[Federal Register Volume 67, Number 5 (Tuesday, January 8, 2002)]
[Rules and Regulations]
[Pages 791-801]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-359]



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  Federal Register / Vol. 67, No. 5 / Tuesday, January 8, 2002 / Rules 
and Regulations  

[[Page 791]]



DEPARTMENT OF AGRICULTURE

Farm Service Agency

7 CFR Part 764

Rural Housing Service

Rural Business-Cooperative Service

Rural Utilities Service

Farm Service Agency

7 CFR Part 1945

RIN 0560-AF72


Streamlining of the Emergency Farm Loan Program Loan Regulations

AGENCY: Farm Service Agency, USDA.

ACTION: Final rule.

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

SUMMARY: The Farm Service Agency amends its regulations governing the 
Farm Service Agency's (FSA) Emergency Farm Loan Program. It clarifies, 
simplifies, and streamlines the procedures to apply for and make FSA 
emergency loans.

DATES: This regulation is effective on February 7, 2002.

FOR FURTHER INFORMATION CONTACT: Mike Hinton, Branch Chief, Loan Making 
Division, Farm Loan Programs, Farm Service Agency, United States 
Department of Agriculture, STOP 0522, 1400 Independence Avenue, SW., 
Washington, DC 20250-0522 telephone (202) 720-1632; or e-mail: 
[email protected].

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This rule has been determined to be significant for purposes of 
Executive Order 12866 and, therefore, was reviewed by the Office of 
Management and Budget.

Regulatory Flexibility Act

    The FSA certifies that this rule will not have a significant 
economic effect on a substantial number of small entities because under 
the rule the economic effect of the regulation is reduced from the 
prior rule. Therefore, FSA is not required to perform a Regulatory 
Flexibility Analysis as required by the Regulatory Flexibility Act (5 
U.S.C. 601). This rule does not impact small entities to a greater 
extent than large entities.

Environmental Impact Statement

    FSA has determined 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, (42 U.S.C. 4321 et seq.) neither an Environmental Impact 
Statement nor an environmental assessment is required.

Executive Order 12988

    This rule has been reviewed in accordance with E.O. 12988, Civil 
Justice Reform. All State and local laws and regulations that are in 
conflict with this rule will be preempted. No retroactive effect will 
be given to this rule. It will not affect agreements entered into prior 
to the effective date of the rule. The administrative appeal provisions 
published at 7 CFR parts 11 and 780 must be exhausted before bringing 
any action for judicial review.

Executive Order 12372

    For reasons contained in the Notice related to 7 CFR part 3015, 
subpart V (48 FR 29115, June 24, 1983) the programs and activities 
within this rule are excluded from the scope of Executive Order 12372, 
which requires intergovernmental consultation with State and local 
officials.

Executive Order 13132

    The policies contained in this rule do not have any substantial 
direct effect on states, on the relationship between the national 
government and the states, or on the distribution of power and 
responsibilities among various levels of government. Nor does this rule 
impose substantial direct compliance costs on state and local 
governments. Therefore, consultation with the states is not required.

Unfunded Mandates

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub. 
L. 104-4, establishes requirements for 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 assessment, 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, under the regulatory 
provisions of title II of the UMRA, for State, local, and tribal 
governments or the private sector. Therefore, this rule is not subject 
to the requirements of sections 202 and 205 of the UMRA.

Paperwork Reduction Act

    The amendments to 7 CFR parts 764 and 1945 contained in this final 
rule require no revisions to the information collection requirements 
that are currently approved by OMB under control number 0560-0159. A 
proposed rule containing an estimate of the information collection 
burden of this rule was published on September 12, 2000 (65 FR 54973-
54981). No comments regarding the burden estimates were received. This 
information collection has been approved through January 31, 2004.

Federal Assistance Programs

    These changes affect the following FSA program as listed in the 
Catalog of Federal Domestic Assistance: 10.404--Emergency Loans.

New CFR Part

    The proposed rule proposed changes to the existing 7 CFR part 1945, 
subpart B, and removed subpart D. This final rule, in addition to 
finalizing, with changes, the proposed rule, moves these provisions to 
7 CFR part 764 and removes 7 CFR 1945 subparts B, C, and D. In order to 
facilitate this change in the final regulation, in all places 1945.5 
was replaced with 764 and any numbers following the .5 remained the 
same. An

[[Page 792]]

example of this is in the proposed rule there is a section 
1945.53(b)(1) in the final rule this has been changed to 764.3(b)(1). 
FSA is moving its Emergency loan program regulations from Chapter XVIII 
to Chapter VII of the Code of Federal Regulations (CFR). Prior to the 
Department of Agriculture Reorganization Act of 1994 (1994 Act), 
Chapter XVIII was assigned to the Farmers Home Administration (FmHA) 
and Chapter VII was assigned to the Agricultural Stabilization and 
Conservation Service (ASCS). Under provisions of the 1994 Act, FmHA and 
ASCS were abolished. FmHA's Farm Loan Programs and ASCS programs were 
consolidated under the newly created FSA while the remaining FmHA 
programs were transferred to one of the following Rural Development 
mission agencies: Rural Business Cooperative Service, Rural Housing 
Service, and Rural Business Service. Chapter VII is now assigned to FSA 
while Chapter XVIII is shared by FSA and the Rural Development mission 
area agencies.

Discussion of Comments Received

    In response to the proposed rule, 23 respondents, including a farm 
interest group and individuals, from 14 States commented. The comments 
received involved a number of different sections of the proposed rule 
and overwhelmingly supported most of the changes proposed by the 
Agency.

Emergency Loan Fund Uses

    Eighteen comments were received concerning the authorized uses of 
emergency loan funds outlined in the proposed rule. Five comments 
supported items that were included as new specific emergency loan fund 
uses in the proposed rule.
    One comment on proposed Sec. 1945.53(b)(1), which is now 
Sec. 764.3(b)(1), requested an administrative clarification regarding 
what reorganizing meant. This comment was not addressed in the final 
rule because the usage is the same as what is in the existing 
regulation and the Agency will follow the common definition of 
reorganizing. However, examples of reorganizing will be given in the 
Agency handbook for clarification.
    One comment received expressed concern that the proposed regulation 
did not mention that loan funds can be used to replace dwellings or 
farm structures or other farm buildings. Another comment suggested that 
loan funds used for needs associated with the physical loss of real 
estate be limited to essential real estate. Wording to implement this 
suggestion was adopted in the introductory text of Sec. 764.3(a)(1) of 
the final rule. This change makes the final rule consistent with the 
existing regulation, 7 CFR 1945.163(b), which requires that to qualify 
for a physical loss loan, if the destroyed property is not repaired or 
replaced, the farmer would be unable to continue the operations on a 
reasonably sound basis. If the lost or destroyed real estate is not 
essential to the operation then the policy is that an Emergency loan is 
not necessary for the operator to continue operation. A definition of 
``essential real estate (or chattel)'' was also added to Sec. 764.2 for 
clarity.
    One comment suggested that use of funds should only be allowed for 
replacing buildings or other structures that are essential to the 
ongoing viability of the operation, that are modest in design and cost, 
and that meet the functionality of the property destroyed in the 
disaster. We agree that this loan purpose should be limited for 
practical reasons and to conserve limited emergency loan funds. Section 
764.3(a)(1)(ii) has been modified to state that emergency loan funds 
may be used to replace or repair buildings or other structures 
essential to the ongoing viability of the operation. However, the 
Agency will only finance such replacement or repair to the extent the 
structures conform to industry standards and meet the needs of the 
operation and intended purposes of the structure. The intent of this 
language is to allow the replacement of what was lost with a similar 
structure which meets the needs of the operation but not necessarily 
exactly what was lost. One example of this would be the destruction of 
a family residence. An EM loan to rebuild the house would be based on 
an assessment of the current needs of the family, not necessarily on 
the replacement value of the lost residence. Another example is if a 
300 foot poultry house was destroyed. Current industry standards 
require a 400 foot poultry house. The Agency in this case would make a 
loan for a 400 foot house since a 300 foot house no longer meets the 
needs of the operation.
    Two comments suggested that use of physical loss loan funds be 
limited to replacing what was destroyed. These comments were partially 
adopted. Physical loss funds can be used to replace or repair what was 
lost as a result of the disaster. As discussed above, however, 
consideration of industry standards, needs of the operation, and 
purposes of the structure may result in a replacement similar to, but 
not the same as, the structure destroyed. The changes to 
Sec. 764.3(a)(1)(ii) of the final rule address these concerns.
    Two commentors suggested said that use of physical loss funds for 
family living, as included in the proposed rule, should not be allowed. 
This suggestion was not adopted. All livestock losses are treated as 
physical losses in the final rule, therefore, lost income from market 
animals should be allowed for family living expenses and operating 
expenses. However, the language of Sec. 764.3(a)(2)(v) was changed to 
clarify that family living and operating expenses could not be paid if 
the physical loss was to breeding stock. If the loss was to breeding 
stock then the physical loss funds should be used to replace the 
breeding stock because that stock has been determined to be an 
essential part of the operation. Other livestock losses would be 
considered to generate normal production income and a loan to replace 
that income would be allowed for use as family living expenses.
    One commentor suggested that the restriction in 
Sec. 1945.53(a)(2)(vi) and Sec. 1945.53(b)(6) of the proposed rule 
which prohibits the refinancing of a Farm Loan Program loan with 
emergency loan funds when the applicant has refinanced the loan more 
than four times, be removed. This suggestion was not adopted in the 
final rule as it is a statutory requirement for subtitle B loan 
purposes in Sec. 312(a)(9) of the Consolidated Farm and Rural 
Development Act (Act) (7 U.S.C. 1942(a)(9)) as adopted by Sec. 323 of 
the Act (7 U.S.C. 1963) for emergency loans.
    One commentor suggested that livestock should be eligible as a 
production loss, as well as a physical loss. This suggestion was not 
adopted because based on the past history of the program and on the 
experience of Farm Loan Managers in the field, livestock loss rarely 
qualifies as production loss and by making all livestock losses 
physical losses it will be easier for livestock producers to qualify 
for a loan because they will not have to suffer a 30 percent loss to 
qualify, as is the case for production loans.
    One commentor suggested that use of loan funds should not be 
allowed for the payment of bankruptcy expenses as a cost associated 
with reorganizing the farm. The Agency adopted this suggestion in 
Sec. 764.3(b)(1) of the final rule because it does not make sense for 
the Agency to make a loan to file bankruptcy which could result in the 
Agency having to write-off the loan or other Agency debt. Such debt 
forgiveness generally renders the farmer in-eligible for further 
assistance from the Agency.

[[Page 793]]

Eligibility Requirements

    Twenty-two comments were received concerning eligibility 
requirements contained in the proposed rule. Ten of those comments 
addressed changes to the test for credit requirement. One comment 
suggested that the test for credit documentation requirements be 
consistent with existing requirements in other Agency direct loan 
programs. In response, Sec. 764.4(a)(9) of the final rule was modified 
to eliminate the proposed extra letter requirement when the applicant's 
net worth exceeds $1 million. Instead, the final rule allows Agency 
officials flexibility to contact other commercial lending institutions 
within reasonable proximity of the applicant and make an independent 
determination of the applicant's ability to obtain credit elsewhere. 
This addition allows the Agency to investigate cases where the 
applicant's net worth or other circumstances indicate that credit may 
be available elsewhere without increasing the applicant's burden in 
obtaining additional written declinations of credit. This current 
flexibility in Sec. 1945.156(b)(2) was inadvertently left out of the 
proposed rule. The provisions in the existing Emergency loan procedures 
give the loan approval official the ability to contact other lenders 
and require more than the minimum number of rejection letters if they 
determine that, based on the applicant's financial condition or local 
lending practices, other credit should be available.
    Two commentors disagreed with the proposed changes to the current 
test for credit documentation requirements. Two others disagreed with 
inclusion of a waiver for loans of less than $100,000. One suggested 
that all loans should have at least two rejection letters. Another 
suggested that one rejection letter be required if the loan request was 
for $200,000 or less and two rejection letters if the loan request was 
for more than $200,000, and one suggested that a letter from a Farm 
Credit institution be required as one of the rejection letters. 
Although the Agency understands the concerns expressed by these 
comments, it did not adopt any of these suggestions. The final rule 
gives the Agency maximum flexibility and is consistent with the minimum 
requirements of the Act.
    One commentor pointed out that the proposed rule was inconsistent 
with Sec. 373(b)(2) of the Act (7 U.S.C. 2008h(b)(2)) regarding when an 
applicant who has received debt forgiveness is eligible for an 
Emergency loan. This error is corrected in Sec. 764.4(a)(10) of the 
final rule.
    One comment was received suggesting that the proposed provision 
that an applicant may demonstrate managerial ability by farming 
experience within the last 5 years be changed to 3 years. This 
suggestion was not adopted because it is too restrictive. The Agency 
believes that farming experience in the last five years is current 
enough to demonstrate that the applicant understands current farming 
practices. Additionally, if the change to three years was made many 
college graduates who were raised on a farm and spent the last 4 years 
getting a degree would not be eligible for a loan because they had not 
farmed in the last three years.
    One commentor suggested that the borrower training requirement 
contained in the proposed Sec. 1945.54(a)(13) should only apply to 
beginning farmers or farmers who have demonstrated poor management. 
Section 335 of the Act (7 U.S.C. 2006) does not provide blanket 
exceptions for certain types of farmers. Furthermore, there are 
specific criteria under which a waiver of the borrower training 
requirements may be requested by an applicant in 7 CFR 1924.74. The 
final rule adopts the proposed language without change in 
Sec. 764.4(a)(13).
    One comment was received objecting to the proposed 
Sec. 1945.54(a)(15), which established as an eligibility requirement 
that an applicant demonstrate that they would honestly endeavor to 
carry out the conditions of the loan and provide current, complete, and 
truthful information. The comment indicated that this was not an 
appropriate eligibility requirement because there was no objective 
criteria. Two other comments were received which supported the 
provision and one comment suggested incorporating the concept in the 
definition of past credit history. The Agency agrees that this should 
not be included as a separate eligibility criteria and removed the 
proposed requirement from the final rule. Instead, the eligibility 
requirement of past credit history in Sec. 764.4(a)(8) of the final 
rule was expanded as suggested, to state that as part of the credit 
history analysis, the Agency will determine whether the applicant has 
dealt with the Agency in good faith which includes providing current, 
complete, and truthful information to the Agency and fulfilling its 
obligations to other Federal agencies and third parties. The Agency 
believes this language is sufficiently objective.
    One commentor suggested that harvested and stored crops should be 
eligible as a physical loss. The Agency agrees and incorporated this 
very practical suggestion into the final rule in Sec. 764.4(b)(2)(iii). 
This coverage in Sec. 1945.163(b) was inadvertently left out of the 
proposed rule.
    The Agency also is adding an eligibility requirement in 
Sec. 764.4(a)(15) that the applicant must agree to repay any 
duplicative Federal assistance to the agency providing such assistance. 
A person receiving Federal assistance for a major disaster or emergency 
is liable to the United States to the extent that the assistance 
duplicates benefits available to the person for the same purpose from 
another source. This provision is required by 42 U.S.C. 5155, part of 
the Robert T. Stafford Disaster Relief and Emergency Assistance Act. If 
the Agency determines that it has provided duplicative assistance, the 
Agency will collect the duplicative assistance from the recipient in 
accordance with the Federal Debt Collection Act.

Loan Limitations

    Fifteen comments were received regarding proposed changes to loan 
limitations, including qualifying losses. Three comments were received 
commending the change in maximum loan amount from 80 percent to100 
percent of production loss while two others recommended that the level 
be left at 80 percent or raised to only 90 percent. Another commentor 
pointed out that increasing the limit will increase loan losses. 
Another commentor suggested that if the limit is increased to 100 
percent, the Agency should make adjustments for costs not incurred and 
for substitute crops. Increasing the maximum loan amount to 100 percent 
should not increase loan losses. In many cases the Agency makes an 
operating loan for the additional 20 percent of the loss not currently 
covered by the Emergency loan. Therefore, the Agency has the same 
exposure as if the Emergency loan were made at 100 percent. However, 
because the Emergency loan is at a lower interest rate, there is a 
higher chance of repayment because less interest accrues. Therefore, 
loan losses could actually be reduced. The suggestions that adjustments 
be made for costs not incurred and substitute crops were not adopted 
because they are not required by statute, and such adjustments would 
only make the calculations more complicated and more prone to error. 
The Agency believes that the increase to 100 percent is needed to 
better serve the needs of applicants who have suffered a loss and would 
not add significant risk of loss to the Agency. Therefore, the language 
of the proposed Sec. 1945.55(b) is incorporated in the final rule at 
Sec. 764.5(b) without revision.

[[Page 794]]

    One commentor suggested that when loan funds are used for 
construction, Agency regulations dealing with planning and monitoring 
construction should be followed. The Agency agrees and has adopted this 
comment by adding in Sec. 764.5(a)(2) of the final rule a requirement 
that any construction financed by the Agency comply with 7 CFR part 
1924, subpart A.
    Two comments were received suggesting that the use of Emergency 
loan funds for refinancing consumer debt not be authorized or be 
restricted. In response, the final rule includes a new section 
Sec. 764.5(a)(3) that prohibits use of emergency loan funds for 
refinancing consumer debt unless the debt is directly attributable to 
the farming operation. Subsidized Federal disaster assistance should 
not be used to refinance vacations, automobiles, or other expenses that 
were incurred by the farmer but have nothing to do with the farming 
operation or its recovery from the effects of the disaster. This change 
balances the farmer's need for funds with the Agency's need to allocate 
limited emergency loan funds.

Repayment and Security Requirements

    Thirty-eight comments were received on the proposed Sec. 1945.58 
which addressed repayment and security requirements. One commentor 
recommended that this provision be reworded to ensure that the feasible 
plan demonstrate that the applicant will meet all other obligations for 
which the applicant is legally responsible. The Agency agrees and 
revised the wording in Sec. 764.8(a)(1) accordingly.
    Twelve comments were received expressing opposition to proposed 
Sec. 1945.58(f) which allowed, under certain conditions, an Emergency 
loan to be made when adequate security is not available because of the 
disaster. These comments expressed the opinion that the Agency should 
never make a loan if the value of the security is less than the loan 
amount. Unfortunately, while we agree from a sound lending standpoint 
this should never be done, the statute requires otherwise. Due to 
provisions contained in section 324(d)(2) of the Act, the Agency is 
prohibited from rejecting a loan because it lacks a particular amount 
of security. The Agency believes that the proposed rule language 
complied with this statutory requirement while protecting the Agency's 
interest. Therefore, the proposed language is adopted as final, with 
some minor modifications, as discussed below, at Sec. 764.8(f).
    One commentor suggested that, at a minimum, an assignment on any 
USDA program payments to be received be required when adequate security 
was lacking. The Agency agrees and added Sec. 764.8(f)(4) to the final 
rule which requires such assignment when there is a lack of adequate 
security. Incorporating this comment will result in sounder lending 
practices by allowing the Agency to take Government program payments 
and apply them to the applicant's loan, thereby reducing the under-
secured position.
    The proposed rule also required that the plan indicate how pricing 
risks will be addressed through the use of marketing contracts, 
hedging, options, or revenue insurance and include a marketing plan or 
similar risk management practice. One comment was received recommending 
revenue insurance be included as a method of addressing pricing risk, 
and six comments were received indicating concerns with requiring a 
marketing plan. The latter comments suggested that the Agency might be 
opening itself up to lender liability issues and that substantial 
guidance and clarification was needed as to what constituted an 
acceptable marketing plan. In response to these comments, the final 
rule, at Sec. 764.8(f)(2), included revenue insurance as an example of 
risk management for clarity. The Agency removed the requirement for a 
marketing plan to avoid a wide variance in the interpretation of the 
term and administrative difficulty in establishing appropriate 
standards on what would be an acceptable marketing plan.
    The proposed rule also provided that, where there is a lack of 
adequate security, the applicant must demonstrate a positive net cash 
income in at least 1 of the immediately preceding 5 years. The Agency 
received fifteen comments on this proposed requirement. One suggested 
that this requirement would keep farmers who have had droughts for the 
last 5 years from being eligible; 6 commentors said that 1 out of 5 
years is not much of an indication that the farmer is successful; one 
suggested that it should be 50 percent of the time; three suggested it 
should be 3 out of the last 5 years; and one suggested 1 out of the 
last 3 years. The other three commentors were concerned that it was too 
easy to manipulate a farm plan to show repayment ability or wanted a 
much more complicated formula than that proposed based on net farm 
income. In response to these comments, Sec. 764.8(f)(3) provides that 
if the applicant is using ability to repay the loan as security, the 
applicant must have had positive net cash farm income in at least 3 of 
the past 5 years. Due to natural disasters and fluctuating prices it 
was determined that 1 out of 3 years was too restrictive. Given the 
concern that 1 out of 5 years was too liberal and not a good indication 
of ability to repay, the Agency determined that requiring records from 
3 out of the last 5 years to show net cash income made the most sense 
from a lending standpoint.
    The proposed rule stated that the Agency will require that the 
applicant pledge all available assets (including personal assets for 
both individuals and members of entities). One commentor suggested that 
if substantial non-essential assets are available, the Agency should 
require that they be liquidated to reduce the need for an Emergency 
loan or, if they are not liquidated, the applicant would not be 
eligible. The Agency did not adopt this suggested change because it 
believes that taking a lien on such assets is adequate. Also, if there 
is a substantial amount of non-essential assets, the applicant may be 
able to obtain credit elsewhere and, therefore, would not be eligible 
for Agency assistance. The final rule adopted the proposed language at 
Sec. 764.8(g).
    One comment noted that the proposed regulation did not address 
taking Indian Trust land as security. In response to that comment, the 
Agency included Sec. 764.8(j), which specifically authorizes taking 
Indian Trust land as security if the requirements in Sec. 1943.17(a)(7) 
for such security are met.

Appraisal and Valuation Requirements

    The proposed rule, at Sec. 1945.59(b), provided that the security 
value of annual agricultural commodities production is presumed to be 
100 percent of the amount loaned for annual operating and essential 
family household expenses. One commentor noted that this may overstate 
the security value in certain cases. The Agency agreed and revised the 
final regulation at Sec. 764.9(b) to provide that the security value is 
the lower of the amount loaned for annual operating and essential 
family household expenses or the amount of expected crop revenue. The 
amount of expected crop revenue will be equal to the amount of gross 
receipts from all crop and livestock production as shown on the 
cashflow used to approve the loan. Expected revenue does not include 
farm program or crop insurance payments.

Insurance for Loan Security

    The proposed rule, at Sec. 1945.60(b), required that all security 
except growing crops be covered by hazard insurance. One commentor 
pointed out that this was too restrictive. The Agency agrees.

[[Page 795]]

In response, the final rule, at Sec. 764.10(b), provides that there 
must be hazard insurance if it is readily available (i.e. normally sold 
by insurance agents in the farmer's normal trade area) and economically 
feasible.

Definitions

    Thirty comments were received concerning the proposed definitions. 
Thirteen of the comments were requests for clarifications and five 
comments pointed out errors. The proposed definitions of additional 
security, adequate security, agency, agricultural commodity, applicant, 
basic part of an applicant's total farming operation, established 
farmer, majority interest, physical loss, and security value were 
modified in the final rule at Sec. 764.2 to clarify the definitions or 
to correct errors. For additional clarity, the definition of ``entity'' 
was properly alphabetized. Two comments suggested that the final rule 
include the entire definition, rather than a reference to another 
Agency regulation. This suggestion was adopted.
    Three comments pointed out that the proposed definition of ``normal 
production yield'' could cause inconsistent treatment depending upon 
whether an applicant had or had not been an Agency borrower. The Agency 
agrees. The definition was revised as the comments suggested so that 
all applicants will be treated consistently when determining normal 
production yield.
    The Agency modified the definition of established farmer to state 
that the term did not include an operation that employs a full-time 
manager. This provision in current Sec. 1945.162(d) was unintentionally 
omitted in the proposed rule.

List of Subjects

7 CFR Part 764

    Agriculture, Credit, Disaster assistance, Loan programs--
Agriculture.

7 CFR Part 1945

    Agriculture, Credit, Disaster assistance, Loan programs--
Agriculture.

    Accordingly, 7 CFR chapters VII and XVIII are amended as follows:
    1. Part 764 is added to read as follows:

PART 764--EMERGENCY FARM LOANS

Sec.
764.1   Purpose.
764.2   Definitions.
764.3   Emergency loan funds uses.
764.4   Eligibility requirements.
764.5   Limitations.
764.6   Interest rate.
764.7   Loan terms.
764.8   Repayment and security requirements.
764.9   Appraisal and valuation requirements.
764.10   Insurance for loan security.
764.11   Charges and fees.

    Authority: 5 U.S.C. 301 and 7 U.S.C. 1989.


Sec. 764.1  Purpose.

    The purpose of the Emergency Loan Program is to provide financial 
assistance to family farmers who have suffered losses as the result of 
a disaster so that they can return to normal farming operations as soon 
as possible after the disaster. Specifically, this part describes the 
policies and procedures of the Agency for making Emergency loans to 
operators of such farms.


Sec. 764.2  Definitions.

    Act means the Consolidated Farm and Rural Development Act (7 U.S.C. 
1921 et seq.).
    Additional security means property that provides security in excess 
of the amount of security value equal to the loan amount, excluding 
security described in Sec. 764.8(g).
    Adequate security means property that provides a security value at 
least equal to the loan amount.
    Agency means the Farm Service Agency, including its employees, any 
predecessor agency, and any successor agency.
    Agricultural commodity means livestock, grains, cotton, oilseeds, 
dry beans, tobacco, peanuts, sugar beets, sugar cane, fruit, vegetable, 
forage, tree farming, nursery crops, nuts, aquacultural species, and 
other plant or animal production as determined by the Agency.
    Allowable costs means those costs for replacement or repair that 
are supported by acceptable documentation, including but not limited to 
written estimates, invoices, and bills.
    Applicant means an individual or entity (including each owner of 
the entity unless specified otherwise) operating a farming operation at 
the time of the disaster, who is requesting assistance from the Agency 
under this part. All requirements of applicants apply to owners of the 
entity individually and collectively unless specified otherwise.
    Aquacultural species means aquatic organisms (including fish, 
mollusks, crustaceans or other invertebrates, amphibians, reptiles, or 
aquatic plants) raised in a controlled or selected environment which 
the applicant has exclusive rights to use.
    Basic part of an applicant's total farming operation means any 
single agricultural commodity or livestock production enterprise of an 
applicant's farming operation which normally generates sufficient 
income to be considered essential to the success of such farming 
operation.
    Borrower means an individual or entity which has an outstanding 
obligation to the Agency under any Farm Loan Program loan, without 
regard to whether the loan has been accelerated. A borrower includes 
all parties liable for such obligation owed to the Agency, including 
collection-only borrowers, except for debtors whose total loans and 
accounts have been voluntarily or involuntarily foreclosed, sold, or 
conveyed; or who have been discharged of all such obligations owed to 
the Agency.
    Chattel means any property that is not real estate.
    Chattel or real estate essential to the farming operation means 
chattel or real estate that would be necessary for the applicant to 
continue operating the farm on a after the disaster in a manner similar 
to the manner in which the farm was operated immediately prior to the 
disaster, as determined by the Agency.
    Corporation means a private domestic entity recognized as a 
corporation and authorized as a corporation under the laws of the State 
or States in which the entity does business.
    County means a local administrative subdivision of a State or 
similar political subdivision of the United States.
    Debt forgiveness means reducing or terminating a debt under the Act 
in a manner that results in a loss to the Agency (excluding a 
consolidation, rescheduling, reamortization, or deferral), through:
    (1) Writing down or writing off a debt pursuant to 7 U.S.C. 2001;
    (2) Compromising, adjusting, reducing, or charging off a debt or 
claim pursuant to 7 U.S.C. 1981; or
    (3) Paying a loss pursuant to 7 U.S.C. 2005 on a Farm Loan Program 
loan guaranteed by the Agency.
    Disaster means an event of unusual and adverse weather conditions 
or other natural phenomena that has substantially affected producers of 
agricultural commodities by causing physical property or production 
losses in a county, or similar political subdivision, that triggered 
the inclusion of such county or political subdivision in the disaster 
area designated by the Agency.
    Disaster area means the county, declared or designated as a 
disaster area for Emergency loan assistance as a result of disaster 
related losses and counties

[[Page 796]]

contiguous to those counties declared or designated as disaster areas.
    Disaster yield means the per-acre yield of an agricultural 
commodity for the farming operation during the production period when 
the disaster occurred.
    Entity means a partnership, corporation, cooperative, or joint 
operation that is an operator of an operation engaged in farming, 
ranching, or aquaculture activities at the time the disaster occurs.
    Essential family household expenses means the expenses associated 
with providing food, clothing, and shelter necessary to maintain the 
borrower and the immediate family of the borrower.
    Established farmer means a farmer who is an operator of the farming 
operation (in the case of a farming operation operated by an entity, 
its owners as a group) who:
    (a) Actively participated in the operation and the management, 
including but not limited to, exercising control over, making decisions 
regarding, and establishing the direction of the farming operation at 
the time of the disaster;
    (b) Spends a substantial portion of time in carrying out the 
farming operation;
    (c) Planted the crop, or purchased or produced the livestock on the 
farming operation;
    (d) In the case of an entity, is primarily engaged in farming and 
has over 50 percent of its gross income from all sources from its 
farming operation based on the farming operation's projected cash flow 
for the next crop year or the next 12 month period, as mutually 
determined; and
    (e) Is not:
    (1) A corporation with an ownership interest of 50 percent or more 
held by one or more estates, trusts, other corporations, partnerships, 
or joint operations;
    (2) A partnership or joint operation with an ownership interest of 
50 percent or more held by one of more estates, trusts, corporations, 
other partnerships or other joint operations;
    (3) An integrated livestock, poultry, or fish processor who 
operates primarily and directly as a commercial business through 
contracts or business arrangements with farmers, except a grower under 
contract with an integrator or processor may be considered an 
established farmer, provided the operation is not managed by an outside 
full-time manager or management service and such loans shall be based 
on the applicant's share of the agricultural production as contained in 
the contract; or
    (4) An operation that employs a full-time farm manager.
    Family farm means a farm that:
    (a) Produces agricultural commodities for sale in sufficient 
quantities so that it is recognized in the community as a farm rather 
than a rural residence.
    (b) Provides enough agricultural income by itself, including rented 
land, or together with any other dependable income, to enable the 
borrower to:
    (1) Pay necessary family and operating expenses;
    (2) Maintain essential chattel and real property; and
    (3) Pay debts.
    (c) Is managed by:
    (1) The borrower, when a loan is made to an individual.
    (2) The members, stockholders, partners, or joint operators 
responsible for operating the farm when a loan is made to a entity.
    (d) Has a substantial amount of the labor requirements for the farm 
enterprise provided by:
    (1) The borrower and family members for a loan made to an 
individual.
    (2) The members, stockholders, partners, or joint operators 
responsible for operating the farm, along with the families of these 
individuals, for a loan made to an entity.
    (e) May use a reasonable amount of full-time hired labor and 
seasonal labor during peak load periods.
    Farm Loan Program loan means a Farm Ownership loan, Operating loan, 
Emergency loan, Soil and Water loan, or Economic Emergency loan made or 
guaranteed by the Agency pursuant to the Act.
    Farmer means individuals, cooperatives, corporations, partnerships 
or joint operations who are farmers, ranchers, or aquaculture operators 
actively engaged in their operation at the time a disaster occurs.
    Feasible plan means a plan based upon the applicant's records that 
show the farming operation's actual production and expenses. These 
records will be used along with realistic anticipated prices, including 
farm program payments when available, to determine that the income from 
the farming operation, along with any other reliable off-farm income, 
will provide the income necessary for an applicant to at least be able 
to:
    (a) Pay all operating expenses and all taxes that are due during 
the projected farm budget period;
    (b) Meet necessary payments on all debts; and
    (c) Provide living expenses for family members of an individual 
borrower or a wage of the farm operator in the case of a entity 
borrower which is in accordance with the essential family needs. Family 
members include the individual borrower, or farm operator in the case 
of an entity, and the immediate members of the family who reside in the 
same household.
    Hazard insurance means coverage against losses due to fire, 
windstorm, lightning, hail, explosion, business interruption, riot, 
civil commotion, aircraft, land vehicles, marine vehicles, smoke, 
builders risk, public liability, property damage, flood or mudslide, 
workman's compensation, or any similar insurance that is available and 
needed to protect the security, or that is required by law.
    Household contents means the essential household items necessary to 
maintain viable living quarters such as: stove, refrigerator, furnace, 
couch, chairs, tables, beds, lamps, clothes, etc. The term excludes all 
luxury items including jewelry, furs, antiques, paintings, etc.
    Livestock means a member of the animal kingdom, or product thereof, 
as determined by the Agency.
    Majority interest means an ownership interest of more than 50 
percent of the entity.
    Non-essential asset means those assets in which the applicant has 
an ownership interest that do not contribute a net income to pay 
essential family living expenses or to maintain a sound farming 
operation and are not exempt from judgment creditors or in a bankruptcy 
action.
    Nonfarm enterprise means any nonfarm business enterprise, including 
recreation, that is closely associated with the farm operation and 
located on or adjacent to the farm and provides income to supplement 
farm income. This may include, but is not limited to, such enterprises 
as raising earthworms, exotic birds, tropical fish, dogs, and horses 
for nonfarm purposes, welding shops, roadside stands, boarding horses 
and riding stables.
    Normal production yield means:
    (a) The per-acre actual production history of the crops produced by 
the farming operation used to determine Federal crop insurance payments 
or payment under the Non-Insured Assistance Program for the production 
year during which the disaster occurred;
    (b) When the actual production history is not available, the 
applicant's own production records for the previous three years will be 
used. If the applicant's production records are not available, the 
records of production on which FSA farm program payments are made that 
are contained in the applicant's farm program file, for the previous 
three years will be used;

[[Page 797]]

    (c) When the production records outlined in paragraphs (a) and (b) 
of this definition are not available, the county average production 
yield will be used.
    Owner means those persons with an interest in the entity as a 
stockholder, partner, member, or joint operator.
    Physical loss means verifiable damage or destruction with respect 
to real estate or chattel, excluding annual growing crops.
    Production loss means verifiable damage or destruction with respect 
to annual growing crops.
    Security value means the Agency-established market value of 
property (less the value of any prior liens) used as security for a 
loan under this part as of the date of the closing of the loan.
    United States means each of the several States, the Commonwealth of 
Puerto Rico, the Virgin Islands of the United States, Guam, American 
Samoa, and the Commonwealth of the Northern Mariana Islands.
    Working capital means cash available to conduct normal daily 
farming or ranching operations including, but not limited to, feed, 
seed, fertilizer, pesticides, farm or ranch supplies, cooperative 
stock, and cash rent.


Sec. 764.3  Emergency loan funds uses.

    (a) Physical losses--(1) Real estate losses. Emergency loans may be 
used to address the needs of the farming operation associated with 
physical losses of essential real estate that were the result of a 
disaster to:
    (i) Acquire or enlarge the farm, as specified in Sec. 1943.16(a) of 
this title, as long such acquisition or enlargement does not cause the 
farm to exceed the requirements for a family farm;
    (ii) Replace or repair buildings or other structures which are 
essential to the ongoing viability of the operation. The Agency will 
finance such replacement or repair only to the extent that the 
structures conform to industry standards and meet the needs of the 
operation and intended purposes of the structure.
    (iii) Pay for activities to promote soil and water conservation and 
protection on the family farm as specified in Sec. 1943.16(c) of this 
title;
    (iv) Pay loan closing costs related to acquiring, enlarging, or 
improving the family farm as specified in Sec. 1943.16(d) of this 
title, that an applicant cannot pay from other sources;
    (v) Replace land or water resources on the family farm which 
resources cannot be restored;
    (vi) Pay costs associated with land and water development for 
conservation or use purposes;
    (vii) Establish a new site for farm dwelling and service buildings 
outside of a flood or mudslide area; and
    (viii) Replace land from the family farm that was sold or conveyed 
as a direct result of the disaster, if such land is necessary for the 
farming operation to be effective.
    (2) Chattel losses. Emergency loans may be used to address the 
needs of the farming operation associated with the physical losses of 
essential chattel that were the result of a disaster to:
    (i) Purchase livestock and farm equipment, including but not 
limited to quotas, and cooperative stock for credit, production, 
processing, or marketing purposes;
    (ii) Pay customary costs associated with obtaining, planning, and 
closing a loan that an applicant cannot pay from other sources (e.g. 
fees for legal, architectural, and other technical services, but not 
fees for agricultural management consultation and preparation of Agency 
forms);
    (iii) Repair or replace essential household contents damaged in the 
disaster;
    (iv) Pay the costs to restore perennials that produce an 
agricultural commodity, to the stage of development the damaged 
perennials had obtained prior to the disaster;
    (v) In the case of a farming operation that has suffered livestock 
losses not from breeding stock, pay essential farm operating and family 
household expenses; and
    (vi) Refinance debt (in the case of Farm Loan Program loan debt, as 
long as the applicant has not refinanced the loan more than 4 times).
    (b) Production losses. Emergency loans may be used to address the 
losses of the farming operation associated with production of 
agricultural commodities (except the losses associated with the loss of 
livestock) of the farming operation that were the result of a disaster 
to:
    (1) Pay costs associated with reorganizing the family farm to 
improve its profitability except that such costs shall not include the 
payment of bankruptcy expenses;
    (2) Pay annual operating expenses, which include, but are not 
limited to, feed, seed, fertilizer, pesticides, farm or ranch supplies, 
cooperative stock, and cash rent;
    (3) Pay costs associated with Federal or State-approved standards 
under the Occupational Safety and Health Act of 1970 (29 U.S.C. 655 and 
667) if the applicant can show that compliance or non-compliance with 
the standards will cause substantial economic injury;
    (4) Pay training costs required or recommended by the Agency;
    (5) Pay essential family household expenses;
    (6) Refinance debt (in the case of Farm Loan Program loan debt, as 
long as the applicant has not refinanced the loan more than 4 times); 
and
    (7) Replace lost working capital.


Sec. 764.4  Eligibility requirements.

    (a) General borrower eligibility requirements. An applicant for an 
Emergency loan must meet the following requirements:
    (1) Legal capacity. The applicant must have the legal capacity to 
incur the obligation of the loan.
    (2) Citizenship--(i) Applicant who is an individual. The individual 
applicant must be a citizen of the United States or an alien lawfully 
admitted to the United States for permanent residence as determined by 
the U.S. Immigration and Naturalization Service.
    (ii) Applicant that is an entity. If the applicant is an entity, 
the majority interest of the applicant must be held by individuals who 
are citizens of the United States or aliens lawfully admitted to the 
United States for permanent residence, as determined by the U.S. 
Immigration and Naturalization Service.
    (3) Family farm and nonfarm enterprise. The applicant's farming 
operation must qualify as a family farm and must not be a nonfarm 
enterprise.
    (4) Established farmer. An applicant must be an established farmer.
    (5) Owner and operator requirements.
    (i) Loans for physical losses to real estate. In the case of a loan 
for a purpose specified in Sec. 764.3(a)(1), an applicant must be:
    (A) The owner and operator of the farming operation; or
    (B) An operator of the farming operation whose lease on the 
affected real estate would exceed the term of the loan and give the 
Agency prior notification of the termination of the lease during the 
term of the loan, and whose lessor would provide the Agency a mortgage 
on the real estate as security for the loan.
    (ii) Loans for physical losses to chattel. In the case of a loan 
for a purpose specified in Sec. 764.3(a)(2), an applicant must be the 
operator of the farming operation.
    (iii) Loans for production losses. In the case of a loan for a 
purpose specified in Sec. 764.3(b), an applicant must be the operator 
of the farming operation.
    (6) Entity applicants. For entity applicants:
    (i) If the owners holding a majority interest in the entity 
applicant are

[[Page 798]]

related by blood or marriage, at least one of such related owners must 
operate the family farm.
    (ii) If the owners holding a majority interest in the entity 
applicant are not related by blood or marriage, the majority interest 
holders must all operate the family farm.
    (iii) If the entity applicant has an operator interest in any other 
farming operation, that farming operation must not exceed the 
requirements of a family farm.
    (7) Intent to continue farming. The applicant must demonstrate the 
intent to continue the farm operation after the disaster.
    (8) Credit history. The applicant must demonstrate a credit history 
satisfactory to the Agency. As part of the credit history the Agency 
will determine whether the applicant has dealt with the Agency in good 
faith. This includes the applicant providing current, complete, and 
truthful information when applying for assistance and in all past 
dealings with the Agency. The Agency will also examine whether the 
applicant has properly fulfilled its obligations to other parties, 
including other Federal agencies. The Agency may use credit reports or 
any other available information to evaluate credit history.
    (9) Availability of credit elsewhere. The applicant must be unable 
to obtain sufficient credit elsewhere at reasonable rates and terms. To 
establish this, the applicant must obtain written declinations of 
credit from legally organized commercial lending institutions within 
reasonable proximity of the applicant that specify the reasons for the 
declination as follows:
    (i) In the case of a loan for $300,000 or more, two written 
declinations of credit are required;
    (ii) In the case of a loan of less than $300,000, one written 
declination of credit is required; and
    (iii) In the case of a loan of $100,000 or less, the Agency may 
waive the requirement for obtaining a written declination of credit if 
the Agency determines that it would pose an undue burden on the 
applicant, the applicant certifies that they cannot get credit 
elsewhere, and based on the applicant's circumstances credit is not 
likely to be available;
    (iv) Notwithstanding the applicant's submission of the required 
written declinations of credit, the Agency may contact other commercial 
lending institutions within reasonable proximity of the applicant and 
make an independent determination of the applicant's ability to obtain 
credit elsewhere.
    (10) Prior debt forgiveness. The applicant must not have received 
debt forgiveness from the Agency on more than one occasion on or before 
April 4, 1996, or any time after April 4, 1996.
    (11) Federal judgment lien. The applicant's property must not be 
subject to a Federal judgment lien (other than a United States Tax 
Court lien).
    (12) Managerial ability. The applicant must have sufficient 
managerial ability to assure reasonable prospects of loan repayment, as 
determined by the Agency. The applicant must demonstrate this 
managerial ability by education, on-the-job training, or farming 
experience within the last 5 years that covers an entire production 
cycle.
    (13) Borrower training. The applicant must agree to meet the 
borrower training requirements in accordance with Sec. 1924.74 of this 
title.
    (14) Prior drug convictions. The applicant cannot have been 
convicted under Federal or State law of planting, cultivating, growing, 
producing, harvesting, or storing a controlled substance, as defined in 
21 CFR part 1308, during the current crop year or the previous 4 crop 
years.
    (15) Recovery of duplicative benefits. The applicant must agree to 
repay any duplicative Federal assistance to the agency providing such 
assistance. A person receiving Federal assistance for a major disaster 
or emergency is liable to the United States to the extent that the 
assistance duplicates benefits available to the person for the same 
purpose from another source.
    (b) Additional Emergency loan eligibility requirements--(1) Timely 
loan application. A loan application must be received by the Agency not 
later than 8 months after the date the disaster is declared or 
designated in the county of the applicant's farming operation.
    (2) Qualifying losses--(i) Loss must occur in a disaster area. The 
applicant may seek an Emergency loan only with respect to a family farm 
that had production or physical losses as a result of a disaster in a 
disaster area.
    (ii) Eligible production loss. For production loss loans, the 
applicant must have a disaster yield that is at least 30 percent below 
the normal production yield of any single crop, as determined by the 
Agency, that comprises a basic part of an applicant's total farming 
operation.
    (iii) Eligible physical loss. For physical loss loans, the 
applicant must have suffered disaster-related damage to chattel or real 
estate essential to the farming operation, to household items that must 
be repaired or replaced, to harvested or stored crops, or to perennial 
crops.
    (3) Changes in ownership structure. The ownership structure of a 
family farm may change between the time of a qualifying loss and the 
time an Emergency loan is closed. In such case, all of the following 
requirements must be met:
    (i) The applicant, in its new form, including all owners must meet 
all applicable eligibility requirements contained in this section;
    (ii) The new individual applicant, or all owners of a new entity 
applicant must have had an ownership interest in the farming operation 
at the time of the disaster; and
    (iii) The amount of the loan will be based on the percentage of the 
former farming operation transferred to the new applicant and in no 
event will the individual portions, aggregated, equal more than would 
have been authorized for the former farming operation.
    (4) Insurance requirement. Emergency loan funds may not be used for 
physical loss purposes (excluding losses to livestock) unless that 
physical property was covered by general hazard insurance at the time 
that the damage caused by the natural disaster occurred. The level of 
the coverage in effect at the time of the disaster must have been the 
tax or cost depreciated value, whichever is less. Chattel property must 
have been covered at the tax or cost depreciated value, whichever is 
less, when such insurance was readily available and the benefits of the 
coverage (i.e. the amount of coverage equaling the lesser of the 
property's tax or cost depreciated value) justify the cost of the 
insurance.


Sec. 764.5  Limitations.

    (a) General limitations--(1) Highly erodible soil and wetlands 
conservation. The Agency will not make a loan under this part for any 
purpose that contributes to erosion of highly-erodible land or the 
conversion of wetlands to produce an agricultural commodity.
    (2) Construction. Any construction financed by the Agency must 
comply with applicable Federal, State, local, and industry building 
standards and subpart A of part 1924 of this title.
    (3) Refinancing. Emergency loan funds may not be used to refinance 
consumer debt, such as automobile loans, or credit card debt unless 
such credit card debt is directly attributable to the farming 
operation.
    (b) Restriction on loan amount. An Emergency loan may not exceed 
the lesser of:
    (1) The amount of credit necessary to restore the family farming 
operation to its pre-disaster condition;

[[Page 799]]

    (2) In the case of a physical loss loan, the total eligible 
physical losses caused by the disaster; or
    (3) In the case of a production loss loan, 100 percent of the total 
actual production loss sustained by the applicant calculated pursuant 
to paragraph (d) of this section.
    (c) Maximum cumulative loan principal. The maximum cumulative 
Emergency loan principal that any individual or entity may have 
outstanding is $500,000.
    (d) Production losses. The applicant's actual production loss with 
respect to a crop is calculated as follows:
    (1) Subtract the applicant's disaster yield from the applicant's 
normal production yield to determine the applicant's per acre 
production loss;
    (2) Multiply the applicant's per acre production loss by the number 
of acres of the farming operation devoted to the crop to determine the 
volume of the production loss;
    (3) Multiply the volume of the applicant's production loss by the 
market price for such crop as determined by the Agency to determine the 
dollar value for the production loss; and
    (4) Subtract any other disaster related compensation or insurance 
indemnities received or to be received by the applicant for the 
production loss.
    (e) Physical loss--(1) Amount of loss. The applicant's total 
eligible physical loss is calculated as follows:
    (i) Add the allowable costs associated with replacing or repairing 
chattel covered by hazard insurance (excluding labor, machinery, 
equipment, or materials contributed by the applicant to repair or 
replace chattel);
    (ii) Add the allowable costs associated with repairing or replacing 
real estate, covered by hazard insurance;
    (iii) Add the value of livestock and livestock products (such 
valuation will be based on a national or regional valuation of species 
or product classification, whichever the Agency determines is more 
accurate);
    (iv) Add the allowable costs to restore perennials, which produce 
an agricultural commodity, to the stage of development the damaged 
perennials had obtained prior to the disaster;
    (v) Add, in the case of an applicant that is an individual, the 
allowable costs associated with repairing or replacing essential 
household contents, not to exceed $20,000; and
    (vi) Subtract any other disaster-related compensation or insurance 
indemnities received or to be received by the applicant for the loss or 
damage to the chattel or real estate.
    (2) Documentation. In the case of physical losses associated with 
livestock, the applicant must have written documentation of the 
inventory of livestock and records of livestock product sales 
sufficient to allow the Agency to value such livestock or livestock 
products just prior to the loss.


Sec. 764.6  Interest rate.

    The interest rate applicable for an Emergency loan will be the 
lower of the interest rate at the time of either loan approval or loan 
closing and in no event shall exceed 8 percent annually.


Sec. 764.7  Loan terms.

    (a) Basis for repayment. The Agency schedules repayment of 
Emergency loans based on the useful life of the loan security, the 
applicant's repayment ability, and the type of loss.
    (b) Minimum payment requirement. The repayment schedule must 
include at least one payment every year.
    (c) Repayment of loans for annual operating expenses. Emergency 
loans for annual operating expenses, except those expenses associated 
with establishing a perennial crop, must be repaid within 12 months. 
The Agency, however, may extend this term to not more than 18 months to 
accommodate the production cycle of the agricultural commodities of the 
farming operation.
    (d) Repayment of loans for production or physical losses to 
chattel. The repayment schedule for loans for production losses or 
physical losses to chattel (including but not limited to assets with an 
expected life between 1 and 7 years) may not exceed 7 years. If 
necessary to improve the repayment ability of the loan and real estate 
security is available, the term of the loan may be extended up to a 
total length not to exceed 20 years.
    (e) Repayment of loans for physical losses to real estate. The 
repayment schedule for loans for physical losses to real estate is 
based on repayment ability of the applicant and the useful life of the 
security, but in no case will the term of repayment exceed 40 years.


Sec. 764.8  Repayment and security requirements.

    (a) General requirements--(1) Ability to repay. The applicant must 
submit a feasible plan that demonstrates the applicant's ability to 
repay the loan. The plan also must demonstrate that the applicant will 
meet all other credit needs and obligations, including judgments, for 
which the applicant is legally responsible.
    (2) Sufficient equity. The applicant must have sufficient equity in 
the security pledged for an Emergency loan to provide adequate security 
for the loan except as permitted in paragraph (f) of this section. The 
applicant must provide additional security, if available, not to exceed 
150 percent of the loan amount.
    (3) Interests in property not owned by the applicant. Interests in 
property not owned by the applicant (such as leases that provide a 
mortgageable value, water rights, easements, mineral rights, and 
royalties) can be offered as security for the loan and will be 
considered in determining whether adequate security is available.
    (b) Real estate loans. In the case of an Emergency loan for real 
estate losses, the loan shall be secured at a minimum by the real 
estate that is being purchased, repaired, replaced, or improved with 
the loan funds.
    (c) Chattel and production loans. In the case of an Emergency loan 
for chattel and production losses, the loan shall be secured, at a 
minimum, by the chattel that is being purchased, repaired, replaced, 
refinanced, or produced with the loan funds.
    (d) Agency lien position--(1) Real estate security. If real estate 
is pledged as security for a loan, the Agency must obtain a first lien, 
if available, on the real estate. When a first lien is not available, 
the Agency may take a junior lien under the following conditions:
    (i) The prior lien does not contain any provision that may 
jeopardize the Agency's interest or the applicant's ability to repay 
the loan to the Agency;
    (ii) Prior lienholders agree to notify the Agency of acceleration 
and foreclosure whenever State law or other arrangements do not require 
such notice; and
    (iii) The applicant must agree to obtain permission from the Agency 
prior to granting any additional security interests in the real estate.
    (2) Real estate held under a purchase contract. If the real estate 
offered as security is held under a recorded purchase contract:
    (i) The applicant must provide a security interest in the real 
estate;
    (ii) The applicant and the purchase contract holder must agree in 
writing that any insurance proceeds received to compensate for real 
estate losses will be used only to replace or repair the damaged real 
estate;
    (iii) The applicant must refinance the existing purchase contract, 
or demonstrate that financing is not available, if an acceptable 
contract of sale cannot be negotiated or the purchase contract holder 
refuses to agree to apply all the insurance proceeds to repair or 
replace the damaged real estate and wants to retain

[[Page 800]]

some of the proceeds as an extra payment on the balance owed;
    (iv) The purchase contract must not be subject to summary 
cancellation on default and must not contain any provisions that are 
contrary to the Agency's best interests; and
    (v) The contract holder must agree in writing to notify the Agency 
of any breach by the purchaser, and give the Agency the option to 
rectify the conditions that amount to a breach within 30 days after the 
date the Agency receives written notice of the breach.
    (3) Chattel security. If chattel property is pledged as security 
for a loan the Agency must obtain a first lien on the chattel that is 
being purchased, repaired, replaced, refinanced, or produced with the 
loan funds.
    (e) Same security for multiple loans. The same property may be 
pledged as security for more than one Farm Loan Program loan.
    (f) Lack of adequate security. When adequate security is not 
available because of the disaster, the loan application may be approved 
if the Agency determines, based on the plan required in paragraph 
(a)(1) of this section, that there is a reasonable assurance that the 
applicant has the ability to repay the loan (based on an on-going 
operational basis, excluding special one-time sources of income or 
expenses) provided:
    (1) The applicant has pledged as collateral for the loan, all 
available personal and business collateral, except those items listed 
in paragraphs (h)(1) and (h)(2) of this section;
    (2) The feasible plan, approved by the Agency, indicates the loan 
will be repaid based upon the applicant's production and income history 
and addresses applicable pricing risks through the use of marketing 
contracts, hedging, options, revenue insurance or similar risk 
management practices;
    (3) The applicant has had positive net cash farm income in at least 
3 of the past 5 years; and
    (4) The applicant has given the Agency an assignment on any USDA 
program payments to be received.
    (g) Conditions for taking other assets as security--(1) Conditions. 
In addition to the requirements for adequate and additional security, 
the Agency will take a security interest in other assets (other than 
assets listed under the exceptions in paragraph (h) of this section), 
if available, when:
    (i) An applicant has non-essential assets that are not being 
converted to cash to reduce the loan amount; or
    (ii) The real estate security and chattel security do not provide 
adequate security for the loan.
    (2) List of other assets. Other assets may include:
    (i) A pledge of real estate or chattel by a third party;
    (ii) Patents, copyrights, life insurance, stocks, other securities, 
and membership in cooperatives, owned by the applicant;
    (iii) Assets owned by an applicant that cannot be converted to cash 
without jeopardizing the farm operation; and
    (iv) Non-essential assets owned by the applicant with an aggregate 
value in excess of $5,000.
    (h) Exceptions to security requirements. The Agency will not take a 
security interest in certain property in the following situations:
    (1) The property proposed as security has environmental 
contamination, restrictions, or historical impact that could impair the 
value or expose the Agency to potential liability;
    (2) The Agency cannot obtain a valid lien on the security;
    (3) The applicant's personal residence and appurtenances are on a 
parcel of land separate and apart from that real estate being used as 
adequate security for the loan; or
    (4) The applicant's other assets are used for farming or for 
essential living expenses and are not needed for security purposes, 
including but not limited to, subsistence livestock, cash or special 
cash collateral accounts, retirement accounts, personal vehicles, 
household goods, and small tools and equipment such as hand tools, 
power lawn mowers.
    (i) Requirements for security. (1) For loans over $25,000, title 
clearance is required when real estate is taken as security.
    (2) For loans of $25,000 or less, when real estate is taken as 
security, a certification of ownership in real estate is required. 
Certification of ownership may be in the form of an affidavit which is 
signed by the applicant, naming the record owner of the real estate in 
question and listing the balances due on all known debts against the 
real estate. Whenever the loan approving official is uncertain of the 
record owner or debts against the real estate security, a title search 
is required.
    (j) Taking Indian Trust lands as security. The Agency may take a 
lien on Indian Trust lands as security provided that the requirements 
of Sec. 1943.19(a)(7) of this title are satisfied.


Sec. 764.9  Appraisal and valuation requirements.

    (a) Establishing value for real estate. Real estate appraisals 
conducted pursuant to this part may be completed by designated 
appraisers or contract appraisers and shall conform to the Uniform 
Standards of Professional Appraisal Practice guidelines and standards 
in accordance with Sec. 761.8 of this chapter.
    (b) Establishing value for agricultural commodities and equipment. 
Valuations of agricultural commodities and equipment shall be 
established as follows:
    (1) The security value of the annual agricultural commodities 
production (excluding livestock) will be 100 percent of the amount 
loaned for annual operating and essential family household expenses, or 
the amount of expected crop revenue, excluding farm program and 
insurance payments, whichever is lower.
    (2) The value of livestock and equipment will be the market value 
as determined by the Agency in accordance with Sec. 761.8 of this 
chapter.
    (c) Assets damaged by the disaster. In the case of farm assets 
damaged by the disaster, the value of such security shall be 
established as of the day before the disaster occurred.


Sec. 764.10  Insurance for loan security.

    (a) Adequacy of insurance. An applicant must obtain insurance, 
consistent with this section, equal to the lesser of the value of the 
security at the time of loan closing, or the principal of the loan.
    (b) Hazard insurance. All security (except growing crops) must be 
covered by hazard insurance if it is readily available (i.e. sold by 
insurance agents in the applicants normal trade area) and economically 
feasible.
    (c) Flood or mudslide insurance. Real estate security located in 
flood or mudslide prone areas, as determined by the Agency, must be 
covered by flood or mudslide insurance.
    (d) Crop insurance--(1) Requirement to obtain crop insurance. 
Except as provided in paragraph (d)(2) of this section, prior to 
closing the loan, the applicant must have obtained at least the 
catastrophic risk protection level of crop insurance coverage for the 
crop during the crop year for which the loan is sought for each crop 
which is a basic part of an applicant's total farming operation, if 
such insurance is available, unless the applicant executes a written 
waiver of any emergency crop loss assistance with respect to such crop.
    (2) Exception. Growing crops used to provide adequate security must 
be covered by crop insurance if such insurance is available.
    (e) Indemnities. A borrower must:
    (1) List the Agency as loss payee for the insurance indemnity 
payment or as

[[Page 801]]

a beneficiary of a mortgagee loss payable clause; and
    (2) In the case of crop insurance, execute an assignment of 
indemnity in favor of the Agency.


Sec. 764.11  Charges and fees.

    The applicant must pay all filing, recording, notary, and lien 
search fees necessary to process and close a loan. The applicant may 
pay or be reimbursed for these fees from Emergency loan funds.

PART 1945--EMERGENCY

    2. Subparts B, C and D are removed.

    Signed at Washington, DC, on December 31, 2001.
J.B. Penn,
Under Secretary for Farm and Foreign Agricultural Services.
[FR Doc. 02-359 Filed 1-7-02; 8:45 am]
BILLING CODE 3410-05-P