[Federal Register Volume 59, Number 10 (Friday, January 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-944]


[[Page Unknown]]

[Federal Register: January 14, 1994]


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DEPARTMENT OF AGRICULTURE
Farmers Home Administration

7 CFR Parts 1941, 1943, 1945, and 1951

RIN 0575-AB71

 

Revisions to the Direct Operating (OL), Farm Ownership (FO), Soil 
and Water (SW) and Emergency (EM) Loan Regulations to Modify Collateral 
Requirements

Agency: Farmers Home Administration, USDA.

Action: Proposed rule.

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Summary: The Farmers Home Administration (FmHA) proposes to amend its 
direct operating (OL), farm ownership (FO), soil and water (SW) and 
emergency (EM) loan making and servicing regulations to modify 
collateral requirements. These amendments concern the amount of 
collateral required when an FmHA loan is made. There will be no change 
in security requirements for loan restructuring. The intended effect is 
to reduce the burden on farmers and FmHA personnel in servicing FmHA 
loan collateral and to avoid encumbering all of a farmer's collateral, 
thereby making it less difficult for farmers who receive FmHA loans to 
subsequently obtain non-FmHA credit.

DATES: Written comments must be submitted on or before January 31, 
1994.

ADDRESSES: Submit written comments, in duplicate, to the Office of the 
Chief, Regulations Analysis and Control Branch, Farmers Home 
Administration, USDA, room 6348, South Agriculture Building, 14th 
Street and Independence Avenue SW., Washington, DC 20250-0700. All 
written comments made pursuant to this notice will be available for 
public inspection during regular working hours at the above address.

For Further Information Contact: David R. Smith, Senior Loan Officer, 
Farmer Programs Loan Making Division, Farmers Home Administration, 
USDA, South Agriculture Building, room 5430, 14th and Independence 
Avenue, SW., Washington, DC 20250-0700, Telephone (202) 720-5114.

SUPPLEMENTARY INFORMATION:

Classification

    We are issuing this proposed rule in conformance with Executive 
Order 12866, and we have determined that it is not a ``significant 
regulatory action.'' Based on information compiled by the Department, 
we have determined that this proposed rule: (1) Would have an effect on 
the economy of less than $100 million; (2) would not adversely affect 
in a material way the economy, a sector of the economy, productivity, 
competition, jobs, the environment, public health or safety, or State, 
local, or tribal governments or communities; (3) would not create a 
serious inconsistency or otherwise interfere with an action taken or 
planned by another agency; (4) would not alter the budgetary impact of 
entitlements, grants, user fees, or loan programs or rights and 
obligations of recipients thereof; and (5) would not raise novel legal 
or policy issues arising out of legal mandates, the President's 
priorities, or principles set forth in Executive Order 12866.

Intergovernmental Consultation

    1. For the reasons set forth in the final rule related to Notice 7 
CFR part 3015, subpart V (48 FR 29115, June 24, 1983) and FmHA 
Instruction 1940-J, ``Intergovernmental Review of Farmers Home 
Administration Programs and Activities'' (December 23, 1983), Farm 
Ownership Loans, Farm Operating Loans, and Emergency Loans are excluded 
from the scope of Executive Order 12372, which requires 
intergovernmental consultation with State and local officials.
    2. The Soil and Water Loan Program is subject to the provisions of 
Executive Order 12372 and FmHA Instruction 1940-J.

Programs Affected

    These changes affect the following FmHA programs as listed in the 
Catalog of Federal Domestic Assistance:

10.404--Emergency Loans
10.406--Farm Operating Loans
10.407--Farm Ownership Loans
10.416--Soil and Water Loans

Environmental Impact Statement

    This document has been reviewed in accordance with 7 CFR part 1940, 
subpart G, ``Environmental Program.'' It is the determination of FmHA 
that this action does not constitute a major Federal action 
significantly affecting the quality of the human environment, and in 
accordance with the National Environmental Policy Act of 1969, Public 
Law 91-190, an Environmental Impact Statement is not required.

Civil Justice Reform

    This document has been reviewed in accordance with Executive Order 
(E.O.) 12778. It is the determination of FmHA that this action does not 
unduly burden the Federal Court System in that it meets all applicable 
standards provided in section 2 of the E.O.

Paperwork Reduction Act

    The information collection requirements contained in these 
regulations have been approved by the Office of Management and Budget 
(OMB) under the provisions of 44 U.S.C. Chapter 35 and have been 
assigned OMB control numbers 0575-0141, 0575-0085, 0575-0083, 0575-0090 
and 0575-0133 in accordance with the Paperwork Reduction Act of 1980 
(44 U.S.C. 3507). The proposed rule does not revise or impose any new 
information collection or recordkeeping requirement from those approved 
by OMB.

Discussion of Proposed Rule

    It is the policy of this Department that rules relating to public 
property, loans, grants, benefits, or contracts shall be published for 
comment not withstanding the exemption of 5 U.S.C. 553 with respect to 
such rules. FmHA is publishing this proposed rule with a 15-day comment 
period. This proposed rule relieves the restriction of taking a lien on 
all assets at the time of loan making. Furthermore, the Agency has 
concluded that the need to provide immediate assistance to farmers who 
have suffered severe production and physical losses as a result of 
natural disasters also justifies the shortened comment period under 5 
U.S.C. 553(d) as discussed below.
    Major agricultural disasters during the 1993 crop year, including 
extensive flooding and rainfall in 9 Midwestern States and drought in 3 
Southeastern States will result in a significant increase in demand for 
FmHA direct loan assistance. Requests will not be limited to emergency 
loan applications. In the 9 flood states alone, over 8 million acres of 
crops were lost or not planted in 1993. Estimates indicate that the 
1993 floods were the second costliest weather disaster in the history 
of the United States. Preliminary estimates are that as many as 10,000 
of the affected farmers may require financial assistance from FmHA.
    Frequently, other lenders are willing to provide part of the 
farmers' credit needs, in combination with some FmHA assistance. 
However, the existing FmHA loan security requirements would preclude 
many lenders from continuing to provide credit to these farmers. FmHA 
does not have the staff or financial resources to cope with this 
situation without participation from private sector lenders. The need 
for a change in the regulations is immediate. Most farmers are now 
concluding 1993 operations, consulting with their lenders, and planning 
for 1994. FmHA is receiving loan requests at an increasing rate. The 
Agency wants to give the public an opportunity for input on the 
proposed change but FmHA needs regulations in place for spring 
planting, so a reasonable compromise was the 15-day comment period. 
Because of the scope of the situation and the impact on local, 
regional, and national economies, the Agency believes that an amendment 
to the regulations after a shortened comment period is the only way to 
assure that affected farmers receive the assistance they need on a 
timely basis to recover from these disasters. Any further delay in the 
timing of this amendment will reduce the Agency's ability to meet the 
needs of those affected, thus imposing additional hardships on those 
who have already suffered substantially from flood or drought, and 
jeopardizing individual and community financial recovery from these 
disasters.
    In 1989, the General Accounting Office (GAO) submitted a report 
(GAO/RCED-89-9) to the Senate Committee on Agriculture addressing 
FmHA's loan making policies and practices. One of the concerns noted 
was FmHA's eroding security position on many loans and the significant 
dollar losses being projected (and realized). One of GAO's 
recommendations addressed the need for a change in FmHA collateral 
requirements. The report recommended additional security be taken when 
servicing loans, including obtaining the best security interest 
available on all of the borrower's assets. In an effort to reduce loan 
losses and protect the public interest, FmHA published a proposed rule 
on February 15, 1991, requiring a lien on all assets when loans are 
made. A final rule implementing this policy was published on April 30, 
1992. On April 30, 1992, the Agency also published an interim rule 
requiring a lien on all a borrower's assets when loans are 
restructured. This policy had been issued as a proposed rule on October 
23, 1991.
    The requirement for a lien on all assets at the time a loan is made 
was intended to assure that FmHA had a security interest in all of a 
borrower's property, reducing the potential for program abuse and loan 
losses. However, this policy has proven unwieldy, imposing an excessive 
burden on FmHA borrowers and requiring an excessive amount of FmHA 
staff time. When FmHA acquires a security interest in property owned by 
a borrower, that security must be serviced in accordance with all FmHA 
regulations applying to the type of security property involved, 
regardless of the purpose of the loan. For example, under existing 
regulations, the recipient of an FmHA FO loan must pledge not only real 
estate, but all chattel property as well to secure the loan. The 
borrower must account to FmHA for all farm products sold, even though 
FmHA's primary interest in the sale is for payment of the FO loan 
installment coming due, not the disposition of loan security. This 
requirement imposes a major burden on borrowers, especially on those 
who sell farm products on a frequent basis. Also, FmHA employees must 
spend a significant amount of time completing the necessary 
documentation for release of its security interest for such sales. This 
time is a precious resource that the Agency believes would be better 
spent providing advice and counsel to those borrowers under the most 
severe hardship who could benefit most from FmHA credit supervision.
    One of the exceptions to FmHA's blanket lien requirement is that a 
lien will not be taken on chattel security when it will prevent the 
applicant from obtaining operating credit from other sources. This 
exception does not adequately correct the problems experienced with the 
lien on all assets rule. FmHA officials sometimes determine this 
exception is not necessary at the time the loan is made. However, 
taking a lien can later interfere with a borrower's ability to obtain 
credit from other sources, when borrowers have sufficient equity in 
assets to qualify for a non-FmHA loan to meet a portion of their credit 
needs. The Agency can subordinate or release liens on security property 
to facilitate credit from other lenders. However, these actions also 
impose a processing burden on borrowers and require staff time. 
Further, the Agency has found that some lenders shy away from providing 
credit to such borrowers due to the time and paperwork involved, even 
though the borrower otherwise meets the lender's loan criteria. The 
only recourse for the borrower to meet his or her credit needs is to 
request FmHA assistance. Thus, the lien on all assets requirement 
forces those borrowers who would otherwise not have a need for FmHA 
credit to consume resources which would be more appropriately directed 
toward borrowers in greater difficulty. Devoting more attention to 
those borrowers who desperately need intensive financial assistance and 
the time of FmHA staff should reduce the failure rate of these 
borrowers, thereby reducing program costs.
    The intent of this proposed rule is to make the loan security 
requirements less demanding while continuing to protect the 
Government's interest. The Agency will continue to make loans provided 
the value of the security available is at least equal to the amount of 
the loan. This is consistent with the authorizing statute and the 
Agency's mission of providing assistance to farmers with limited 
financial resources. However, rather than requiring a lien on all a 
borrower's additional assets, if any, when making a loan, FmHA 
generally will only require a lien on property only to the point that 
the value of the security is at least equal to 150 percent of the 
amount of the loan. The Agency has determined that security at least 
equal to 150 percent of the loan amount will provide adequate assurance 
of repayment. Studies have indicated that loan liquidation costs are 
about 20 percent of the value of collateral. Additionally, the Agency 
has a funding cost as a result of monies borrowed from the Treasury in 
accordance with the Federal Credit Reform Act of 1990, which continues 
until the loan is paid or written off. This cost is difficult to 
estimate because interest rates and liquidation periods vary widely. 
However, this cost should be no more than 30 percent of the loan amount 
on the average.
    Obtaining security at least equal to 150 percent of the loan amount 
is a goal. Generally, the Agency will be unable to obtain security 
exactly meeting the 150 percent goal. Security in excess of 150 percent 
of the loan will only be taken when it is not practicable to separate 
the property, i.e., a tract of land, same type of livestock (dairy 
cows, brood sows), and when nonessential assets are taken as security 
for EM loans, as discussed below.
    The first security preference for operating type loans will be 
crops/chattels, and for real estate type loans the first priority will 
be real estate. Where there are several collateral possibilities for 
chattels (cattle, machinery) or real estate (different tracts of land), 
the FmHA loan approval official will select the most reasonable choice 
to reach the 150 percent collateral goal. If the applicant offers an 
acceptable alternative, the loan approval official will accept the 
applicant's choice. Because of this change, entity members no longer 
need to pledge their assets as collateral. Entity members still will be 
personally obligated on the loan note(s). The Agency proposes to amend 
7 CFR part 1941, subpart A, Sec. 1941.19; part 1943, subpart A, 
Sec. 1943.19; part 1943, subpart B, Sec. 1943.69; and part 1945, 
subpart D, Sec. 1945.169 to incorporate these changes. All loan making 
regulations are being changed because most applicants affected by 
disasters apply for various types of farm loans and the changes are 
needed for administrative consistency.
    The Agency also proposes to amend 7 CFR part 1943, subpart A, 
Sec. 1943.19 to state that chattel property will be taken as security 
for real estate loans only in certain situations. For the reasons 
discussed earlier with regard to burdensome chattel security servicing 
requirements and reduced availability of conventional credit, farm 
ownership (FO) loans will not be secured with chattels unless there is 
no other real estate available to provide security at least equal to 
the loan amount, or unless the chattels are real estate improvements 
(fixtures) made with FO funds. Generally, real estate values are more 
constant than chattel values and provide adequate loan security. 
Chattel security is not desirable on long term real estate loans due to 
servicing difficulties and rapid depreciation. Because of the limited 
circumstances in which certain chattel security will be taken on real 
estate loans, the exception for when title to a livestock or crop 
enterprise is held by a contractor or under a share lease agreement is 
no longer needed. The exception to taking a lien, therefore, is being 
removed from subparts A and B and part 1943. To clarify the existing 
policy and to assure that all possibilities are considered when the 
available loan security is not at least equal to the loan amount, 7 CFR 
part 1943, subpart A, Sec. 1943.19, along with 7 CFR part 1941, subpart 
A, Sec. 1941.19; 7 CFR part 1943, subpart B, Sec. 1943.69; and 7 CFR 
part 1945, subpart D, Sec. 1945.169, are revised to specifically state 
that in situations where the farmer does not or will not have adequate 
real estate or chattel property to secure the loan needed, other 
property, including real estate owned by a third party, can serve as 
security. A pledge of security is preferable to a cosigner. 7 CFR part 
1943, subpart A, Sec. 1943.19, 7 CFR part 1943, subpart B, 
Sec. 1943.69, and 7 CFR part 1945, subpart D, Sec. 1945.169 will be 
revised accordingly. This policy already is stated in existing 7 CFR 
part 1941, subpart A, Sec. 1941.19.
    The Agency also proposes to amend 7 CFR part 1945, subpart D, 
Sec. 1945.169 to add a provision regarding nonessential assets in EM 
loan situations. In many cases, EM loan applicants are not typical FmHA 
loan applicants in that they may have significant nonfarm asset 
holdings. Prior to April 30, 1992, FmHA had required EM loan applicants 
to liquidate nonessential assets prior to loan closing if possible, on 
the theory that the applicant's equity in these assets should be used 
to reduce Government subsidized credit needs. This policy proved to 
impose hardship on farmers already suffering from the affects of a 
disaster, with minimal results. In many cases, the assets in question 
could not be sold for the estimated value, and thus no equity was 
realized. In other cases, the assets were not readily liquidated, and 
loan recipients were forced to accept much less than true value, or 
unable to liquidate the assets at any price within the necessary 
timeframe. As a result of these difficulties, FmHA modified this policy 
and amended the regulations to require a lien on, rather than a sale 
of, such assets. A lien on all nonessential assets (with no 150% limit) 
assures the Agency that the equity will be applied to reducing the 
farmer's Federally subsidized credit when nonessential assets are sold. 
On this basis, the requirement for a lien on all nonessential assets in 
the case of EM loans is continued even though the requirement for a 
lien on all farm assets is substantially modified.
    Finally, the Agency has amended 7 CFR part 1951, subpart S, 
Sec. 1951.910. The requirement that liens will be taken on all assets 
when loans are restructured will be continued to protect against 
potential loan losses as a result of extended repayment terms. The 
Agency proposes to continue this action since a significant amount of 
debt has been written off over the years, the Agency continues to have 
a large number of financially stressed high-risk borrowers, and to 
comply with the GAO report discussed previously in this rule. This 
section had previously referred to the loan making regulations to 
prescribe the security requirements for loan restructuring. Since the 
requirements for loan making will now be different from loan servicing, 
it is necessary to insert the guidelines into the debt restructuring 
regulations.

List of Subjects

7 CFR part 1941

    Crops, Livestock, Loan programs--Agriculture, Rural areas, Youth.

7 CFR part 1943

    Credit, Loan programs--Agriculture, Recreation, Water resources.

7 CFR part 1945

    Agriculture, Disaster assistance, Loan programs--Agriculture.

7 CFR part 1951

    Account servicing, Debt restructuring, Credit, Loan programs--
Agriculture, Loan programs--Housing and community development, Low and 
moderate income housing loans--Servicing.

    Therefore, chapter XVIII, title 7, Code of Federal Regulations is 
proposed to be amended as follows:

PART 1941--OPERATING LOANS

    1. The authority citation for part 1941 continues to read as 
follows:

    Authority: 7 U.S.C. 1989; 5 U.S.C. 301; 7 CFR 2.23 and 2.70.

Subpart A--Operating Loan Policies, Procedures, and Authorizations

    2. Section 1941.19 is amended by redesignating current paragraphs 
(b) through (i) as paragraphs (c) through (j), respectively, revising 
paragraph (a), and adding a new introductory paragraph and a new 
paragraph (b) to read as follows:


Sec. 1941.19  Security.

    Primary security must be available for the loan. If available, the 
total amount of security required will be at least equal to 150 percent 
of the loan amount. Security in excess of 150 percent of the loan 
amount will only be taken when it is not practicable to separate the 
property, i.e., same type of livestock (dairy cows, brood sows). In 
unusual cases, the loan approval official may require a cosigner as 
defined in Sec. 1910.3 (d) of subpart A of part 1910 of this chapter or 
a pledge of security from a third party. A pledge of security is 
preferable to a cosigner.
    (a) Chattels. The loan must be secured by:
    (1) A first lien on all property or products acquired, produced, or 
refinanced with loan funds.
    (2) If the security for the loan under paragraph (a)(1) of this 
section is not at least equal to 150 percent of the loan amount, the 
best lien obtainable will be taken on other chattel security owned by 
the applicant, up to the point that security for the loan at least 
equals 150 percent of the loan amount.
    (i) When there are several alternatives available (cattle, 
machinery), any one of which will meet the security requirements of 
this section, the approval official will select the most logical and 
efficient alternative for obtaining security.
    (ii) When alternatives exist and the applicant has a preference as 
to the property to be taken for security, the approval official will 
honor the preference so long as the requirements of paragraphs (a) (1) 
and (2) of this section are met.
    (b) Real estate. The loan approval official will require a lien on 
all or part of the applicant's real estate as security when chattel 
security alone is not at least equal to 150 percent of the amount of 
the loan. Different lien positions on real estate are considered 
separate and identifiable collateral.
    (1) Security may 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.
    (2) Advice on obtaining security will be received from OGC when 
necessary.
* * * * *

PART 1943--FARM OWNERSHIP, SOIL AND WATER AND RECREATION

    3. The authority citation for part 1943 continues to read as 
follows:

    Authority: 7 U.S.C. 1989; 5 U.S.C. 301; 7 CFR 2.23 and 2.70.

Subpart A--Direct Farm Ownership Loan Policies, Procedures and 
Authorizations

    4. Section 1943.19 is amended by removing paragraphs (a)(2), and 
(b)(4); redesignating current paragraphs (a)(3) through (a)(8) as 
paragraphs (a)(2) through (a)(7), respectively, and paragraph (b)(5) as 
(b)(4); redesignating current paragraphs (b), (d), (e), and (f), as 
paragraphs (d), (e), (f), and (g), respectively; revising the 
introductory paragraph, paragraph (a)(1), newly redesignated paragraph 
(a)(2), paragraph (c), and adding new paragraph (b) to read as follows:


Sec. 1943.19  Security.

    Each FO loan will be secured by real estate. Chattels and/or other 
security also may be taken as security. The total amount of security 
required will be the lesser of 150 percent of the loan amount, or all 
real estate owned by the applicant. A loan will be considered 
adequately secured when the real estate security for the loan is at 
least equal to the loan amount. Security in excess of 150 percent of 
the loan amount will only be taken when it is not practicable to 
separate the property, i.e., a tract of land. In unusual cases, the 
loan approval official may require a cosigner as defined in 
Sec. 1910.3(d) of subpart A of part 1910 of this chapter or a pledge of 
security from a third party. A pledge of security is preferable to a 
cosigner.
    (a) * * * (1) A mortgage will be taken on all real estate acquired, 
refinanced or improved with FO funds, and by any additional real estate 
security needed to meet the requirements of this section.
    (2) Security will also include items which are considered part of 
the farm and ordinarily pass with the title to the farm, such as but 
not limited to assignments of leases or leasehold interests having 
mortgageable value, water rights, easements, rights-of-way, revenues, 
and royalties from mineral rights.
* * * * *
    (b) Chattel security. Ordinarily, FO loans will not be secured by 
chattels. However, loans will be secured by chattels as follows:
    (1) A first lien will be taken on equipment or fixtures purchased 
or refinanced with loan funds whenever such property cannot be included 
in the real estate lien and the additional security is needed to secure 
the loan.
    (2) Chattel security will be obtained when there is not enough real 
estate security for the loan and the best lien obtainable on all real 
estate has been taken.
    (3) The same collateral may be used to secure two or more loans 
made, direct or guaranteed, to the same borrower. Therefore, junior 
liens on chattels may be taken when there is enough equity in the 
property. However, when possible, a first lien on selected chattel 
items should be obtained.
    (4) Chattel security liens will be obtained and kept effective, as 
provided in subpart A of part 1962 of this chapter.
    (c) Other security. (1) A pledge of real estate by a third party 
may be taken as security when the real estate owned and to be acquired 
by the applicant is not adequate to secure the loan.
    (2) Other property may be taken as additional security when the 
real estate owned and to be acquired by the applicant is not adequate 
to secure the loan. Examples of such security include but are not 
limited to cash surrender value of life insurance, securities, patents 
and copyrights, and membership or stock in cooperatives and 
associations.
* * * * *

Subpart B--Direct Soil and Water Loan Policies, Procedures and 
Authorizations

    5. Section 1943.69 is amended by removing paragraphs (a)(2), 
(b)(4), and (c)(1); redesignating current paragraphs (a)(3) through 
(a)(8) as paragraphs (a)(2) through (a)(7) respectively; redesignating 
current paragraph (b)(5) as paragraph (b)(4); redesignating current 
paragraphs (c)(2) through (c)(5) as paragraphs (c)(1) through (c)(4) 
respectively; revising the introductory paragraph, paragraph (a)(1), 
newly redesignated paragraph (a)(2), paragraph (c) introductory text, 
and newly redesignated paragraph (c)(1) to read as follows:


Sec. 1943.69  Security.

    Each SW loan will be secured by real estate. Chattels and/or other 
security also may be taken as security. The total amount of security 
required will be the lesser of 150 percent of the loan amount, or all 
real estate owned by the applicant. A loan will be considered 
adequately secured when the real estate security for the loan is at 
least equal to the loan amount. Security in excess of 150 percent of 
the loan amount will only be taken when it is not practicable to 
separate the property, i.e., a tract of land. In unusual cases, the 
loan approval official may require a cosigner as defined in 
Sec. 1910.3(d) of subpart A of part 1910 of this chapter or a pledge of 
security from a third party. A pledge of security is preferable to a 
cosigner.
    (a) * * * (1) A mortgage will be taken on all real estate 
refinanced or improved with SW funds, and by any additional real estate 
security needed to meet the requirements of this section.
    (2) Security will also include items which are considered part of 
the farm and ordinarily pass with the title to the farm, such as, but 
not limited to assignments of leases or leasehold interests having 
mortgageable value, water rights, easements, rights-of-way, revenues, 
and royalties from mineral rights.
* * * * *
    (c) Chattel security. Loans will be secured by chattels when there 
is not adequate real estate security for the loan.
    (1) The loan will be secured by:
    (i) A first lien on all property acquired, improved, or refinanced 
with loan funds; and
    (ii) If the security for the loan is not at least equal to 150 
percent of the loan amount, the best lien obtainable will be taken on 
other chattel security owned by the applicant, up to the point that 
security for the loan equals 150 percent of the loan amount.
* * * * *

PART 1945--EMERGENCY

    6. The authority citation for part 1945 is revised to read as 
follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 42 U.S.C. 1480; 7 CFR 
2.23 and 2.70.

Subpart D--Emergency Loan Policies, Procedures and Authorizations

    7. Section 1945.169 is amended by redesignating current paragraphs 
(b) through (n) as paragraphs (d) through (p), respectively; revising 
paragraph (a), and adding a new introductory paragraph and paragraphs 
(b) and (c) to read as follows:


Sec. 1945.169  Security.

    Each EM loan will be secured by chattels, real estate, and/or other 
security and nonessential assets in accordance with this section. The 
same collateral may be used to secure two or more loans made, direct or 
guaranteed, to the same borrower. Thus, a junior lien on property 
serving as collateral for a guaranteed loan(s) is acceptable.
    (a) Security for operating type purposes. In the case of emergency 
loans made for subtitle B (operating) purposes, primary security must 
be available for the loan, except as provided for in Sec. 1945.169 
(e)(2) of this section. If available, the total amount of security 
required will be at least equal to 150 percent of the loan amount. 
Except as provided in paragraph (c) of this section, security in excess 
of 150 percent of the loan amount will only be taken when it is not 
practicable to separate the property, i.e., same type of livestock 
(dairy cows, brood sows). In unusual cases, the loan approval official 
may require a cosigner as defined in Sec. 1910.3 (d) of subpart A of 
part 1910 of this chapter, or a pledge of security from a third party. 
A pledge of security is preferable to a cosigner.
    (1) Chattels. The loan must be secured by:
    (i) A first lien on all property or products acquired, produced, or 
refinanced with loan funds.
    (ii) If the security for the loan under paragraph (a)(1)(i) of this 
section is not at least equal to 150 percent of the loan amount, the 
best lien obtainable will be taken on other chattel security owned by 
the applicant, up to the point that security for the loan at least 
equals 150 percent of the loan amount.
    (A) When there are several alternatives available (cattle, 
machinery), any one of which will meet the security requirements of 
this section, the approval official will select the most logical and 
efficient alternative for obtaining security.
    (B) When alternatives exist and the applicant has a preference as 
to the property to be taken for security, the approval official will 
honor the preference so long as the requirements of paragraphs 
(a)(1)(i) and (ii) of this section are met.
    (2) Real estate. The loan approval official will require a lien on 
all or part of the applicant's real estate as security when chattel 
security alone is not at least equal to 150 percent of the amount of 
the loan. Different lien positions on real estate are considered 
separate and identifiable collateral.
    (3) Other security.
    (i) A pledge of real estate or chattels by a third party may be 
taken as security when the property owned by the applicant is not 
adequate to secure the loan.
    (ii) Other property that cannot be converted to cash without 
jeopardizing the applicant's farm operation or imposing substantial 
financial penalty on the applicant may be taken as additional security 
when the property owned by the applicant is not adequate to secure the 
loan. Examples of such security include but are not limited to cash 
surrender value of life insurance, securities, patents and copyrights, 
and membership or stock in cooperatives and associations.
    (b) Security for real estate type purposes. EM loans made for 
subtitle A (real estate) purposes will be secured by real estate. 
Chattels and/or other security also may be taken as security. The total 
amount of security required will be the lesser of 150 percent of the 
loan amount, or all real estate owned by the applicant. A loan will be 
considered adequately secured when the real estate security for the 
loan is at least equal to the loan amount, except as provided for in 
Sec. 1945.169(e)(2) of this section. Except as provided in paragraph 
(c) of this section, security in excess of 150 percent of the loan 
amount will only be taken when it is not practicable to separate the 
property, i.e., a tract of land. In unusual cases, the loan approval 
official may require a cosigner as defined in Sec. 1910.3(d) of subpart 
A of part 1910 of this chapter, or a pledge of security from someone 
other than the applicant(s). A pledge of security is preferable to a 
cosigner.
    (1) Real estate security.
    (i) A mortgage will be taken on all real estate repaired or 
rehabilitated, refinanced, or improved with EM funds, and by any 
additional real estate security needed to meet the requirements of this 
section.
    (ii) Security will also include assignments of leases or leasehold 
interests which have mortgageable value, water rights, easements, 
rights of way, mineral rights, and royalties.
    (iii) A first lien is required on real estate, when available. 
Loans may be secured by a junior lien on real estate provided:
    (A) Prior lien instruments do not contain provisions for future 
advances (except for taxes, insurance, and other costs needed to 
protect the security, or reasonable foreclosure costs), cancellation, 
summary forfeiture, or other clauses that may jeopardize the 
Government's interest or the applicant's ability to pay the loan unless 
any such undesirable provision is waived, modified, or subordinated 
insofar as the Government is concerned.
    (B) Agreements are obtained from prior lienholders to give notice 
of foreclosure to FmHA whenever State law or other arrangements do not 
require such a notice. Any agreements needed will be obtained as 
provided in subpart B of part 1927 of this chapter, except as modified 
by the ``Memorandum of Understanding-FCA-FmHA,'' FmHA Instruction 2000-
R (available in any FmHA office).
    (2) Chattel security. Loans will be secured by chattels as follows:
    (i) A first lien will be taken on equipment or fixtures purchased 
or refinanced with loan funds whenever such property cannot be included 
in the real estate lien and the additional security is needed to secure 
the loan.
    (ii) Chattel security will be obtained when there is not enough 
real estate security for the loan.
    (iii) The same collateral may be used to secure two or more loans 
made, direct or guaranteed, to the same borrower. Therefore, junior 
liens on chattels may be taken when there is enough equity in the 
property. However, when possible, a first lien on selected chattel 
items should be obtained.
    (iv) Chattel security liens will be obtained and kept effective, as 
provided in subpart A of part 1962 of this chapter.
    (3) Other security.
    (i) A pledge of real estate by a third party may be taken as 
security when the real estate owned and to be acquired by the applicant 
is not adequate to secure the loan.
    (ii) Other property may be taken as additional security when the 
real estate owned and to be acquired by the applicant is not adequate 
to secure the loan. Examples of such security include but are not 
limited to cash surrender value of life insurance, securities, patents 
and copyrights, and membership or stock in cooperatives and 
associations.
    (c) Nonessential assets. Nonessential assets are assets which the 
applicant has an ownership interest in that do not contribute a net 
income to pay family living expenses or to maintain a sound farming 
operation (see Sec. 1962.17 of subpart A of part 1962 of this chapter 
for further guidance). A lien will be taken on all nonessential assets 
if an applicant cannot or will not dispose of the assets and use the 
proceeds to reduce the FmHA credit needs prior to loan closing. The 150 
percent security requirement does not apply to nonessential assets.
* * * * *

PART 1951--SERVICING AND COLLECTIONS

    8. The authority citation for part 1951 continues to read as 
follows:

    Authority: 42 U.S.C. 1480; 5 U.S.C. 301; 7 CFR 2.23; 7 CFR 2.70.

Subpart S--Farmer Programs Account Servicing Policies

    9. Section 1951.910 is amended by revising paragraph (b) to read as 
follows:


Sec. 1951.910  Consideration of borrower's other assets for NEW 
APPLICATIONS.

* * * * *
    (b) Lien on certain assets. Delinquent borrowers must pledge 
certain assets, essential and nonessential, unencumbered to FmHA as 
security at the time FmHA 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 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 restructure. The FmHA lien will be taken only at the time of 
closing the restructured FmHA loans.

    Dated: January 8, 1994.
Bob J. Nash,
Under Secretary for Small Community and Rural Development.
[FR Doc. 94-944 Filed 01-13-94; 8:45 am]
BILLING CODE 3410-07-U