obtaining and 
retaining decent, safe, and sanitary dwellings and related facilities as 
long as the borrower remains eligible for payments when funds are 
available for interest assistance. Interest assistance must be 
established for the borrower at the time the loan guarantee is 
authorized.
    (b) Processing interest assistance agreements. The Lender will 
process the interest assistance agreement and submit it to RHS for 
approval.
    (1) RHS will reimburse the Lender in the amounts authorized in 
exhibit D of FmHA Instruction 1980-D (available in any RHS office) for 
the cost of processing the agreement. The fee will be paid upon receipt 
of a valid agreement which has been coded as requiring a processing fee 
payment. The processing fee is payable when:
    (i) A new agreement is made with the borrower except at the time of 
loan closing.
    (ii) The borrower had an agreement for the previous year and a new 
agreement is made for the current year.
    (iii) The borrower is eligible for but not presently on interest 
assistance and enters into a new interest assistance agreement.
    (iv) The borrower has a change in circumstances which requires a 
revision to the current agreement. When the change in circumstances 
results in an agreement with less than 90 days remaining, the agreement 
for the subsequent year will be prepared at the same time. This action 
is considered one agreement.
    (2) A processing fee will not be paid when the revision to an 
existing agreement is required due to an error on the part of the Lender 
or the borrower.
    (c) Amount of interest assistance. (1) The amount of interest 
assistance granted will be the difference between

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the monthly installment due on the promissory note eligible for interest 
assistance and the amount the borrower would pay if the note were 
amortized at the rate corresponding to the borrower's income range as 
outlined in the master interest assistance agreement.
    (2) The basis for the amount of interest assistance for each loan is 
determined by the amount of interest assistance authorized to the Agency 
as shown in exhibit D of FmHA Instruction 1980-D (available in any RHS 
office) and the note interest rate.
    (3) A borrower receiving a loan in a high cost area will be granted 
an additional 1 percent interest assistance in order to assist the 
borrower up to the maximum rate in exhibit D of FmHA Instruction 1980-D 
(available in any RHS office).
    (i) The Administrator may designate an area as a high cost area for 
interest assistance purposes. Such designation may be granted when the 
State Director makes a written request for it and provides documentation 
that low-income borrowers in the area could not afford to purchase a 
dwelling under the interest assistance table in exhibit D of FmHA 
Instruction 1980-D (available in any RHS office). The area must also be 
designated by HUD as a high cost area. The amount of additional interest 
assistance for high cost areas is 1 percent; however, in no case will 
more interest assistance be granted than the amount necessary to reach 
the lowest floor rate in exhibit D of FmHA Instruction 1980-D (available 
in any RHS office).
    (ii) The change in a designation to (or from) a high cost area will 
not affect existing loans. An individual's loan eligibility for high 
cost designation is determined at the time of issuance of the 
conditional commitment for loan guarantee.
    (d) Shared equity. Prior to loan closing, the Lender will advise the 
applicant that interest assistance is subject to equity sharing.
    (e) Eligibility. To be eligible for interest assistance, a borrower 
must personally occupy the dwelling and must meet the following 
additional requirements:
    (1) Initial loans. Interest assistance may be granted at the time 
the loan note guarantee is issued, or an assumption is processed in 
accordance with Sec. 1980.366, when:
    (i) The borrower's adjusted income at the time of loan guarantee 
approval did not exceed the applicable low-income limit, the loan 
guarantee was funded from interest assisted guaranteed loan funds, and a 
master interest assistance agreement was completed at closing if the 
borrower is ever to receive interest assistance.
    (ii) The borrower's net family assets do not exceed the maximum 
allowable amount as per exhibit D of FmHA Instruction 1980-D (available 
in any RHS office) unless an exception is authorized. The calculation of 
net family assets will exclude the value of the dwelling and a minimum 
adequate dwelling site, cash on hand which will be used to reduce the 
amount of the loan, and household goods and personal automobiles and the 
debts against them. The Lender may request an exception at the time the 
initial application is submitted to RHS for a loan guarantee. For the 
purpose of determining whether an exception is justified, consideration 
will be given to the nature of the assets upon which a borrower is 
currently dependent for a livelihood or which could be used to reduce or 
eliminate the need for interest assistance.
    (iii) The loan was approved as a subsidized guaranteed loan on or 
after April 17, 1991.
    (iv) The amount of interest assistance will be $20 or more per month 
in accordance with the provisions of paragraph (c)(1) of this section. 
Interest assistance in amounts of less than $20 per month will not be 
granted.
    (2) Existing loans. Interest assistance may be granted at any time 
after loan closing if:
    (i) The requirements of paragraphs (e)(1)(i), (e)(1)(iii), and 
(e)(1)(iv) of this section are met.
    (ii) The borrower's adjusted annual income does not exceed the low-
income limit.
    (iii) The borrower requests interest assistance through the Lender 
or the Lender determines that interest assistance is needed to enable 
the borrower to repay the loan.

[[Page 444]]

    (iv) The Lender processes the interest assistance agreement and 
submits it to RHS for approval.
    (f) Processing interest assistance. The Lender will process interest 
assistance agreements in accordance with this section. The interest 
assistance agreement will be executed by the Lender and borrower and 
forwarded to RHS for approval.
    (1) Amount of interest assistance. The amount of interest assistance 
for which a borrower is eligible will be determined by use of the 
interest assistance agreement as outlined in paragraph (c) of this 
section.
    (i) Determination of income. The Lender is responsible for 
determining the borrower's annual and adjusted annual income as outlined 
in Sec. Sec. 1980.347 and 1980.348 of this subpart. Income of all 
persons occupying the dwelling will be verified in accordance with Sec. 
1980.347 of this subpart.
    (ii) Effective period. Annual interest assistance agreements will be 
for a 12-month period.
    (2) Interest assistance agreements. The master interest assistance 
agreement will be executed for each qualifying loan at loan closing 
provided funds are available for interest assistance at the time the 
guarantee is issued. This agreement establishes the conditions and 
maximum amounts of interest assistance for the life of the loan. Each 
year, an annual interest assistance agreement will be used to determine 
the amount of interest assistance for the coming 12 months.
    (i) The Lender will determine the borrower's adjusted annual income, 
document the calculations, and complete the interest assistance 
agreement form.
    (ii) The borrower will review the interest assistance agreement form 
and sign the form signifying that all information is correct as shown.
    (iii) If the information contained on the interest assistance 
agreement appears correct, RHS will approve the agreement and make 
monthly payments to the Lender on behalf of the borrower.
    (iv) When the borrower's income is within the low-income limits but 
the provisions of paragraphs (e)(1)(ii) or (e)(1)(iv) of this section 
preclude granting interest assistance, the master interest assistance 
agreement must be executed if the borrower desires to be considered for 
interest assistance at a later date due to a change in circumstances.
    (g) Interest assistance modification. A change in the borrower's 
circumstances after the effective date of the Annual Interest Assistance 
Agreement will be handled as follows:
    (1) RHS required modifications before expiration. The borrower is 
responsible for reporting any increases in income exceeding $100 per 
month to the Lender. The Lender is not responsible for monitoring the 
borrower's income. The Lender must process a revised interest assistance 
agreement when a reported increase in the borrower's income results in 
the need for less interest assistance in accordance with paragraph (c) 
of this section.
    (2) Additional interest assistance before expiration. The borrower 
may request and the Lender may process a modification of the interest 
assistance agreement and submit the modified agreement to RHS when:
    (i) The borrower's adjusted annual income decreases by more than 
$100 per month;
    (ii) The interest assistance calculation per paragraph (c) of this 
section indicates that the borrower is eligible for an additional $20 
interest assistance per month; and
    (iii) There are interest assistance funds available if the amount 
needed by the borrower exceeds the initial floor rate established at the 
time the loan was closed per paragraph (c) of this section.
    (3) Other changes in the borrower's circumstances. When one 
coborrower has left the dwelling, interest assistance based on the 
remaining coborrower's income may be extended if:
    (i) The remaining coborrower is occupying the dwelling, owns a legal 
interest in the property, and is liable for the debt;
    (ii) The remaining coborrower certifies as to who lives in the 
house;
    (iii) Separation is not due only to work assignment or military 
orders; and

[[Page 445]]

    (iv) The remaining coborrower is informed and agrees that should the 
coborrower begin to live in the dwelling, that coborrower's income will 
then be counted toward annual income and interest assistance may be 
reduced or canceled.
    (4) Effect of modification. An interest assistance agreement 
modified as per paragraph (g)(1), (g)(2), or (g)(3) of this section is 
valid for the remainder of the agreement period.
    (5) Correction of interest assistance agreement. When an error by 
RHS or the Lender resulted in too little interest assistance being 
granted, a corrected agreement will be prepared effective the date of 
the error if the error results in granting $20 or more per month less 
interest assistance than the borrower was eligible to receive. The 
Lender must return any overpayment made by the borrower unless an 
agreement is reached to apply the funds to the loan as an extra payment.
    (h) Eligibility review. Borrowers receiving interest assistance will 
be reviewed annually within 30 to 60 days prior to the anniversary date 
of the loan. All existing agreements must be reviewed and processed for 
the upcoming 12 months during the review period. Interest assistance 
will not be renewed if the amount that the borrower qualifies for is 
less than $20 per month.
    (1) The Lender will obtain written verification of the income of 
each borrower and all adult members of the borrower's household and 
conduct the review.
    (i) Borrower responsibility. The borrower will:
    (A) Report the income of each adult member of the household to the 
Lender;
    (B) Assure that each household member has provided sufficient 
information on that person's income for the Lender to conduct the 
review; and
    (C) Cooperate in the Lender's efforts to verify income.
    (ii) [Reserved]
    (2) Processing interest assistance renewals not reviewed during the 
review period. The Lender may process interest assistance renewals not 
completed during the review period as follows:
    (i) The amount of interest assistance will be based on the 
borrower's current annual income.
    (ii) The effective date will be:
    (A) The expiration period of the previous interest assistance 
agreement if the RHS approval official determines failure to renew was 
the fault of RHS or the Lender.
    (B) The next payment due date following approval in all other cases.
    (3) Interest assistance form. Interest assistance payments will not 
be made after the expiration date unless RHS receives and approves a new 
interest assistance agreement form.
    (i) Cancellation of interest assistance. (1) An existing interest 
assistance agreement will be canceled under the following circumstances:
    (i) When the borrower has never occupied the dwelling, the interest 
assistance will be canceled as of the date of issuance of the guarantee. 
The Lender will refund all interest assistance payments to RHS.
    (ii) The cancellation will be effective on the date on which the 
earliest action occurs which causes the cancellation or the date the 
Lender became aware of the situation if the date cannot be determined 
when:
    (A) The borrower ceases to occupy, sells, or conveys title to the 
dwelling.
    (B) The borrower has received improper interest assistance and a 
corrected agreement will not be submitted.
    (C) The borrower has had an increase in income and is no longer 
eligible for interest assistance.
    (D) The security is acquired by the Lender.
    (E) The Lender formally declares the loan to be in default and 
accelerates the loan.
    (2) [Reserved]
    (j) Overpayment. When the Lender becomes aware of circumstances that 
have resulted in an overpayment of interest assistance for any reason, 
except as provided in paragraph (k) of this section, the following 
actions will be taken:
    (1) The Lender will immediately notify RHS.
    (2) The borrower will be notified and the interest assistance 
agreement will be corrected.

[[Page 446]]

    (3) A repayment agreement acceptable to RHS will be reached.
    (k) Unauthorized use of loan funds. When RHS becomes aware that the 
Lender allowed loan funds to be used for unauthorized purposes, interest 
assistance paid on said amounts will be promptly repaid by the Lender. 
The Lender may work out a repayment agreement with the borrower but is 
expected to make every effort to minimize the adverse impact on the 
borrower's repayment ability.
    (l) Appeals. All applicants/borrowers and Lenders may appeal adverse 
determinations in accordance with Sec. 1980.399 when RHS denies, 
reduces, cancels, or refuses to renew interest assistance.
    (m) Reinstatement of interest assistance. The RHS approval official 
may authorize reinstatement of the borrower's interest assistance if it 
was canceled because the loan was accelerated and if the acceleration 
was withdrawn with RHS approval.



Sec. 1980.391  Equity sharing.

    The policy of RHS is to collect all or a portion of interest 
assistance granted on a guaranteed RH loan when any of the events 
described in paragraph (a) of this section occur, if any equity exists 
in the security.
    (a) Determining the amount of shared equity. The RHS approval 
official will calculate shared equity when a borrower's account is 
settled by payment-in-full (including refinancing) of the outstanding 
indebtedness, the transfer of title, or when the borrower ceases to 
occupy the property. The calculation of shared equity when the account 
is in liquidation will be handled in accordance with Sec. 1980.374(e).
    (1) How to calculate. The amount of shared equity will be based on 
the amount of interest assistance granted on the loan, the appreciation 
in property value between the closing date of the loan and the date the 
account is satisfied or acquired by the Lender via liquidation action, 
the period of time the loan is outstanding, the amount of original 
equity the borrower has in the property, and the value of capital 
improvements to the property. Shared equity will be the lesser of the 
interest assistance granted or the amount of value appreciation 
available for shared equity. Value appreciation available for shared 
equity means the market value of the property less all debts secured by 
prior liens, sales expenses, any original borrower equity, principal 
reduction, and value added by any capital improvements.
    (i) Market value. Market value of the property as of the date the 
loan is to be paid in full or the date the borrower ceases to occupy and 
will be documented by one of the following:
    (A) A sales contract which reasonably represents the fair market 
value based on the Lender's and RHS approval official's knowledge of the 
property and the area.
    (B) Lender's appraisal when the loan will be refinanced provided the 
appraisal reasonably represents the fair market value.
    (C) If the items listed in either paragraph (a)(l)(i)(A) or 
(a)(1)(i)(B) of this section are not available, another current 
appraisal, if readily available, when the appraiser meets the 
qualifications of Sec. 1980.334.
    (D) When the account is being paid off from insurance proceeds, the 
most recent appraisal available if the Lender or RHS can document that 
it represents an accurate indication of the value at the time the 
dwelling was damaged or destroyed. If not, the best information 
available will be used to determine the market value. The RHS approval 
official will interview the borrower to determine the extent of 
improvements, if any, and the general condition of the property at the 
time of loss. The amount of the insurance payment is generally a good 
indication of value; however, tax records or comparable sales will be 
considered.
    (E) RHS appraisal, with prior approval of the State Director.
    (ii) Prior liens. Prior liens refers to the amount of liens that are 
prior to the Lender's liens and include, but may not be limited to, 
prior mortgages, and real estate taxes and assessments levied against 
the property.
    (iii) Sale/refinancing expenses. Sale/refinancing expenses include, 
but are not limited to, expenses commonly associated with the sale or 
refinancing of real estate that are not reimbursed, such as sales 
commissions, advertising costs, recording fees, pro rata taxes,

[[Page 447]]

points based on the current interest rate, appraisal fees, transfer tax, 
deed preparation fee, loan origination fee, etc. In refinancing 
situations, only those expenses necessary to finance the amount of the 
current RHS debt are allowed. Shared equity may be calculated using 
estimated expenses if actual expenses cannot be obtained and the RHS 
approval official is satisfied with the estimated amount and the 
prorating of the expenses are accurate for this transaction.
    (iv) Original borrower equity. Original equity consists of a 
contribution by the borrower that reduces the amount of the loan below 
the market value. The contribution may be in the form of cash and/or 
value of the lot if the home was constructed on the borrower's property.
    (v) Capital improvements. Capital improvements will be considered to 
the extent that they do not exceed market value contribution as 
indicated by a sales comparison analysis. Generally, the value added by 
improvements will be the difference in market value at the time of sale 
and market value without capital improvements. Cost of the improvement 
will not be considered, only contribution to value. Maintenance cost and 
replacement of short-lived depreciable items are normal expenses 
associated with home ownership and are not considered capital 
improvements.
    (2) Other considerations. (i) Overpayments of interest assistance. 
When RHS has overpaid interest assistance and the overpaid amounts 
remain uncollected at the time shared equity is calculated, the overpaid 
amount will be added to shared equity.
    (ii) Multiple loans. When a borrower has more than one loan and 
elects to pay only some of the loans, shared equity will not be 
calculated unless the remaining loan is not subject to shared equity. 
Shared equity will be calculated when the account is paid in full taking 
into consideration all of the interest assistance granted on the 
account.
    (b) Miscellaneous provisions--(1) Changes in terms. Shared equity 
will not be calculated when an account is reamortized.
    (2) Junior liens. Junior liens are not considered in the shared 
equity calculation. In the event a junior lienholder forecloses, the RHS 
approval official will calculate shared equity before providing the 
lienholder with a pay-off figure, which is in addition to any amounts 
still due the Lender on the loan in the same manner as paragraph (a) of 
this section.
    (c) Affordable housing proposals. Shared equity under an affordable 
housing innovation (such as limited equity or a state or county 
sponsored shared equity) will be calculated in accordance with this 
subpart unless prior written approval is obtained from RHS. Proposals 
that deviate from this subpart must be reviewed and approved in the 
National office prior to issuance of the loan note guarantee.



Sec. 1980.392  Mortgage Credit Certificates (MCCs) and Funded Buydown Accounts.

    (a) MCCs. MCCs are authorized under the Tax Reform Act of 1986 and 
allow the borrower to receive a Federal tax credit for a percentage of 
their mortgage interest payment. They may be used by RHS guaranteed RH 
borrowers to improve their repayment ability for the loan. MCCs impact 
on the borrower's tax liability. MCCs may be used with interest assisted 
loans when the amount of the tax credit is based on the amount of 
interest actually paid by the borrower. MCCs are subject to shared 
equity of a portion of any ``gain'' realized on the property when sold 
within 10 years after purchase. If the loan is also an RHS interest 
assisted loan, RHS shall receive priority for shared equity repayment. 
Income taxes are complex issues; RHS employees and Lenders are not 
expected to be able to identify all issues impacting the borrower's 
taxes. Lenders should encourage borrowers to consult with a tax advisor.
    (1) When the Lender is participating in an MCC program the amount of 
the tax credit is considered as an additional resource available for 
repayment of the loan when the credit is taken on a monthly basis from 
withholding.
    (2) The Lender will submit a copy of the MCC and a copy of the 
applicant's

[[Page 448]]

Form IRS W-4, ``Employee's Withholding Allowance Certificate,'' along 
with the other materials for the loan guarantee request. The amount of 
tax credit is limited to the applicant's maximum tax liability.
    (i) The MCC must show the rate of credit allowed.
    (ii) The Form IRS W-4 must reflect that the borrower is taking the 
tax credit on a monthly basis.
    (iii) The Lender will certify that the borrower has completed and 
processed all of the necessary documents to obtain the tax credit in 
accordance with this section.
    (b) Funded buydown accounts. A funded buydown account is a prepaid 
arrangement between a builder or a seller and a Lender that is designed 
to improve applicant's repayment ability. Funded buydown accounts are 
permitted when the Lender obtains prior RHS concurrence. RHS will 
consider buydown accounts when there are compensating factors which 
indicate the borrower's ability to meet the expected increases in loan 
payment. The seller, Lender or other third party must place funds in an 
escrow account with monthly releases scheduled directly to the Lender to 
reduce the borrower's monthly payment during the early years of the 
loan. The maximum reduction which may be considered is 2 percent below 
the note rate, even though the actual buydown may be for more. 
Reductions in buydown assistance may not result in an increase in the 
interest rate paid by the borrower of more than 1 percent per year. The 
borrower shall not be required to repay escrowed buydown funds. Funds 
must be escrowed with a state or federally supervised Lender. Funded 
buydown accounts must be fully funded for the buydown period. Buydown 
periods must be at least 12 months for each 1 percent of the buydown.



Sec. Sec. 1980.393-1980.396  [Reserved]



Sec. 1980.397  Exception authority.

    The Administrator may, in individual cases, make an exception to any 
requirement or provision of this subpart or address any omission of this 
subpart which is not inconsistent with the authorizing statute or other 
applicable law if the Administrator determines that application of the 
requirement, or provision, or failure to take action in the case of an 
omission would adversely affect the Government's financial interest. The 
Administrator will exercise this authority upon request of the State 
Director with the recommendation of the Assistant Administrator for 
Housing. Requests for exception must be made in writing accompanied by 
the borrower's casefile in cases involving specific borrowers and 
supported with documentation to explain the adverse effect, propose 
alternative courses of action, and to show how the adverse effect will 
be eliminated or minimized if the exception is granted.



Sec. 1980.398  Unauthorized assistance and other deficiencies.

    (a) Unauthorized assistance. Unauthorized assistance includes, but 
is not limited to, issuance of a loan note guarantee when the borrower 
was not eligible for the loan or the borrower was eligible but the loan 
was not made for authorized purposes. Unauthorized assistance in the 
form of interest assistance is discussed in Sec. 1980.390.
    (b) Initial determination of unauthorized assistance. The reasons 
for unauthorized assistance being received by the Lender may include:
    (1) Submission of false or inaccurate information by the Lender;
    (2) Submission of false or inaccurate information by the borrower;
    (3) Error by RHS personnel; or
    (4) Error by the Lender.
    (c)-(d) [Reserved]
    (e) Categories of unauthorized assistance--(1) Minor deficiency. A 
minor deficiency is one that does not change the eligibility of the 
borrower, the eligibility of the property, or amount of the loan. Such 
incidents will be brought to the Lender's attention in writing. Examples 
of minor deficiencies include improperly completed builder 
certifications, use of an outdated credit report, or use of an outdated 
income verification. Minor deficiencies also include those significant 
deficiencies when the Lender is willing and able to correct the problem 
such as obtaining flood insurance for a dwelling located

[[Page 449]]

in a flood hazard area and assuring the escrow amount is sufficient.
    (2) Significant deficiency. A significant deficiency is one that 
creates a significant risk of loss to the Government, or involves 
acceptance of a borrower or property not permitted by Agency 
regulations. Such cases may result in probation or withdrawal of the 
Lender's approval for program participation. Examples of significant 
deficiencies include gross miscalculation of income, acceptance of 
property that is severely deficient of the required standards, missing 
builder certifications, and construction changes that materially affect 
value without proper change orders.
    (3) Fraud or misrepresentation. A deficiency that involves an action 
by the Lender to misrepresent either the financial capacity of the 
borrower or the condition of the property being financed may, in 
addition to any criminal and civil penalties, result in a withdrawal of 
RHS approval, or debarment. Examples of this type of deficiency include 
falsified Verifications of Employment, false certifications, reporting a 
delinquent loan as being current, and omitting conditions relating to 
the health and safety of a property.
    (f) Borrower noncompliance. When the borrower receives unauthorized 
assistance due to an error or oversight, the Lender may continue with 
the guaranteed loan. More serious violations will be viewed on a case-
by-case basis by the National office.
    (g) RHS error oversight. When the borrower receives unauthorized 
assistance solely due to an error or oversight by RHS, the Lender may 
continue with the guaranteed loan.



Sec. 1980.399  Appeals.

    The borrower and the Lender respectively can appeal an RHS 
administrative decision that directly and adversely impacts them. 
Decisions made by the Lender are not covered by this paragraph even if 
RHS concurrence is required before the Lender can proceed. Appeals will 
be conducted in accordance with the rules of the National Appeals 
Division, USDA.
    (a) Appealable decisions. (1) The borrower and the Lender must 
jointly execute the written request for an alleged adverse decision made 
by RHS. The Lender need not be an active participant in the appeal 
process.
    (2) The Lender only may appeal cases where RHS has denied or reduced 
the amount of a loss payment to the Lender.
    (b) Nonappealable decisions. (1) The Lender's decision as to whether 
to make a loan is not subject to appeal.
    (2) The Lender's decision to deny servicing relief is not subject to 
appeal.
    (3) The Lender's decision to accelerate the account is not subject 
to appeal.



Sec. 1980.400  [Reserved]



             Subpart E_Business and Industrial Loan Program

    Source: 52 FR 6501, Mar. 4, 1987, unless otherwise noted.



Sec. 1980.401  Introduction.

    (a) Direct Business and Industry (B&I) loans are disbursed by the 
Agency under this subpart. B&I loan guarantees are to be processed and 
serviced under the provisions of subparts A and B of part 4279 and 
subpart B of part 4287 of this title. Any processing or servicing 
activity conducted pursuant to this subpart involving authorized 
assistance to relatives, or business or close personal associates, is 
subject to the provisions of part 1900 subpart D of this chapter. 
Applicants for this assistance are required to identify any known 
relationship or association with any Agency employee.
    (b) The purpose of the B&I program is to improve, develop or finance 
business, industry and employment and improve the economic and 
environmental climate in rural communities, including pollution 
abatement and control. This purpose is achieved through bolstering the 
existing private credit structure through guarantee of quality loans 
which will provide lasting community benefits. It is NOT intended that 
the guarantee authority be used for marginal or substandard loans or to 
``bail out'' lenders having such loans.
    (c) This subpart and its appendices (especially appendix I and 
appendix K) also contain regulations for Drought

[[Page 450]]

and Disaster (D&D) and Disaster Assistance for Rural Business 
Enterprises (DARBE) guaranteed loans authorized by section 331 of the 
Disaster Assistance Act of 1988 (Pub. L. 100-387) and section 401 of the 
Disaster Assistance Act of 1989 (Pub. L. 101-82). D&D loans must be to 
alleviate distress caused to rural business entities, directly or 
indirectly, by drought, hail, excessive moisture, or related conditions 
occurring in 1988, or to provide for the guarantee of loans to such 
rural business entities that refinance or restructure debt as a result 
of losses incurred, directly or indirectly, because of such natural 
disasters and are limited to a guarantee of principal only. DARBE loans 
must be to alleviate distress caused to rural business entities, 
directly or indirectly, by drought, freeze, storm, excessive moisture, 
earthquake, or related conditions occurring in 1988 or 1989, or to 
provide for the guarantee of loans to such rural business entities that 
refinance or restructure debt as a result of losses incurred, directly 
or indirectly, because of such natural disasters and within certain 
parameters guarantee both principal and interest.
    (d) The B&I loan program is administered by the Administrator 
through a State Director serving each State. The State Director is the 
focal point for the program and the local contact person for processing 
and servicing activities, although this subpart refers in various places 
to the duties and responsibilities of other FmHA or its successor agency 
under Public Law 103-354 employees.
    (e) Throughout this subpart there appear Administrative provisions 
for the State Director, District Director, and County Supervisor. These 
provisions establish the internal duties, responsibilities and 
procedures to carry out the requirements of the program. These 
provisions are identified as ``Administrative'' and follow appropriate 
sections of this subpart.
    (f) This subpart and its appendices also contains regulations for 
Business and Industry Disaster (BID) loans under the authority of the 
Dire Emergency Supplemental Appropriations Act, 1992, Public Law 102-
368. This program provides B&I guarantees for loans needed as a result 
of natural disasters. Some of the requirements of this subpart are 
waived or altered for BID loans. The waivers and alterations are 
provided in Sec. 1980.498 of this subpart.

[52 FR 6501, Mar. 4, 1987, as amended at 54 FR 4, Jan. 3, 1989; 54 FR 
42483, Oct. 17, 1989; 55 FR 19245, May 8, 1990; 57 FR 45969, Oct. 5, 
1992; 58 FR 229, Jan. 5, 1993; 61 FR 67633, Dec. 23, 1996]



Sec. 1980.402  Definitions.

    The following general definitions are applicable to the terms used 
in this subpart. Additional definitions may be found in Sec. 1980.6 of 
subpart A of this part.
    Area of high unemployment. An area in which a B&I Loan Guarantee can 
be issued, consisting of a county or group of contiguous counties or 
equivalent subdivisions of a State which, on the basis of the most 
recent 12-month average or the most recent annual average data, has a 
rate of unemployment 150 percent or more of the national rate. Data used 
must be those published by the Bureau of Labor Statistics, U.S. 
Department of Labor.
    Borrower. A borrower may be a cooperative, corporation, partnership, 
trust or other legal entity organized and operated on a profit or 
nonprofit basis; an Indian Tribe on a Federal or State reservation or 
other Federally recognized tribal group; a municipality, county or other 
political subdivision of a State; or an individual. Such borrower must 
be engaged in or proposing to engage in improving, developing or 
financing business, industry and employment and improving the economic 
and environmental climate in rural areas, including pollution abatement 
and control.
    Business and Industry Disaster Loans. Business and Industry loans 
guaranteed under the authority of the Dire Emergency Supplemental 
Appropriations Act, 1992, Public Law 102-368. These guaranteed loans 
cover costs arising from the direct consequences of natural disasters 
such as Hurricanes Andrew and Iniki and Typhoon Omar that occur after 
August 23, 1992, and receive a Presidential declaration. Also included 
are the costs to any producer of crops and livestock that are a direct 
consequence of at least a 40 percent loss to a crop, 25 percent loss to 
livestock or damage to building structures from a microburst wind 
occurrence in calendar year 1992.

[[Page 451]]

    Community facilities. For the purpose of this subpart, community 
facilities are those facilities designed to aid in the development of 
private business and industry in rural areas. Such facilities include, 
but are not limited to, acquisition and site preparation of land for 
industrial sites (but not for improvements erected thereon), access 
streets and roads serving the site, parking areas extension or 
improvement of community transportation systems serving the site and 
utility extensions all incidental to site preparation. Projects eligible 
for assistance under Subpart A of Part 1942 of this chapter are not 
eligible for assistance under this subpart.
    Development cost. These costs include, but are not limited to, those 
for acquisition, planning, construction, repair or enlargement of the 
proposed facility; purchase of buildings, machinery, equipment, land 
easements, rights-of-way; payment of startup operating costs, and 
interest during the period before the first principal payment becomes 
due, including interest on interim financing.
    Disaster Assistance for Rural Business Enterprises. Guaranteed loans 
authorized by section 401 of the Disaster Assistance Act of 1989 (Pub. 
L. 101-82), providing for the guarantee of loans to assist in 
alleviating distress caused to rural business entities, directly or 
indirectly, by drought, freeze, storm, excessive moisture, earthquake, 
or related conditions occurring in 1988 or 1989, and providing for the 
guarantee of loans to such rural business entities that refinance or 
restructure debt as a result of losses incurred, directly or indirectly, 
because of such natural disasters. See this subpart and its appendices, 
especially appendix K, containing additional regulations for these 
loans.
    Drought and Disaster guaranteed loans. Guaranteed loans authorized 
by section 331 of the Disaster Assistance Act of 1988 (Pub. L. 100-387), 
providing for the guarantee of loans to assist in alleviating distress 
caused to rural business entities, directly or indirectly, by drought, 
hail, excessive moisture, or related conditions occurring in 1988, or 
providing for the guarantee of loans to such rural business entities 
that refinance or restructure debt as a result of losses incurred, 
directly or indirectly, because of such natural disasters.
    Hurricane Andrew. A hurricane that caused damage in southern Florida 
on August 24, 1992, and in Louisiana on August 26, 1992.
    Hurricane Iniki. A hurricane that caused damage in Hawaii on 
September 11, 1992.
    Letter of conditions. Letter issued by FmHA or its successor agency 
under Public Law 103-354 to a borrower setting forth the conditions 
under which FmHA or its successor agency under Public Law 103-354 will 
make a direct (insured) loan from the Rural Development Insurance Fund.
    Loan classification system. The process by which loans are examined 
and categorized by degree of potential for loss in the event of default.
    Microburst wind. A violently descending column of air associated 
with a thunderstorm which causes straight-line wind damage.
    Problem loan. A loan which is not performing according to its 
original terms and conditions or which is not expected in the future to 
perform according to those terms and conditions.
    Public body. A municipality, political subdivision, public 
authority, district, or similar organization.
    Seasoned loan. A loan which:
    (1) Has a remaining principal guaranteed loan balance of two-thirds 
or less of the original aggregate of all existing B&I guaranteed loans 
made to that business.
    (2) Is in compliance with all loan conditions and B&I regulations.
    (3) Has been current on the B&I guaranteed loan(s) payments for 24 
consecutive months.
    (4) Is secured by collateral which is determined to be adequate to 
insure there will be no loss on the B&I guaranteed loan.
    State. Any of the fifty States, the Commonwealth of Puerto Rico, the 
Virgin Islands of the United States, Guam, American Samoa, and the 
Commonwealth of the Northern Mariana Islands.
    Typhoon Omar. A typhoon that caused damage in Guam on August 28, 
1992.

[[Page 452]]

    Working capital. The excess of current assets over current 
liabilities. It identifies the relatively liquid portion of total 
enterprise capital which constitutes a margin or buffer for meeting 
obligations within the ordinary operating cycle of the business.

[52 FR 6501, Mar. 4, 1987, as amended at 53 FR 40401, Oct. 17, 1988; 54 
FR 4, Jan. 3, 1989, and 54 FR 26946, June 27, 1989; 54 FR 42483, Oct. 
17, 1989; 55 FR 19245, May 8, 1990; 57 FR 45969, Oct. 5, 1992; 67 FR 
78130, Dec. 23, 2002]



Sec. 1980.403  Citizenship of borrowers.

    Loans to individuals will be made or guaranteed only to those who 
are citizens of the United States or reside in the United States after 
being legally admitted for permanent residence. At least 51 percent of 
the outstanding interest in any corporation or organization-type 
applicant must be owned by those who are either citizens of the United 
States or reside in the United States after being legally admitted for 
permanent residence.



Sec. 1980.404  [Reserved]



Sec. 1980.405  Rural areas.

    The business financed with a B&I loan must be located in a rural 
area. Loans to borrowers with facilities located in both rural and non-
rural areas will be limited to the amount necessary to finance the 
facility located in the eligible rural area. Cooperatives that are 
headquartered in a non-rural area may be eligible for a B&I loan if the 
loan is used for a project or venture that is located in a rural area. 
Rural areas are any areas other than:
    (a) A city or town that has a population of greater than 50,000 
inhabitants; and
    (b) The urbanized area contiguous and adjacent to such a city or 
town, as defined by the U.S. Bureau of the Census using the latest 
decennial census of the United States.

[67 FR 78130, Dec. 23, 2002]



Sec. Sec. 1980.406-1980.410  [Reserved]



Sec. 1980.411  Loan purposes.

    Loans to borrowers with facilities located in both urban and rural 
areas will be limited to the amount necessary to finance the facility 
located in the eligible rural area.
    (a) Private entrepreneurs. Loans may be for improving, developing or 
financing business, industry and employment and improving the economic 
and environmental climate, including pollution and abatement control, of 
rural areas, and may include but not be limited to:
    (1) Business and industrial acquisitions, construction, conversion, 
enlargement, repair, modernization of development cost.
    (2) Purchasing and development of land, easements, rights-of-way, 
buildings, facilities, leases or materials.
    (3) Purchasing of equipment, lease-hold improvements machinery or 
supplies.
    (4) Pollution control and abatement including those in connection 
with farming and ranching operations.
    (5) Transportation services incidential to industrial development.
    (6) Startup costs and working capital.
    (7) The financing of housing development sites located in open 
country or cities, towns or villages with populations not in excess of 
those eligible for FmHA or its successor agency under Public Law 103-354 
rural housing loans, provided the community demonstrates a need for 
additional housing to prevent a loss of jobs in the area, or to house 
families moving to the area as a result of new employment opportunities.
    (8) Loans, other than for working capital or debt refinancing, for 
meat processing facilities and integrated meat and poultry operations. 
Loans may not be guaranteed for agricultural production as defined in 
Sec. 1980.412(e); however, applicants who are in the business of 
processing, marketing or packaging of agricultural products, as well as 
agricultural production, may be eligible for loan assistance for that 
portion of the business other than agricultural production provided the 
agricultural production aspect is separate from the rest of the 
business; i.e., the production aspects are handled through separate 
legal business entities or through maintenance of the accounting system 
in such a manner as to clearly

[[Page 453]]

identify the use of and future accounting of the loan proceeds and 
operation of the business.
    (9) Interest (including interest on interim financing) during the 
period before the first principal payment becomes due or the facility 
becomes income producing, whichever occurs first.
    (10) Feasibility studies.
    (11) Debt refinancing. Lenders and FmHA or its successor agency 
under Public Law 103-354 must provide as part of their loan analysis the 
reasons for refinancing and the file must be documented accordingly. 
Refinancing debts may be allowed in connection with viable projects when 
it is determined by the lender and FmHA or its successor agency under 
Public Law 103-354 that it is necessary to create new or save existing 
jobs. FmHA or its successor agency under Public Law 103-354 will 
consider any lender's exposure as it relates to this item and may adjust 
the guarantee percentage accordingly. Refinancing in accordance with 
this paragraph may be insured or guaranteed only when:
    (i) It is necessary to spread substantial debt payment over a longer 
period of time thereby improving the business' net cash flow and working 
capital position consistent with the useful life of the asset(s) being 
refinanced, or
    (ii) For payment of short-term debt when required in situations 
customarily financed over long periods of time (e.g., financing the 
purchase of real estate, machinery, or equipment with short-term debt or 
cash expenditures, when lenders would not extend reasonable longer terms 
to the business), or
    (iii) It is necessary to place a permanent loan subsequent to an 
interim loan for financing the construction of the project.
    (12) Reasonable fees and charges only as specifically listed below 
and disclosed on Form FmHA or its successor agency under Public Law 103-
354 449-1, ``Application for Loan and Guarantee,'' or on an addendum to 
the application at the time the request is submitted to FmHA or its 
successor agency under Public Law 103-354 for processing. Authorized 
fees include professional fees rendered by professionals generally 
licensed by individual State or accreditation Associations, such as 
Engineers, Architects, Lawyers, Accountants, and Appraisers. The amount 
of the fee will be what is reasonable and customary in the community or 
region where the project is located. For example, Architects and 
Engineers customarily charge fees based on a percentage of estimated 
project costs. Lawyers, Accountants, and Appraisers customarily charge 
for services on an hourly basis. Any fees for professional or expert 
services are to be fully documented and justified on the Form FmHA or 
its successor agency under Public Law 103-354 449-1 and are subject to 
FmHA or its successor agency under Public Law 103-354 review and 
approval before the application is presented to the FmHA or its 
successor agency under Public Law 103-354 State Loan Review Board for 
action. The above approved fees and charges may be funded out of loan 
proceeds.
    (13) FmHA or its successor agency under Public Law 103-354 guarantee 
fee.
    (14) Acquisition of membership and/or stocks, bonds, or debentures 
necessary to obtain a loan from Production Credit Associations, Banks 
for Cooperatives, Small Business Investment Companies, and other 
lenders, provided such acquisition is required of all their borrowers. 
However, a lender which requires membership fees in such organization or 
the purchase of securities issued by such organization will not use such 
proceeds to acquire, lease or improve property which does not benefit 
its members.
    (15) Aquaculture including conservation, development and utilization 
of water for aquaculture. Aquaculture means the culture or husbandry of 
aquatic animals or plants by private industry for commercial purposes 
including the culture and growing of fish by private industry for the 
purpose of granting or augmenting publicly-owned and regulated stock of 
fish.
    (b) Public bodies. See Sec. Sec. 1980.481 and 1980.488.

[52 FR 6501, Mar. 4, 1987, as amended at 53 FR 45258, Nov. 9, 1988; 54 
FR 28022, July 5, 1989]



Sec. 1980.412  Ineligible loan purposes.

    Loans may not be made or guaranteed if the funds are used:

[[Page 454]]

    (a) To pay off a creditor in excess of the value of the collateral.
    (b) For distribution or payment to the owner, partners, shareholders 
or beneficiaries of the applicant or members of their families when such 
persons will retain any portion of their equity in the business.
    (c) For projects in which such assistance exceeds $1 million and 
when direct employment increases more than 50 employees which is 
calculated to or is likely to result in the transfer from one area to 
another of any employment or business activity provided by the 
operations of the applicant. This limitation will not prohibit 
assistance for the expansion of an existing business entity through the 
establishment of a new branch, affiliate or subsidiary of such entity if 
the expansion will not result in an increase in the unemployment in the 
area of original location or in any other area where such entity 
conducts business operations unless there is reason to believe that such 
explanation is being established with the intention of closing down the 
operations of the existing business entity in the area of its original 
location or in any other area where it conducts such operations.
    (d) For projects in which such assistance exceeds $1 million and 
when direct employment increased more than 50 employees which is 
calculated to or likely to result in an increase in the production of 
goods, materials or commodities, or the availability of services or 
facilities in the area when there is not sufficient demand for such 
goods, materials, commodities, services or facilities to employ the 
efficient capacity of existing competitive commercial or industrial 
enterprises, unless such financial or other assistance will not have an 
adverse effect upon existing competitive enterprises in the area.
    (e) For agricultural production which means the cultivation, 
production (growing), and harvesting, either directly or through 
integrated operations, of agricultural products (crops, animals, birds, 
and marine life, either for fiber or food for human consumption), and 
disposal or marketing thereof, the raising, housing, feeding (including 
commercial custom feedlots), breeding, hatching, control, and/or 
management of farm and domestic animals. Exceptions to this definition 
are:
    (1) Aquaculture as identified under eligible purposes.
    (2) Commercial nurseries primarily engaged in the production of 
ornamental plants and trees and other nursery products such as bulbs, 
florists' greens, flowers, shrubbery, flower and vegetable seeds, sod, 
and the growing of vegetables from seed to the transplant stage.
    (3) Forestry which includes establishments primarily engaged in the 
operation of timber tracts, tree farms, forest nurseries, and related 
activities such as reforestation.
    (4) Loans for livestock and poultry processing as identified under 
eligible purposes.
    (5) The growing of mushrooms or hydroponics.
    (f) For the transfer of ownership of a business unless the loan will 
keep the business from closing, or prevent the loss of employment 
opportunities in the area, or provide expanded job opportunities.
    (g) For financing community antenna television services or 
facilities.
    (h) Charitable and educational institutions, churches, organizations 
affiliated with or sponsored by churches, and fraternal organizations.
    (i) For lending and investment institutions and insurance companies.
    (j) For assistance to government employees and military personnel 
who are directors, officers or have a major ownership of 20 percent or 
more in the business.
    (k) For any legitimate business activity when more than 10 percent 
of the annual gross revenue is derived from legalized gambling activity.
    (l) For any illegal business activity.
    (m) For hotels, motels, tourist homes, or convention centers.
    (n) For any tourist, recreation or amusement facility.
    (o) For any line of credit.

                             Administrative

    Par (c) and (d). The FmHA or its successor agency under Public Law 
103-354 State Director will review the criteria in Sec. 1980.412(c) and 
(d) and make a written determination with supporting data and reasons as 
to the determinations. Such review must be independent of the Department 
of Labor certification.

[[Page 455]]

The State Director will make sure the loan file contains these 
determinations as part of the loan analysis prior to the issuance of the 
Conditional Commitment for Guarantee.

[52 FR 6501, Mar. 4, 1987, as amended at 53 FR 45258, Nov. 9, 1988]



Sec. 1980.413  Transactions which will not be guaranteed.

    (a) The following transactions will not be guaranteed by FmHA or its 
successor agency under Public Law 103-354:
    (1) The guarantee of lease payments.
    (2) The guarantee of loans made by other Federal agencies. This does 
not preclude the guaranteeing of loans made by the Bank for 
Cooperatives, Federal Land Bank, or Production Credit Association.
    (3) The guarantee or making of any B&I loans(s), to any one 
borrower, when the total amount of the B&I loans(s) requested plus the 
outstanding balance of any existing B&I loan(s) is in excess of $10 
million.
    (b) Guaranteeing of loans involved in tax-exempt obligations under 
Sec. 1980.23 of Subpart A of this Part.

                             Administrative

    The State Director will consider the overall State allocations of 
funding authority in recommending loans for processing. Loan requests 
which fall within Small Business Administration (SBA) authority should 
continue to be referred to SBA. If the State Director decides to process 
SBA size loans, the loan file must be fully documented as to the reasons 
for such actions.

[52 FR 6501, Mar. 4, 1987, as amended at 53 FR 40401, Oct. 17, 1988]



Sec. 1980.414  Fees and charges by lender and others.

    [See Subpart A, Sec. 1980.22]
    (a) All fees and charges must be specifically documented and 
justified on the Form FmHA or its successor agency under Public Law 103-
354 449-1 or on an addendum to the application at the time the loan 
request is submitted to FmHA or its successor agency under Public Law 
103-354 for processing. Allowable fees will be those reasonably and 
customarily charged borrowers in similar circumstances in the ordinary 
course of business and are subject to FmHA or its successor agency under 
Public Law 103-354 review and approval.
    (b) Packaging fees include services rendered by the lender or others 
in connection with preparation of the application and seeing the project 
through to final decision. These services may or may not be performed by 
an investment banker. If an investment banker provides needed assistance 
in addition to the packaging of the loan, additional charges may be 
added to the packaging fee. The maximum allowable packaging fees are 2 
percent of the total principal amount of the loan up to $1 million and 
on all amounts over $1 million, an additional one-fourth percent up to 
total maximum fee of $50,000. Packaging fees, investment banker fees and 
and other fees and charges not specifically provided for in this section 
are permitted subject to FmHA or its successor agency under Public Law 
103-354 review and approval. Loan proceeds may be used to pay fees as 
specifically authorized under Sec. Sec. 1980.411(a)(12) and (13). 
Packaging fees, investment banker fees, and any other fees or charges 
shall not be paid from loan proceeds.

[52 FR 6501, Mar. 4, 1987, as amended at 53 FR 45258, Nov. 9, 1988]



Sec. Sec. 1980.415-1980.418  [Reserved]



Sec. 1980.419  Eligible lenders.

    [See Subpart A, Sec. 1980.13.]

                             Administrative

    A. Par (a) of Subpart A, Sec. 1980.13 requires National Office 
approval for any variations.
    B. Par (b)(4) of Subpart A, Sec. 1980.13, State Director submits 
information to National Office with recommendations.
    C. With prior written approval of the FmHA or its successor agency 
under Public Law 103-354 National Office, a new eligible lender may be 
substituted for the original lender provided the new lender agrees to 
assume all original loan requirements including liabilities, servicing 
responsibilities and acquiring legal title to the unguaranteed portion 
of the loan. Such approval will be granted by the National Office only 
when a lender discontinues lending operations or other extreme 
situations require a substitution of lender. If approved by the National 
Office, the State Director will submit to the Finance Office Form FmHA 
or its successor agency under Public Law 103-354 1980-42. ``Notice of 
Substitution of Lender.''

[[Page 456]]



Sec. 1980.420  Loan guarantee limits.

    The percentage of guarantee, up to the maximum allowed by this 
section, is a matter of negotiation between the lender and FmHA or its 
successor agency under Public Law 103-354.
    (a) For loans of $2 million or less, the maximum percentage of 
guarantee is 90 percent.
    (b) For loans over $2 million but not over $5 million, the maximum 
percentage of guarantee is 80 percent.
    (c) For loans in excess of $5 million, the maximum percentage of 
guarantee is 70 percent.
    (d) Lenders and borrowers will propose the percentage of guarantee. 
FmHA or its successor agency under Public Law 103-354 informs lenders 
and borrowers in writing on Form FmHA or its successor agency under 
Public Law 103-354 449-14 of any percentage of guarantee less than 
proposed by the lender and borrower, and the reasons therefore. FmHA or 
its successor agency under Public Law 103-354 determines the percentage 
of guarantee after considering all credit factors involved, including 
but not limited to:
    (1) Borrower's management. The borrower's management, and when 
appropriate, equity capital, history of operation, marketing plan, raw 
material requirements, and availability of necessary supporting 
utilities and services;
    (2) Collateral. Collateral for the loan;
    (3) Financial condition. Financial condition of borrower or 
borrower's principals, if appropriate;
    (4) Lender's exposure. The lender's exposure before and after the 
loan, and any applicable limits on the lender's lending authority; and
    (5) Trends and conditions. Current trends and economic conditions.

[53 FR 40401, Oct. 17, 1988]



Sec. Sec. 1980.421-1980.422  [Reserved]



Sec. 1980.423  Interest rates.

    (a) Guaranteed loans. Rates will be negotiated between the lender 
and the borrower. They may be either fixed or variable as long as they 
are legal. Interest rates will be those rates customarily charged 
borrowers in similar circumstances in the ordinary course of business 
and are subject to FmHA or its successor agency under Public Law 103-354 
review and approval. Should any part of the loan(s) be sold by the 
lender, FmHA or its successor agency under Public Law 103-354, in its 
analysis, will take into consideration in approving the lender's 
interest rate, the rate at which guaranteed loans are being sold or 
traded in the secondary market.
    (1) A variable interest rate must be a rate that is tied to a base 
rate published periodically in a recognized national or regional 
financial publication specifically agreed to by the lender and borrower. 
The variable interest rate may be adjusted at different intervals during 
the term of the loan but the adjustments may not be more often than 
quarterly. The intervals between interest rate adjustments will be 
specified in the Loan Agreement. The lender must incorporate within the 
variable rate promissory note at loan closing, the provision for 
adjustment of payment installments coincident with an interest rate 
adjustment. This will assure that the outstanding principal balance is 
properly amortized within the prescribed loan maturity to eliminate the 
possibility of a balloon payment at the end of the loan.
    (2) Under a Memorandum of Understanding between FmHA or its 
successor agency under Public Law 103-354 and the Farm Credit 
Administration dated September 25, 1974, the interest rate on loans made 
by the Bank for Cooperatives, Federal Land Banks and Production Credit 
Associations may be a variable rate based on their administrative and 
borrowing costs.
    (3) Any change in the interest rate between the date of issuance of 
the Form FmHA or its successor agency under Public Law 103-354 
conditional Commitment For Guarantee,'' and before the issuance of the 
Loan Note Guarantee must be approved by the State Director. Approval of 
such change will be shown on an amendment to Form FmHA or its successor 
agency under Public Law 103-354 449-14.
    (4) It is permissible to have one interest rate on the guaranteed 
portion of the loan and another interest rate on the unguaranteed 
portion of the loan, provided the lender and borrower agree and:

[[Page 457]]

    (i) The rate on the unguaranteed portion does not exceed that 
currently being charged on loans of similar size and purpose for 
borrowers under similar circumstances.
    (ii) The rate on the guaranteed portion of the loan will not exceed 
the rate on the unguaranteed portion.
    (5) When multi-rates are used, the lender will provide FmHA or its 
successor agency under Public Law 103-354 with the overall effective 
interest rate for the entire loan.
    (6) The borrower, lender and holder (if any) may collectively effect 
a permanent reduction in the interest rate of their B&I guaranteed loan 
at any time during the life of the loan upon written agreement by these 
parties. FmHA or its successor agency under Public Law 103-354 must be 
notified by the lender, in writing, within 10 calendar days of the 
change. If the guaranteed portion has been repurchased by FmHA or its 
successor agency under Public Law 103-354, then FmHA or its successor 
agency under Public Law 103-354 is a holder and must affirm or reject 
interest rate change proposals. When FmHA or its successor agency under 
Public Law 103-354 is a holder, it will concur in such interest rate 
change only when it is demonstrated to FmHA or its successor agency 
under Public Law 103-354 that the change is a more viable alternative 
than initiating or proceeding with liquidation of the loan or continuing 
with the loan in its present state and that the Government's financial 
interests are not adversely affected. Factors which will be considered 
in making such determination will include whether the proposed interest 
rate will be below the Government's cost of borrowing money, whether 
continuing with the loan would realistically promote or enhance rural 
development and employment in rural areas, whether the monetary recovery 
would be increased by proceeding immediately to liquidation, if 
applicable, or allowing the borrower to continue at a reduced interest 
rate, and whether an in-depth financial analysis by the lender 
reasonably indicates that the business would be successful at a lower 
interest rate and reasonably indicates that the borrower could make the 
reduced payment and pay off amounts in arrears, if any. The FmHA or its 
successor agency under Public Law 103-354 will reflect the documentation 
of the interest rate change decision.
    (i) Fixed rates cannot be changed to variable rates to reduce the 
interest rate to the borrower unless the variable rate has a ceiling 
which is less than the original fixed rate.
    (ii) Variable rates can be changed to reduced fixed rates. In a 
final loss settlement, when qualifying rate changes were made with the 
required written agreements and notification, the interest will be 
calculated for the periods the given rates were in effect, except that 
interest claimed on a loan which originated at a variable rate can never 
exceed the amount which would have been eligible for claim had the 
variable interest remained in force. The lesser cost to the Government 
will always prevail. The lender must maintain records which adequately 
document the accrued interest claimed.
    (iii) The lender is responsible for the legal documentation of 
interest changes by an allonge attached to the promissory note(s) or any 
other legally effective amendment of the rate(s); however, no new 
note(s) may be issued.
    (7) No increases in interest rates will be permitted under the B&I 
loan guarantee except the normal fluctuations in approved variable 
interest rate loans.
    (b) Insured loans. (1) Loans for other than those in paragraph 
(b)(2) of this section will bear interest at a rate prescribed by FmHA 
or its successor agency under Public Law 103-354, and will be announced 
periodically. The interest rate for insured loans will be the rate in 
effect at the time the loan is approved or at the time the loan is 
closed, whichever rate is lower.
    (2) Loans to public bodies, nonprofit associations and Indian Tribes 
used to finance community facilities will bear interest at the rate 
prescribed in FmHA or its successor agency under Public Law 103-354 
Instruction 440.1, Exhibit B (available in any FmHA or its successor 
agency under Public Law 103-354 Office).

[[Page 458]]

                             Administrative

    Par (a)(6) and (a)(7). (Added 4-26-85, SPECIAL PN.) The Director 
will notify the Finance Office of any interest rate reduction by using 
Form FmHA or its successor agency under Public Law 103-354 1980-47, 
``Guaranteed Loan Borrower Adjustments.'' The State Director will make 
corrections to the Rural Community Facility Tracking System (FCFTS) 
reflecting the interest rate change. The FmHA or its successor agency 
under Public Law 103-354 loan file, as well as the attachments to the 
copy of the promissory note in the file, will be documented by the State 
Director to reflect any change in the interest rate.

[52 FR 6501, Mar. 4, 1987, as amended at 54 FR 28022, July 5, 1989]



Sec. 1980.424  Term of loan repayment.

    (a) Principal and interest on the loan will be due and payable as 
provided in the promissory note except, any interest accrued as the 
result of the borrower's default on the guaranteed loan(s) over and 
above that which would have accrued at the normal note rate on the 
guaranteed loan(s) will not be guaranteed by FmHA or its successor 
agency under Public Law 103-354. The lender will structure repayments as 
established in the loan agreement between the lender and borrower. 
Ordinarily, such installments will be scheduled for payment as agreed 
upon by the lender and applicant but on terms that reasonably assure 
repayment of the loan. However, the first installment to include a 
repayment of principal may be scheduled for payment after the project is 
operable and has begun to generate income, but such installment will be 
due and payable within three years from the date of the promissory note 
and at least annually thereafter. Interest will be due at least annually 
from the date of the note. Ordinarily, monthly payments will be 
expected, except for seasonal-type businesses.
    (b) The maximum time allowable for final maturity for an FmHA or its 
successor agency under Public Law 103-354 guaranteed B&I loan will be 
limited to thirty (30) years for land, buildings and permanent fixtures; 
the usable life of the machinery and equipment purchased with loan 
funds, but not to exceed fifteen (15) years; and seven (7) years for the 
working capital portion of the loan. The term for a loan that is being 
refinanced may be based on the collateral the lender will take to secure 
the loan.
    (c) The maximum time allowable for final maturity of an FmHA or its 
successor agency under Public Law 103-354 insured loan for community 
facilities will not exceed forty (40) years.
    (d) FmHA or its successor agency under Public Law 103-354 will not 
guarantee any loan in which the promissory note or any other document 
provides for the payment of interest upon interest.

                             Administrative

    It is permissible for lenders to structure the borrower's financial 
proposal under the multi-note option as provided for in paragraph III 
A.2. of Form FmHA or its successor agency under Public Law 103-354 449-
35, ``Lender's Agreement,'' in the following ways:
    A. To treat the entire financial package of the borrower as one loan 
(i.e., loan purposes may include one or any combination of working 
capital, machinery and equipment or real estate) provided:
    1. The loan is amortized to provide repayment of the working capital 
portion within the 7 years, the machinery and equipment portion within 
useful life or 15 years, whichever is less, and real estate portion 
within 30 years.
    2. One note represents the unguaranteed portion of the loan. It is 
permissible to issue as many as 10 notes or the guaranteed portion of 
the loan.
    3. A Form FmHA or its successor agency under Public Law 103-354 449-
34, ``Loan Note Guarantee,'' is attached to all notes, including the 
unguaranteed note.
    4. One interest rate (either variable or fixed) is used for the 
entire loan or one interest rate is used on the guaranteed portion and a 
different interest rate is used on the unguaranteed portion, subject to 
the requirements and conditions found in Sec. 1980.423 of this subpart.
    5. One of each of the following Forms: FmHA or its successor agency 
under Public Law 103-354 449-14, FmHA or its successor agency under 
Public Law 103-354 1940-3, ``Request for Obligation of Funds--Guaranteed 
Loans,'' FmHA or its successor agency under Public Law 103-354 449-35, 
and FmHA or its successor agency under Public Law 103-354 1980-19, 
``Guaranteed Loan Closing Report,'' is used.
    B. To treat the financial package of the borrower as separate loans 
that are processed as a single application provided:

[[Page 459]]

    1. A separate loan is made for each purpose (i.e., working capital, 
machinery and equipment or real estate). As an example, a working 
capital loan could be structured as follows:
    One note for $XXXX at X% interest due in 7 years representing the 
unguaranteed portion of the loan, and
    Up to 10 notes for $XXXX at X% interest due in 7 years representing 
the guaranteed portions of the loan.
    2. A Form FmHA or its successor agency under Public Law 103-354 449-
34 is attached to all notes, including the unguaranteed note.
    3. A different interest rate may be used on the guaranteed and 
unguaranteed portions of the loan, subject to the requirements and 
conditions found in Sec. 1980.423 of this subpart.
    4. Separate Forms FmHA or its successor agency under Public Law 103-
354 449-14, 1940-3, 449-35, and 1980-19 are required for each loan. If 
you have two loans, one for working capital and another for real estate, 
then a set of these forms will be required for each loan.
    C. Form FmHA or its successor agency under Public Law 103-354 449-
36, ``Assignment Guarantee Agreement,'' will never be used when the 
multi-note option is utilized.
    D. Par. (b). The State Director will assure that the loan officer 
reviewing the application fully evaluates the useful life of the 
collateral offered for the loan when determining maturities for the 
loan. Loan requests for the maximum maturities could result in 
collateral obsolescence prior to full repayment of the indebtedness. The 
loan file must be documented to support the maturity granted for the 
loan.

[52 FR 6501, Mar. 4, 1987, as amended at 56 FR 8271, Feb. 28, 1991]



Sec. 1980.425  Availability of credit from other sources.

    (a) Inability to obtain credit elsewhere is not a requirement for 
guaranteed assistance under this subpart.
    (b) To be eligible for an insured loan under this subpart, the 
borrower must be unable to obtain the required credit from private or 
cooperative sources at reasonable rates and terms, taking into 
consideration prevailing private and cooperative rates and terms in the 
community in or near the borrower's location(s) for loans for similar 
purposes and period of time. The borrower's inability to obtain such 
credit elsewhere will be determined in accordance with subpart A of part 
1942 of this chapter.



Sec. 1980.426-1980.431  [Reserved]



Sec. 1980.432  Environmental requirements.

    [See subpart A, Sec. 1980.40 and subpart G of part 1940 of this 
chapter.]

                             Administrative

    When required by subpart G of part 1940 of this chapter, the 
approving official will review Form FmHA or its successor agency under 
Public Law 103-354 1940-20, ``Request for Environmental Information,'' 
submitted by the borrower and the environmental impact assessment 
prepared by the environmental reviewer. The approving official will 
indicate his/her decision as part of the assessment when required. If 
the approving official determines that an EIS is required, he/she will 
notify the borrower and lender in writing.



Sec. 1980.433  Flood or mudslide hazard area precautions.

    (See subpart A, Sec. 1980.42.)

                             Administrative

    The State Director is responsible for determining if a project is 
located in a special flood or mudslide hazard area. Refer to subpart B 
of part 1806 of this chapter [FmHA or its successor agency under Public 
Law 103-354 Instruction 426.2].



Sec. 1980.434  Equal opportunity and nondiscrimination requirements.

    (See subpart A Sec. 1980.41.)

                             Administrative

    The State Director will assure that equal opportunity and 
nondiscrimination requirements are met. If there is indication of 
noncompliance with these requirements, such facts will be reported by 
the Compliance Reviewing Officer or FmHA or its successor agency under 
Public Law 103-354 Official in writing to the Administrator, ATTN: Equal 
Opportunity Officer.



Sec. 1980.435-1980.440  [Reserved]



Sec. 1980.441  Borrower equity requirements.

    (a) A minimum of 10 percent tangible balance sheet equity will be 
required for insured loans at loan closing or at the time the Loan Note 
Guarantee is issued for guaranteed loans. However, balance sheet equity 
in the amount of at least 20-25 percent will be required under the 
following circumstances:
    (1) For new businesses since they do not have a history of proven 
operations

[[Page 460]]

and such businesses generally experience unforeseen startup expenses 
which may deplete the available cash resources.
    (2) For businesses where the borrower does not or cannot offer a 
limited or full personal or corporate guarantee as required in Sec. 
1980.443 and thereby weakens the financial soundness of the loan.
    (3) For energy related businesses since these types of projects may 
be technically feasible, but in many instances are more susceptible to 
higher risk. A higher equity position will assure management's 
commitment to the project.
    (b) FmHA or its successor agency under Public Law 103-354 may also 
require more than a 10 percent equity investment in projects other than 
those in paragraphs (a)(1), (2) and (3) of this section if the reviewing 
official makes a written determination that special circumstances 
necessitate this course of action. Special circumstances are limited to 
credit factors which negatively affect the financial soundness of the 
loan, the chances of the project's success or the repayment ability of 
the borrower. Such determination will be in writing by the reviewing 
official and explain fully what the special circumstances are and how 
FmHA or its successor agency under Public Law 103-354 decided upon the 
percentage of equity investment to be required in the individual case.
    (c) FmHA or its successor agency under Public Law 103-354 will 
require the borrower to contribute all of the equity requirement in the 
form of either cash or tangible earning assets injected into the 
business and reflected on the balance sheet. Appraisal surplus and/or 
subordinated debt cannot be used in the calculation of the equity 
requirements.

[52 FR 6501, Mar. 4, 1987, as amended at 58 FR 40039, July 27, 1993]



Sec. 1980.442  Feasibility studies.

    A feasibility study by a recognized independent consultant will be 
required for all loans, except as provided in this paragraph. The cost 
of the study will be borne by the borrower and may be paid from funds 
included in the loan. The loan approval official may make an exception 
to the requirement of a feasibility study for loans to existing 
businesses when the financial history of the business, the current 
financial condition of the business, and guarantees or other collateral 
offered for the loan are sufficient to protect the interest of the 
lenders and FmHA or its successor agency under Public Law 103-354. FmHA 
or its successor agency under Public Law 103-354 will thoroughly 
document the justification for the exception to the feasibility study 
for such businesses. An acceptable feasibility study should include but 
not be limited to:
    (a) Economic feasibility. Information related to the project site, 
availability of trained or trainable labor; utilities; rail, air and 
road service to the site; and the overall economic impact of the 
project.
    (b) Market feasibility. Information on the sales organization and 
management, nature and extent of market area, marketing plans for sale 
of projected output, extent of competition and commitments from 
customers or brokers.
    (c) Technical feasibility. Technical feasibility reports shall be 
prepared by individuals who have previous experience in the design and 
analysis of similar facilities and/or processes as are proposed in the 
application. The technical feasibility reports shall address the 
suitability of the selected site for the intended use, including an 
environmental impact analysis. The report shall be based upon verifiable 
data and contain sufficient information and analysis so that a 
determination may be made on the technical feasibility of achieving the 
levels of income and/or production that are projected in the financial 
statements. The report shall also identify any constraints or 
limitations in these financial projections and any other facility or 
design related factors which might affect the success of the enterprise. 
The report shall also identify and estimate project operating and 
development costs and specify the level of accuracy of these estimates 
and the assumptions on which these estimates have been based. For the 
purpose of the technical feasibility reports, the project engineer or 
architect may be considered an independent party provided the principals 
of the firm or any

[[Page 461]]

individual of the firm who participates in the technical feasibility 
report does not have a financial interest in the project, and provided 
further that no other individual or firm with the expertise necessary to 
make such a determination is reasonably available to perform the 
function.
    (d) Financial feasibility. An opinion on the reliability of the 
financial projections and the ability of the business to achieve the 
projected income and cash flow. An assessment of the cost accounting 
system, the availability of short-term credit for seasonal business and 
the adequacy of raw material and supplies.
    (e) Management feasibility. Evidence that continuity and adequacy of 
management has been evaluated and documented as being satisfactory.

                             Administrative

    FmHA or its successor agency under Public Law 103-354 loan approval 
officials will be selective in approving borrowers for new business 
ventures involved in unproven products, services, or markets. Should 
such businesses be considered, additional equity will usually be 
required.

[52 FR 6501, Mar. 4, 1987, as amended at 58 FR 40039, July 27, 1993]



Sec. 1980.443  Collateral, personal and corporate guarantees and other requirements.

    (a) Collateral. (1) The lender is responsible for seeing that proper 
and adequate collateral is obtained and maintained in existence and of 
record to protect the interest of the lender, the holder, and FmHA or 
its successor agency under Public Law 103-354.
    (2) Collateral must be of such a nature that repayment of the loan 
is reasonably assured when considered with the integrity and ability of 
project management, soundness of the project, and applicant's 
prospective earnings. Collateral may include, but is not limited to the 
following: Land, buildings, machinery, equipment, furniture, fixtures, 
inventory, accounts receivable, cash or special cash collateral 
accounts, marketable securities and cash surrender value of life 
insurance. Collateral may also include assignments of leases or 
leasehold interest, revenues, patents, and copyrights.
    (3) All collateral must secure the entire loan. The lender will not 
take separate collateral to secure only that portion of the loan or loss 
not covered by the guarantee. The lender will not require compensating 
balances or certificates of deposit as a means of eliminating the 
lender's exposure on the unguaranteed portion of the loan. However, 
compensating balances as used in the ordinary course of business may be 
used.
    (4) Release of collateral of a going concern is based on a complete 
analysis of the proposal.
    (i) Release of collateral prior to payment-in-full of the FmHA or 
its successor agency under Public Law 103-354 guaranteed debt must be 
requested by the lender and concurred with by the State Director as 
prescribed in Sec. 1980.469 Administrative D.2 of this subpart subject 
to the following conditions:
    (A) Collateral taken initially or subsequently may not be released 
prior to the payoff, in full, of the loan balance without adequate 
consideration for the value of that collateral. Adequate consideration 
may include, but is not limited to:
    (1) Application of the net proceeds from the sale of the collateral 
to the note in inverse order of maturity. All or part of the total 
proceeds, if approved by the Administrator, may be applied to the 
payment of current or delinquent principal and interest on the note; or
    (2) Use of the net proceeds from the sale of collateral to purchase 
collateral of equal or greater value for which the lender will obtain a 
first lien position; or
    (3) Application of net proceeds from the sale of collateral to the 
borrower's business operations in such a manner that enhancement of the 
borrower's debt service ability can be clearly demonstrated; for 
example, the payoff or reamortization of the loan as the result of a 
large extra payment which reduces subsequent installments on the loan; 
or
    (4) Assurance to FmHA or its successor agency under Public Law 103-
354 that the release of collateral will contribute to the project's 
success thereby

[[Page 462]]

furthering the goals of the B&I program to show why the release of 
collateral will contribute to the success of the borrower and repayment 
of the loan; and
    (B) FmHA or its successor agency under Public Law 103-354 must not 
be adversely affected by the release of collateral; and
    (C) If the release of collateral does not involve a reduction of the 
FmHA or its successor agency under Public Law 103-354 guaranteed debt 
equal to the net proceeds of the disposition of the collateral, then it 
must be determined that the remaining collateral is sufficient to 
provide for the recovery of the FmHA or its successor agency under 
Public Law 103-354 guaranteed loan(s).
    (ii) Sale of collateral of a going concern to the borrower, 
borrower's stockholder(s) or officer(s), the lender or lender's 
stockholder(s) or officer(s) must be based on an arm's-length 
transaction with the concurrence of FmHA or its successor agency under 
Public Law 103-354.
    (b) Personal and corporate guarantees. (1) Unconditional personal/
corporate guarantees (i.e., absolute guarantees of full and punctual 
payment and performance by the borrower) from owners or major 
stockholders as determined by FmHA or its successor agency under Public 
Law 103-354 and all partners of partnerships (except for limited 
partnerships) unless restricted by law will be required unless exempted 
as provided for in paragraph (b)(2) of this section. Guarantees of 
parent, subsidiaries, or affiliated companies and/or secured guarantees 
may also be required. FmHA or its successor agency under Public Law 103-
354 is not a co-guarantor with the personal or corporate guarantors. The 
personal and corporate guarantees are part of the collateral for the 
loan.
    (2) An exception to the requirement for personal or corporate 
guarantees may be made by FmHA or its successor agency under Public Law 
103-354 when requested by the lender and if:
    (i) The borrower has a satisfactory and current (not over 90 days 
old) credit report, proven management, evidence of the market necessary 
to support projections, profitable historical performance of no less 
than 3 years, abundant collateral to protect the lender and FmHA or its 
successor agency under Public Law 103-354, sufficient cash flow to 
service its debts and meets key industry standards such as those of 
Robert Morris Associates, Dunn and Bradstreet or the like; or
    (ii) The borrower's stock is widely enough held so that no one 
individual can exercise control. Examples of control would include but 
are not limited to: Holding sufficient proxies and maintaining 
sufficient family or special interest voting blocks; or
    (iii) A borrower which has a parent, subsidiary, or affiliate which 
is legally restricted from guaranteeing, or if the guarantee would 
conflict with existing contractual obligations. Examples of existing 
contractual obligations include but are not limited to restrictions in 
loan agreements or in credit lines which may preclude guaranteeing.
    (3) No guarantees are required from any partners in a limited 
partnership.
    (4) As a general rule, stockholders of publicly traded corporations 
will not be required to guarantee. However, such guarantees can be 
required from some of the stockholders where such guarantees are 
determined necessary to adequately protect the interest of the 
Government.
    (5) If the guarantee would conflict with existing contractual 
restrictions, the Administrator will have the authority to grant 
exceptions to the above restrictions upon a finding by the Administrator 
that such a guarantee is not necessary to adequately protect the 
Government's interest. Relief would only be granted as to contractual 
restrictions existing at the time the lender filed an application with 
FmHA or its successor agency under Public Law 103-354.
    (6) Unsecured personal guarantees, while collateral, will not be 
considered for purposes of adequacy of security. Personal guarantees 
will be secured by collateral when business collateral offered is 
determined by FmHA or its successor agency under Public Law 103-354 to 
be insufficient or when the borrower's credit does not meet the 
program's normal requirements or anytime the lender deems such security 
should be taken.

[[Page 463]]

    (7) Guarantors of borrowers will:
    (i) In the case of personal guarantees, provide current financial 
statements (not over 60 days old at time of filing), signed by the 
guarantors, which make a clear disclosure of community or homestead 
property.
    (ii) in the case of corporate guarantees, provide current financial 
statements (not over 90 days old at time of filing), certified by an 
officer of the corporation.
    (iii) When applicable, provide written evidence to FmHA or its 
successor agency under Public Law 103-354 of their inability to provide 
a guarantee because of existing contractual arrangements or legal 
restrictions.
    (c) Other requirements. (1) The lender will ascertain that no claim 
or liens of laborers, material men, contractors, subcontractors, 
suppliers of machinery and equipment or other parties are against the 
collateral of the borrower, and that no suits are pending or threatened 
that would adversely affect the collateral of the borrower when the 
security instruments are filed.
    (2) Hazard insurance with a standard mortgage clause naming the 
lender as beneficiary will be required on every loan in an amount that 
is at least the lesser of the depreciated replacement value of the 
property being insured or the amount of the loan. Hazard insurance 
includes fire, windstorm, lightning, hail, business interruption, 
explosion, riot, civil commotion, aircraft, vehicle, marine, smoke, 
builder's risk, public liability, property damage, flood or mudslide or 
any other hazard insurance that may be required to protect the 
collateral.
    (3) Ordinarily, life insurance, which may be decreasing term 
insurance, is required for the principals and key employees of the 
borrower and will be assigned or pledged to the lender. A schedule of 
life insurance available for the benefit of the loan will be included as 
part of the application.
    (4) Workman's compensation insurance is required in accordance with 
State law.

                             Administrative

    A. Par (a)(2). FmHA or its successor agency under Public Law 103-
354's credit analysis of collateral will consist of the following:
    1. Little or no value will be assigned to unsecured personal or 
corporate guarantees.
    2. A maximum of 80 percent of current market value will be given to 
real estate. Special purpose real estate should be assigned less value.
    3. FmHA or its successor agency under Public Law 103-354 at its 
option may permit a maximum of 60 percent of book value to be assigned 
to acceptable accounts receivable; however, all accounts over 90 days 
past due, contra accounts, affiliated accounts and other accounts 
deemed, by the FmHA or its successor agency under Public Law 103-354 
official, not to be collateral will be omitted. Calculations to 
determine the percentage to be applied in the analysis are to be based 
on the realizable value of the accounts receivable taken from a current 
aging of accounts receivable from the borrower's most recent financial 
statement.
    4. A maximum of 60 percent of book value will be assigned to 
inventory.
    5. Collateral value assigned to machinery and equipment, furniture 
and fixtures will be based upon its marketability, mobility, useful life 
and alternative uses, if any.
    B. Par (b). The State Director will assure that the collateral 
values and personal and corporate guarantees are fully reviewed, 
analyzed and the loan file is documented as to the facts and reasons for 
decisions reached.



Sec. 1980.444  Appraisal of property serving as collateral.

    (a) Appraisal reports prepared by independent qualified fee 
appraisers will be required on all property that will serve as 
collateral. In the case of loans two million dollars or less, the State 
Director may modify this requirement by permitting the appraisal to be 
made by a qualified appraiser on the lender's staff with experience 
appraising the type of collateral involved. The appraisers will give 
their opinion regarding the current market value of the collateral and 
the purpose for which the appraisal will be used. The lender will be 
responsible for assuring that appropriate appraisals are made.
    (b) The lender will be responsible for determining that appraisers 
have the necessary qualifications and experience to make the appraisals. 
The lender will consult with FmHA or its successor agency under Public 
Law 103-354 for its recommendations before having the appraisal made.
    (c) The lender will determine that the fees or charges of appraisers 
are reasonable.

[[Page 464]]

    (d) Independent appraisals will be made in accordance with the 
accepted format of the industry and those prepared by the lender in 
accordance with its policy and procedures. All appraisals will become 
part of the application. (See Sec. 1980.541(i)(6) of this subpart.)
    (e) If a subsequent loan request is made within 3 years from the 
date of the most recent borrower's appraisal report, and there is no 
significant change in collateral, then the FmHA or its successor agency 
under Public Law 103-354 State Director in his/her discretion, and if 
the lender agrees, may use the existing appraisal report in lieu of 
having a new appraisal prepared.

[52 FR 6501, Mar. 4, 1987, as amended at 53 FR 40401, Oct. 17, 1988]



Sec. 1980.445  Periodic financial statements and audits.

    All borrowers will be required to submit periodic financial 
statements to the lender. Lenders must forward copies of the financial 
statements and the lender's analysis of the statements to the Agency.
    (a) Audited financial statements. Except as provided in paragraphs 
(d) and (e) of this section, all borrowers with a total principal and 
interest loan balance for loans under this subpart, at the end of the 
borrower's fiscal year of more than $1 million, must submit annual 
audited financial statements. The audit must be performed in accordance 
with generally accepted accounting principles (GAAP). In addition, the 
audits are also to be performed in accordance with approriate Office of 
Management and Budget (OMB) circulars and any Agency requirements 
specified in this subpart.
    (b) Unaudited financial statements. For borrowers with a loan 
balance (principal plus interest at year-end) of $1 million or less, the 
Agency will require annual financial statements which may be statements 
compiled or reviewed by an accountant qualified in accordance with the 
publication ``Standards for Audit of Governmental Organizations, 
Programs, Activities and Functions'' instead of audited financial 
statements.
    (c) Internal financial statements. The Agency may require submission 
of financial statements prepared by the borrower at whatever frequency 
is determined necessary to adequately monitor the loan. Quarterly 
financial statements will be required on new business enterprises or 
those needing close monitoring.
    (d) Minimum requirements. This section sets out minimum requirements 
for audited and unaudited financial statements to be submitted to the 
Agency. If specific circumstances warrant, the Agency may require 
audited financial statements or independent unaudited financial 
statements in excess of the minimum requirements. For example, loans 
that depend heavily on inventory and accounts receivable for collateral 
will normally be audited, regardless of the size of the loan. Nothing in 
this section shall be considered an impediment to the lender requiring 
financial statements more frequently than required by the Agency or 
requiring audited financial statements when the Agency would accept 
unaudited financial statements.
    (e) Public bodies and nonprofit corporations. Notwithstanding other 
provisions of this section, any public body or nonprofit corporation 
that receives a guarantee of a loan that meets the thresholds 
established by OMB Circular A-128 or A-133 for coverage under such 
circular, must provide an audit in accordance with the applicable OMB 
Circular A-128 or A-133 for the fiscal year of the borrower in which the 
Loan Note Guarantee is issued. If the loan is for development or 
purchases made in a previous fiscal year through interim financing, an 
audit, in accordance with the applicable circular, will also be provided 
for the fiscal year in which the development or purchases occurred. Any 
audit provided by a public body or nonprofit corporation in compliance 
with OMB Circular A-128 or A-133 will be considered adequate to meet the 
requirements of this section for that year. OMB Circulars are available 
from the Office of Management and Budget, EOP Publications Office, 725 
17th Street, NW., Room 2200, New Executive Office Building, Washington, 
DC 20503.

[61 FR 18494, Apr. 26, 1996]

[[Page 465]]



Sec. Sec. 1980.446-1980.450  [Reserved]



Sec. 1980.451  Filing and processing applications.

    (a) Borrowers' and lenders' contact. Borrowers and lenders desiring 
FmHA or its successor agency under Public Law 103-354 assistance as 
provided in this subpart may file preapplications or applications with 
the County Supervisor or District Director servicing the area in which 
the project is to be located. In either case, the requirements of Sec. 
1980.46 of Subpart A of this part must be met. The County Supervisor or 
District Director receiving the request for assistance will promptly 
notify the State Director of the nature and facts of the request. The 
FmHA or its successor agency under Public Law 103-354 State Director 
will promptly arrange an early meeting with the borrower and lender 
representatives to discuss assembly, preparation and processing of 
preapplications and applications. The State Director may call upon the 
County Supervisor and District Director to assist the State Office in 
any way necessary.
    (b) Applications from cooperatives. Borrowers eligible for loans 
from the Bank for Cooperatives will be encouraged to obtain guaranteed 
loans from that source since the Bank for Cooperatives is experienced in 
making and servicing such loans and can provide substantial counsel to 
the applicant. Applications must be submitted to the Bank for 
Cooperatives as a test for credit elsewhere when an insured loan is 
being considered. (See FmHA or its successor agency under Public Law 
103-354 Instruction 2000-Q available in any FmHA or its successor agency 
under Public Law 103-354 office for Memorandum of Understanding between 
FmHA or its successor agency under Public Law 103-354 and Farm Credit 
Administration.)
    (c) Borrowers eligible for Small Business Administration (SBA) 
assistance. All borrowers for loan guarantees eligible for SBA 
assistance will be advised by FmHA or its successor agency under Public 
Law 103-354 at the time of receipt of the preapplication of the 
availability of such assistance and will be encouraged to apply to that 
agency. (See FmHA or its successor agency under Public Law 103-354 
Instruction 2000-P available in any FmHA or its successor agency under 
Public Law 103-354 office for Memorandum of Understanding between SBA 
and FmHA or its successor agency under Public Law 103-354).
    (d) Loan Priorities. Applications and preapplications received by 
FmHA or its successor agency under Public Law 103-354 will be considered 
in the order received; however, for the purpose of assigning priorities 
as described in paragraph (d)(3) of this section, FmHA or its successor 
agency under Public Law 103-354 will compare an application to other 
pending applications.
    (1) FmHA or its successor agency under Public Law 103-354 will 
cooperate fully with appropriate State agencies in guaranteeing and 
insuring loans in a manner which will assure maximum support of the 
State's strategies for development of its rural areas.
    (2) When applications on hand otherwise have equal priority, the 
applications from a veteran will have preference. A veteran is a person 
who has been discharged or released from the active forces of the United 
States Army, Navy, Air Force, Marine Corps, or Coast Guard under 
conditions other than dishonorable and who served on active duty in such 
forces:
    (i) During the period April 6, 1917, though March 31, 1921;
    (ii) During the period of December 7, 1941, through December 31, 
1946;
    (iii) During the period of June 27, 1950, through January 31, 1955; 
or
    (iv) For a period of more than 180 days, any part of which occurred 
after January 31, 1955; but on or before May 17, 1975. Discharges under 
conditions other than dishonorable include ``clemency discharges.''
    (3) Priorities will be assigned by FmHA or its successor agency 
under Public Law 103-354 to eligible applications on the basis of a 
point system that takes into account project location, the creation and 
saving of jobs, the cost at which those jobs would be created or saved, 
seasonal and part-time job impact, and leveraging of FmHA or its 
successor agency under Public Law 103-354 assistance. The application 
and supporting information

[[Page 466]]

submitted with it will be used to determine an eligible proposed 
project's priority for available funds or guarantee authority. The 
priorities described in this paragraph will be used by FmHA or its 
successor agency under Public Law 103-354 to score projects. A copy of 
the calculation of the score should be placed in the case file for 
future reference.
    (i) Location priorities. The priority score for location will be the 
score for the highest-ranked category in which the project fits. If the 
location does not fit one of these categories, its receives no points 
for location. The categories, and their point scores, are:
    (A) Located in a city or area under 25,000 population (10 points).
    (B) Located in a city or area under 25,000 population that is in an 
area of high unemployment as of the date of application (20 points).
    (C) Located in an area of high unemployment as of the date of 
application, provided the borrower certifies in writing to the State 
Director in simple narrative or letter form that the project will employ 
on a permanent, full-time basis (providing at its own cost such training 
or retraining as may be needed) persons (numbering no fewer than 25 
percent of the project's employment) who are members of displaced farm 
families which recently derived from farming or ranching the majority of 
their combined incomes but are no longer actively engaged in farming or 
ranching as operators or employees (35 points).
    (ii) Jobs priorities. The priority score for jobs created and/or 
saved is the score for the highest-ranked category in which the project 
fits. If the project does not fit one of these categories, it receives 
no points for jobs. The categories, and their point scores, are:
    (A) Project will contribute to the overall economic stability of the 
project area and generate permanent jobs beyond the entrepreneur and the 
entrepreneur's household (10 points).
    (B) Project will contribute to the overall economic stability of the 
project area and will employ on a permanent, full-time basis a number of 
persons that is significant in the context of the area's economy (20 
points).
    (C) Project will contribute to the overall economic stability of the 
project area, will employ on a permanent, full-time basis a number of 
persons that is significant in the context of the area's economy, and 
will retain in that area a significant number of jobs that would 
otherwise be lost (35 points)
    (iii) Job cost priorities. The priority score for the project's cost 
per job is the score for the highest-ranked category in which the 
project fits. First, divide the amount of the FmHA or its successor 
agency under Public Law 103-354 guaranteed loan by the number of jobs 
created or saved. This will result in the cost per job. Count only full-
time jobs. Part-time jobs may be reduced to a fraction of a full-time 
job and counted. For example, a 20-hour-per-week job, or a job that is 
full-time for six months per year, is one-half of a job. Second, 
determine the State's nonmetropolitan household income as described in 
Sec. 1980.451(d)(3)(vi). Third, divide the cost per job by the State's 
nonmetropolitan household income. For example, if the cost per job is 
$10,000 and the State's nonmetropolitan household income is $20,000, the 
result will be 0.5. The categories, and their point scores are:
    (A) Loans on which the result is greater than 1.5 but less than 2.0 
(5 points).
    (B) Loans on which the result is from 1.0 to 1.5 (15 points).
    (C) Loans on which the result is less than 1.0 (25 points).
    If the result exceeds 2.0, a high cost per job in that State, no 
points are received for job cost.
    (iv) Additional Points. There shall be added to the score the points 
indicated for any and all of the following criteria met by the project.
    (A) FmHA or its successor agency under Public Law 103-354 guaranteed 
loan is less than 50 percent of project cost (5 points).
    (B) Percentage of guarantee is 10 or more percentage points less 
than the maximum allowable for a loan of its size (5 points).
    (C) Project will, in addition to any permanent full-time jobs, 
create a significant number of part-time or seasonal jobs that will 
provide additional

[[Page 467]]

income to underemployed residents of the project area without their 
having to give up any present part-time or seasonal jobs (10 points).
    (v) Administrative Points. The State Director may assign up to 20 
points to an application in addition to those points scored under Sec. 
1980.451(d)(3) (i) through (iv). These administrative points are 
intended to be assigned by a State Director only in cases of unforeseen 
exigencies, emergencies, benefits to other FmHA or its successor agency 
under Public Law 103-354-assisted projects (including the limiting of 
financial risks affecting FmHA or its successor agency under Public Law 
103-354 loans and loan guarantees) or the loss of financing if FmHA or 
its successor agency under Public Law 103-354 funds are not committed in 
a timely fashion. They may also be assigned in cases in which the 
project's goods or services are essential to other Federally assisted 
projects and activities in the area or to the successful implementation 
of an economic development strategy for the area that is sponsored and/
or operated by an agency of the Federal or State government. An 
explanation for the assigning of these points by the State Director will 
be appended to the calculation of the project score maintained in the 
case file. If an application is considered in the National Office, the 
Administrator may also assign up to 20 points. An assignment of points 
by the Administrator will be by memorandum, stating the Administrator's 
reasons, and that memorandum will be appended to the calculation of the 
project score maintained in the case file. In assigning priorities to 
applications and in selecting projects for funding, FmHA or its 
successor agency under Public Law 103-354 will consider State 
development strategies. Funds (guarantee authority) allocated for use as 
prescribed in this regulation are to be considered for use by Indian 
tribes within the State regardless of whether State development plans 
include Indian reservations within the State's boundaries. It is 
essential that Indians residing on such reservations have equal 
opportunity to participate in any benefits of these programs.
    (vi) Indexation. When current, annual data are not available to 
determine a State's nonmetropolitan household income for purposes of the 
calculations described in paragraph (d)(3)(iii) of this section, 
indexation of census data is necessary. The State Director will use the 
figure from the most recent decennial census of the United States, 
increased by a factor representing the increase since the year of that 
census in the Consumer Price Index (``CIP-U''). That factor shall be 
furnished annually by the National Office, FmHA or its successor agency 
under Public Law 103-354.
    (e) Filing preapplications and applications. Borrowers or lenders 
may file preapplications described in paragraph (f) of this section if 
they desire an expression of FmHA or its successor agency under Public 
Law 103-354 interest prior to assembling the complete application and 
request for Loan Note Guarantee or they may present the complete 
application, in one package, including the material required in 
paragraphs (f), (i), (j), and (k) of this section.
    (f) Preapplications. Applicants may file preapplications with the 
County, District, or State Office including:
    (1) A letter prepared by the borrower and the lender which shall 
include:
    (i) Borrower's name, address, contact person and telephone number.
    (ii) Amount of loan request.
    (iii) Name of the proposed lender, address, contact person, and 
telephone number.
    (iv) Brief description of the projects, products and services 
provided.
    (v) Type and number of employment opportunities and unemployment 
rate where the project will be located.
    (vi) Amount of borrower's equity and guarantees offered.
    (vii) Anticipated loan maturity and interest rates.
    (viii) Availabiity of raw materials and supplies.
    (ix) If a corporation, names and addresses of borrower's parent, 
affiliates and/or subsidiary firms and a brief description of 
relationship, products and ownership among borrower, parent, affiliates 
and subsidiary firms.
    (2) Form FmHA or its successor agency under Public Law 103-354 449-
22,

[[Page 468]]

``Certification of Non-Relocation and Market and Capacity Information 
Report.''
    (3) Form FmHA or its successor agency under Public Law 103-354 449-
4, ``Statement of Personal History,'' for a proprietor (owner), each 
partner, officer, director, key employee and stockholders holding 20 
percent or more interest in the borrower except for those corporations 
listed on a major stock exchange and for those so listed if required by 
FmHA or its successor agency under Public Law 103-354. Forms FmHA or its 
successor agency under Public Law 103-354 449-4 are not required to be 
submitted for elected officials and appointed officials in connection 
with loan applications from public bodies. Failure to report full, 
complete and accurate information on the Statement of Personal History 
may result in FmHA or its successor agency under Public Law 103-354's 
not making or guaranteeing the loan. Whenever possible, a local, 
regional, or national credit report, furnished by the lender, will be 
used to verify data on Form FmHA or its successor agency under Public 
Law 103-354 449-4.
    (4) A record of any pending or final regulatory or legal (civil or 
criminal) action against the borrower, parent, affiliate, proposed 
guarantors, subsidiaries, principal stockholders, officers and 
directors.
    (5) For existing businesses, a current balance sheet, and latest 
profit and loss statement (not more than 60 days old) and financial 
statements including parent, affiliate and subsidiary firms, for at 
least the last 3 years or more if necessary for a thorough evaluation.
    (6) A detailed projection of gross revenue, net earnings and cash 
flow statements for 3 years including assumptions upon which such 
forecasts are based.
    (7) Sales projections indicating the percent of the national and 
local market the business expects to obtain.
    (8) Intergovernmental consultation should be carried out in 
accordance with 7 CFR Part 3015, Subpart V, ``Intergovernmental Review 
of Department of Agriculture Programs and Activities.'' See FmHA or its 
successor agency under Public Law 103-354 Instruction 1940-J, available 
in any FmHA or its successor agency under Public Law 103-354 Office.
    (g) Preliminary determination by FmHA or its successor agency under 
Public Law 103-354. If preparation information indicates the project 
will not meet FmHA or its successor agency under Public Law 103-354's 
minimum credit standards for a sound loan, is ineligible, does not have 
sufficient priority or that funds or guarantee authority are not 
available for the project, FmHA or its successor agency under Public Law 
103-354 will so inform the lender. The lender will be notified in 
writing with all reasons for the decision indicated. If it appears that 
the project is eligible, has sufficient priority, is economically 
feasible and loan guarantee authority is available, FmHA or its 
successor agency under Public Law 103-354 will inform the lender and 
borrower in writing and request that they complete the application.
    (h) Department of Labor certifications. FmHA or its successor agency 
under Public Law 103-354 will submit Form FmHA or its successor agency 
under Public Law 103-354 449-22 to the Department of Labor for the 
necessary certification that the proposal will not be in conflict with 
Sec. 1980.412(c) and (d).
    (i) Content of Applications:
    (1) Form FmHA or its successor agency under Public Law 103-354 449-
1.
    (2) Form FmHA or its successor agency under Public Law 103-354 449-
2.
    (3) Form FmHA or its successor agency under Public Law 103-354 1940-
20, when required by Subpart G of Part 1940 of this chapter.
    (4) Architectural or engineering plans, if applicable.
    (5) Cost estimates and forecasts of contingency funds to cover 
inflation or project changes.
    (6) Appraisal reports.
    (7) For existing businesses a pro forma balance sheet at startup and 
for at least three additional projected years, indicating the necessary 
startup capital, operating capital and short-term credit based on 
financial statements for the last three years, or more (if available); 
and projected cash flow and earnings statements for at least three years 
supported by a list of assumptions showing the basis for the

[[Page 469]]

projections. The business should submit a current balance sheet with a 
debt schedule of any debts to be refinanced and an income statement to 
FmHA or its successor agency under Public Law 103-354, through the 
lender, every 90 days from the time the application is filed with the 
lender to the time of issuance of the Loan Note Guarantee. If debt 
refinancing is requested, a debt schedule is prepared (correlated to the 
latest balance sheets) reflecting the debts to be refinanced including 
the name of the creditor, the original loan amount and loan balance, 
date of loan, interest rate, maturity date, monthly or annual payments, 
payment status and collateral that secured such loans.
    (8) For new businesses, a pro forma balance sheet at startup and for 
the next three years, project cash flow (monthly first year, quarterly 
for two additional years) and projected earnings statements for three 
years supported by a list of assumptions showing the basis for the 
projections.
    (9) Any credit reports obtained by the lender or FmHA or its 
successor agency under Public Law 103-354 on the borrower, its 
principals and parent, affiliate and subsidiary firms.
    (10) Form FmHA or its successor agency under Public Law 103-354 400-
1, ``Equal Opportunity Agreement,'' if construction costing more than 
$10,000 is involved.
    (11) Copies of building permits, if applicable, and any necessary 
certifications and recommendations of appropriate regulatory or other 
agency having jurisdiction over the project including any pollution 
control agency.
    (12) Personal and corporate financial statements of those guarantors 
named in Sec. 1980.443.
    (13) Proposed loan agreement. (See paragraph VII of Form FmHA 449-
35). Loan agreements between the borrower and lender will be required. 
The final executed loan agreement must include the Agency requirements 
as set forth in the Form FmHA 449-14 including the requirements for 
periodic financial statements in accordance with Sec. 1980.445. The 
loan agreement must also include, but is not limited to, the following:
    (i) Prohibition against assuming liabilities or obligations of 
others.
    (ii) Restrictions on dividend payments.
    (iii) Limitation on purchase or sale of equipment and fixed assets.
    (iv) Limitations on compensation of officers and owners.
    (v) Minimum working capital requirements.
    (vi) Maximum debt to net worth ratio.
    (vii) Restrictions concerning consolidations, mergers or other 
circumstances.
    (viii) Limitations on selling the business without concurrence of 
the lender and FmHA or its successor agency under Public Law 103-354.
    (ix) Repayment and amortization of the loan.
    (x) List of collateral for the loan including a list of persons and/
or corporations guaranteeing the loan with a schedule for providing the 
lender and FmHA or its successor agency under Public Law 103-354 with 
personal and/or corporate financial statements. (See Sec. 1980.443)
    (14) A complete feasibility study when required. (See Sec. 
1980.442)
    (15) Any additional information required by FmHA or its successor 
agency under Public Law 103-354.
    (16) For companies listed on major stock exchanges and/or subject to 
the Securities and Exchange Commission regulations, a copy of Form 10-K, 
``Annual Report Pursuant to section 13 or 15 D of the Act of 1934.''
    (17) Documented evidence that the project is located within or 
without special flood or mudslide hazard areas.
    (18) Notices of compliance with the Privacy Act of 1974.
    (i) If the borrower is acting in a personal capacity and not as an 
entrepreneur for such entities as proprietorships, partnerships, or 
corporations, and FmHA or its successor agency under Public Law 103-354 
solicits personal information for him/her, the individual will be 
provided Form FmHA or its successor agency under Public Law 103-354 410-
9, ``Statement Required by the Privacy Act.''
    (ii) If FmHA or its successor agency under Public Law 103-354 
desires to obtain information concerning an individual from any source, 
FmHA or its successor agency under Public Law 103-

[[Page 470]]

354 will provide such source with Form FmHA or its successor agency 
under Public Law 103-354 410-10, ``Privacy Act Statement to 
References.''
    (19) On any request for refinancing of existing loan(s) as 
authorized under Sec. 1980.411(a)(11), the lender is required, as a 
minimum, to obtain the previously held collateral as security for the 
guaranteed loan(s). Additional collateral will be required by FmHA or 
its successor agency under Public Law 103-354 when refinancing of 
unsecured or undersecured loans is unavoidable in order to accomplish 
the necessary strengthening of the firm's current position.
    (j) Use of forms. FmHA or its successor agency under Public Law 103-
354 numbered forms will be used where shown in both preapplications and 
applications. Otherwise, lenders should use their forms, real estate 
mortgages, security instruments and other agreements, provided such 
forms do not contain any provisions that are in conflict or are 
inconsistent with provisions of the subpart.
    (k) Certificate of need. If the loan request is for health care 
facilities (e.g., hospitals or nursing homes), a ``Certificate of Need'' 
will be obtained by the borrower from the appropriate regulatory or 
other agency having jurisdiction over the project and submitted to FmHA 
or its successor agency under Public Law 103-354 by the lender. If a 
significant part of the project's income will be from third party 
payors, (e.g., medicare or medicaid), the project will be designed and 
operated in a manner necessary to meet the requirements of the third-
party payors.

                             Administrative

                         A. The State Director:

    1. Determines if material and information submitted is completed and 
signed by the appropriate party in the appropriated capacity.
    2. May request the comments and recommendations of the County 
Supervisor and District Director. Such comments will include but are not 
limited to the following: Community attitude toward project; a summary 
of comments regarding the proposal by the lender, county leaders and 
other interested parties; whether the project is likely to result in the 
need for additional community facilities such as schools, water, sewer 
and health care services, and if so, the community's plan for providing 
such facilities; availability of any required additional labor force and 
training plans for such force, if needed; an economic forecast of the 
effect on the community should the project fail, if financed.
    3. Will furnish all individuals acting in a personal capacity at the 
time of filing a preapplication or application and two copies of Form 
FmHA or its successor agency under Public Law 103-354 410-9. The 
individual will sign both copies, retaining one and providing FmHA or 
its successor agency under Public Law 103-354 with the other copy which 
becomes a part of the loan file.
    4. Will provide any source whom FmHA or its successor agency under 
Public Law 103-354 obtains information concerning an individual with two 
copies of Form FmHA or its successor agency under Public Law 103-354 
410-10. The source will sign both copies, retain one and provide FmHA or 
its successor agency under Public Law 103-354 with the other copy which 
becomes a part of the loan file.
    5. Will input the necessary data via terminal screens into the Rural 
Community Facility Tracking System (RCFTS). The RCFTS data structure 
consists of 3 sets: Applicant/Borrower (BOR), Facility (FAC), and Loan/
Grant Request (LGR) sets. There are multiple screens for the BOR and LGR 
sets. The State Director may, if he/she so desires, prepare a Form FmHA 
or its successor agency under Public Law 103-354 2033-34, ``Management 
System Card--Business and Industry,'' in accordance with FmHA or its 
successor agency under Public Law 103-354 Instruction 2033-F.
    6. Will forward immediately to the National Office on all projects.
    (a) Form FmHA or its successor agency under Public Law 103-354 449-
22 (7 copies) for loans over $1 million and when direct employment 
increases more than 50 employees.
    (b) For insured loans where the borrower leases facilities to 
another, submit Form FmHA or its successor agency under Public Law 103-
354 449-22 for such borrower. The lessor(s) will also be required to 
provide Form FmHA or its successor agency under Public Law 103-354 449-
22. Subsequent loan requests require resubmission of Form FmHA or its 
successor agency under Public Law 103-354 449-22.
    (c) A local, national or regional credit report and Form FmHA or its 
successor agency under Public Law 103-354 449-4 for all loans over one 
million dollars or for loans, regardless of size, when the State 
Director believes a character evaluation check is advisable.

    Note: Forms FmHA or its successor agency under Public Law 103-354 
449-22 and FmHA or its successor agency under Public Law 103-354 449-4 
should only be processed if

[[Page 471]]

a complete preapplication or application has been received.

    B. Miscellaneous Administrative provisions:
    1. Par (f). Preapplications are not to be accepted or processed 
unless a lender has agreed in writing to finance the proposal. The 
preapplication letter is a joint letter prepared by the borrower and 
lender.
    2. Par (g). Upon receipt of all preapplications in excess of $5 
million, the State Director will transmit to the National Office the 
material required under paragraph (f)(1), (f)(4) and (f)(5) of this 
section together with recommendations and observations an analysis of 
the quality and permanency of the employment opportunities involved in 
the project. The National Office will review the proposed project in 
relation to objectives, priorities and intent of the program and will 
advise the State Director. After receiving the National Office advice or 
for loans less than $5 million, the State Director will inform the 
borrower of the decision.
    3. Par (i). State Director submits a transmittal letter with 
recommendations on loan applications requiring National Office review. 
Included are:
    (a) Loan file.
    (b) Form FmHA or its successor agency under Public Law 103-354 449-
29, ``Project Summary--Business Industrial Loan Division,'' including 
State Director's a spread sheets, financial history and projections (use 
attachments to Project Summary if necessary).
    (c) Proposed Form FmHA or its successor agency under Public Law 103-
354 449-14.
    (d) Copy of FmHA or its successor agency under Public Law 103-354 
State Loan Review Board Minutes.
    (e) Notification of required financial and other reports, their 
frequency, due dates and fiscal yearend.
    4. Par (i)(9), Credit reports.
    (a) The National Office has a contract to provide credit reports for 
preapplications, applications, and in instances after the loan(s) is 
made, where a credit report is needed.
    (b) States should first try to have the lender provide such a report 
because credit reports are the responsibility of the lender.
    (c) Any state needing a credit report should telephone the National 
Office, Director, B&I, and give the name of the business and the city 
and State location. The report will be mailed to the State the same day, 
if possible.
    5. File documentation. Applications will be organized in a loan file 
in accordance with FmHA or its successor agency under Public Law 103-354 
Instruction 2033-A (available in any FmHA or its successor agency under 
Public Law 103-354 office.) An 8-position folder with tabs will be 
utilized.
    The State Director may supplement the Position Guides to include 
specific legal requirements within their State. If the lender prepares a 
complete application package, it may accompany the docket provided the 
docket is organized in a binder, indexed and tabbed. Feasibility studies 
should be kept separate. It is the responsibility of FmHA or its 
successor agency under Public Law 103-354 employees who work on 
applications or servicing actions to add to the correspondence section 
of the loan file (also known as the running record) a written report of 
any field visits, meetings, telephone conversations and memorandums 
covering decisions or reasons for FmHA or its successor agency under 
Public Law 103-354's actions on the cases. Particular attention must be 
given to this requirement on cases that become delinquent or problems in 
order that FmHA or its successor agency under Public Law 103-354 
position will be defensible in the event of an adverse action.
    6. Par (i), (13), Audit agreements and requirements. FmHA or its 
successor agency under Public Law 103-354 urges the use of a written 
agreement between the lender and borrower to assure that there is no 
misunderstanding concerning FmHA or its successor agency under Public 
Law 103-354 audit requirements.
    7. Par (i), Forms and documents found in loan docket. The following 
table is a guide to forms and documents used in completing an 
application and loan docket. The filing position within the 8 position 
folder is shown on the right. Some of these items may not be applicable 
for a particular loan. However, a complete loan docket may need to 
include items in addition to the following:

             Description of Record or Form Number and Title
------------------------------------------------------------------------
                                                                 Filing
                                                                position
------------------------------------------------------------------------
AD-425........................  Contractor's Affirmative               1
                                 Action Plan For Equal
                                 Employment Opportunity.
FmHA or its successor agency    Equal Opportunity Agreement..          6
 under Public Law 103-354 400-
 1.
FmHA or its successor agency    Notice to Contractors and              6
 under Public Law 103-354 400-   Applicants.
 3.
FmHA or its successor agency    Assurance Agreement..........          3
 under Public Law 103-354 400-
 4.

[[Page 472]]

 
FmHA or its successor agency    Compliance Statement.........          6
 under Public Law 103-354 400-
 6.
FmHA or its successor agency    Applicant Reference Letter...          3
 under Public Law 103-354 410-
 8.
FmHA or its successor agency    Statement Required by the              3
 under Public Law 103-354 410-   Privacy Act.
 9.
FmHA or its successor agency    Privacy Act Statement to               3
 under Public Law 103-354 410-   References.
 10.
FmHA or its successor agency    Inspection Report............          6
 under Public Law 103-354 424-
 12.
FmHA or its successor agency    Request for Obligation of              2
 under Public Law 103-354 1940-  Funds--Guaranteed Loans;
 3.                              Filing Position 2.
FmHA or its successor agency    Environmental Checklist for            3
 under Public Law 103-354 1940-  Categorical Exclusion, or.
 22.
FmHA or its successor agency    Environmental Assessment for           3
 under Public Law 103-354 1940-  Class I Action, or.
 21.
Exhibit H, Subpart G of Part    Environmental Assessment for           3
 1940.                           Class II Action.
                                Environmental Impact                   3
                                 Statement.
FmHA or its successor agency    Acknowledgement of Obligated           2
 under Public Law 103-354 440-   Funds/Check Request.
 57.
FmHA or its successor agency    Application for Loan and               3
 under Public Law 103-354 449-   Guarantee.
 1.
FmHA or its successor agency    Statement of Collateral......          5
 under Public Law 103-354 449-
 2.
FmHA or its successor agency    Statement of Personal History          3
 under Public Law 103-354 449-
 4.
FmHA or its successor agency    Request for Environmental              3
 under Public Law 103-354 1940-  Information.
 20.
FmHA or its successor agency    Condition Commitment for               2
 under Public Law 103-354 449-   Guarantee.
 14.
FmHA or its successor agency    Certification of Non-                  3
 under Public Law 103-354 449-   relocation and Market and
 22.                             Capacity Information Report.
FmHA or its successor agency    Project Summary--Business              3
 under Public Law 103-354 449-   Industrial Loan Division.
 29.
FmHA or its successor agency    Loan Note Guarantee..........          2
 under Public Law 103-354 449-
 34.
FmHA or its successor agency    Lender's Agreement...........          2
 under Public Law 103-354 449-
 35.
FmHA or its successor agency    Assignment Guarantee                   2
 under Public Law 103-354 449-   Agreement.
 36.
FmHA or its successor agency    Guaranteed Loan Closing                2
 under Public Law 103-354 1980-  Report.
 19.
                                Annual Audit Report..........          1
                                Borrower Financial Statements          3
                                Chattel Security Instruments.          1

[[Page 473]]

 
                                Report--Exhibit B, FmHA or             1
                                 its successor agency under
                                 Public Law 103-354
                                 Instruction 2015--C.
                                Borrower's Certification of            1
                                 Indebtedness.
                                Lender's Loan Agreement......          2
                                Promissory Notes.............          2
                                Bond (specimen) Bond                   2
                                 Ordinances, Bond Transcripts
                                 or Similar Items.
                                Running Case Record..........          3
                                Market Analysis Information            3
                                 (feasibility study).
                                Borrower's and Lender's                3
                                 Preapplication Letters.
                                Lender's Evaluation and                3
                                 Recommendations.
                                Cost Estimates and Forecast            6
                                 for Contingency Funds.
                                Dun and Bradstreet Reports...          3
                                Corporate or Personal                  3
                                 Financial Statements of
                                 Guarantors.
                                S.E.C. 10-K Report...........          3
                                Pro-forma Balance Sheet......          3
                                Current Profit and Loss                3
                                 Statements.
                                Projection of Gross Revenues           3
                                 and Net Earnings.
                                Cash Flow Statements, 3 Years          3
                                 with Assumptions.
                                Appraisal Reports............          8
                                Documentation for Considering          3
                                 Refinancing.
                                Financial Statements for last          3
                                 3 years.
                                Complete Debt Schedule.......          3
                                Interim Financial Statements.          3
                                Aging and Turnover of                  3
                                 Receivables and Inventory.
                                Credit Reports...............          3
                                Records of any Pending or              3
                                 Final Regulatory Litigation.
                                Comments on any State                  3
                                 Development Strategies..
                                Flood or Mudslide Hazard Area          3
                                 Statement.
                                National Historic                      3
                                 Preservation Act Statement.
                                State Review Board Minutes...          3
                                Certificate of Need (Health            3
                                 Care Facilities).
                                Clean Air and Water Pollution          3
                                 Control Act Requirements
                                 Statement.
                                Correspondence (excluding              4
                                 closing instruments).
                                Department of Labor                    4
                                 Certification.
                                Mortgagee Title Insurance              5
                                 Policy.
                                Title Opinions...............          5
                                By-Laws, Resolutions, or               5
                                 Regulations and Amendments.
                                Articles of Incorporation, By-         5
                                 laws and Regulations or
                                 Charter.
                                Lender Security agreements             5
                                 and Financing Statements.
                                Lender Mortgages and Notes...          5
                                Advice of Office of General            5
                                 Counsel from Review of
                                 Docket.
                                Partnership Agreements.......          5
                                Other Documents used in Loan           5
                                 Closing.
                                Schedule of Stock Ownership..          5
                                Franchise Agreement..........          5
                                Construction Contracts and             6
                                 Compliance Statements.
                                Lender's Approval of Plans             6
                                 and Specifications.
                                Engineer's Certification of            6
                                 Satisfactory Completion in
                                 Accordance with Plans and
                                 Specifications.
                                Lender's Audit of                      6
                                 Expenditures and Project
                                 Costs.
                                Evidence of Concurrence and            6
                                 compliance with Construction
                                 Requirements of State,
                                 County, and Municipal
                                 Government (including
                                 building permits).
                                Lender's Closing                       6
                                 Certification.
                                Lender's Loan Servicing Plan.          6
                                Loan Closing Opinion of                6
                                 Lender's Legal Counsel.
------------------------------------------------------------------------


[52 FR 6501, Mar. 4, 1987, as amended at 53 FR 40401, Oct. 17, 1988; 53 
FR 45258, Nov. 9, 1988; 55 FR 26199, June 27, 1990; 56 FR 8271, Feb. 28, 
1991; 61 FR 18495, Apr. 26, 1996]



Sec. 1980.452  FmHA or its successor agency under Public Law 103-354 
evaluation of application.

    FmHA or its successor agency under Public Law 103-354 will evaluate 
the application and make a determination whether the borrower is 
eligible, the proposed loan is for an eligible purpose and that there is 
reasonable assurance of repayment ability, sufficient collateral and 
sufficient equity and the proposed loan complies with all applicable 
statutes and regulations. If FmHA or its successor agency under Public 
Law

[[Page 474]]

103-354 determines it is unable to guarantee the loan, the lender will 
be informed in writing. Such notification will include the reasons for 
denial of the guarantee. If FmHA or its successor agency under Public 
Law 103-354 is able to guarantee the loan, it will provide the lender 
and the borrower with Form FmHA or its successor agency under Public Law 
103-354 449-14, listing all requirements for such guarantees. FmHA or 
its successor agency under Public Law 103-354 will include in the 
requirements of the Conditional Commitment for Guarantee a full 
description of the approved use of guaranteed loan funds as reflected in 
the Form FmHA or its successor agency under Public Law 103-354 449-1. 
The Conditional Commitment for Guarantee may not be issued on any loan 
until the State Director has been notified by the National Officer that 
the Statements of Personal History(s) have been processed and cleared. 
FmHA or its successor agency under Public Law 103-354 State Directors 
are the only persons authorized to execute Form FmHA or its successor 
agency under Public Law 103-354 449-14.

                             Administrative

    State Director evaluates the application and considers:
    A. Rural area determinations. (See Sec. 1980.405 of this subpart.)
    B. Community impact of the proposal which includes:
    1. Number of businesses and industries in the town or city.
    2. Employment impact upon the community.
    3. Availability of skilled and unskilled labor and permanency of 
employment opportunities.
    4. Vocational and educational facilities to provide skilled labor, 
if applicable.
    5. Policies of applicant regarding unemployment, lay-offs, wage 
scales, etc.
    C. If debt refinancing is requested, consider in accordance with 
Sec. 1980.411(a)(11) of this subpart and:
    1. A complete review will be made to determine whether it is 
essential to restructure the company's debts on a schedule that will 
allow the business to operate successfully rather than merely 
guaranteeing an unsound loan.
    (a) Obtain a borrower's complete debt schedule. Schedule should 
agree with borrower's latest balance sheet.
    (b) Determine from lender if the borrower's present loan(s) is on 
the lender's regulatory examiner's report and if so determine the loan 
classification.
    (c) Analyze lender's liability ledger on the borrower, individual 
customer credit file, installment Loan Ledger Card or Computer printouts 
and other credit reports.
    (d) The percentage of guarantee should be adjuted to assure that the 
lender does not bring its previously existing unguaranteed exposure 
under the guarantee.
    (e) Any special servicing requirements should be identified and 
included in the Conditional Commitment for Guarantee.
    D. Applications will be analyzed by an FmHA or its successor agency 
under Public Law 103-354 State Loan Review Board before execution of 
Form FmHA or its successor agency under Public Law 103-354 449-14. When 
analyzing the B&I loan request, the State Loan Review Board will 
specifically address the issue of the guarantee percentage to be 
approved. Consideration of reducing the maximum guarantee to less than 
90 percent is appropriate when the loan has sufficient strength to 
warrant further participation by the private sector or refinancing of 
existing lender debts to the borrower is involved. Ordinarily, B&I loan 
guarantees should be structured so that the lender bears a significant 
portion of the risk of loss from a default. ``Significant'' means equal 
to or greater than 20 percent of the loss stemming from default. All 
review board meetings will be fully documented, including the review and 
decision concerning the guarantee percentage, and will be signed by 
those FmHA or its successor agency under Public Law 103-354 employees 
serving on the board. A copy of such documentation will be retained in 
the loan file.
    1. Generally, the review board consists of the State Director as 
Chairperson, Community and Business Program Chief or the Business and 
Industry Chief (Loan Specialist) and either the Community Programs 
Chief, Rural Housing Chief, or Farmer Programs Chief, as appropriate.
    2. The State Director may wish to contact non-FmHA or its successor 
agency under Public Law 103-354 sources for expertise, such as banker or 
other lenders, industrial development specialists from state 
commissions, academicians, certified public accountants, tax attorneys, 
successful business and professional lenders, management consultants and 
officials from other Federal agencies. Outside resource consultants may 
be reimbursed only for their travel costs (transportation and 
subsistence). (See FmHA or its successor agency under Public Law 103-354 
Instruction 2036-A which is available in any FmHA or its successor 
agency under Public Law 103-354 Office).
    3. The Rural Housing Loan Chief will be a member of the FmHA or its 
successor agency under Public Law 103-354 State Loan Review Board if a 
site development loan (see

[[Page 475]]

Sec. 1980.411(a)(7) of this subpart) is being considered. The Community 
and Business Programs Chief (Loan Specialist) will be a member if a loan 
for facilities of the type financed under the provisions of Subpart A of 
Part 1942 of this chapter is being considered. The Farmer Programs Chief 
will be a member of the board if a project, the success of which is 
dependent on the production of agricultural products, is being 
considered. If the proposed project covers more than one program area, 
all the chiefs for those programs involved will be members of the board. 
If the approval of an application for a B&I loan may result in 
benefiting or hindering other FmHA or its successor agency under Public 
Law 103-354 programs, the review board will determine whether the making 
of such loan or guarantee is likely to result in embarrassment for FmHA 
or its successor agency under Public Law 103-354 as a result of a 
possible conflict of interest whereby other parties may accuse the 
agency of giving loan preference to housing borrowers (in the case of 
site development) or producers (in the case of agricultural processing 
plants) or other FmHA or its successor agency under Public Law 103-354 
programs.
    4. The State Director may request the County Supervisor and/or 
District Director to attend the review board meeting whenever it is 
determined they may have special knowledge of the proposed loan which 
may affect the board's decision.
    5. Prior to submission of a B&I guaranteed loan(s) request to the 
National Office for loan processing review and prior to loan approval, 
the appropriate loan processing official must visit the project site and 
discuss the loan proposal with the lender and borrower. In the event 
there are multiple project sites the official should visit a 
representative sample of project sites to develop deeper understanding 
of the project operation. For businesses without a developed project 
site a visit is not necessary; however, a visit with the lender and 
borrower is still required. The findings of the visit should be 
documented in the loan docket submitted to the National Office.
    6. The State Director will prepare an original and two copies of 
Form FmHA or its successor agency under Public Law 103-354 1940-3 for 
each loan to be obligated. Also, for each initial loan, Form FmHA or its 
successor agency under Public Law 103-354 1980-50, ``Add, Delete, or 
Change Guaranteed Loan Borrower Information,'' will be prepared. The 
State Director will sign the original and one copy and conform the 
second copy. Form FmHA or its successor agency under Public Law 103-354 
1940-3 will not be mailed to the Finance Office. Notice of approval to 
lender will be accomplished by providing or sending the lender the 
signed copy of Form FmHA or its successor agency under Public Law 103-
354 1940-3 and Form FmHA or its successor agency under Public Law 103-
354 449-14 on the obligation date, unless the Administrator has given 
prior authorization to the Finance Office to obligate before the 6-day 
reservation period and directs the State Director to forward Form FmHA 
or its successor agency under Public Law 103-354 1940-3 to the lender in 
advance of issuance of Form FmHA or its successor agency under Public 
Law 103-354 449-14. The State Director or designee will record the 
actual date of lender notification on the original of the Form FmHA or 
its successor agency under Public Law 103-354 1940-3 and retain the 
original of the form as a permanent part of the FmHA or its successor 
agency under Public Law 103-354 case file. The State Director may retain 
the remaining conformed copy of Form FmHA or its successor agency under 
Public Law 103-354 1940-3. The State Director or designee will use the 
State Office terminal to request reservation/obligation of funds. Use of 
the telephone for the reservation/obligation of funds is restricted to 
those instances when the State Office terminal is inoperative. Form FmHA 
or its successor agency under Public Law 103-354 1980-50 will be 
prepared and distributed for initial loans only.
    a. Immediately after contacting the Finance Office, the requesting 
official will furnish the requesting office's security identification 
code. Failure to furnish the security code will result in rejection of 
the request for reservation of authority. After the security code is 
furnished, all pertinent information contained on Form FmHA or its 
successor agency under Public Law 103-354 1940-3 will be furnished to 
the Finance Office. Upon receipt of the telephone request for 
reservation of authority, the Finance Office will record all information 
necessary to process the request for reservation in addition to the date 
and time of the request.
    b. The individual making the telephone request will record the date 
and time of the telephone request and place his/her signature in section 
35 of Form FmHA or its successor agency under Public Law 103-354 1940-3.
    c. The Finance Office will terminally process telephone reservation 
requests. Those requests for reservation received before 2:30 p.m. 
Central Time, to the extent possible, will be processed on the date 
received; however, there may be instances in which the reservation will 
be processed on the next working day.
    d. Each working day the Finance Office will notify the State Office 
by telephone of all projects for which authority was reserved during the 
previous night's processing cycle and the date of obligation. If 
authority cannot be reserved for a project, the Finance Office will 
notify the State Office that authority is not available within the State 
allocation. The obligation date will be 6 working

[[Page 476]]

days from the date of the request for reservation of authority which is 
being processed in the Finance Office. The Finance Office will mail to 
the State Director Form FmHA or its successor agency under Public Law 
103-354 440-57, ``Acknowledgment of Obligated Funds/Check Request,'' 
prepared in duplicate, confirming the reservation of authority with the 
obligation date inserted as required by item No. 9 on the FMI for Form 
FmHA or its successor agency under Public Law 103-354 440-57. 
Immediately after notification by telephone of the reservation of 
authority, the State Director will call the Legislative Affairs and 
Public Information staff in the National Office as required by FmHA or 
its successor agency under Public Law 103-354 Instruction 2015-C 
(available in any FmHA or its successor agency under Public Law 103-354 
office).
    e. See FmHA or its successor agency under Public Law 103-354 
Instruction 2015-C (available in any FmHA or its successor agency under 
Public Law 103-354 office) for notification procedures.
    7. State Director notifies the lender and borrower if he/she will 
not issue the Form FmHA or its successor agency under Public Law 103-354 
449-14.

[52 FR 6501, Mar. 4, 1987, as amended at 53 FR 45258, Nov. 9, 1988; 56 
FR 8271, Feb. 28, 1991]



Sec. 1980.453  Review of requirements.

    (a) Immediately after reviewing the conditions and requirements in 
Form FmHA or its successor agency under Public Law 103-354 449-14 the 
lender and applicant should complete and sign the ``Acceptance of 
Conditions,'' and return a copy to the FmHA or its successor agency 
under Public Law 103-354 State Director. If certain conditions cannot be 
met, the lender and borrower may propose alternate conditions to FmHA or 
its successor agency under Public Law 103-354.
    (b) If the lender indicates in the ``Acceptance of Conditions'' that 
it desires to obtain a Loan Note Guarantee and subsequently decides at 
any time after receiving a conditional commitment that it no longer 
wants a Loan Note Guarantee, the lender will immediately advise the FmHA 
or its successor agency under Public Law 103-354 State Director.

                             Administrative

    A. The State Director will negotiate with the lender and proposed 
borrower any changes made to the initially issued or proposed Form FmHA 
or its successor agency under Public Law 103-354 449-14. For loans 
requiring National Office concurrence, a copy of Form FmHA or its 
successor agency under Public Law 103-354 449-14 and any amendments 
thereto will be included when the loan file is submitted to the National 
Office for review. When the National Office recommends modifications or 
additions to Form FmHA or its successor agency under Public Law 103-354 
449-14, the State Director will further negotiate these recommendations 
with the lender and proposed borrower. If, as a result of these further 
negotiations, the lender, proposed borrower or State Director presents 
alternate conditions which would result in a change in the scope of the 
proposed project and if the loan exceeds the State Director's loan 
approval authority, the State Director will submit these conditions by 
memorandum to the National Office for consideration with a copy of the 
revised Form FmHA or its successor agency under Public Law 103-354 449-
14 and any amendments thereto. If the loan is within the State 
Director's loan approval authority, the State Director may approve such 
changes.
    B. On loan applications within the State Director's loan approval 
authority, the State Director will submit to the National Office, 
Business and Industry Division, within 30 days after the Form FmHA or 
its successor agency under Public Law 103-354 449-14 has been accepted:
    1. A copy of Form FmHA or its successor agency under Public Law 103-
354 449-29.
    2. A copy of Form FmHA or its successor agency under Public Law 103-
354 449-14 is accepted by the lender and borrower.
    2. A copy of FmHA or its successor agency under Public Law 103-354 
State Loan Review Board Minutes.
    4. Notification of required financial and other reports, their 
frequency, due dates and fiscal year-end.
    5. A copy of the proposed loan agreement between the lender and the 
borrower.
    6. When debt refinancing is involved, a copy of the justification 
for the refinancing.
    7. The cover memorandum should indicate whether the Form FmHA or its 
successor agency under Public Law 103-354 449-34 has been issued. If the 
Loan Note Guarantee has been issued, enclose a copy of the Lender 
Certification required by Sec. 1980.60(a) of Subpart A of this part, 
and, if not, a proposed date for issuance of the Form FmHA or its 
successor agency under Public Law 103-354 449-34.

[52 FR 6501, Mar. 4, 1987, as amended at 54 FR 28022, July 5, 1989; 57 
FR 4359, Feb. 5, 1992]



Sec. 1980.454  Conditions precedent to issuance of the Loan Note Guarantee.

    In addition to compliance with the requirements of Sec. 1980.60 of 
subpart A of

[[Page 477]]

this subpart, compliance with the following provisions are required 
prior to issuance of the Loan Note Guarantee.
    (a) Transfer of lenders. The FmHA or its successor agency under 
Public Law 103-354 State Director may approve a substitution of a new 
eligible lender in place of a former lender who holds an outstanding 
Conditional Commitment for Guarantee (where the Loan Note Guarantee has 
not yet been issued and the loan is within the State Director's loan 
approval authority) provided there are no changes in the borrower's 
ownership or control, loan purposes, scope of project and loan 
conditions in the Form FmHA or its successor agency under Public Law 
103-354 449-14 and the loan agreement remains the same. To effect such a 
substitution, the former lender will provide FmHA or its successor 
agency under Public Law 103-354 with a letter stating the reasons it no 
longer desires to be a lender for the project. For loans in excess of 
the State Director's loan approval authority, National Office 
concurrence is required. The State Director will submit a recommendation 
concerning the transfer of lenders along with the lender's letter 
stating the reasons it no longer desires to be a lender for the project. 
The substituted lender will execute a new Part ``B'' of Form FmHA or its 
successor agency under Public Law 103-354 449-1. If approved by FmHA or 
its successor agency under Public Law 103-354, the State Director will 
issue a letter or amendment to the original Form FmHA or its successor 
agency under Public Law 103-354 449-14 reflecting the new lender and the 
new lender will acknowledge acceptance of the letter or amendment in 
writing.
    (b) Substitution of borrowers. FmHA or its successor agency under 
Public Law 103-354 will not issue a Loan Note Guarantee to the lender 
who is in receipt of a Form FmHA or its successor agency under Public 
Law 103-354 449-14 with an obligation in a previous fiscal year if the 
originally approved borrower (including changes in legal entity) or 
owners are changed. The only exception to this provision prohibiting a 
change in the legal entity's form of ownership is when the originally 
approved borrower or owner is replaced with substantially the same 
individuals with substantially the same interests, as originally 
approved and identified in the Form FmHA or its successor agency under 
Public Law 103-354 449-1, item 15. All requests for exceptions must be 
approved by the FmHA or its successor agency under Public Law 103-354 
National Office.
    (c) Changes in terms and conditions in Form FmHA or its successor 
agency under Public Law 103-354 449-14. It is the intent of FmHA or its 
successor agency under Public Law 103-354 that once the Form FmHA or its 
successor agency under Public Law 103-354 449-14 is issued and accepted 
by the lender, the commitment is not to be modified as to the scope of 
the project, overall facility concept, project purpose, use of proceeds 
or terms and conditions. Should changes be requested by the lender, the 
State Director will negotiate with the lender and proposed borrower any 
proposed changes to the originally accepted Form FmHA or its successor 
agency under Public Law 103-354 449-14. If, as a result of these 
negotiations, the lender, proposed borrower or State Director presents 
alternate conditions which would result in a change in the scope of the 
project, and if the loan exceeds the State Director's loan approval 
authority, the State Director will submit these changes in the 
conditions by memorandum to the National Office for consideration with a 
copy of the revised Form FmHA or its successor agency under Public Law 
103-354 449-14 and any amendments thereto. Changes to the conditional 
commitment may be approved by the State Director for loans within their 
loan approval authority.
    (d) Additional requirements for B&I guaranteed loans. All B&I 
borrowers and lenders, as applicable, must comply with Appendix D, 
paragraphs (I) (A) and (B); (II)(A) through (II)(A)(2)(g)(1); (II) (B) 
and (C); (III) (A), (B), (C), (D), and (E).
    (e) Preguarantee review. Coincident with, or immediately after loan 
closing, the lender will contact FmHA or its successor agency under 
Public Law 103-354 and provide those documents and certifications 
required in Sec. Sec. 1980.60 and 1980.61 of subpart A of this part. 
Only when the FmHA or its successor agency under Public Law 103-354 B&I 
or

[[Page 478]]

C&BP Chief or Loan Specialist, as required in paragraph B. 
(Administrative) of this section, is satisfied that all conditions for 
the guarantee have been met will the Loan Note Guarantee be executed.
    (f) Loan closing. When loan closing plans are established, the 
lender will notify FmHA or its successor agency under Public Law 103-
354.
    (g) Closing of working capital loans. The State Director will not 
issue a Loan Guarantee for a working capital loan prior to the 
completion of all proposed construction for the project. Working capital 
loan funds will not be used to pay short-term notes.

                             Administrative

    A. The State Director reviews: 1. [Reserved]
    2. Plans for inspections made on construction projects. These should 
be coordinated with the lender and borrower. Form FmHA or its successor 
agency under Public Law 103-354 424-12, ``Inspection Reports,'' may be 
used by the State Engineer or Architect who will make an inspection of 
the projects which involve substantial construction. The inspection 
shall be completed prior to the issuance of the Loan Note Guarantee to 
assure all construction is complete. The State Loan Specialist or Chief 
may also participate in the inspections.
    3. Cost overruns, if any, and how they will be met. State Directors 
may approve cost overruns for projects in any amount or percentage 
within their loan approval authority not to exceed 10 percent in loan 
amounts between $1 million and $10 million.
    4. Basic credit requirements of all loans.
    B. In all cases, the Program Chief or the B&I Loan Specialist will 
conduct a preguarantee review before issuance of the Loan Note Guarantee 
to assure that all requirements of the application, Conditional 
Commitment for Guarantee and Loan Agreement have been met including the 
required certifications using language specified by the regulations, and 
will provide such verification in the loan file, including arrangements 
for annual audit reports. In the conduct of this review, all 
requirements of Sec. 1980.60(a) of Subpart A of this part will be 
reviewed and special attention should be paid to reviewing current 
financial statements of the borrower to assure that no adverse change 
has taken place. The District Director may participate in the review.
    C. The State Director or any other FmHA or its successor agency 
under Public Law 103-354 personnel shall not sign any documents other 
than those specifically provided for in Subparts A or E of this part. No 
certificates shall be signed except the ``Certificate of Incumbency and 
Signature'' as set forth as Appendix B of this subpart.
    D. Par (a) Transfer of Lender. The State Director will analyze all 
requests for substituted lenders including the servicing capability, 
eligibility and experience of the new lender before the request is 
approved. If approved, notify the Finance Office of the change using 
Form FmHA or its successor agency under Public Law 103-354 1980-42, Do 
not deobligate and reobligate the loan if the Form FmHA or its successor 
agency under Public Law 103-354 449-14 was issued in a previous fiscal 
year.
    E. Par (b) Substitution of borrowers. The State Director will review 
any request for exceptions to substitution of borrowers and forward such 
requests with a memorandum of facts and recommendations to the National 
Office for a decision. The National Office will not approve any request 
where the legal entity is changed, such as from a corporation to a 
partnership, etc., or if the ownership changes more than 20 percent.
    F. Par (c) Changes in terms and conditions in Form FmHA or its 
successor agency under Public Law 103-354 449-14. The State Director 
will review any request for changes to Form FmHA or its successor agency 
under Public Law 103-354 449-14. Only those changes which do not 
materially affect the project, its capacity, employment, original 
projections or credit factors may be approved. Changes in legal entities 
or where tax considerations are the reason for change will not be 
approved when modifying any loan guarantee or conditions of guarantee. 
State Directors may approve these changes in terms and conditions if the 
loan is within the State Director's loan approval authority and the 
change will not result in a major change in the scope of the project. 
Changes in terms and conditions for loans in excess of the State 
Director's loan approval authority, must be submitted to the National 
Office with a memorandum of facts and recommendations for review and 
concurrence.

    In order to identify the number and types of action taken, the 
following procedures are to be followed when requests of this type are 
approved by FmHA or its successor agency under Public Law 103-354.

    1. Start with the number 1 when the first modification is approved 
and enter this number in the upper right hand corner of the Letter of 
Concurrence and on the related ``Modification or Administration Action'' 
sheet.
    2. Next to the modified wording on the work copy of the Conditional 
Commitment for Guarantee and the Term Loan Agreement or any form which 
has been modified, pencil in a short cross reference to the modification 
and identify the number given it.

[[Page 479]]

    3. File the copies of the ``Modification or Administrative Action'' 
sheet and related Letters of Concurrence numerically in the docket 
directly on top of the affected original documents of conditions.
    4. This order of recordkeeping should include any requests which 
were declined by the National Office.

[52 FR 6501, Mar. 4, 1987, as amended at 53 FR 26413, July 12, 1988; 57 
FR 4359, Feb. 5, 1992; 61 FR 18495, Apr. 26, 1996]



Sec. Sec. 1980.455-1980.468  [Reserved]



Sec. 1980.469  Loan servicing.

    The lender is responsible for loan servicing and for notifying the 
FmHA or its successor agency under Public Law 103-354 of any violations 
in the Lender's Loan Agreement. (See Paragraph X of Form FmHA or its 
successor agency under Public Law 103-354 449-35).
    (a) All B&I guaranteed loans in the lender's portfolio will be 
classified by the lender as soon as it is notified by the State Office 
to do so and again whenever there is a change in the loan which would 
impact on the original classification. The State Director will notify 
the lender of this requirement for all existing loan guarantees, when 
new Loan Note Guarantees are issued to a lender and/or when the State 
Office becomes aware of a condition that would affect the classification 
and justification of the classification will be sent to the State 
Office. The loans will be classified according to the following 
criteria:
    (1) Substandard Classifications. Those loans which are inadequately 
protected by the current sound worth and paying capacity of the obligor 
or of the collateral pledged, if any. Loans in this category must have a 
well defined weakness or weaknesses that jeopardize the payment in full 
of the debt. If the deficiencies are not corrected, there is a distinct 
possibility that the lender and FmHA or its successor agency under 
Public Law 103-354 will sustain some loss.
    (2) Doubtful Classification. Those loans which have all the 
weaknesses inherent in those classified Substandard with the added 
characteristics that the weaknesses make collection or liquidation in 
full, based on currently known facts, conditions and values, highly 
questionable and improbable.
    (3) Loss Classifications. Those loans which are considered 
uncollectible and of such little value that their continuance as 
bankable loans is not warranted. Even though partial recovery may be 
effected in the future, it is not practical or desirable to defer 
writing off these basically worthless loans.
    (b) There is a close relationship between classifications; and no 
classifications category should be viewed as more important than the 
other. The uncollectibility aspect of Doubtful and Loss classifications 
are of obvious importance; however, the function of the Substandard 
classification is to indicate those loans that are unduly risky which 
may result in future claims against the B&I guarantee.
    (c) Substandard, Doubtful and Loss are adverse classifications. 
There are other classifications for loans which are not adversely 
classified but which require the attention and followup of the lenders 
and FmHA or its successor agency under Public Law 103-354. These 
classifications are:
    (1) Special Mention Classification. Those loans which do not 
presently expose the lender and FmHA or its successor agency under 
Public Law 103-354 to a sufficient degree of risk to warrant a 
Substandard classification but do possess credit deficiencies deserving 
the lender's close attention. Failure to correct these deficiencies 
could result in greater credit risk in the future. This classification 
would include loans that the lender is unable to supervise properly 
because of a lack of expertise, an inadequate loan agreement, the 
condition of or lack of control over the collateral, failure to obtain 
proper documentation or any other deviations from prudent lending 
practices. Adverse trends in the borrower's operation or an imbalanced 
position in the balance sheet which has not reached a point that 
jeopardizes the repayment of the loan should be assigned to this 
designation. Loans in which actual, not potential, weaknesses are 
evident and significant should be considered for a Substandard 
classification.
    (2) Seasoned Loan Classification. A loan which: (i) Has a remaining 
principal guaranteed loan balance of two

[[Page 480]]

thirds or less of the original aggregate of all existing B&I guaranteed 
loans made to that business.
    (ii) Is in compliance with all loan conditions and B&I regulations.
    (iii) Has been current on the B&I guaranteed loan(s) payments for 24 
consecutive months.
    (iv) Is secured by collateral which is determined to be adequate to 
ensure there will be no loss on the guaranteed loan.
    (3) Current Non-problem Classification--Those loans that are current 
and are in compliance with all loan conditions and B&I regulations but 
do not meet all the criteria for a Seasoned Loan classification. All 
loans not classified as Seasoned or Current Non-problem will be reported 
on the quarterly status report with documentation of the details of the 
reason(s) for the assigned classification.

                             Administrative

    Refer to Appendix G of this subpart (available in any FmHA or its 
successor agency under Public Law 103-354 Office) for advice on how to 
interact with the lender on liquidations and property management.
    A. While the lender has the primary responsibility for loan 
servicing and protecting the collateral, the State Director is 
responsible for seeing that servicing as required by the Lender's 
Agreement and regulation is properly accomplished. Loan servicing is 
intended to be a preventive rather than a curative action. Prompt 
followup on delinquent accounts and early recognition of potential 
problems and pursuing a solution to them are keys to resolving many 
problem loan cases.
    B. Paragraph II of the Lender's Agreement. 1. The Loan Note 
Guarantee is unenforceable by the lender to the extent any loss is 
occasioned by violation of usury laws, use of loan funds for 
unauthorized purposes, negligent servicing, or failure to obtain the 
required security regardless of the time at which FmHA or its successor 
agency under Public Law 103-354 acquires knowledge of the foregoing. As 
used herein, the phrase ``use of loan funds for unauthorized purposes'' 
refers to the situation in which the lender in fact agrees with the 
borrower that loan funds are to be so used and the phrase ``unauthorized 
purposes'' means any purpose not listed by the Lender in the completed 
application as approved by FmHA or its successor agency under Public Law 
103-354.
    2. With respect to the negligent servicing and use of loan funds for 
unauthorized purposes, the Loan Note Guarantee is unenforceable by the 
lender to the extent any loss is occasioned by negligent servicing and 
use of loan funds for unauthorized purposes regardless of the time FmHA 
or its successor agency under Public Law 103-354 acquires knowledge of 
the negligent servicing or use of loan funds for unauthorized purposes 
by the lender. Only the amount of the loss caused by negligent servicing 
or use of loan funds for unauthorized purposes can be withheld from the 
final loss claim submitted by the lender. The dollar amount withheld 
from the final loss claim must be ascertainable. In order to determine 
the final loss amount, the guaranteed loan collateral and any collateral 
of the guarantor(s) must be liquidated and settled or a settlement with 
the guarantor(s) reached. In the event there is reason to suspect the 
lender of negligent servicing or use of loan funds for unauthorized 
purposes during the life of the loan, the lender should be notified in 
writing that (a) the acts of negligent servicing and/or use of loan 
funds for unauthorized purposes will cause the guarantee to be 
unenforceable by the lender to the extent these acts cause a loss; (b) 
any decision not to honor any part of the guarantee is not possible 
until the loan has been liquidated and a loss established; (c) if any 
loss occurs FmHA or its successor agency under Public Law 103-354 will 
consider whether negligent acts of the lender caused a loss after the 
liquidation is complete; and (d) at the time FmHA or its successor 
agency under Public Law 103-354 determines a loss has occurred as the 
result of negligent servicing the lender may appeal any adverse 
decision.
    3. When facts or circumstances indicate that criminal violations may 
have been committed by an applicant, a borrower, or third party 
purchaser, the State Director will refer the case to the appropriate 
Regional Inspector General for Investigations, Office of Inspector 
General (OIG), USDA, in accordance with FmHA or its successor agency 
under Public Law 103-354 Instruction 2012-B (available in any FmHA or 
its successor agency under Public Law 103-354 office) for criminal 
investigation. Any questions as to whether a matter should be referred 
will be resolved through consultation with OIG for Investigations and 
the State Director and confirmed in writing. In order to assure 
protection of the financial and other interest of the government, a 
duplicate of the notification will be sent to the Office of General 
Counsel (OGC). After OIG has accepted any matter for investigation, FmHA 
or its successor agency under Public Law 103-354 staff must coordinate 
with OIG in advance regarding routine servicing actions on existing 
loans. A borrower or lender can be sued even though criminal fraud is 
present. If FmHA or its successor agency under Public Law 103-354 has 
good reason to believe that, for example, a borrower or a lender made a 
false statement to obtain a loan or guarantee, or

[[Page 481]]

a lender submitted a loss claim to FmHA or its successor agency under 
Public Law 103-354 which was false or fraudulent, it should promptly 
call the matter to the attention of OGC--even if no payment of the loss 
claim has occurred yet. (This would include those situations in which a 
borrower lied to the lender in order to get the loan, the lender 
believed the borrower and made the loan--which was guaranteed by FmHA or 
its successor agency under Public Law 103-354--and then the lender 
presented a loss claim to FmHA or its successor agency under Public Law 
103-354 for payment after the borrower defaulted on the loan.) Sometimes 
it might be necessary to ask OIG to do an investigation to establish all 
the aspects of the fraud. If at all possible, this should then be done 
prior to referral to OGC.
    4. There are two methods the Government could use to seek relief for 
the fraud. One of the ways the Government could seek redress for the 
fraud is to sue under the False Claims Act (31 U.S.C. sections 3729-
3731). If fraud is proven to have occurred, the False Claims Act 
provides for the recovery of double damages and a $2,000 penalty (and 
the costs of one civil suit) for each act involving, for example: (a) 
Knowingly submitting to a Government employee of false or fraudulent 
claim for payment or approval, (b) knowingly making or using a false 
record or statement to get a false or fraudulent claim paid or approved, 
or (c) conspiring to defraud the United States by getting a false or 
fraudulent claim allowed or paid. Suit under the False Claims Act must 
be filed within six years from the date of the commission of the act 
(e.g., presentation of the claim to FmHA or its successor agency under 
Public Law 103-354 for payment). The double damage feature ought to be a 
good incentive to convince OIG to undertake necessary investigations to 
help establish the fraud.
    5. In order to decide whether to file suit, the Department of 
Justice will need to know such things as: What was the amount of the 
loan or the loss paid to the lender or holder? How much did the scheme 
cost the Government? What is the difference in money between what the 
Government paid out and what it should have paid out? Does the borrower 
or lender have enough assets to make it worth suing? If FmHA or its 
successor agency under Public Law 103-354 can answer these questions 
before referral to OGC--either on its own or by using OIG--than OGC can 
refer the matter that much more quickly to the Justice Department.
    6. There is also a way to bring suit for civil fraud by alleging 
that ``common law'' fraud occurred. This would just involve proving that 
a borrower or a lender falsely represented by their words or actions, a 
matter of fact either by alleging something in a false or misleading 
manner or by concealing something that should have been disclosed; and 
that FmHA or its successor agency under Public Law 103-354 was deceived 
by this conduct, and relied on it to its detriment. Under ``common law'' 
fraud, only single damages could be recovered, and there would be no 
$2,000 penalty assessed. The action would generally have to be brought 
within three years from the date of the discovery of the fraud.
    7. Neither the False Claims Act nor the right to bring a ``common 
law'' action for fraud precludes the Government from just suing to 
recover the money wrongfully or mistakenly paid by its employees. If the 
Justice Department decides not to pursue a civil frauds claim under the 
False Claims Act or ``common law,'' it will return the matter to OGC. 
Depending on what stage the proceedings were in when the matter was 
first referred, FmHA or its successor agency under Public Law 103-354 
could then continue to negotiate with the lender or OGC could re-refer 
the case to Justice for any contract-based actions, including fraud or 
misrepresentation based on the terms of the guarantee.
    C. The State Director will assure that: 1. [Reserved]
    2. A timetable for routine site, borrower and lender visitations by 
FmHA or its successor agency under Public Law 103-354 personnel is 
established before the Loan Note Guarantee is issued. As a guide, visits 
to newly established borrowers with the lender represented should be 
scheduled monthly. Visits to established, nonproblem borrowers must be 
made at least annually except for seasoned loans which will be visited 
at least bi-annually. Special attention problem accounts should be 
visited as frequently as the need demands. If possible, these 
visitations should be coordinated with the lender's visits.
    3. During or in preparation for field visits, the following 
functions are to be performed:
    (a) Current financial information is obtained in advance and 
analyzed for trends.
    (b) Any issues revealed or problems not resolved from the last 
visitation are included in the agenda.
    (c) Collateral is observed and its condition, maintenance, 
protection and utilization by the borrower appears to be satisfactory.
    (d) A report of the visit is made on Form FmHA or its successor 
agency under Public Law 103-354 449-39, ``Field Visit Review (Business 
and Industrial Loans),'' or otherwise documented and included in the 
loan file. The report should include an opinion of the borrower's status 
based upon observations made during the visit.
    (e) Any instructions or directions to the lender should be confirmed 
by letter.
    4. The Program Chief or Loan Specialist will conduct an annual 
meeting with each lender or its agent with whom a Loan Note Guarantee(s) 
or Contract of Guarantee(s) is

[[Page 482]]

outstanding. This cannot be redelegated. These meetings may be scheduled 
at the time FmHA or its successor agency under Public Law 103-354 makes 
periodic field inspections to the borrower's place of business. At the 
meeting, a review will be made of the lender's performance in loan 
servicing, including enforcement of conditions and covenants in the loan 
agreements. The observations and results of the meeting will be 
documented. Form FmHA or its successor agency under Public Law 103-354 
449-39 may be used for this purpose. Servicing exceptions on the part of 
the lender which are noted by FmHA or its successor agency under Public 
Law 103-354 will be confirmed by letter to the lender.
    5. The lender performs an adequate analysis of borrower financial 
statements for FmHA or its successor agency under Public Law 103-354. 
FmHA or its successor agency under Public Law 103-354 in turn will 
evaluate the lender's analysis and follow up with the lender on 
servicing action(s) required or negative observations not detected 
through the lender's analysis. The financial statement analysis of the 
lender, the financial statement and a memorandum reflecting FmHA or its 
successor agency under Public Law 103-354's analysis, including a 
comparison to previous and projected performance of the borrower, will 
be forwarded to the National Office, Attention: Business and Industry 
Division, only for the following loans:
    (a) All loans within the first year of loan closing.
    (b) Loans over one year old as determined by the State Director or a 
National Office assigned loan reviewer who is participating in a field 
review. In event of a disagreement between the State Director and an 
assigned loan reviewer as to which loans should be included, the 
assigned loan reviewer's decision will take precedence.
    (c) All problem and delinquent loans.
    (d) Loans that the State Director would like reviewed by the 
National Office.
    6. Meetings are arranged between the lender, borrower and FmHA or 
its successor agency under Public Law 103-354 to resolve any problems of 
late payment, etc.
    D. State Director authorities. 1. The State Director may delegate 
authority for the conduct of all functions listed in Sec. 1980.469 
Administrative B., except item C. 4. in Administrative B.
    2. The State Director may approve B&I guaranteed loan servicing 
actions as authorized in separate written approval authorities issued in 
accordance with Subpart A of Part 1901 of this chapter.
    3. Servicing actions on loans which exceed the State Director's loan 
approval authority are to be referred together with the State Director's 
recommendations to the Director, Business and Industry Division, for 
prior review and concurrence.

[52 FR 6501, Mar. 4, 1987, as amended at 53 FR 40403, Oct. 17, 1988; 60 
FR 26350, May 17, 1995; 61 FR 18495, Apr. 26, 1996]



Sec. 1980.470  Defaults by borrower.

    [See Sec. 1980.63 of Subpart A, of this part.]

                             Administrative

    Refer to Appendix G of FmHA or its successor agency under Public Law 
103-354 Instruction 1980-E (available in any FmHA or its successor 
agency under Public Law 103-354 Office) for advice on how to interact 
with the lender on liquidations and property management.
    A. In case of any monetary or significant non-monetary default under 
the loan agreement, the lender is responsible for arranging a meeting 
with the State Director, or its designee, and borrower to resolve the 
problem. A memorandum of the meeting, individuals who attend, a summary 
of the problem and proposed solution will be prepared by the FmHA or its 
successor agency under Public Law 103-354 representative and retained in 
the loan file. When the State Director receives a notice of default on a 
loan, he/she will immediately notify the National Office in writing of 
the details and will subsequently report the problem loan to the 
National Office on the quarterly status report. The State Director will 
notify the lender and borrower of any decision reached by FmHA or its 
successor agency under Public Law 103-354.
    B. In considering servicing options, some of which are identified in 
paragraph X. A of Form FmHA or its successor agency under Public Law 
103-354 449-35, the prospects for providing a permanent cure without 
adversely affecting the risks of the FmHA or its successor agency under 
Public Law 103-354 and the lender must become the paramount objective. 
Within the State Director's authority temporary curative actions such as 
payment deferments, moratoriums on payments or collateral subordination, 
if approved, must strengthen the loan and be in the best interests of 
the lender and FmHA or its successor agency under Public Law 103-354. 
Some of these actions may require concurrence of the holder(s). A 
deferral, rescheduling, reamortization or moratorium is limited by the 
period of time authorized by this subpart for the purpose for which the 
loan(s) is made or the remaining useful life of the collateral securing 
the loan. For example, if the promissory note on a working captial loan 
is scheduled to mature in 2 years the loan could be rescheduled for 7 
years or the remaining life of the collateral whichever is the lesser of 
the two.

[[Page 483]]

    C. Subsequent loan guarantee requests will be processed in 
accordance with provisions of Sec. 1980.473 of this subpart.
    D. If the loan was closed with the multi-note option, the lender may 
need to possess all notes to take some servicing actions. In these 
situations when FmHA or its successor agency under Public Law 103-354 is 
holder of some of the notes, the State Director may endorse the notes 
back to the lender after the State Director has sought the advice and 
guidance of OGC, provided a proper receipt is received from the lender 
which defines the reason for the transfer. Under no circumstances will 
FmHA or its successor agency under Public Law 103-354 endorse the 
original Form FmHA or its successor agency under Public Law 103-354 449-
34 to the lender.
    E. The State Director's authority to approve servicing actions is 
defined in Sec. 1980.469, Administrative D.2.
    F. Consultant services may be recommended by the State Director to 
assist FmHA or its successor agency under Public Law 103-354 and the 
lender in determining which servicing action is appropriate. Requests 
for consultant services should be made by the State Director and 
addressed to the Administrator, Attn: Business and Industry Division. A 
full explanation of the loan history, an evaluation and scope of the 
proposed study and the need should be included in the request.
    G. When the National Office determines it is necessary on individual 
cases, due to some special servicing requirements, it may, at its 
option, assume the servicing responsibility on individual cases.
    H. The State Director will report all delinquent and problem loans 
quarterly to the Director, Business and Industry Division, by the 10th 
day of January, April, July and October.
    I. The State Director will notify the Finance Office by memorandum 
of any change in payment terms such as reamortizations or interest rate 
adjustments and effective dates of any changes resulting from servicing 
actions.



Sec. 1980.471  Liquidation.

    (See Sec. 1980.64 of subpart A of this part.)
    Refer to appendix G of this subpart (available in any FmHA or its 
successor agency under Public Law 103-354 Office) for advice on how to 
interact with the lender on liquidations and property management.
    (a) Collateral acquired by the lender can only be released after a 
complete review of the proposal.
    (1) There may be instances when the lender acquires the collateral 
of a business where the cost of liquidation exceeds the potential 
recovery value of the collection. Whenever this occurs the lender with 
the concurrence of FmHA or its successor agency under Public Law 103-
354on the collateral in lieu of liquidation.
    (2) Sale of acquired collateral to the former borrower, former 
borrower's stockholder(s) or officer(s), the lender or lender's 
stockholder(s) or officer(s) must be based on an arm's length 
transaction with the concurrence of FmHA or its successor agency under 
Public Law 103-354.

                             Administrative

    A. The State Director determines which FmHA or its successor agency 
under Public Law 103-354 personnel will attend meetings with the lender.
    B. Introduction to Paragraph XI and Paragraph XI B of the Lender's 
Agreement. FmHA or its successor agency under Public Law 103-354 will 
exercise the option to liquidate only when there is reason to believe 
the lender is not likely to initiate liquidation efforts that will 
result in maximum recovery. When there is reason to believe the lender 
will not initiate efforts that will maximize recovery through 
liquidation, the State Director will forward the lender's liquidation 
plan, if available with appropriate recommendations, along with the 
State Director's exceptions to the lender's plan, if any, to the 
Director, Business and Industry Division, for evaluation and approval or 
rejection of the State Director's recommendation regarding liquidation. 
Only when compromise cannot be reached between FmHA or its successor 
agency under Public Law 103-354 and the lender on the best means of 
liquidation will FmHA or its successor agency under Public Law 103-354 
consider conducting the liquidation. The State Director has no authority 
to exercise the option to liquidate without National Office approval. 
When FmHA or its successor agency under Public Law 103-354 liquidates, 
reasonable liquidation expenses will be assessed against the proceeds 
derived from the sale of the collateral. In such instances the State 
Director will send to the Finance Office Form FmHA or its successor 
agency under Public Law 103-354 1980-45, ``Notice of Liquidation 
Responsibility.''
    C. State Directors are authorized to approve lender liquidation 
plans as authorized on separate written approval authorities issued in 
accordance with Subpart A of Part 1901 of this chapter. Within delegated 
authorities, the State Director may approve a written partial 
liquidation plan submitted by the lender covering collateral that must 
be immediately protected or cared for in

[[Page 484]]

order to preserve or maintain its value. Approval of the partial 
liquidation plan must be in the best interest of the government. The 
approved partial liquidation plan is only good for those actions 
necessary to immediately preserve and protect the collateral and must be 
followed by a complete liquidation plan prepared by the lender in 
accordance with the requirements of paragraph XII A of the Lender's 
Agreement.
    D. Paragraph XI D. State Directors are responsible for review and 
acceptance of accounting reports as submitted by lenders and for 
submission of such reports to lenders when FmHA or its successor agency 
under Public Law 103-354 is conducting liquidation, after they have been 
submitted with the State's recommendations to the Director, Business and 
Industry Division for prior review.
    E. Paragraph XI E 2. State Directors are authorized to approve final 
reports of loss from the lender in separate written approval authorities 
issued in accordance with Subpart A of Part 1901 of this chapter. The 
State Director will submit to the Finance Office for payment any loss 
claims of the lender on Form FmHA or its successor agency under Public 
Law 103-354 499-30, ``Loan Note Guarantee Report of Loss.'' The Finance 
Office forwards loss payment checks to the State Director for delivery 
to lender. When a loss claim is involved on a particular loan guarantee, 
ordinarily one ``Estimated Loss Report'' will be authorized. Only one 
final ``Report of Loss'' will be authorized. A final Form FmHA or its 
successor agency under Public Law 103-354 449-30 must be filed with the 
Finance Office at the completion of all liquidations. Finance Office 
will use this form to close out the account.
    F. Paragraph XI E 3. Final loss payments will be made within the 60 
days required but only after a review by FmHA or its successor agency 
under Public Law 103-354 to assure that all collateral for the loan has 
been properly accounted for and liquidation expenses are reasonable and 
within approved limits. State Directors are responsible to see that such 
reviews are accomplished by the State within 30 days and final loss 
claims in excess of the State Director's approval authority are 
forwarded to be accepted or otherwise resolved by the Director, Business 
and Industry Division within the 60-day period. Any estimated loss 
payments made to the lender must be taken into consideration when paying 
a final loss on the FmHA or its successor agency under Public Law 103-
354 guaranteed loan. The estimated loss payment must be treated as a 
deduction from the principal amount of the loan and interest cannot be 
accrued on the principal amount of the loan that is equal to the 
estimated loss payment. Community and Business Program Chiefs (C&BP), 
Business and Industry Chiefs or Loan Specialists will conduct such 
reviews. The State Director may request National Office assistance in 
the conduct of any review. All reviews for final loss claim in excess of 
the State Director's approval authority (See Subpart A of Part 1901 of 
this Chapter) will be submitted to the National Office, Business and 
Industry Division, for concurrence prior to the State Director's 
approval of the claim. Close scrutiny of liquidation proceeds and their 
application in accordance with lien priorities is required. Before final 
loss payments are approved and to assist in the required review, the 
C&BP Chief, B&I Chief or Loan Specialist will prepare a narrative 
history of the guarantee transaction which will serve as the summary of 
occurrence which led to failure of the borrower and actions taken to 
maximize loan recovery. The original of this report will be filed in the 
loan case file. A copy of this report together with the review of the 
final loss claim will be included in the material sent to the Director, 
B&I Division, for review prior to approval of final loss payments.



Sec. 1980.472  Protective advances.

    [See Sec. 1980.65 Subpart A of this Part.]

                             Administrative

    Refer to Appendix G of this subpart (available in any FmHA or its 
successor agency under Public Law 103-354 Office) for advice on how to 
interact with the lender on liquidations and property management.
    A. Protective advances will not be made in lieu of additional loans, 
in particular, working capital loans. Protective advances are advances 
made by the lender for the purpose of preserving and protecting the 
collateral where the debtor has failed to and will not or cannot meet 
its obligations. Ordinarily, protective advances are made when 
liquidation is contemplated or in process. A precise rule of when a 
protective advance should be made is impossible to state. A common, but 
by no means the only, period when protective advances might be needed is 
during liquidation. At this point, the borrower and success of the 
project are no longer of paramount importance, but preserving collateral 
for maximum recovery is of vital importance. Elements which should 
always be considered include how close the project is to liquidation or 
default, how much control the borrower will have over the funds, what 
danger is there that collateral may be destroyed and whether there will 
be a good chance of saving the collateral later if a protective advance 
in contemplation of liquidation is made immediately. A protective 
advance must be an indebtedness of the borrower.
    B. The State Director must approve, in writing, all protective 
advances on loans within his/her loan approval authority which exceed a 
total commulative advance of $500 to the same borrower. Protective 
advances

[[Page 485]]

must be reasonable when associated with the value of collateral being 
preserved.
    C. When considering protective advances, sound judgment must be 
exercised in determining that the additional funds advanced will 
actually preserve collateral interests and recovery is actually enhanced 
by making the advance.



Sec. 1980.473  Additional loans or advances.

    (Refer to paragraph XIII of Form FmHA or its successor agency under 
Public Law 103-354 449-35.)

                             Administrative

    Only the State Director shall approve within his/her loan approval 
authority additional nonguaranteed loans or advances prior to or 
subsequent to the issuance of the Loan Note Guarantee. The State 
Director shall determine that there will be no adverse changes in the 
borrower's financial situation and that such loan or advance is not 
likely to adversely affect the collateral or the guaranteed loan.



Sec. 1980.474  [Reserved]



Sec. 1980.475  Bankruptcy.

    (a) It is the lender's responsibility to protect the guaranteed loan 
debt and all the collateral securing it in bankruptcy proceedings. These 
responsibilities include but are not limited to the following:
    (1) The lender will file a proof of claim where necessary and all 
the necessary papers and pleadings concerning the case.
    (2) The lender will attend and where necessary participate in 
meetings of the creditors and all court proceedings.
    (3) The lender, whose collateral is subject to being used by the 
trustee in bankruptcy, will immediately seek adequate protection of the 
collateral.
    (4) Where appropriate, the lender should seek involuntary conversion 
of a pending Chapter 11 case to a liquidating proceeding under Chapter 7 
or under Section 1123(b) (4) or seek dismissal of the proceedings.
    (5) When permitted by the Bankruptcy Code, the lender will request 
modification of any plan of reorganization whenever it appears that 
additional recoveries are likely.
    (6) FmHA or its successor agency under Public Law 103-354 will be 
kept adequately and regularly informed in writing of all aspects of the 
proceedings.
    (b) In a Chapter 11 reorganization, if an independent appraisal of 
collateral is necessary in FmHA or its successor agency under Public Law 
103-354's opinion, FmHA or its successor agency under Public Law 103-354 
and the lender will share such appraisal fee equally.
    (c) Expenses on Chapter 11 reorganization, liquidating Chapter 11 or 
Chapter 7 (unless the lender is directly handling the liquidation) cases 
are not to be deducted from the collateral proceeds.
    (d) Estimated loss payments. See paragraph XVI of Form FmHA or its 
successor agency under Public Law 103-354 449-35.

                             Administrative

    Refer to Appendix G of this subpart (available in any FmHA or its 
successor agency under Public Law 103-354 office) for advice on how to 
interact with the lender on liquidation and property management.
    A. It is the responsibility of the State Program Chief to see that 
FmHA or its successor agency under Public Law 103-354 is being fully 
informed by the lender in all bankruptcy cases.
    B. All bankruptcy cases should be reported immediately to the 
National Office by utilizing and completing a problem/delinquent status 
report. The Regional Attorney must be informed promptly of the 
proceedings.
    C. Chapter 11 pertains to a reorganization of a business 
contemplating an ongoing business rather than a termination and 
dissolution of the business where legal protection is afforded to the 
business as defined under Chapter 11 of the Bankruptcy Code. 
Consequently, expenses incurred by the lender in a Chapter 11 
reorganization can never be liquidation expenses unless the proceeding 
becomes a Liquidating 11. If the proceeding should become a Liquidating 
11, reasonable and customary liquidation expenses may be deducted from 
proceeds of collateral provided the lender is doing the actual 
liquidation of the collateral as provided by the Lender's Agreement. 
Chapter 7 pertains to a liquidation of the borrower's assets. If and 
when liquidation of the borrower's assets under Chapter 7 is conducted 
by the bankruptcy trustee, the lender cannot claim expenses.
    D. The State Director may approve the repurchase of the unpaid 
guaranteed portion of the loan from the holder(s) to reduce interest 
accruals during Chapter 7 proceedings or after a Chapter 11 proceeding 
becomes a liquidation proceeding. On loans in bankruptcy,

[[Page 486]]

any loss payment must be halted in accordance with the Lender's 
Agreement and carry the approval of the State Director.
    E. The State Director must approve in advance and in writing the 
lender's estimated liquidation expenses on loans in liquidation 
bankruptcy. These expenses must be reasonable and customary and not in-
house expenses of the lender.
    F. The lender is responsible for advising FmHA or its successor 
agency under Public Law 103-354 of the completion of the Chapter 11 
reorganization plan; however, the FmHA or its successor agency under 
Public Law 103-354 servicing office will monitor the lender's files to 
ensure timely notification of servicing actions.
    G. If an estimated loss claim is paid during the operation of the 
reorganization plan, and the borrower repays in full the remaining 
balance of the loan as set forth in the plan without an additional loss 
sustained by the lender, a Final Report of Loss is not necessary. The 
Finance Office will close out the estimated loss account as a Final Loss 
at the time notification of payment in full is received.
    H. If the bankruptcy court attempts to direct that loss payments 
will be applied to the account other than the unsecured principal first 
and then to unsecured accrued interest, the lender is responsible for 
notifying the FmHA or its successor agency under Public Law 103-354 
servicing office immediately. The FmHA or its successor agency under 
Public Law 103-354 servicing office will then obtain advice from OGC on 
what actions FmHA or its successor agency under Public Law 103-354 
should take.
    I. Protective Advances--Authorized protective advances may be 
included with the estimated loss payment associated with the Chapter 11 
reorganization provided they were incurred in connection with 
liquidation of the account prior to the borrower filing bankruptcy.
    J. Adequate Protection--The bankruptcy court can order protection of 
the collateral while the borrower is in a reorganization bankruptcy. The 
lender whose collateral is subject to being used by the trustee in 
bankruptcy should immediately seek adequate protection of the 
collateral, including petitioning for a super priority.

[54 FR 1598, Jan. 13, 1989]



Sec. 1980.476  Transfer and assumptions.

    (a) All transfers and assumptions will be approved in writing by 
FmHA or its successor agency under Public Law 103-354. Such transfers 
and assumptions will be to an eligible applicant.
    (b) Transfers and assumptions will be considered without regard to 
Sec. 1980.451 (d) of this subpart.
    (c) The borrower will submit to FmHA or its successor agency under 
Public Law 103-354 Form FmHA or its successor agency under Public Law 
103-354 449-4 for the required character evaluation prior to the 
execution of the Assumption Agreement.
    (d) Available transfer and assumption options to eligible borrowers 
include the following:
    (1) The total indebtedness may be transferred to another borrower on 
the same terms.
    (2) The total indebtedness may be transferred to another borrower on 
different terms not to exceed those terms for which an initial loan can 
be made.
    (3) Less than the total indebtedness may be transferred to another 
borrower on the same terms.
    (4) Less than the total indebtedness may be transferred to another 
borrower on different terms.
    (e) In any transfer and assumption case, the transferor, including 
any guarantor(s), may be released from liability by the lender with FmHA 
or its successor agency under Public Law 103-354 written concurrence 
only when the value of the collateral being transferred is at least 
equal to the amount of the loan or part of the loan being assumed. If 
the transfer is for less than the entire debt:
    (1) FmHA or its successor agency under Public Law 103-354 must 
determine that the transferor and any guarantors have no reasonable 
debt-paying ability considering their assets and income at the time of 
transfer.
    (2) The FmHA or its successor agency under Public Law 103-354 County 
Committee must certify that the transferor has cooperated in good faith, 
used due diligence to maintain the collateral against loss, and has 
otherwise fulfilled all of the regulations of this subpart to the best 
of borrower's ability.
    (f) Any proceeds received from the sale of secured property before a 
transfer and assumption will be credited on the transferor's guaranteed 
loan debt in inverse order of maturity before the transfer and 
assumption transaction is closed.
    (g) When the transferee makes any cash downpayment in connection 
with the transfer and assumption:

[[Page 487]]

    (1) The lender will employ an independent appraiser, subject to 
concurrence of both the transferor and transferee, to make an appraisal 
to determine the fair market value of all the collateral securing the 
loan. Such appraisal report fee and any other costs related thereto will 
be paid by the transferor and the transferee as they mutually agree.
    (2) The market value of the secured property being acquired by the 
transferee, plus any additional security the transferee proposes to give 
to secure the debt, will be adequate to secure the balance of the total 
guaranteed loan owed, plus any prior liens. If any cash downpayment is 
made, it may be paid directly to the transferor as payment for equity in 
the project provided:
    (i) The lender recommends and FmHA or its successor agency under 
Public Law 103-354 approves the case downpayment be released to the 
transferor. The lender and FmHA or its successor agency under Public Law 
103-354 may require that an amount be retained for an established period 
of time in escrow as a reserve account as security for use against any 
future default on the loan. Any interest accruing on such an escrow 
account may be paid periodically to the transferor.
    (ii) Any payments that are to be made by the transferee to the 
transferor in respect to the downpayment do not suspend the transferee's 
obligation to continue to meet the guaranteed loan payments as they come 
due under the terms of the assumption.
    (iii) The transferor will agree not to take any actions against the 
transferee in connection with such transfer in the future without first 
obtaining the written approval of FmHA or its successor agency under 
Public Law 103-354 and the lender.
    (iv) The lender determines that there is repayment ability for the 
guaranteed debt assumed and any other indebtedness of the transferee.
    (h) The lender will make, in all cases, a complete credit analysis 
to determine viability of the project, subject to FmHA or its successor 
agency under Public Law 103-354 review and approval, including any 
requirement for deposits in an escrow account as security to meet its 
determined equity requirements for the project.
    (i) The lender will issue a statement to FmHA or its successor 
agency under Public Law 103-354 that the transaction can be properly 
transferred and the conveyance instruments will be filed, registered, or 
recorded as appropriate and legally permissible.
    (j) FmHA or its successor agency under Public Law 103-354 will not 
guarantee any additional loans to provide equity funds for a transfer 
and assumption.
    (k) The assumption will be made on the lender's form of assumption 
agreement.
    (l) The assumption agreement will contain the FmHA or its successor 
agency under Public Law 103-354 case number of the transferor and 
transferee.
    (m) Loan terms cannot be changed by the Assumption agreement unless 
previously approved in writing by FmHA or its successor agency under 
Public Law 103-354, with the concurrence of any holder(s) and 
concurrence of the transferor (including guarantors) if they have not 
been released from personal liability. Any new loan terms cannot exceed 
those authorized in this subpart. The lender's request will be supported 
by:
    (1) An explanation of the reasons for the proposed change in the 
loan terms.
    (2) Certification that the lien position securing the guaranteed 
loan will be maintained or improved, proper hazard insurance will be 
continued in effect and all applicable Truth in Lending requirements 
will be met.
    (n) In the case of a transfer and assumption, it is the lender's 
responsibility to see that all such transfers and assumptions will be 
noted on all originals of the Loan Note Guarantee(s). The lender will 
provide FmHA or its successor agency under Public Law 103-354 a copy of 
the transfer and assumption agreement. Notice must be given by the 
lender to FmHA or its successor agency under Public Law 103-354 before 
any borrower or guarantor is released from liability.
    (o) The holder(s), if any, need not be consulted on a transfer and 
assumption case unless there is a change in loan terms.

[[Page 488]]

    (p) If a loss should occur upon consummation of a complete transfer 
of assets and assumption for less than the full amount of the debt and 
the transferor-debtor (including personal guarantor) is released from 
personal liability, as provided in paragraph (e) of this section, the 
lender, if it holds the guaranteed portion, may file an estimated 
``report of Loss'' on Form FmHA or its successor agency under Public Law 
103-354 449-30 to recover its pro rata share of the actual loss at that 
time. In completing Form FmHA or its successor agency under Public Law 
103-354 449-30, the amount of the debt assumed will be entered on Line 
24 as Net Collateral (Recovery). Approved protective advances and 
accrued interest thereon made during the arrangement of a transfer and 
assumption, if not assumed by the transferee, will be entered on Form 
449-30, lines 13 and 14.

                             Administrative

    Refer to Appendix G of this subpart (available in any FmHA or its 
successor agency under Public Law 103-354 Office) for advice on how to 
interact with the lender on liquidations and property management.
    A. The State Director may approve all transfer and assumption 
provisions if the guaranteed loan debt balance is within his/her 
individual loan approval authority including:
    1. Consent in writing to the release of the transferor and 
guarantors from liability.
    2. Any changes in loan terms.
    Note-- The assumption will be reviewed as if it were a new loan. The 
Loan Note Guarantee(s) will be endorsed in the space provided on the 
form(s).
    B. A copy of the Assumption Agreement will be retained in the FmHA 
or its successor agency under Public Law 103-354 file. The State 
Director will notify the Finance Office of all approved transfer and 
assumption cases on Form FmHA or its successor agency under Public Law 
103-354 1980-7, ``Notice of Transfer and Assumption of a Guaranteed 
Loan,'' and submit Form FmHA or its successor agency under Public Law 
103-354 1980-50 for all new borrowers and Form FmHA or its successor 
agency under Public Law 103-354 1980-51, ``Add, Change, or Delete 
Guaranteed Loan Record,'' in order that Finance records may be adjusted 
accordingly.
    C. Any transfer and assumption of less than the total indebtedness 
must be submitted to the Director, Business and Industry Division, for 
review and concurrence.
    D. If the guaranteed loan debt balance is in excess of the State 
Director's loan approval authority, the State Director will forward the 
file, together with his/her recommendations, to the National Office for 
approval, ATTN: Business and Industry Division.



Sec. Sec. 1980.477-1980.480  [Reserved]



Sec. 1980.481  Insured loans.

    Applications from private parties for whom FmHA or its successor 
agency under Public Law 103-354 and such borrowers agree that a 
guarantee lender is not available and from public bodies shall be 
processed as insured loans in accordance with the applicable provisions 
of this subpart and Subpart A of Part 1942 of this chapter, including 
the credit elsewhere requirement, except as provided in Sec. 1980.488 
of this subpart which provides for the guarantee of taxable bond issues 
of public bodies. Loans to public bodies will be used only to finance:
    (a) Community facilities as defined in Sec. 1980.402 of this 
subpart, and
    (b) Constructing and equipping industrial plants for lease to 
private businesses (not including loans for operating such businesses) 
when the requesting loan is not available under Subpart A of Part 1942 
of this chapter.

                             Administrative

    A. Without specific written delegated authority, all insured loans 
require National Office concurrence prior to approval.
    B. Applications from private parties for insured loans will not be 
encouraged.
    C. Loan closings on insured loans will be in accordance with this 
subpart, the Regional Attorney and applicable provisions of Subpart A of 
Part 1942 of this chapter.

[52 FR 6501, Mar. 4, 1987, as amended at 53 FR 40403, Oct. 17, 1988]



Sec. Sec. 1980.482-1980.487  [Reserved]



Sec. 1980.488  Guaranteed industrial development bond issues.

    (a) Loans to public bodies will be guaranteed only in connection 
with the issuance of any class or series of industrial development bonds 
(as defined in section 103(c)(2) of the Internal Revenue Code of 1954, 
as amended (IRC)), the interest on which is included in gross income 
under IRC. No part of the loan guaranteed by FmHA or its successor 
agency under Public Law 103-354 may extend to any class or series of 
industrial development bonds the interest on which is excludable from 
gross

[[Page 489]]

income under section 103(a)(1) of such Code. Before the execution of any 
Loan Note Guarantee, the lender will furnish FmHA or its successor 
agency under Public Law 103-354 evidence regarding interest on bonds 
being taxable for Federal income tax purposes. Such evidence may be in 
the form of an unqualified opinion of a recognized bond counsel or a 
ruling from the Internal Revenue Service. Guaranteed loans to public 
bodies can only be used for constructing and equipping industrial plants 
for lease to private businesses engaged in industrial manufacturing and 
does not provide funds for debt refinancing, working capital and other 
miscellaneous fees, charges or services. The lessee will have to provide 
necessary capital and sufficient financial strength to provide for a 
sound project.
    (b) If FmHA or its successor agency under Public Law 103-354 and the 
applicant agree that a guaranteed lender is not available, the 
application may be considered for an insured loan under the provisions 
of Sec. 1980.481 of this subpart.

                             Administrative

    The lender is responsible for notifying the FmHA or its successor 
agency under Public Law 103-354 of the taxability of the proposed bond 
issue.



Sec. 1980.489  [Reserved]



Sec. 1980.490  Business and industry buydown loans.

    (a) Introduction. This section contains regulations for the Business 
and Industry Buydown (BIB) loan program. The purpose of this program is 
to provide loan guarantees with reduced interest rates to the borrowers, 
under the authority of Public Law 103-50 (107 Stat. 241). All provisions 
of Subparts A and E of this part apply to BIB loans except as provided 
in this section. All forms used in connection with a BIB loan will be 
those used with other B&I loans, except as provided in this section.
    (b) Location of applicants. Businesses eligible for BIB loans shall 
be located within the area covered by the Presidential disaster 
declaration related to Hurricanes Andrew or Iniki or Typhoon Omar.
    (c) Interest rate. (1) If the interest rate charged by the lender 
(note rate) on a BIB loan is a variable rate in accordance with Sec. 
1980.423 of this subpart, the base rate must be the prime rate as 
published in the Wall Street Journal and the note rate must not exceed 
the prime rate as published in the Wall Street Journal by more than 100 
basis points. If the note rate is fixed, it must not exceed by more than 
100 basis points the prime rate as published in the Wall Street Journal 
on the day the Loan Note Guarantee is issued.
    (2) The note rate for a BIB loan must be the same for the entire 
loan, including both the guaranteed and unguaranteed portion.
    (d) Interest rate buydown. (1) To be eligible for a BIB loan, the 
business must provide evidence and the lender and FmHA or its successor 
agency under Public Law 103-354 must determine that, at least for the 
first year of the loan, the business will not have adequate cash flow to 
meet all of its financial obligations including the required payments on 
the proposed loan at the note rate, but that it can meet all obligations 
if the interest rate is reduced by 100 basis points.
    (2) During the first year after a Loan Note Guarantee is issued for 
a BIB loan, FmHA or its successor agency under Public Law 103-354 will 
pay one percentage point of interest on the loan directly to the lender, 
thereby reducing the interest due from the borrower by this amount. This 
interest payment shall be applied to both the guaranteed and 
unguaranteed portion of the loan pro ratably according to FmHA or its 
successor agency under Public Law 103-354 regulations.
    (3) Interest payments by FmHA or its successor agency under Public 
Law 103-354 may continue in subsequent years if the borrower's cash flow 
is insufficient to pay all obligations including the required payments 
on the proposed loan at the note rate. On or about each yearly 
anniversary of the promissory note the lender may submit a request to 
FmHA or its successor agency under Public Law 103-354 for continued 
interest payments, along with current profit and loss and cash flow 
statements and cash flow projections to show that the continued payments 
are needed for another year. FmHA or its successor agency under Public 
Law 103-354 will

[[Page 490]]

promptly review the material submitted, determine whether the continued 
interest payments by FmHA or its successor agency under Public Law 103-
354 are needed to provide for sufficient cash flow in the coming year, 
and notify the lender in writing of the determination. Once interest 
payments by FmHA or its successor agency under Public Law 103-354 are 
terminated because the borrower's cash flow is determined to be 
sufficient to pay the note rate, such payments will not be made in 
subsequent years even if the cash flow decreases.
    (4) This section does not authorize interest payments by FmHA or its 
successor agency under Public Law 103-354 on B&I loans other than those 
approved under this section. To be eligible for interest payments by 
FmHA or its successor agency under Public Law 103-354, the loan must be 
designated as a BIB loan when approved and funded from funds authorized 
by Public Law 103-50.
    (e) Duration of BIB loan program. No BIB loan will be obligated 
after September 30, 1994.
    (f) Administrative procedures. (1) A lender that wants a B&I 
application considered under BIB authorities should so indicate by 
notation on Form FmHA or its successor agency under Public Law 103-354 
449-1 or by letter submitted with the Form FmHA or its successor agency 
under Public Law 103-354 449-1.
    (2) FmHA or its successor agency under Public Law 103-354 will 
identify a loan as a BIB loan by notation in the top margin of Form FmHA 
or its successor agency under Public Law 103-354 449-29 and by the 
``type of assistance'' code listed on Form FmHA or its successor agency 
under Public Law 103-354 1940-3, in accordance with the Forms Manual 
Insert.
    (3) FmHA or its successor agency under Public Law 103-354 will set 
out the interest buydown provisions in accordance with this section in 
the Conditional Commitment for Guarantee. When the Loan Note Guarantee 
is issued, the lender and FmHA or its successor agency under Public Law 
103-354 will execute Form FmHA or its successor agency under Public Law 
103-354 1980-48, ``Business and Industry Interest Rate Buydown 
Agreement.''
    (4) The lender will request the interest payment from FmHA or its 
successor agency under Public Law 103-354 by submitting Form FmHA or its 
successor agency under Public Law 103-354 1980-23, ``Request for 
Business and Industry Interest Buydown Payment,'' to the FmHA or its 
successor agency under Public Law 103-354 servicing office. Each request 
must cover exactly 1 year and be filed within 30 days after the 
anniversary date of the promissory note, except when interest buydown is 
terminated between anniversary dates. The FmHA or its successor agency 
under Public Law 103-354 servicing office will review each request for 
consistency with FmHA or its successor agency under Public Law 103-354 
regulations and the Form FmHA or its successor agency under Public Law 
103-354 1980-48 and, if the claim is valid, will approve it and forward 
it to the Finance Office for issuance of the payment to the lender.
    (g) Termination of interest buydown. When FmHA or its successor 
agency under Public Law 103-354 purchases a portion of a loan, interest 
buydown will cease on the entire loan. Interest buydown will also cease 
upon termination of the Loan Note Guarantee or assumption/transfer of 
the loan. In the event of any action that causes the interest buydown to 
terminate, the lender will submit a claim on Form FmHA or its successor 
agency under Public Law 103-354 1980-23 for interest buydown payments 
through the date of termination.
    (h) Loan purposes--(1) Refinancing. Section 1980.452 Administrative 
C.1. (d) of this subpart does not apply to BIB loans if refinancing is 
needed as a direct consequence of the disaster. In such cases, the 
lender may be allowed to bring previously unguaranteed exposure under 
the guarantee. No loan will be refinanced unless the current market 
value of the collateral is at least equal to the amount of the loan to 
be refinanced plus any new loan amount.
    (2) Agriculture. Section 1980.412 (e) of this subpart does not apply 
to BIB loans. BIB loans may be guaranteed for agriculture production, 
which means the cultivation, production (growing),

[[Page 491]]

and harvesting, either directly or through integrated operations, of 
agricultural products (crops, animals, birds, and marine life, either 
for fiber or food for human consumption), and disposal or marketing 
thereof, the raising, housing, feeding (including commercial custom 
feedlots), breeding, hatching, control and/or management of farm or 
domestic animals.
    (3) Other eligible businesses. Eligible types of businesses also 
include:
    (i) Commercial nurseries primarily engaged in the production of 
ornamental plants and trees and other nursery products such as bulbs, 
florists' greens, flowers, shrubbery, flower and vegetable seeds, sod, 
and the growing of vegetables from seed to the transplant stage.
    (ii) Forestry which includes establishments primarily engaged in the 
operation of timber tracts, tree farms, forest nurseries, and related 
activities such as reforestation.
    (iii) The growing of mushrooms or hydroponics.
    (4) Recreation and tourism. Loans may be guaranteed for tourist or 
recreation facilities except for hotels, motels, bed and breakfasts, 
race tracks, gambling, or golf courses.
    (5) Meat processing facilities. The provisions of Sec. 1980.411 
(a)(8) of this subpart will not apply to BIB loans. Loans, including 
working capital or debt refinancing, may be guaranteed for businesses 
engaged in meat or poultry processing.
    (i) Small Business Administration. Section 1980.451 (c) of this 
subpart will not apply to BIB loans. Applicants eligible for Small 
Business Administration assistance will be advised of the availability 
of that assistance.
    (j) Loan guarantee limits. Notwithstanding the provisions of Sec. 
1980.420 of this subpart, the guarantee percentage on any BIB loan will 
not exceed 80 percent.
    (k) Credit quality analysis. In analyzing the credit quality of a 
proposed loan to a business that has lost assets to a natural disaster, 
primary emphasis will be placed on the operating history of the 
business, rather than its current financial condition. If the business 
has a sound, profitable and successful history prior to the disaster and 
there are reasonable projections to ensure it can operate successfully 
in the future, the proposed loan may be approved even if disaster losses 
have caused somewhat less equity and/or collateral than would normally 
be expected for a B&I loan guarantee. If the business appears to have 
had an unprofitable operation or inadequate cash flow prior to the 
disaster, the proposed loan guarantee will not be approved.
    (l) Equity requirements. The equity requirements of Sec. 1980.441 
of this subpart do not apply to BIB loans.
    (m) Collateral. Section 1980.443 Administrative A. 2., 3., and 4. of 
this subpart will not apply to BIB loans. Collateral may be considered 
at its current market value without discount. Work-in-process inventory 
may be valued at the estimated market value of the finished product. All 
costs of producing the finished product must be included in the cash 
flow analysis.
    (n) Conditional approval. A Form FmHA or its successor agency under 
Public Law 103-354 449-14 may be issued prior to receipt of specific 
items needed to complete an application package provided:
    (1) The lender and/or borrower demonstrates to the Government's 
satisfaction that it has a need for a prompt indication of the 
availability of the proposed loan guarantee and the conditions under 
which a guarantee are available;
    (2) The specific items missing from the application package will 
take considerable time to obtain;
    (3) The lender requests a commitment prior to providing the items;
    (4) The attachment to Form FmHA or its successor agency under Public 
Law 103-354 449-14 clearly states that the commitment is conditioned on 
satisfactory completion of the missing item(s) and a guarantee will not 
be issued unless all conditions of these regulations are met; and
    (5) No Form FmHA or its successor agency under Public Law 103-354 
449-14 will be issued prior to the obligation date established with the 
Finance Office.
    (o) Financial statements. All requirements of Sec. 1980.451(i)(13) 
of this subpart will apply except that for BIB loans

[[Page 492]]

minimum annual financial statements will be required as follows:
    (1) For nonagricultural borrowers with a B&I indebtedness of 
$500,000 or less, an annual compilation by an independent certified 
public accountant or by an independent public accountant licensed and 
certified on or before December 31, 1970.
    (2) For nonagricultural borrowers with a B&I indebtedness of 
$500,001 through $1 million, an annual review by an independent 
certified public accountant or by an independent public accountant 
licensed and certified on or before December 31, 1970.
    (3) For nonagricultural borrowers with a B&I indebtedness of more 
than $1 million, an annual audited financial statement by an independent 
certified public accountant or by an independent public accountant 
licensed and certified on or before December 31, 1970.
    (4) All agricultural loans will require annual financial statements 
per Sec. 1980.113 of subpart B of this part.
    (p) Agriculture loans. The following additional provisions apply to 
BIB loan guarantees for businesses engaged in agriculture production:
    (1) General policy. Paragraph (p) of this section contains the 
regulations for making BIB loans to farmers for agricultural purposes. 
BIB loans made for agricultural purposes are subject to the provisions 
in subparts A and E of this part except as specified. In addition, 
certain sections of subpart B of this part referenced in this section 
are applicable subject to the limitations outlined in this section. 
Several key loan processing and loan servicing requirements stipulated 
in subpart B of this part do not apply to loans made to borrowers under 
this section.
    (2) Type of guarantee. BIB loans will be processed under the Loan 
Note Guarantee option of Sec. 1980.101 (e)(1) of subpart B of this part 
Only. No loan will be processed for a Contract of Guarantee (Line of 
Credit) under Sec. 1980.101 (e)(2) of subpart B of this part.
    (3) Farm size. Loan guarantees may be made under the BIB program 
without regard to the size of the farming operation.
    (4) Filing and processing preapplications and applications. If the 
applicant has already developed material for an FmHA or its successor 
agency under Public Law 103-354 Farmer Programs loan or if the financial 
and production information required by Sec. 1980.113 of subpart B of 
this part is needed to document repayment ability or is required by the 
lender, Sec. 1980.113 of subpart B of this part may apply with the 
following exceptions:
    (i) Lines of credit will not be guaranteed.
    (ii) If the application is submitted solely for a farm as defined in 
Sec. 1980.106(b) of subpart B of this part, Form FmHA or its successor 
agency under Public Law 103-354 1980-25, ``Farmer Programs 
Application,'' or Form FmHA or its successor agency under Public Law 
103-354 449-1, will be used as an application for assistance.
    (5) Evaluation of applications. If the application is developed and 
processed in accordance with Sec. 1980.113 of subpart B of this part, 
the provisions outlined in Sec. 1980.114 of subpart B of this part 
apply with the following exceptions:
    (i) Timeframe requirements for the evaluation of applications and 
references to the Approved Lender Program are not applicable.
    (ii) County Committee reviews of applications processed under this 
section will not be required. If the loan approval official finds the 
applicant is not eligible, the applicant will be notified in writing of 
the reasons for disapproval and his/her rights through inclusion of the 
Equal Credit Opportunity Act (ECOA) statement. An opportunity will be 
given for an appeal as set out in subpart B of part 1900 of this 
chapter.
    (iii) When applied to BIB applications, references in Sec. 1980.114 
of this part to ``County Office'' shall normally be construed to mean 
``State Office.'' References to ``County Supervisor'' shall be construed 
to mean ``Business and Industry Chief or Community and Business Programs 
Chief, or other appropriate FmHA or its successor agency under Public 
Law 103-354 official as designated by the State Director.''
    (6) Terms of loan repayment. (i) Principal and interest on the loan 
will be due and payable to coincide with the cash flow operating cycle 
of the business. Installments will be scheduled for payment as agreed 
upon by the lender

[[Page 493]]

and borrower on terms that reasonably assure repayment of the loan. The 
first installment to include a repayment of principal may be scheduled 
for payment after the project is operational and has begun to generate 
income. However, such installment will be due and payable within 6 years 
from the date of the debt instrument and at least annually thereafter. 
Interest will not be deferred and will be due at least annually from the 
date of the debt instrument. In granting a deferral of principal 
payment, the loan approval official must document based on pro forma 
financial statements and the nature of the crop that the deferral of 
payments is necessary.
    (ii) The lender must ensure that loan repayment is scheduled to 
eliminate the possibility of a balloon payment at the end of the loan.
    (7) Agriculture BIB loan purposes. Loans may be made only for the 
following purposes:
    (i) Operating purposes as outlined in Sec. 1980.175 (c)(1) of 
Subpart B of this part except for those stipulated in Sec. 
1980.175(c)(1)(iv) and (vii).
    (ii) Real estate purposes as outlined in Sec. 1980.180 (c) of 
Subpart B of this part except for those stipulated in Sec. 1980.180 
(c)(1) and (4).
    (iii) Refinancing in accordance with paragraph (h)(1) of this 
section and Sec. Sec. 1980.411 (a)(11), 1980.451 (i)(19), and 1980.452 
Administrative C. (except Sec. 1980.452 Administrative C. 1. (d) of 
this subpart.
    (8) Sodbuster and swampbuster requirements. The provisions of 
exhibit M of subpart G of part 1940 of this chapter will apply to loans 
made to enterprises engaged in agricultural production.

[59 FR 28466, June 2, 1994]



Sec. Sec. 1980.491-1980.494  [Reserved]



Sec. 1980.495  FmHA or its successor agency under Public Law 103-354 
forms and guides.

    The following FmHA or its successor agency under Public Law 103-354 
forms and guides, as applicable, are used in connection with processing 
B&I, D&D, and DARBE loan guarantees; they are incorporated in this 
subpart and made a part hereof:
    (a) Form FmHA or its successor agency under Public Law 103-354 449-
1. ``Application for Loan and Guarantee,'' is referred to as ``Appendix 
A,''
    (b) The ``Certificate of Incumbency and Signature'' is referred to 
as ``Appendix B,''
    (c) ``Guidelines for Loan Guarantees for Alcohol Fuel Production 
Facilities'' is referred to as ``Appendix C,''
    (d) ``Alcohol Production Facilities Planning, Performing, 
Development and Project Control'' is referred to as ``Appendix D,''
    (e) ``Environmental Assessment Guidelines'' is referred to as 
``Appendix E.''
    (f) Form FmHA or its successor agency under Public Law 103-354 449-
14, ``Conditional Commitment for Guarantee'' is referred to as 
``Appendix F,'' and
    (g) ``Liquidation and Property Management Guide'' is referred to as 
``Appendix G.''
    (h) ``Suggested Format for the Opinion of the Lender's Legal 
Counsel'' is referred to as ``Appendix H.''
    (i) ``Instructions for Loan Guarantees for Drought and Disaster 
Relief'' and Forms FmHA or its successor agency under Public Law 103-354 
1980-68, ``Lender's Agreement--Drought and Disaster Guaranteed Loans,'' 
1980-69, ``Loan Note Guarantee--Drought and Disaster Guaranteed Loans,'' 
and 1980-70, ``Assignment Guarantee Agreement--Drought and Disaster 
Guaranteed Loans,'' are referred to as ``Appendix I.''
    (j) [Reserved]
    (k) ``Regulations for Loan Guarantees for Disaster Assistance for 
Rural Business Enterprises'' and Forms FmHA or its successor agency 
under Public Law 103-354 1980-71, ``Lender's Agreement--Disaster 
Assistance for Rural Business Enterprises Guaranteed Loans,'' 1980-72 
``Loan Note Guarantee--Disaster Assistance for Rural Business 
Enterprises Guaranteed Loans,'' and 1980-73 ``Assignment Guarantee 
Agreement--Disaster Assistance for Rural Business Enterprises Guaranteed 
Loans'' are referred to as ``Appendix K.''

[52 FR 6501, Mar. 4, 1987, as amended at 54 FR 4, Jan. 3, 1989, and 54 
FR 26946, June 27, 1989; 54 FR 42483, Oct. 17, 1989]

[[Page 494]]



Sec. 1980.496  Exception authority.

    The Administrator may in individual cases grant an exception to any 
requirement or provision of this subpart which is not inconsistent with 
any applicable law or opinion of the Comptroller General, provided the 
Administrator determines that application of the requirement or 
provision would adversely affect the Government's interest. Requests for 
exceptions must be in writing by the State Director and submitted 
through the Assistant Administrator, Community and Business Programs. 
Requests must be supported with documentation to explain the adverse 
effect on the Government's interest, propose alternative courses of 
action, and show how the adverse effect will be eliminated or minimized 
if the exception is granted.



Sec. 1980.497  General administrative.

    Refer to appendix G of this subpart (available in any FmHA or its 
successor agency under Public Law 103-354 Office) for advice on how to 
interact with the OGC on liquidations and property management.
    (a) Office of the General Counsel (OGC). In performing the FmHA or 
its successor agency under Public Law 103-354 functions with respect to 
B&I, D & D, and DARBE loans, the advice and assistance of OGC may be 
sought and followed on any legal matter. However, it is the 
responsibility of the lender to ascertain that all requirements for 
making, securing, and servicing the loan are duly met. If FmHA or its 
successor agency under Public Law 103-354 has any questions concerning 
the lender's resolution of these matters, OGC should be consulted. 
Assistance of OGC will be requested on all loans as specified herein and 
all liquidations and workouts.
    (b) Contact with OGC. Initial informal contact with OGC should be 
made as soon as possible. FmHA or its successor agency under Public Law 
103-354 State Directors should use the following format in formally 
requesting legal assistance on workouts.
    (1) Origination: All written requests should come from the State 
Director.
    (2) Method: Request should be made by referral memorandum to the 
Regional Attorney setting forth a brief statement of the facts, the 
reason assistance is requested, the extent of legal assistance sought, 
the date when FmHA or its successor agency under Public Law 103-354's 
response to the lender's liquidation plan (if any) is due and:
    (i) Projected losses on collateral: e.g., projected losses on 
collateral are expected to be significant.
    (ii) Unusual or complex nature of primary collateral: e.g., multi-
state foreclosures or foreclosure of leases or general intangibles.
    (iii) Presence of other major creditors or of senior creditors: 
e.g., guaranteed loan collateral may be subject to a prior lien or other 
creditors may have rights in other assets of borrower, such as inventory 
and accounts receivable.
    (iv) Litigation is pending or threatened: e.g., bankruptcy, other 
foreclosure suits.
    (3) Materials to submit: Referral memorandums will be accompanied by 
a copy of lender's liquidation plan together with a copy of FmHA or its 
successor agency under Public Law 103-354's planned response and 
principal loan papers, conditional commitment for guarantee, guarantee 
documents and any comments from the National Office. If lender refuses 
to prepare a plan, the State Director should so state. DO NOT SEND 
DOCKETS unless specifically requested by OGC.
    (c) Reviews prior to issuance of the loan note guarantee. After the 
conditional commitment for guarantee has been issued and proposed with 
closing documents prepared by the lender and forwarded to FmHA or its 
successor agency under Public Law 103-354 with the lender's legal 
counsel's opinion in the suggested format of appendix H of this subpart, 
but prior to issuing the loan note guarantee, the State Director will 
forward the loan docket to the Regional Attorney for review. After an 
administrative review, the State Director will include with the docket a 
letter with recommendations and indicating any special items, documents 
or problems that need to be addressed specifically which may have a 
significant impact upon the loan or may be contrary to the regulation. 
The docket will be assembled for OGC review in accordance with Sec. 
1980.451 Administrative

[[Page 495]]

B 5 of this subpart and indexed and tabbed.
    (d) Please submit the following for OGC review. Copies of:
    (1) Letter from FmHA or its successor agency under Public Law 103-
354 National Office authorizing loan guarantee containing conditions (if 
applicable);
    (2) Form FmHA or its successor agency under Public Law 103-354 449-
14, including any amendments;
    (3) Loan Agreement;
    (4) Promissory Notes;
    (5) Security documents--Real Estate Mortgage, Security Agreement, 
Financing Statements, and Leases (if applicable);
    (6) Personal or corporation guarantees with related security 
documents;
    (7) Proposed Form FmHA or its successor agency under Public Law 103-
354 449-35.
    (8) Proposed Form FmHA or its successor agency under Public Law 103-
354 449-34.
    (9) Proposed Form FmHA or its successor agency under Public Law 103-
354 449-36, if any;
    (10) Proposed Lender's Certification (Sec. 1980.60 of subpart A of 
this part); and
    (11) Opinion of Lender's Counsel in form prescribed by OGC.
    (e) Do not submit for OGC review feasibility studies, title 
information, or the original application unless specifically requested 
to do so.
    (f) OGC advice. The Regional Attorney will review the docket and 
furnish advice to FmHA or its successor agency under Public Law 103-354 
on whether it may issue the LOAN NOTE GUARANTEE AFTER THE LOAN IS 
CLOSED. SUCH ADVICE IS FOR THE BENEFIT OF FmHA or its successor agency 
under Public Law 103-354 ONLY AND DOES NOT RELIEVE THE LENDER OF ITS 
RESPONSIBILITIES UNDER FmHA or its successor agency under Public Law 
103-354 REGULATIONS. The Regional Attorney at his/her option may attend 
the loan closing. Upon receipt of the Regional Attorney's advice, the 
State Director will correct or cause to be corrected any noted 
deficiencies before issuing the Loan Note Guarantee.
    (g) Delegation of authority. The State Director may delegate those 
administrative duties and responsibilities as authorized in the 
Administrative sections of this subpart, except those specifically 
reserved to the State Director.



Sec. 1980.498  Business and Industry Disaster Loans.

    (a) Introduction. This section contains regulations for the Business 
and Industry Disaster (BID) loan program. The purpose of the program is 
to provide loan guarantees under the authority of the Dire Emergency 
Supplemental Appropriations Act, 1992, Public Law 102-368. These 
guaranteed loans cover costs arising from the consequences of natural 
disasters such as Hurricanes Andrew and Iniki and Typhoon Omar that 
occur after August 23, 1992, and receive a Presidential declaration. 
Also included are the costs to any producer of crops and livestock that 
are a consequence of at least a 40 percent loss to a crop, 25 percent 
loss to livestock, or damage to building structures from a microburst 
wind occurrence in calendar year 1992. No BID loan guarantee will be 
approved after September 30, 1993. All provisions of subparts A and E of 
part 1980 of this chapter apply to BID loans, except as provided in this 
section. All forms used in connection with a BID loan will be those used 
with other Business and Industry (B&I) loans, except as provided in 
paragraph (m) of this section.
    (b) Location of Applicants. (1) Section 1980.405 of this subpart. 
``Rural area determinations,'' will not apply to BID loans. BID loans 
may be made in rural and nonrural areas.
    (2) Eligible borrowers' businesses must be located within the area 
covered by the Presidential declaration except for those with qualifying 
losses from microburst wind in accordance with paragraph (a) of this 
section.
    (c) Loan Purposes. Loans may be guaranteed for the purposes listed 
in Sec. 1980.411 of this subpart, ``Loan Purposes,'' except as follows:
    (1) Relationship to disaster. The purpose of any BID loan must be to 
cover costs that are a direct consequence of a natural disaster or 
microburst of wind in accordance with paragraph (a) of this section. The 
amount of the loan must not be greater than the amount

[[Page 496]]

needed as determined by the Rural Development Administration or its 
successor agency under Public Law 103-354 (RDA or its successor agency 
under Public Law 103-354) to cure problems caused by the natural 
disaster so that the business is reestablished on a successful basis. 
Facilities which were damaged or destroyed by the natural disaster may 
be repaired or replaced by modern facilities as necessary to ensure 
success. Replacement by modern facilities will not be made solely for 
the purpose of enlarging the business or increasing its production 
capacity. No loan for a change of purpose of the business will be 
guaranteed. Eligible refinancing or working capital loans should not 
exceed the amount needed to overcome the financial distress caused by 
the disaster. Losses that were adequately paid by insurance or by loans 
or grants from other sources will not be covered by BID loans. BID loans 
may be used to supplement insurance payments and/or assistance from 
other sources when the insurance coverage or other assistance is not 
sufficient.
    (2) Refinancing. Section 1980.452, Administrative C.1.(d) of this 
subpart does not apply to BID loans. If refinancing is needed as a 
direct consequence of the disaster, the lender may be allowed to bring 
previously unguaranteed exposure under the guarantee. No loan will be 
refinanced unless the current market value of the collateral is at least 
equal to the amount of the loan to be refinanced plus any new loan 
amount.
    (3) Agriculture. Section 1980.412(e) of this subpart does not apply 
to BID loans. BID loans may be guaranteed for agriculture production, 
which means the cultivation, production (growing), and harvesting, 
either directly or through integrated operations, of agricultural 
products (crops, animals, birds, and marine life, either for fiber or 
food for human consumption), and disposal or marketing thereof, the 
raising, housing, feeding (including commercial custom feedlots), 
breeding, hatching, control and/or management of farm or domestic 
animals.
    (4) Other eligible businesses. Eligible types of businesses also 
include:
    (i) Commercial nurseries primarily engaged in the production of 
ornamental plants and trees and other nursery products such as bulbs, 
florists' greens, flowers, shrubbery, flower and vegetable seeds, sod, 
and the growing of vegetables from seed to the transplant stage.
    (ii) Forestry which includes establishments primarily engaged in the 
operation of timber tracts, tree farms, forest nurseries, and related 
activities such as reforestation.
    (iii) The growing of mushrooms or hydroponics.
    (5) Recreation and tourism. Loans may be guaranteed for tourist or 
recreation facilities except for hotels, motels, bed and breakfasts, 
race tracks, gambling, or golf courses.
    (6) Meat processing facilities. The provisions of Sec. 
1980.411(a)(8) of this subpart will not apply to BID loans. Loans, 
including working capital or debt refinancing, may be guaranteed for 
businesses engaged in meat or poultry processing.
    (d) Federal Emergency Management Agency (FEMA). BID loans may be 
approved only to the extent that the assistance is not available from 
FEMA. The case file will be documented to show that FEMA assistance was 
not available or that FEMA assistance is not adequate to cover the costs 
as a consequence of the natural disaster.
    (e) Small Business Administration. Section 1980.451 of this subpart 
will not apply to BID loans. Applicants eligible for Small Business 
Administration assistance will be advised of the availability of that 
assistance.
    (f) Loan guarantee limits. Notwithstanding the provisions of Sec. 
1980.420 of this subpart, the guarantee percentage on any BID loan will 
not exceed 80 percent.
    (g) Credit quality analysis. In analyzing the credit quality of a 
proposed loan to a business that has lost assets to a natural disaster, 
primary emphasis will be placed on the operating history of the 
business, rather than its current financial condition. If the business 
has a sound, profitable and successful history prior to the disaster and 
there are reasonable projections to ensure it can operate successfully 
in the future, the proposed loan may be approved even if disaster losses 
have caused somewhat less equity and/or

[[Page 497]]

collateral than would normally be expected for a B&I guarantee. If the 
business appears to have had an unprofitable operation or inadequate 
cash flow prior to the disaster, the proposed loan guarantee will not be 
approved.
    (h) Equity requirements. The equity requirements of Sec. 1980.441 
of this subpart do not apply to BID loans.
    (i) Feasibility studies. Feasibility studies as required by Sec. 
1980.442 of this subpart will not be required for BID loans if the 
business has a successful financial history that supports future plans 
and projections that indicate a successful operation with adequate 
repayment ability.
    (j) Collateral. Section 1980.443, Administrative A. 2., 3., and 4. 
of this subpart will not apply to BID loans. Collateral may be 
considered at its current market value without discount. Work-in-process 
inventory may be valued at the estimated market value of the finished 
product. All costs of producing the finished product must be included in 
the cash flow analysis.
    (k) Conditional approval. A Form FmHA or its successor agency under 
Public Law 103-354 449-14, ``Conditional Commitment for Guarantee,'' may 
be issued prior to receipt of specific items needed to complete an 
application package provided:
    (1) The lender and/or borrower demonstrates to the Government's 
satisfaction that it has a need for a prompt indication of the 
availability of the proposed loan guarantee and the conditions under 
which a guarantee are available;
    (2) The specific items missing from the application package will 
take considerable time to obtain;
    (3) The lender requests a commitment prior to providing the items;
    (4) The attachment to Form FmHA or its successor agency under Public 
Law 103-354 449-14 clearly states that the commitment is conditioned on 
satisfactory completion of the missing item(s) and a guarantee will not 
be issued unless all conditions of these regulations are met; and
    (5) No Form FmHA or its successor agency under Public Law 103-354 
449-14 will be issued prior to the obligation date established with the 
Finance Office.
    (l) Financial statements. All requirements of Sec. 1980.451(i)(13) 
of this subpart will apply except that it is modified for BID loans to 
require minimum annual financial statements as follows:
    (1) For nonagricultural borrowers with a B&I indebtedness of 
$500,000 or less, an annual compilation by an independent certified 
public accountant or by an independent public accountant licensed and 
certified on or before December 31, 1970.
    (2) For nonagricultural borrowers with a B&I indebtedness of 
$500,001 through $1,000,000, an annual review by an independent 
certified public accountant or by an independent public accountant 
licensed and certified on or before December 31, 1970.
    (3) For nonagricultural borrowers with a B&I indebtedness of more 
than $1 million, an annual audited financial statement by an independent 
certified public accountant or by an independent public accountant 
licensed and certified on or before December 31, 1970.
    (4) All agricultural loans will require annual financial statements 
per Sec. 1980.113 of subpart B of part 1980 of this chapter.
    (m) Agriculture loans. The following additional provisions apply to 
BID loan guarantees for businesses engaged in agriculture production:
    (1) General policy. This portion of this section contains the 
regulations for making BID loans to farmers for agricultural purposes. 
BID loans made for agricultural purposes are subject to the provisions 
in subparts A and E of part 1980 of this chapter except as specified. In 
addition, certain sections of subpart B of part 1980 of this chapter 
referenced in this section are applicable subject to the limitations 
outlined in this section. BID loans made for agricultural purposes are 
made under the Business and Industry authority of section 310B of the 
Consolidated Farm and Rural Development Act of 1972, as amended. In this 
regard, several key loan processing and loan servicing requirements 
stipulated in subpart B of part 1980 of this chapter do not apply to 
loans made to borrowers under this section. Only the material cross-
referenced to subpart B of part 1980 of this chapter is to be utilized 
in lieu of or in addition

[[Page 498]]

to the requirements contained in subpart E of part 1980 of this chapter 
in processing loans under this section.
    (2) Type of guarantee. See Sec. 1980.101(e)(1) of subpart B of part 
1980 of this chapter. BID loans will be processed under the Loan Note 
Guarantee option ONLY. No loan will be processed for a Contract of 
Guarantee (Line of Credit) under this section.
    (3) Abbreviations and definitions. (i) The abbreviations and 
definitions found in Sec. 1980.106 of subpart B of part 1980 of this 
chapter will apply to loans made under this section except for ``family 
farm,'' ``related by blood or marriage,'' and ``subsequent loans.''
    (ii) Loan guarantees may be made under the BID program without 
regard to the size of the farming operation.
    (4) Loan eligibility requirements. In addition to the requirements 
set forth in this subpart, the requirements in Sec. 1980.175(b) of 
subpart B of part 1980 of this chapter regarding controlled substances 
are applicable.
    (5) Filing and processing preapplications and applications. If the 
applicant has already developed material for an FmHA or its successor 
agency under Public Law 103-354 Farmer Programs loan or if the financial 
and production information required by Sec. 1980.113 of subpart B of 
part 1980 of this chapter is needed to document repayment ability or is 
required by the lender, Sec. 1980.113 of subpart B of part 1980 of this 
chapter may apply with the following exceptions:
    (i) Lines of credit will not be guaranteed.
    (ii) Timeframes for applicant/lender notification in Sec. 1980.113 
of subpart B of part 1980 of this chapter do not apply.
    (iii) If the application is submitted solely for a farm as defined 
in Sec. 1980.106(b) of subpart B of part 1980 of this chapter, Form 
FmHA or its successor agency under Public Law 103-354 410-1, 
``Application for FmHA or its successor agency under Public Law 103-354 
Services,'' or Form FmHA or its successor agency under Public Law 103-
354 449-1, ``Application for Loan and Guarantee,'' will be used as an 
application for assistance.
    (6) Evaluation of applications. If the application is developed and 
processed in accordance with Sec. 1980.113 of subpart B of part 1980 of 
this chapter, the provisions outlined in Sec. 1980.114 of subpart B of 
part 1980 of this chapter applies with the following exceptions:
    (i) Timeframe requirements for the evaluation of applications and 
references to the Approved Lender Program are not applicable.
    (ii) County Committee reviews of applications processed under this 
section will not be required. If the loan approval official finds the 
applicant is not eligible, the applicant will be notified in writing of 
the reasons for disapproval and the opportunity given for an appeal as 
set out in subpart B of part 1900 of this chapter.
    (7) Terms of loan repayment. (i) Principal and interest on the loan 
will be due and payable to coincide with the cash flow operating cycle 
of the business. Installments will be scheduled for payment as agreed 
upon by the lender and borrower on terms that reasonably assure 
repayment of the loan. The first installment to include a repayment of 
principal may be scheduled for payment after the project is operable and 
has begun to generate income. However, such installment will be due and 
payable within 6 years from the date of the debt instrument and at least 
annually thereafter. All accrued interest will be due at least annually 
from the date of the debt instrument. In no case will interest be 
deferred. In granting a deferral of principal payment, the loan approval 
official must document based on pro forma financial statements and the 
nature of the crop that the deferral of payments is necessary.
    (ii) The lender must ensure that loan repayment is scheduled to 
eliminate the possibility of a balloon payment at the end of the loan.
    (8) BID agriculture loan purposes. Loans may be made only for the 
following purposes:
    (i) Operating purposes as outlined in Sec. 1980.175(c)(1) of 
subpart B of part 1980 of this chapter except for those stipulated in 
paragraphs (c)(1) (iv) and (vii) of that section.
    (ii) Real estate purposes as outlined in Sec. 1980.180(c) of 
subpart B of part 1980 of this chapter except for those stipulated in 
paragraphs (c) (1) and (4) of that section.

[[Page 499]]

    (iii) Refinancing in accordance with paragraphs (c)(1) and (c)(2) of 
this section and Sec. Sec. 1980.411(a)(11), 1980.451(i)(19) and 
1980.452 ADMINISTRATIVE C [except 1980.452 ADMINISTRATIVE C 1(d)] of 
this subpart.
    (9) Sodbuster and swampbuster requirements. The provisions of 
exhibit M of subpart G of part 1940 of this chapter will apply to loans 
made to enterprises engaged in agricultural production.

[57 FR 45969, Oct. 5, 1992, as amended at 58 FR 34342, June 24, 1993; 58 
FR 38952, July 21, 1993; 58 FR 41172, Aug. 3, 1993; 58 FR 48300, Sept. 
15, 1993]



Sec. 1980.499  [Reserved]



Sec. 1980.500  OMB control number.

    The reporting and recordkeeping requirements contained in this 
regulation have been approved by the Office of Management and Budget and 
have been assigned OMB control number 0575-0029. Public reporting burden 
for this collection of information is estimated to vary from 5 minutes 
to 58 hours per response, with an average of 4 hours per response 
including time for reviewing instructions, searching existing data 
sources, gathering and maintaining the data needed, and completing and 
reviewing the collection of information. Send comments regarding this 
burden estimate or any other aspect of this collection of information, 
including suggestions for reducing this burden, to the Department of 
Agriculture, Clearance Officer, OIRM, Room 404-W, Washington, DC 20250; 
and to the Office of Management and Budget, Paperwork Reduction Project 
(OMB 0575-XXXX), Washington, DC 20503.

[55 FR 19245, May 8, 1990]

[[Page 500]]

 Appendix A to Subpart E of Part 1980--Form FmHA 49-1, Application for 
                           Loan and Guarantee
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[[Page 509]]



  Appendix B to Subpart E of Part 1980--Certificate of Incumbency and 
                                Signature

   U.S. Department of Agriculture--Farmers Home Administration or its 
                successor agency under Public Law 103-354

    I, (Name)------------, (Title)-------- of the Farmers Home 
Administration or its successor agency under Public Law 103-354, (FmHA 
or its successor agency under Public Law 103-354), an Agency of the 
United States Department of Agriculture, DO HEREBY CERTIFY that the 
following person holds the office of (State Director, State Program Loan 
Chief, District Director, or County Supervisor)------------ of --------, 
for FmHA or its successor agency under Public Law 103-354 and that the 
signature appearing below and that the signatures appearing above that 
person's name on the following described document is the genuine 
signature of such person:
    1. Form(s) FmHA or its successor agency under Public Law 103-354 
449-34, ``Loan Note Guarantee,'' dated------ relating to loan made by 
(Lender's Name)------------ to (Borrower's Name)------------, FmHA or 
its successor agency under Public Law 103-354 Loan Identification No.--.
    2. Form(s) FmHA or its successor agency under Public Law 103-354 
449-35, ``Lender's Agreement,'' dated------ relating to loan made by 
(Lender's Name)-------------- to (Borrower's Name)--------------, FmHA 
or its successor agency under Public Law 103-354 Loan Identification 
No.--.
    3. Form(s) FmHA or its successor agency under Public Law 103-354 
449-36, ``Assignment Guarantee Agreement,'' dated------ relating to loan 
made by (Lender's Name)-------------- to (Borrower's Name)--------------
, FmHA or its successor agency under Public Law 103-354 Loan 
Identification No.--.
    Signature-------------- (Name
Type)--------------.
    In witness whereof, I have hereunto signed my name this ---- day of 
--------, 19--.

Farmers Home Administration or its successor agency under Public Law 
103-354.
By --___________________________________________________________________
(Title)_________________________________________________________________

Appendix C to Subpart E of Part 1980--Guidelines for Loan Guarantees for 
                   Alcohol Fuel Production Facilities

    (1) Alcohol production facility. An alcohol production facility is a 
facility in which alcohol, suitable for use by itself or in combination 
with other substances as a substitute for petroleum or petrochemical 
feedstocks and not suitable for beverage purposes, is manufactured from 
biomass.
    (2) The alcohol production facility includes all facilities 
necessary for the production and storage of alcohol and the processing 
of the by-products of alcohol production. The intent is to limit the 
alcohol and by-products processing facilities to those facilities which 
are necessary to yield marketable products and necessary for the 
financial success of the project. Further refinements, such as gasoline 
blending or the construction of facilities which use the alcohol or by-
products in another manufacturing process, are not considered part of 
the alcohol production facility.
    (3) Application will be reviewed by both B&I personnel and the State 
Office engineer and forwarded to the National Office if approval is 
recommended.
    (4) The applicant should have a startup tangible book equity of 20-
25 percent. (Appraisal surplus and subordinated debt are not eligible 
equity items.)
    (5) Loan maturity maximums will be as follows:

Real Estate=15-20 years
Machinery & Equipment=10 years or less depending on the estimated life 
of the equipment involved
Working Capital=3 years (It is assumed that the additional equity 
required for these projects will provide much of the working capital 
needs.)

    (6) Farmers Home Administration or its successor agency under Public 
Law 103-354 will ordinarily only finance new facilities and will not get 
involved in the refinancing of existing ones.
    (7) Priority consideration will be given to the use of primary fuel 
other than petroleum or natural gas.
    (8) A positive energy balance must be indicated and supported by 
appropriate data; i.e., the energy content of the alcohol produced at 
the alcohol production facility must be greater than the energy used to 
produce the alcohol and by-products.
    (9) Plant location, in relation to feedstocks, primary fuel and 
markets for product and by-products, will be an important consideration.
    (10) Debt refinancing will only be considered in modest amounts and 
only when necessary to provide a satisfactory lien position.
    (11) Feasibility studies are very important and required and will be 
prepared by competent and knowledgeable independent parties.
    (12) Participating lenders must either have expertise or the 
availability of expertise in this field.
    (13) The proposed operating managers must have experience in this or 
a related field.
    (14) Alcohol Fuel Production Facilities are eligible for assistance 
under the Drought and

[[Page 510]]

Disaster (D&D) Guaranteed Loan and Disaster Assistance for Rural 
Business Enterprises (DARBE) programs described in this subpart, and 
especially in appendix I and appendix K. Any such loan must meet the 
requirements for D&D and DARBE loans.

[52 FR 6522, Mar. 4, 1987, as amended at 53 FR 40403, Oct. 17, 1988; 54 
FR 5, Jan. 3, 1989, and 54 FR 26946, June 27, 1989; 54 FR 42483, Oct. 
17, 1989]

  Appendix D to Subpart E of Part 1980--Alcohol Production Facilities 
          Planning, Performing, Development and Project Control

    (I) Design Policy. The borrower shall ensure or cause to be ensured 
that:
    (A) All project facilities are designed utilizing accepted 
engineering practices and are conformed to applicable Federal, State and 
local codes and requirements.
    (B) Proven equipment and processes are employed in all project 
facilities unless an exception is granted by the Administrator or 
designee of the Farmers Home Administration or its successor agency 
under Public Law 103-354 (FmHA or its successor agency under Public Law 
103-354) (``Administrator'') in accordance with paragraph (B)(2) hereof 
and pilot equipment or processes are used instead.
    (1) Equipment and processes shall be considered ``proven'' if they 
have been successfully employed in other commercial facilities.
    (2) Equipment and processes shall be considered pilot if they have 
not been used in a commercial operation but have been operated on a 
scale such that all design and material problems have been identified 
and resolved and operations maintained to demonstrate that the equipment 
and process may be successfully applied to the proposed commercial 
operation. Pilot equipment and processes may be considered for use in 
the project subject to the following:
    (a) The plans, specifications, and operational data for the 
applicable facilities are reviewed by the Administrator or designee and 
lender. If, in the opinion of FmHA or its successor agency under Public 
Law 103-354, the proposed processes or equipment are insufficiently 
developed to assure reliable and successful operation of the project, 
proven processes and equipment will be utilized.
    (b) If pilot processes or equipment are used, the Administrator or 
designee will also require that:
    (i) Reasonable provision is made in the project for conversion to 
proven equipment or processes; and
    (ii) The borrower agrees to convert to proven equipment or processes 
if conversion is necessary to protect the interest of the Government in 
the project. A reserve account for this conversion may be required. This 
account will not be an eligible loan purpose.
    (C) Facility and equipment design incorporates cost-effective 
primary fuel systems, energy recovery systems and conservation measures 
to the maximum extent that this is feasible and consistent with 
paragraphs (I), (A), and (B) of this appendix.
    (II) Technical Services.
    (A) The borrower is responsible for selecting engineering 
consultants with suitable experience, training and professional 
competence in the design and construction of the project to assure that 
the completed project will operate at the prescribed levels of 
performance. In discharging its responsibility the borrower will obtain 
or cause to be obtained:
    (1) Full engineering services for design and construction inspection 
for all project facilities. Resident inspection by qualified persons 
will be required.
    (2) Agreements for engineering or design/build services which 
describe the project facilities in terms of the parameters critical to 
the successful operation of the project. The parameters shall include 
input quantities, conversion efficiency, rate of production and fuel 
consumption and product quality under normal operating conditions. The 
design parameters will be mutually agreed upon by the borrower, lender, 
the State Director and the project engineer, and may not be modified 
without the written concurrence of each of these parties. These 
agreements for engineering or design/build services will require, or the 
borrower will otherwise obtain, assurance satisfactory to the State 
Director that:
    (a) The project engineer will maintain adequate insurance to protect 
the borrower, lender and the Government from incurring expenses 
resulting from errors and omissions of the engineer in performance of 
engineering services.
    (b) The project engineer will certify that only proven equipment and 
processes will be utilized in the proposed development. The State 
Director may request evidence of successful operations of such proven 
equipment and process. If proven equipment or processes are not used in 
the project, the project engineer will identify these items and provide 
the information necessary for acceptance by the Administrator, borrower 
and lender in accordance with paragraph (I)(B)(2) of this appendix.
    (c) If used equipment or existing facilities are incorporated into 
the project, they must be inspected by the project engineer or by 
another qualified engineer of the borrower. This engineer will prepare a 
report describing the proposed facilities or equipment and will comment 
on their suitability for use in the project. The report will also 
identify the modifications necessary for successful integration into the 
project. A cost estimate will also be included comparing new equipment

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and facilities to the proposed existing facilities or used equipment. 
Consideration must be given to the relative energy requirements of used 
and new facilities and their relative operation and maintenance costs.
    (d) The project engineer or qualified individuals representing the 
manufacturer of principal equipment (or the designer/builder if the 
contractor has designed the plant) will visit the plant site at 
reasonable intervals for a period of one year after substantial 
completion of the project. Such personnel will be experienced in the 
proper operation and maintenance of applicable plant components. A 
report will be presented to the borrower within two weeks of each site 
visit advising the borrower of operation and maintenance deficiencies. A 
copy of each report will be forwarded to the State Director and lender 
by the borrower.
    (e) The project engineer will prepare or supervise the preparation 
of a record drawing of all facilities. One copy will be submitted to the 
lender and the borrower.
    (f) The project engineer or another group acceptable to the State 
Director and lender will prepare an operation and maintenance manual and 
assist the borrower in the start-up of the project. The operation and 
maintenance manual will describe the specific operation and maintenance 
procedures which must be performed for the project to operate at its 
rated capacity and efficiency and outline product testing, quality 
control, plant safety and emergency shut-down procedures.
    (g) The project engineer will assist the borrower in determining 
acceptability of materials, equipment and construction during the 
construction period, review shop drawings, payment estimates and change 
orders, and assist in determining substantial completion of the project 
and final completion of individual contracts.
    (1) The project is substantially complete when:
    (i) Construction is sufficiently completed in accordance with plans 
and specifications so that the project may be used for its intended 
purpose, and;
    (ii) The project is producing products of the quantity and quality 
and at the conversion and energy efficiencies proposed in the completed 
application submitted by the lender and borrower and approved by the 
FmHA or its successor agency under Public Law 103-354.
    (2) The State Director must concur that the project is substantially 
complete. The following evidence, in form and substance satisfactory to 
the State Director and lender, must be submitted prior to such 
concurrence:
    (i) A certificate from the project engineer stating that all 
facilities are substantially complete. Engineers who design specialized 
equipment or processes must also certify that construction/fabrication 
is acceptable in accordance with plans and specifications previously 
approved by them. The certification of the project engineer must be 
based upon a project start-up procedure where the complete project 
operates continuously to reach steady-state operating conditions. During 
this period contractors and engineers will identify and correct problems 
in operations, malfunctions in equipment, failure in materials and 
defects in workmanship. After this pre-startup, the certifying engineers 
will monitor project operations for a continuous period of at least 72 
hours or 3 consecutive batch runs as appropriate to assure that all 
equipment is operating satisfactorily at rated capacity and efficiency.
    (ii) Copies of system operation and performance data obtained during 
project start-up.
    (iii) Exceptions to substantial completion and a list of 
nonsubstantial items which must be completed prior to release of any 
contractor's retainage.
    (3) If the project is not producing products of the required 
quantity or quality at the prescribed conversion efficiencies, even 
though the project is otherwise physically complete in accordance with 
paragraph (1)(i) of this subparagraph, the project engineer will prepare 
a report identifying the corrective actions including an estimate of 
costs and additional time necessary to meet established performance 
criteria.
    (4) The project must be certified to be substantially complete by an 
independent engineer if any portion of the project has been designed or 
constructed by the borrower or the project engineer has participated in 
any portion of the construction.
    (B) Modification of plans and specifications will not be made 
without the written authorization of the project engineer.
    (C) The Administrator, State Director or their representative's 
acceptance or concurrence in feasibility studies, preliminary 
engineering reports, plans, specifications, contract documents and 
payment estimates will not be construed as a representation of the 
adequacy of same, reliability of cost estimates or quality of 
construction, nor will such acceptance or concurrence be deemed a waiver 
of any of the Government's rights or remedies against any person or 
party. Reviews and construction inspections by the Administrator, State 
Director or their representatives are solely for the benefit of the 
Government and do not relieve the lender or borrower of their obligation 
to conduct project reviews and inspections.
    (III) Project Construction.
    (A) Borrower will not award contracts for the construction of any 
project facilities unless and until:
    (1) The borrower obtains applicable construction permits, right-of-
ways, licenses

[[Page 512]]

and approvals of Federal, State and local authorities for the 
construction of such facilities.
    (2) The State Director concurs in applicable plans, specifications 
and contract documents. Standard contract documents prescribed for use 
in Federally assisted projects may be used as a guide for determining 
the minimum standards for contract acceptability. These standard 
documents are contained in Guides 18 and 19 of subpart A of part 1942 of 
this chapter (available in any FmHA or its successor agency under Public 
Law 103-354 office).
    (B) The borrower has the responsibility, without recourse to the 
Government, for the settlement and satisfaction of all contractual and 
administrative issues arising out of procurements. This includes, but is 
not limited to, disputes, claims, protests of awards, or other matters 
of a contractual nature. Matters concerning violation of laws are to be 
referred to such local, State, or Federal authority as may have proper 
jurisdiction.
    (C) The borrower's attorney will review executed contract documents 
including applicable performance and payment bonds and provide a 
certificate to the borrower and lender that they have been properly 
executed and that the persons executing these documents have been 
properly authorized to do so.
    (D) In all contracts for construction or facility improvement 
awarded in excess of $100,000, the borrower will require bonds and a 
bank letter of credit or cash deposit in escrow, assuring performance 
and payment of 100 percent of the contract cost. The surety will 
normally be in the form of performance and payment bonds. Such assurance 
shall remain in full force and effect through any warranty period. 
Companies providing performance and payment bonds must hold a 
certificate of authority as an acceptable security on Federal bonds and 
eligible for listing in Treasury circular 510 as amended and be legally 
doing business in the State the project is located.
    (E) Project Changes. Any change in the project which may affect 
collateral, its ultimate financial viability or compliance with the 
conditional commitment must have prior approval of the lender and FmHA 
or its successor agency under Public Law 103-354.
    (1) Construction contracts will require that change orders receive 
prior approval from the lender when such changes:
    (a) Increase or decrease contract price,
    (b) Materially modify contract provisions,
    (c) Increase or decrease time of completion,
    (d) Affect project performance.
    (2) All change orders will be recorded on a chronologically numbered 
contract change order as they occur. Change orders will not be included 
in payment estimates until approved by the borrower, project engineer, 
the lender and concurred in by FmHA or its successor agency under Public 
Law 103-354.
    (F) Warranty.
    (1) All major equipment must be guaranteed by the manufacturer to be 
free from defects in workmanship and materials for a period of one year 
after start-up of equipment.
    (2) Equipment purchased by a construction contractor or design 
builder and all other work shall be further warranted to be free from 
defect in material and workmanship by the contractor or the design 
builder for a period of one year after substantial completion of the 
contract.
    (3) Applicable provisions to this effect shall be included in 
equipment purchase orders or construction contracts.
    (G) Lease agreements. Where the right of use or control of any 
property or equipment not owned by the borrower is essential to the 
successful operation of the project during the life of the loan, such 
right will be evidenced by written agreements or contracts between the 
owner(s) of the property or equipment and the borrower. Lease agreements 
shall not contain provisions for restricted use of the site or facility, 
forfeiture or similiar cancellation clauses and shall provide for the 
right to transfer and lease without restriction. Such lease contracts or 
agreements shall be approved by the lender and FmHA or its successor 
agency under Public Law 103-354.
    (IV) Project Control.
    (A) Lender will adopt project control procedures to assure that loan 
funds are applied for costs or expenses properly attributable to the 
project (``Eligible Project Costs'') as proposed in the completed 
application submitted by the lender and borrower and approved by the 
FmHA or its successor agency under Public Law 103-354. A project 
monitoring account (``Project Monitoring Account'') will be developed by 
lender for this purpose and concurred in by the State Director. This 
account will be divided into sufficient budget categories to permit 
adequate control of expenditures and identification of potential budget 
overruns.
    (B) The first advance (``First Advance'') of loan funds to the 
borrower will not commence from the Project Monitoring Account prior to 
lender's receipt of evidence that:
    (1) The borrower has made adequate provisions for compliance with 
measures established by FmHA or its successor agency under Public Law 
103-354 to mitigate adverse historical and environmental impacts.
    (2) Applicable engineering, design/build, construction management, 
inspection and plant start-up service agreements have been obtained and 
accepted by the State Director and lender.
    (3) The project engineer has prepared a detailed cost estimate and 
construction schedule for all facilities related to the project. This 
estimate must indicate that the project

[[Page 513]]

can be completed with the funds available as shown on the Form FmHA or 
its successor agency under Public Law 103-354 449-1, ``Application for 
Loan and Guarantee.'' A reasonable contingency amount will be included 
in the estimate. This contingency shall be at least 20 percent of the 
estimated project costs for which firm bids have not been received plus 
5 percent of project costs for which firm bids have been received. 
Construction interest and inspection costs will be based upon a 
reasonable contingency for unforeseen delays in project completion. The 
estimate shall include a listing with associated costs of any proposed 
leasing arrangements for property or equipment that is essential to the 
successful operation of the project.
    (4) All funds necessary for construction of project facilities will 
be available when needed.
    (5) The borrower has retained a project manager with sufficient 
experience and training to supervise project construction and 
engineering services on behalf of the borrower.
    (C) After the first advance, future advances may be made from the 
Project Monitoring Account, in accordance with prudent lender practice, 
for all Eligible Project Costs established in the Project Monitoring 
Account, provided these payments are made in accordance with the terms 
of applicable contracts and are approved by the borrower and, when 
applicable, recommended by the project engineer.
    (D) Payments for Eligible Project Costs incurred by the borrower 
prior to satisfaction of the conditions precedent to the first advance 
shall be made with borrower's funds or other nonguaranteed loan funds 
only. These payments however, may be reimbursed through the Project 
Monitoring Account as authorized by the State Director after compliance 
with Paragraph (IV)(B) hereof. The lender will not advance and the 
borrower will not be entitled to loan funds for reimbursement if such 
costs or expenses incurred by the borrower prior to the first advance, 
or at anytime thereafter, were for costs or expenses other than Eligible 
Project Costs. Costs and expenses accruing from but not limited to, 
interest charges imposed by construction, equipment, material or service 
contracts, penalty payments, damage claims, awards or settlements are 
not Eligible Project Costs unless specifically approved by the State 
Director.
    (E) The lender will monitor the progress of construction and 
undertake the reviews and project inspections necessary to reasonably 
assure that funds are paid for Eligible Project Costs and that problems 
in project development are expeditiously reported to the State Director.
    (F) The lender will prepare a monthly report showing the 
expenditures made from each budget category of the Project Monitoring 
Account. This report will include a review of construction progress 
including proposed and approved contract change orders and, to the 
extend possible, identify problems or delays in construction or other 
matters which might affect successful startup of project. This report 
may be based upon information received from the project engineer and 
borrower and/or independent observations of the lender. The report will 
be initialed by the borrower and project engineeer and submitted to the 
State Director.
    (G) Transfer of loan funds between established or new categories of 
the Project Monitoring Account or any change in the total amount of 
funds committed to the project will be reported by the lender to the 
State Director as these changes occur.

     Appendix E to Subpart E of Part 1980--Environmental Assessment 
                               Guidelines

    In completing an assessment, it is important to understand the 
comprehensive nature of the impacts which must be analyzed. 
Consideration must be given to all potential impacts associated with the 
construction of the project and its operation and maintenance. The 
attainment of the project's major objectives often induces or supports 
changes in population densities, land uses, community services, 
transportation systems and resource consumption. The impacts of these 
activities must also be assessed.
    The environmental reviewer should consult with appropriate experts 
from Federal, State and local agencies, universities and other 
organizations or groups whose views could be helpful in the assessment 
of potential impacts. In so doing, each discussion which is utilized in 
reaching a conclusion with respect to the degree of an impact should be 
summarized in the assessment as accurately as possible and include name, 
title, phone number, and organization of the individual contacted, plus 
the date of contact. Related correspondence should be attached to the 
assessment.
    The Farmers Home Administration or its successor agency under Public 
Law 103-354 assessment should be prepared in the following format; it 
should address the listed items and questions and contain as attachments 
the indicated descriptive materials, as well as the environmental 
information submitted by the applicant.
    These assessment guidelines have been designed to cover the wide 
variety of impacts which may be encountered. Consequently, not every 
issue or potential impact raised in these guildlines may be relevant to 
each project. The purpose of the format is to give the preparer an 
understanding of a standard range of impacts, environmental factors and

[[Page 514]]

issues which may be encountered. In preparing an assessment, each topic 
heading identified by a roman numeral and each environmental factor 
listed under topic heading IV, such as air quality for example, must be 
addressed.
    The amount of analysis and material that must be provided will 
depend upon the type and size of the project, the environment in which 
it is located and the range and complexity of the potential impacts. The 
amount of analysis and detail provided, therefore, must be commensurate 
with the magnitude of the expected impact. The analysis of each 
environmental factor (i.e., water quality) must be taken to the point 
that a conclusion can be reached and supported concerning the degree of 
the expected impact with respect to that factor.
    (I) Project description and need. Identify the name, project number, 
location, and specific elements of the project along with their sizes, 
and, when applicable, their design capacities. Indicate the purpose of 
the project, FmHA or its successor agency under Public Law 103-354's 
position regarding the need for it, and the extent or area of land to be 
considered as the project site.
    (II) Primary beneficiaries and related activities.
    Identify any existing businesses or major developments that will 
benefit from the project and those which will expand or locate in the 
area because of the project. Specify by name, product, service, and 
operations involved.
    Identify any related activities which are defined as interdependent 
parts of an FmHA or its successor agency under Public Law 103-354 
action. Such undertakings are considered interdependent parts whenever 
they either make possible or support the FmHA or its successor agency 
under Public Law 103-354 action or are themselves induced or supported 
by the FmHA or its successor agency under Public Law 103-354 action or 
another related activity. These activities may have been completed in 
the very recent past and are now operational or they may reasonably be 
expected to be accomplished in the near future. Related activities may 
or may not be Federally permitted or assisted. When they are, identify 
the involved Federal agency(s).
    In completing the remainder of the assessment, it must be remembered 
that the impacts to be addressed are those which stem from the project, 
the primary beneficiaries, and the related activities.
    (III) Description of project area. Describe the project site and its 
present use. Describe the surrounding land uses; indicate the directions 
and distances involved. The extent of the surrounding land to be 
considered depends on the extent of the impacts of the project, its 
related activities, and the primary beneficiaries. Unique or sensitive 
areas must be pointed out. These include residential, schools, 
hospitals, recreational, historical sites, beaches, lakes, rivers, 
parks, floodplains, wetlands, dunes, estuaries, barrier islands, natural 
landmarks, unstable soils, steep slopes, aquifer recharge areas, 
important farmlands and forestlands, prime rangelands, endangered 
species habitats, or other delicate or rare ecosystems.
    Attach adequate location maps of the project area, as well as (1) a 
U.S. Geological Survey ``15 minute'' (``7\1/2\ minute'' if available) 
topographic map which clearly delineates the area and the location of 
the project elements, (2) the Department of Housing and Urban 
Development's floodplain map(s) for the project area, (3) site photos, 
(4) if completed, a standard soil survey for the project and, (5) if 
available, an aerial photograph of the site. When necessary for 
descriptive purposes or environmental analysis, include land use maps or 
other graphic information. All graphic materials shall be of high 
quality resolution.
    (IV) Environmental impact.
    (1) Air Quality--Discuss, in terms of the amounts and types of 
emissions to be produced, all aspects of the project including 
beneficiaries' operations and known indirect effects (such as increased 
motor vehicle traffic) which will affect air quality. Indicate the 
existing air quality in the area. Indicate if topographical or 
meteorological conditions hinder or affect the dispersals of air 
emissions. Evaluate the impact on air quality given the types and 
amounts of projected emissions, the existing air quality and 
topographical and meteorological conditions. Discuss the project's 
consistency with the State's air quality implementation plan for the 
area, the classification of the air quality control region within which 
the project is located, and the status of compliance with air quality 
standards within that region. Cite any contacts with appropriate experts 
and agencies which must issue necessary permits.
    (2) Water Quality--Discuss, in terms of amounts and types of 
effluents all aspects of the project, including primary beneficiaries' 
operations and known indirect effects which will affect water quality. 
Indicate the existing water quality of surface and/or underground water 
to be affected. Evaluate the impacts of the project on this existing 
water quality. Indicate if an aquifer recharge area is to be adversely 
affected. If the project lies within or will affect a sole source 
aquifer recharge area as designated by the Environmental Protection 
Agency (EPA), contact the appropriate EPA regional office to determine 
if its review is necessary. If it is, attach the results of its review.
    Indicate the source and available supply of raw water and the extent 
to which the additional demand will affect the raw water supply. 
Describe the wastewater treatment system(s) to be used and indicate 
their capacity

[[Page 515]]

and their adequacy in terms of the degree of treatment provided. Discuss 
the characteristics and uses of the receiving waters for any sources of 
discharge. If the treatment systems are or will be inadequate or 
overloaded, describe the steps being taken for necessary improvements 
and their completion dates. Compare such dates to the completion date of 
the FmHA or its successor agency under Public Law 103-354 project. 
Analyze the impacts on the receiving water during any estimated period 
of inadequate treatment.
    Discuss the project's consistency with the water quality planning 
for the area, such as EPA's Section 208 areawide waste treatment 
management plan. Describe how surface runoff is to be handled and the 
effect of erosion on streams.
    Evaluate the extent to which the project may create shortages for or 
otherwise adversely affect the withdrawal capabilities of other present 
users of the raw water supply, particularly in terms of possible human 
health, safety, or welfare problems.
    For projects utilizing a groundwater supply, evaluate the potential 
for the project to exceed the safe pumping rate for the aquifer to the 
extent that it would (1) adversely affect the pumping capability of 
present users, (2) increase the likelihood of brackish or saltwater 
intrusion, thereby decreasing water quality, or (3) substantially 
increase surface subsidence risks.
    For projects utilizing a surface water supply, evaluate the 
potential for the project to (1) reduce flows below the minimum required 
for the protection of fish and wildlife or (2) reduce water quality 
standards below those established for the stream classification at the 
point of withdrawal or the adjacent downstream section.
    Cite contacts with appropriate experts and agencies that must issue 
necessary permits.
    (3) Solid Waste Management--Indicate all aspects of the project, 
including primary beneficiaries' operations, and known indirect effects 
which will necessitate the disposal of solid wastes. Indicate the kinds 
and expected quantities of solid wastes involved and the disposal 
techniques to be used. Evaluate the adequacy to these techniques 
especially in relationship to air and water quality. Indicate if 
recycling or resource recovery programs are or will be used. Cite any 
contacts with appropriate experts and agencies that must issue necessary 
permits.
    (4) Land Use--Given the description of land uses as previously 
indicated, evaluate (a) the effect of changing the land use of the 
project site and (b) how this change in land use will affect the 
surrounding land uses and those within the project's area of 
environmental impact. Particularly address the potential impacts to the 
unique or sensitive areas discussed under Section III, Description of 
Project Area. Also address any changes in land use which may result from 
demand for feedstock for the plant's operation. Describe the existing 
land use plan and zoning restrictions for the project area. Evaluate the 
consistency of the project and its impacts with these plans.
    (5) Transportation--Describe available facilities such as highways 
and rail. Discuss whether the project will result in an increase in 
motor vehicle traffic and the existing roads' ability to safely 
accommodate this increase. Indicate if additional traffic control 
devices are to be installed. Describe new traffic patterns which will 
arise because of the project. Discuss how these new traffic patterns 
will affect the land uses described above, especially residential, 
hospitals, schools, and recreational. Describe the consistency of the 
project's transportation impacts with the transportation plans for the 
area and any air quality control plans. Cite any contact with 
appropriate experts.
    (6) Natural Environment--Indicate all aspects of the project, 
including construction, beneficiaries' operations, and known indirect 
effects which will affect the natural environment including wildlife, 
their habitats, and unique natural features. Cite contacts with 
appropriate experts. If an area listed on the National Registry of 
Natural Landmarks may be affected, consult with the Department of 
Interior and document these consultations and any agreements reached 
regarding avoidance or mitigation of potential adverse impacts.
    (7) Human Population--Indicate the number of people to be relocated 
and arrangements being made for this relocation. Discuss how impacts 
resulting from the project such as changes in land use, transportation 
changes, air emissions, noise, odor, etc., will effect nearby residents 
and their lifestyles or users of the project area and surrounding areas. 
Cite contacts with appropriate experts.
    (8) Construction--Indicate the potential effects of construction of 
the project on air quality, water quality noise levels, solid waste 
disposal, soil erosion and siltation. Describe the measures that will be 
employed to limit adverse effects. Give particular consideration to 
erosion, stream siltation, and clearing operations.
    (9) Energy Impacts--Indicate the project's and its primary 
beneficiaries' effects on the area's existing energy supplies. This 
discussion should address not only the direct energy utilization, but 
any major indirect utilization resulting from the siting of the project. 
Describe the availability of these supplies to the project site. Discuss 
whether the project will utilize a large share of the remaining capacity 
of an energy supply or will create a shortage of such supply. Discuss 
any steps to be taken to conserve energy.
    (10) Discuss any of the following areas which may be relevant: 
noise, vibrations,

[[Page 516]]

safety, seismic conditions, fire prone locations, radiation, and 
aesthetic considerations. Cite any discussions with appropriate experts.
    (V) Coastal Zone Management Act.
    Indicate if the project is within or will impact a coastal area 
defined as such by the state's approved Coastal Zone Management Program. 
If so, consult with the State agency responsible for the Program to 
determine the project's consistency with it. The results of this 
coordination shall be included in the assessment and considered in 
completing the environmental impact determination and environmental 
findings,
    (VI) Compliance with Advisory Council on Historic Preservation's 
regulations.
    In this section, the environmental reviewer shall detail the steps 
taken to comply with the above regulations as specified in Subpart F of 
Part 1901 of this Chapter. First, indicate that the National Register of 
Historic Places, including its monthly supplements, has been reviewed 
and whether there are any listed properties located within the area to 
be affected by the project. Second, indicate the steps taken such as 
historical/archeological surveys to determine if there are any 
properties eligible for listing located within the affected area. 
Summarize the results of the consultation with the State Historic 
Preservation Officer (SHPO) and attach appropriate documentation of the 
SHPO's views. Discuss the views of any other experts contacted. Based 
upon the above review process and the views of the SHPO, state whether 
or not an eligible or listed property will be affected.
    If there will be an effect, discuss all of the steps and protective 
measures taken to complete the Advisory Council's regulations. Describe 
the affected property and the nature of the effect. Attach to the 
asessment the results of the coordination process with the Advisory 
Council on Historic Preservation.
    (VII) Compliance with the Wild and Scenic Rivers Act.
    Indicate whether the project will affect a river or portion of it 
which is either included in the National Wild and Scenic Rivers System 
or designated for potential addition to the System. This analysis shall 
be conducted through discussions with the appropriate regional office of 
the National Park Service or the Forest Service when its lands are 
involved, as well as the appropriate State agencies having 
implementation authorities. A summary of discussions held or any 
required formal coordination shall be included in the assessment.
    (VIII) Compliance with the Endangered Species Act.
    Indicate whether the project will either (1) affect a listed 
endangered or threatened species or critical habitat or (2) adversely 
affect a proposed critical habitat for an endangered or threatened 
species or jeopardize the continued existence of a proposed endangered 
or threatened species. This analysis shall be conducted in consultation 
with the Fish and Wildlife Service and the National Marine Fisheries 
Service, when appropriate.
    The results of any required coordination shall be included in the 
assessment along with any completed biological opinion and mitigation 
measures to be required for the project. These factors shall be 
considered in completing the environmental impact determination.
    (IX) Compliance with Executive Order 11988, Floodplain Management, 
and Executive Order 11990, Protection of Wetlands.
    Indicate whether the project is either located within a 100-year 
floodplain (500-year floodplain for a critical action) or a wetland or 
will impact a floodplain or wetland. If so, determine if there is a 
practicable alternative project or location. If there is no such 
alternative, determine whether all practicable mitigation measures are 
included in the project and document as an attachment these 
determinations and the steps taken to inform the public, locate 
alternatives, and mitigate potential adverse impacts. See the U.S. Water 
Resource Council's Floodplain Management Guidelines for more specific 
guidance.
    (X) State Environmental Policy Act.
    Indicate if the proposed project is subject to a State environmental 
policy act or similar regulation. Summarize the results of compliance 
with these requirements and attach available documentation.
    (XI) Consultation requirements.
    Attach the comments of any State or local agency received through 
the implementation of Executive Order 12372, Intergovernmental Review of 
Federal Programs.
    (XII) Environmental analysis of participating Federal agency.
    Indicate if another federal agency is participating in the project 
either through the provision of additional funds, a companion project, 
or a permit review authority. Summarize the results of the involved 
agency's environmental impact analysis and attach available 
documentation.
    (XIII) Reaction to project.
    Discuss any negative comments or public views raised about the 
project and the consideration given to these comments. Indicate whether 
a public hearing or public information meeting has been held either by 
the applicant or FmHA or its successor agency under Public Law 103-354 
to include a summary of the results and any objections raised. Indicate 
any other examples of the community's awareness of the project, such as 
newspaper articles or public notifications.
    (XIV) Cumulative impacts.
    Summarize the cumulative impacts of this project and the related 
activities. Give particular attention to land use changes and air and 
water quality impacts. Summarize the

[[Page 517]]

results of the environmental impact analysis done for any of these 
related activities and/or your discussion with the sponsoring agencies. 
Attach available documentation of the analysis.
    (XV) Adverse impact.
    Summarize the potential adverse impacts of the proposal as pointed 
out in the above analysis.
    (XVI) Alternatives.
    Discuss the feasibility of alternatives to the project and their 
environmental impacts. These alternatives should include (a) alternative 
location, (b) alternative designs, (c) alternative projects having 
similar benefits, and (d) no project.
    (XVII) Mitigation measures.
    Describe any measures which will be taken or required by FmHA or its 
successor agency under Public Law 103-354 to avoid or mitigate the 
identified adverse impacts. Such measures shall be included as special 
requirements or provisions to the offer of financial assistance.

    Appendix F to Subpart E of Part 1980--Conditional Commitment for 
                                Guarantee

       USDA-FmHA or its successor agency under Public Law 103-354

Form FmHA or its successor agency under Public Law 103-354 449-14
(Rev. 12-89)
FORM APPROVED
OMB NO. 0575-0024
TO: Lender______________________________________________________________
Case No.________________________________________________________________
Lender's Address________________________________________________________
State___________________________________________________________________
Borrower________________________________________________________________
County__________________________________________________________________
Type of Loan____________________________________________________________
Principal Amount of Loan________________________________________________
$_______________________________________________________________________
    From an examination of information supplied by the Lender on the 
above proposed loan, the county committee certification or 
recommendation, if required, and other relevant information deemed 
necessary, it appears that the transaction can properly be completed.
    Therefore, the United States of America acting through the Farmers 
Home Administration or its successor agency under Public Law 103-354 
(FmHA or its successor agency under Public Law 103-354) hereby agrees 
that, in accordance with applicable provisions of the FmHA or its 
successor agency under Public Law 103-354 regulations published in the 
Federal Register and related forms, it will execute Form(s) FmHA or its 
successor agency under Public Law 103-354 449-34, ``Loan Note 
Guarantee,'' subject to the conditions and requirements specified in 
said regulations and below.
    The Loan Note Guarantee fee payable by the Lender to FmHA or its 
successor agency under Public Law 103-354 will be the amount as 
specified in the regulations on the date of this Conditional Commitment 
for Guarantee. The interest rate for the loan is \1\ --------% and, if 
applicable, the loan subsidy rate is --------% \1\. If a variable rate 
is used, it must be tied to a base rate which cannot change more often 
than -------- \2\ and must be published periodically in a financial 
publication specifically agreed to by the Lender and Borrower.
---------------------------------------------------------------------------

    \1\ Footnotes appear at the end of Form.
---------------------------------------------------------------------------

    A Loan Note Guarantee will not be issued until the Lender certifies 
as required in 7 CFR 1980.60 that there has been no adverse change(s) in 
the Borrower's financial condition, nor any other adverse change in the 
Borrower's condition during the period of time from FmHA or its 
successor agency under Public Law 103-354's issuance of the Conditional 
Commitment for Guarantee to issuance of the Loan Note Guarantee. The 
Lender's certification must address all adverse changes and be supported 
by financial statements of the Borrower and its guarantors not more than 
60 days old at the time of certification. As used in this paragraph 
only, the term ``Borrower'' includes any parent, affiliate, or 
subsidiary of the Borrower.
    This agreement becomes null and void unless the conditions are 
accepted by the Lender and Borrower within 60 days from date of issuance 
by FmHA or its successor agency under Public Law 103-354. Any 
negotiations concerning these conditions must be completed by that time.
    Except as set out below, the purposes for which the loan funds will 
be used and the amounts to be used for such purposes are set out on the 
Request for Loan Note Guarantee, the Request for Guarantee Operating 
Loan Line of Credit, Emergency Livestock Loan, or Economic Emergency 
Loan, or the Application for Loan and Guarantee. Once this instrument is 
executed and returned to FmHA or its successor agency under Public Law 
103-354, no major change of conditions or approved loan purpose as 
listed on the forms will be considered. Additional Conditions and 
Requirements including Source and Use of Funds:\3\
    This conditional commitment will expire on -------- \4\ unless the 
time is extended in writing by FmHA or its successor agency under Public 
Law 103-354, or upon the Lender's earlier notification to FmHA or its 
successor agency under Public Law 103-354 that it does not desire to 
obtain an FmHA or its successor agency under Public Law 103-354 
guarantee.

UNITED STATES OF AMERICA
BY:_____________________________________________________________________
Date:___________________________________________________________________

[[Page 518]]

FmHA or its successor agency under Public Law 103-354 (Title)___________

                        Acceptance of Conditions

To: Farmers Home Administration or its successor agency under Public Law 
103-354 (FmHA or its successor agency under Public Law 103-354)\5\
The conditions of this Conditional Commitment for Guarantee including 
attachments are acceptable and the undersigned intends to proceed with 
the loan transaction and request issuance of a Loan Note Guarantee 
within -------- days.
________________________________________________________________________
(Name of Lender)
By:_____________________________________________________________________
(Signature of Lender)
\6\_____________________________________________________________________
(Signature for Borrower)
________________________________________________________________________
    \1\ Insert fixed interest rate or, if authorized by regulations, 
variable interest rate followed by a ``V'' and the appropriate loan 
subsidy rate, if applicable.
    \2\ Insert the period prescribed in the applicable FmHA or its 
successor agency under Public Law 103-354 regulation. For B&I loans 
``quarterly'' and for CP loans ``annually'' will be inserted in this 
space.
    \3\ Insert any additional conditions or requirements in this space 
or on an attachment referred to in this space; otherwise, insert 
``NONE''.
    \4\ FmHA or its successor agency under Public Law 103-354 will 
determine the expiration date of this contract. Consideration will be 
given to the date indicated by the lender in the acceptance of 
conditions. If construction is involved the expiration date will 
correspond with the projected completion of the project.
    \5\ Return completed and signed copy of this form to FmHA or its 
successor agency under Public Law 103-354 issuing office.
    \6\ Required in B&I, CP, and RH-MF cases, not in other cases.

[55 FR 11139, Mar. 27, 1990]

                   Appendix G to Subpart E [Reserved]

 Appendix H to Subpart E of Part 1980--Suggested Format for the Opinion 
                      of the Lender's Legal Counsel

     (Legal Opinion to be Retyped on Lender's Counsel's Letterhead)

To: (Name of Lender).

    I/We have acted as counsel to (Lender) -------- in connection with a 
$ (amount) -------- (type) -------- loan by the (Lender) -------- 
(hereinafter ``the Lender'' to (Borrower) -------- (hereinafter 
``Borrower''), the terms of which loans are set forth in a certain Loan 
Agreement (hereinafter ``the Loan Agreement'') executed by the Lender 
and Borrower on (date) --------.
    In connection with this loan, I/we have examined:
    1. The corporate records of Borrower, including its Articles of 
Incorporation, By-Laws and Resolutions of its Board of Directors.
    2. The Loan Agreement between the Lender and Borrower.
    3. The Security Agreement executed by Borrower on (date) --------.
    4. The Guaranty (where applicable) executed on (date) -------- by 
(personal guarantors) --------.
    5. Financing Statements executed by Borrower and the Lender.
    6. Real Estate Mortgages dated -------- and executed by Borrower in 
favor of the Lender.
    7. Real Estate Mortgages dated -------- and/or other security 
documents dated-------- executed by (personal guarantors) -------- in 
favor of the Bank.
    8. The appropriate title and/or lien searches relating to Borrower's 
property.
    9. The pledge of stock and instruments related thereto.
    10. Such other materials, including relevant provisions of the laws 
of this state as I/we have deemed pertinent as a basis for rendering the 
opinion hereafter set forth.

                          In Some Circumstances

    11. Lease(s) between Borrower and (lessor's name) -------- for the 
rental of (property being rented) --------, (if real property, give the 
address of the premises; if machinery equipment, etc., give brief, 
precise description of property for a (length of lease) -------- term 
commencing on (date) --------.
    Based on the foregoing examinations, I am/we are of the opinion and 
advise you that:
    1. Borrower is a duly organized corporation in good standing under 
the laws of the Commonwealth/State of (State) --------.
    2. Borrower has the necessary corporate power to authorize and has 
taken the necessary corporate action to authorize the Loan Agreement and 
to execute and deliver the Note, Security Agreement, Financing 
Statement, and Mortgage. Said instruments hereinafter collectively 
referred to as the ``Loan Instruments.''
    3. The Loan Instruments were all duly authorized, executed, and 
delivered and constitute the valid and legally binding obligation of the 
Borrower and collectively create and valid (first) lien upon or valid 
security interest in favor of the Lender, in the security covered 
thereby, and are enforceable in accordance with their terms except to 
the extent that the enforceability (but not the validity) thereof may be 
limited by laws of bankruptcy, insolvency, or other laws generally 
affecting creditors' rights.

[[Page 519]]

    4. The execution and delivery of the Loan Instruments and compliance 
with the provisions thereof under the circumstances contemplated thereby 
did not, do not and will not in any material respect conflict with, 
constitute default under, or contravene any contract or agreement or 
other instrument to which the Borrower is a party or any existing law, 
regulation, court order, or consent decree or device to which the 
Borrower is subject.
    5. All applicable Federal, State and local tax returns and reports 
as required have been duly filed by Borrower and all Federal, State and 
local taxes, assessments and other governmental charges imposed upon 
Borrower or its respective assets, which are due and payable, have been 
paid.
    6. The guaranty has been duly executed by the Guarantors and is a 
legal, valid and binding joint and several obligations of the 
Guarantors, enforceable in accordance with its terms, except to the 
extent that the enforceability (but not the validity) thereof may be 
limited by laws of bankruptcy, insolvency, or other laws generally 
affecting creditors' rights.
    7. All necessary consents, approvals, or authorizations of any 
governmental agency or regulatory authority or of stockholders which are 
necessary have been obtained. The improvements and the use of the 
property comply in all respects with all Federal, State, and local laws 
applicable thereto.
    8. (In cases involving subordinate or other than first lien 
position) That the mortgage/deed of trust on Borrower's real estate and 
(fixtures, e.g., machinery and equipment) and the security interest on 
(type of collateral, e.g., machinery and equipment, accounts, 
receivables and inventory) both given as security to the Lender for the 
Loan, will be subordinate to (first mortgagee) -------- given as 
security for a loan in the amount of $-------- and the security interest 
in Borrower's (type of collateral, e.g., accounts inventory) -------- 
given to (secured creditor) -------- as security for a loan (state type 
of loan, i.e., revolving line of credit, -------- if known) in the 
amount of $--------.
    9. That there are no liens, as of the date hereof, on record with 
respect to the property of Borrower other than those set forth above.
    10. There are no actions, suits or proceedings pending or, to the 
best of our knowledge, threatened before any court or administrative 
agency against Borrower which could materially adversely affect the 
financial condition and operations of Borrower.
    11. Borrower has good and marketable title to the real estate 
security free and clear of all liens and encumbrances other than those 
set forth above. I/we have no knowledge of any defect in the title of 
the Borrower to the property described in the Loan Instruments.
    12. Borrower is the absolute owner of all property given to secure 
the repayment of the loan, free and clear of all liens, encumbrances, 
and security interests.
    13. Duly executed and valid functioning statements have been filed 
in all offices in which it is necessary to file financing statements to 
fully perfect the security interests granted in the Loan Instruments.
    14. Duly executed real estate mortgages/deeds of trust have been 
recorded in all offices in which it is necessary to record to fully 
perfect the security interests granted in the Loan Instruments.
    15. (IN SOME OTHER CIRCUMSTANCES) The Indemnification Agreemnt has 
been duly executed by the Indemnitors and is a legal, valid and binding 
joint and several obligation of the Indemnitors, enforceable in 
accordance with its terms, except to the extent that the enforceability 
(but not the validity) thereof may be limited by laws of bankruptcy, 
insolvency, or other laws generally affecting creditors' rights.
    16. That the lease contains a valid and enforceable right of 
assignment and right of reassignment, enforceable in accordance with its 
terms, except to the extent the enforceability (but not the validity) 
thereof may be limited by laws of bankruptcy, insolvency, or other laws 
generally affecting creditors' rights.
    17. The Lender's lien has been duly noted on all motor vehicle 
titles, stock certificates or other instruments where such notations are 
required for proper perfection of security interests therein.
    18. That a valid pledge of the outstanding and unissued stock and/or 
shares of Borrower has been obtained and the Lender has a validly 
perfected and enforceable security interest in the shares/stock of 
Borrower, except to the extent the enforceability thereof may be limited 
by laws of bankruptcy, insolvency, or other laws generally affecting 
creditors rights.

[52 FR 6522, Mar. 4, 1987]

 Appendix I to Subpart E of Part 1980--Instructions for Loan Guarantees 
                     for Drought and Disaster Relief

    A. In general. Drought and Disaster (D&D) guaranteed loans are 
authorized by section 331 (``Disaster Assistance for Rural Business 
Enterprises'') of the Disaster Assistance Act of 1988, which provides 
for guarantees of up to 90 percent of the unpaid principal amount of 
qualifying loans. Interest and protective advances are not covered by 
the guarantee. Drought and Disaster Guaranteed Loans may be either to 
assist in alleviating financial

[[Page 520]]

distress caused to rural business entities, directly or indirectly, by 
drought, hail, excessive moisture, or related conditions occurring in 
1988, or to assist such entities that refinance or restructure debt as a 
result of losses incurred, directly or indirectly, because of such 
natural disasters. Where used in this appendix, the term ``natural 
disaster(s)'' refers only to drought, hail, excessive moisture, and 
related conditions occurring in 1988. All provisions of Subparts A and E 
of Part 1980 of this chapter apply to D&D loans, except as provided in 
this appendix. All forms used in connection with a D&D loan will be 
those used in connection with a B&I guaranteed loan, except for the 
following three forms that are incorporated in this Appendix I of this 
Subpart E, made a part hereof, and appear in the Federal Register 
following the body of this appendix as Exhibits A, B, and C in the 
following order:
    (1) Form FmHA or its successor agency under Public Law 103-354 1980-
68, ``Lender's Agreement--Drought and Disaster Guaranteed Loans,'' will 
be used instead of Form FmHA or its successor agency under Public Law 
103-354 449-35, ``Lender's Agreement.''
    (2) Form FmHA or its successor agency under Public Law 103-354 1980-
69, ``Loan Note Guarantee--Drought and Disaster Guaranteed Loans,'' will 
be used instead of Form FmHA or its successor agency under Public Law 
103-354 449-34, ``Loan Note Guarantee.''
    (3) Form FmHA or its successor agency under Public Law 103-354 1980-
70, ``Assignment Guarantee Agreement--Drought and Disaster Guaranteed 
Loans,'' will be used instead of Form FmHA or its successor agency under 
Public Law 103-354 449-36, ``Assignment Guarantee Agreement.''
    B. Loan purpose. Except for Sec. Sec. 1980.411(a)(11), 1980.412, 
and section C., below, loan procees may be used for purposes described 
in Sec. 1980.411(a) if such use of loan proceeds will assist in 
alleviating financial distress caused, directly or indirectly, by 
drought, hail, excessive moisture, or related conditions which occurred 
in 1988. In lieu of the debt refinancing requirements in Sec. 
1980.411(a)(11), the following refinancing requirements apply to D&D 
loans. Loan proceeds to be used for refinancing must be used solely for 
refinancing or restructuring of debts as a result of losses incurred, 
directly or indirectly, as a result of drought, hail, excessive 
moisture, or related condition occurring in 1988, and such refinancing 
or restructuring of debt(s) must be essential for the borrower to meet 
its financial obligations in a timely fashion. In addition, D&D loan 
proceeds may be used for hotels, motels, tourist or recreation 
facilities which meet the eligibility requirements for D&D guaranteed 
loans.
    C. Ineligible loan purposes. See Sec. 1980.412. Except for hotels, 
motels, tourist and recreation facilities mentioned in section B of this 
appendix, purposes listed as ineligible B&I loan purposes are ineligible 
D&D loan purposes. In addition, D&D guaranteed loans may not be used 
for:
    (1) Business expansion, acquisition of real estate, machinery, 
equipment, inventory, other goods or services, or for any other purpose 
unless related directly to the financial distress or loss that is the 
basis for the D&D guaranteed loan.
    (2) Any eligible agricultural production purpose if annual tillage 
of the soil is involved.
    (3) Refinancing or restructuring debt(s) which are or were in 
payment default more than 60 consecutive days during the 12 months 
preceding the date of the adverse financial effect of the natural 
disaster of 1988 upon the borrower.
    D. Transactions which will not be guaranteed. In addition to 
transactions listed in Sec. 1980.413, FmHA or its successor agency 
under Public Law 103-354 will not guarantee:
    (1) D&D guaranteed loan(s) to any borrower if the total cumulative 
principal amount of D&D guaranteed loan(s) to that borrower would exceed 
$500,000, or
    (2) Any D&D guaranteed loan if the completed application is not 
received by FmHA or its successor agency under Public Law 103-354 on or 
before September 30, 1991.
    E. Borrower equity requirements. See Sec. 1980.441. In lieu of the 
borrower equity requirements in Sec. 1980.441, paragraphs (a) and (b), 
the following applies to D&D loans. Tangibles balance sheet equity must 
be positive when the Loan Note Guarantee is issued. Equity must be such 
that, when considered with other credit factors, repayment of the loan 
and the continued success of the business operation are reasonably 
assured. Requirements of Sec. 1980.441(c) apply to D&D guaranteed 
loans.
    F. Filing and processing preapplications and applications. See Sec. 
1980.451. All requirements of Sec. 1980.451 remain in effect. But, in 
addition to the information required as part of a preapplication under 
Sec. 1980.451(f), and unless previously submitted, as a part of an 
application under Sec. 1980.451(i) evidence is required which 
demonstrates:
    (1) The causal relationship between a 1988 natural disaster and the 
financial distress or loss upon which the preapplication or application 
is based; and,
    (2) That the amount of the loan requested is not greater than the 
amount necessary for curing the problems caused by the natural disaster. 
Financial distress or loss shall be determined on the basis of a 
comparison of financial data for comparable periods of time and need not 
necessarily be based on data at the year's end. Evidence submitted may 
include, but is not limited to, the following:
    (a) Evidence of financial loss or distress (including loss or 
distress caused by business

[[Page 521]]

interruption) resulting from physical damage caused by natural disaster, 
or
    (b) Evidence that the financial loss and/or distress of the business 
is the direct or indirect result of loss of sales, business 
interruption, loss of markets, shortage of raw materials, or decline in 
patronage or customers caused by a natural disaster. It must be shown 
that business operations were damaged as a result of such natural 
disaster.
    G. Loan guarantee limit. See Sec. 1980.20 of Subpart A. The maximum 
loss covered by the Loan Note Guarantee, Form FmHA or its successor 
agency under Public Law 103-354 1980-69, can never exceed the percentage 
of guarantee multiplied by the unpaid principal amount of the loan as 
evidenced by the note(s) or by assumption agreement(s). Interest, 
capitalized interest, and protective advances are not covered by the 
guarantee of a D&D loan.
    H. Percentage of guarantee. See Sec. 1980.420. The maximum 
percentage of guarantee on a D&D loan is 90 percent of the unpaid 
principal.
    I. Lender's existing unguaranteed exposure. The provisions of 
Sec. 1980.452 Administrative C. 1(d) do not apply.
    J. No direct or ``insured'' loans. Sections 1980.423(b), 
1980.488(b), 1980.481, 1980.411(b), and other provisions of this subpart 
dealing with ``insured'' or direct loans do not apply to D&D loans. All 
D&D loans are FmHA or its successor agency under Public Law 103-354 
guaranteed loans. FmHA or its successor agency under Public Law 103-354 
has no authority to make D&D loans directly to borrowers.

   Exhibit A to Appendix I--Lender's Agreement; Drought and Disaster 
              Guaranteed Loans (Interest not Guaranteed)\1\

 Form FmHA or its successor agency under Public Law 103-354 1980-68 (11-
                                   88)

FmHA or its successor agency under Public Law 103-354 Loan Ident. No.___
---------------------------------------------------------------------------

    \1\ Public reporting burden for this collection of information is 
estimated to average 1.5 hours per response, including the time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the collection 
of information. Send comments regarding this burden estimate or any 
other aspect of this collection of information, including suggestions 
for reducing this burden to, Department of Agriculture, Clearance 
Officer, OIRM, Room 404-W, Washington, DC 20250; and to the Office of 
Management and Budget, Paperwork Reduction Project (OMB No. 0575-0029), 
Washington, DC 20503.
---------------------------------------------------------------------------

________________________________________________________________________
     (Lender) of
________________________________________________________________________
     has made a loan(s) to
________________________________________________________________________
     (Borrower)
________________________________________________________________________
in the principal amount of $____________________________________________
as evidenced by ------ note(s) (include Bond as appropriate) described 
as follows:
________________________________________________________________________
________________________________________________________________________
The United States of America, acting through Farmers Home Administration 
or its successor agency under Public Law 103-354 (FmHA or its successor 
agency under Public Law 103-354) has entered into a Loan Note 
Guarantee--Drought and Disaster Guaranteed Loans (Loan Note Guarantee)'' 
(Form FmHA or its successor agency under Public Law 103-354 1980-69) or 
has issued a ``Conditional Commitment for Guarantee'' (Form FmHA or its 
successor agency under Public Law 103-354 449-14) to enter into a Loan 
Note Guarantee with the Lender applicable to such loan to participate in 
a percentage of any loss on the loan not to exceed ------% of the amount 
of the principal advance and any interest (including any loan subsidy) 
thereon. The terms of the Loan Note Guarantee are controlling. In order 
to facilitate the marketability of the guaranteed portion of the loan 
and as a condition for obtaining a guarantee of the loan(s), the Lender 
enters into this agreement. The maximum loss guaranteed is governed by 7 
CFR Part 1980 Subpart E Appendix I and the Loan Note Guarantee (Drought 
and Disaster Guaranteed Loans)

    The Parties Agree:
    I. The maximum loss covered under the Loan Note Guarantee will not 
exceed ------ percent of the principal (Maximum $------).
    II. Full Faith and Credit. The Loan Note Guarantee constitutes an 
obligation supported by the full faith and credit of the United States 
and is incontestable except for fraud or misrepresentation of which the 
Lender has actual knowledge at the time it became such Lender or which 
Lender participates in or condones. Any note which provides for the 
payment of interest on interest shall not be guaranteed. Any Loan Note 
Guarantee or Assignment Guarantee Agreement Drought and Disaster 
Guaranteed Loan (Assignment Guarantee Agreement) attached to or relating 
to a note which provides for payment of interest on interest is void.
    The Loan Note Guarantee will be unenforceable by the Lender to the 
extent any loss is occasioned by violation of usury laws, negligent 
servicing, or failure to obtain the required security regardless of the 
time at which FmHA or its successor agency under Public Law 103-354 
acquires knowledge of the foregoing. Any losses will be unenforceable by 
the Lender to the extent that loan funds are used for purposes other 
than those specifically approved by FmHA or its successor

[[Page 522]]

agency under Public Law 103-354 in its Conditional Commitment for 
Guarantee. Negligent servicing is defined as the failure to perform 
those services which a reasonably prudent Lender would perform in 
servicing its own portfolio of loans that are not guaranteed. The term 
includes not only the concept of failure to act but also not acting in a 
timely manner or acting in a manner contrary to the manner in which a 
reasonably prudent lender would act up to the time of loan maturity or 
until a final loss is paid.
    III. Lender's Sale or Assignment of Guaranteed Loan. A. The Lender 
may retain all of the guaranteed loan. The Lender is not permitted to 
sell or participate any amount of the guaranteed or unguaranteed 
portion(s) of the loan(s) to the applicant or Borrower or members of 
their immediate families, their officers, directors, stockholders, other 
owners, or any parent, subsidiary or affiliate. If the Lender desires to 
market all or part of the guaranteed portion of the loan at or 
subsequent to loan closing, such loan must not be in default as set 
forth in the terms of the notes. The Lender may proceed under the 
following options:
    1. Assignment. Assign all or part of the guaranteed portion of the 
loan to one or more Holders by using Form FmHA or its successor agency 
under Public Law 103-354 1980-70, ``Assignment Guarantee Agreement--
Drought and Disaster Guaranteed Loan.'' Holder(s), upon written notice 
to Lender and FmHA or its successor agency under Public Law 103-354, may 
reassign the unpaid guaranteed portion of the loan sold thereunder. Upon 
such notification the assignee shall succeed to all rights and 
obligations of the Holder(s) therunder. If this portion is selected, the 
Lender may not at a later date cause to be issued any additional notes.
    2. Multi-Note System. When this option is selected by the Lender, 
upon disposition the Holder will receive one of the Borrower's executed 
notes and Form FmHA or its successor agency under Public Law 103-354 
1980-69, ``Loan Note Guarantee--Drought and Disaster Guaranteed Loan'' 
attached to the Borrower's note. However, all rights under the security 
instruments (including personal and/or corporate guarantees) will remain 
with the Lender and in all cases inure to its and the Government's 
benefit notwithstanding any contrary provisions of state law.
    a. At Loan Closing: Provide for no more than 10 notes, unless the 
Borrower and FmHA or its successor agency under Public Law 103-354 agree 
otherwise, for the guaranteed portion and one note for the unguaranteed 
portion. When this option is selected, FmHA or its successor agency 
under Public Law 103-354 will provide the Lender with a Form FmHA or its 
successor agency under Public Law 103-354 1980-69, for each of the 
notes.
    b. After Loan Closing: (1) Upon written approval by FmHA or its 
successor agency under Public Law 103-354, the Lender may cause to be 
issued a series of new notes, not to exceed the total provided in 2.a. 
above, as replacement for previously issued guaranteed note(s) provided:
    (a) The Borrower agrees and executes the new notes.
    (b) The interest rate does not exceed the interest rate in effect 
when the loan was closed.
    (c) The maturity of the loan is not changed.
    (d) FmHA or its successor agency under Public Law 103-354 will not 
bear any expenses that may be incurred in reference to such reissue of 
notes.
    (e) There is adequate collateral securing the note(s).
    (f) No intervening liens have arisen or have been perfected and the 
secured lien priority remains the same.
    (2) FmHA or its successor agency under Public Law 103-354 will issue 
the appropriate Loan Note Guarantees--Drought and Disaster Guaranteed 
Loan to be attached to each of the notes then extant in exchange for the 
original Loan Note Guarantee--Drought and Disaster Guaranteed Loan which 
will be cancelled by FmHA or its successor agency under Public Law 103-
354.
    3. Participations. a. The Lender may obtain participation in its 
loan under its normal operating procedures. Participation means a sale 
of an interest in the loan wherein the Lender retains the note, 
collateral securing the note, and all responsibility for loan servicing 
and liquidation.
    b. The Lender is required to hold in its portfolio or retain a 
minimum of 5 percent of the total guaranteed loan(s) amount. The amount 
required to be retained must be of the unguaranteed portion of the loan 
and cannot be participated to another. The Lender may sell the remaining 
amount of the unguaranteed portion of the loan only through 
participation. However, the Lender will always retain the responsibility 
for loan servicing and liquidation.
    B. When a guaranteed portion of a loan is sold by the Lender to a 
Holder(s), the Holder(s) shall thereupon succeed to all rights of Lender 
under the Loan Note Guarantee--Drought and Disaster Guaranteed Loan to 
the extent of the portion of loan purchased. Lender will remain bound to 
all the obligations under the Loan Note Guarantee--Drought and Disaster 
Guaranteed Loan, and this agreement, and the FmHA or its successor 
agency under Public Law 103-354 program regulations found in the 
applicable Subpart of Title 7 CFR Part 1980, and to future FmHA or its 
successor agency under Public Law 103-354 program regulations not

[[Page 523]]

inconsistent with the express provisions hereof.
    C. The Holder(s) upon written notice to the Lender may resell the 
unpaid guaranteed portion of the loan sold under provision III A.
    IV. The Lender agrees loan funds will be used for the purposes 
authorized in the applicable Subpart of Title 7 CFR Part 1980 and in 
accordance with the terms of Form FmHA or its successor agency under 
Public Law 103-354 449-14.
    V. The Lender certifies that none of its officers or directors, 
stockholders or other owners has a substantial financial interest in the 
borrower. The Lender certifies that neither the Borrower nor its 
officers or directors, stockholders, or other owners has a substantial 
financial interest in the Lender.
    VI. The Lender certifies that it has no knowledge of any material 
adverse change, financial or otherwise, in the Borrower. Borrower's 
business, or any parent, subsidiaries, or affiliates since it requested 
a Loan Note Guarantee.
    VII. Lender certifies that a loan agreement and/or loan instruments 
concurred in by FmHA or its successor agency under Public Law 103-354 
has been or will be signed with the Borrower.
    VIII. Lender certifies it has paid the required guarantee fee.
    IX. Servicing. A. The Lender will service the entire loan and will 
remain mortgagee and/or secured party of record, not withstanding the 
fact that another may hold a portion of the loan. The entire loan will 
be secured by the same security with equal lien priority for the 
guaranteed and unguaranteed portions of the loan. Lender may charge 
Holder a servicing fee. The unguaranteed portion of a loan will not be 
paid first nor given any preference or priority over the guaranteed 
portion of the loan.
    B. Disposition of the guaranteed portion of a loan may be made prior 
to full disbursement, completion of construction and acquisitions only 
with the prior written approval of FmHA or its successor agency under 
Public Law 103-354. Subsequent to full disbursement completion of 
construction, and acquisition, the guaranteed portion of the loan may be 
disposed of as provided herein.
    It is the Lender's responsibility to see that all construction is 
properly planned before any work proceeds; that any required permits, 
licenses or authorizations are obtained from the appropriate regulatory 
agencies; that the Borrower has obtained contracts through acceptable 
procurement procedures; that periodic inspections during construction 
are made and that FmHA or its successor agency under Public Law 103-
354's concurrence on the overall development schedule is obtained.
    C. Lender's servicing responsibilities include, but are not limited 
to:
    1. Obtaining compliance with the covenants and provisions in the 
note, loan agreement, security instruments, and any supplemental 
agreements and notifying in writing FmHA or its successor agency under 
Public Law 103-354 and the Borrower of any violations. None of the 
aforesaid instruments will be altered without FmHA or its successor 
agency under Public Law 103-354's prior written concurrence. The Lender 
must service the loan in a reasonable and prudent manner.
    2. Receiving all payments on principal and interest (including any 
loan subsidy) on the loan as they fall due and promptly remitting and 
accounting to any Holder(s) of their pro rata share thereof determined 
according to their respective interests in the loan, less only Lender's 
servicing fee. The loan may be reamortized or renewed only with 
agreement of the Lender and Holder(s) of the guaranteed portion of the 
loan and only with FmHA or its successor agency under Public Law 103-
354's written concurrence. It is the Lender's responsibility to maximize 
the collection of interest due on the loan. The Holder(s) remain 
entitled to all interest due up to the point of repurchase by the Lender 
or purchase from the Holder(s) by FmHA or its successor agency under 
Public Law 103-354 if such interest can be collected. If FmHA or its 
successor agency under Public Law 103-354 has repurchased, FmHA or its 
successor agency under Public Law 103-354 is equally so entitled.
    3. Inspecting the collateral as often as necessary to properly 
service the loan.
    4. Assuring that adequate insurance is maintained. This includes 
hazard insurance obtained and maintained with a loss payable clause in 
favor of the Lender as the mortgagee or secured party.
    5. Assuring that: taxes, assessment or ground rents against or 
affecting collateral are paid; the loan and collateral are protected in 
foreclosure, bankruptcy, receivership, insolvency, condemnation, or 
other litigation, insurance loss payments, condemnation awards, or 
similar proceeds are applied on debts in accordance with lien priorities 
on which the guarantee was based, or to rebuilding or otherwise 
acquiring needed replacement collateral with the written approval of 
FmHA or its successor agency under Public Law 103-354; proceeds from the 
sale or other disposition of collateral are applied in accordance with 
the lien priorities on which the guarantee is based, except that 
proceeds from the disposition of collateral, such as machinery, 
equipment, furniture or fixtures, may be used to acquire property of 
similar nature in value up to $------ without written concurrence of 
FmHA or its successor agency under Public Law 103-354; the

[[Page 524]]

Borrower complies with all laws and ordinances applicable to the loan, 
the collateral and or operating of the farm, business or industry.
    6. Assuring that if personal or corporate guarantees are part of the 
collateral, current financial statements from such loan guarantors will 
be obtained and copies provided to FmHA or its successor agency under 
Public Law 103-354 at such time and frequency as required by the loan 
agreement or Conditional Commitment for Guarantee. In the case of 
guarantees secured by collateral, assuring the security is properly 
maintained.
    7. Obtaining the lien coverage and lien priorities specified by the 
Lender and agreed to by FmHA or its successor agency under Public Law 
103-354, properly recording or filing lien or notice instruments to 
obtain or maintain such lien priorities during the existence of the 
guarantee by FmHA or its successor agency under Public Law 103-354.
    8, Assuring that the Borrower obtains marketable title to the 
collateral.
    9. Assuring that the Borrower (any party liable) is not released 
from liability for all or any part of the loan, except in accordance 
with FmHA or its successor agency under Public Law 103-354 regulations.
    10. Providing FmHA or its successor agency under Public Law 103-354 
Finance Office with loan status reports semiannually as of June 30 and 
December 31 on Form FmHA or its successor agency under Public Law 103-
354 1980-41, ``Guaranteed Loan Status Report.''
    11. Obtaining from the Borrower periodic financial statements under 
the following schedule:
________________________________________________________________________
    Lender is responsible for analyzing the financial statements, taking 
any servicing actions and providing copies of statements and record of 
actions to the FmHA or its successor agency under Public Law 103-354 
office immediately responsible for the loan.
    12. Monitoring the use of loan funds to assure they will not be used 
for any purpose that will contribute to excessive erosion of highly 
erodible land or to the conversion of wetlands to produce an 
agricultural commodity, as further explained in 7 CFR Part 1940, Subpart 
G, Exhibit M.
    X. Default. A. The Lender will notify FmHA or its successor agency 
under Public Law 103-354 when a Borrower is thirty (30) days past due on 
a payment or if the Borrower has not met its responsibilities of 
providing the required financial statements to the Lender or is 
otherwise in default. The Lender will notify FmHA or its successor 
agency under Public Law 103-354 of the status of a Borrower's default on 
Form FmHA or its successor agency under Public Law 103-354 1980-44. 
``Guaranteed Loan Borrower Default Status.'' A meeting will be arranged 
by the Lender with the Borrower and FmHA or its successor agency under 
Public Law 103-354 to resolve the problem. Actions taken by the Lender 
with written concurrence of FmHA or its successor agency under Public 
Law 103-354 will include but are not limited to the following or any 
combination thereof:
    1. Deferment of principal payments (subject to rights of any 
Holder(s)).
    2. An additional temporary loan by the Lender to bring the account 
current.
    3. Reamortization of or rescheduling the payments on the loan 
(subject to rights of any Holder(s)).
    4. Transfer and assumption of the loan in accordance with the 
applicable Subpart of Title 7 CFR Part 1980.
    5. Reorganization.
    6. Liquidation.
    7. Subsequent loan guarantees.
    8. Changes in interest rates with FmHA or its successor agency under 
Public Law 103-354's, Lender's, and the Holders(s) approval; provided, 
such interest rate is adjusted proportionally between the guaranteed and 
unguaranteed portion of the loan and the type of rate remains the same.
    B. The Lender will negotiate in good faith in an attempt to resolve 
any problem to permit the Borrower to cure a default, where reasonable.
    C. The Lender has the option to repurchase the unpaid guaranteed 
portion of the loan from the Holder(s) within 30 days of written demand 
by the Holder(s) when: (a) the Borrower is in default not less than 60 
days in payment of principal or interest due on the loan or (b) the 
Lender has failed to remit to the Holder(s) its pro rata share of any 
payment made by the Borrower or any loan subsidy within 30 days of its 
receipt thereof. The repurchase by the Lender will be for an amount 
equal to the unpaid guaranteed portion of the principal and accrued 
interest less the Lender's servicing fee. The loan note guarantee will 
not cover the note interest to the Holder on the guaranteed loan(s). 
Holder(s) will concurrently send a copy of demand to FmHA or its 
successor agency under Public Law 103-354. The lender will accept an 
assignment without recourse from the Holder(s) upon repurchase. The 
Lender is encouraged to repurchase the loan to facilitate the accounting 
for funds, resolve the problem, and to permit the borrower to cure the 
default, where reasonable. The Lender will notify the Holder(s) and FmHA 
or its successor agency under Public Law 103-354 of its decision.
    D. If Lender does not repurchase as provided by paragraph C, FmHA or 
its successor agency under Public Law 103-354 will purchase from 
Holder(s) the unpaid principal balance of the guaranteed portion within 
30 days after written demand to FmHA or its successor agency under 
Public Law 103-354 from the Holder(s). The loan note guarantee will not 
cover the note interest to the Holder

[[Page 525]]

on the guaranteed loan(s). Such demand will include a copy of the 
written demand made upon the Lender.
    The Holder(s) or its duly authorized agent will also include 
evidence of its right to require payment from FmHA or its successor 
agency under Public Law 103-354. Such evidence will consist of either 
the originals of the Loan Note Guarantee and note properly endorsed to 
FmHA or its successor agency under Public Law 103-354 or the original of 
the Assignment Guarantee Agreement properly assigned to FmHA or its 
successor agency under Public Law 103-354 without recourse including all 
rights, title, and interest in the loan. FmHA or its successor agency 
under Public Law 103-354 will be subrogated to all rights of Holder(s). 
The Holder(s) will include in its demand the amount of unpaid principal, 
due (no capitalized interest).
    The Holder will also inform FmHA or its successor agency under 
Public Law 103-354 of the amount of past interest and capitalized 
interest it is owed. Such interest is not guaranteed. The Holder(s) 
remain entitled to all interest due up to the point of repurchase by the 
Lender or purchase by FmHA or its successor agency under Public Law 103-
354 from the Holder(s) if such interest is or can be collected. If FmHA 
or its successor agency under Public Law 103-354 has purchased, FmHA or 
its successor agency under Public Law 103-354 is equally entitled.
    The FmHA or its successor agency under Public Law 103-354 office 
serving the Borrower will promptly notify the Lender of the Holder(s) 
demand for payment. The Lender will promptly provide the FmHA or its 
successor agency under Public Law 103-354 office servicing the Borrower 
with the information necessary for FmHA or its successor agency under 
Public Law 103-354's determination of the appropriate amount due the 
Holder(s). Any discrepancy between the amount claimed by the Holder(s) 
and the information submitted by the Lender must be resolved before 
payment will be approved. FmHA or its successor agency under Public Law 
103-354 will notify both parties who must resolve the conflict before 
payment by FmHA or its successor agency under Public Law 103-354 will be 
approved. Such a conflict will suspend the running of the 30 day payment 
requirement. Upon receipt of the appropriate information, the FmHA or 
its successor agency under Public Law 103-354 office servicing the 
Borrower will review the demand and submit it to the State Director for 
verification. After reviewing the demand, the State Director will 
transmit the request to the FmHA or its successor agency under Public 
Law 103-354 Finance Office for issuance of the appropriate check. Upon 
issuance, the Finance Office will notify the office serving the Borrower 
and State Director and remit the check(s) to the Holder(s).
    E. Lender consents to the purchase by FmHA or its successor agency 
under Public Law 103-354 and agrees to furnish on request by FmHA or its 
successor agency under Public Law 103-354 a current statement certified 
by an appropriate authorized officer of the Lender of the unpaid 
principal and interest then owed by the Borrower on the loan and the 
amount due to the Holder(s). Lender agrees that any purchase by FmHA or 
its successor agency under Public Law 103-354 does not change, alter or 
modify any of the Lender's obligations to FmHA or its successor agency 
under Public Law 103-354 arising from said loan or guarantee, nor does 
such purchase waive any of FmHA or its successor agency under Public Law 
103-354's rights against Lender, and FmHA or its successor agency under 
Public Law 103-354 will have the right to set-off against Lender all 
rights inuring to FmHA or its successor agency under Public Law 103-354 
from the Holder against FmHA or its successor agency under Public Law 
103-354's obligation to Lender under the Loan Note Guarantee. To the 
extent FmHA or its successor agency under Public Law 103-354 holds a 
portion of a loan, loan subsidy will not be paid the Lender.
    F. Servicing fees assessed by the Lender to a Holder are collectible 
only from payment installments received by the Lender from the Borrower. 
When FmHA or its successor agency under Public Law 103-354 repurchases 
from a Holder, FmHA or its successor agency under Public Law 103-354 
will pay the Holder only the amounts due the Holder. FmHA or its 
successor agency under Public Law 103-354 will not reimburse the Lender 
for servicing fees assessed to a Holder and not collected from payments 
received from the Borrower. No servicing fee shall be charged FmHA or 
its successor agency under Public Law 103-354 and no such fee is 
collectible from FmHA or its successor agency under Public Law 103-354.
    G. Lender may also repurchase the guaranteed portion of the loan 
consistent with paragraph 10 of the Loan Note Guarantee.
    XI. Liquidation. If the Lender concludes that liquidation of a 
guaranteed loan account is necessary because of one or more defaults or 
third party actions that the Borrower cannot or will not cure or 
eliminate within a reasonable period of time, a meeting will be arranged 
by the Lender with FmHA or its successor agency under Public Law 103-
354. When FmHA or its successor agency under Public Law 103-354 concurs 
with the Lender's conclusion or at any time concludes independently that 
liquidation is necessary, it will notify the Lender and the matter will 
be handled as follows:
    The Lender will liquidate the loan unless FmHA or its successor 
agency under Public Law 103-354, at its option, decides to carry out 
liquidation.

[[Page 526]]

    When the decision to liquidate is made, the Lender may proceed to 
purchase from Holder(s) the guaranteed portion of the loan. The 
Holder(s) will be paid according to the provision in the Loan Note 
Guarantee or the Assignment Guarantee Agreement.
    If the Lender does not purchase the guaranteed portion of the loan, 
FmHA or its successor agency under Public Law 103-354 will be notified 
immediately in writing. FmHA or its successor agency under Public Law 
103-354 will then purchase the guaranteed portion of the loan from the 
Holder(s). If FmHA or its successor agency under Public Law 103-354 
holds any of the guaranteed portion, FmHA or its successor agency under 
Public Law 103-354 will be paid first its pro rata share of the proceeds 
from liquidation of the collateral.
    A. Lender's proposed method of liquidation. Within 30 days after the 
decision to liquidate, the Lender will advise FmHA or its successor 
agency under Public Law 103-354 in writing of its proposed detailed 
method of liquidation called a liquidation plan and will provide FmHA or 
its successor agency under Public Law 103-354 with:
    1. Such proof as FmHA or its successor agency under Public Law 103-
354 requires to establish the Lender's ownership of the guaranteed loan 
promissory note(s) and related security instruments.
    2. Information lists concerning the Borrower's assets including real 
and personal property, fixtures, claims, contracts, inventory (including 
perishables), accounts receivable, personal and corporate guarantees, 
and other existing and contingent assets, advice as to whether or not 
each item is serving as collateral for the guaranteed loan.
    3. A proposed method of making the maximum collection possible on 
the indebtedness.
    4. If the outstanding loan balance including accrued interest is 
less than $200,000, the Lender will obtain an estimate of the market and 
potential liquidated value of the collateral. On loan balances in excess 
of $200,000, the Lender will obtain an independent appraisal report on 
all collateral securing the loan, which will reflect the current market 
value and potential liquidation value. The appraisal report is for the 
purpose of permitting the Lender and FmHA or its successor agency under 
Public Law 103-354 to determine the appropriate liquidation actions. Any 
independent appraiser's fee will be shared equally by FmHA or its 
successor agency under Public Law 103-354 and the Lender.
    B. FmHA or its successor agency under Public Law 103-354's response 
to Lender's liquidation plan. FmHA or its successor agency under Public 
Law 103-354 will inform the Lender in writing whether it concurs in the 
Lender's liquidation plan within 30 days after receipt of such 
notification from the Lender. If FmHA or its successor agency under 
Public Law 103-354 needs additional time to respond to the liquidation 
plan, it will advise the Lender of a definite time for such response. 
Should FmHA or its successor agency under Public Law 103-354 and the 
Lender not agree on the Lender's liquidation plan, negotiations will 
take place between FmHA or its successor agency under Public Law 103-354 
and the Lender to resolve the disagreement. The Lender will ordinarily 
conduct the liquidation; however, should FmHA or its successor agency 
under Public Law 103-354 opt to conduct the liquidation, FmHA or its 
successor agency under Public Law 103-354 will proceed as follows:
    1. The Lender will transfer to FmHA or its successor agency under 
Public Law 103-354 all rights and interests necessary to allow FmHA or 
its successor agency under Public Law 103-354 to liquidate the loan. In 
this event, the Lender will not be paid for any loss until after the 
collateral is liquidated and the final loss is determined by FmHA or its 
successor agency under Public Law 103-354.
    2. FmHA or its successor agency under Public Law 103-354 will 
attempt to obtain the maximum amount of proceeds from liquidation.
    3. Options available to FmHA or its successor agency under Public 
Law 103-354 include any one or combination of the usual commercial 
methods of liquidation.
    C. Acceleration. The Lender or FmHA or its successor agency under 
Public Law 103-354, if it liquidates, will proceed as expeditiously as 
possible when acceleration of the indebtedness is necessary including 
giving any notices and taking any other legal actions required by the 
security instruments. A copy of the acceleration notice or other 
acceleration document will be sent to FmHA or its successor agency under 
Public Law 103-354 or the Lender, as the case may be.
    D. Liquidation: Accounting and Reports. When the Lender conducts the 
liquidation, it will account for funds during the period of liquidation 
and will provide FmHA or its successor agency under Public Law 103-354 
with periodic reports on the progress of liquidation, disposition of 
collateral, resulting costs and additional procedures necessary for 
successful completion of liquidation. The Lender will transmit to FmHA 
or its successor agency under Public Law 103-354 any payments received 
from the Borrower and/or pro rata share of liquidation or other 
proceeds, etc. when FmHA or its successor agency under Public Law 103-
354 is the holder of a portion of the guaranteed loan using Form FmHA or 
its successor agency under Public Law 103-354 1980-43, ``Lender's 
Guaranteed Loan Payment to FmHA or its successor agency under Public Law 
103-354.'' When FmHA or its successor agency under Public

[[Page 527]]

Law 103-354 liquidates, the Lender will be provided with similar reports 
on request.
    E. Determination of Loss and Payment. In all liquidation cases, 
final settlement will be made with the Lender after the collateral is 
liquidated. FmHA or its successor agency under Public Law 103-354 will 
have the right to recover losses paid under the guarantee from any party 
liable.
    1. Form FmHA or its successor agency under Public Law 103-354 449-
30, ``Loan Note Guarantee Report of Loss,'' will be used for 
calculations of all estimated and final loss determinations. Estimated 
loss payments may be approved by FmHA or its successor agency under 
Public Law 103-354 after the Lender has submitted a liquidation plan 
approved by FmHA or its successor agency under Public Law 103-354. 
Payment will be made in accordance with applicable FmHA or its successor 
agency under Public Law 103-354 regulations.
    2. When the Lender is conducting the liquidation, and owns any of 
the guaranteed portion of the loan, it may request a tentative loss 
estimate by submitting to FmHA or its successor agency under Public Law 
103-354 an estimate of the loss that will occur in connection with 
liquidation of the loan. FmHA or its successor agency under Public Law 
103-354 will agree to pay an estimated loss settlement to the Lender 
provided the Lender applies such amount due to the outstanding principal 
balance owed on the guaranteed debt. Such estimate will be prepared and 
submitted by the Lender on Form FmHA or its successor agency under 
Public Law 103-354 449-30, using the basic formula as provided on the 
report except that the appraisal value will be used in lieu of the 
amount received from the sale of collateral.
    After the Report of Loss estimate has been approved by FmHA or its 
successor agency under Public Law 103-354, and within 30 days 
thereafter, FmHA or its successor agency under Public Law 103-354 will 
send the original Report of Loss estimate to FmHA or its successor 
agency under Public Law 103-354 Finance Office for issuance of a 
Treasury check in payment of the estimated amount due the Lender.
    After liquidation has been completed, a final loss report will be 
submitted on Form FmHA or its successor agency under Public Law 103-354 
449-30 by the Lender to FmHA or its successor agency under Public Law 
103-354.
    3. After the Lender has completed liquidation, FmHA or its successor 
agency under Public Law 103-354 upon receipt of the final accounting and 
report of loss, may audit and will determine the actual loss. If FmHA or 
its successor agency under Public Law 103-354 has any questions 
regarding the amounts set forth in the final Report of Loss, it will 
investigate the matter. The Lender will make its records available to 
and otherwise assist FmHA or its successor agency under Public Law 103-
354 in making the investigation. If FmHA or its successor agency under 
Public Law 103-354 finds any discrepancies, it will contact the Lender 
and arrange for the necessary corrections to be made as soon as 
possible. When FmHA or its successor agency under Public Law 103-354 
finds the final Report of Loss to be proper in all respects, it will be 
tentatively approved in the space provided on the form for that purpose.
    4. When the Lender has conducted liquidation and after the final 
Report of Loss has been tentatively approved:
    a. If the loss is greater than the estimated loss payment, FmHA or 
its successor agency under Public Law 103-354 will send the original of 
the final Report of Loss to the Finance Office for issuance of a 
Treasury check in payment of the additional amount owed by FmHA or its 
successor agency under Public Law 103-354 to the Lender.
    b. If the loss is less than the estimated loss, the Lender will 
reimburse FmHA or its successor agency under Public Law 103-354 for the 
overpayment plus interest at the note rate from date of payment.
    5. If FmHA or its successor agency under Public Law 103-354 has 
conducted liquidation, it will provide an accounting and Report of Loss 
to the Lender and will pay the Lender in accordance with the Loan Note 
Guarantee.
    F. Maximum amount of interest loss payment. Interest is not covered 
by the guarantee.
    G. Application of FmHA or its successor agency under Public Law 103-
354 loss payment. The estimated loss payment shall be applied as of the 
date of such payment. The total amount of the loss payment remitted by 
FmHA or its successor agency under Public Law 103-354 will be applied by 
the Lender on the guaranteed portion of the loan debt. However, such 
application does not release the Borrower from liability. At time of 
final loss settlement the Lender will notify the Borrower that the loss 
payment has been so applied. In all cases a final Form FmHA or its 
successor agency under Public Law 103-354 449-30 prepared and submitted 
by the Lender must be processed by FmHA or its successor agency under 
Public Law 103-354 in order to close out the files at the FmHA or its 
successor agency under Public Law 103-354 Finance Office.
    H. Income from collateral. Any net rental or other income that has 
been received by the Lender from the collateral will be applied on the 
guaranteed loan debt.
    I. Liquidation costs. Certain reasonable liquidation costs will be 
allowed during the liquidation process. These liquidation costs will be 
submitted as a part of the liquidation plan. Such costs will be deducted 
from gross proceeds from the disposition of collateral

[[Page 528]]

unless the costs have been previously determined by the Lender (with 
FmHA or its successor agency under Public Law 103-354 written 
concurrence) to be protective advances. If changed circumstances after 
submission of the liquidation plan require a revision of liquidation 
costs, the Lender will procure FmHA or its successor agency under Public 
Law 103-354's written concurrence prior to proceeding with the proposed 
changes. No in-house expenses of the Lender will be allowed. In-house 
expenses include, but are not limited to, employees' salaries, staff 
lawyers, travel and overhead.
    J. Foreclosure. The parties owning the guaranteed portion and 
unguaranteed portions of the loan will join to institute foreclosure 
action or, in lieu of foreclosure, to take a deed of conveyance to such 
parties. When the conveyance is received and liquidated, net proceeds 
will be applied to the guaranteed loan debt.
    K. Payment. Such loss will be paid by FmHA or its successor agency 
under Public Law 103-354 within 60 days after the review of the 
accounting of the collateral.
    XII. Protective Advances. Protective advances will not be covered by 
the guarantee.
    XIII. Additional Loans or Advances. The Lender will not make 
additional expenditures or new loans without first obtaining the written 
approval of FmHA or its successor agency under Public Law 103-354 even 
though such expenditures or loans will not be guaranteed.
    XIV. Future Recovery. After a loan has been liquidated and a final 
loss has been paid by FmHA or its successor agency under Public Law 103-
354, any future funds which may be recovered by the Lender, will be pro-
rated between FmHA or its successor agency under Public Law 103-354 and 
the Lender. FmHA or its successor agency under Public Law 103-354 will 
be paid such amount recovered in proportion to the percentage it 
guaranteed for the loan and the Lender will retain such amounts in 
proportion to the percentage of the unguaranteed portion of the loan.
    XV. Transfer and Assumption Cases. Refer to the applicable Subpart 
of Title 7 of CFR Part 1980.
    If a loss should occur upon consummation of a complete transfer and 
assumption for less than the full amount of the debt and the transferor-
debtor (including personal guarantees) is released from personal 
liability, the Lender, if it holds the guarantee portion, may file an 
estimated Report of Loss on Form FmHA or its successor agency under 
Public Law 103-354 449-30, ``Loan Note Guarantee Report of Loss,'' to 
recover its pro rata share of the actual loss at that time. In 
completing Form FmHA or its successor agency under Public Law 103-354 
449-30, the amount of the debt assumed will be entered on line 24 as Net 
Collateral (Recovery).
    XVI. Other Requirements. This agreement is subject to all the 
requirements of the applicable Subpart of Title 7 CFR Part 1980, and any 
future amendments of these regulations not inconsistent with this 
agreement. Interested parties may agree to abide by future FmHA or its 
successor agency under Public Law 103-354 regulations not inconsistent 
with this agreement.
    XVII. Execution of Agreements. If this agreement is executed prior 
to the execution of the Loan Note Guarantee, this agreement does not 
impose any obligation upon FmHA or its successor agency under Public Law 
103-354 with respect to execution of such contract. FmHA or its 
successor agency under Public Law 103-354 in no way warrants that such a 
contract has been or will be executed.
    XVIII. Notices. All notices and actions
will be initiated through FmHA or its successor agency under Public Law 
103-354 for--___________________________________________________________
________________________________________________________________________
(State) with mailing address at the
Date of this instrument_________________________________________________
________________________________________________________________________
Dated this ------ day of ------, 19--.

Lender:
By______________________________________________________________________
Title___________________________________________________________________
United States of America
Farmers Home Administration or its successor agency under Public Law 
103-354
By______________________________________________________________________
Title___________________________________________________________________
Attest: ------ (SEAL)

   Exhibit B to Appendix I--Loan Note Guarantee; Drought and Disaster 
               Guaranteed Loans (Interest not Guaranteed)

 Form FmHA or its successor agency under Public Law 103-354 1980-69 (11-
                                   88)

Borrower________________________________________________________________
Lender__________________________________________________________________
Lender's Address________________________________________________________
State___________________________________________________________________
County__________________________________________________________________
Date of Note____________________________________________________________
FmHA or its successor agency under Public Law 103-354 Loan 
Identification Number___________________________________________________
Lender's IRS ID Tax Number______________________________________________
Principal Amount of Loan $______________________________________________
    The guaranteed portion of the loan is $------ which is ------ (----
-- %)
percent of loan principal. The principal amount of loan is evidenced by 
------ note(s) (includes bonds as appropriate) described below. The 
guaranteed portion of each note is indicated below. This instrument is 
attached to note ------ in the face amount of $ ------ and is number --
---- of ------ .

Lender's Identifying Number_____________________________________________
Face Amount_____________________________________________________________
Percent of Total Face Amount____________________________________________
Amount Guaranteed_______________________________________________________

[[Page 529]]

Maximum Loss Guaranteed Governed by 7 CFR Part 1980, Subpart E, Appendix 
                                    I

Total $ ------ 100% $ ------
    In consideration of the making of the subject loan by the above 
named Lender, the United States of America, acting through the Farmers 
Home Administration or its successor agency under Public Law 103-354 of 
the United States Department of Agriculture (herein called ``FmHA or its 
successor agency under Public Law 103-354''), pursuant to the Disaster 
Assistance Act (P.L. 100-387, 7 USC ) does hereby agree that in 
accordance with and subject to the conditions and requirements herein, 
it will pay to:
    The Lender the lesser of 1. or 2. below:
    1. Any loss sustained by such Lender on the guaranteed portion 
including principal indebtedness as evidenced by said note(s) or by 
assumption agreement(s), or
    2. The guaranteed principal advanced to or assumed by the Borrower 
under said note(s) or assumption agreement(s) (Maximum $ ). No 
capitalized interest is guaranteed.
    Definition of Holder. The Holder is the person or organization other 
than the Lender who holds all or part of the guaranteed portion of the 
loan with no servicing responsibilities. Holders are prohibited from 
obtaining any part(s) of the guaranteed portion of the loan with 
proceeds from any obligation, the interest on which is excludable from 
income, under Section 103 of the Internal Revenue Code of 1954, as 
amended (IRC). When the Lender assigns a part(s) of the guaranteed loan 
to an assignee, the assignee becomes a Holder only when Form FmHA or its 
successor agency under Public Law 103-354 1980-70, ``Assignment 
Guarantee Agreement--Drought and Disaster Guaranteed Loans,'' is used.
    Definition of Lender. The Lender is the person or organization 
making and servicing the loan which is guaranteed under the provisions 
of the applicable subpart of 7 CFR Part 1980. The Lender is also the 
party requesting a loan guarantee.

                         Conditions of Guarantee

    1. Loan Servicing. Lender will be responsible for servicing the 
entire loan, and Lender will remain mortgagee and/or secured party of 
record not withstanding the fact that another party may hold a portion 
of the loan. When multiple notes are used to evidence a loan, Lender 
will structure repayments as provided in the loan agreement.
    2. Priorities. The entire loan will be secured by the same security 
with equal lien priority for the guaranteed and unguaranteed portions of 
the loan. The unguaranteed portion of the loan will not be paid first 
nor given any preference or priority over the guaranteed portion.
    3. Full Faith and Credit. The Loan Note Guarantee constitutes an 
obligation supported by the full faith and credit of the United States 
and is incontestable except for fraud or misrepresentation of which 
Lender or any Holder has actual knowledge at the time it became such 
Lender or Holder or which Lender or any Holder participates in or 
condones. If the note to which this is attached or relates provides for 
payment of interest on interest, then this Loan Note Guarantee is void. 
In addition, the Loan Note Guarantee will be unenforceable by Lender to 
the extent any loss is occasioned by the violation of usury laws, 
negligent servicing, or failure to obtain the required security 
regardless of the time at which FmHA or its successor agency under 
Public Law 103-354 acquires knowledge of the foregoing. Any losses 
occasioned will be unenforceable to the extent that loan funds are used 
for purposes other than those specifically approved by FmHA or its 
successor agency under Public Law 103-354 in its Conditional Commitment 
for Guarantee. Negligent servicing is defined as the failure to perform 
those services which a reasonably prudent lender would perform in 
servicing its own portfolio of loans that are not guaranteed. The term 
includes not only the concept of a failure to act but also not acting in 
a timely manner or acting in a manner contrary to the manner in which a 
reasonably prudent lender would act up to the time of loan maturity or 
until a final loss is paid.
    4. Rights and Liabilities. The guarantee and right to require 
purchase will be directly enforceable by Holder notwithstanding any 
fraud or misrepresentation by Lender or any unenforceability of this 
Loan Note Guarantee by Lender. Nothing contained herein will constitute 
any waiver by FmHA or its successor agency under Public Law 103-354 of 
any rights it possesses aganinst the Lender. Lender will be liable for 
and will promptly pay to FmHA or its successor agency under Public Law 
103-354 any payment made by FmHA or its successor agency under Public 
Law 103-354 to Holder which if such Lender had held the guaranteed 
portion of the loan, FmHA or its successor agency under Public Law 103-
354 would not be required to make.
    5. Payments. Lender will receive all payments of principal, or 
interest, on account of the entire loan and will promptly remit to 
Holder(s) its pro rata share thereof determined according to its 
respective interest in the loan, less only Lender's servicing fee.
    6. Protective Advances. Protective advances made by Lender will not 
be guaranteed.
    7. Repurchase by Lender. The Lender has the option to repurchase the 
unpaid guaranteed portion of the loan from the Holder(s) within 30 days 
of written demand by the Holder(s) when: (a) the borrower is in default 
not less than 60 days on principal or interest due on the loan or (b) 
the Lender has failed to remit to the Holder(s) its pro rata share of

[[Page 530]]

any payment made by the borrower or any loan subsidy within 30 days of 
its receipt thereof. The repurchase by the Lender will be for an amount 
equal to the unpaid guaranteed portion of principal and accrued interest 
less the Lender's servicing fee. The Loan Note Guarantee will not cover 
the note interest on the guaranteed loan(s). Holder(s) will concurrently 
send a copy of demand to FmHA or its successor agency under Public Law 
103-354. The Lender is encouraged to repurchase the loan to facilitate 
the accounting for funds, resolve the problem, and to permit the 
borrower to cure the default, where reasonable. The Lender will notify 
the Holder(s) and FmHA or its successor agency under Public Law 103-354 
of its decision.
    8. FmHA or its successor agency under Public Law 103-354 Purchase. 
If Lender does not repurchase as provided by paragraph 7 hereof, FmHA or 
its successor agency under Public Law 103-354 will purchase from Holder 
the unpaid principal balance of the guaranteed portion less Lender's 
servicing fee, within thirty (30) days after written demand to FmHA or 
its successor agency under Public Law 103-354 from Holder. The Loan Note 
Guarantee will not cover the note interest to the Holder on the 
guaranteed loan(s). Such demand will include a copy of the written 
demand made upon the Lender. The Holder(s) or its duly authorized agent 
will also include evidence of its right to require payment from FmHA or 
its successor agency under Public Law 103-354. Such evidence will 
consist of either the original of the Loan Note Guarantee properly 
endorsed to FmHA or its successor agency under Public Law 103-354 or the 
original of the Assignment Guarantee Agreement properly assigned to FmHA 
or its successor agency under Public Law 103-354 without recourse 
including all rights, title, and interest in the loan. FmHA or its 
successor agency under Public Law 103-354 will be subrogated to all 
rights of Holder(s). The Holder(s) will include in its demand the amount 
of unpaid principal due (no capitalized interest).
    The Holder will also inform FmHA or its successor agency under 
Public Law 103-354 of the amount of past interest and capitalized 
interest it is owed. Such interest is not guaranteed. The Holder(s) 
remain entitled to all interest due to the point of repurchase by the 
Lender or purchase by FmHA or its successor agency under Public Law 103-
354 from the Holder(s) if such interest is or can be collected. If FmHA 
or its successor agency under Public Law 103-354 has purchased, FmHA or 
its successor agency under Public Law 103-354 is equally entitled.
    The FmHA or its successor agency under Public Law 103-354 will 
promptly notify the Lender of its receipt of the Holder(s)'s demand for 
payment. The Lender will promptly provide the FmHA or its successor 
agency under Public Law 103-354 with the information necessary for FmHA 
or its successor agency under Public Law 103-354 determination of the 
appropriate amount due the Holder(s). Any discrepancy between the amount 
claimed by the Holder(s) and the information submitted by the Lender 
must be resolved before payment will be approved. FmHA or its successor 
agency under Public Law 103-354 will notify both parties who must 
resolve the conflict before payment of FmHA or its successor agency 
under Public Law 103-354 will be approved. Such conflict will suspend 
the running of the 30 day payment requirement. Upon receipt of the 
appropriate information, FmHA or its successor agency under Public Law 
103-354 will review the demand and submit it to the State Director for 
verification. After reviewing the demand the State Director will 
transmit the request to the FmHA or its successor agency under Public 
Law 103-354 Finance Office for issuance of the appropriate check. Upon 
issuance, the Finance Office will notify the office servicing the 
borrower and State Director and remit the check(s) to the Holder(s).
    9. Lender's Obligations. Lender consents to the purchase by FmHA or 
its successor agency under Public Law 103-354 and agrees to furnish on 
request by FmHA or its successor agency under Public Law 103-354 a 
current statement certified by an appropriate authorized officer of the 
Lender of the unpaid principal and interest then owed by Borrowers on 
the loan and the amount including any loan subsidy then owed by any 
Holder(s). Lender agrees that any purchase by FmHA or its successor 
agency under Public Law 103-354 does not change, alter or modify any of 
the Lender's obligations to FmHA or its successor agency under Public 
Law 103-354 arising from said loan or guarantee nor does it waive any of 
FmHA or its successor agency under Public Law 103-354's rights against 
Lender, and that FmHA or its successor agency under Public Law 103-354 
will have the right to set-off against Lender all rights inuring to FmHA 
or its successor agency under Public Law 103-354 as the Holder of this 
instrument against FmHA or its successor agency under Public Law 103-
354's obligation to Lender under the Loan Note Guarantee.
    10. Repurchase by Lender for Servicing. If, in the opinion of the 
Lender, repurchase of the guaranteed portion of the loan is necessary to 
adequately service the loan, the Holder will sell the portion of the 
loan to the Lender for an amount equal to the unpaid principal and 
interest (including any loan subsidy) on such portion less Lender's 
servicing fee. The Loan Note Guarantee will not cover the note interest 
to the Holder on the guaranteed loans.
    a. The lender will not repurchase from the Holder(s) for arbitrage 
purposes or other purposes to further its own financial gain.

[[Page 531]]

    b. Any repurchase will only be made after the Lender obtains FmHA or 
its successor agency under Public Law 103-354 written approval.
    c. If the Lender does not repurchase the portion from the Holder(s), 
FmHA or its successor agency under Public Law 103-354 at its option may 
purchase such guaranteed portions for servicing purposes.
    11. Custody of Unguaranteed Portion. The Lender may retain, or sell 
the unguaranteed portion of the loan only through participation. 
Participation, as used in this instrument, means the sale of an interest 
in the loan wherein the Lender retains the note, collateral securing the 
note, and all responsibility for loan servicing and liquidation.
    12. When Guarantee Terminates. This Loan Note Guarantee will 
terminate automatically (a) upon full payment of the guaranteed loan; or 
(b) upon full payment of any loss obligation hereunder; or (c) upon 
written notice from the Lender to FmHA or its successor agency under 
Public Law 103-354 that the guarantee will terminate 30 days after the 
date of notice, provided the Lender holds all of the guaranteed portion 
and the Loan Note Guarantee(s) are returned to be cancelled by FmHA or 
its successor agency under Public Law 103-354.
    13. Settlement. The amount due under this instrument will be 
determined and paid as provided in the applicable Subpart of Part 1980 
of Title 7 CFR in effect on the date of this instrument.
    14. Notices. All notices and actions will be initiated through the 
FmHA or its successor agency under Public Law 103-354 ------
for ------ (State) with mailing address at the date of this instrument:
________________________________________________________________________
United States of America
Farmers Home Administration or its successor agency under Public Law 
103-354
By:_____________________________________________________________________
Title:__________________________________________________________________
(Date)__________________________________________________________________
Assumption Agreement by_________________________________________________
dated ------, 19--
Assumption Agreement by_________________________________________________
dated ------, 19--

  Exhibit C to Appendix I--Assignment Guarantee Agreement--Drought and 
         Disaster Guaranteed Loans (Interest Not Guaranteed) \1\

FmHA or its successor agency under Public Law 103-354 Loan Ident. No.___
---------------------------------------------------------------------------

    \1\ Public reporting burden for this collection of information is 
estimated to average 2 hours per response, including the time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the collection 
of information. Send comments regarding this burden estimate or any 
other aspect of this collection of information, including suggestions 
for reducing this burden to, Department of Agriculture, Clearance 
Officer, OIRM, Room 404-W, Washington, DC 20250; and to the Office of 
Management and Budget, Paperwork Reduction Project (OMB No. 0575-0029), 
Washington, DC 20503.
---------------------------------------------------------------------------

 Form FmHA or its successor agency under Public Law 103-354 1980-70 (11-
                                   88)

________________________________________________________________________
of______________________________________________________________________
(Lender) has made a loan to_____________________________________________
in the principal amount of $____________________________________________
as evidenced by a note(s) dated_________________________________________
The United States of America, acting through Farmers Home Administration 
or its successor agency under Public Law 103-354 (FmHA or its successor 
agency under Public Law 103-354) entered into a Loan Note Guarantee--
Drought and Disaster Guaranteed Loans (Loan Note Guarantee) (Form FmHA 
or its successor agency under Public Law 103-354 1980-69) with the 
Lender applicable to such loan to guarantee the loan not to exceed ----
-- % of the amount of the principal advanced.
________________________________________________________________________
of______________________________________________________________________

(Holder) desires to purchase from Lender ------ % of the guaranteed 
portion of such loan. Copies of Borrower's note(s) and the Loan Note 
Guarantee are attached hereto as a part hereof._________________________
    Now, Therefore, the Parties Agree:
    1. The principal amount of the loan now outstanding is $ ------ . 
Lender hereby assigns to Holder ------ % of the guaranteed portion of 
the loan representing $ ------ of such loan now outstainding in 
accordance with all of the terms and conditions hereinafter set forth. 
The Lender and FmHA or its successor agency under Public Law 103-354 
certify to the Holder that the Lender has paid and FmHA or its successor 
agency under Public Law 103-354 has received the Guarantee Fee in 
exchange for the issuance of the Loan Note Guarantee.
    2. Loan Servicing. The Lender will be responsible for servicing the 
entire loan and will remain mortgagee and/or secured party of record. 
The entire loan will be secured by the same security with equal lien 
priority for the guaranteed and unguaranteed portions of the loan.
    The Lender will receive all payments on account of principal of, or 
interest (including any loan subsidy) on, the entire loan and shall 
promptly remit to the Holder its pro rata share thereof determined 
according to their respective interests in the loan, less only Lender's 
servicing fee.
    3. Servicing Fee. Holder agrees that Lender will retain a servicing 
fee of ------ percent

[[Page 532]]

per annum of the unpaid balance of the guaranteed portion of the loan 
assigned hereunder.
    4. Purchase by Holder. The guaranteed protion purchased by the 
Holder will always be a portion of the loan which is guaranteed. The 
Holder will hereby succeed to all rights of the Lender under the Loan 
Note Guarantee to the extent of the assigned portion of the loan. The 
Lender, however, will remain bound by all the obligations under the Loan 
Note Guarantee and the program regulations found in the applicable 
Subpart of 7 CFR Part 1980 now in effect and future FmHA or its 
successor agency under Public Law 103-354 program regulations not 
inconsistent with the provisions hereof.
    5. Full Faith and Credit. The Loan Note Guarantee constitutes an 
obligation supported by the full faith and credit of the United States 
and is inconstestable except for fraud or misrepresentation of which the 
Holder has actual knowledge at the time of this assignment, or which it 
participates in or condones. A note which provides for the payment of 
interest on interest shall not be guaranteed. Any Assignment Guarantee 
Agreement--Drought and Disaster Guaranteed Loan attached to or relating 
to a note which provides for payment of interest on interest is void.
    6. Rights and Liabilities. The guarantee and right to require 
purchase will be directly enforceable by Holder notwithstanding any 
fraud or misrepresentations by Lender or any unenforceability of the 
Loan Note Guarantee by Lender. Nothing contained herein shall constitute 
any waiver by FmHA or its successor agency under Public Law 103-354 of 
any rights it possesses against the Lender, and the Lender agrees that 
Lender will be liable and will promptly reimburse FmHA or its successor 
agency under Public Law 103-354 for any payment made by FmHA or its 
successor agency under Public Law 103-354 to Holder which, if such 
Lender had held the guaranteed portion of the loan, FmHA or its 
successor agency under Public Law 103-354 would not be required to make. 
The Holder(s) upon written notice to the Lender may resell the unpaid 
balance of the guaranteed portion of the loan assigned hereunder. An 
endorsement may be added to the Form FmHA or its successor agency under 
Public Law 103-354 1980-70 to effectuate the transfer.

Lender:
Address:
By______________________________________________________________________
Title___________________________________________________________________
Attest:_________________________________________________________________
     (SEAL)
Holder:
Address:
By______________________________________________________________________
Title___________________________________________________________________
Attest:_________________________________________________________________
     (SEAL)

United States of America
Farmers Home Administration or its successor agency under Public Law 
103-354
Address:________________________________________________________________
By______________________________________________________________________
Title___________________________________________________________________

[54 FR 5, Jan. 3, 1989, as amended at 54 FR 14792, Apr. 13, 1989; 54 FR 
26946, June 27, 1989]

             Appendix J to Subpart E of Part 1980 [Reserved]

 Appendix K to Subpart E of Part 1980--Regulations for Loan Guarantees 
         for Disaster Assistance For Rural Business Enterprises

                              A. In general

    Disaster Assistance for Rural Business Enterprises (DARBE) 
guaranteed loans are authorized by Section 401 of the Disaster 
Assistance Act of 1989, which provides for guarantees of up to 90 
percent of the unpaid principal and interest amount of qualifying loans, 
or $2,500,000 whichever is less, to any one borrower. DARBE guaranteed 
loans may be either to assist in alleviating financial distress caused 
to rural business entities, directly or indirectly, by drought, freeze, 
storm, excessive moisture, earthquake, or related conditions occurring 
in 1988 or 1989, or to assist such entities that refinance or 
restructure debt as a result of losses incurred, directly or indirectly, 
because of such natural disasters. Where used in this appendix, the term 
``natural disaster(s)'' refers only to drought, freeze, storm, excessive 
moisture, earthquake, and related conditions occurring in 1988 or 1989. 
All provisions of subparts A and E of part 1980 of this chapter apply to 
DARBE loans, except as provided in this appendix. All forms used in 
connection with a DARBE loan will be those used in connection with a 
Business and Industrial (B&I) guaranteed loan, except for the following 
three forms that are incorporated in this appendix K of this subpart E, 
made a part hereof, and appear in the Federal Register following the 
body of this appendix as exhibits A, B, and C in the following order:
    (1) Form FmHA or its successor agency under Public Law 103-354 1980-
71, ``Lender's Agreement--Disaster Assistance for Rural Business 
Enterprise Guaranteed Loans,'' will be used instead of Form FmHA or its 
successor agency under Public Law 103-354 449-35, ``Lender's 
Agreement.''
    (2) Form FmHA or its successor agency under Public Law 103-354 1980-
72, ``Loan Note Guarantee--Disaster Assistance for Rural Business 
Enterprise Guaranteed Loans,'' will be used instead of Form FmHA or its 
successor agency under Public Law 103-354 449-34, ``Loan Note 
Guarantee.''

[[Page 533]]

    (3) Form FmHA or its successor agency under Public Law 103-354 1980-
73, ``Assignment Guarantee Agreement--Disaster Assistance for Rural 
Business Enterprise Guaranteed Loans,'' will be used instead of Form 
FmHA or its successor agency under Public Law 103-354 449-36, 
``Assignment Guarantee Agreement.''

                            B. Loan purposes

    Loan proceeds may be used for purposes described in Sec. 
1980.411(a), except in lieu of the debt refinancing requirements in 
Sec. 1980.411(a)(11), the following refinancing requirements apply to 
DARBE loans. Loan proceeds to be used for refinancing must be used 
solely for refinancing or restructuring of debts as a result of losses 
incurred, directly or indirectly, as a result of drought, freeze, storm, 
excessive moisture, earthquake, or related conditions occurring in 1988 
or 1989, and such refinancing or restructuring of debt(s) must be 
essential for the borrower to meet its financial obligations in a timely 
fashion. DARBE loan proceeds may be used for hotels, motels, tourist, or 
recreation facilities which meet the eligibility requirements of DARBE 
guaranteed loans in addition to the eligible loan purposes as stated in 
FmHA or its successor agency under Public Law 103-354 Instruction 1980-
E. In addition, DARBE loan proceeds may be used for business enterprises 
engaged in agricultural production (production agriculture) which means 
the cultivation, production (growing), and harvesting, either directly 
or through integrated operations, of agricultural products (crops, 
animals, birds, and marine life, either for fibers or food for human 
consumption), and disposal or marketing thereof, the raising, housing, 
feeding (including commercial custom feedlots), breeding, hatching, 
control and/or management of farm and domestic animals. Other eligible 
uses of loan proceeds under agricultural production include:
    (1) Commercial nurseries primarily engaged in the production of 
ornamental plants and trees and other nursery products such as bulbs, 
florists' greens, flowers, shrubbery, flower and vegetable seeds, sod, 
and the growing of vegetables from seed to the transplant stage.
    (2) Forestry which includes establishments primarily engaged in the 
operation of timber tracts, tree farms, forest nurseries, and related 
activities such as reforestation.
    (3) Loans for livestock and poultry processing as identified under 
eligible purposes.
    (4) The growing of mushrooms or hydroponics.
    In addition, those business enterprises which qualify for assistance 
as agricultural production must be ineligible entities for FmHA or its 
successor agency under Public Law 103-354 farmer program loans because 
the entity exceeds the definition of a family-size farm as defined by 
FmHA or its successor agency under Public Law 103-354 Instruction 1941-
A, Sec. 1941.4(d).

                       C. Ineligible loan purposes

    FmHA or its successor agency under Public Law 103-354 Instruction 
1980-E, Sec. 1980.412 are ineligible purposes for DARBE guaranteed 
loans except for hotels, motels, tourist, recreation facilities and 
agricultural production (production agriculture) as defined in Sec. 
1980.412(e), DARBE guaranteed loans may not be used for:
    (1) Business expansion, acquisition of real estate, machinery, 
equipment, inventory, other goods or services, or for any other purpose 
unless related directly to the financial distress or loss that is the 
basis for the DARBE guaranteed loan.
    (2) Alleviating financial distress of entities engaged in 
agricultural production that are eligible for other FmHA or its 
successor agency under Public Law 103-354-type farm loan programs.

              D. Transactions which will not be guaranteed

    In addition to transactions listed in FmHA or its successor agency 
under Public Law 103-354 Instruction 1980-E, Sec. 1980.413, except for 
Sec. 1980.413(a)(3), FmHA or its successor agency under Public Law 103-
354 will not make DARBE guaranteed loans if the completed application is 
not received by FmHA or its successor agency under Public Law 103-354 on 
or before September 30, 1991, nor will FmHA or its successor agency 
under Public Law 103-354 make subsequent DARBE guarantee loans.

                     E. Borrower equity requirements

    See FmHA or its successor agency under Public Law 103-354 
Instruction 1980-E, Sec. 1980.441. In lieu of the borrower equity 
requirements in Sec. 1980.441, paragraphs (a) and (b), the following 
applies to DARBE loans. Tangible balance sheet equity must be positive 
when the Loan Note Guarantee is issued. Equity must be such that, when 
considered with other credit factors, repayment of the loan and the 
continued success of the business operation are reasonably assured. 
Requirements of Sec. 1980.441(c) apply to DARBE guaranteed loans.

        F. Filing and processing preapplications and applications

    See FmHA or its successor agency under Public Law 103-354 
Instruction 1980-E, Sec. 1980.451. All requirements of Sec. 1980.451 
remain in effect. In addition to the information required as part of a 
preapplication under Sec. 1980.451(f), and unless previously submitted 
as a part of an application under Sec. 1980.451(i) evidence is required 
which demonstrates to FmHA or its successor agency under Public Law 103-
354's satisfaction:

[[Page 534]]

    (1) The causal relationship between a 1988 or 1989 natural disaster 
and the financial distress or loss upon which the preapplication or 
application is based; and,
    (2) That the amount of the loan requested is not greater than the 
amount necessary for curing the problems caused by the natural disaster. 
Financial distress or loss shall be determined on the basis of a 
comparison of financial data for comparable periods of time and need not 
necessarily be based on data at the year's end. Evidence submitted may 
include, but is not limited to, the following:
    (a) Evidence of financial loss or distress (including loss or 
distress caused by business interruption) resulting from physical damage 
caused by natural disaster, or
    (b) Evidence that the financial loss and/or distress of the business 
is the direct or indirect result of loss of sales, business 
interruption, loss of markets, shortage of raw materials, or decline in 
patronage or customers caused by a nautral disaster. It must be shown 
that business operations were damaged as a result of such natural 
disaster.
    (3) Evidence of compliance with Sodbuster and Swampbuster 
requirements as referenced in paragraph K below.
    G. Loan guarantee limit. The total principal amount of DARBE 
guaranteed loans to any one borrower cannot exceed $10,000,000. The 
maximum loss covered by Form FmHA or its successor agency under Public 
Law 103-354 1980-72, ``Loan Note Guarantee DARBE,'' issued on any one 
borrower can never exceed the percentage of guarantee multiplied by the 
unpaid principal and accrued interest on the loan as evidenced by the 
note(s) or by assumption agreement(s), and protective advances, or 
$2,500,000, whichever is the lesser amount.
    H. Percentage of guarantee. The provisions of FmHA or its successor 
agency under Public Law 103-354 instruction 1980-E, Sec. 1980.420 will 
not apply to DARBE. For loans in excess of $2,000,000, the percentage of 
guarantee will be calculated so that the guaranteed portion of the 
principal amount of the loan cannot exceed $2,000,000. For loans of 
$2,000,000 or less the maximum percentage of guarantee will be 90 
percent. For example, a loan of $10,000,000 would not exceed a 20 
percent guarantee; a $5,000,000 loan would not exceed a 40 percent 
guarantee.

               I. Lender's existing unguaranteed exposure

    The provisions of Sec. 1980.452 ADMINISTRATIVE C. 1(d) do not 
apply.

                      J. No direct or insured loans

    FmHA or its successor agency under Public Law 103-354 Instruction 
1980-E, Sec. Sec. 1980.423(b), 1980.488(b), 1980.481, 1980.411(b), and 
other provisions of this subpart dealing with insured or direct loans do 
not apply to DARBE loans. All DARBE loans are FmHA or its successor 
agency under Public Law 103-354 guaranteed loans. FmHA or its successor 
agency under Public Law 103-354 has no authority to make DARBE loans 
directly to borrowers.

                K. Sodbuster and Swampbuster requirements

    The provisions of FmHA or its successor agency under Public Law 103-
354 Instruction 1940-G, exhibit M, will apply to loans made to rural 
business enterprises engaged in agricultural production.

                         Exhibit A to Appendix K

USDA-FmHA or its successor agency under Public Law 103-354

    Form FmHA or its successor agency under Public Law 103-354 1980-71
    (Rev. 11-89)
    FORM APPROVED
    OMB NO. 0575-0029

                           Lender's Agreement

        Disaster Assistance for Rural Business Enterprise (DARBE)

                            Guaranteed Loans

 Maximum Loss Payable by FmHA or its successor agency under Public Law 
              103-354 to a Holder or Lender Is $2,500,000.

Type of Loan.
________________________________________________________________________
Applicable 7 CFR part 1980 subpart
________________________________________________________________________
FmHA or its successor agency under Public Law 103-354 Loan Ident. No.
________________________________________________________________________
(Lender) of
________________________________________________________________________
has made a loan(s) to
________________________________________________________________________
(Borrower)
________________________________________________________________________
in the principal amount of $-------------- as evidenced by
________________________________________________________________________
note(s) (include Bond as appropriate) described as follows:
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
The United States of America, acting through Farmers Home Administration 
or its successor agency under Public Law 103-354 (FmHA or its successor 
agency under Public Law 103-354) has entered into a ``Loan Note 
Guarantee--DARBE'' (Form FmHA or its successor agency under Public Law 
103-354 1980-72) or has issued a ``Conditional Commitment for 
Guarantee'' (Form FmHA or its successor agency under Public Law 103-354 
449-14) to enter into a Loan Note

[[Page 535]]

Guarantee with the Lender applicable to such loan to participate in a 
percentage of any loss on the loan not to exceed ----------% of the 
amount of the principal advance and any interest (including any loan 
subsidy) thereon. The terms of the Loan Note Guarantee are controlling. 
In order to facilitate the marketability of the guaranteed portion of 
the loan and as a condition for obtaining a guarantee of the loan(s), 
the Lender enters into this agreement.

                           The Parties Agree:

I. The maximum loss covered under the Loan Guarantee--DARBE will not 
exceed -------- percent of the principal and accrued interest including 
any loan subsidy on the above indebtedness.

   The Maximum Loss Payment Under a Loan Guarantee Under the Disaster 
  Assistance For Rural Business Enterprise Guaranteed Loan Program is 
    Limited to $2,500,000, or the Percentage of Guarantee Times the 
Principal, Accrued Interest, and Approved Protective Advances, Whichever 
                                is Less.

                       II. Full Faith and Credit.

    The Loan Note Guarantee--DARBE constitutes an obligation supported 
by the full faith and credit of the United States and is incontestable 
except for fraud or misrepresentation of which the Lender has actual 
knowledge at the time it became such Lender or which Lender participates 
in or condones. Any note which provides for the payment of interest on 
interest shall not be guaranteed. Any Loan Note Guarantee--DARBE or 
Assignment Guarantee Agreement--DARBE attached to or relating to a note 
which provides for payment of interest on interest is void.
    The Loan Note Guarantee--DARBE will be unenforceable by the Lender 
to the extent any loss is occasioned by violation of usury laws, 
negligent servicing, or failure to obtain the required security 
regardless of the time at which FmHA or its successor agency under 
Public Law 103-354 acquires knowledge of the foregoing. Any losses will 
be unenforceable by the Lender to the extent that loan funds are used 
for purposes other than those specifically approved by FmHA or its 
successor agency under Public Law 103-354 in its Conditional Commitment 
for Guarantee. Negligent servicing is defined as the failure to perform 
those services which a reasonably prudent Lender would perform in 
servicing its own portfolio of loans that are not guaranteed. The term 
includes not only the concept of a failure to act but also not acting in 
a timely manner or acting in a manner contrary to the manner in which a 
reasonably prudent Lender would act up to the time of loan maturity or 
until a final loss is paid.
Public reporting burden for this collection of information is estimated 
to average 1\1/2\ hours per response, including the time for reviewing 
instructions, searching existing data sources, gathering and maintaining 
the data needed, and completing and reviewing the collection of 
information. Send comments regarding this burden estimate or any other 
aspect of this collection of information including suggestions for 
reducing this burden, to Department of Agriculture, Clearance Officer, 
OIRM, Room 404-W, Washington, D.C. 20250; and to the Office of 
Management and Budget, Paperwork Reduction Project (OMB No. 0575-0029), 
Washington, D.C. 20503.

       III. Lender's Sale or Assignment of Guarantee Loan--DARBE.

    A. The Lender may retain all of the guaranteed loan. The Lender is 
not permitted to sell or participate in any amount of the guaranteed or 
unguaranteed portion(s) of the loan(s) to the applicant or Borrower or 
members of their immediate families, their officers, directors, 
stockholders, other owners, or any parent, subsidiary or affiliate. If 
the Lender desires to market all or part of the guaranteed portion of 
the loan at or subsequent to loan closing, such loan must not be in 
default as set forth in the terms of the notes. The Lender may proceed 
under the following options:
    1. Assignment. Assign all or part of the guaranteed portion of the 
loan to one or more Holders by using Form FmHA or its successor agency 
under Public Law 103-354 1980-73, ``Assignment Guarantee Agreement--
DARBE.'' Holder(s), upon written notice to Lender and FmHA or its 
successor agency under Public Law 103-354, may reassign the unpaid 
guaranteed portion of the loan sold thereunder. Upon such notification 
the assignee shall succeed to all rights and obligations of the 
Holder(s) thereunder. If this option is selected, the Lender may not at 
a later date cause to be issued any additional notes.
    2. Multi-Note System. When this option is selected by the Lender, 
upon disposition the Holder will receive one of the Borrower's executed 
notes and Form FmHA or its successor agency under Public Law 103-354 
1980-72, ``Loan Note Guarantee--DARBE,'' attached to the Borrower's 
note. However, all rights under the security instruments (including 
personal and/or corporate guarantees) will remain with the Lender and in 
all cases inure to its and the Government's benefit notwithstanding any 
contrary provisions of state law.
    a. At Loan Closing: Provide for no more than 10 notes, unless the 
Borrower and FmHA or its successor agency under Public Law 103-354 agree 
otherwise, for the guaranteed portion and one note for the unguaranteed 
portion. When this option is selected, FmHA or its successor agency

[[Page 536]]

under Public Law 103-354 will provide the Lender with a Form FmHA or its 
successor agency under Public Law 103-354 1980-72, for each of the 
notes.
    b. After Loan Closing:
    (1) Upon written approval by FmHA or its successor agency under 
Public Law 103-354, the Lender may cause to be issued a series of new 
notes, not to exceed the total provided in 2.a. above, as replacement 
for previously issued guaranteed note(s) provided:
    (a) The Borrower agrees and executes the new notes.
    (b) The interest rate does not exceed the interest rate in effect 
when the loan was closed.
    (c) The maturity of the loan is not changed.
    (d) FmHA or its successor agency under Public Law 103-354 will not 
bear any expenses that may be incurred in reference to such reissue of 
notes.
    (e) There is adequate collateral securing the note(s).
    (f) No intervening liens have arisen or have been perfected and the 
secured lien priority remains the same.
    (2) FmHA or its successor agency under Public Law 103-354 will issue 
the appropriate Loan Note Guarantees--DARBE to be attached to each of 
the notes then extant in exchange for the original loan Note Guarantee--
DARBE which will be cancelled by FmHA or its successor agency under 
Public Law 103-354.
    3. Participations.
    a. The Lender may obtain participation in its loan under its normal 
operating procedures. Participation means a sale of an interest in the 
loan wherein the Lender retains the note, collateral securing the note, 
and all responsibility for loan servicing and liquidation.
    b. The Lender is required to hold in its own portfolio or retain a 
minimum of 5% for Disaster Assistance for Rural Business Enterprises 
loans of the total guaranteed loan(s) amount. The amount required to be 
retained must be of the unguaranteed portion of the loan and cannot be 
participated to another. The Lender may sell the remaining amount of the 
unguaranteed portion of the loan only through participation. However, 
the Lender will always retain the responsibility for loan servicing and 
liquidation.
    B. When a guaranteed portion of a loan is sold by the Lender to a 
(Holder(s), the Holder(s) shall thereupon succeed to all rights of 
Lender under the Loan Note Guarantee--DARBE to the extent of the portion 
of the loan purchased. Lender will remain bound to all the obligations 
under the Loan Note Guarantee--DARBE, and this agreement, and the FmHA 
or its successor agency under Public Law 103-354 program regulations 
found in the applicable subpart of title 7 CFR part 1980, and to future 
FmHA or its successor agency under Public Law 103-354 program 
regulations not inconsistent with the express provisions hereof.
    C. The Holder(s) upon written notice to the lender may resell the 
unpaid guaranteed portion of the loan sold under provision III A.

IV. The Lender agrees loan funds will be used for the purposes 
authorized in the applicable subpart of title 7 CFR part 1980 and in 
accordance with the terms of Form FmHA or its successor agency under 
Public Law 103-354 449-14.

V. The Lender certifies that none of its officers or directors, 
stockholders or other owners (except stockholders in a Farm Credit Bank 
or other Farm Credit System Institution with direct lending authority 
that have normal stockshare requirements for participation) has a 
substantial financial interest in the Borrower. The Lender certifies 
that neither the Borrower nor its officers or directors, stockholders or 
other owners has a substantial financial interest in the Lender. If the 
Borrower is a member of the board of directors or an officer of a Farm 
Credit Bank or other Farm Credit System Institution with direct lending 
authority, the Lender certifies that an FCS institution on the next 
highest level will independently process the loan request and will act 
as the Lender's agent in servicing the account.

VI. The Lender certifies that it has no knowledge of any material 
adverse change, financial or otherwise, in the Borrower, Borrower's 
business, or any parent, subsidiaries, or affiliates since it requested 
a Loan Note Guarantee--DARBE.

VII. Lender certifies that a loan agreement and/or loan instruments 
concurred in by FmHA or its successor agency under Public Law 103-354 
has been or will be signed with the Borrower.

VIII. Lender certifies that it has paid the required guarantee fee.

                             IX. Servicing.

    A. The Lender will service the entire loan and will remain mortgagee 
and/or secured party of record, notwithstanding the fact that another 
may hold a portion of the loan. The entire loan will be secured by the 
same security with equal lien priority for the guaranteed and 
unguaranteed portions of the loan. Lender may charge Holder a servicing 
fee. The unguaranteed portion of a loan will not be paid first nor given 
any preference or priority over the guaranteed portion of the loan.
    B. Disposition of the guaranteed portion of a loan may be made prior 
to full disbursement, completion of construction and acquisitions only 
with the prior written approval

[[Page 537]]

of FmHA or its successor agency under Public Law 103-354. Subsequent to 
full disbursement, completion of construction, and acquisition, the 
guaranteed portion of the loan may be disposed of as provided herein.
    It is the Lender's responsibility to see that all construction is 
properly planned before any work proceeds; that any required permits, 
licenses or authorizations are obtained from the appropriate regulatory 
agencies; that the Borrower has obtained contracts through acceptable 
procurement procedures; that periodic inspections during construction 
are made and that FmHA or its successor agency under Public Law 103-
354's concurrence on the overall development schedule is obtained.
    C. Lender's servicing responsibilities include, but are not limited 
to:
    1. Obtaining compliance with the convenants and provisions in the 
note, loan agreement, security instruments, and any supplemental 
agreements and notifying in writing FmHA or its successor agency under 
Public Law 103-354 and the Borrower of any violations. None of the 
aforesaid instruments will be altered without FmHA or its successor 
agency under Public Law 103-354's prior written concurrence. The Lender 
must service the loan in a reasonable and prudent manner.
    2. Receiving all payments on principal and interest (including any 
loan subsidy) on the loan as they fall due and promptly remitting and 
accounting to any Holder(s) of their pro rata share thereof determined 
according to their respective interests in the loan, less only Lender's 
servicing fee. The loan may be reamortized, renewed, rescheduled or (for 
Farm Ownership, Soil and Water, and Operating loans only) written down 
only with agreement of the Lender and Holder(s) of the guaranteed 
portion of the loan and only with FmHA or its successor agency under 
Public Law 103-354's written concurrence. For loans covered by 7 CFR 
part 1980, subpart H, the Holder may designate the payee when an 
Individual Certificate is issued.
    3. Inspecting the collateral as often as necessary to properly 
service the loan.
    4. Assuring that adequate insurance is maintained. This includes 
hazard insurance obtained and maintained with a loss payable clause in 
favor of the Lender as the mortgagee or secured party.
    5. Assuring that: taxes, assessment or ground rents against or 
affecting collateral are paid; the loan and collateral are protected in 
foreclosure, bankruptcy, receivership, insolvency, condemnation, or 
other litigation, insurance loss payments, condemnation awards, or 
similar proceeds are applied on debts in accordance with lien priorities 
on which the guarantee was based, or to rebuilding or otherwise 
acquiring needed replacement collateral with the written approval of 
FmHA or its successor agency under Public Law 103-354; proceeds from the 
sale or other disposition of collateral are applied in accordance with 
the lien priorities on which the guarantee is based, except that 
proceeds from the disposition of collateral, such as machinery, 
equipment, furniture or fixtures, may be used to acquire property of 
similar nature in value up to $------------ without written concurrence 
of FmHA or its successor agency under Public Law 103-354; the Borrower 
complies with all laws and ordinances applicable to the loan, the 
collateral and/or operating of the farm, business or industry.
    6. Assuring that if personal or corporate guarantees are part of the 
collateral, current financial statements from such loan guarantors will 
be obtained and copies provided to FmHA or its successor agency under 
Public Law 103-354 at such time and frequency as required by the loan 
agreement or Conditional Commitment for Guarantee. In the case of 
guarantees secured by collateral, assuring the security is properly 
maintained.
    7. Obtaining the lien coverage and lien priorities specified by the 
Lender and agreed to by FmHA or its successor agency under Public Law 
103-354, properly recording or filing lien or notice instruments to 
obtain or maintain such lien priorities during the existence of the 
guarantee by FmHA or its successor agency under Public Law 103-354.
    8. Assuring that the Borrower obtains marketable title to the 
collateral.
    9. Assuring that the Borrower (any party liable) is not released 
from liability for all or any part of the loan, except in accordance 
with FmHA or its successor agency under Public Law 103-354 regulations.
    10. Providing FmHA or its successor agency under Public Law 103-354 
Finance Office with loan status reports semiannually as of June 30 and 
December 31 on Form FmHA or its successor agency under Public Law 103-
354 1980-41, ``Guaranteed Loan Status Report.''
    11. Obtaining from the Borrower periodic financial statements under 
the following schedule:
________________________________________________________________________
Lender is responsible for analyzing the financial statements, taking any 
servicing actions and providing copies of statements and record of 
actions to the FmHA or its successor agency under Public Law 103-354 
office immediately responsible for the loan.
    12. Monitoring the use of loan funds to assure they will not be used 
for any purpose that will contribute to excessive erosion of highly 
erodible land or to the conversion of wetlands to produce an 
agricultural commodity, as further explained in 7 CFR part 1940, subpart 
G, exhibit M.

                               X. Default.

    A. The Lender will notify FmHA or its successor agency under Public 
Law 103-354 when

[[Page 538]]

a Borrower is thirty (30) days (90 days for guaranteed rural housing 
loan) past due on a payment or if the Borrower has not met its 
responsibilities of providing the required financial statements to the 
Lender or is otherwise in default. The Lender will notify FmHA or its 
successor agency under Public Law 103-354 of the status of a Borrower's 
default on Form FmHA or its successor agency under Public Law 103-354 
1980-44, ``Guaranteed Loan Borrower Default Status.'' A meeting will be 
arranged by the Lender with the Borrower and FmHA or its successor 
agency under Public Law 103-354 to resolve the problem. Actions taken by 
the Lender with written concurrence of FmHA or its successor agency 
under Public Law 103-354 will include but are not limited to the 
following or any combination thereof:
    1. Deferment of principal payments (subject to rights of any 
Holder(s)).
    2. An additional temporary loan by the Lender to bring the account 
current.
    3. Reamortization of or rescheduling the payments on the loan 
(subject to rights of any Holder(s)).
    4. Transfer and assumption of the loan in accordance with the 
applicable subpart of title 7 CFR part 1980.
    5. Reorganization.
    6. Liquidation.
    7. Subsequent loan guarantees.
    8. Changes in interest rates with FmHA or its successor agency under 
Public Law 103-354's Lender's, and the Holder'(s) approval; provided, 
such interest rate is adjusted proportionally between the guaranteed and 
unguaranteed portion of the loan and the type of rate remains the same.
    9. Principal and interest write down in accordance with 7 CFR part 
1980, subpart B, Sec. 1980.125.
    B. The Lender will negotiate in good faith in an attempt to resolve 
any problem to permit the Borrower to cure a default, where reasonable.
    C. The Lender has the option to repurchase the unpaid guaranteed 
portion of the loan from the Holder(s) within 30 days of written demand 
by the Holder(s) when: (a) the Borrower is in default not less than 60 
days in payment of principal or interest due on the loan or (b) the 
Lender has failed to remit to the Holder(s) its pro rata share of any 
payment made by the Borrower or any loan subsidy within 30 days of its 
receipt thereof. The repurchase by the Lender will be for an amount 
equal to the unpaid guaranteed portion of the principal and accrued 
interest less the Lender's servicing fee. The loan note guarantee will 
not cover the note interest to the Holder on the guaranteed loan(s) 
accruing after 90 days from the date of the demand letter to the Lender 
requesting the repurchase. Holder(s) will concurrently send a copy of 
demand to FmHA or its successor agency under Public Law 103-354. The 
Lender will accept an assignment without recourse from the Holder(s) 
upon repurchase. The Lender is encouraged to repurchase the loan to 
facilitate the accounting for funds, resolve the problem, and to permit 
the borrower to cure the default, where reasonable. The Lender will 
notify the Holder(s) and FmHA or its successor agency under Public Law 
103-354 of its decision. As per the terms of the Loan Note Guarantee--
DARBE the maximum loss payment will not exceed $2,500,000 for principal, 
interest and approved protective advances.
    D. If Lender does not repurchase as provided by paragraph C, FmHA or 
its successor agency under Public Law 103-354 will purchase from 
Holder(s) the unpaid principal balance of the guaranteed portion herein 
together with accrued interest (including any loan subsidy) to date of 
repurchase, within 30 days after written demand to FmHA or its successor 
agency under Public Law 103-354 from the Holder(s). The loan note 
guarantee will not cover the note interest to the Holder on the 
guaranteed loan(s) accruing after 90 days from the date of original 
demand letter of the Holder(s) to the Lender requesting the repurchase. 
Such demand will include a copy of the written demand upon the Lender. 
Under the Disaster Assistance for Rural Business Enterprise Guaranteed 
Loan program, the maximum cumulative payment to the holder(s) of the 
guaranteed portion of the loan is limited to $2,500,000 or the 
percentage of guarantee multiplied by the principal and accrued interest 
together with protective advances, whichever is less.
    The Holder(s) or its duly authorized agent will also include 
evidence of its right to require payment from FmHA or its successor 
agency under Public Law 103-354. Such evidence will consist of either 
the originals of the Loan Note Guarantee--DARBE and note properly 
endorsed to FmHA or its successor agency under Public Law 103-354 or the 
original of the Assignment Guarantee Agreement properly assigned to FmHA 
or its successor agency under Public Law 103-354 without recourse 
including all rights, title, and interest in the loan. FmHA or its 
successor agency under Public Law 103-354 will be subrogated to all 
rights of Holder(s). The Holder(s) will include in its demand the amount 
due including unpaid principal, unpaid interest (including any loan 
subsidy) to date of demand and interest subsequently accruing from date 
of demand to proposed payment date. Unless otherwise agreed to by FmHA 
or its successor agency under Public Law 103-354, such proposed payment 
will not be later than 30 days from the date of the demand.
    The FmHA or its successor agency under Public Law 103-354 office 
serving the Borrower will promptly notify the Lender of the Holder(s) 
demand for payment. The Lender will promptly provide the FmHA or its 
successor agency under Public Law 103-354 office

[[Page 539]]

servicing the Borrower with the information necessary for FmHA or its 
successor agency under Public Law 103-354's determination of the 
appropriate amount due the Holder(s). Any discrepancy between the amount 
claimed by the Holder(s) and the information submitted by the Lender 
must be resolved before payment will be approved. FmHA or its successor 
agency under Public Law 103-354 will notify both parties who must 
resolve the conflict before payment by FmHA or its successor agency 
under Public Law 103-354 will be approved. Such a conflict will suspend 
the running of the 30 day payment requirement. Upon receipt of the 
appropriate information, the FmHA or its successor agency under Public 
Law 103-354 office servicing the Borrower will review the demand and 
submit it to the State Director for verification. After reviewing the 
demand, the State Director will transmit the request to the FmHA or its 
successor agency under Public Law 103-354 Finance Office for issuance of 
the appropriate check. Upon issuance, the Finance Office will notify the 
office serving the Borrower and State Director and remit the check(s) to 
the Holder(s).
    E. Lender consents to the purchase by FmHA or its successor agency 
under Public Law 103-354 and agrees to furnish on request by FmHA or its 
successor agency under Public Law 103-354 a current statement certified 
by an appropriate authorized officer of the Lender of the unpaid 
principal and interest then owed by the Borrower on the loan and the 
amount due the Holder(s). Lender agrees that any purchase by FmHA or its 
successor agency under Public Law 103-354 does not change, alter or 
modify any of the Lender's obligations to FmHA or its successor agency 
under Public Law 103-354 arising from said loan or guarantee, nor does 
such purchase waive any of the FmHA or its successor agency under Public 
Law 103-354's rights against Lender, and FmHA or its successor agency 
under Public Law 103-354 will have the right to set-off against Lender 
all rights insuring to FmHA or its successor agency under Public Law 
103-354 from the Holder against FmHA or its successor agency under 
Public Law 103-354's obligation to Lender under the Loan Note 
Guarantee--DARBE. To the extent FmHA or its successor agency under 
Public Law 103-354 holds a portion of a loan, loan subsidy will not be 
paid the Lender.
    F. Servicing fees assessed by the Lender to the Holder are 
collectible only from payment installments received by the Lender from 
the Borrower. When FmHA or its successor agency under Public Law 103-354 
repurchases from a Holder, FmHA or its successor agency under Public Law 
103-354 will pay the Holder only the amounts due the Holder, FmHA or its 
successor agency under Public Law 103-354 will not reimburse the Lender 
for servicing fees assessed to a Holder and not collected from payments 
received from the Borrower. No servicing fee shall be charged FmHA or 
its successor agency under Public Law 103-354 and no such fee is 
collectible from FmHA or its successor agency under Public Law 103-354.
    G. Lender may also repurchase the guaranteed portion of the loan 
consistent with paragraph 10 of the Loan Note Guarantee--DARBE.

                            XI. Liquidation.

    If the Lender concludes that liquidation of a guaranteed loan 
account is necessary because of one or more defaults or third party 
actions that the Borrower cannot or will not cure or eliminate within a 
reasonable period of time, a meeting will be arranged by the Lender with 
FmHA or its successor agency under Public Law 103-354. When FmHA or its 
successor agency under Public Law 103-354 concurs with the Lender's 
conclusion or at any time concludes independently that liquidation is 
necessary, it will notify the Lender and the matter will be handled as 
follows:
    The Lender will liquidate the loan unless FmHA or its successor 
agency under Public Law 103-354, at its option, decides to carry out 
liquidation.
    When the decision to liquidate is made, the Lender may proceed to 
purchase from Holder(s) the guaranteed portion of the loan. The 
Holder(s) will be paid according to the provisions in the Loan Note 
Guarantee--DARBE or the Assignment Guarantee Agreement--DARBE.
    When the decision to liquidate is made, the Lender may proceed to 
purchase from Holder(s) the guaranteed portion of the loan. The 
Holder(s) will be paid according to the provisions in the Loan Note 
Guarantee--DARBE or the Assignment Guarantee Agreement--DARBE.
    If the Lender does not purchase the guaranteed portion of the loan 
FmHA or its successor agency under Public Law 103-354 will be notified 
immediately in writing. FmHA or its successor agency under Public Law 
103-354 will then purchase the guaranteed portion of the loan from the 
Holder(s). If FmHA or its successor agency under Public Law 103-354 
holds any of the guaranteed portion, FmHA or its successor agency under 
Public Law 103-354 will be paid first its pro rata share of the proceeds 
from liquidation of the collateral.
    A. Lender's proposed method of liquidation. Within 30 days after the 
decision to liquidate, the Lender will advise FmHA or its successor 
agency under Public Law 103-354 in writing of its proposed detailed 
method of liquidation called a liquidation plan and will provide FmHA or 
its successor agency under Public Law 103-354 with:
    1. Such proof as FmHA or its successor agency under Public Law 103-
354 requires to

[[Page 540]]

establish the Lender's ownership of the guaranteed loan promissory 
note(s) and related security instruments.
    2. Information lists concerning the Borrower's assets including real 
and personal property, fixtures, claims, contracts, inventory (including 
perishables), accounts receivable, personal and corporate guarantees, 
and other existing and contingent assets, advice as to whether or not 
each item is serving as collateral for the guaranteed loan.
    3. A proposed method of making the maximum collection possible on 
the indebtedness.
    4. If the outstanding principal DARBE loan balance including accrued 
interest is less than $200,000, the Lender will obtain an estimate of 
the market and potential liquidated value of the collateral. On DARBE 
loan balances in excess of $200,000, the Lender will obtain an 
independent appraisal report on all collateral securing the loan, which 
will reflect the current market value and potential liquidation value. 
The appraisal report is for the purpose of permitting the Lender and 
FmHA or its successor agency under Public Law 103-354 to determine the 
appropriate liquidation actions. Any independent appraiser's fee will be 
shared equally by FmHA or its successor agency under Public Law 103-354 
and the Lender.
    B. FmHA or its successor agency under Public Law 103-354's response 
to Lender's liquidation plan. FmHA or its successor agency under Public 
Law 103-354 will inform the Lender in writing whether it concurs in the 
Lender's liquidation plan within 30 days after receipt of such 
notification from the Lender. If FmHA or its successor agency under 
Public Law 103-354 needs additional time to respond to the liquidation 
plan, it will advise the Lender of a definite time for such response. 
Should FmHA or its successor agency under Public Law 103-354 and the 
Lender not agree on the Lender's liquidation plan, negotiations will 
take place between FmHA or its successor agency under Public Law 103-354 
and the Lender to resolve the disagreement. The Lender will ordinarily 
conduct the liquidation; however, should FmHA or its successor agency 
under Public Law 103-354 opt to conduct the liquidation, FmHA or its 
successor agency under Public Law 103-354 will proceed as follows:
    1. The Lender will transfer to FmHA or its successor agency under 
Public Law 103-354 all rights and interest necessary to allow FmHA or 
its successor agency under Public Law 103-354 to liquidate the loan. In 
this event, the Lender will not be paid for any loss until after the 
collateral is liquidated and the final loss is determined by FmHA or its 
successor agency under Public Law 103-354.
    2. FmHA or its successor agency under Public Law 103-354 will 
attempt to obtain the maximum amount of proceeds from liquidation.
    3. Options available to FmHA or its successor agency under Public 
Law 103-354 include any one or combination of the usual commercial 
methods of liquidation.
    C. Acceleration. The Lender or FmHA or its successor agency under 
Public Law 103-354, if it liquidates, will proceed as expeditiously as 
possible when acceleration of the indebtedness is necessary including 
giving any notices and taking any other legal actions required by the 
security instruments. A copy of the acceleration notice or other 
acceleration document will be sent to FmHA or its successor agency under 
Public Law 103-354 or the Lender, as the case may be.
    D. Liquidation. Accounting and Reports. When the Lender conducts the 
liquidation, it will account for funds during the period of liquidation 
and will provide FmHA or its successor agency under Public Law 103-354 
with periodic reports on the progress of liquidation, disposition of 
collateral, resulting costs and additional procedures necessary for 
successful completion of liquidation. The Lender will transmit to FmHA 
or its successor agency under Public Law 103-354 any payments received 
from the Borrower and/or pro rata share of liquidation or other 
proceeds, etc. when FmHA or its successor agency under Public Law 103-
354 is the holder of a portion of the guaranteed loan using Form FmHA or 
its successor agency under Public Law 103-354 1980-43, ``Lender's 
Guaranteed Loan Payment to FmHA or its successor agency under Public Law 
103-354.'' When FmHA or its successor agency under Public Law 103-354 
liquidates, the Lender will be provided with similar reports on request.
    E. Determination of Loss and Payment. In all liquidation cases, 
final settlement will be made with the Lender after the collateral is 
liquidated. FmHA or its successor agency under Public Law 103-354 will 
have the right to recover losses paid under the guarantee from any party 
liable.
    1. Form FmHA or its successor agency under Public Law 103-354 449-
30, ``Loan Note Guarantee Report of Loss,'' will be used for 
calculations of all estimated and final loss determinations. Estimated 
loss payments may be approved by FmHA or its successor agency under 
Public Law 103-354 after the Lender has submitted a liquidation plan 
approved by FmHA or its successor agency under Public Law 103-354. 
Payments will be made in accordance with applicable FmHA or its 
successor agency under Public Law 103-354 regulations.
    2. When the Lender is conducting the liquidation, and owns any of 
the guaranteed portion of the loan, it may request a tentative loss 
estimate by submitting to FmHA or its successor agency under Public Law 
103-354 an estimate of loss that will occur in connection with 
liquidation of the loan.

[[Page 541]]

FmHA or its successor agency under Public Law 103-354 will agree to pay 
an estimated loss settlement to the Lender provided the lender applies 
such amount due to the outstanding principal balance owed on the 
guaranteed debt. Such estimate will be prepared and submitted by the 
Lender on Form FmHA or its successor agency under Public Law 103-354 
449-30, using the basic formula as provided on the report except that 
the appraisal value will be used in lieu of the amount received from the 
sale of collateral. For Farm Ownership, Soil and Water, and Operating 
loans only, if it appears the liquidation period will exceed 90 days, 
the Lender will file an estimated loss claim. Once this claim is 
approved by FmHA or its successor agency under Public Law 103-354, the 
Lender will discontinue interest accrual on the defaulted loan and the 
loss claim will be promptly processed in accordance with the applicable 
FmHA or its successor agency under Public Law 103-354 regulations.
    After the Report of Loss estimate has been approved by FmHA or its 
successor agency under Public Law 103-354, and within 30 days 
thereafter, FmHA or its successor agency under Public Law 103-354 will 
send the original Report of Loss estimate to FmHA or its successor 
agency under Public Law 103-354 Finance Office for issuance of a 
Treasury check in payment of the estimated amount due the Lender.
    After liquidation has been completed, a final loss report will be 
submitted on Form FmHA or its successor agency under Public Law 103-354 
449-30 by the Lender to FmHA or its successor agency under Public Law 
103-354.
    3. After the Lender has completed liquidation, FmHA or its successor 
agency under Public Law 103-354 upon receipt of the final accounting and 
report of loss, may audit and will determine the actual loss. If FmHA or 
its successor agency under Public Law 103-354 has any questions 
regarding the amounts set forth in the final Report of Loss, it will 
investigate the matter. The Lender will make its records available to 
and otherwise assist FmHA or its successor agency under Public Law 103-
354 in making the investigation. If FmHA or its successor agency under 
Public Law 103-354 finds any discrepancies, it will contact the Lender 
and arrange for the necessary corrections to be made as soon as 
possible. When FmHA or its successor agency under Public Law 103-354 
finds the final Report of Loss to be proper in all respects, it will be 
tentatively approved in the space provided on the form for that purpose.
    4. When the Lender has conducted liquidation and after the final 
Report of Loss has been tentatively approved:
    a. If the loss is greater than the estimated loss payment, FmHA or 
its successor agency under Public Law 103-354 will send the original to 
the final Report of Loss to the Finance Office for issuance of a 
Treasury check in payment of the additional amount owed by FmHA or its 
successor agency under Public Law 103-354 to the Lender.
    b. If the loss is less than the estimated loss, the Lender will 
reimburse FmHA or its successor agency under Public Law 103-354 for the 
overpayment plus interest at the note rate from date of payment.
    5. If FmHA or its successor agency under Public Law 103-354 has 
conducted liquidation, it will provide an accounting and Report of Loss 
to the Lender and will pay the Lender in accordance with the Loan Note 
Guarantee--DARBE.
    6. In those instances where the Lender has made authorized 
protective advances, it may claim recovery for the guaranteed portion of 
any loss of monies advanced as protective advances and interest 
resulting from such protective advances as provided above, and such 
payment will be made by FmHA or its successor agency under Public Law 
103-354 when the final Report of Loss is approved.
    F. Maximum amount of interest loss payment. Notwithstanding any 
other provisions of this agreement, the amount payable by FmHA or its 
successor agency under Public Law 103-354 to the Lender cannot exceed 
the limits set forth in the Loan Note Guarantee--DARBE. If FmHA or its 
successor agency under Public Law 103-354 conducts the liquidation, loss 
occasioned by accruing interest will be covered by the guarantee only to 
the date FmHA or its successor agency under Public Law 103-354 accepts 
this responsibility. Loss occasioned by accruing interest will be 
covered to the extent of the Loan Note Guarantee--DARBE to the date of 
final settlement when the liquidation is conducted by the Lender 
provided it proceeds expeditiously with the liquidation plan approved by 
FmHA or its successor agency under Public Law 103-354. The balance of 
allowable accrued interest payable to the Lender, if any, will be 
calculated on the final Report of Loss form.
    G. Application of FmHA or its successor agency under Public Law 103-
354 loss payment. The estimated loss payment shall be applied as of the 
date of such payment. The total amount of the loss payment remitted by 
FmHA or its successor agency under Public Law 103-354 will be applied by 
the Lender on the guaranteed portion of the loan debt. However, such 
application does not release the Borrower from liability. In all cases a 
final Form FmHA or its successor agency under Public Law 103-354 449-30 
prepared and submitted by the Lender must be processed by FmHA or its 
successor agency under Public Law 103-354 in order to close out the 
files at the FmHA or its successor agency under Public Law 103-354 
Finance Office.
    H. Income from collateral. Any net rental or other income that has 
been received by

[[Page 542]]

the Lender from the collateral will be applied on the guaranteed loan 
debt.
    I. Liquidation costs. Certain reasonable liquidation costs will be 
allowed during the liquidation process. The liquidation costs will be 
submitted as a part of the liquidation plan. Such costs will be deducted 
from gross proceeds from the disposition of collateral unless the costs 
have been previously determined by the Lender (with FmHA or its 
successor agency under Public Law 103-354 written concurrence) to be 
protective advances. If changed circumstances after submission of the 
liquidation plan require a revision of liquidation costs, the Lender 
will procure FmHA or its successor agency under Public Law 103-354's 
written concurrence prior to proceeding with the proposed changes. No 
in-house expenses of the Lender will be allowed. In-house expenses 
include, but are not limited to, employee's salaries, staff lawyers, 
travel and overhead.
    J. Foreclosure. The parties owning the guaranteed portion and 
unguaranteed portions of the loan will join the institute foreclosure 
action or, in lieu of foreclosure, to take a deed of conveyance to such 
parties. When the conveyance is received and liquidated, net proceeds 
will be applied to the guaranteed loan debt.
    K. Payment. Such loss will be paid by FmHA or its successor agency 
under Public Law 103-354 within 60 days after the review of the 
accounting of the collateral.

                        XII. Protective Advances.

    Protective advances must constitute an indebtedness of the Borrower 
to the Lender and be secured by the security instrument(s). FmHA or its 
successor agency under Public Law 103-354 written authorization is 
required on all protective advances in excess of $500. Protective 
advances include, but are not limited to, advances made for taxes, 
annual assessments, ground rent, hazard or flood insurance premiums 
affecting the collateral, and other expenses necessary to preserve or 
protect the security. Attorney fees are not a protective advance.

                   XIII. Additional Loans or Advances.

    The Lender will not make additional expenditures or new loans 
without first obtaining the written approval of FmHA or its successor 
agency under Public Law 103-354 even though such expenditures or loans 
will not be guaranteed.

                          XIV. Future Recovery.

    After a loan has been liquidated and a final loss has been paid by 
FmHA or its successor agency under Public Law 103-354, any future funds 
which may be recovered by the Lender, will be pro-rated between FmHA or 
its successor agency under Public Law 103-354 and the Lender. FmHA or 
its successor agency under Public Law 103-354 will be paid such amount 
recovered in proportion to the percentage it guaranteed for the loan and 
the Lender will retain such amounts in proportion to the percentage of 
the unguaranteed portion of the loan.

                   XV. Transfer and Assumption Cases.

    Refer to the applicable subpart of title 7 of CFR part 1980.
    If a loss should occur upon consummation of a complete transfer and 
assumption for less than the full amount of the debt and the transferor-
debtor (including personal guarantees) is released from personal 
liability, the Lender, if it holds the guaranteed portion, may file an 
estimated Report of Loss on Form FmHA or its successor agency under 
Public Law 103-354 449-30, ``Loan Note Guarantee Report of Loss,'' to 
recover its pro rata share of the actual loss at that time. In 
completing Form FmHA or its successor agency under Public Law 103-354 
449-30, the amount of the debt assumed will be entered on line 24 as Net 
Collateral (Recovery). Approved protective advances and accrued interest 
thereon made during the arrangement of a transfer and assumption, if not 
assumed by the Transfer, will be entered on Form FmHA or its successor 
agency under Public Law 103-354 449-30, line 13 and 14.

                            XVI. Bankruptcy.

    A. The Lender is responsible for protecting the guaranteed loan debt 
and all collateral securing the loan in bankruptcy proceedings. When the 
loan is involved in a reorganization bankruptcy proceeding under 
chapters 11, 12 or 13 of the Bankruptcy Code, payment of loss claims may 
be made as provided in this paragraph XVI. For a chapter 7 bankruptcy or 
liquidation plan in a chapter 11 bankruptcy, only paragraphs XVI B3 and 
B6 are applicable.
    B. Loss Payments.
    1. Estimated Loss Payments.
    a. If a borrower has filed for protection under a reorganization 
bankruptcy, the Lender will request a tentative estimated loss payment 
of accrued interest and principal written off. This request can only be 
made after the bankruptcy plan is confirmed by the court. Only one 
estimated loss payment is allowed during the reorganization bankruptcy. 
All subsequent claims during reorganization will be considered revisions 
to the initial estimated loss. A revised estimated loss payment may be 
processed by FmHA or its successor agency under Public Law 103-354, at 
its option, in accordance with any court approved changes in the 
reorganization plan. At the time the performance under the confirmed 
reorganization plan has been completed, the Lender is responsible for 
providing FmHA or its successor agency

[[Page 543]]

under Public Law 103-354 with the documentation necessary to review and 
adjust the estimated loss claim to (a) reflect the actual principal and 
interest reduction on any part of the guaranteed debt determined to be 
unsecured and (b) to reimburse the Lender for any court ordered interest 
rate reduction during the term of the reorganization plan.
    b. The Lender will use Form FmHA or its successor agency under 
Public Law 103-354 449-30, ``Loan Note Guarantee Report of Loss,'' to 
request an estimated loss payment and to review estimated loss payments 
during the course of the reorganization plan. The estimated loss claim 
as well as any revisions to this claim will be accompanied by applicable 
legal documentation to support the claim.
    c. Upon completion of the reorganization plan, the Lender will 
complete Form FmHA or its successor agency under Public Law 103-354 
1980-44, ``Guaranteed Loan Borrower Default Status,'' and forward this 
form to the Finance Office.
    2. Interest Loss Payments.
    a. Interest loss payments sustained during the period of the 
reorganization plan will be processed in accordance with paragraph XVI 
B1.
    b. Interest loss payments sustained after the reorganization plan is 
completed will be processed annually when the Lender sustains a loss as 
a result of a permanent interest rate reduction which extends beyond the 
period of the reorganization plan.
    c. Form FmHA or its successor agency under Public Law 103-354 449-30 
will be completed to compensate the Lender for the difference in 
interest rates specified on the Loan Note Guarantee--DARBE or Interest 
Rate Buydown Agreement and the rate of interest specified by the 
bankruptcy court.
    3. Final Loss Payments.
    a. Final Loss Payments will be processed when the loan is 
liquidated.
    b. If the loan is paid in full without an additional loss, the 
Finance Office will close out the estimated loss account at the time 
notification of payment in full is received.
    4. Payment Application. The Lender must apply estimated loss 
payments first to the unsecured principal of the guaranteed portion of 
the debt and then to the unsecured interest of the guaranteed portion of 
the debt. In the event the bankruptcy court attempts to direct the 
payments to be applied in a different manner, the Lender will 
immediately notify the FmHA or its successor agency under Public Law 
103-354 servicing office.
    5. Overpayments. Upon completion of the reorganization plan, the 
Lender will provide FmHA or its successor agency under Public Law 103-
354 with the documentation necessary to determine whether the estimated 
loss paid equals the actual loss sustained. If the actual loss 
sustained, as a result of the reorganization, is greater than the 
estimated loss payment, the Lender will submit a revised estimated loss 
in order to obtain payment of the additional amount owed by FmHA or its 
successor agency under Public Law 103-354 to the Lender. If the actual 
loss payment is less than the estimated loss, the Lender will reimburse 
FmHA or its successor agency under Public Law 103-354 for the 
overpayment plus interest at the note rate from the date of the payment 
of the estimated loss.
    6. Protective Advances. If approved protective advances were made 
prior to the borrower having filed bankruptcy, as a result of prior 
liquidation action, these protective advances and accrued interest will 
be entered on Form FmHA or its successor agency under Public Law 103-354 
449-30.

                        XVII. Other Requirements.

    This agreement is subject to all the requirements of the applicable 
subpart of title 7 CFR part 1980, and any future amendments of these 
regulations not inconsistent with this agreement. Interested parties may 
agree to abide by future FmHA or its successor agency under Public Law 
103-354 regulations not inconsistent with this agreement.

                     XVIII. Execution of Agreements.

    If this agreement is executed prior to the execution of the Loan 
Note Guarantee--DARBE, this agreement does not impose any obligation 
upon FmHA or its successor agency under Public Law 103-354 with respect 
to the execution of such contract. FmHA or its successor agency under 
Public Law 103-354 in no way warrants that such a contract has been or 
will be executed.

                              XIX. Notices.

    All notices and actions will be initiated through FmHA or its 
successor agency under Public Law 103-354 for
________________________________________________________________________
(State) with mailing address at the date of this instrument
Dated this ---------- day of ----------, 19 ----.

                                 Lender:

Attest:
________________________________________________________________________
(Seal)
By
________________________________________________________________________
Title
________________________________________________________________________
United States of America
Farmers Home Administration or its successor agency under Public Law 
103-354
By
________________________________________________________________________
Title
________________________________________________________________________

[[Page 544]]

                         Exhibit B to Appendix K

USDA-FmHA or its successor agency under Public Law 103-354
    Form FmHA or its successor agency under Public Law 103-354 1980-72
    (Rev. 11-89)
    Type of Loan: ----------
    Applicable 7 CFR part 1980
    Subpart--------

                           Loan Note Guarantee

        Disaster Assistance for Rural Business Enterprise (DARBE)

                            Guaranteed Loans

 Maximum Loss Payable by FmHA or its successor agency under Public Law 
               103-354 To a Holder or Lender is $2,500,000

________________________________________________________________________

USDA-FmHA or its successor agency under Public Law 103-354

    From FmHA or its successor agency under Public Law 103-354 1980-72
    (Rev. 11-89)
    Type of Loan:----------
    Applicable 7 CFR Part 1980
    Subpart----------

                           Loan Note Guarantee

                         Disaster Assistance for

                    Rural Business Enterprise (DARBE)

                            Guaranteed Loans

 Maximum Loss Payable by FmHA or its successor agency under Public Law 
                                 103-354

                   To a Holder or Lender is $2,500,000

________________________________________________________________________
Borrower--
________________________________________________________________________
Lender--
________________________________________________________________________
Lender's Address
________________________________________________________________________
State
________________________________________________________________________
County
________________________________________________________________________
Date of Note
________________________________________________________________________
FmHA or its successor agency under Public Law 103-354 Loan 
Identification No.
________________________________________________________________________
Principal Amount of Loan $
--Borrower______________________________________________________________

________________________________________________________________________
Lender


--Lender's Address______________________________________________________

--State_________________________________________________________________

 County_________________________________________________________________

--Date of Note__________________________________________________________

--FmHA or its successor agency under Public Law 103-354 Loan 
Identification No.______________________________________________________

--Lender's IRS ID Tax No._______________________________________________

--Principal Amount of Loan $____________________________________________
    The guaranteed portion of the loan is ------------ which is -------- 
(--------%) percent of loan principal. The principal amount of loan is 
evidenced by ------------ note(s) (includes bonds as appropriate) 
described below. The guaranteed portion of each note is indicated below. 
This instrument is attached to note -------- in the face amount of $----
---- and is number -------- of. --------.

------------------------------------------------------------------------
                                          Percent
 Lender's identifying                    of total
        Number            Face amount      face      Amount guaranteed
                                          amount
------------------------------------------------------------------------
                       $                        %  $
 
 
----------------------
 
    Total              $-------- 100%         100  $--------
------------------------------------------------------------------------


    In consideration of the making of the subject loan by the above 
named Lender, the United States of America, acting through the Farmers 
Home Administration or its successor agency under Public Law 103-354 of 
the United States Department of Agriculture (herein called ``FmHA or its 
successor agency under Public Law 103-354''), pursuant to the Disaster 
Assistance Act of 1989 does hereby agree that in accordance with and 
subject to the conditions and requirements herein, it will pay to:

    A. Holders:

    1. Any loss sustained by the Holder on the guaranteed portion and 
interest due on such portion up to a maximum aggregate amount of 
$2,500,000. On loans with multiple Holders and/or a Lender who owns part 
of the guaranteed portion, if the aggregate losses exceed $2,500,000, 
each Holder's loss will be prorated by the percentage of the guaranteed 
portion of the loan the holder owns.
    B. The Lender the lesser of 1, or 2 below:

    1. Any loss sustained by the Lender on the guaranteed portion 
including:
    a. Principal and interest indebtedness as evidenced by said note(s) 
or by assumption agreement(s), and
    b. Principal and interest indebtedness on secured protective 
advances for protection and preservation of collateral made with FmHA or 
its successor agency under Public Law 103-354's authorization, including 
but

[[Page 545]]

not limited to advances for taxes, annual assessments, any ground rents, 
and hazard or flood insurance premiums affecting the collateral, but 
only to the extent that inclusion of such protective advances would not 
cause the total aggregate loss to exceed $2,500,000, or
    2. The guaranteed principal advanced to or assumed by the Borrower 
under said note(s) or assumption agreement(s) and any interest due 
thereon.

But only up to a maximum aggregate amount of $2,500,000. On loans with 
single or multiple holders and a Lender who owns part of the guaranteed 
portion, if the aggregate losses exceed $2,500,000, the Lender's loss 
will be prorated by the percentage of the guaranteed portion of the loan 
the Lender owns.

If FmHA or its successor agency under Public Law 103-354 conducts the 
liquidation of the loan, loss occasioned to a Lender by accruing 
interest (including any loan subsidy) after the date FmHA or its 
successor agency under Public Law 103-354 accepts responsibility for 
liquidation will not be covered by this Loan Note Guarantee--DARBE. If 
Lender conducts the liquidation of the loan, accruing interest 
(including any loan subsidy) shall be covered by this Loan Note 
Guarantee--DARBE to date of final settlement when the Lender conducts 
the liquidation expeditiously in accordance with the liquidation plan 
approved by FmHA or its successor agency under Public Law 103-354.

                          Definition of Holder.

    The Holder is the person or organization other than the Lender who 
holds all or part of the guaranteed portion of the loan with no 
servicing responsibilities. Holders are prohibited from obtaining any 
part(s) of the guaranteed portion of the loan with proceeds from any 
obligation, the interest on which is excludable from income, under 
section 103 of the Internal Revenue Code of 1954, as amended (IRC). When 
the Lender assigns a part(s) of the guaranteed loan to an assignee, the 
assignee becomes a Holder only when Form FmHA or its successor agency 
under Public Law 103-354 1980-73, ``Assignment Guarantee Agreement--
DARBE,'' is used. Loan evidenced by a single note may be assigned only 
by using Form FmHA or its successor agency under Public Law 103-354 
1980-73.

                          Definition of Lender.

    The Lender is the person or organization making and servicing the 
loan which is guaranteed under the provisions of the applicable subpart 
7 CFR part 1980. The Lender is also the party requesting a loan 
guarantee.

                           1. Loan Servicing.

    Lender will be responsible for servicing the entire loan, and the 
Lender will remain mortgagee and/or secured party of record not 
withstanding the fact that another party may hold a portion of the loan. 
When multiple notes are used to evidence a loan, Lender will structure 
repayments as provided in the loan agreement.

                             2. Priorities.

    The entire loan will be secured by the same security with equal lien 
priority for the guaranteed and unguaranteed portions of the loan. The 
unguaranteed portion of the loan will not be paid first nor given any 
preference or priority over the guaranteed portion.

                        3. Full Faith and Credit.

    The Loan Note Guarantee--DARBE constitutes an obligation supported 
by the full faith and credit of the United States and is incontestable 
except for fraud or misrepresentation of which Lender or any Holder has 
actual knowledge at the time it became such Lender or Holder or which 
Lender or any Holder participates in or condones. If the note to which 
this is attached or relates provides for payment of interest on 
interest, then this Loan Note Guarantee--DARBE is void. In addition, the 
Loan Note Guarantee--DARBE will be unenforceable by Lender to the extent 
any loss is occasioned by the violation of usury laws, negligent 
servicing, or failure to obtain the required security regardless of the 
time at which FmHA or its successor agency under Public Law 103-354 
acquires knowledge of the foregoing. Any losses occasioned will be 
unenforceable to the extent that loan funds are used for purposes other 
than those specifically approved by FmHA or its successor agency under 
Public Law 103-354 in its Conditional Commitment for Guarantee. 
Negligent servicing is defined as the failure to perform those services 
which a reasonably prudent lender would perform in servicing its own 
portfolio of loans that are not guaranteed. The term includes not only 
the concept of a failure to act but also not acting in a timely manner 
or acting in a manner contrary to the manner in which a reasonably 
prudent lender would act up to the time of loan maturity or until a 
final loss is paid.

                       4. Rights and Liabilities.

    The guarantee and right to require purchase will be directly 
enforceable by Holder notwithstanding any fraud or misrepresentation by 
Lender or any unenforceability of this Loan Note Guarantee--DARBE by 
Lender. Nothing contained herein will constitute any waiver by FmHA or 
its successor agency under Public Law 103-354 of any rights it possesses 
against the Lender. Lender will be liable for and will promptly pay to 
FmHA or its successor agency under Public Law 103-354 any payment made 
by FmHA or its successor agency under Public Law 103-354 to Holder

[[Page 546]]

which if such Lender had held the guaranteed portion of the loan, FmHA 
or its successor agency under Public Law 103-354 would not be required 
to make.

                              5. Payments.

    Lender will receive all payments of principal, or interest, and will 
promptly remit to Holder(s) its pro rata share thereof determined 
according to its respective interest in the loan, less only Lender's 
servicing fee.

                         6. Protective Advances.

    Protective advances made by Lender pursuant to the regulations will 
be guaranteed against a percentage of loss to the extent provided in 
this Loan Note Guarantee--DARBE notwithstanding the guaranteed portion 
of the loan that is held by another.

                        7. Repurchase by Lender.

    The Lender has the option to repurchase the unpaid guaranteed 
portion of the loan from the Holder(s) within 30 days of written demand 
by the Holder(s) when: (a) the borrower is in default not less than 60 
days on principal or interest due on the loan or (b) the Lender has 
failed to remit to the Holder(s) its pro rata share of any payment made 
by the borrower or any loan subsidy within 30 days of its receipt 
thereof. The repurchase by the Lender will be for an amount equal to the 
unpaid guaranteed portion of principal and accrued interest less the 
Lender's servicing fee. The Loan Note Guarantee--DARBE will not cover 
the note interest to the Holder on the guaranteed loan(s) accruing after 
90 days from the date of the demand letter to the Lender requesting the 
repurchase. Holder(s) will concurrently send a copy of demand to FmHA or 
its successor agency under Public Law 103-354. The Lender will accept an 
assignment without recourse from the Holder(s) upon repurchase. The 
Lender is encouraged to repurchase the loan to facilitate the accounting 
for funds, resolve the problem, and to permit the borrower to cure the 
default, where reasonable. The Lender will notify the Holder(s) and FmHA 
or its successor agency under Public Law 103-354 of its decision. As per 
the terms of this guarantee the maximum loss payment will not exceed 
$2,500,000 for principal, interest, and approved protective advances.

   8. FmHA or its successor agency under Public Law 103-354 Purchase.

    If Lender does not repurchase as provided by paragraph 7 hereof, 
FmHA or its successor agency under Public Law 103-354 will purchase from 
Holder the unpaid principal balance of the guaranteed portion together 
with accrued interest to date of repurchase less Lender's servicing fee, 
within thirty (30) days after written demand to FmHA or its successor 
agency under Public Law 103-354 from Holder. The Loan Note Guarantee 
DARBE will not cover the note interest to the Holder on the guaranteed 
loan(s) accruing after 90 days from the date of the original demand 
letter of the Holder to the Lender requesting the repurchase. Such 
demand will include a copy of the written demand made upon the Lender. 
The Holder(s) or its duly authorized agent will also include evidence of 
its right to require payment from FmHA or its successor agency under 
Public Law 103-354. Such evidence will consist of either the original of 
the Loan Note Guarantee--DARBE properly endorsed to FmHA or its 
successor agency under Public Law 103-354 or the original of the 
Assignment Guarantee Agreement--DARBE properly assigned to FmHA or its 
successor agency under Public Law 103-354 without recourse including all 
rights, title, and interest in the loan. FmHA or its successor agency 
under Public Law 103-354 will be subrogated to all rights of Holder(s). 
The Holder(s) will include in its demand the amount due including unpaid 
principal, unpaid interest to date of demand and interest subsequently 
accruing from date of demand to proposed payment date or $2,500,000, 
whichever is less. Unless otherwise agreed to by FmHA or its successor 
agency under Public Law 103-354, such proposed payment will not be later 
than 30 days from the date of demand. On loans with multiple Holders 
and/or a Lender who owns part of the guaranteed portion, if the 
aggregate unpaid principal and unpaid interest on the guaranteed portion 
exceeds $2,500,000, the Holder will be paid on a prorated basis--
prorated by the percentage of the guaranteed portion of the loan the 
Holder owns.
    The FmHA or its successor agency under Public Law 103-354 will 
promptly notify the Lender of its receipt of the Holder(s)'s demand for 
payment. The Lender will promptly provide the FmHA or its successor 
agency under Public Law 103-354 with the information necessary for FmHA 
or its successor agency under Public Law 103-354 determination of the 
appropriate amount due the Holder(s). Any discrepancy between the amount 
claimed by the Holder(s) and the information submitted by the Lender 
must be resolved before payment will be approved. FmHA or its successor 
agency under Public Law 103-354 will notify both parties who must 
resolve the conflict before payment by FmHA or its successor agency 
under Public Law 103-354 will be approved. Such conflict will suspend 
the running of the 30 day payment requirement. Upon receipt of the 
appropriate information, FmHA or its successor agency under Public Law 
103-354 will review the demand and submit it to the State Director for 
verification. After reviewing the demand the State Director will 
transmit the request to the FmHA or its successor agency under Public 
Law 103-354 Finance Office for issuance of the appropriate check. Upon

[[Page 547]]

issuance, the Finance Office will notify the office servicing the 
borrower and State Director and remit the check(s) to the Holder(s).

                        9. Lender's obligations.

    Lender consents to the purchase by FmHA or its successor agency 
under Public Law 103-354 and agrees to furnish on request by FmHA or its 
successor agency under Public Law 103-354 a current statement certified 
by an appropriate authorized officer of the Lender of the unpaid 
principal and interest then owed by Borrowers on the loan and the amount 
including any loan subsidy then owed to any Holder(s). Lender agrees 
that any purchase by FmHA or its successor agency under Public Law 103-
354 does not change, alter or modify any of the Lender's obligations to 
FmHA or its successor agency under Public Law 103-354 arising from said 
loan or guarantee nor does it waive any of FmHA or its successor agency 
under Public Law 103-354's rights against Lender, and that FmHA or its 
successor agency under Public Law 103-354 will have the right to set-off 
against Lender all rights inuring to FmHA or its successor agency under 
Public Law 103-354 as the Holder of this instrument against FmHA or its 
successor agency under Public Law 103-354's obligation to Lender under 
the Loan Note Guarantee--DARBE.

                 10. Repurchase by Lender for Servicing.

    If, in the opinion of the Lender, repurchase of the guaranteed 
portion of the loan is necessary to adequately service the loan, the 
Holder will sell the portion of the loan to the Lender for an amount 
equal to the unpaid principal and interest on such portion. The Lender's 
servicing fee will be subtracted from these amounts. The Loan Note 
Guarantee--DARBE will not cover the note interest to the Holder on the 
guaranteed loans accruing after 90 days from the date of the demand 
letter of the Lender or FmHA or its successor agency under Public Law 
103-354 to the Holder(s) requesting the Holder(s) to tender their 
guaranteed portion(s).
    a. The Lender will not repurchase from the Holder(s) for arbitrage 
purposes or other purposes to further its own financial gain.
    b. Any repurchase will only be made after the Lender obtains FmHA or 
its successor agency under Public Law 103-354 written approval.
    c. If the Lender does not repurchase the portion from the Holder(s), 
FmHA or its successor agency under Public Law 103-354 at its option may 
purchase such guaranteed portions for servicing purposes.

                  11. Custody of Unguaranteed Portion.

    The Lender may retain, or sell the unguaranteed portion of the loan 
only through participation. Participation, as used in this instrument, 
means the sale of an interest in the loan wherein the Lender retains the 
note, collateral securing the note, and all responsibility for loan 
servicing and liquidation.

                     12. When Guarantee Terminates.

    This Loan Note Guarantee--DARBE will terminate automatically (a) 
upon full payment of the guaranteed loan; or (b) upon full payment of 
any loss obligation hereunder; or (c) upon written notice from the 
Lender to FmHA or its successor agency under Public Law 103-354 that the 
guarantee will terminate 30 days after the date of notice, provided the 
Lender holds all of the guaranteed portion and the Loan Note 
Guarantee(s) are returned to be cancelled by FmHA or its successor 
agency under Public Law 103-354.

                             13. Settlement.

    The amount due under this instrument will be determined and paid as 
provided in the applicable Subpart of Part 1980 of Title 7 CFR in effect 
on the date of this instrument.

                              14. Notices.

    All notice and actions will be initiated through the FmHA or its 
successor agency under Public Law 103-354 -------------- for ---------- 
(State) with mailing address at the date of this instrument:
________________________________________________________________________
________________________________________________________________________
United States of America
Farmers Home Administration or its successor agency under Public Law 
103-354
By:
________________________________________________________________________
Title:
________________________________________________________________________
(Date)
________________________________________________________________________
Assumption Agreement by
________________________________________________________________________
dated------------,19----,
Assumption Agreement by
________________________________________________________________________
dated------------,19----.

                         Exhibit C to Appendix K

USDA-FmHA or its successor agency under Public Law 103-354

    Form FmHA or its successor agency under Public Law 103-354 1980-73
    (Rev. 11-89)
    FORM APPROVED
    OMB NO. 0575-0029

[[Page 548]]

                     ASSIGNMENT GUARANTEE AGREEMENT

        DISASTER ASSISTANCE FOR RURAL BUSINESS ENTERPRISE (DARBE)

                             GUARANTEED LOAN

 MAXIMUM LOSS PAYABLE BY FmHA or its successor agency under Public Law 
               103-354 TO A HOLDER OR LENDER IS $2,500,000

Type of Loan:
________________________________________________________________________
Applicable 7 CFR Part 1980 Subpart
________________________________________________________________________
FmHA or its successor agency under Public Law 103-354 Loan 
Identification Number
________________________________________________________________________
------------ of ------------
(Lender) has made a loan to
________________________________________________________________________
in the principal amount of $ ---------- as evidenced by a note(s) dated 
----------. The United States of America, acting through Farmers Home 
Administration or its successor agency under Public Law 103-354 (FmHA or 
its successor agency under Public Law 103-354) entered into a Loan Note 
Guarantee--Disaster Assistance for Rural Business Enterprise Guaranteed 
Loans (Form FmHA or its successor agency under Public Law 103-354 1980-
72) with the Lender applicable to such loan to guarantee the loan not to 
exceed -------- % of the amount of the principal advanced and any 
interest (including any loan subsidy) due thereon as provided therein. 
Under the Disaster Assistance and Rural Business Enterprise Guaranteed 
Loan program, the maximum cumulative payment to the holder(s) of the 
guaranteed portion of the loan is limited to $2,500,000 or the 
percentage of guarantee multiplied by the principal and interest, 
whichever is less.
---------- of ----------
(Holder) desires to purchase from Lender -------- % of the guaranteed 
portion of such loan. Copies of Borrower's note(s) and the Loan Note 
Guarantee--Disaster Assistance for Rural Business Enterprises are 
attached hereto as a part hereof.

                   Now, Therefore, the Parties Agree:

    1. The principal amount of the loan now outstanding is $ ----------. 
Lender hereby assigns to Holder -------- % of the guaranteed portion of 
the loan representing
$---------- of such loan now outstanding in accordance with all of the 
terms and conditions hereinafter set forth. The Lender and FmHA or its 
successor agency under Public Law 103-354 certify to the Holder that the 
Lender has paid and FmHA or its successor agency under Public Law 103-
354 has received the Guarantee Fee in exchange for the issuance of the 
Loan Note Guarantee--Disaster Assistance for Rural Business Enterprises.
    2. Loan Servicing. The Lender will be responsible for servicing the 
entire loan and will remain mortgagee and/or secured party of record. 
The entire loan will be secured by the same security with equal lien 
priority for the guaranteed and unguaranteed portions of the loan.
    The Lender will receive all payments on account of principal of, or 
interest on, the entire loan and shall promptly remit to the Holder its 
pro rata share thereof determined according to their respective 
interests in the loan, less only Lender's servicing fee.
    3. Servicing Fee. Holder agrees that Lender will retain a servicing 
fee of -------- percent per annum of the unpaid balance of the 
guaranteed portion of the loan assigned hereunder.
    4. Purchase by Holder. The guaranteed portion purchased by the 
Holder will always be a portion of the loan which is guaranteed. The 
Holder will hereby succeed to all rights of the Lender under the Loan 
Note Guarantee--Disaster Assistance for Rural Business Enterprises to 
the extent of the assigned portion of the loan. The Lender, however, 
will remain bound by all the obligations under the Loan Note Guarantee--
Disaster Assistance for Rural Business Enterprises and the program 
regulations found in the applicable subpart of 7 CFR part 1980 now in 
effect and future FmHA or its successor agency under Public Law 103-354 
program regulations not inconsistent with the provisions hereof.

Public reporting burden for this collection of information is estimated 
to average 2 hours per response, including the time for reviewing 
instructions, searching existing data sources, gathering and maintaining 
the data needed, and completing and reviewing the collection of 
information. Send comments regarding this burden estimate or any other 
aspect of this collection of information, including suggestions for 
reducing this burden, to Department of Agriculture, Clearance Officer, 
OIRM, Room 404-W, Washington, DC 20250; and to the Office of Management 
and Budget, Paperwork Reduction Project (OMB No. 0575-0029), Washington, 
DC 20503.

    5. Full Faith and Credit. The Loan Note Guarantee--DARBE constitutes 
an obligation supported by the full faith and credit of the United 
States and is incontestable except for fraud or misrepresentation of 
which the Lender or any Holder has actual knowledge at the time of this 
assignment, or which the Holder participates in or condones. If the note 
to which this is attached or relates provides for payment of interest on 
interest, then this Loan Note Guarantee--DARBE is void. In addition, the 
Loan Note Guarantee--DARBE will be unenforceable by Lender to the extent 
any loss is occasioned by the violation of usury laws, negligent 
servicing, or failure to obtain the required security regardless of the 
time at which FmHA or its

[[Page 549]]

successor agency under Public Law 103-354 acquires knowledge of the 
foregoing. Any losses occasioned will be unenforceable to the extent 
that loan funds are used for purposes other than those specifically 
approved by FmHA or its successor agency under Public Law 103-354 in its 
Conditional Commitment for Guarantee. Negligent servicing is defined as 
the failure to perform those services which a reasonably prudent lender 
would perform in servicing its own portfolio of loans that are not 
guaranteed. The term includes not only the concept of a failure to act 
but also not acting in a timely manner or acting in a manner contrary to 
the manner in which a reasonably prudent lender would act up to the time 
of loan maturity or until a final loss is paid.
    6. Rights and Liabilities. The guarantee and right to require 
purchase will be directly enforceable by Holder notwithstanding any 
fraud or misrepresentations by Lender or any unenforceability of the 
Loan Note Guarantee--DARBE by Lender. Nothing contained herein shall 
constitute any waiver by FmHA or its successor agency under Public Law 
103-354 of any rights it possesses against the Lender, and the Lender 
agrees that Lender will be liable and will promptly reimburse FmHA or 
its successor agency under Public Law 103-354 for any payment made by 
FmHA or its successor agency under Public Law 103-354 to Holder which, 
if such Lender had held the guaranteed portion of the loan, FmHA or its 
successor agency under Public Law 103-354 would not be required to make. 
The Holder(s) upon written notice to the Lender may resell the unpaid 
balance of the guaranteed portion of the loan assigned hereunder. An 
endorsement may be added to the Form FmHA or its successor agency under 
Public Law 103-354 1980-73 to effectuate the transfer.
    7. Repurchase by the Lender (Defaults). The Lender has the option to 
repurchase the unpaid guaranteed portion of the loan from the Holder(s) 
within 30 days of written demand by the Holder(s) when: (a) the borrower 
is in default not less than 60 days on principal or interest due on the 
loan or (b) the Lender has failed to remit to the Holder(s) its pro rata 
share of any payment made by the borrower or any loan subsidy within 30 
days of its receipt thereof. The repurchase by the Lender will be for an 
amount equal to the unpaid guaranteed portion of principal and accrued 
interest (including any loan subsidy), less the Lender's servicing fee. 
The loan note guarantee will not cover the note interest to the Holder 
on the guaranteed loan(s) accruing after 90 days from the date of the 
demand letter to the Lender requesting the repurchase. Holder(s) will 
concurrently send a copy of demand to FmHA or its successor agency under 
Public Law 103-354. The Lender will accept an assignment without 
recourse from the Holder(s) upon repurchase. The Lender is encouraged to 
repurchase the loan to facilitate the accounting for funds, resolve the 
problem, and to permit the borrower to cure the default, where 
reasonable. The Lender will notify the Holder(s) and FmHA or its 
successor agency under Public Law 103-354 of its decision. As per the 
terms of the Loan Note Guarantee--DARBE the maximum loss payment will 
not exceed $2,500,000 for principal, interest and approved protective 
advances.
    8. Purchase by FmHA or its successor agency under Public Law 103-
354. If Lender does not repurchase as provided by paragraph 7, FmHA or 
its successor agency under Public Law 103-354 will purchase from Holder 
the unpaid principal balance of the guaranteed portion together with 
accrued interest to date of repurchase, less Lender's servicing fee, 
within 30 days after written demand to FmHA or its successor agency 
under Public Law 103-354 from the Holder. The Loan Note Guarantee--DARBE 
will not cover the note interest to the Holder on the guaranteed loans 
accruing after 90 days from the date of the original demand letter of 
the Holder to the Lender requesting the repurchase. Such demand will 
include a copy of the written demand made upon the Lender. The Holder(s) 
or its duly authorized agent will also include evidence of its right to 
require payment from FmHA or its successor agency under Public Law 103-
354. Such evidence will consist of either the original of the Loan Note 
Guarantee--DARBE properly endorsed to FmHA or its successor agency under 
Public Law 103-354 or the original of the Assignment Guarantee 
Agreement--DARBE properly assigned to FmHA or its successor agency under 
Public Law 103-354 without recourse including all rights, title, and 
interest in the loan. FmHA or its successor agency under Public Law 103-
354 will be subrogated to all rights of Holder(s). The Holder will 
include in its demand the amount due including unpaid principal, unpaid 
interest to date of demand and interest subsequently accruing from date 
of demand to proposed payment date or $2,500,000, whichever is less. 
Unless otherwise agreed to by FmHA or its successor agency under Public 
Law 103-354, such proposed payment will not be later than 30 days from 
the date of demand.
    On loans with multiple Holders and/or a Lender who owns part of the 
guaranteed portion, if the aggregate unpaid principal and unpaid 
interest on the guaranteed portion exceeds $2,500,000, the Holder will 
be paid on a prorated basis--prorated by the percentage of the 
guaranteed portion of the loan the Holders owns.
    The FmHA or its successor agency under Public Law 103-354 will 
promptly notify the Lender of its receipt of the Holder's demand for 
payment. The Lender will promptly provide the FmHA or its successor 
agency under

[[Page 550]]

Public Law 103-354 with the information necessary for FmHA or its 
successor agency under Public Law 103-354's determination of the 
appropriate amount due the Holder(s). Any discrepancy between the amount 
claimed by the Holder(s) and the information submitted by the Lender 
must be resolved before payment will be approved. FmHA or its successor 
agency under Public Law 103-354 will notify both parties who must 
resolve the conflict before payment will be approved. Such a conflict 
will suspend the running of the 30 day payment requirement. Upon receipt 
of the appropriate information, FmHA or its successor agency under 
Public Law 103-354 will review the demand and submit it to the State 
Director for verification. After reviewing the demand the State Director 
will transmit the request to the FmHA or its successor agency under 
Public Law 103-354 Finance Office for issuance of the appropriate check. 
Upon issuance, the Finance Office will notify the office servicing the 
borrower and the State Director and remit the check(s) to the Holder(s).
    9. Lender's Obligations. Lender consents to the purchase by FmHA or 
its successor agency under Public Law 103-354 and agrees to furnish on 
request by FmHA or its successor agency under Public Law 103-354 a 
current statement certified by an appropriate authorized officer of the 
Lender of the unpaid principal and interest then owed by Borrowers on 
the loan and the amount then owed to any Holder(s). Lender agrees that 
any purchase by FmHA or its successor agency under Public Law 103-354 
does not change, alter or modify any of the Lender's obligations to FmHA 
or its successor agency under Public Law 103-354 arising from said loan 
or guarantee nor does it waive any of FmHA or its successor agency under 
Public Law 103-354's rights against Lender, and that FmHA or its 
successor agency under Public Law 103-354 shall have the right to set-
off against Lender all rights inuring to FmHA or its successor agency 
under Public Law 103-354 as the Holder of this instrument against FmHA 
or its successor agency under Public Law 103-354's obligation to Lender 
under the Loan Note Guarantee--DARBE.
    10. Repurchase by Lender for Servicing. If, in the opinion of the 
Lender, repurchase of the assigned portion of the loan is necessary to 
adequately service the loan, the Holder will sell the assigned portion 
of the loan to the Lender for an amount equal to the unpaid principal 
and interest on such portion. The Lender's servicing fee will be 
subtracted from these amounts. The loan note guarantee will not cover 
the note interest to the Holder on the guaranteed loans accruing after 
90 days from the date of the demand letter of the Lender or FmHA or its 
successor agency under Public Law 103-354 to the Holder(s) requesting 
the Holder(s) to tender their guaranteed portion(s).
    a. The Lender will not repurchase from the Holder(s) for arbitrage 
purpose or other purposes to further its own financial gain.
    b. Any repurchase will only be made after the Lender obtains FmHA or 
its successor agency under Public Law 103-354 written approval.
    c. If the Lender does not repurchase the portion from the Holder(s), 
FmHA or its successor agency under Public Law 103-354 at its option may 
purchase such guaranteed portions for servicing purposes.
    11. Foreclosure. The parties owning the guaranteed portions and 
unguaranteed portion of the loan will join to institute foreclosure 
action, or in lieu of foreclosure, take a deed of conveyance to such 
parties.
    12. Reassignment. Holder upon written notice to Lender and FmHA or 
its successor agency under Public Law 103-354 may reassign the unpaid 
guaranteed portion of the loan sold hereunder. Upon such notification, 
the assignee will succeed to all rights and obligations of the Holder 
hereunder.
    13. Notices. All notices and actions will be initiated through the 
FmHA or its successor agency under Public Law 103-354 ------------ for 
------------ (state) with mailing address at the date of this 
assignment:
________________________________________________________________________
Dated this ------------ day of ------------, 19----.
Lender:
________________________________________________________________________
Address:
________________________________________________________________________
Attest: ------------(Seal)
By
________________________________________________________________________
Title
________________________________________________________________________
Holder:
________________________________________________________________________
Address:
________________________________________________________________________
Attest: ------------(Seal)
By
________________________________________________________________________
Title
________________________________________________________________________
United States of America
Farmers Home Administration or its successor agency under Public Law 
103-354
Address:
________________________________________________________________________
________________________________________________________________________
By
________________________________________________________________________
Title
________________________________________________________________________

[54 FR 42483, Oct. 17, 1989, as amended at 55 FR 137, Jan. 3, 1990; 55 
FR 19245, May 8, 1990]

                          Exhibits to Subpart E



[[Page 551]]

                   Exhibit G to Subpart E of Part 1980

    Note. --The Exhibit is not published in the Code of Federal 
Regulations. It is available in any FmHA or its successor agency under 
Public Law 103-354 office.

[54 FR 1599, Jan. 13, 1989]

Subparts F-I [Reserved]

                       PARTS 1981	1999 [RESERVED]

[[Page 553]]



                              FINDING AIDS




  --------------------------------------------------------------------

  A list of CFR titles, subtitles, chapters, subchapters and parts and 
an alphabetical list of agencies publishing in the CFR are included in 
the CFR Index and Finding Aids volume to the Code of Federal Regulations 
which is published separately and revised annually.

  Table of CFR Titles and Chapters
  Alphabetical List of Agencies Appearing in the CFR
  List of CFR Sections Affected

[[Page 555]]



                    Table of CFR Titles and Chapters




                     (Revised as of January 1, 2004)

                      Title 1--General Provisions

         I  Administrative Committee of the Federal Register 
                (Parts 1--49)
        II  Office of the Federal Register (Parts 50--299)
        IV  Miscellaneous Agencies (Parts 400--500)

                          Title 2 [Reserved]

                        Title 3--The President

         I  Executive Office of the President (Parts 100--199)

                           Title 4--Accounts

         I  General Accounting Office (Parts 1--99)

                   Title 5--Administrative Personnel

         I  Office of Personnel Management (Parts 1--1199)
        II  Merit Systems Protection Board (Parts 1200--1299)
       III  Office of Management and Budget (Parts 1300--1399)
         V  The International Organizations Employees Loyalty 
                Board (Parts 1500--1599)
        VI  Federal Retirement Thrift Investment Board (Parts 
                1600--1699)
      VIII  Office of Special Counsel (Parts 1800--1899)
        IX  Appalachian Regional Commission (Parts 1900--1999)
        XI  Armed Forces Retirement Home (Part 2100)
       XIV  Federal Labor Relations Authority, General Counsel of 
                the Federal Labor Relations Authority and Federal 
                Service Impasses Panel (Parts 2400--2499)
        XV  Office of Administration, Executive Office of the 
                President (Parts 2500--2599)
       XVI  Office of Government Ethics (Parts 2600--2699)
       XXI  Department of the Treasury (Parts 3100--3199)
      XXII  Federal Deposit Insurance Corporation (Part 3201)
     XXIII  Department of Energy (Part 3301)
      XXIV  Federal Energy Regulatory Commission (Part 3401)
       XXV  Department of the Interior (Part 3501)
      XXVI  Department of Defense (Part 3601)

[[Page 556]]

    XXVIII  Department of Justice (Part 3801)
      XXIX  Federal Communications Commission (Parts 3900--3999)
       XXX  Farm Credit System Insurance Corporation (Parts 4000--
                4099)
      XXXI  Farm Credit Administration (Parts 4100--4199)
    XXXIII  Overseas Private Investment Corporation (Part 4301)
      XXXV  Office of Personnel Management (Part 4501)
        XL  Interstate Commerce Commission (Part 5001)
       XLI  Commodity Futures Trading Commission (Part 5101)
      XLII  Department of Labor (Part 5201)
     XLIII  National Science Foundation (Part 5301)
       XLV  Department of Health and Human Services (Part 5501)
      XLVI  Postal Rate Commission (Part 5601)
     XLVII  Federal Trade Commission (Part 5701)
    XLVIII  Nuclear Regulatory Commission (Part 5801)
         L  Department of Transportation (Part 6001)
       LII  Export-Import Bank of the United States (Part 6201)
      LIII  Department of Education (Parts 6300--6399)
       LIV  Environmental Protection Agency (Part 6401)
        LV  National Endowment for the Arts (Part 6501)
       LVI  National Endowment for the Humanities (Part 6601)
      LVII  General Services Administration (Part 6701)
     LVIII  Board of Governors of the Federal Reserve System (Part 
                6801)
       LIX  National Aeronautics and Space Administration (Part 
                6901)
        LX  United States Postal Service (Part 7001)
       LXI  National Labor Relations Board (Part 7101)
      LXII  Equal Employment Opportunity Commission (Part 7201)
     LXIII  Inter-American Foundation (Part 7301)
       LXV  Department of Housing and Urban Development (Part 
                7501)
      LXVI  National Archives and Records Administration (Part 
                7601)
     LXVII  Institute of Museum and Library Services (Part 7701)
      LXIX  Tennessee Valley Authority (Part 7901)
      LXXI  Consumer Product Safety Commission (Part 8101)
    LXXIII  Department of Agriculture (Part 8301)
     LXXIV  Federal Mine Safety and Health Review Commission (Part 
                8401)
     LXXVI  Federal Retirement Thrift Investment Board (Part 8601)
    LXXVII  Office of Management and Budget (Part 8701)

                      Title 6--Homeland Security

         I  Department of Homeland Security, Office of the 
                Secretary (Parts 0--99)

[[Page 557]]

                         Title 7--Agriculture

            Subtitle A--Office of the Secretary of Agriculture 
                (Parts 0--26)
            Subtitle B--Regulations of the Department of 
                Agriculture
         I  Agricultural Marketing Service (Standards, 
                Inspections, Marketing Practices), Department of 
                Agriculture (Parts 27--209)
        II  Food and Nutrition Service, Department of Agriculture 
                (Parts 210--299)
       III  Animal and Plant Health Inspection Service, Department 
                of Agriculture (Parts 300--399)
        IV  Federal Crop Insurance Corporation, Department of 
                Agriculture (Parts 400--499)
         V  Agricultural Research Service, Department of 
                Agriculture (Parts 500--599)
        VI  Natural Resources Conservation Service, Department of 
                Agriculture (Parts 600--699)
       VII  Farm Service Agency, Department of Agriculture (Parts 
                700--799)
      VIII  Grain Inspection, Packers and Stockyards 
                Administration (Federal Grain Inspection Service), 
                Department of Agriculture (Parts 800--899)
        IX  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Fruits, Vegetables, Nuts), Department 
                of Agriculture (Parts 900--999)
         X  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Milk), Department of Agriculture 
                (Parts 1000--1199)
        XI  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Miscellaneous Commodities), Department 
                of Agriculture (Parts 1200--1299)
       XIV  Commodity Credit Corporation, Department of 
                Agriculture (Parts 1400--1499)
        XV  Foreign Agricultural Service, Department of 
                Agriculture (Parts 1500--1599)
       XVI  Rural Telephone Bank, Department of Agriculture (Parts 
                1600--1699)
      XVII  Rural Utilities Service, Department of Agriculture 
                (Parts 1700--1799)
     XVIII  Rural Housing Service, Rural Business-Cooperative 
                Service, Rural Utilities Service, and Farm Service 
                Agency, Department of Agriculture (Parts 1800--
                2099)
        XX  Local Television Loan Guarantee Board (Parts 2200--
                2299)
      XXVI  Office of Inspector General, Department of Agriculture 
                (Parts 2600--2699)
     XXVII  Office of Information Resources Management, Department 
                of Agriculture (Parts 2700--2799)
    XXVIII  Office of Operations, Department of Agriculture (Parts 
                2800--2899)
      XXIX  Office of Energy, Department of Agriculture (Parts 
                2900--2999)
       XXX  Office of the Chief Financial Officer, Department of 
                Agriculture (Parts 3000--3099)

[[Page 558]]

      XXXI  Office of Environmental Quality, Department of 
                Agriculture (Parts 3100--3199)
     XXXII  Office of Procurement and Property Management, 
                Department of Agriculture (Parts 3200--3299)
    XXXIII  Office of Transportation, Department of Agriculture 
                (Parts 3300--3399)
     XXXIV  Cooperative State Research, Education, and Extension 
                Service, Department of Agriculture (Parts 3400--
                3499)
      XXXV  Rural Housing Service, Department of Agriculture 
                (Parts 3500--3599)
     XXXVI  National Agricultural Statistics Service, Department 
                of Agriculture (Parts 3600--3699)
    XXXVII  Economic Research Service, Department of Agriculture 
                (Parts 3700--3799)
   XXXVIII  World Agricultural Outlook Board, Department of 
                Agriculture (Parts 3800--3899)
       XLI  [Reserved]
      XLII  Rural Business-Cooperative Service and Rural Utilities 
                Service, Department of Agriculture (Parts 4200--
                4299)

                    Title 8--Aliens and Nationality

         I  Department of Homeland Security (Immigration and 
                Naturalization) (Parts 1--499)
         V  Executive Office for Immigration Review, Department of 
                Justice (Parts 1000--1399)

                 Title 9--Animals and Animal Products

         I  Animal and Plant Health Inspection Service, Department 
                of Agriculture (Parts 1--199)
        II  Grain Inspection, Packers and Stockyards 
                Administration (Packers and Stockyards Programs), 
                Department of Agriculture (Parts 200--299)
       III  Food Safety and Inspection Service, Department of 
                Agriculture (Parts 300--599)

                           Title 10--Energy

         I  Nuclear Regulatory Commission (Parts 0--199)
        II  Department of Energy (Parts 200--699)
       III  Department of Energy (Parts 700--999)
         X  Department of Energy (General Provisions) (Parts 
                1000--1099)
      XVII  Defense Nuclear Facilities Safety Board (Parts 1700--
                1799)
     XVIII  Northeast Interstate Low-Level Radioactive Waste 
                Commission (Part 1800)

[[Page 559]]

                      Title 11--Federal Elections

         I  Federal Election Commission (Parts 1--9099)

                      Title 12--Banks and Banking

         I  Comptroller of the Currency, Department of the 
                Treasury (Parts 1--199)
        II  Federal Reserve System (Parts 200--299)
       III  Federal Deposit Insurance Corporation (Parts 300--399)
        IV  Export-Import Bank of the United States (Parts 400--
                499)
         V  Office of Thrift Supervision, Department of the 
                Treasury (Parts 500--599)
        VI  Farm Credit Administration (Parts 600--699)
       VII  National Credit Union Administration (Parts 700--799)
      VIII  Federal Financing Bank (Parts 800--899)
        IX  Federal Housing Finance Board (Parts 900--999)
        XI  Federal Financial Institutions Examination Council 
                (Parts 1100--1199)
       XIV  Farm Credit System Insurance Corporation (Parts 1400--
                1499)
        XV  Department of the Treasury (Parts 1500--1599)
      XVII  Office of Federal Housing Enterprise Oversight, 
                Department of Housing and Urban Development (Parts 
                1700--1799)
     XVIII  Community Development Financial Institutions Fund, 
                Department of the Treasury (Parts 1800--1899)

               Title 13--Business Credit and Assistance

         I  Small Business Administration (Parts 1--199)
       III  Economic Development Administration, Department of 
                Commerce (Parts 300--399)
        IV  Emergency Steel Guarantee Loan Board, Department of 
                Commerce (Parts 400--499)
         V  Emergency Oil and Gas Guaranteed Loan Board, 
                Department of Commerce (Parts 500--599)

                    Title 14--Aeronautics and Space

         I  Federal Aviation Administration, Department of 
                Transportation (Parts 1--199)
        II  Office of the Secretary, Department of Transportation 
                (Aviation Proceedings) (Parts 200--399)
       III  Commercial Space Transportation, Federal Aviation 
                Administration, Department of Transportation 
                (Parts 400--499)
         V  National Aeronautics and Space Administration (Parts 
                1200--1299)
        VI  Air Transportation System Stabilization (Parts 1300--
                1399)

[[Page 560]]

                 Title 15--Commerce and Foreign Trade

            Subtitle A--Office of the Secretary of Commerce (Parts 
                0--29)
            Subtitle B--Regulations Relating to Commerce and 
                Foreign Trade
         I  Bureau of the Census, Department of Commerce (Parts 
                30--199)
        II  National Institute of Standards and Technology, 
                Department of Commerce (Parts 200--299)
       III  International Trade Administration, Department of 
                Commerce (Parts 300--399)
        IV  Foreign-Trade Zones Board, Department of Commerce 
                (Parts 400--499)
       VII  Bureau of Industry and Security, Department of 
                Commerce (Parts 700--799)
      VIII  Bureau of Economic Analysis, Department of Commerce 
                (Parts 800--899)
        IX  National Oceanic and Atmospheric Administration, 
                Department of Commerce (Parts 900--999)
        XI  Technology Administration, Department of Commerce 
                (Parts 1100--1199)
      XIII  East-West Foreign Trade Board (Parts 1300--1399)
       XIV  Minority Business Development Agency (Parts 1400--
                1499)
            Subtitle C--Regulations Relating to Foreign Trade 
                Agreements
        XX  Office of the United States Trade Representative 
                (Parts 2000--2099)
            Subtitle D--Regulations Relating to Telecommunications 
                and Information
     XXIII  National Telecommunications and Information 
                Administration, Department of Commerce (Parts 
                2300--2399)

                    Title 16--Commercial Practices

         I  Federal Trade Commission (Parts 0--999)
        II  Consumer Product Safety Commission (Parts 1000--1799)

             Title 17--Commodity and Securities Exchanges

         I  Commodity Futures Trading Commission (Parts 1--199)
        II  Securities and Exchange Commission (Parts 200--399)
        IV  Department of the Treasury (Parts 400--499)

          Title 18--Conservation of Power and Water Resources

         I  Federal Energy Regulatory Commission, Department of 
                Energy (Parts 1--399)
       III  Delaware River Basin Commission (Parts 400--499)
        VI  Water Resources Council (Parts 700--799)

[[Page 561]]

      VIII  Susquehanna River Basin Commission (Parts 800--899)
      XIII  Tennessee Valley Authority (Parts 1300--1399)

                       Title 19--Customs Duties

         I  Bureau of Customs and Border Protection, Department of 
                Homeland Security; Department of the Treasury 
                (Parts 0--199)
        II  United States International Trade Commission (Parts 
                200--299)
       III  International Trade Administration, Department of 
                Commerce (Parts 300--399)
        IV  Bureau of Immigration and Customs Enforcement, 
                Department of Homeland Security (Parts 400--599)

                     Title 20--Employees' Benefits

         I  Office of Workers' Compensation Programs, Department 
                of Labor (Parts 1--199)
        II  Railroad Retirement Board (Parts 200--399)
       III  Social Security Administration (Parts 400--499)
        IV  Employees' Compensation Appeals Board, Department of 
                Labor (Parts 500--599)
         V  Employment and Training Administration, Department of 
                Labor (Parts 600--699)
        VI  Employment Standards Administration, Department of 
                Labor (Parts 700--799)
       VII  Benefits Review Board, Department of Labor (Parts 
                800--899)
      VIII  Joint Board for the Enrollment of Actuaries (Parts 
                900--999)
        IX  Office of the Assistant Secretary for Veterans' 
                Employment and Training, Department of Labor 
                (Parts 1000--1099)

                       Title 21--Food and Drugs

         I  Food and Drug Administration, Department of Health and 
                Human Services (Parts 1--1299)
        II  Drug Enforcement Administration, Department of Justice 
                (Parts 1300--1399)
       III  Office of National Drug Control Policy (Parts 1400--
                1499)

                      Title 22--Foreign Relations

         I  Department of State (Parts 1--199)
        II  Agency for International Development (Parts 200--299)
       III  Peace Corps (Parts 300--399)
        IV  International Joint Commission, United States and 
                Canada (Parts 400--499)
         V  Broadcasting Board of Governors (Parts 500--599)
       VII  Overseas Private Investment Corporation (Parts 700--
                799)
        IX  Foreign Service Grievance Board Regulations (Parts 
                900--999)

[[Page 562]]

         X  Inter-American Foundation (Parts 1000--1099)
        XI  International Boundary and Water Commission, United 
                States and Mexico, United States Section (Parts 
                1100--1199)
       XII  United States International Development Cooperation 
                Agency (Parts 1200--1299)
       XIV  Foreign Service Labor Relations Board; Federal Labor 
                Relations Authority; General Counsel of the 
                Federal Labor Relations Authority; and the Foreign 
                Service Impasse Disputes Panel (Parts 1400--1499)
        XV  African Development Foundation (Parts 1500--1599)
       XVI  Japan-United States Friendship Commission (Parts 
                1600--1699)
      XVII  United States Institute of Peace (Parts 1700--1799)

                          Title 23--Highways

         I  Federal Highway Administration, Department of 
                Transportation (Parts 1--999)
        II  National Highway Traffic Safety Administration and 
                Federal Highway Administration, Department of 
                Transportation (Parts 1200--1299)
       III  National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 1300--1399)

                Title 24--Housing and Urban Development

            Subtitle A--Office of the Secretary, Department of 
                Housing and Urban Development (Parts 0--99)
            Subtitle B--Regulations Relating to Housing and Urban 
                Development
         I  Office of Assistant Secretary for Equal Opportunity, 
                Department of Housing and Urban Development (Parts 
                100--199)
        II  Office of Assistant Secretary for Housing-Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Parts 200--299)
       III  Government National Mortgage Association, Department 
                of Housing and Urban Development (Parts 300--399)
        IV  Office of Housing and Office of Multifamily Housing 
                Assistance Restructuring, Department of Housing 
                and Urban Development (Parts 400--499)
         V  Office of Assistant Secretary for Community Planning 
                and Development, Department of Housing and Urban 
                Development (Parts 500--599)
        VI  Office of Assistant Secretary for Community Planning 
                and Development, Department of Housing and Urban 
                Development (Parts 600--699) [Reserved]
       VII  Office of the Secretary, Department of Housing and 
                Urban Development (Housing Assistance Programs and 
                Public and Indian Housing Programs) (Parts 700--
                799)

[[Page 563]]

      VIII  Office of the Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Section 8 Housing Assistance 
                Programs, Section 202 Direct Loan Program, Section 
                202 Supportive Housing for the Elderly Program and 
                Section 811 Supportive Housing for Persons With 
                Disabilities Program) (Parts 800--899)
        IX  Office of Assistant Secretary for Public and Indian 
                Housing, Department of Housing and Urban 
                Development (Parts 900--1699)
         X  Office of Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Interstate Land Sales 
                Registration Program) (Parts 1700--1799)
       XII  Office of Inspector General, Department of Housing and 
                Urban Development (Parts 2000--2099)
        XX  Office of Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Parts 3200--3899)
       XXV  Neighborhood Reinvestment Corporation (Parts 4100--
                4199)

                           Title 25--Indians

         I  Bureau of Indian Affairs, Department of the Interior 
                (Parts 1--299)
        II  Indian Arts and Crafts Board, Department of the 
                Interior (Parts 300--399)
       III  National Indian Gaming Commission, Department of the 
                Interior (Parts 500--599)
        IV  Office of Navajo and Hopi Indian Relocation (Parts 
                700--799)
         V  Bureau of Indian Affairs, Department of the Interior, 
                and Indian Health Service, Department of Health 
                and Human Services (Part 900)
        VI  Office of the Assistant Secretary-Indian Affairs, 
                Department of the Interior (Parts 1000--1199)
       VII  Office of the Special Trustee for American Indians, 
                Department of the Interior (Part 1200)

                      Title 26--Internal Revenue

         I  Internal Revenue Service, Department of the Treasury 
                (Parts 1--899)

           Title 27--Alcohol, Tobacco Products and Firearms

         I  Alcohol and Tobacco Tax and Trade Bureau, Department 
                of the Treasury (Parts 1--399)
        II  Bureau of Alcohol, Tobacco, Firearms, and Explosives, 
                Department of Justice (Parts 400--699)

                   Title 28--Judicial Administration

         I  Department of Justice (Parts 0--299)

[[Page 564]]

       III  Federal Prison Industries, Inc., Department of Justice 
                (Parts 300--399)
         V  Bureau of Prisons, Department of Justice (Parts 500--
                599)
        VI  Offices of Independent Counsel, Department of Justice 
                (Parts 600--699)
       VII  Office of Independent Counsel (Parts 700--799)
      VIII  Court Services and Offender Supervision Agency for the 
                District of Columbia (Parts 800--899)
        IX  National Crime Prevention and Privacy Compact Council 
                (Parts 900--999)
        XI  Department of Justice and Department of State (Parts 
                1100--1199)

                            Title 29--Labor

            Subtitle A--Office of the Secretary of Labor (Parts 
                0--99)
            Subtitle B--Regulations Relating to Labor
         I  National Labor Relations Board (Parts 100--199)
        II  Office of Labor-Management Standards, Department of 
                Labor (Parts 200--299)
       III  National Railroad Adjustment Board (Parts 300--399)
        IV  Office of Labor-Management Standards, Department of 
                Labor (Parts 400--499)
         V  Wage and Hour Division, Department of Labor (Parts 
                500--899)
        IX  Construction Industry Collective Bargaining Commission 
                (Parts 900--999)
         X  National Mediation Board (Parts 1200--1299)
       XII  Federal Mediation and Conciliation Service (Parts 
                1400--1499)
       XIV  Equal Employment Opportunity Commission (Parts 1600--
                1699)
      XVII  Occupational Safety and Health Administration, 
                Department of Labor (Parts 1900--1999)
        XX  Occupational Safety and Health Review Commission 
                (Parts 2200--2499)
       XXV  Employee Benefits Security Administration, Department 
                of Labor (Parts 2500--2599)
     XXVII  Federal Mine Safety and Health Review Commission 
                (Parts 2700--2799)
        XL  Pension Benefit Guaranty Corporation (Parts 4000--
                4999)

                      Title 30--Mineral Resources

         I  Mine Safety and Health Administration, Department of 
                Labor (Parts 1--199)
        II  Minerals Management Service, Department of the 
                Interior (Parts 200--299)
       III  Board of Surface Mining and Reclamation Appeals, 
                Department of the Interior (Parts 300--399)
        IV  Geological Survey, Department of the Interior (Parts 
                400--499)

[[Page 565]]

       VII  Office of Surface Mining Reclamation and Enforcement, 
                Department of the Interior (Parts 700--999)

                 Title 31--Money and Finance: Treasury

            Subtitle A--Office of the Secretary of the Treasury 
                (Parts 0--50)
            Subtitle B--Regulations Relating to Money and Finance
         I  Monetary Offices, Department of the Treasury (Parts 
                51--199)
        II  Fiscal Service, Department of the Treasury (Parts 
                200--399)
        IV  Secret Service, Department of the Treasury (Parts 
                400--499)
         V  Office of Foreign Assets Control, Department of the 
                Treasury (Parts 500--599)
        VI  Bureau of Engraving and Printing, Department of the 
                Treasury (Parts 600--699)
       VII  Federal Law Enforcement Training Center, Department of 
                the Treasury (Parts 700--799)
      VIII  Office of International Investment, Department of the 
                Treasury (Parts 800--899)
        IX  Federal Claims Collection Standards (Department of the 
                Treasury--Department of Justice) (Parts 900--999)

                      Title 32--National Defense

            Subtitle A--Department of Defense
         I  Office of the Secretary of Defense (Parts 1--399)
         V  Department of the Army (Parts 400--699)
        VI  Department of the Navy (Parts 700--799)
       VII  Department of the Air Force (Parts 800--1099)
            Subtitle B--Other Regulations Relating to National 
                Defense
       XII  Defense Logistics Agency (Parts 1200--1299)
       XVI  Selective Service System (Parts 1600--1699)
     XVIII  National Counterintelligence Center (Parts 1800--1899)
       XIX  Central Intelligence Agency (Parts 1900--1999)
        XX  Information Security Oversight Office, National 
                Archives and Records Administration (Parts 2000--
                2099)
       XXI  National Security Council (Parts 2100--2199)
      XXIV  Office of Science and Technology Policy (Parts 2400--
                2499)
     XXVII  Office for Micronesian Status Negotiations (Parts 
                2700--2799)
    XXVIII  Office of the Vice President of the United States 
                (Parts 2800--2899)

               Title 33--Navigation and Navigable Waters

         I  Coast Guard, Department of Homeland Security (Parts 
                1--199)
        II  Corps of Engineers, Department of the Army (Parts 
                200--399)

[[Page 566]]

        IV  Saint Lawrence Seaway Development Corporation, 
                Department of Transportation (Parts 400--499)

                          Title 34--Education

            Subtitle A--Office of the Secretary, Department of 
                Education (Parts 1--99)
            Subtitle B--Regulations of the Offices of the 
                Department of Education
         I  Office for Civil Rights, Department of Education 
                (Parts 100--199)
        II  Office of Elementary and Secondary Education, 
                Department of Education (Parts 200--299)
       III  Office of Special Education and Rehabilitative 
                Services, Department of Education (Parts 300--399)
        IV  Office of Vocational and Adult Education, Department 
                of Education (Parts 400--499)
         V  Office of Bilingual Education and Minority Languages 
                Affairs, Department of Education (Parts 500--599)
        VI  Office of Postsecondary Education, Department of 
                Education (Parts 600--699)
        XI  National Institute for Literacy (Parts 1100--1199)
            Subtitle C--Regulations Relating to Education
       XII  National Council on Disability (Parts 1200--1299)

                        Title 35--Panama Canal

         I  Panama Canal Regulations (Parts 1--299)

             Title 36--Parks, Forests, and Public Property

         I  National Park Service, Department of the Interior 
                (Parts 1--199)
        II  Forest Service, Department of Agriculture (Parts 200--
                299)
       III  Corps of Engineers, Department of the Army (Parts 
                300--399)
        IV  American Battle Monuments Commission (Parts 400--499)
         V  Smithsonian Institution (Parts 500--599)
       VII  Library of Congress (Parts 700--799)
      VIII  Advisory Council on Historic Preservation (Parts 800--
                899)
        IX  Pennsylvania Avenue Development Corporation (Parts 
                900--999)
         X  Presidio Trust (Parts 1000--1099)
        XI  Architectural and Transportation Barriers Compliance 
                Board (Parts 1100--1199)
       XII  National Archives and Records Administration (Parts 
                1200--1299)
        XV  Oklahoma City National Memorial Trust (Part 1501)
       XVI  Morris K. Udall Scholarship and Excellence in National 
                Environmental Policy Foundation (Parts 1600--1699)

[[Page 567]]

             Title 37--Patents, Trademarks, and Copyrights

         I  United States Patent and Trademark Office, Department 
                of Commerce (Parts 1--199)
        II  Copyright Office, Library of Congress (Parts 200--299)
        IV  Assistant Secretary for Technology Policy, Department 
                of Commerce (Parts 400--499)
         V  Under Secretary for Technology, Department of Commerce 
                (Parts 500--599)

           Title 38--Pensions, Bonuses, and Veterans' Relief

         I  Department of Veterans Affairs (Parts 0--99)

                       Title 39--Postal Service

         I  United States Postal Service (Parts 1--999)
       III  Postal Rate Commission (Parts 3000--3099)

                  Title 40--Protection of Environment

         I  Environmental Protection Agency (Parts 1--1099)
        IV  Environmental Protection Agency and Department of 
                Justice (Parts 1400--1499)
         V  Council on Environmental Quality (Parts 1500--1599)
        VI  Chemical Safety and Hazard Investigation Board (Parts 
                1600--1699)
       VII  Environmental Protection Agency and Department of 
                Defense; Uniform National Discharge Standards for 
                Vessels of the Armed Forces (Parts 1700--1799)

          Title 41--Public Contracts and Property Management

            Subtitle B--Other Provisions Relating to Public 
                Contracts
        50  Public Contracts, Department of Labor (Parts 50-1--50-
                999)
        51  Committee for Purchase From People Who Are Blind or 
                Severely Disabled (Parts 51-1--51-99)
        60  Office of Federal Contract Compliance Programs, Equal 
                Employment Opportunity, Department of Labor (Parts 
                60-1--60-999)
        61  Office of the Assistant Secretary for Veterans' 
                Employment and Training Service, Department of 
                Labor (Parts 61-1--61-999)
            Subtitle C--Federal Property Management Regulations 
                System
       101  Federal Property Management Regulations (Parts 101-1--
                101-99)
       102  Federal Management Regulation (Parts 102-1--102-299)
       105  General Services Administration (Parts 105-1--105-999)
       109  Department of Energy Property Management Regulations 
                (Parts 109-1--109-99)
       114  Department of the Interior (Parts 114-1--114-99)
       115  Environmental Protection Agency (Parts 115-1--115-99)

[[Page 568]]

       128  Department of Justice (Parts 128-1--128-99)
            Subtitle D--Other Provisions Relating to Property 
                Management [Reserved]
            Subtitle E--Federal Information Resources Management 
                Regulations System
       201  Federal Information Resources Management Regulation 
                (Parts 201-1--201-99) [Reserved]
            Subtitle F--Federal Travel Regulation System
       300  General (Parts 300-1--300-99)
       301  Temporary Duty (TDY) Travel Allowances (Parts 301-1--
                301-99)
       302  Relocation Allowances (Parts 302-1--302-99)
       303  Payment of Expenses Connected with the Death of 
                Certain Employees (Part 303-70)
       304  Payment of Travel Expenses from a Non-Federal Source 
                (Parts 304-1--304-99)

                        Title 42--Public Health

         I  Public Health Service, Department of Health and Human 
                Services (Parts 1--199)
        IV  Centers for Medicare & Medicaid Services, Department 
                of Health and Human Services (Parts 400--499)
         V  Office of Inspector General-Health Care, Department of 
                Health and Human Services (Parts 1000--1999)

                   Title 43--Public Lands: Interior

            Subtitle A--Office of the Secretary of the Interior 
                (Parts 1--199)
            Subtitle B--Regulations Relating to Public Lands
         I  Bureau of Reclamation, Department of the Interior 
                (Parts 200--499)
        II  Bureau of Land Management, Department of the Interior 
                (Parts 1000--9999)
       III  Utah Reclamation Mitigation and Conservation 
                Commission (Parts 10000--10010)

             Title 44--Emergency Management and Assistance

         I  Federal Emergency Management Agency, Department of 
                Homeland Security (Parts 0--399)
        IV  Department of Commerce and Department of 
                Transportation (Parts 400--499)

                       Title 45--Public Welfare

            Subtitle A--Department of Health and Human Services 
                (Parts 1--199)
            Subtitle B--Regulations Relating to Public Welfare

[[Page 569]]

        II  Office of Family Assistance (Assistance Programs), 
                Administration for Children and Families, 
                Department of Health and Human Services (Parts 
                200--299)
       III  Office of Child Support Enforcement (Child Support 
                Enforcement Program), Administration for Children 
                and Families, Department of Health and Human 
                Services (Parts 300--399)
        IV  Office of Refugee Resettlement, Administration for 
                Children and Families, Department of Health and 
                Human Services (Parts 400--499)
         V  Foreign Claims Settlement Commission of the United 
                States, Department of Justice (Parts 500--599)
        VI  National Science Foundation (Parts 600--699)
       VII  Commission on Civil Rights (Parts 700--799)
      VIII  Office of Personnel Management (Parts 800--899)
         X  Office of Community Services, Administration for 
                Children and Families, Department of Health and 
                Human Services (Parts 1000--1099)
        XI  National Foundation on the Arts and the Humanities 
                (Parts 1100--1199)
       XII  Corporation for National and Community Service (Parts 
                1200--1299)
      XIII  Office of Human Development Services, Department of 
                Health and Human Services (Parts 1300--1399)
       XVI  Legal Services Corporation (Parts 1600--1699)
      XVII  National Commission on Libraries and Information 
                Science (Parts 1700--1799)
     XVIII  Harry S. Truman Scholarship Foundation (Parts 1800--
                1899)
       XXI  Commission on Fine Arts (Parts 2100--2199)
     XXIII  Arctic Research Commission (Part 2301)
      XXIV  James Madison Memorial Fellowship Foundation (Parts 
                2400--2499)
       XXV  Corporation for National and Community Service (Parts 
                2500--2599)

                          Title 46--Shipping

         I  Coast Guard, Department of Homeland Security (Parts 
                1--199)
        II  Maritime Administration, Department of Transportation 
                (Parts 200--399)
       III  Coast Guard (Great Lakes Pilotage), Department of 
                Homeland Security (Parts 400--499)
        IV  Federal Maritime Commission (Parts 500--599)

                      Title 47--Telecommunication

         I  Federal Communications Commission (Parts 0--199)
        II  Office of Science and Technology Policy and National 
                Security Council (Parts 200--299)

[[Page 570]]

       III  National Telecommunications and Information 
                Administration, Department of Commerce (Parts 
                300--399)

           Title 48--Federal Acquisition Regulations System

         1  Federal Acquisition Regulation (Parts 1--99)
         2  Department of Defense (Parts 200--299)
         3  Department of Health and Human Services (Parts 300--
                399)
         4  Department of Agriculture (Parts 400--499)
         5  General Services Administration (Parts 500--599)
         6  Department of State (Parts 600--699)
         7  United States Agency for International Development 
                (Parts 700--799)
         8  Department of Veterans Affairs (Parts 800--899)
         9  Department of Energy (Parts 900--999)
        10  Department of the Treasury (Parts 1000--1099)
        12  Department of Transportation (Parts 1200--1299)
        13  Department of Commerce (Parts 1300--1399)
        14  Department of the Interior (Parts 1400--1499)
        15  Environmental Protection Agency (Parts 1500--1599)
        16  Office of Personnel Management, Federal Employees 
                Health Benefits Acquisition Regulation (Parts 
                1600--1699)
        17  Office of Personnel Management (Parts 1700--1799)
        18  National Aeronautics and Space Administration (Parts 
                1800--1899)
        19  Broadcasting Board of Governors (Parts 1900--1999)
        20  Nuclear Regulatory Commission (Parts 2000--2099)
        21  Office of Personnel Management, Federal Employees 
                Group Life Insurance Federal Acquisition 
                Regulation (Parts 2100--2199)
        23  Social Security Administration (Parts 2300--2399)
        24  Department of Housing and Urban Development (Parts 
                2400--2499)
        25  National Science Foundation (Parts 2500--2599)
        28  Department of Justice (Parts 2800--2899)
        29  Department of Labor (Parts 2900--2999)
        30  Department of Homeland Security, Homeland Security 
                Acquisition Regulation (HSAR) (Parts 3000--3099)
        34  Department of Education Acquisition Regulation (Parts 
                3400--3499)
        35  Panama Canal Commission (Parts 3500--3599)
        44  Federal Emergency Management Agency (Parts 4400--4499)
        51  Department of the Army Acquisition Regulations (Parts 
                5100--5199)
        52  Department of the Navy Acquisition Regulations (Parts 
                5200--5299)
        53  Department of the Air Force Federal Acquisition 
                Regulation Supplement (Parts 5300--5399)

[[Page 571]]

        54  Defense Logistics Agency, Department of Defense (Parts 
                5400--5499)
        57  African Development Foundation (Parts 5700--5799)
        61  General Services Administration Board of Contract 
                Appeals (Parts 6100--6199)
        63  Department of Transportation Board of Contract Appeals 
                (Parts 6300--6399)
        99  Cost Accounting Standards Board, Office of Federal 
                Procurement Policy, Office of Management and 
                Budget (Parts 9900--9999)

                       Title 49--Transportation

            Subtitle A--Office of the Secretary of Transportation 
                (Parts 1--99)
            Subtitle B--Other Regulations Relating to 
                Transportation
         I  Research and Special Programs Administration, 
                Department of Transportation (Parts 100--199)
        II  Federal Railroad Administration, Department of 
                Transportation (Parts 200--299)
       III  Federal Motor Carrier Safety Administration, 
                Department of Transportation (Parts 300--399)
        IV  Coast Guard, Department of Homeland Security (Parts 
                400--499)
         V  National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 500--599)
        VI  Federal Transit Administration, Department of 
                Transportation (Parts 600--699)
       VII  National Railroad Passenger Corporation (AMTRAK) 
                (Parts 700--799)
      VIII  National Transportation Safety Board (Parts 800--999)
         X  Surface Transportation Board, Department of 
                Transportation (Parts 1000--1399)
        XI  Bureau of Transportation Statistics, Department of 
                Transportation (Parts 1400--1499)
       XII  Transportation Security Administration, Department of 
                Homeland Security (Parts 1500--1599)

                   Title 50--Wildlife and Fisheries

         I  United States Fish and Wildlife Service, Department of 
                the Interior (Parts 1--199)
        II  National Marine Fisheries Service, National Oceanic 
                and Atmospheric Administration, Department of 
                Commerce (Parts 200--299)
       III  International Fishing and Related Activities (Parts 
                300--399)
        IV  Joint Regulations (United States Fish and Wildlife 
                Service, Department of the Interior and National 
                Marine Fisheries Service, National Oceanic and 
                Atmospheric Administration, Department of 
                Commerce); Endangered Species Committee 
                Regulations (Parts 400--499)

[[Page 572]]

         V  Marine Mammal Commission (Parts 500--599)
        VI  Fishery Conservation and Management, National Oceanic 
                and Atmospheric Administration, Department of 
                Commerce (Parts 600--699)

                      CFR Index and Finding Aids

            Subject/Agency Index
            List of Agency Prepared Indexes
            Parallel Tables of Statutory Authorities and Rules
            List of CFR Titles, Chapters, Subchapters, and Parts
            Alphabetical List of Agencies Appearing in the CFR

[[Page 573]]





           Alphabetical List of Agencies Appearing in the CFR




                     (Revised as of January 1, 2004)

                                                  CFR Title, Subtitle or 
                     Agency                               Chapter

Administrative Committee of the Federal Register  1, I
Advanced Research Projects Agency                 32, I
Advisory Council on Historic Preservation         36, VIII
African Development Foundation                    22, XV
  Federal Acquisition Regulation                  48, 57
Agency for International Development, United      22, II
     States
  Federal Acquisition Regulation                  48, 7
Agricultural Marketing Service                    7, I, IX, X, XI
Agricultural Research Service                     7, V
Agriculture Department                            5, LXXIII
  Agricultural Marketing Service                  7, I, IX, X, XI
  Agricultural Research Service                   7, V
  Animal and Plant Health Inspection Service      7, III; 9, I
  Chief Financial Officer, Office of              7, XXX
  Commodity Credit Corporation                    7, XIV
  Cooperative State Research, Education, and      7, XXXIV
       Extension Service
  Economic Research Service                       7, XXXVII
  Energy, Office of                               7, XXIX
  Environmental Quality, Office of                7, XXXI
  Farm Service Agency                             7, VII, XVIII
  Federal Acquisition Regulation                  48, 4
  Federal Crop Insurance Corporation              7, IV
  Food and Nutrition Service                      7, II
  Food Safety and Inspection Service              9, III
  Foreign Agricultural Service                    7, XV
  Forest Service                                  36, II
  Grain Inspection, Packers and Stockyards        7, VIII; 9, II
       Administration
  Information Resources Management, Office of     7, XXVII
  Inspector General, Office of                    7, XXVI
  National Agricultural Library                   7, XLI
  National Agricultural Statistics Service        7, XXXVI
  Natural Resources Conservation Service          7, VI
  Operations, Office of                           7, XXVIII
  Procurement and Property Management, Office of  7, XXXII
  Rural Business-Cooperative Service              7, XVIII, XLII
  Rural Development Administration                7, XLII
  Rural Housing Service                           7, XVIII, XXXV
  Rural Telephone Bank                            7, XVI
  Rural Utilities Service                         7, XVII, XVIII, XLII
  Secretary of Agriculture, Office of             7, Subtitle A
  Transportation, Office of                       7, XXXIII
  World Agricultural Outlook Board                7, XXXVIII
Air Force Department                              32, VII
  Federal Acquisition Regulation Supplement       48, 53
Air Transportation Stabilization Board            14, VI
Alcohol and Tobacco Tax and Trade Bureau          27, I
Alcohol, Tobacco, Firearms, and Explosives,       27, II
     Bureau of
AMTRAK                                            49, VII
American Battle Monuments Commission              36, IV
American Indians, Office of the Special Trustee   25, VII
Animal and Plant Health Inspection Service        7, III; 9, I
Appalachian Regional Commission                   5, IX

[[Page 574]]

Architectural and Transportation Barriers         36, XI
     Compliance Board
Arctic Research Commission                        45, XXIII
Armed Forces Retirement Home                      5, XI
Army Department                                   32, V
  Engineers, Corps of                             33, II; 36, III
  Federal Acquisition Regulation                  48, 51
Benefits Review Board                             20, VII
Bilingual Education and Minority Languages        34, V
     Affairs, Office of
Blind or Severely Disabled, Committee for         41, 51
     Purchase From People Who Are
Broadcasting Board of Governors                   22, V
  Federal Acquisition Regulation                  48, 19
Census Bureau                                     15, I
Centers for Medicare & Medicaid Services          42, IV
Central Intelligence Agency                       32, XIX
Chief Financial Officer, Office of                7, XXX
Child Support Enforcement, Office of              45, III
Children and Families, Administration for         45, II, III, IV, X
Civil Rights, Commission on                       45, VII
Civil Rights, Office for                          34, I
Coast Guard                                       33, I; 46, I; 49, IV
Coast Guard (Great Lakes Pilotage)                46, III
Commerce Department                               44, IV
  Census Bureau                                   15, I
  Economic Affairs, Under Secretary               37, V
  Economic Analysis, Bureau of                    15, VIII
  Economic Development Administration             13, III
  Emergency Management and Assistance             44, IV
  Federal Acquisition Regulation                  48, 13
  Fishery Conservation and Management             50, VI
  Foreign-Trade Zones Board                       15, IV
  Industry and Security, Bureau of                15, VII
  International Trade Administration              15, III; 19, III
  National Institute of Standards and Technology  15, II
  National Marine Fisheries Service               50, II, IV, VI
  National Oceanic and Atmospheric                15, IX; 50, II, III, IV, 
       Administration                             VI
  National Telecommunications and Information     15, XXIII; 47, III
       Administration
  National Weather Service                        15, IX
  Patent and Trademark Office, United States      37, I
  Productivity, Technology and Innovation,        37, IV
       Assistant Secretary for
  Secretary of Commerce, Office of                15, Subtitle A
  Technology, Under Secretary for                 37, V
  Technology Administration                       15, XI
  Technology Policy, Assistant Secretary for      37, IV
Commercial Space Transportation                   14, III
Commodity Credit Corporation                      7, XIV
Commodity Futures Trading Commission              5, XLI; 17, I
Community Planning and Development, Office of     24, V, VI
     Assistant Secretary for
Community Services, Office of                     45, X
Comptroller of the Currency                       12, I
Construction Industry Collective Bargaining       29, IX
     Commission
Consumer Product Safety Commission                5, LXXI; 16, II
Cooperative State Research, Education, and        7, XXXIV
     Extension Service
Copyright Office                                  37, II
Corporation for National and Community Service    45, XII, XXV
Cost Accounting Standards Board                   48, 99
Council on Environmental Quality                  40, V
Court Services and Offender Supervision Agency    28, VIII
     for the District of Columbia
Customs and Border Protection Bureau              19, I
Defense Contract Audit Agency                     32, I
Defense Department                                5, XXVI; 32, Subtitle A; 
                                                  40, VII

[[Page 575]]

  Advanced Research Projects Agency               32, I
  Air Force Department                            32, VII
  Army Department                                 32, V; 33, II; 36, III, 
                                                  48, 51
  Defense Intelligence Agency                     32, I
  Defense Logistics Agency                        32, I, XII; 48, 54
  Engineers, Corps of                             33, II; 36, III
  Federal Acquisition Regulation                  48, 2
  National Imagery and Mapping Agency             32, I
  Navy Department                                 32, VI; 48, 52
  Secretary of Defense, Office of                 32, I
Defense Contract Audit Agency                     32, I
Defense Intelligence Agency                       32, I
Defense Logistics Agency                          32, XII; 48, 54
Defense Nuclear Facilities Safety Board           10, XVII
Delaware River Basin Commission                   18, III
District of Columbia, Court Services and          28, VIII
     Offender Supervision Agency for the
Drug Enforcement Administration                   21, II
East-West Foreign Trade Board                     15, XIII
Economic Affairs, Under Secretary                 37, V
Economic Analysis, Bureau of                      15, VIII
Economic Development Administration               13, III
Economic Research Service                         7, XXXVII
Education, Department of                          5, LIII
  Bilingual Education and Minority Languages      34, V
       Affairs, Office of
  Civil Rights, Office for                        34, I
  Educational Research and Improvement, Office    34, VII
       of
  Elementary and Secondary Education, Office of   34, II
  Federal Acquisition Regulation                  48, 34
  Postsecondary Education, Office of              34, VI
  Secretary of Education, Office of               34, Subtitle A
  Special Education and Rehabilitative Services,  34, III
       Office of
  Vocational and Adult Education, Office of       34, IV
Educational Research and Improvement, Office of   34, VII
Elementary and Secondary Education, Office of     34, II
Emergency Oil and Gas Guaranteed Loan Board       13, V
Emergency Steel Guarantee Loan Board              13, IV
Employee Benefits Security Administration         29, XXV
Employees' Compensation Appeals Board             20, IV
Employees Loyalty Board                           5, V
Employment and Training Administration            20, V
Employment Standards Administration               20, VI
Endangered Species Committee                      50, IV
Energy, Department of                             5, XXIII; 10, II, III, X
  Federal Acquisition Regulation                  48, 9
  Federal Energy Regulatory Commission            5, XXIV; 18, I
  Property Management Regulations                 41, 109
Energy, Office of                                 7, XXIX
Engineers, Corps of                               33, II; 36, III
Engraving and Printing, Bureau of                 31, VI
Environmental Protection Agency                   5, LIV; 40, I, IV, VII
  Federal Acquisition Regulation                  48, 15
  Property Management Regulations                 41, 115
Environmental Quality, Office of                  7, XXXI
Equal Employment Opportunity Commission           5, LXII; 29, XIV
Equal Opportunity, Office of Assistant Secretary  24, I
     for
Executive Office of the President                 3, I
  Administration, Office of                       5, XV
  Environmental Quality, Council on               40, V
  Management and Budget, Office of                5, III, LXXVII; 14, VI; 
                                                  48, 99
  National Drug Control Policy, Office of         21, III
  National Security Council                       32, XXI; 47, 2
  Presidential Documents                          3
  Science and Technology Policy, Office of        32, XXIV; 47, II

[[Page 576]]

  Trade Representative, Office of the United      15, XX
       States
Export-Import Bank of the United States           5, LII; 12, IV
Family Assistance, Office of                      45, II
Farm Credit Administration                        5, XXXI; 12, VI
Farm Credit System Insurance Corporation          5, XXX; 12, XIV
Farm Service Agency                               7, VII, XVIII
Federal Acquisition Regulation                    48, 1
Federal Aviation Administration                   14, I
  Commercial Space Transportation                 14, III
Federal Claims Collection Standards               31, IX
Federal Communications Commission                 5, XXIX; 47, I
Federal Contract Compliance Programs, Office of   41, 60
Federal Crop Insurance Corporation                7, IV
Federal Deposit Insurance Corporation             5, XXII; 12, III
Federal Election Commission                       11, I
Federal Emergency Management Agency               44, I
  Federal Acquisition Regulation                  48, 44
Federal Employees Group Life Insurance Federal    48, 21
     Acquisition Regulation
Federal Employees Health Benefits Acquisition     48, 16
     Regulation
Federal Energy Regulatory Commission              5, XXIV; 18, I
Federal Financial Institutions Examination        12, XI
     Council
Federal Financing Bank                            12, VIII
Federal Highway Administration                    23, I, II
Federal Home Loan Mortgage Corporation            1, IV
Federal Housing Enterprise Oversight Office       12, XVII
Federal Housing Finance Board                     12, IX
Federal Labor Relations Authority, and General    5, XIV; 22, XIV
     Counsel of the Federal Labor Relations 
     Authority
Federal Law Enforcement Training Center           31, VII
Federal Management Regulation                     41, 102
Federal Maritime Commission                       46, IV
Federal Mediation and Conciliation Service        29, XII
Federal Mine Safety and Health Review Commission  5, LXXIV; 29, XXVII
Federal Motor Carrier Safety Administration       49, III
Federal Prison Industries, Inc.                   28, III
Federal Procurement Policy Office                 48, 99
Federal Property Management Regulations           41, 101
Federal Railroad Administration                   49, II
Federal Register, Administrative Committee of     1, I
Federal Register, Office of                       1, II
Federal Reserve System                            12, II
  Board of Governors                              5, LVIII
Federal Retirement Thrift Investment Board        5, VI, LXXVI
Federal Service Impasses Panel                    5, XIV
Federal Trade Commission                          5, XLVII; 16, I
Federal Transit Administration                    49, VI
Federal Travel Regulation System                  41, Subtitle F
Fine Arts, Commission on                          45, XXI
Fiscal Service                                    31, II
Fish and Wildlife Service, United States          50, I, IV
Fishery Conservation and Management               50, VI
Food and Drug Administration                      21, I
Food and Nutrition Service                        7, II
Food Safety and Inspection Service                9, III
Foreign Agricultural Service                      7, XV
Foreign Assets Control, Office of                 31, V
Foreign Claims Settlement Commission of the       45, V
     United States
Foreign Service Grievance Board                   22, IX
Foreign Service Impasse Disputes Panel            22, XIV
Foreign Service Labor Relations Board             22, XIV
Foreign-Trade Zones Board                         15, IV
Forest Service                                    36, II
General Accounting Office                         4, I
General Services Administration                   5, LVII; 41, 105
  Contract Appeals, Board of                      48, 61
  Federal Acquisition Regulation                  48, 5

[[Page 577]]

  Federal Management Regulation                   41, 102
  Federal Property Management Regulations         41, 101
  Federal Travel Regulation System                41, Subtitle F
  General                                         41, 300
  Payment From a Non-Federal Source for Travel    41, 304
       Expenses
  Payment of Expenses Connected With the Death    41, 303
       of Certain Employees
  Relocation Allowances                           41, 302
  Temporary Duty (TDY) Travel Allowances          41, 301
Geological Survey                                 30, IV
Government Ethics, Office of                      5, XVI
Government National Mortgage Association          24, III
Grain Inspection, Packers and Stockyards          7, VIII; 9, II
     Administration
Harry S. Truman Scholarship Foundation            45, XVIII
Health and Human Services, Department of          5, XLV; 45, Subtitle A
  Centers for Medicare & Medicaid Services        42, IV
  Child Support Enforcement, Office of            45, III
  Children and Families, Administration for       45, II, III, IV, X
  Community Services, Office of                   45, X
  Family Assistance, Office of                    45, II
  Federal Acquisition Regulation                  48, 3
  Food and Drug Administration                    21, I
  Human Development Services, Office of           45, XIII
  Indian Health Service                           25, V; 42, I
  Inspector General (Health Care), Office of      42, V
  Public Health Service                           42, I
  Refugee Resettlement, Office of                 45, IV
Homeland Security, Department of                  6, I
  Coast Guard                                     33, I; 46, I; 49, IV
  Coast Guard (Great Lakes Pilotage)              46, III
  Customs and Border Protection Bureau            19, I
  Federal Emergency Management Agency             44, I
  Immigration and Customs Enforcement Bureau      19, IV
  Immigration and Naturalization                  8, I
  Transportation Security Administration          49, XII
Housing and Urban Development, Department of      5, LXV; 24, Subtitle B
  Community Planning and Development, Office of   24, V, VI
       Assistant Secretary for
  Equal Opportunity, Office of Assistant          24, I
       Secretary for
  Federal Acquisition Regulation                  48, 24
  Federal Housing Enterprise Oversight, Office    12, XVII
       of
  Government National Mortgage Association        24, III
  Housing--Federal Housing Commissioner, Office   24, II, VIII, X, XX
       of Assistant Secretary for
  Housing, Office of, and Multifamily Housing     24, IV
       Assistance Restructuring, Office of
  Inspector General, Office of                    24, XII
  Public and Indian Housing, Office of Assistant  24, IX
       Secretary for
  Secretary, Office of                            24, Subtitle A, VII
Housing--Federal Housing Commissioner, Office of  24, II, VIII, X, XX
     Assistant Secretary for
Housing, Office of, and Multifamily Housing       24, IV
     Assistance Restructuring, Office of
Human Development Services, Office of             45, XIII
Immigration and Customs Enforcement Bureau        19, IV
Immigration and Naturalization                    8, I
Immigration Review, Executive Office for          8, V
Independent Counsel, Office of                    28, VII
Indian Affairs, Bureau of                         25, I, V
Indian Affairs, Office of the Assistant           25, VI
     Secretary
Indian Arts and Crafts Board                      25, II
Indian Health Service                             25, V; 42, I
Industry and Security, Bureau of                  15, VII
Information Resources Management, Office of       7, XXVII
Information Security Oversight Office, National   32, XX
     Archives and Records Administration
Inspector General

[[Page 578]]

  Agriculture Department                          7, XXVI
  Health and Human Services Department            42, V
  Housing and Urban Development Department        24, XII
Institute of Peace, United States                 22, XVII
Inter-American Foundation                         5, LXIII; 22, X
Interior Department
  American Indians, Office of the Special         25, VII
       Trustee
  Endangered Species Committee                    50, IV
  Federal Acquisition Regulation                  48, 14
  Federal Property Management Regulations System  41, 114
  Fish and Wildlife Service, United States        50, I, IV
  Geological Survey                               30, IV
  Indian Affairs, Bureau of                       25, I, V
  Indian Affairs, Office of the Assistant         25, VI
       Secretary
  Indian Arts and Crafts Board                    25, II
  Land Management, Bureau of                      43, II
  Minerals Management Service                     30, II
  National Indian Gaming Commission               25, III
  National Park Service                           36, I
  Reclamation, Bureau of                          43, I
  Secretary of the Interior, Office of            43, Subtitle A
  Surface Mining and Reclamation Appeals, Board   30, III
       of
  Surface Mining Reclamation and Enforcement,     30, VII
       Office of
Internal Revenue Service                          26, I
International Boundary and Water Commission,      22, XI
     United States and Mexico, United States 
     Section
International Development, United States Agency   22, II
     for
  Federal Acquisition Regulation                  48, 7
International Development Cooperation Agency,     22, XII
     United States
International Fishing and Related Activities      50, III
International Investment, Office of               31, VIII
International Joint Commission, United States     22, IV
     and Canada
International Organizations Employees Loyalty     5, V
     Board
International Trade Administration                15, III; 19, III
International Trade Commission, United States     19, II
Interstate Commerce Commission                    5, XL
James Madison Memorial Fellowship Foundation      45, XXIV
Japan-United States Friendship Commission         22, XVI
Joint Board for the Enrollment of Actuaries       20, VIII
Justice Department                                5, XXVIII; 28, I, XI; 40, 
                                                  IV
  Alcohol, Tobacco, Firearms, and Explosives,     27, II
       Bureau of
  Drug Enforcement Administration                 21, II
  Federal Acquisition Regulation                  48, 28
  Federal Claims Collection Standards             31, IX
  Federal Prison Industries, Inc.                 28, III
  Foreign Claims Settlement Commission of the     45, V
       United States
  Immigration Review, Executive Office for        8, V
  Offices of Independent Counsel                  28, VI
  Prisons, Bureau of                              28, V
  Property Management Regulations                 41, 128
Labor Department                                  5, XLII
  Benefits Review Board                           20, VII
  Employee Benefits Security Administration       29, XXV
  Employees' Compensation Appeals Board           20, IV
  Employment and Training Administration          20, V
  Employment Standards Administration             20, VI
  Federal Acquisition Regulation                  48, 29
  Federal Contract Compliance Programs, Office    41, 60
       of
  Federal Procurement Regulations System          41, 50
  Labor-Management Standards, Office of           29, II, IV
  Mine Safety and Health Administration           30, I
  Occupational Safety and Health Administration   29, XVII
  Public Contracts                                41, 50
  Secretary of Labor, Office of                   29, Subtitle A

[[Page 579]]

  Veterans' Employment and Training Service,      41, 61; 20, IX
       Office of the Assistant Secretary for
  Wage and Hour Division                          29, V
  Workers' Compensation Programs, Office of       20, I
Labor-Management Standards, Office of             29, II, IV
Land Management, Bureau of                        43, II
Legal Services Corporation                        45, XVI
Library of Congress                               36, VII
  Copyright Office                                37, II
Local Television Loan Guarantee Board             7, XX
Management and Budget, Office of                  5, III, LXXVII; 14, VI; 
                                                  48, 99
Marine Mammal Commission                          50, V
Maritime Administration                           46, II
Merit Systems Protection Board                    5, II
Micronesian Status Negotiations, Office for       32, XXVII
Mine Safety and Health Administration             30, I
Minerals Management Service                       30, II
Minority Business Development Agency              15, XIV
Miscellaneous Agencies                            1, IV
Monetary Offices                                  31, I
Morris K. Udall Scholarship and Excellence in     36, XVI
     National Environmental Policy Foundation
National Aeronautics and Space Administration     5, LIX; 14, V
  Federal Acquisition Regulation                  48, 18
National Agricultural Library                     7, XLI
National Agricultural Statistics Service          7, XXXVI
National and Community Service, Corporation for   45, XII, XXV
National Archives and Records Administration      5, LXVI; 36, XII
  Information Security Oversight Office           32, XX
National Bureau of Standards                      15, II
National Capital Planning Commission              1, IV
National Commission for Employment Policy         1, IV
National Commission on Libraries and Information  45, XVII
     Science
National Council on Disability                    34, XII
National Counterintelligence Center               32, XVIII
National Credit Union Administration              12, VII
National Crime Prevention and Privacy Compact     28, IX
     Council
National Drug Control Policy, Office of           21, III
National Foundation on the Arts and the           45, XI
     Humanities
National Highway Traffic Safety Administration    23, II, III; 49, V
National Imagery and Mapping Agency               32, I
National Indian Gaming Commission                 25, III
National Institute for Literacy                   34, XI
National Institute of Standards and Technology    15, II
National Labor Relations Board                    5, LXI; 29, I
National Marine Fisheries Service                 50, II, IV, VI
National Mediation Board                          29, X
National Oceanic and Atmospheric Administration   15, IX; 50, II, III, IV, 
                                                  VI
National Park Service                             36, I
National Railroad Adjustment Board                29, III
National Railroad Passenger Corporation (AMTRAK)  49, VII
National Science Foundation                       5, XLIII; 45, VI
  Federal Acquisition Regulation                  48, 25
National Security Council                         32, XXI
National Security Council and Office of Science   47, II
     and Technology Policy
National Telecommunications and Information       15, XXIII; 47, III
     Administration
National Transportation Safety Board              49, VIII
National Weather Service                          15, IX
Natural Resources Conservation Service            7, VI
Navajo and Hopi Indian Relocation, Office of      25, IV
Navy Department                                   32, VI
  Federal Acquisition Regulation                  48, 52
Neighborhood Reinvestment Corporation             24, XXV
Northeast Interstate Low-Level Radioactive Waste  10, XVIII
   Commission

[[Page 580]]

Nuclear Regulatory Commission                     5, XLVIII; 10, I
  Federal Acquisition Regulation                  48, 20
Occupational Safety and Health Administration     29, XVII
Occupational Safety and Health Review Commission  29, XX
Offices of Independent Counsel                    28, VI
Oklahoma City National Memorial Trust             36, XV
Operations Office                                 7, XXVIII
Overseas Private Investment Corporation           5, XXXIII; 22, VII
Panama Canal Commission                           48, 35
Panama Canal Regulations                          35, I
Patent and Trademark Office, United States        37, I
Payment From a Non-Federal Source for Travel      41, 304
     Expenses
Payment of Expenses Connected With the Death of   41, 303
     Certain Employees
Peace Corps                                       22, III
Pennsylvania Avenue Development Corporation       36, IX
Pension Benefit Guaranty Corporation              29, XL
Personnel Management, Office of                   5, I, XXXV; 45, VIII
  Federal Acquisition Regulation                  48, 17
  Federal Employees Group Life Insurance Federal  48, 21
       Acquisition Regulation
  Federal Employees Health Benefits Acquisition   48, 16
       Regulation
Postal Rate Commission                            5, XLVI; 39, III
Postal Service, United States                     5, LX; 39, I
Postsecondary Education, Office of                34, VI
President's Commission on White House             1, IV
     Fellowships
Presidential Documents                            3
Presidio Trust                                    36, X
Prisons, Bureau of                                28, V
Procurement and Property Management, Office of    7, XXXII
Productivity, Technology and Innovation,          37, IV
     Assistant Secretary
Public Contracts, Department of Labor             41, 50
Public and Indian Housing, Office of Assistant    24, IX
     Secretary for
Public Health Service                             42, I
Railroad Retirement Board                         20, II
Reclamation, Bureau of                            43, I
Refugee Resettlement, Office of                   45, IV
Regional Action Planning Commissions              13, V
Relocation Allowances                             41, 302
Research and Special Programs Administration      49, I
Rural Business-Cooperative Service                7, XVIII, XLII
Rural Development Administration                  7, XLII
Rural Housing Service                             7, XVIII, XXXV
Rural Telephone Bank                              7, XVI
Rural Utilities Service                           7, XVII, XVIII, XLII
Saint Lawrence Seaway Development Corporation     33, IV
Science and Technology Policy, Office of          32, XXIV
Science and Technology Policy, Office of, and     47, II
     National Security Council
Secret Service                                    31, IV
Securities and Exchange Commission                17, II
Selective Service System                          32, XVI
Small Business Administration                     13, I
Smithsonian Institution                           36, V
Social Security Administration                    20, III; 48, 23
Soldiers' and Airmen's Home, United States        5, XI
Special Counsel, Office of                        5, VIII
Special Education and Rehabilitative Services,    34, III
     Office of
State Department                                  22, I; 28, XI
  Federal Acquisition Regulation                  48, 6
Surface Mining and Reclamation Appeals, Board of  30, III
Surface Mining Reclamation and Enforcement,       30, VII
     Office of
Surface Transportation Board                      49, X
Susquehanna River Basin Commission                18, VIII
Technology Administration                         15, XI
Technology Policy, Assistant Secretary for        37, IV

[[Page 581]]

Technology, Under Secretary for                   37, V
Tennessee Valley Authority                        5, LXIX; 18, XIII
Thrift Supervision Office, Department of the      12, V
     Treasury
Trade Representative, United States, Office of    15, XX
Transportation, Department of                     5, L
  Commercial Space Transportation                 14, III
  Contract Appeals, Board of                      48, 63
  Emergency Management and Assistance             44, IV
  Federal Acquisition Regulation                  48, 12
  Federal Aviation Administration                 14, I
  Federal Highway Administration                  23, I, II
  Federal Motor Carrier Safety Administration     49, III
  Federal Railroad Administration                 49, II
  Federal Transit Administration                  49, VI
  Maritime Administration                         46, II
  National Highway Traffic Safety Administration  23, II, III; 49, V
  Research and Special Programs Administration    49, I
  Saint Lawrence Seaway Development Corporation   33, IV
  Secretary of Transportation, Office of          14, II; 49, Subtitle A
  Surface Transportation Board                    49, X
  Transportation Statistics Bureau                49, XI
Transportation, Office of                         7, XXXIII
Transportation Security Administration            49, XII
Transportation Statistics Bureau                  49, XI
Travel Allowances, Temporary Duty (TDY)           41, 301
Treasury Department                               5, XXI; 12, XV; 17, IV; 
                                                  31, IX
  Alcohol and Tobacco Tax and Trade Bureau        27, I
  Community Development Financial Institutions    12, XVIII
       Fund
  Comptroller of the Currency                     12, I
  Customs and Border Protection Bureau            19, I
  Engraving and Printing, Bureau of               31, VI
  Federal Acquisition Regulation                  48, 10
  Federal Law Enforcement Training Center         31, VII
  Fiscal Service                                  31, II
  Foreign Assets Control, Office of               31, V
  Internal Revenue Service                        26, I
  International Investment, Office of             31, VIII
  Monetary Offices                                31, I
  Secret Service                                  31, IV
  Secretary of the Treasury, Office of            31, Subtitle A
  Thrift Supervision, Office of                   12, V
Truman, Harry S. Scholarship Foundation           45, XVIII
United States and Canada, International Joint     22, IV
     Commission
United States and Mexico, International Boundary  22, XI
     and Water Commission, United States Section
Utah Reclamation Mitigation and Conservation      43, III
     Commission
Veterans Affairs Department                       38, I
  Federal Acquisition Regulation                  48, 8
Veterans' Employment and Training Service,        41, 61; 20, IX
     Office of the Assistant Secretary for
Vice President of the United States, Office of    32, XXVIII
Vocational and Adult Education, Office of         34, IV
Wage and Hour Division                            29, V
Water Resources Council                           18, VI
Workers' Compensation Programs, Office of         20, I
World Agricultural Outlook Board                  7, XXXVIII

[[Page 583]]



List of CFR Sections Affected



All changes in this volume of the Code of Federal Regulations which were 
made by documents published in the Federal Register since January 1, 
2001, are enumerated in the following list. Entries indicate the nature 
of the changes effected. Pages numbers refer to Federal Register pages. 
The user should consult the entries for chapters and parts as well as 
sections for revisions.
For the period before January 1, 2001, see the ``List of CFR Sections 
Affected, 1949-1963, 1964-1972, 1973-1985, and 1986-2000,'' published in 
11 separate volumes.

                                  2001

7 CFR
                                                                   66 FR
                                                                    Page
Chapter XVIII
1951.201 Amended....................................................1569
    Regulation at 66 FR 1569 eff. date delayed......................8886
1951.221 (b) amended................................................1569
    Regulation at 66 FR 1569 eff. date delayed......................8886
1951.222 (a)(11) removed............................................1569
    Regulation at 66 FR 1569 eff. date delayed......................8886
1951.230 (b)(5) and (6) amended; (b)(7) removed.....................1569
    Regulation at 66 FR 1569 eff. date delayed......................8886
1955.10 (a)(1)(ii) removed..........................................7568
1955.104 (c) removed................................................7568
1956.101 Amended....................................................1569
    Regulation at 66 FR 1569 eff. date delayed......................8886
1956.105 (k) removed................................................1569
    Regulation at 66 FR 1569 eff. date delayed......................8886
1956.137 Removed....................................................1569
    Regulation at 66 FR 1569 eff. date delayed......................8886
1965.13 (e)(1) removed; (e)(2) and (3) redesignated as new (e)(1) 
        and (2).....................................................7568
1965.27 (a) removed.................................................7568
1980.1--1980.100 (Subpart A) Removed...............................23151
1980.801--1980.900 (Subpart I) Removed.............................23151

                                  2002

7 CFR
                                                                   67 FR
                                                                    Page
Chapter XVIII
1950.105 (d) amended; eff. 1-23-03.................................78329
1951 Authority citation revised....................................12458
1951.101 Revised...................................................69671
1951.102 (b)(1) revised............................................69671
1951.111 Introductory text and (d)(1) revised......................69671
1951.136 Added.....................................................69672
1951.137 Added.....................................................69672
1951.882 Removed...................................................19101
1951.901--1951.950 (Subpart S) Heading revised......................7943
1951.901 Amended....................................................7943
1951.909 (e)(2)(vii)(D) revised; (e)(2)(viii)(A) amended............7943
1951.914 (e) revised................................................7943
    1951.901--1951.950 (Subpart S) Exhibit A amended...............12458
1955.10 (f)(1) introductory text amended...........................78329
1955.15 (b)(2), (d)(2)(iv) introductory text, (C) and (D) amended 
                                                                   78329
1955.53 Amended....................................................78329
1955.114 (a)(5) amended............................................78329
1955.115 (a)(3) amended............................................78329
1965.61 (d) and (e)(3) amended.....................................78329
1965.202 Amended...................................................78329
1980 Authority citation revised....................................78130
1980.312 Amended...................................................78329
1980.353 (e)(3) amended............................................78329
1980.402 Amended...................................................78130
1980.405 Revised...................................................78130

[[Page 584]]

                                  2003

7 CFR
                                                                   68 FR
                                                                    Page
1951.6 Removed.....................................................61331
1951.51--1951.55 (Subpart B) Removed...............................61331
1951.201 Amended; eff. 1-15-04.....................................69952
1951.221 Introductory text revised.................................61331
    (b) heading amended; eff. 1-15-04..............................69952
1951.455 (e) amended...............................................61331
1951.463 (e) removed................................................7698
1951.506 (b) and (c) removed.......................................61331
1951.903 Amended....................................................7698
1951.909 (a)(3), (e)(1)(xii), (2)(viii) and (i)(2)(i) revised; 
        (e)(2)(ix) redesignated as (e)(2)(x); new (e)(2)(ix) added
                                                                    7698
1951.909--1951.950 (Subpart S) Exhibit A amended....................7699
1951.951 Amended...................................................55303
1951.952 Revised...................................................55303
1951.953 Revised...................................................55303
1951.954 Revised...................................................55303
    (b)(3) correctly revised.......................................69955
1951.957 (a) and (b)(4) revised....................................55303
1951.1000 Removed..................................................55304
1955.1-1955.50 (Subpart A) Exhibits G and G-1 removed...............7700
1955.10 (f)(2) and (3) revised......................................7699
1955.55 (e) revised................................................61331
1955.62 (b)(1) introductory text revised...........................61332
1955.63 (a) and (b) revised.........................................7700
1955.66 (l) introductory text revised..............................61332
1955.103 Amended...................................................62224
1955.107 (a)(2)(i), (b) introductory text, (b)(1) and (2) revised 
                                                                    7700
1955.109 (c) revised...............................................61332
1955.117 (d) revised...............................................61332
1955.118 (a) and (b)(4) revised....................................61332
1955.120 Amended...................................................61332
1955.122 (e) revised...............................................61332
1955.123 (b) revised...............................................61332
1955.130 (e)(2) revised............................................61332
1955.137 (b)(3)(ii) and (iii) amended...............................7700
1955.139 (a)(2) and (3)(iv) amended................................61332
1955.147 (e) amended...............................................61332
1955.148 Amended...................................................61332
1956.57 (f) removed.................................................7700
1956.70 (b)(3) introductory text revised............................7700
1956.84 (e) revised.................................................7700
1956.85 (a)(2) removed.............................................61332
1956.96 Revised.....................................................7700
1956.139 (b) removed...............................................61332
1956.143 (g)(2) removed............................................61332
1962.41 (f) removed; (e) revised....................................7701
1962.46 (g)(5)(ii) revised..........................................7701
1962.49 (e)(3)(ii) removed.........................................61332
1965.26 (f)(6) and (g) removed; (c)(2)(iv) introductory text and 
        (f)(5) revised..............................................7701
1965.27 (b)(19) and (g)(6) removed; (f) revised; (h) amended........7701
1965.61 (a) revised................................................61332
1980 Authority citation revised....................................61333
1980.461 Removed...................................................61333


                                  [all]