[Federal Register Volume 62, Number 174 (Tuesday, September 9, 1997)]
[Proposed Rules]
[Pages 47384-47388]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23750]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 62, No. 174 / Tuesday, September 9, 1997 / 
Proposed Rules  

[[Page 47384]]


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DEPARTMENT OF AGRICULTURE

Rural Housing Service
Rural Business-Cooperative Service
Rural Utilities Service
Farm Service Agency

7 CFR Parts 1962, 1965 and 1980

RIN 0560-AE92


Subordination of Direct Loan Basic Security to Secure a 
Guaranteed Line of Credit

AGENCIES: Rural Housing Service, Rural Business-Cooperative Service, 
Rural Utilities Service, Farm Service Agency, USDA.

ACTION: Proposed rule.

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SUMMARY: The Farm Service Agency (FSA) proposes to revise its 
regulations regarding loan security servicing to allow the Agency to 
enhance the use of subordinations to move direct farm credit program 
borrowers to the private sector. The first change is to allow 
subordinations of direct loan basic chattel and real estate security if 
necessary to secure a guaranteed operating line of credit. This action 
is intended to encourage the making of guaranteed lines of credit as 
opposed to direct annual operating loans or subordinations. Secondly, 
this rule also proposes to revise FCP regulations to allow 
subordination of Agency loan security so another lender may refinance a 
borrower's debt. This change is needed because recent legislation 
places restrictions on the uses of direct loans for refinancing. The 
proposal is intended to allow the Agency to transfer a portion of a 
direct loan borrower's government debt to commercial credit.

DATES: Comments on the proposed rule, comments on alternatives to this 
proposal, and the information collection requirements of this rule must 
be received on or before November 10, 1997 to be assured consideration.

ADDRESSES: Send comments on, and alternatives to, the proposed rule to: 
Director, Farm Credit Programs Loan Servicing and Property Management 
Division (LSPMD), Farm Service Agency (FSA), U.S. Department of 
Agriculture (USDA), room 5449-S, 1400 Independence Avenue, SW, STOP 
0523, Washington, D.C. 20013-0523. Comments on the information 
collection requirements of this proposed rule must be sent to the 
Office of Management and Budget (OMB) at the address listed in the 
Paperwork Reduction Act section of this preamble or sent to the 
Department address listed after the OMB address.

FOR FURTHER INFORMATION CONTACT: Craig Nehls, Branch Chief, USDA, FSA, 
Farm Credit Programs Loan Servicing Division, 1400 Independence Avenue, 
SW, STOP 0523, Washington, D.C. 20013-0523, telephone (202) 720-1984.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This rule has been reviewed under E.O. 12866 and has been 
determined to be a significant regulatory action and has been reviewed 
by OMB.

Executive Order 12372

    1. For the reasons set forth in the Notice related to 7 CFR part 
3015, subpart V (48 FR 29115, June 24, 1983), Farm Ownership Loans, 
Farm Operating Loans and Emergency Loans are excluded from the scope of 
E.O. 12372, which requires intergovernmental consultation with State 
and local officials.
    2. The Soil and Water Loan Program is subject to and has met the 
provisions of E.O. 12372.

Federal Assistance Program

    These changes affect the following FSA 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

    It is the determination of the issuing agency that this action is 
not a major Federal action significantly affecting the environment. 
Therefore, in accordance with the National Environmental Policy Act of 
1969, Pub. L. 91-190, and 7 CFR part 1940 subpart G, an Environmental 
Impact Statement is not required.

Executive Order 12988

    This proposed rule has been reviewed in accordance with E.O. 12988, 
Civil Justice Reform. In accordance with this rule; (1) All State and 
local laws and regulations that are in conflict with this rule will be 
preempted; (2) no retroactive effect will be given to this rule: and 
(3) administrative proceedings in accordance with 7 CFR parts 11 and 
780 must be exhausted before bringing suit in court challenging action 
taken under this rule unless those regulations specifically allow 
bringing suit at an earlier time.

Regulatory Flexibility Act

    In compliance with the Regulatory Flexibility Act (5 U.S.C. 601--
602), the undersigned has determined and certified by signature of this 
document that this rule will not have a significant economic impact on 
a substantial number of small entities. This rule does not involve a 
new or expanded program and new provisions included in this rule will 
not impact a substantial number of small entities to a greater extent 
than large entities. Although it is the intent of this rule to move 
direct loans to guaranteed loans, participation is voluntary and 
requires no action on the part of small entities. Thus, large entities 
are subject to these rules to the same extent as small entities. 
Therefore, a regulatory flexibility analysis was not performed.

Unfunded Mandates

    Title II of the Unfunded Mandate Reform Act of 1995 (UMRA), Pub. L. 
104-4, requires Federal agencies to assess the effects of their 
regulatory actions on State, local, and tribal governments or the 
private sector. Agencies generally must prepare a written statement, 
including a cost benefit analysis, for proposed and final rules with 
``Federal mandates'' that may result in expenditures of $100 million or 
more in any 1 year for State, local, or tribal governments, in the 
aggregate, or to the private sector. UMRA generally requires agencies 
to consider alternatives and adopt the more cost effective or least 
burdensome alternative that achieves the objectives of the rule.
    The rule contains no Federal mandates, as defined under title II of 
the UMRA, for State, local, and tribal governments or the private 
sector. Thus, this rule is not subject to the

[[Page 47385]]

requirements of sections 202 and 205 of UMRA.

Paperwork Reduction Act

    The amendments to 7 CFR parts 1962, 1965 and 1980 set forth in this 
proposed rule require no revisions to the information collection 
requirements that were previously approved by OMB under the provisions 
of 44 U.S.C. chapter 35. Comments regarding the following issues should 
be sent to the Desk Officer for Agriculture, Office of Information and 
Regulatory Affairs, Office of Management and Budget, Washington, D.C. 
20503 and to Craig Nehls, Branch Chief, USDA, FSA, Farm Credit Programs 
Loan Servicing Division, Farm Service Agency, USDA, 1400 Independence 
Avenue, SW, STOP 0523, Washington, D.C. 20013-0523: (a) Whether the 
collection of information is necessary for the proper performance of 
the functions of the agency, including whether the information will 
have practical utility; (b) the accuracy of the agency's estimate of 
burden including the validity of the methodology and assumptions used; 
(c) ways to enhance the quality, utility and clarity of the information 
to be collected; (d) ways to minimize the burden of the collection of 
information on those who are to respond, including through the use of 
appropriate automated, electronic, mechanical, or other technological 
collection techniques or other forms of information technology. 
Comments regarding paperwork burden will be summarized and included in 
the request for OMB approval of the information collection. All 
comments will also become a matter of public record.
    Title: 7 CFR 1980-B, Farmer Program Loans.
    OMB Control Number: 0560-0155.
    Expiration Date: March 31, 1998.
    Type of Request: Request for Comments.
    Abstract: The information collected under OMB Control Number 0560-
0155, as identified above, is needed in order for FSA to effectively 
administer the regulation relating to the subordination of direct loan 
security to secure a guaranteed loan line of credit. The information is 
collected by the loan official in consultation with the lender. The 
basic objective of the guaranteed loan program is to provide credit to 
applicants who are unable to obtain credit from lending institutions 
without a guarantee. The reporting requirements imposed on the public 
by the regulations set out in 7 CFR part 1980-B are necessary to 
administer the guaranteed loan program in accordance with statutory 
requirements listed above and are consistent with commonly performed 
lending practices. Collection of information after loans are made is 
necessary to protect the Government's financial interest.
    This rule--to allow for subordinations of direct loan security to 
secure a guaranteed line of credit--is expected to result in the 
substitution of guaranteed loans in several cases where direct 
Operating Loans (OL) or subordinations are being used to fund annual 
farm operating needs. This is expected to result in a slight increase 
in the number of guaranteed lines of credit, a decrease in the number 
of OL's and an increase in the number of subordinations. The respective 
requirements of subordinations and OL loans will not change. The Agency 
has determined that the currently approved information collection 
requirements contain sufficient estimates to absorb this proposed 
change since the first part of this rule will affect the current burden 
of these regulations by only 0.3 percent, if at all. Therefore, no 
request for revision is being made. Subordinations of direct loan 
security (subordinations) are governed by 7 CFR 1962.30 and 1965.12. 
Guaranteed Operating loans (OL) are governed by 7 CFR 1980.175.
    Estimate of Burden: Public reporting burden for this collection of 
information is estimated to average .71 hours per response.
    Respondents: Individuals or households, businesses or other for 
profit and farms.
    Estimated Number of Respondents: 23,150.
    Estimated Number of Responses per Respondent: 1.
    Estimated Total Annual Burden on Respondents: 193,343.

    Title: 7 CFR 1962-A, has no information collection requirements and 
does not have an OMB Control Number.

    Title: 7 CFR 1965-A, Servicing of Real Estate Security for Farmer 
Program Loans and Certain Note-Only Cases.
    OMB Control Number: 0560-0158.
    Expiration Date: April 30, 1998.
    Type of Request: Revision and Extension of a Currently Approved 
Information Collection.
    Abstract: The information collected under OMB Control Number 0560-
0158, as identified above, is collected by the loan servicing official 
in consultation with the borrower, another creditor, or other 
appropriate individuals from whom information is necessary. The 
information is used in order to process subordination request and 
effectively administer program policies and procedures in a way that 
maximize benefits to borrowers and maintains the Government's financial 
interest.
    Section 331 of the Consolidated Farm and Rural Development Act, as 
amended, authorizes the Secretary of Agriculture to grant releases from 
personal liability where security property is transferred to approved 
applicants who, under agreement, assume the outstanding secured 
indebtedness. That section also authorizes the Secretary of Agriculture 
to grant partial releases and subordinations of mortgages subject to 
certain conditions and to consent to leases of security and transfers 
of security property. FSA county offices must collect information from 
borrowers requesting subordinations in order to assure that the program 
is carried out in accordance with the applicable laws and authorities.
    The 1996 Act modified the authorized loan purposes for direct Farm 
Ownership Loans (FO) by eliminating the refinancing of existing 
indebtedness as well as placing a limit on the number of times a direct 
Farm Operating Loan (OL) may be used for refinancing. This has 
unintentionally restricted the Agency's ability to subordinate security 
since 7 CFR 1965.12 allows subordination for ``authorized loan 
purposes.'' This causes problems in cases where subordinations are 
necessary for graduating direct loan borrowers to commercial credit. 
Graduation to commercial credit is one of the Agency's basic goals. The 
second part of this rule--to allow for subordinations for refinancing 
debt--is intended to allow the Agency to meet the need for refinancing 
created by the Federal Agriculture Improvement Act of 1996 (1996 Act). 
It will have no effect on currently approved information collection 
requirements. The public reporting burden under the requirements of the 
regulation are shown in the following estimates:
    Estimate of Burden: Public reporting burden for this collection of 
information is estimated to average .64 hours per response.
    Respondents: Individuals or households, businesses or other for 
profit and farms.
    Estimated Number of Respondents: 29,516.
    Estimated Number of Responses per Respondent: 1.
    Estimated Total Annual Burden on Respondents: 18,971.

Discussion of Proposed Rule

    These changes involve the Farm Credit Programs (FCP) loans of FSA 
formerly administered by the Farmers Home Administration (FmHA) as 
Farmer Programs loans.

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    Section 1980.108 (a)(iii) of Title 7 of the Code of Federal 
Regulations states that when a borrower is involved with both a direct 
and guaranteed loan with the Agency, the Agency may subordinate its 
lien position only on crops, feeder livestock or livestock products in 
order to secure a guaranteed loan and in other limited cases. FCP loan 
servicing regulations (7 CFR part 1962, subpart A and part 1965, 
subpart A), provide conditions for the subordination of Agency lien 
position on basic chattel and real estate security to another lender 
without mention of when the Agency will be providing the lender a 
guarantee on the loan to be made.
    This proposed rule will allow FSA to grant a subordination of basic 
chattel and real estate security in connection with a guaranteed line 
of credit. Such subordinations will be subject to the applicable 
requirements of 7 CFR 1962.30 and 1965.12 as referenced in 7 CFR 
1980.108 in addition to conditions specific to granting a subordination 
in conjunction with a guaranteed loan. The Agency currently offers 
subordinations of basic chattel and real estate security under 7 CFR 
1980.108 (a)(1)(iii) up to an amount necessary to collateralize a crop 
loan or a guarantee of up to 90 percent of principal and accrued 
interest on an operating loan. However, some commercial lenders and 
Congressional representatives have expressed concerns that this policy 
is too restrictive in areas where commercial lenders do not normally 
make loans to farm producers secured only by crops, or livestock 
products. Real estate and basic chattel security is desired. The Agency 
does not feel that this is a widespread problem. Furthermore, since the 
Government will be assuming nearly all of the risk for these 
combination subordination and guaranteed loans, conditions are proposed 
to ensure that these loans are made only in those areas that can 
document problems with credit availability. In addition, the loans will 
only be made where the Agency will have an extra 25 percent in security 
value to cover its loan after the subordination to protect the 
Government from an undue risk of loss.
    This rule is also proposing revisions to FCP loan servicing 
regulations to allow subordination of Agency loan security so another 
lender may refinance a borrower's debt. This is necessary as a result 
of a recent modification to Agency loan eligibility criteria made by 
the 1996 Act. Section 602 of the 1996 Act does not include refinancing 
as an authorized loan purpose for direct Farm Ownership loans (FO). 
Section 312 of the 1996 Act also places a limit on the number of times 
a direct Farm Operating loan (OL) may be used for refinancing. This has 
unintentionally restricted the Agency's ability to subordinate security 
since 7 CFR 1962.30 and 1965.12 allow a subordination only for 
``authorized loan purposes.'' This language is not required by statute. 
The legislation has also caused problems in cases where a subordination 
is necessary for graduations of direct loan borrowers to commercial 
credit on some of their loans. Graduation is one of the Agency's basic 
goals.
    To address these problems, the Agency proposes to allow 
subordinations for loans to refinance a borrower's debts. 
Subordinations for such purposes are not in conflict with the language 
or the intent of the 1996 Act. The 1996 Act did not restrict the use of 
guaranteed FO's and OL's for refinancing purposes, so it is clear that 
Congress did not intend to prohibit all refinancing.
    The Agency also proposes to revise the provision concerning the 
relationship between direct and guaranteed loans in 7 CFR 1980.108 to 
delete the requirement limiting combined direct and guaranteed to 
$650,000 when an Economic Emergency loan is involved. This requirement 
of the Emergency Agricultural Credit Adjustment Act of 1978 was 
repealed by Sec. 1851 of the Food, Agriculture, Conservation, and Trade 
Act of 1990 (Pub. L. 101-624).
    This rule also removes administrative provisions from some of the 
affected sections, leaving only regulatory actions which impact the 
public in the Federal Register. Matters involving internal operating 
procedures and requirements will be contained in the Agency's 
instructions and handbooks. This streamlining makes the regulation more 
concise and easier to read and understand. Handbooks and instructions 
are available to the public upon request from an FSA office. Daily 
management of existing programs will not be affected by these 
administrative deletions.
    Also, this rule makes minor wording changes, redesignates some 
numbered paragraphs and revises references to ``FmHA'' to reference 
``FSA'' or ``Agency.''
    Accordingly, it is proposed that 7 CFR chapter XVIII be amended as 
follows:

List of Subjects

7 CFR Part 1962

    Crops, Government property, Livestock, Loan programs--Agriculture, 
Rural areas

7 CFR Part 1965

    Real Property--Foreclosure, Loan programs--Agriculture, Rural areas

7 CFR Part 1980

    General--Agriculture, Loan programs--Agriculture, EM

PART 1962--PERSONAL PROPERTY

    1. The authority citation for part 1962 continues to read as 
follows:

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

Subpart A--Servicing and Liquidation of Chattel Security

    2. Section 1962.30 is revised to read as follows:


Sec. 1962.30  Subordination and waiver of liens on chattel security.

    (a) Purposes. Subject to the limitations set out in paragraph (b) 
of this section, the Agency chattel liens may be subordinated to a lien 
of another creditor in any of the following situations:
    (1) The prior lien will soon mature or has matured and the prior 
lienholder desires to extend or renew the obligation, or the obligation 
can be refinanced. The relative lien position of the Agency must be 
maintained.
    (2) The subordination will permit another creditor to refinance 
other debt or lend for an authorized direct loan purpose.
    (3) The subordination is necessary to obtain crop insurance. The 
creditor to whom a subordination is given must consent in writing to 
payment of the insurance premiums from the crop or insurance proceeds. 
When a subordination is executed to enable the borrower to obtain crop 
insurance on Agency security, the borrower will assign the insurance 
proceeds to the Agency or name the Agency in the loss-payable clause of 
the policy.
    (b) Conditions. Agency chattel liens may be subordinated to a lien 
of another creditor if all of the following conditions are met:
    (1) The lien to be subordinated is on crops, livestock increase, 
feeder livestock, and other normal income security. If the lien is on 
basic chattel security, the Agency will subordinate only to the extent 
necessary to provide the lender with the security it requires to make 
the loan.
    (2) The subordination is limited to a specific amount.
    (3) Only one subordination to one creditor may be outstanding at 
any one time in connection with the same security.

[[Page 47387]]

    (4) The borrower has not been convicted of planting, cultivating, 
growing, producing, harvesting or storing a controlled substance under 
Federal or State law. ``Borrower'' for purposes of this provision, 
specifically includes an individual or entity borrower and any member 
stockholder, partner, or joint operator, of an entity borrower and any 
member, stockholder, partner, or joint operator of an entity borrower. 
``Controlled substance'' is defined at 21 CFR part 1308. The borrower 
will be ineligible for a subordination for the crop year in which the 
conviction occurred and the 4 succeeding crop years. Applicants must 
attest on the Agency application form that it and its members, if an 
entity, have not been convicted of such a crime.
    (5) The loan funds will not be used in such a way that will 
contribute to erosion of highly erodible land or conversion of wetlands 
for the production of an agricultural commodity according to subpart G 
of part 1940 of this chapter.
    (6) Subordinations will not be granted to another USDA agency.
    (c) Subordination to make a guaranteed loan. Notwithstanding the 
requirements of this section subordinations on chattel security to make 
a guaranteed loan will be approved in accordance with Sec. 1980.108 of 
subpart B of part 1980 of this chapter.
    (d) Forms. Subordinations will be executed on Agency forms 
available in any FSA office or on another form approved by the Agency.

PART 1965--REAL PROPERTY

    3. The authority citation for 7 CFR part 1965 continues to read as 
follows:

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

Subpart A--Servicing of Real Estate Security for Farmer Program 
Loans and Certain Note-Only Cases

    4. Section 1965.12 is revised to read as follows:


Sec. 1965.12  Subordination of an Agency mortgage.

    (a) A subordination may be granted if all of the following 
conditions are met:
    (1) The subordination is to refinance debt or for any other 
authorized loan purpose.
    (2) The Agency debt cannot be refinanced without a subordination.
    (3) The subordination will further the purposes for which the 
Agency loans were originally made.
    (4) Any cooperative stock required in connection with the loan 
secured by the subordinated security will be assigned to the Agency.
    (5) If the unpaid principal and accrued interest balance of the 
Agency loan exceeds the value of the loan security, a subordination may 
be granted only if the value of the security will be increased by at 
least the amount of the advances to be made.
    (6) The Agency loan is still adequately secured after the 
subordination.
    (7) The borrower can document the ability to repay the total amount 
due under subordination and pay all other debt payments scheduled for 
the subject operating cycle.
    (8) The loan funds will not be used in such a way that will 
contribute to erosion of highly erodible land or conversion of wetlands 
for the production of an agricultural commodity according to part 1940, 
subpart G of this chapter.
    (9) When a non-farm tract secures a single family housing (SFH) 
loan, the other lender's funds will only be used for the same purposes 
and with the same limitations that would be applicable if a SFH loan 
were made.
    (10) When the subordination will be used to acquire land, the FSA 
county committee has made a favorable recommendation.
    (11) Any planned development performed in a manner directed by the 
creditor and agreed to by the Agency which reasonably attains the 
objectives of part 1924, subpart A of this chapter.
    (12) Funds to be used to develop or to acquire land will be 
deposited in a supervised bank account that is subject to signature by 
the Agency and the borrower or in a similar arrangement to ensure that 
funds will be spent for the planned purposes.
    (13) In cases of land purchase or exchange of property, the Agency 
will obtain a valid mortgage on the acquired land. Title clearance and 
loan closing will be required as for an initial or subsequent FO loan, 
as appropriate.
    (14) The borrower has not been convicted of planting, cultivating, 
growing, producing, harvesting or storing a controlled substance under 
Federal or State law. ``Borrower'' for purposes of this provision, 
specifically includes an individual or entity borrower and any member 
stockholder, partner, or joint operator, of an entity borrower and any 
member, stockholder, partner, or joint operator of an entity borrower. 
``Controlled substance'' is defined at 21 CFR part 1308. The borrower 
will be ineligible for a subordination for the crop year in which the 
conviction occurred and the four succeeding crop years. Applicants must 
attest on the Agency application form that it and its members, if an 
entity, have not been convicted of such a crime.
    (b) Subordination on real estate owned by an entity member. When 
the borrower is an entity and the Agency has taken real estate as 
additional security on property owned by an entity member, a 
subordination for any authorized Farm Credit Programs loan purpose may 
be approved when it is needed for the entity member to finance a 
separate operation. The subordination, however, may be approved only if 
it does not cause the unpaid principal and accrued interest balance of 
the Agency loan to exceed the value of the loan security or otherwise 
adversely affect the security.
    (c) Request for subordination. A borrower must complete an 
application provided by the Agency to receive consideration for a 
subordination.
    (d) Notice of foreclosure. The lienholder requesting the 
subordination will agree to give notice of foreclosure as required by 
the Agency.
    (e) Reamortizing existing Agency debts. The Agency may consent to a 
reamortization of an existing Agency debt, other than an SFH debt, when 
a subordination is granted to the debt of another lender. The 
reamortization will be allowed only when the borrower cannot reasonably 
be expected to meet all currently scheduled installments when due and 
the conditions of part 1951, subpart S, of this chapter are met.
    (g) Subordination to make a guaranteed loan. Notwithstanding the 
requirements of this section, subordinations of liens on real estate 
security to make a guaranteed loan will be in accordance with 
Sec. 1980.108 of this chapter.

PART 1980--GENERAL

    5. The authority citation for 7 CFR part 1980 continues to read as 
follows:

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

Subpart B--Farmer Programs Loans

    6. Section 1980.108 is amended to add paragraphs (a)(1)(v) and (vi) 
and to revise paragraphs (a)(1)(iii) and (d) to read as follows:


Sec. 1980.108  General provisions.

    (a) ***
    (1) ***
    (v) The Agency may subordinate its security interest on a direct 
loan when a guaranteed loan is involved in any of the following 
circumstances:
    (A) To permit a guaranteed lender to advance funds and perfect a 
security interest in crops, feeder livestock, or

[[Page 47388]]

livestock products, (milk, eggs, wool, etc.).
    (B) When the lender requesting the guarantee needs the 
subordination of the Agency's lien position to maintain its lien 
position when servicing or restructuring.
    (C) When the lender requesting the guarantee is refinancing the 
debt of another lender and the Agency's position on real estate 
security will not be adversely affected.
    (vi) The Agency may subordinate its security interest in chattels 
and real estate, or both to permit a Contract of Guarantee--Line of 
Credit to be advanced for annual operating needs in accordance with 
Sec. 1980.175 (c)(2) only when the following conditions are met:
    (A) The value of the total security for the direct loan or loans 
exceeds the total unpaid balance of the direct loan that it secures by 
at least 25 percent of the amount of the proposed line of credit after 
the subordination.
    (B) The applicant cannot obtain sufficient credit through a 
conventional guaranteed loan.
    (C) The subordination is limited to a specific amount.
    (D) The loan funds will not be used in such a way that will 
contribute to erosion of highly erodible land or conversion of wetlands 
for the production of an agricultural commodity according to part 1940, 
subpart G of this chapter.
    (E) The borrower has not been convicted of planting, cultivating, 
growing, producing, harvesting or storing a controlled substance under 
Federal or State law. ``Borrower'' for purposes of this provision, 
specifically includes an individual or entity borrower and any member 
stockholder, partner, or joint operator, of an entity borrower and any 
member, stockholder, partner, or joint operator of an entity borrower. 
``Controlled substance'' is defined at 21 CFR part 1308. The borrower 
will be ineligible for a subordination for the crop year in which the 
conviction occurred and the 4 succeeding crop years. Applicants must 
attest on the Agency application form that it and its members, if an 
entity, have not been convicted of such a crime.
    (F) No subordination will exist in favor of another creditor on the 
same security.
    (G) The subordination is not in favor of another USDA agency.
    (H) Any stock required in connection with the loan secured by the 
subordinated security will be assigned to the Agency.
    (I) The borrower can document the ability to repay the total amount 
due under subordination and pay all other debt payments scheduled for 
the subject operating cycle.
    (J) The borrower will complete an application provided by the 
Agency to receive consideration for a subordination, and
    (K) The lienholder requesting the subordination will agree to give 
notice of foreclosure as required by the Agency.
* * * * *
    (d) Relationship between Agency loans, direct and guaranteed. A 
guaranteed FO or OL loan may be made to an insured borrower with the 
same type of direct loan provided:
    (1) The outstanding combined direct and guaranteed FO or OL 
principal balance owned by the loan applicant or owed by anyone who 
will sign the note as cosigner may not exceed the authorized guaranteed 
loan limit for that type of loan.
    (2) Chattel and real estate collateral must be separate and 
identifiable so as to be discernible from the collateral pledged to the 
Agency for a direct loan. Different lien positions on real estate are 
considered separate and identifiable collateral.
    7. Section 1980.175 is amended to add paragraph (h)(3) as follows:


Sec. 1980.175  Operating Loans.

* * * * *
    (h) Special security requirements. (1) * * *
    (3) Subject to the requirements of this section, the Agency may 
approve a Contract of Guarantee for a line of credit to be secured by 
basic chattel or real estate security in which the Agency has 
subordinated its lien position in accordance with Sec. 1980.108.
* * * * *

    Signed in Washington, DC, on September 2, 1997.
Dallas Smith,
Acting Under Secretary for Farm and Foreign Agricultural Services.

Jill Long Thompson,
Under Secretary for Rural Development.
[FR Doc. 97-23750 Filed 9-8-97; 8:45 am]
BILLING CODE 3410-05-P