[Federal Register Volume 59, Number 95 (Wednesday, May 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12092]
[[Page Unknown]]
[Federal Register: May 18, 1994]
-----------------------------------------------------------------------
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: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Farmers Home Administration (FmHA) amends 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.
EFFECTIVE DATE: May 18, 1994.
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
This rule has been determined to be not significant for purposes of
Executive Order 12866 and therefore has not been reviewed by OMB.
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). This final rule does not revise or impose any new
information collection or recordkeeping requirement from those approved
by OMB.
Background
The Agency published a proposed rule in the Federal Register (59 FR
2307-12) on January 14, 1994, which provided for a 15-day comment
period ending on January 31, 1994.
The proposed rule proposed that, rather than requiring a lien on
all assets, FmHA would only require a lien on available property to the
point that the value of the security would be at least equal to 150
percent of the amount of the loan(s). The loan at least would have to
be ``adequately'' secured with security value equalling 100 percent of
the loan amount.
Discussion of Comments
In response to the proposed rule, 24 individual comments were
received from 11 respondents. All the comments were received from FmHA
employees.
Seven respondents commented that requiring security at least equal
to 150 percent of the loan amount would require more appraisals, which
would add to the cost of and delay loan processing. Four of these
respondents commented that the number of appeals would increase, due to
differences of opinion as to the collateral values and items to be
taken as security. The Agency agrees and has taken this into
consideration in the final rule. To implement the 150 percent
requirement, OL, FO, SW, and EM regulations have been amended to state
that the value of property taken as security will be documented in the
case file. These values will be established based on the appraisal
requirements of each program which have not been amended. Therefore, no
additional appraisals will be required as a result of this rule. If the
applicant disagrees with the FmHA valuation of real estate, the
applicant may, at his/her expense, provide an appraisal which meets
FmHA regulatory requirements. Acceptance of the applicant's appraisal
will minimize appeals.
Two respondents commented that the proposed rule was confusing
relative to the lien position on chattel security and in view of its
complexity would be difficult to explain to applicants. The Agency
agrees and has taken this into consideration in clarifying the final
rule. A first lien is required on all property acquired, produced or
refinanced with loan funds. The best lien obtainable will be taken on
other security to meet the primary security and/or the ``at least'' 150
percent security requirement.
One respondent stated that the emergency loan regulation was not
clear with respect to the lien position on chattel security when
extended repayment terms (7 years) are offered to the borrower. The
respondent assumed a first lien was required when 7-year terms are
used. The Agency feels that the existing regulation provides adequate
guidance when extended repayment terms are offered with chattel
security. Loans may be scheduled for longer repayment periods if the
needs of the applicant justify a longer term, and the loan(s) can be
secured for the longer term. A first lien, however, is not required in
such a situation, except on property purchased, produced, or refinanced
with loan funds.
Three respondents commented that only like security should be
required for the type of loan being made. Operating loans would be
secured by crops and chattels, and real estate loans by real estate.
Five respondents commented that loans should be adequately secured as
determined by the loan approval official. The Agency has not adopted
these comments in the final rule. Available like security will be used
if it provides primary security for the loan or additional security up
to 150 percent of the loan amount. However, when adequate security is
not available for the type of loan being made, the Agency will require
the loan approval official to take other types of security to at least
adequately secure the loan.
Two respondents commented that for OL loans, it appears that if the
applicant does not have adequate chattels to bring the equity position
up to at least 150 percent, a loan would not be made to the applicant.
The Agency has clarified that a lien will be taken on other chattels,
``if available,'' to provide additional security up to 150 percent of
the loan amount.
Two respondents commented as to how a security value will be
established for crops, suggesting it be based on the farm financial
standard, the normal value if being sold by the owner, or the amount of
the insurance coverage. This comment has not been adopted. The Agency
instead has determined that the security value of the crop will be
equal to 100 percent of the amount loaned for annual operating and
family living expenses, as reflected on Form FmHA 431-2, ``Farm and
Home Plan,'' or other acceptable plan of operation. This will allow
FmHA to continue, as it has done historically, to approve a loan to a
borrower when there is no other loan security and a feasible plan of
operation can be developed.
Two respondents commented that the ``lien on all assets'' policy
should remain in place. One comment indicated that this policy would be
less difficult to administer than the 150 percent requirement. The
second comment indicated that the ``lien on all assets'' benefits
outweigh the negative aspects outlined in the proposed rule text. The
policy provides FmHA with more control over the finances of the
operation. The Agency does not agree with the ``lien on all assets''
policy for the reasons stated in the proposed rule. The Agency believes
that the clarifications made on appraisals simplify implementation of
this rule.
One respondent commented that with respect to real estate loans, if
the real estate provides 100 percent security to loan ratio, the State
Director should have the authority to waive the 150 percent security
requirement. This comment has not been adopted. For reasons discussed
in the proposed rule, the Agency generally supports attaining a 150
percent security to loan ratio. For real estate loans, the lesser of
150 percent or all real estate owned by the applicant will be taken as
security. A loan will be considered adequately secured when the real
estate security for the loan is at least equal to the loan amount. If
additional real estate is available up to 150 percent, however, it will
be taken as security. Security in excess of 150 percent will only be
taken when it is not practical to separate the property.
One respondent commented that FmHA Instruction 1962-A should be
revised to allow FmHA to release its chattel lien when the remaining
debt is for real estate purposes and is adequately secured by real
estate. The Agency believes the existing regulation
(Sec. 1962.17(c)(5)) adequately addresses the release of chattel liens
when the remaining security adequately secures the loan.
One respondent commented that the requirement to take a lien on all
assets when loans are restructured under FmHA Instruction 1951-S is too
restrictive, and recommended taking a lien on all assets when
additional security is needed or when loans are written down or
deferred. The respondent's concern was that not all borrowers that
require rescheduling or reamortization are in poor financial condition
or have undersecured loans. While the Agency concurs to some degree
with these comments, when a borrower receives government-subsidized
assistance and needs loan restructuring to continue the farming
operation, all assets should be offered as security in view of
potential loss risks and the borrower's generally highly leveraged
financial position. The Agency does not plan to revise the loan
servicing security requirements.
Discussion of Final Rule
The intent of this final rule is to make the loan security
requirements less demanding while continuing to protect the
Government's interest. If available, the total amount of security
required will be at least equal to 150 percent of the amount of the
loan. 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. Thus
the Agency is adopting the proposed rule as final with the changes as
discussed above. In addition, the following amendments are made to the
policy proposed.
The Agency also amends 7 CFR part 1941, subpart A, Sec. 1941.19, 7
CFR part 1943, subpart A, Sec. 1943.19, along with 7 CFR part 1943,
subpart B, Sec. 1943.69; and 7 CFR part 1945, subpart D, Sec. 1945.169
to state that a lien will not be taken on the applicant's personal
residence and appurtenances when the residence is located on a separate
parcel and the farm real estate provides primary security (adequate
security) for the loan. The Agency does not feel that the borrower's
off-farm residence generally should be encumbered in conjunction with
FmHA farmer programs loan assistance unless absolutely necessary. It is
intended, however, that the residence be included as security when loan
funds are to purchase or provide major repairs or improvements to the
dwelling, or when there is insufficient equity in other real property
to provide primary security for the loan. 7 CFR part 1943, subpart A,
Sec. 1943.24 has been amended for consistency with this new policy.
The Agency also amends 7 CFR part 1945, subpart D, Sec. 1945.169 to
state emergency loans made for subtitle A (real estate purposes) will
be secured by a lien on real estate and additional security as needed.
A provision also has been added 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. Therefore, in the case of EM loans a lien will be taken on
all nonessential assets with an aggregate value over $5,000 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. When the
nonessential asset value does not exceed $5,000, the County Supervisor
will estimate and document such value in the case file but not attempt
to place a lien on the assets. The $5,000 floor has been added because
the benefit of taking liens on lesser amounts is outweighed by the
administrative costs.
Section 1941.25(a) of subpart A of part 1941 of this chapter has
been revised to remove for clarity the provision requiring that a real
estate appraisal be done when the loan is being made to refinance real
estate secured debt. Under the revised regulation, real estate is only
taken as security if the chattel security value is less than a 150
percent of the loan. If the real estate is primary security it is
already covered by Sec. 1941.25(a) and will be appraised. If it is
additional security, its value only will be estimated and documented in
the case file.
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
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)(4) through (b)(6) as paragraphs (b)(5) through (b)(7),
respectively, and redesignating current paragraphs (b) through (i) as
paragraphs (c) through (j), respectively; revising paragraph (a),
revising the word ``insured'' to read ``direct'' in newly redesignated
paragraph (f)(1); and adding a new introductory paragraph and new
paragraphs (b) and (c)(4) to read as follows:
Sec. 1941.19 Security.
Primary security must be available for the loan. Any additional
security available up to and including 150 percent of the loan amount
also will be taken. Security in excess of 150 percent of the loan
amount will only be taken when it is not practical to separate the
property, i.e., same type of livestock (dairy cows, brood sows). In
cases when a loan is being made in conjunction with a servicing action,
the security requirements as stated in subpart S of part 1951 of this
chapter will prevail. In unusual cases, the loan approval official may
require a cosigner in accordance with 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.
(1) The loan must be secured by 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, if available, 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 generally has the discretion to
select the best alternative for obtaining security.
(ii) When alternatives exist and the applicant has a preference as
to the property to be taken for security, however, the approval
official will honor the preference so long as the requirements of
paragraphs (a)(1) and (2) of this section are met.
(3) To comply with the 150 percent requirement, security values
will be established as follows:
(i) For the purposes of loan making only, the security value of the
crop and/or livestock production is presumed to be 100 percent of the
amount loaned for annual operating and family living expenses listed on
Form FmHA 431-2, ``Farm and Home Plan,'' or other acceptable plan of
operation.
(ii) The specific livestock and/or equipment to be taken as
security, along with the value of the security, will be documented in
the case file. This information will be obtained from values
established in accordance with Sec. 1941.25 of this subpart.
(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. Real estate taken as security,
along with its value established in accordance with Sec. 1941.25 of
this subpart, will be documented in the case file. If the applicant
disagrees with the values established, FmHA will accept an appraisal
from the applicant, obtained at the applicant's expense, if the
appraisal meets all FmHA requirements.
(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.
(c) * * *
(4) A lien will not be taken on the applicant's personal residence
and appurtenances, when the residence is located on a separate parcel
and the farm tract(s) being used for collateral, in addition to any
crops or chattels, meet the security requirement of at least equal to
150 percent of the loan.
* * * * *
3. Section 1941.25 is amended by revising paragraph (a)(4) to read
as follows:
Sec. 1941.25 Appraisals.
(a) * * *
(4) A real estate appraisal is required when real estate is taken
as primary security, as defined in Sec. 1941.4 of this subpart.
* * * * *
PART 1943--FARM OWNERSHIP, SOIL AND WATER AND RECREATION
4. 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
Sec. 1943.17 [Amended]
5. Section 1943.17 is amended by revising the reference ``subpart
LL of part 2000 of this chapter'' to read ``FmHA Instruction 2000-LL''
in paragraph (b).
6. 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, paragraph (b)(3) as
(b)(4), and 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) and paragraph
(c); revising the word ``insured'' to read ``direct'' in newly
redesignated paragraph (f)(1); revising the reference ``paragraph (e)''
to read ``paragraph (f)'' and the word ``insured'' to read ``direct''
in newly redesignated paragraph (g); and adding new paragraphs (b) and
(d)(3) to read as follows:
Sec. 1943.19 Security.
Each FO loan will be secured by real estate. Chattels and/or other
security will only be taken as security as set forth in paragraphs (b)
and (c) of this section. The total amount of security required will be
the lesser of either 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 practical to separate the property, i.e.,
a tract of land. All security taken, along with the value of the
security, will be documented in the case file. This information will be
obtained from values established in accordance with Sec. 1943.25 of
this subpart. If the applicant disagrees with the real estate values
established, FmHA will accept an appraisal from the applicant, obtained
at the applicant's expense, if the appraisal meets all FmHA
requirements. In cases when a loan is being made in conjunction with a
servicing action, the security requirements as stated in subpart S of
part 1951 of this chapter will prevail. In unusual cases, the loan
approval official may require a cosigner in accordance with
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 best lien obtainable on all real estate
does not provide primary security for the loan.
(2) Chattel security will be obtained when the best lien obtainable
on all real estate does not provide primary security for the loan.
(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 best lien obtainable on all real
estate does not provide primary security for the loan.
(2) Other property may be taken as security when the best lien
obtainable on all real estate does not provide primary security for 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.
(d) * * *
(3) A lien will not be taken on the applicant's personal residence
and appurtenances, when the residence is located on a separate parcel
and the farm tract being financed, refinanced, improved, or otherwise
used for collateral provides primary security for the loan(s).
* * * * *
Sec. 1943.24 [Amended]
7. Section 1943.24 is amended by removing the last sentence in
paragraph (b)(1)(i).
Sec. 1943.38 [Amended]
8. Section 1943.38 is amended by revising the reference
``Sec. 1943.19 (a)(7)'' to read ``Sec. 1943.19 (a)(6)'' in paragraph
(a).
Subpart B--Direct Soil and Water Loan Policies, Procedures and
Authorizations
9. Section 1943.69 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)(3) as
paragraph (b)(4); revising the introductory paragraph, paragraph
(a)(1), newly redesignated paragraph (a)(2), and paragraphs (c)
introductory text, (c)(1) and (c)(2); and adding a new paragraph (b)(3)
to read as follows:
Sec. 1943.69 Security.
Each SW loan will be secured by real estate, chattels, leaseholds,
or a combination of these. Chattels and/or leaseholds, however, will
only be taken as security as set forth in paragraphs (c) and (d) of
this section. The total amount of security required will be the lesser
of either 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 practical to separate the property, i.e., a tract of
land. The specific items of security, along with the value of the
security, will be documented in the case file. This information will be
obtained from values established in accordance with Sec. 1943.75 of
this subpart. If the applicant disagrees with the values established,
FmHA will accept an appraisal from the applicant, obtained at the
applicant's expense, if the appraisal meets all FmHA requirements. In
cases, when a loan is being made in conjunction with a servicing
action, the security requirements as stated in subpart S of part 1951
of this chapter will prevail. In unusual cases, the loan approval
official may require a cosigner in accordance with 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.
* * * * *
(b) * * *
(3) A lien will not be taken on the applicant's personal residence
and appurtenances, when the residence is located on a separate parcel
and the farm tract being financed, refinanced, improved, or otherwise
used for collateral provides primary security for the loan(s).
* * * * *
(c) Chattel security. Ordinarily, SW 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 bought with
loan funds whenever such property cannot be included in the real estate
lien and the best lien obtainable on all real estate will be taken and
does not provide primary security for the loan.
(2) Chattel security will be obtained when real estate will not
provide primary security for the loan and the best lien obtainable has
been taken on all real estate.
* * * * *
Sec. 1943.88 [Amended]
10. Section 1943.88 is amended by revising the reference
``Sec. 1943.69(a)(7)'' to read ``Sec. 1943.69(a)(6)'' in paragraph (a).
PART 1945--EMERGENCY
11. 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
12. Section 1945.169 is amended by redesignating current paragraphs
(b)(3) through (b)(7) as (b)(4) through (b)(8), respectively, and
paragraphs (b) through (n) as (d) through (p), respectively; revising
the reference ``Sec. 1910.3 (e)'' to read ``Sec. 1910.3 (d)'' in newly
redesignated paragraph (e)(1); revising the reference ``paragraph (d)''
to read ``paragraph (f)'' in newly redesignated paragraph (f)(3);
revising the reference ``paragraph (f)(2)'' to read ``paragraph
(h)(2)'' in newly redesignated paragraph (h)(3); revising the reference
``paragraphs (f)(1), (2), and (3)'' to read ``paragraphs (h)(1), (2),
and (3)'' in newly redesignated paragraph (h)(4); revising the
reference ``paragraph (j)(1)'' to read ``paragraph (l)(1)'' in newly
redesignated paragraph (l) introductory text; revising the reference
``paragraph (j)(1)'' to read ``paragraph (l)(1)'' in newly redesignated
paragraph (l)(3); revising the reference ``paragraph (b)(1) of the
financing statement'' to read ``paragraph 1. (b) of Form FmHA 440-25,
``Financing Statement'''' in newly redesignated paragraph (p)(2);
revising paragraph (a); and adding a new introductory paragraph and new
paragraphs (b), (c), and (d)(3) 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. In cases
when a loan is being made in conjunction with a servicing action, the
security requirements as stated in subpart S of part 1951 of this
chapter will prevail.
(a) Security for operating type purposes. Primary security must be
available for the loan, except as provided for in paragraph (g) of this
section. Any additional security available up to and including 150
percent of the loan amount also will be taken. 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 practical 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 in
accordance with 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, if available, 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 generally has the discretion to
select the best alternative for obtaining security.
(B) When alternatives exist and the applicant has a preference as
to the property to be taken for security, however, the approval
official will honor the preference so long as the requirements of
paragraphs (a)(1)(i) and (ii) of this section are met.
(iii) To comply with the 150 percent requirement, security values
will be established as follows:
(A) Annual production. For the purposes of loan making only, the
security value of the crop and/or livestock production is presumed to
be 100 percent of the amount loaned for annual operating and family
living expenses listed on Form FmHA 431-2, ``Farm and Home Plan,'' or
other acceptable plan of operation.
(B) The specific livestock and/or equipment to be taken as
security, along with the value of the security, will be documented in
the case file. This information will be obtained from values
established in accordance with Sec. 1945.175 (c) of this subpart.
(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. A lien, however, will not be taken on the applicant's
personal residence and appurtenances, when the residence is located on
a separate parcel and the farm tract(s) being used for collateral, in
addition to any crops or chattels, meet the security requirement of at
least equal to 150 percent of the loan. Different lien positions on
real estate are considered separate and identifiable collateral. Real
estate taken as security, along with its value established in
accordance with Sec. 1945.175 (c) of this subpart, will be documented
in the case file. If the applicant disagrees with the values
established, FmHA will accept an appraisal from the applicant, obtained
at the applicant's expense, if the appraisal meets all FmHA
requirements.
(3) Other security.
(i) A pledge of real estate or chattels by a third party will be
taken as security when the property owned by the applicant does not
provide primary security.
(ii) Other available property that cannot be converted to cash
without jeopardizing the applicant's farm operation or imposing
substantial financial penalty on the applicant will be taken as
security when the property owned by the applicant does not provide
primary security. 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. Primary security must
be available for the loan, except as provided for in paragraph (g) of
this section. EM loans made for subtitle A (real estate) purposes will
be secured by real estate. Chattels and/or other security will only be
taken as security as set forth in paragraphs (b)(2), (b)(3), and (c) of
this section. The total amount of security required will be the lesser
of either 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 in paragraph (c) of this section, security in excess
of 150 percent of the loan amount will only be taken when it is not
practical to separate the property, i.e., a tract of land. All security
taken, along with the value of security, will be documented in the case
file. This information will be obtained from values established in
accordance with Sec. 1945.175 (c) of this subpart. If the applicant
disagrees with the real estate values established, FmHA will accept an
appraisal from the applicant, obtained at the applicant's expense, if
the appraisal meets all FmHA requirements. In unusual cases, the loan
approval official may require a cosigner in accordance with 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 best lien obtainable on all real estate
does not provide primary security for the loan.
(ii) Chattel security will be obtained when the best lien
obtainable on all real estate does not provide primary 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
does not provide primary security for the loan.
(ii) Other property may be taken as security when the real estate
owned and to be acquired by the applicant does not provide primary
security. 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,
with an aggregate value exceeding $5,000, 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. When the value does not exceed
$5,000, the County Supervisor will estimate and document such value in
the case file, but will not take a lien on the assets. The 150 percent
security requirement does not apply to nonessential assets.
(d) * * *
(3) A lien will not be taken on the applicant's personal residence
and appurtenances, when the residence is located on a separate parcel
and the farm tract being financed, refinanced, improved, or otherwise
used for collateral provides primary security for the loan(s).
* * * * *
Sec. 1945.175 [Amended]
13. Section 1945.175 is amended by revising the reference
``Sec. 1945.169 (n)(1)'' to read ``Sec. 1945.169 (p)(1)'' in paragraph
(c)(1)(iii).
PART 1951--SERVICING AND COLLECTIONS
14. 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
15. 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 restructuring. The FmHA lien will be taken only at the time
of closing the restructured FmHA loans.
Dated: May 10, 1994.
Bob J. Nash,
Under Secretary for Small Community and Rural Development.--
[FR Doc. 94-12092 Filed 5-17-94; 8:45 am]
BILLING CODE 3410-07-U