[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]


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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: 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