[Federal Register Volume 68, Number 23 (Tuesday, February 4, 2003)]
[Proposed Rules]
[Pages 5595-5610]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-2506]


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FARM CREDIT ADMINISTRATION

12 CFR Parts 609, 614, 615, and 617

RIN 3052-AB69


Electronic Commerce; Loan Policies and Operations; Funding and 
Fiscal Affairs, Loan Policies and Operations, and Funding Operations; 
Borrower Rights

AGENCY: Farm Credit Administration (FCA).

ACTION: Proposed rule.

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SUMMARY: These proposed rules clarify existing provisions, respond to 
comments, and reorganize the rules into a separate section of FCA 
(agency, we, or our) regulations. This update will help agricultural 
borrowers and institutions of the Farm Credit System (FCS or System) 
better understand the rights Congress afforded applicants and borrowers 
of the System. We intend for the proposal to clarify how FCS 
institutions should apply these rights to applicants and borrowers.

DATES: Written comments should be received on or before April 7, 2003.

ADDRESSES: You may submit comments by electronic mail to ``[email protected]'' or through the Pending Regulations section of our Web 
site at ``http://www.fca.gov.'' You may also mail or deliver written 
comments to Thomas G. McKenzie, Director,

[[Page 5596]]

Regulation and Policy Division, Office of Policy and Analysis, Farm 
Credit Administration, 1501 Farm Credit Drive, McLean, Virginia 22102-
5090 or send them by facsimile transmission to (703) 734-5784. You may 
review copies of all comments we receive at our office in McLean, 
Virginia.

FOR FURTHER INFORMATION CONTACT: Mark L. Johansen, Policy Analyst, 
Office of Policy Analysis, Farm Credit Administration, McLean, VA 
22102-5090, (703) 883-4479, TTY (703) 883-4434;

    Or

    Joy Strickland, Senior Counsel, Office of General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 
883-2020.

SUPPLEMENTARY INFORMATION:

I. Objectives

    The objectives of these proposed rules are to:
    [sbull] Ensure that the borrower rights regulations provide the 
protection to applicants and distressed borrowers as mandated by the 
Farm Credit Act of 1971, as amended (Act).\1\
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    \1\ Pub. L. 92-181, 85 Stat. 583.
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    [sbull] Avoid placing unnecessary burdens on FCS institutions.
    [sbull] Use plain language and a question and answer format.

II. Background

    In the Farm Credit Amendments of 1985\2\ and the Agricultural 
Credit Act of 1987,\3\ Congress gave certain rights to borrowers of 
System institutions that operate under titles I and II of the Act. 
These rights include the right of review of certain loan decisions, the 
right to receive a notice when a loan becomes distressed, the 
opportunity to request a restructuring of a distressed loan, and the 
opportunity for the right of first refusal to repurchase or lease 
acquired agricultural real estate following foreclosure or voluntary 
conveyance. Collectively, these rights are referred to as borrower 
rights. On September 14, 1988, we published final borrower rights 
rules.\4\ Since then we have observed differences in how System 
institutions apply these regulations and reviewed complaints from 
borrowers and applicants regarding their rights. To ensure that our 
expectations for borrower rights are clear, we propose these updated 
regulations.
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    \2\ Pub. L. 99-205, 99 Stat. 1678.
    \3\ Pub. L. 100-233, 101 Stat. 1568.
    \4\ 53 FR 35427 (September 14, 1988).
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III. Comments Received

    We received comments on our existing regulations prior to 
developing these proposed rules. The comments were in response to a 
June 23, 1993, regulatory burden solicitation \5\ and a May 17, 2000, 
letter from the Farm Credit Council (FCC) on behalf of its member banks 
and associations.
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    \5\ 58 FR 34003 (June 23, 1993).
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IV. Redesignate Portions of Part 614 to Part 617

    We propose redesignating the regulations from existing subparts H, 
L, and N of part 614 to part 617 of the regulations. This move will 
make the borrower rights rules more readily identifiable. We also 
propose conforming changes in Sec. Sec.  609.910(c), 615.5280(h), and 
615.5290(a) and (b) to part 617.

V. General Issues

    We received comments on general issues of borrower rights 
applicability and relationship to other laws. We will address those 
first and then proceed to comments concerning specific issues.

A. Family Farmers [Sec.  617.7000]

    The term ``loan,'' defined in section 4.14A(a)(5) of the Act and 
existing Sec. Sec.  614.4440(g) and 614.4512(f), means an extension of 
credit made to a farmer, rancher, or producer or harvester of aquatic 
products, for any agricultural or aquatic purpose and other credit 
needs of the borrower, including financing for basic processing and 
marketing directly related to the borrower's operations and those of 
other eligible farmers, ranchers, and producers or harvesters of 
aquatic products. The FCC commented that we should restrict application 
of borrower rights to ``family farmers,'' which FCC defined to mean 
farmers with agricultural sales equal to or less than $500,000. The 
FCC's interpretation of the legislative history of the borrower rights 
legislation is that Congress intended to narrow the bargaining position 
between borrowers and the System institutions. The FCC believes that, 
with increased consolidation and sophistication of farming operations, 
the need for a level-bargaining position has decreased.
    We recognize that the consolidation among agricultural producers 
has resulted in more sophisticated operators, but we do not believe 
Congress intended that the borrower rights legislation apply only to 
family farmers. The statutory definition of loans covered by borrower 
rights is clear, unambiguous, and does not distinguish between types of 
farmers, nor does it contain any sales or income limitations. Although 
Congress considered limiting borrower rights to only family farmers 
when this legislation was being debated, it ultimately chose not to do 
so. The Senate bill limited borrower rights and provided a definition 
of family farmers.\6\ Once the Senate and House bills were reconciled 
in conference, limiting borrower rights to family farmers was 
abandoned. Congress did not adopt the Senate's definition of family 
farmer. Instead, it adopted a definition of loan that includes all 
agricultural loans.\7\
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    \6\ See S. Rep. No. 100-230 at 34, 109 (1987).
    \7\ See H.R. Conf. Rep. 100-490 at 164-165 (1987).
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    We do not believe it is appropriate to restrict borrower rights to 
family farmers or farmers with agricultural sales of equal to or less 
than $500,000 as the FCC requested. Thus, we make no changes to the 
existing rules.

B. How Do Borrower Rights Apply to Loans That Are Sold to, Participated 
With, or Subordinated in Favor of Non-qualified Lenders? [Sec.  
617.7015]

    Section 4.14A(a)(5)(B) of the Act provides that borrower rights do 
not apply to loans sold into the secondary market. The FCC recommended 
defining loans sold into the secondary market to include 
participations, subordinated debt transactions, and other sales 
transactions that include non-qualified lenders. The FCC asserted that 
non-qualified lenders are hesitant to participate in such transactions 
with the System because of borrower rights requirements.
    Loan sales to other lenders, participations, and subordinated debt 
transactions are not secondary market activities. We found no evidence 
that Congress intended the secondary market sales exemption to apply to 
other types of loan transactions.
    We propose moving Sec.  614.4336 from part 614, subpart H to Sec.  
617.7015 in part 617, subpart A.

C. Are Borrowers With Trade Credit Loans Excluded From Borrower Rights? 
[Sec.  617.7000]

    The FCC commented that borrower rights are an impediment to an 
effective trade credit program. They suggested that borrowers purchase 
participation certificates instead of stock with trade credit loans in 
order to exempt such loans from borrower rights.
    We do not agree with this comment and do not propose such a change. 
Existing Sec.  614.4525(a) allows a qualified lender to ``enter into 
agreements with agents, dealers, cooperatives, other lenders, and 
individuals to facilitate its

[[Page 5597]]

making of loans'' to eligible borrowers. For the purpose of applying 
borrower rights, a loan that is facilitated by a third-party dealer or 
other agent is no different from any other loan made by a qualified 
lender. As a direct loan, trade credit loans require that the borrower 
buy stock pursuant to section 4.3A of the Act. Further, trade credit 
loans meet the definition contained in part C of title IV of the Act 
and are subject to borrower rights.

VI. Specific Issues

A. Definitions [Sec.  617.7000]

    We propose moving the existing definition sections in Sec. Sec.  
614.4440 and 614.4512 to proposed Sec.  617.7000. The definitions of 
applicant (Sec.  614.4440(b)), foreclosure proceeding (Sec.  
614.4512(e)), independent evaluator (Sec.  614.4440(f)), and qualified 
lender (Sec. Sec.  614.4440(h) and 614.4512(g)) remain unchanged. We 
propose the following definitional changes.
1. Adverse Credit Decision [Sec.  614.4440(a) to Proposed Sec.  
617.7000]
    The FCC and a System institution requested that we revise the 
definition of ``adverse credit decision'' in existing Sec.  614.4440(a) 
to clarify its intent. According to the commenters, the definition has 
been incorrectly construed to mean a denial of a loan and all the loan 
terms requested by the applicant.
    We agree with this comment and propose clarifying this definition 
by deleting the phrase ``deny the credit applied for, or approve an 
extension of credit in an amount less than the amount applied for'' and 
replacing it with the following: (a) The lender decides not to make a 
loan to an applicant; (b) makes the loan in an amount less than the 
applicant requested; or (c) denies an application for restructuring. 
Making a loan in the amount requested, but with different terms, is not 
considered an adverse credit decision.
2. Application for Restructuring [Sec. Sec.  614.4440(c) and 
614.4512(a) to Proposed Sec.  617.7000]
    In response to a comment from the FCC, we propose to amend this 
definition to allow a borrower's plan of reorganization submitted in a 
bankruptcy proceeding to serve as the application for restructuring. We 
propose this change because the application for restructuring and the 
bankruptcy plan of reorganization contain similar information.
3. Distressed Loan [Sec. Sec.  614.4440(e) and 614.4512(d) to proposed 
Sec.  617.7000]
    The FCC asked us to change our definition of a distressed loan to 
include all the loans from the qualified lender that the borrower is 
obligated to repay. We decline to change our definition because each 
loan separately must meet the definition of distressed.
4. Loan Application [Sec.  614.4440(d) to Proposed Sec.  617.7000]
    The FCC commented that we should clarify when a loan application is 
sufficiently complete to begin deliberations. FCC commented that 
qualified lenders need to distinguish between an inquiry and an 
application because an adverse decision on an application triggers 
borrower rights, but an inquiry does not. The FCC also suggested that 
we adopt the Regulation B definition of an application.\8\
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    \8\ 12 CFR 202.2(f).
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    We agree with the comment and propose changing the definition of a 
loan application to one similar to Regulation B. We propose adding 
language specifically describing a loan application as a package that 
provides the qualified lender with enough information to make a credit 
decision. Lenders should be mindful of the distinction between an 
application and an inquiry for purposes of borrower rights and 
Regulation B. Informal inquiries may rise to the level of applications 
if the lender evaluates information about the inquirer, decides to 
decline the request, and communicates this to the inquirer. Whether or 
not an inquiry is an application depends on the particular 
circumstances and a qualified lender needs to focus on how it responds 
to an applicant, rather than on what the applicant asks, in order to 
make the determination.
    We propose to change the title of ``Application for a Loan or Loan 
Application'' in Sec.  614.4440(d) to ``Loan Application'' in proposed 
Sec.  617.7000.
5. Restructure [Sec. Sec.  614.4440(i) and 614.4512(h) to Proposed 
Sec.  617.7000]
    We propose modifying the definition of restructure to recognize 
that not all restructurings will result in viability. For more 
discussion, see Part E.2. of this preamble.
6. Delete Reference to the Certified Lender and Special Asset Group 
[Sec.  614.4512(b)]
    We propose deleting the definition of a certified lender in 
existing Sec.  614.4512(b) and the reference to special asset group in 
Sec.  614.4519(c) because the requirements for them are obsolete.
7. Redesignate Existing Sec.  614.4512(c)--Cost of Foreclosure--to 
Proposed Sec.  617.7415(b) [Sec.  617.7415(b)]
    We propose redesignating the content of existing Sec.  614.4512(c) 
to proposed Sec.  617.7415(b) to locate the criteria for the cost of 
foreclosure near the rules on evaluating applications for 
restructuring.

B. May Qualified Lenders Use Electronic Communications to Comply with 
Borrower Rights? [Sec.  617.7005]

    The FCC asked that we amend our existing rules to authorize 
electronic communications for borrower rights disclosures. As part of 
our initiative to implement the Electronic Signatures in Global and 
National Commerce Act, Pub. L. No. 106-229, codified at 15 U.S.C. 7001 
et seq. (E-SIGN) and our electronic commerce (E-commerce) rule,\9\ we 
propose adding Sec.  617.7005 to permit electronic communications as 
allowed for by law.
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    \9\ 67 FR 16627 (April 7, 2002).
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    The preamble to the final E-commerce rule states that E-SIGN 
preempts (with some exceptions) provisions in most state or federal 
statutes or regulations, including the Act and its implementing 
regulations, which require contracts or other records to be written, 
signed, or to be in non-electronic form. With the parties' agreement, 
qualified lenders may now use E-commerce and electronic communications 
in many situations.
    Qualified lenders should interpret this part broadly to allow 
electronic transmission, communications, records, and submissions, as 
provided by E-SIGN. Qualified lenders may interpret the terms used in 
this part to permit electronic transmission, communications, records, 
and submissions in business, consumer, or commercial transactions, 
unless otherwise prohibited. E-SIGN does not, however, allow electronic 
communications for a notice of default, acceleration, repossession, 
foreclosure, eviction, or the right to cure when an individual's 
primary residence secures the loan.\10\ In these instances, a qualified 
lender must use the paper communications required by the Act and 
borrower rights regulations. E-SIGN also requires paper notification to 
cancel or terminate life insurance.
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    \10\ This exception is found in section 103(b)(2)(B) of E-SIGN 
and 12 CFR 609.950(c).
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    In addition to the primary residence provision, E-SIGN established 
different standards for business and consumers

[[Page 5598]]

using E-commerce. While both businesses and consumers must agree to E-
commerce, E-SIGN provides certain protections and compulsory procedures 
when a statute or regulation, such as the Equal Credit Opportunity Act, 
requires that information be provided to a consumer. These same 
protections are not afforded to businesses. Under E-SIGN, ``consumer'' 
means an individual who obtains, through a transaction, products or 
services used primarily for personal, family, or household purposes. 
Some loans under E-SIGN qualify as consumer transactions, while others 
are business transactions. A qualified lender must distinguish between 
the two types of transactions to comply with E-SIGN.
    We have summarized the pertinent consumer consent provisions below. 
For a complete list, please see the preamble to the proposed E-commerce 
rule.\11\ You may also view the proposed rule and other E-commerce 
information under the ``Resources for the FCS'' section of our Web site 
at http://www.fca.gov.
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    \11\ 66 FR 53348 (October 22, 2001).
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    [sbull] Consumer consent may apply to a particular transaction and/
or category of records. Consumers may decide when they want electronic 
records and notices.
    [sbull] Consumers who choose to receive documents electronically 
must show the technological capacity to do so prior to consenting to E-
commerce. For example, to show technological capacity, the lender may 
ask the consumer to communicate with the lender by sending an e-mail to 
the lender through an Internet provider or by logging onto the lender's 
Internet Web site.
    We direct qualified lenders to E-SIGN and part 609 of our 
regulations to determine how to apply E-commerce and use electronic 
communications. Qualified lenders should also consult legal counsel 
before engaging in E-commerce and using electronic communications.

C. May a Borrower Waive All or a Portion of the Borrower Rights? [Sec.  
617.7010]

    Questions about whether a borrower may waive the rights granted in 
the Act and FCA regulations have arisen since these laws were enacted. 
We have consistently taken the position that, as a general rule, an 
institution may not obtain a waiver of borrower rights. These rights 
have a public policy purpose and should only be waived in limited 
circumstances, such as when the parties are in a reasonably equal 
bargaining position or when other federal rights provide protections 
similar to borrower rights. We propose adding this position in proposed 
Sec.  617.7010(a).
1. May a Borrower Who Has a Loan Guaranteed by the Small Business 
Administration (SBA) Waive Borrower Rights? [Sec.  617.7010(b)]
    In FCA Bookletter BL-028, issued April 1, 1996, we permitted 
borrowers to waive certain borrower rights in connection with receiving 
a loan guarantee from the SBA. A borrower with an SBA guaranteed loan 
may waive the right of distressed loan restructuring, the right to 
appear before the credit review committee (CRC or committee), and the 
right of first refusal. We believe such a waiver is appropriate because 
the laws governing SBA guaranteed loans provide for servicing actions 
similar to the borrower rights provided in the Act. We propose 
incorporating this waiver in proposed Sec.  617.7010(b)(1). Any waivers 
that are obtained pursuant to this regulation must be given voluntarily 
by the borrower and must be in writing. The qualified lender would be 
required to provide written explanation of the rights being waived by 
the borrower.
2. May a Borrower Waive Borrower Rights in Connection With a 
Subordinated Debt Transaction? [Sec.  617.7010(a)]
    The FCC commented that a borrower should be able to waive borrower 
rights in subordinated debt transactions in the same manner as in loan 
sale transactions. We do not agree and are not proposing any regulatory 
changes. Subordinated debt transactions are direct loans made by a 
qualified lender. In these transactions, the lender is merely allowing 
another lender to have a priority lien on the collateral. The loan 
remains unchanged and borrower rights continue to apply.
3. How Does a Waiver Apply in a Loan Sale Transaction? [Sec.  
617.7015(c)]
    Existing Sec.  614.4336(c) describes the procedures that a 
qualified lender must follow when selling a loan to a non-qualified 
lender. The qualified lender must either: (1) Include, with the 
borrower's consent, a provision in the original loan contract or modify 
it so that the purchasing lender will continue to provide the borrower 
rights granted by part C of title IV of the Act; or (2) obtain a waiver 
of borrower rights from the borrower. The FCC commented that we should 
allow, without borrower consent, the prospective buyer of a loan to 
execute an agreement with the qualified lender in which the buyer will 
provide all borrower rights that a qualified lender is obligated to 
provide. We do not propose adding this alternative. Under the Act, 
borrower rights belong to the borrower and may only be modified by the 
borrower. Absent a provision in the loan contract, non-qualified 
lenders are not obligated to provide borrower rights and we do not have 
enforcement authority over them.
    The FCC alternatively asked if the buyer of a loan may directly 
obtain a waiver of borrower rights from the borrower, rather than 
requiring the qualified lender to obtain the waiver. We do not agree 
with this comment. Implementing all borrower rights provisions, 
including waivers, are the responsibility of the qualified lender. 
Therefore, we are proposing no changes to the waiver provisions of 
existing Sec.  614.4336(c) and redesignating it as proposed Sec.  
617.7015(c).

D. What Is the Review Process for Adverse Credit Decisions? [Sec.  
617.7300 et seq.]

    Section 4.14 of the Act requires a qualified lender to establish a 
CRC to review adverse credit decisions made by the qualified lender on 
loan applications and denials of applications for restructuring.
1. Whom Should the Qualified Lender Notify? [Sec. Sec.  617.7300, 
617.7410(d), and 617.7420(b)]
    Existing Sec. Sec.  614.4441, 614.4516(a)(2), and 614.4518 allow a 
lender to notify one designated primary obligor or applicant in 
situations where there are multiple borrowers or applicants. The FCC 
recommended a single notice provision as a way of eliminating multiple 
notices and claims of a wrong party receiving notice. Although we 
recognize the efficiencies gained in sending disclosures to only one of 
the obligors, we also recognize the value of keeping all obligors 
informed. As a result, we propose in Sec. Sec.  617.7300, 617.7410(d), 
and 617.7420(b) to require that qualified lenders notify all applicants 
or all parties listed on the promissory note as primarily obligated to 
repay the debt. The applicants or borrowers may designate one person to 
be the primary contact and the lender may then send the original notice 
to that person. However, the lender must send copies of the notice to 
the other applicants or borrowers.

[[Page 5599]]

2. When Should a Qualified Lender Notify a Borrower That the 
Application for Restructuring Has Been Denied and What Information May 
the Borrower Use in the CRC Review? [Sec.  617.7310(c)]
    Confusion has arisen over the years as to when in the restructuring 
process the qualified lender must offer the right of CRC review. In 
addition, an FCS institution asked if a borrower may present the 
original application for restructuring to the CRC even if the original 
application was not the basis for the ultimate restructuring decision. 
In the preamble to Sec.  614.4443,\12\ we expressed the intent for the 
lender and borrower to engage in ``* * * a cooperative effort to 
attempt to find solutions before the CRC process began.'' We believe 
Congress expected borrowers and lender to negotiate applications for 
restructuring. The negotiations, which may include plan modifications, 
must reach a conclusion. Once negotiations are concluded and the lender 
denies the borrower's request, the borrower is then given the 
opportunity to appear before the CRC. The borrower may present the 
initial application for restructuring or any subsequent modifications 
that resulted in denial by the qualified lender.
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    \12\ Id. at note 4.
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    We propose moving Sec.  614.4443(b) to Sec.  617.7310(c).
3. Who Serves on the CRC? [Sec.  617.7305]
    Section 4.14(a) of the Act requires the membership of the CRC to 
include at least one farmer-member of the qualified lender's board of 
directors. In the preamble to the existing regulations,\13\ we 
explained farmer board representation means a farmer, rancher, or 
producer or harvester of aquatic products. We are clarifying that 
farmer board representation also means an elected board member, as 
opposed to an appointed board member.
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    \13\ Id. at note 4.
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    Section 4.14(a) of the Act also requires farmer board 
representation and prohibits the loan officer involved in the original 
credit decision from serving on the CRC. The Act does not prohibit 
delegations. However, existing Sec.  614.4442 provides that the board 
member serving on the CRC may designate an alternate to serve on the 
committee as long as the alternate is also an elected farmer board 
member, but prohibits non-board members of the CRC from delegating 
committee duties. The FCC requested that the restriction prohibiting 
delegations be removed. We agree and propose removing the restriction 
in proposed Sec.  617.7305. As long as the replacement members of the 
CRC are experienced and capable of rendering thoughtful and careful 
review of adverse credit decision, we believe the delegation 
restriction is unnecessary.
4. Must a Qualified Lender Notify an Applicant or Borrower of a CRC 
Meeting? [Sec.  617.7310(a)]
    The existing rule at Sec.  614.4443 does not require a qualified 
lender to notify an applicant or borrower of the CRC meeting date where 
the applicant or borrower's request for review will be discussed. 
Although we do not believe that this has been a problem in the past, we 
wish to correct this oversight. Proposed Sec.  617.7310(a) requires a 
qualified lender to inform the applicant or borrower of the CRC meeting 
date at least 15 days in advance of when the request for review will be 
discussed.
5. What Information May Not Be Submitted to the CRC? [Sec.  
617.7310(c)]
    The FCC commented that the CRC is not a substitute for the normal 
credit process and the committee should not act on new information or 
negotiate a new proposal. The FCC requested that we emphasize that the 
CRC review is of the denied loan or restructuring request and is not an 
opportunity for the applicant or borrower to introduce new information. 
We believe the existing rule clearly indicates that the CRC function is 
one of review and the CRC meetings are not forums for new issues. 
Existing Sec.  614.4443(b) allows an applicant or borrower to submit 
``any documents or other evidence'' to the CRC that supports the 
application under review. The purpose of the review is to provide the 
opportunity for the applicant or borrower to demonstrate that the loan 
or restructuring request satisfies the credit standards of the 
qualified lender. The Act makes no provision for presenting a new 
application to the CRC.
    We propose moving Sec.  614.4443(b) to Sec.  617.7310(c).
6. Who Has the Right to an Independent Collateral Evaluation? [Sec.  
617.7310(d)]
    A System institution and the FCC suggested that the right to an 
independent collateral evaluation only applies to those applicants or 
borrowers whose applications were denied because of insufficient real 
estate collateral. We disagree. The Act does not place conditions on 
the right to an independent collateral evaluation. Section 4.14(d) 
provides applicants and borrowers the right to have the CRC review 
independent collateral evaluations, whether or not insufficient 
collateral was the reason for the loan or restructure denial. However, 
we believe that if qualified lenders provide complete disclosure to the 
applicant or borrower of the reasons for the loan or restructure 
denial, unnecessary independent collateral evaluations will not occur.
    We propose moving Sec.  614.4443(c) to Sec.  617.7310(d).
7. How Long Does an Applicant or Borrower Have To Obtain an Independent 
Collateral Evaluation? [Sec.  617.7310(d)(2)]
    The FCC and one System institution suggested we establish a 60-day 
limit to seek an independent collateral evaluation. Section 4.14(d) of 
the Act provides that an applicant or borrower who receives an adverse 
credit decision may request an independent collateral evaluation in 
connection with an appeal to the CRC. Existing Sec.  614.4443(c)(2) 
requires the collateral evaluation to be completed within a reasonable 
period of time. The Act does not provide a more definitive time limit 
for completing an independent evaluation, although the legislative 
history of section 4.14(d)(2) of the Act indicates that Congress was 
concerned with potential delays in this process. We do not believe a 
regulatory time limit to obtain an independent evaluation is 
appropriate. We recognize that in some cases the applicant or borrower 
legitimately may need longer than the 60-day limit recommended by the 
commenters, particularly if there are no authorized independent 
evaluators in the local area. We have instead proposed in Sec.  
617.7310(d)(2) a 30-day limit for applicants or borrowers to enter into 
a contract for evaluation services. We believe this time limit will 
help ensure that the review process is not unnecessarily delayed.
    As a result of this change, we propose removing that portion of 
existing Sec.  614.4443(c)(3) stating ``* * * provided the applicant's 
or borrower's evaluator has provided a copy of the evaluation report to 
the lender not less than 15 days prior to any scheduled meeting of the 
credit review committee.'' We originally adopted this requirement to 
assist a qualified lender in the situation where a borrower is 
attempting to delay the CRC review process. In re-evaluating our entire 
borrower rights regulations, however, we believe the better approach is 
to require the borrower to contract with an independent evaluator 
within 30 days. By removing this portion of the existing rule, we do 
not intend an applicant or borrower to delay submitting an independent 
collateral evaluation to the qualified lender. An applicant or borrower 
should make every effort to provide the independent

[[Page 5600]]

evaluation well in advance of the CRC meeting to ensure it is given 
full consideration. Although ultimately, the CRC must consider any 
independent collateral evaluation obtained, pursuant to section 
4.14(d)(2) of the Act.
8. What Copies of Independent Collateral Evaluations Must a Qualified 
Lender Provide an Applicant or Borrower? [Sec.  617.7310(c)]
    The FCC suggested that a borrower's right to receive a copy of the 
independent collateral evaluations used in a credit decision should be 
limited to the most recent independent collateral evaluation. We 
disagree. Section 4.14(d)(3) of the Act states that a borrower may 
obtain a copy of each independent collateral evaluation made and we 
reiterate this provision in proposed Sec.  617.7310(c).
9. How Long May the CRC Take To Reach a Decision? [Sec.  617.7310(e)]
    Existing Sec.  614.4443(d) does not provide any time limit for the 
CRC to reach a decision. We propose in Sec.  617.7310(e) a time limit 
of no more than 30 days for the CRC to reach a decision. Decisions 
should be made as expeditiously as possible to prevent undue delay and 
increased costs to the qualified lender and applicant or borrower. We 
believe this time limit will ensure an expedited decision-making 
process.
10. What Records Must the CRC Maintain? [Sec.  617.7315]
    Existing Sec.  614.4444 requires the CRC to maintain records of a 
request for review, the meeting minutes, and the decision of the 
committee. We believe the second sentence in the section that refers to 
keeping records for FCA review is redundant and therefore, we propose 
its deletion in Sec.  617.7315.

E. What Are the Distressed Loan Restructuring Notice Options? [Sec.  
617.7410]

1. What Notices May a Qualified Lender Send to a Distressed Borrower? 
[Sec.  617.7410(a) and (b)]
    Once a qualified lender determines a loan is distressed, the lender 
must notify the borrower that: (1) The loan is distressed; (2) the 
borrower has the right to request a restructure of the loan and what to 
include in the application for restructuring; and (3) an alternative to 
restructure may be foreclosure. In 1993, we clarified that qualified 
lenders had the option of sending two distinctly different notices.\14\ 
One notice, the ``non-foreclosure notice,'' would include items (1) and 
(2) above, while the other notice, the ``45-day notice,'' would include 
all three items. A qualified lender may send the non-foreclosure notice 
when it is not considering foreclosure. The 45-day notice must be sent 
when foreclosure is a consideration. To initiate foreclosure, the 
qualified lender must have sent the 45-day notice.
---------------------------------------------------------------------------

    \14\ 58 FR 62513 (November 29, 1993).
---------------------------------------------------------------------------

    A System institution commented that the 45-day notice requirement 
does not provide enough time for a qualified lender to consider an 
application for restructuring and to make a sound decision. We believe 
the commenter has misinterpreted the 45-day requirement. There is no 
requirement that a qualified lender complete a restructuring or make a 
restructuring decision in 45 days. The qualified lender should take the 
time necessary to thoroughly consider the application and work with the 
borrower.
    We are consolidating the notice requirements in Sec. Sec.  
614.4516(a) and 614.4519(a) into proposed Sec.  617.7410(a) and (b).
2. What Is the Purpose of Each Notice? [Sec.  617.7410(a) and (b)]
    The non-foreclosure notice informs the borrower that a loan is 
distressed and may be suitable for restructuring. The 45-day notice 
puts the borrower on notice that if a loan is not restructured, the 
qualified lender may initiate foreclosure.
    The FCC commented that the lender should not have to send another 
notice if the borrower defaults within 12 months of the original 
notice. As we understand the comment, the FCC is concerned about 
sending more than one distressed loan notice before the qualified 
lender can begin foreclosure proceedings. In response, we clarify that 
a qualified lender need only send a second notice if the initial notice 
did not mention that the alternative to restructuring may be 
foreclosure. If the qualified lender sends the 45-day notice and the 
borrower does not apply, or is not granted, a restructuring, the lender 
may proceed with foreclosure. However, we expect lenders to comply with 
the spirit of borrower rights and have ongoing communications with the 
borrower so that a foreclosure proceeding is not a surprise.
3. What Notice Should Be Sent to a Borrower Who Is a Debtor in a 
Bankruptcy Proceeding? [Sec.  617.7410(c) and (d)]
    Section 4.14A(b) of the Act requires a qualified lender to notify a 
borrower that a loan may be suitable for restructuring. If the borrower 
is in bankruptcy, the required notice may be construed as a demand for 
payment, which is prohibited by the automatic stay provision of the 
Bankruptcy Code. We are proposing in Sec.  617.7410(c) and (d) to 
change the notice requirements in existing Sec. Sec.  614.4516(a) and 
614.4519(a). A qualified lender should use alternative language for a 
borrower who is a debtor in a bankruptcy proceeding by restating 
language from the automatic stay provision. The qualified lender should 
send the notice to the borrower's counsel.
4. What Notices Are Required if a Borrower's Loan Becomes Distressed 
Following a Restructuring? [Sec.  617.7410(e)]
    The Act is silent on what notices are required when a borrower's 
loan is restructured, but the loan remains, or again becomes, 
distressed. The FCC and several System institutions requested that we 
provide additional regulatory guidance on how many times a qualified 
lender must provide a distressed loan restructuring notice to a 
borrower who has defaulted on a previously restructured loan. The 
comments varied from requesting limits on the number of times a loan 
could be restructured to giving a distressed borrower only one 
opportunity to restructure the loan in a calendar year or operating 
cycle.
    We agree that additional guidance appropriate to assist a qualified 
lender in determining when another distressed loan notice must be sent 
after the loan has been restructured. We considered what distinguishing 
event would differentiate whether another restructuring opportunity 
should be offered. We believe that a borrower's performance under the 
current restructuring agreement is key in a qualified lender's 
determination of whether the restructure cured the reason(s) the loan 
was originally distressed. We propose in Sec.  617.7410(e) to define 
performance as 6 consecutive monthly payments, 4 consecutive quarterly 
payments, 3 consecutive semiannual payments, or 2 consecutive annual 
payments, depending on the payment scheduled in the current 
restructuring agreement. For purposes of judging performance, the 
borrower may be considered in default if payment is not received within 
30 days of the date the payment is due. We reasoned that if the 
borrower is not able to perform under the restructured loan agreement, 
the loan remains distressed and the qualified lender may proceed 
directly to foreclosure without further notice, provided the qualified 
lender sent the 45-day notice to the borrower. If, however, the 
borrower performs under the restructure agreement, the reason for

[[Page 5601]]

the original distress is cured. Any subsequent problem with the loan 
that causes the loan to meet the definition of a distressed loan 
requires the qualified lender to provide the borrower with a new 
distressed loan notice and opportunity to restructure, regardless of 
the number of times the loan was previously restructured.
    The current notice requirement in existing Sec.  614.4519(a) 
provides only two options, restructure or possible foreclosure. We 
propose in Sec.  617.7425(b) to modify the 45-day notice to ensure that 
borrowers are informed that if they do not perform under the 
restructure, the qualified lender could proceed with foreclosure 
without further notification.
5. May a Qualified Lender Propose Restructuring if the Borrower Did Not 
Submit an Application? [Sec.  617.7410(g)]
    It is the borrower's responsibility to respond to the distressed 
loan notice by submitting an application for restructuring. Section 
4.14A(d)(2) of the Act provides that nothing shall prevent a qualified 
lender from proposing an application for restructuring for an 
individual borrower in the absence of an application for restructuring 
from the borrower. We reaffirm that the qualified lender may submit a 
restructuring proposal for consideration if the borrower fails to do 
so. We believe that Congress provided this option as a means of 
ensuring that all borrowers are considered for a loan restructuring 
regardless of whether the borrower provides an application for 
restructuring.
    We are proposing to move Sec.  614.4516(c) into Sec.  617.7410(g).

What Is a Qualified Lender's Process When Determining Whether to 
Restructure or Foreclosure? [Sec.  617.7415]

    Section 4.14A(e) of the Act and existing Sec. Sec.  614.4517(a) and 
614.4512(c) provide that certain factors should be taken into 
consideration when a qualified lender determines whether the cost of 
restructuring is equal to or less than the cost of foreclosure. The FCC 
commented that in calculating the cost of restructuring, a borrower's 
ability to perform under a restructuring plan is an integral, but not 
necessarily calculable, part of the analysis. The FCC went on to state 
that unrealistic borrower projections make calculating the cost of 
restructuring difficult, particularly when the regulations do not 
permit much analysis or questioning of the financial inputs provided by 
the borrower. We agree and propose in Sec.  617.7415 regulatory 
amendments identified below to address the responsibilities of both the 
borrower and the qualified lender in developing the restructuring plan.
1. What Is the Process for Considering the Restructuring Application? 
[Sec.  617.7415(c)]
    To develop the application for restructuring, the qualified lender 
and borrower should work together to determine the most realistic 
financial inputs. These inputs are the backbone of the application for 
restructuring. Because the Act requires a qualified lender to 
restructure the loan if the cost of restructuring is equal to or less 
than the cost to foreclose, it is imperative that the lender work with 
the most reliable inputs to determine the cost of restructuring. As 
such, we propose in Sec.  617.7415(c) that when developing and 
negotiating the application for restructuring, the qualified lender may 
use benchmarks to determine the financial input costs and chattel 
security values if the borrower and lender are unable to reach 
agreement. Benchmarks may include the borrower's 5-year production 
average, averages in the county where the farming operation is located, 
or other such support. We expect the qualified lender and borrower to 
engage in good faith negotiations with the intended purpose of 
determining reasonable financial input costs for the borrower's 
operation. It is only when the borrower and lender are unable to agree 
on reasonable financial input values that the lender should look to 
benchmarks.
2. What Criteria Does the Qualified Lender Use When Determining Whether 
To Restructure or Foreclose? [Sec.  617.7415]
    Through our examination process and review of borrower complaints, 
questions have arisen about how qualified lenders apply the criteria in 
section 4.14A(d) and (e) of the Act. Specifically, many qualified 
lenders apply the criteria in paragraph (d) that the borrower must 
return to viability, as the controlling criterion. As a result, an 
application for restructuring may have been denied when the cost of 
restructuring was less than the cost of foreclosure. Although we 
believe a rule change is unnecessary, we are clarifying in Sec.  
617.7415(d) that section 4.14A(e) of the Act specifically requires the 
qualified lender to restructure the loan if the cost of restructuring 
is less than or equal to the cost of foreclosure.
    This approach gives full meaning to section 4.14A and allows 
consideration of all relevant factors in evaluating a restructuring. We 
recognize this interpretation may result in approval of an application 
for restructuring because it is the least cost option but unlikely to 
ultimately reestablish viability.
3. May a Qualified Lender Include the Borrower's Performance Under a 
Previous Restructuring When Determining the Cost of Restructuring the 
Loan Again? [Sec.  671.7415(a)]
    Section 4.14A(d)(1) of the Act provides criteria to consider when 
the qualified lender determines whether or not to restructure a loan. 
One of the criteria is the borrower's ability to work out of the 
existing financial difficulties. The Act balances Congress's desire for 
the System to assist borrowers and not cause financial harm to the 
qualified lender. The qualified lender should carefully consider the 
reasons why a prior restructuring was not successful when it analyzes 
whether a subsequent restructuring would make it probable that the 
borrower will become financially viable. If the qualified lender 
determines that deficient management by the borrower contributed to the 
current problem, then this deficiency should weigh heavily in the 
qualified lender's evaluation of the future viability of the borrower's 
operation. However, if the borrower's inability to perform under a 
prior restructuring was the result of a natural disaster, for example, 
and not management deficiencies, the qualified lender should take this 
into consideration when determining the likelihood that a new 
restructuring would be successful.
    Although it is permissible for the qualified lender to analyze and 
quantify why prior restructuring efforts were not successful, the 
qualified lender is not permitted to include the costs of prior 
restructuring efforts in the cost of subsequent restructure requests.
4. What Type of Foreclosure Action Should Be Used in Calculating the 
Cost of Foreclosure? [Sec.  617.7415(b)]
    The FCC commented that we should specify whether the cost of 
foreclosure should be calculated based on a contested or uncontested 
foreclosure proceeding. We do not agree that we need to add this level 
of specificity. The cost of foreclosure varies on a case-by-case basis 
and, when calculating the cost of foreclosure, qualified lenders should 
have the flexibility to adjust the costs according to each situation.

[[Page 5602]]

G. How Would a Decision on an Application for Restructuring Be Issued? 
[Sec. Sec.  617.7420 to 617.7425]

1. When Must a Decision on an Application of Restructuring Be Issued? 
[Sec.  617.7420(a)]
    Existing Sec.  614.4518 requires a qualified lender to issue a 
restructuring decision in an expeditious manner. We believe a specific 
timeframe is necessary and propose in Sec.  617.7420(a) that 
restructuring decisions be issued within 15 days from the conclusion of 
negotiations between the qualified lender and borrower on the 
application for restructuring.
2. What Should the Notice Include When the Restructuring Request Is 
Denied? [Sec.  617.7420(c)]
    Section 4.13B(b) of the Act requires qualified lenders to send 
written notice of actions taken to restructure distressed loans. The 
Act requires the notice to include the reasons for any denial of 
restructuring and to inform the borrower of the right to have the 
decision reviewed. Existing Sec.  614.4518 explains that the notice 
denying restructuring must include the critical assumptions and 
relevant information behind the decision. Although we do not propose in 
Sec.  617.7420(c) to amend existing Sec.  614.4518, we wish to provide 
clarification.
    We expect the notice to contain sufficient information for the 
borrower to understand the exact reasons for the denial, so that the 
borrower can decide whether or not to request a review of the decision. 
This includes providing every reason for a denial, not just one. For 
example, when a lender denies a restructuring application based on 
financial and managerial weaknesses, and inadequate collateral, all of 
these reasons should be provided in the notice. Otherwise, the 
qualified lender is depriving the borrower of the opportunity to know 
the full reason for the denial.

H. How Are Borrower Rights Applied for Chronically Delinquent 
Borrowers? [Sec.  617.7425]

    Section 4.14D(c) prohibits a qualified lender from enforcing 
acceleration of the borrower's repayment schedule because the borrower 
did not timely make one or more principal or interest payments. This 
prohibition has resulted in some borrowers abusing the process by 
repeatedly defaulting on loans and paying the amounts due at the last 
minute to avoid foreclosure. We refer to borrowers who repeatedly 
default as chronically delinquent. Two institutions requested that we 
modify our rules to address chronically delinquent borrowers. Another 
suggested that our rules not require a qualified lender to send out 
distressed loan notices every time a chronically delinquent borrower 
defaults before foreclosure proceedings are commenced, so long as 
borrowers are given an opportunity to seek restructuring once during a 
year or operating cycle. Finally, a fourth System institution requested 
we revise the rules so that borrowers cannot abuse borrower rights 
protections with repeated delinquencies after bringing accounts 
current.
    We do not propose in Sec.  617.7425 to change existing Sec.  
614.4514 in this area. The Act requires notice to be sent to a borrower 
45 days or more before foreclosure proceedings begin. No exceptions are 
provided in the Act for borrowers who are chronically delinquent or are 
believed to have the funds to pay on time. A qualified lender is 
required to send a notice each time a borrower's loan is identified as 
distressed, notwithstanding previous restructuring opportunities, as 
long as the borrower had been current before that payment was due.\15\
---------------------------------------------------------------------------

    \15\ See the discussion in section E.4. of this preamble to 
determine when a previously restructured loan is current.
---------------------------------------------------------------------------

I. When May a Qualified Lender Foreclose on a Loan Without Providing 
Borrower Rights? [Sec.  617.7425(a)]

    Section 4.14A(j) of the Act provides that a qualified lender may 
foreclose on a loan if the lender has reasonable grounds to believe 
that the loan collateral will be destroyed, dissipated, consumed, 
concealed, or permanently removed from the state in which the 
collateral is located. Some institutions are concerned that 
restructuring notices must be given prior to starting foreclosure 
proceedings initiated due to a threat to collateral. If a qualified 
lender believes that collateral is at risk of being destroyed, the 
qualified lender may proceed with foreclosure without providing a 
restructuring notice to the borrower. The lender should, however, 
carefully document the reasons the collateral is at risk.
    We propose moving the language on this issue in existing Sec.  
614.4519(b) to Sec.  617.7425(c).

J. May Borrower Rights Be Waived When Using State Mediation Programs? 
[Sec.  617.7430]

    The FCC commented that we should consider authorizing a waiver of 
borrower rights when the borrower pursues available state mediation 
rights (including mandatory mediation situations). The FCC commented 
that many borrowers elect to pursue state mediation over borrower 
rights, and those borrowers should be able to elect mediation over 
borrower rights through a waiver. The Act clearly provides for federal 
borrower rights and the borrower's right to pursue state mediation. We 
are proposing no substantive changes to existing Sec.  614.4521. We 
propose to redesignate it at Sec.  617.7430 and reword it slightly to 
emphasize that state mediation may proceed concurrently with borrower 
rights.

K. Are Borrower Rights Set Aside as a Result of Arbitration?

    The FCC commented that if the lender and the borrower agree to 
arbitration, the arbitrator should be free to reach a final decision 
that negates borrower rights. We encourage qualified lenders and 
borrowers to consider alternative methods for settling disputes, such 
as arbitration. However, we do not believe that borrower rights may be 
set aside as a result of the arbitration process. We believe that 
Congress could have chosen arbitration as the means for resolving 
disputes between borrowers and lenders. Because Congress instead 
adopted a very specific process for dealings between borrowers and 
lenders in a distressed loan situation, we do not believe it is 
appropriate for the arbitration process to take the place of borrower 
rights or for an arbitrator to have the authority to make a binding 
decision that contravenes the Act and regulations.

L. What Is a Borrower Rights Directive? [Sec.  617.7500 et seq.]

    Section 4.14A(i) of the Act authorizes us to enforce compliance 
with section 4.14A of the Act by issuing a borrower rights directive. 
Directives provide another supervisory tool to us to take action when 
an institution violates the law. Violations of a directive may result 
in civil money penalties or a court order enforcing the directive. We 
are proposing in part 617, subpart F, regulatory procedures to issue 
directives to ensure that a qualified lender fully complies with the 
terms of section 4.14A of the Act.
    These procedures are similar to our existing capital directive 
regulations found in part 615, subpart M. The procedures require notice 
to the qualified lender of the specific noncompliance, providing a 30-
day period for the qualified lender to respond to the notice, 
evaluation of the qualified lender's response, and finally a decision 
on whether or not to issue the directive as proposed or modified.

[[Page 5603]]

M. How Is the Right of First Refusal Applied? [Sec.  617.7600 et seq.]

    Section 4.36 of the Act provides a previous owner the right of 
first refusal to repurchase property when a System institution 
forecloses or a borrower voluntarily conveys agricultural real estate 
because the borrower did not have the financial resources to avoid 
foreclosure.
1. Does the Right of First Refusal Apply When the System Institution 
Acquires Agricultural Real Estate Through a Bankruptcy Liquidation? 
[Sec.  617.7600]
    The right of first refusal does apply to agricultural real estate 
acquired through a bankruptcy proceeding. When a System institution 
gets relief from the automatic stay, or the borrower conveys the 
property as part of a bankruptcy plan, the right of first refusal 
applies because the System institution gains possession of the property 
through foreclosure or voluntary conveyance.
2. Who Is the Previous Owner? [Sec.  617.7600]
    Existing Sec.  614.4522(a)(2) defines a previous owner as a prior 
record holder who was a borrower or whose land was used as collateral 
for a loan to a System borrower. The FCC commented that we should 
clarify that a previous owner does not include a mortgagor or grantor 
of an equivalent interest in agricultural real estate unless such 
person is also the borrower. As previously stated, the term refers to 
the legal title holder of the agricultural real estate used as 
collateral for the loan. The right of first refusal is not transferable 
and belongs only to the legal title holder. We invite the FCC to 
comment further if we have not adequately responded to the comment.
3. May the Previous Owner Waive the Right of First Refusal as a Part of 
a Debt Settlement?
    Borrower rights, which include the right of first refusal, were 
enacted by Congress to address an unequal bargaining position that 
exists between a borrower and a qualified lender. In most debt 
settlement situations, the borrower is in an unequal bargaining 
position. Thus, permitting waivers for this borrower would contradict 
Congress's intent.
4. Must a System Institution Document Whether the Previous Owner Had 
the Financial Resources To Avoid Foreclosure or Voluntary Conveyance? 
[Sec.  617.7605]
    Whether the borrower had the financial resources to avoid either 
foreclosure or voluntarily conveying the agricultural real estate is a 
condition in the Act that must be met before the right of first refusal 
may be offered. We continue to require each System institution to 
document whether the borrower did or did not have the financial 
resources to avoid foreclosure or voluntary conveyance.
    We propose moving existing Sec.  615.4522(b) to Sec.  617.7605.
5. May a System Institution Require a Previous Owner To Pay an Escrow 
Deposit When Buying the Property at a Public Auction? [Sec.  617.7620]
    If an escrow deposit is an advertised requirement of the successful 
bidder in a public auction, then the previous owner, as the successful 
bidder, must also provide this escrow payment. The previous owner must 
be given an equal opportunity to repurchase the property in a public 
auction and should be subject to the same conditions as any other 
successful bidder.

VII. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), the FCA hereby certifies that the proposed rule 
will not have a significant economic impact on a substantial number of 
small entities. Each of the banks in the System, considered together 
with its affiliated associations, has assets and annual income in 
excess of the amounts that would qualify them as small entities. 
Therefore, System institutions are not ``small entities'' as defined in 
the Regulatory Flexibility Act.

List of Subjects

12 CFR Part 609

    Agriculture, Banks, banking, Electronic commerce, Reporting and 
recordkeeping requirements, Rural areas.

12 CFR Part 614

    Agriculture, Banks, banking, Flood insurance, Foreign trade, 
Reporting and recordkeeping requirements, Rural areas.

12 CFR Part 615

    Accounting, Agriculture, Banks, banking, Government Securities, 
Investments, Rural areas.

12 CFR Part 617

    Banks, banking, Criminal referrals, Criminal transactions, 
Embezzlement, Insider abuse, Investigations, Money laundering, Theft.

    For the reasons stated in the preamble, parts 609, 614, 615, and 
617, chapter VI, title 12 of the Code of Federal Regulations are 
proposed to be amended as follows:

PART 609--ELECTRONIC COMMERCE

    1. The authority citation for part 609 continues to read as 
follows:


    Authority: Sec. 5.9 of the Farm Credit Act (12 U.S.C. 2243); 5 
U.S.C. 301; Pub L. 106-229 (114 Stat. 464).

Subpart A--General Rules

    2. Amend Sec.  609.910(c) by revising the fourth sentence to read 
as follows:


Sec.  609.910  Compliance with the Electronic Signatures in Global and 
National Commerce Act (Public Law 106-229) (E-SIGN).

* * * * *
    (c) * * * Thus, System institutions cannot use electronic 
notification to deliver some notices that must be provided under part 
617, subparts A, D, E, and G of this chapter. * * *
* * * * *

PART 614--LOAN POLICIES AND OPERATIONS

    3. The authority citation for part 614 continues to read as 
follows:


    Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; secs. 
1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12, 
2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A, 
4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.18A, 4.19, 4.25, 
4.26, 4.27, 4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.8, 
7.12, 7.13, 8.0, 8.5 of the Farm Credit Act (12 U.S.C. 2011, 2013, 
2014, 2015, 2017, 2018, 2019, 2071, 2073, 2074, 2075, 2091, 2093, 
2094, 2097, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183, 
2184, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2206a, 2207, 
2211, 2212, 2213, 2214, 2219a, 2219b, 2243, 2244, 2252, 2279a, 
2279a-2, 2279b, 2279c-1, 2279f, 2279f-1, 2279aa, 2279aa-5); sec. 413 
of Pub. L. 100-233, 101 Stat. 1568, 1639.

Subpart H--Loan Purchases and Sales


Sec.  614.4336  [Removed]

    4. Remove Sec.  614.4336.

Subpart L--Actions on Applications; Review Credit Decisions

Subpart L [Removed]

    5. Remove subpart L, consisting of Sec. Sec.  614.4440 through 
614.4444.

Subpart N--Loan Servicing Requirements; State Agricultural Loan 
Mediation Programs; Right of First Refusal


Sec. Sec.  614.4514-614.4522  [Removed]

    6. Remove Sec. Sec.  614.4514 through 614.4522 in subpart N.

[[Page 5604]]

PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS, 
AND FUNDING OPERATIONS

    7. The authority citation for part 615 continues to read as 
follows:


    Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5, 
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 
6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm 
Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 
2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 
2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4, 
2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a) of 
Pub. L. 100-233, 101 Stat. 1568, 1608.

Subpart J--Retirement of Equities

    8. Section 615.5280(h) is revised to read as follows:


Sec.  615.5280  Retirement in event of default.

* * * * *
    (h) The requirements of this section may be satisfied by notices 
given pursuant to Sec. Sec.  617.7405, 614.7410, 617.7420, and 617.7425 
of this chapter that contain the information required by this section.
    9. Amend Sec.  615.5290 by revising paragraphs (a) and (b) to read 
as follows:


Sec.  615.5290  Retirement of capital stock and participation 
certificates in event of restructuring.

    (a) If a Farm Credit Bank or agricultural credit bank forgives and 
writes off, under Sec.  617.7415, any of the principal outstanding on a 
loan made to any borrower, where appropriate the Federal land bank 
association of which the borrower is a member and stockholder shall 
cancel the same dollar amount of borrower stock held by the borrower in 
respect of the loan, up to the total amount of such stock, and to the 
extent provided for in the bylaws of the Bank relating to its 
capitalization, the Farm Credit Bank or agricultural credit bank shall 
retire an equal amount of stock owned by the Federal land bank 
association.
    (b) If a production credit association or merged association 
forgives and writes off, under Sec.  617.7415, any of the principal 
outstanding on a loan made to any borrower, the association shall 
cancel the same dollar amount of borrower stock held by the borrower in 
respect of the loan, up to the total amount of such loan.
* * * * *

PART 617--BORROWER RIGHTS

    10. The authority citation for part 617 continues to read as 
follows:

    Authority: Secs. 4.13, 5.9, 5.17 of the Farm Credit Act (12 
U.S.C. 2199, 2243, 2252(a)(9)).

Subpart A--General

    11. Amend Sec.  617.7000 by adding the following definitions 
alphabetically to read as follows:


Sec.  617.7000  Definitions.

* * * * *
    Adverse credit decision means a credit decision where a qualified 
lender:
    (1) Decides not to make a loan to an applicant;
    (2) Makes a loan in an amount less than the applicant requested; or
    (3) Denies an application for restructuring.
    Applicant means any person who completes and executes a loan 
application from a qualified lender.
    Application for restructuring means a written request from a 
borrower to restructure a distressed loan. The request must be:
    (1) Submitted on the appropriate forms prescribed by the qualified 
lender and accompanied by sufficient financial information and 
repayment projections, where appropriate, as required by the qualified 
lender to support a sound credit decision; or
    (2) A borrower's bankruptcy plan of reorganization.
    Distressed loan means a loan that the borrower does not have the 
financial capacity to pay according to its terms, as determined by the 
qualified lender, and exhibits one or more of the following 
characteristics:
    (1) The borrower is demonstrating adverse financial and repayment 
trends.
    (2) The loan is delinquent or past due under the terms of the loan 
contract.
    (3) One or both of the factors listed in paragraphs (1) and (2) of 
this section, together with inadequate collateralization, present a 
high probability of loss to the qualified lender.
* * * * *
    Foreclosure proceeding means:
    (1) A foreclosure or similar legal proceeding to enforce a lien on 
property, whether real or personal, that secures a noninterest-earning 
asset or distressed loan; or
    (2) The seizing of and realizing on non-real property collateral, 
other than collateral subject to a statutory lien arising under title I 
and II of the Act, to effect collection of a nonaccrual or distressed 
loan.
    Independent evaluator means an individual who is a qualified 
evaluator and who satisfies the standards of Sec.  614.4260, subpart F 
of this chapter, and the standards set by the qualified lender for the 
type of property to be evaluated. The independent evaluator may not be 
an employee or agent of a qualified lender or have a relationship with 
the lender or any of its officers or directors in contravention of part 
612 of this chapter.
* * * * *
    Loan application means a complete oral or written request for an 
extension of credit made in accordance with a qualified lender's 
procedures for the type of credit requested. An application is complete 
when the qualified lender receives all the information normally 
obtained and used in evaluating applications for credit. This 
information may include credit reports, supporting information for the 
credit requested, and reports by governmental agencies or other persons 
necessary to guarantee, insure, or provide security for the credit or 
collateral.
* * * * *
    Restructure and restructuring of a loan means a reamortization, 
renewal, deferral of principal or interest, monetary concessions, or 
the taking of any other action to modify the terms of, or forebear on, 
a loan in any way that will provide the best opportunity for the 
borrower to have a reasonable probability of retiring debts and 
returning to a viable operation.
* * * * *
    12. Amend subpart A by adding new Sec. Sec.  617.7005, 617.7010, 
and 617.7015 to read as follows:


Sec.  617.7005  When may electronic communications be used in the 
borrower rights process?

    Qualified lenders may use, with the parties' agreement, electronic 
commerce (E-commerce) including electronic communications for borrower 
rights disclosures. Part 609 of this chapter addresses when a qualified 
lender may use E-commerce. Consistent with these rules, a qualified 
lender should interpret part 617 broadly to allow electronic 
transmissions, communications, records, and submissions. However, 
electronic communications may not be used for a notice of default, 
acceleration, repossession, foreclosure, eviction, or the right to cure 
when an applicant's or borrower's primary residence secures the loan. 
In these instances, a qualified lender must use paper disclosures.


Sec.  617.7010  May borrower rights be waived?

    (a) A qualified lender may not obtain a waiver of borrower rights, 
except as indicated in paragraph (b) of this section.
    (b) A borrower may waive the following rights:

[[Page 5605]]

    (1) Rights relating to distressed loan restructuring, credit 
reviews, and the right of first refusal when a loan is guaranteed by 
the Small Business Administration.
    (2) In connection with a loan sale as provided in Sec.  617.7015.
    (c) All waivers must be voluntary and in writing. The qualified 
lender must first clearly explain the rights the borrower is being 
asked to waive and provide a written explanation of such rights.


Sec.  617.7015  What happens to borrower rights when a loan is sold?

    (a) A loan made by a qualified lender and subsequently sold, in 
whole or in part, to another qualified lender is subject to the 
borrower rights provisions of title IV of the Act.
    (b) What happens when a qualified lender sells a loan into the 
secondary market?
    (1) Except as provided in paragraph (b)(2) of this section, the 
borrower rights provisions of sections 4.14, 4.14A, 4.14B, 4.14C, 
4.14D, and 4.36 of the Act do not apply to a loan made on or after 
February 10, 1996, and designated for sale into a secondary market at 
the time the loan was made.
    (2) Borrower rights apply to a loan designated for sale under 
paragraph (b)(1) of this section but not sold into a secondary market 
during the 180-day period that begins on the date of designation. The 
provisions of paragraph (b)(1) of this section will subsequently apply 
on the date of sale if the loan is later sold into a secondary market.
    (c) What happens when a qualified lender sells a loan to a non-
qualified lender?
    (1) Except for loans sold to another qualified lender or designated 
for sale into a secondary market, a qualified lender must comply with 
one of the following requirements before selling a loan or interest in 
a loan subject to borrower rights:
    (i) The qualified lender and borrower must agree to include 
provisions in the loan contract with the borrower, or a written 
modification thereto, that ensure that the buyer of the loan will be 
obligated to provide the borrower the same rights a qualified lender 
must provide; or
    (ii) The qualified lender must obtain from the borrower a signed 
written consent to the sale, which clearly states the borrower waives 
statutory borrower rights.
    (2) Before the qualified lender obtains the borrower's consent to 
the sale of the loan and the waiver of borrower rights under paragraph 
(c)(1)(ii) of this section, the qualified lender must disclose in 
writing to the borrower:
    (i) A complete description of the statutory rights the borrower 
will waive;
    (ii) Any changes in the loan terms or conditions that will occur if 
the qualified lender does not sell the loan;
    (iii) That waiving borrower rights will not become effective unless 
the qualified lender sells the loan; and
    (iv) That borrower rights will become effective again if any 
qualified lender repurchases the loan or any interest in the loan.
    (3) The consent to the loan sale and waiver of borrower rights 
shall have no effect until the qualified lender sells the loan. 
Borrower rights become effective again if any qualified lender 
repurchases the loan or any interest in the loan.
    (4) A qualified lender may not make a loan conditioned on the 
borrower consenting to the loan's sale and a waiver of borrower rights.
    13. Amend part 617 by adding new subparts D, E, F, and G to read as 
follows:
Subpart D--Actions on Applications; Review of Credit Decisions
Sec.
617.7300 When acting on a loan application, what are the notice 
requirements and review rights?
617.7305 What is a CRC and who are the members?
617.7310 What is the review process of the CRC?
617.7315 What records must the qualified lender maintain on behalf 
of the CRC?

Subpart D--Actions on Applications; Review of Credit Decisions


Sec.  617.7300  When acting on a loan application, what are the notice 
requirements and review rights?

    Each qualified lender must make its decision on a loan application 
as quickly as possible. The qualified lender must provide prompt 
written notice of its decision to the applicant. The qualified lender 
is required to notify all primary applicants. If a loan application has 
more than one primary applicant, the qualified lender may send the 
original notice to the applicant designated to receive notices and may 
send copies to all other applicants. If the qualified lender makes an 
adverse credit decision on a loan application, the notice must include:
    (a) The specific reasons for the qualified lender's decision;
    (b) A statement that the applicant may request a review of the 
decision;
    (c) A statement that a written request for review must be made 
within 30 days after the applicant receives the qualified lender's 
notice; and
    (d) A brief explanation of the process for seeking review of the 
decision, including the independent collateral evaluation review 
process, whom to contact for access to information, and the applicant's 
right to appear in person before the credit review committee (CRC).


Sec.  617.7305  What is a CRC and who are the members?

    The board of directors of each qualified lender must establish one 
or more CRCs to review adverse credit decisions made by a qualified 
lender. The CRC may only review adverse credit decisions at the request 
of the applicant or borrower. The CRC has the ultimate decision making 
authority on the loan or application under review. CRC members are 
selected by the board of directors of each qualified lender and must 
include at least one of the qualified lender's farmer-elected board 
members. The loan officer involved in the adverse credit decision being 
reviewed may not serve on the CRC when it reviews that loan.


Sec.  617.7310  What is the review process of the CRC?

    (a) How will an applicant or borrower know when the CRC will 
consider the review request? The qualified lender must inform the 
applicant or borrower 15 days in advance of the CRC meeting where the 
applicant or borrower's request will be reviewed.
    (b) Who may make a personal appearance before the CRC? Each 
applicant or borrower who has requested a review may appear in person 
before the CRC. The applicant or borrower may be accompanied by counsel 
or other representative when seeking a reversal of a decision on a loan 
or an application for restructuring.
    (c) What documents may the CRC consider? An applicant or borrower 
may submit any documents or other evidence to support the information 
contained in the loan or application for restructuring. The documents 
should demonstrate that the application for a loan or restructuring 
satisfies the credit standards of the qualified lender and is an 
eligible loan or application for restructuring. Additionally, the 
applicant or borrower is entitled to a copy of each independent 
collateral evaluation used by the qualified lender.
    (d) May an applicant obtain a new collateral evaluation even if 
collateral was not a reason for the adverse credit decision? As part of 
a CRC review, an applicant may request an independent collateral 
evaluation of the agricultural real estate securing the loan or being 
offered as security, regardless of

[[Page 5606]]

whether collateral was an identified reason for the adverse credit 
decision. The independent collateral evaluation may be for any 
interest(s) in the property securing the loan, except stock or 
participation certificates issued by the qualified lender and held by 
the applicant or borrower.
    (1) Who may conduct an independent collateral evaluation? The 
independent collateral evaluation must be conducted by an independent 
evaluator. The CRC must provide the applicant or borrower with a list 
of three independent evaluators approved by the qualified lender within 
30 days of the request for an independent collateral evaluation. The 
applicant or borrower must select and engage the services of an 
evaluator from the list. The evaluation must comply with the collateral 
evaluation requirements of part 614, subpart F, of this chapter. The 
qualified lender must provide the applicant or borrower a copy of part 
614, subpart F, for presentation to the selected independent evaluator. 
A copy of part 614, subpart F, signed by the evaluator is a required 
exhibit in the subsequent evaluation report.
    (2) When must an applicant or borrower obtain the independent 
collateral evaluation and who pays for the evaluation? The applicant or 
borrower must enter into a contractual arrangement for evaluation 
services within 30 days of receiving the names of three approved 
independent evaluators. The evaluation must be completed within a 
reasonable period of time, taking into consideration any extenuating 
circumstance. The applicant or borrower must pay for the independent 
evaluation.
    (3) How does the CRC use an independent collateral evaluation when 
making a decision? The CRC will consider the results of any independent 
collateral evaluation before making a final determination with respect 
to the loan or restructuring, except the CRC is not required to 
consider a collateral evaluation that does not conform to the 
collateral evaluation standards described in section 614, subpart F, of 
this chapter.
    (e) When must the CRC issue a decision? The CRC shall reach a 
decision, and it shall be the final decision of the qualified lender, 
not later than 30 days after the meeting on the request under review. 
The CRC must make every reasonable effort to conduct reviews and render 
decisions in as expeditious a manner as possible. After making its 
decision, the committee must promptly notify the applicant or borrower 
in writing of the decision and the reasons for the decision.


Sec.  617.7315  What records must the qualified lender maintain on 
behalf of the CRC?

    A qualified lender must maintain a complete file of all requests 
for CRC reviews, including participation in state mediation programs, 
the minutes of each CRC meeting, and the disposition of each review by 
the committee.
Subpart E--Distressed Loan Restructuring; State Agricultural Loan 
Mediation Programs
Sec.
617.7400 What protections exist for borrowers who meet all loan 
obligations?
617.7405 On what policies are loan restructurings based?
617.7410 When and how does a qualified lender notify a borrower of 
the right to seek loan restructuring?
617.7415 How does a qualified lender decide to restructure a loan?
617.7420 How will a decision on an application for restructuring be 
issued?
617.7425 What type of notice should be given to a borrower before 
foreclosure?
617.7430 Are institutions required to participate in state 
agricultural loan mediation programs?

Subpart E--Distressed Loan Restructuring; State Agricultural Loan 
Mediation Programs


Sec.  617.7400  What protections exist for borrowers who meet all loan 
obligations?

    (a) A qualified lender may not foreclose on a loan because the 
borrower failed to post additional collateral when the borrower has 
made all accrued payments of principal, interest, and penalties on the 
loan.
    (b) A qualified lender may not require a borrower to reduce the 
outstanding principal balance of a loan by any amount that exceeds the 
regularly scheduled principal installment when due and payable, unless:
    (1) The borrower sells or otherwise disposes of part, or all, of 
the collateral without the prior approval of the qualified lender and 
the proceeds from the sale or disposition are not applied to the loan; 
or
    (2) The parties agree otherwise in a written agreement.
    (c) After a borrower has made all accrued payments of principal, 
interest, and penalties on a loan, the qualified lender may not enforce 
acceleration of the borrower's repayment schedule due to the borrower's 
untimely payment of those principal or interest payments.
    (d) If a qualified lender places a loan in noninterest-earning 
status and this results in an adverse action being taken against the 
borrower, such as revoking any undisbursed loan commitment, the lender 
must document the change of status and promptly notify the borrower in 
writing of the action and the reasons for taking it. If the borrower 
was not delinquent on any principal or interest payment at the time of 
such action and the borrower's request to have the loan placed back 
into accrual status is denied, the borrower may obtain a review of the 
denial before the CRC pursuant to Sec.  617.7310 of this part. The 
borrower must request this review within 30 days after receiving the 
lender's notice.


Sec.  617.7405  On what policies are loan restructurings based?

    Loan restructurings must be made in accordance with the policy 
adopted by the supervising bank board of directors under section 
4.14A(g) of the Act.


Sec.  617.7410  When and how does a qualified lender notify a borrower 
of the right to seek loan restructuring?

    (a) When a qualified lender determines that a loan is, or has 
become, distressed, the lender must provide one of the following 
written notices to the borrower stating that the loan may be suitable 
for restructuring.
    (1) A notice stating that the loan has been identified as 
distressed and that the borrower has the right to request a restructure 
of the loan (non-foreclosure notice).
    (2) A notice that the loan has been identified as distressed, that 
the borrower has the right to request a restructure of the loan, and 
that the alternative to restructuring may be foreclosure (45-day 
notice). The qualified lender must provide this notice to the borrower 
no later than 45 days before the qualified lender begins foreclosure 
proceedings with respect to any loan outstanding to the borrower. This 
notice must specifically state that if the loan is restructured and the 
borrower does not perform under the restructuring agreement (as 
described in Sec.  617.7410(e)), the qualified lender may initiate 
foreclosure proceedings without further notice.
    (b) What should each notice include?
    (1) A copy of the policy the qualified lender established governing 
the treatment of distressed loans; and
    (2) All materials necessary for the borrower to submit an 
application for restructuring.
    (c) What notice should a qualified lender send to a borrower who is 
a debtor in a bankruptcy proceeding? The qualified lender should send a 
notice that identifies the loan as distressed and the statutory right 
to file an application for a restructuring. The notice may also restate 
the language from the automatic stay provision to emphasize that the 
notice is not intended as an attempt to collect, assess, or recover a 
claim.

[[Page 5607]]

    (d) Whom should the qualified lender notify? The qualified lender 
is required to notify all primary obligors. If the obligors identify 
one party to receive notices, the qualified lender should send the 
original notice to that person and send copies to the other obligors. 
For borrowers in a bankruptcy proceeding, the qualified lender should 
send the notice to the borrower's counsel.
    (e) When is a qualified lender required to send another restructure 
notice to a borrower whose loan was previously restructured? A 
qualified lender should notify a borrower of the right to file another 
application to restructure the loan only if the borrower has performed 
on the previous restructure agreement. Performance means by 6 
consecutive monthly payments, 4 consecutive quarterly payments, 3 
consecutive semiannual payments, or 2 consecutive annual payments. 
Notice is also required when the borrower has not performed and the 
qualified lender did not initially send the borrower the 45-day notice.
    (f) Does the borrower have the opportunity to meet with the 
qualified lender after sending the restructure notice? The qualified 
lender must provide any borrower to whom a notice has been sent with a 
reasonable opportunity to meet personally with a representative of the 
lender. The borrower and lender may meet to review the status of the 
loan, the financial condition of the borrower, and the suitability of 
the loan for restructuring. A meeting to discuss a loan that is in a 
noninterest-earning status may also involve developing a plan for 
restructuring, if the qualified lender determines the loan is suitable 
for restructuring.
    (g) May the qualified lender voluntarily consider restructuring for 
a borrower who did not submit one? A qualified lender may, in the 
absence of an application for restructuring from a borrower, propose 
restructuring to an individual borrower.


Sec.  617.7415  How does a qualified lender decide to restructure a 
loan?

    (a) What criteria does a qualified lender use to evaluate an 
application for restructuring? The qualified lender should consider the 
following:
    (1) Whether the cost to the lender of restructuring the loan is 
equal to or less than the cost of foreclosure, considering all relevant 
criteria. These criteria include:
    (i) The present value of interest and principal foregone by the 
lender in carrying out the application for restructuring;
    (ii) Reasonable and necessary administrative expenses involved in 
working with the borrower to finalize and implement the application for 
restructuring;
    (iii) Whether the borrower's application for restructuring included 
a preliminary restructuring plan and cashflow analysis, taking into 
account income from all sources to be applied to the debt and all 
assets to be pledged, that show a reasonable probability that orderly 
debt retirement will occur as a result of the proposed restructuring; 
and
    (iv) Whether the borrower has furnished, or is willing to furnish, 
complete and current financial statements in a form acceptable to the 
qualified lender.
    (2) Whether the borrower is applying all income over and above 
necessary and reasonable living and operating expenses to the payment 
of primary obligations;
    (3) Whether the borrower has the financial capacity and the 
management skills to protect the collateral from diversion, 
dissipation, or deterioration;
    (4) Whether the borrower is capable of working out existing 
financial difficulties, taking into consideration any prior 
restructuring of the loan, re-establishing a viable operation, and 
repaying the loan on a rescheduled basis; and
    (5) In the case of a distressed loan that is not delinquent, 
whether restructuring consistent with sound lending practices may be 
taken to reasonably ensure that the loan will not have to be placed 
into noninterest-earning status in the future.
    (b) What should be included in determining the cost of foreclosure?
    (1) The difference between the outstanding balance due, as provided 
by the loan documents, and the liquidation value of the loan, taking 
into consideration the borrower's repayment capacity and the 
liquidation value of the collateral used to secure the loan;
    (2) The estimated cost of maintaining a loan classified as a high-
risk asset;
    (3) The estimated cost of administrative and legal actions 
necessary to foreclose a loan and dispose of property acquired as the 
result of the foreclosure, including attorneys' fees and court costs;
    (4) The estimated cost of value changes in collateral used to 
secure a loan during the period beginning on the date of the initiation 
of an action to foreclose or liquidate the loan and ending on the date 
of the disposition of the collateral; and
    (5) All other costs incurred as the result of the foreclosure or 
liquidation of a loan.
    (c) What should the qualified lender do if the borrower and the 
qualified lender cannot agree on the financial inputs used in the 
application for restructuring? If the borrower and lender are not able 
to agree on supportable or realistic financial inputs, the lender may 
use benchmarks to determine the operational input costs and chattel 
security values. These benchmarks may include, but are not limited to, 
the borrower's 5-year production average; averages in the county where 
the farming operation is located based on data from United States 
Department of Agriculture offices, local colleges or universities, or 
other recognized authority; and other such reasonable sources.
    (d) How does the qualified lender decide whether to restructure or 
foreclose? If a qualified lender determines the potential cost to the 
lender of restructuring the loan as proposed in the application for 
restructuring is less than or equal to the potential cost of 
foreclosure, the qualified lender must restructure the loan. If two or 
more restructuring alternatives are available, the qualified lender 
must restructure the loan using the alternative that results in the 
least cost to the lender.
    (e) What documentation should the qualified lender retain? In the 
event that an application for restructuring is denied, a qualified 
lender must maintain sufficient documentation to demonstrate compliance 
with paragraphs (a), (b), and (c) of this section, as applicable.


Sec.  617.7420  How will a decision on an application for restructuring 
be issued?

    (a) When must a qualified lender make a decision on an application 
for restructuring? Each qualified lender must provide a written 
decision on an application for restructuring and provide this decision 
to the borrower within 15 days from the conclusion of the negotiations 
used to develop the application for restructuring.
    (b) How does a qualified lender notify the borrower of the 
decision? On reaching a decision on an application for restructuring, 
the qualified lender must provide written notice in any manner that 
requires a primary obligor to acknowledge receipt of the lender's 
decision. In the case of a loan involving one or more primary obligors, 
the original notice may be provided to the primary obligor identified 
to receive such notice, with copies provided by regular mail to the 
other obligors.
    (c) What notice is required if the restructuring request is denied? 
When

[[Page 5608]]

an application for restructuring is denied, the notice must include:
    (1) The reason(s) for the denial and any critical assumptions and 
relevant information on which the reasons are based, except that any 
confidential information shall not be disclosed;
    (2) A statement that the borrower may request a review of the 
denial;
    (3) A statement that any request for review must be made in writing 
within 7 days after receiving such notice.
    (4) A brief explanation of the process for seeking review of the 
denial, including the appraisal review process and the right to appear 
before the CRC, pursuant to Sec.  617.7310 of this part, accompanied by 
counsel or any other representative, if the borrower so chooses.


Sec.  617.7425  What type of notice should be given to a borrower 
before foreclosure?

    Not later than 45 days before any qualified lender begins 
foreclosure proceedings, the qualified lender must notify the borrower 
in writing that the loan may be suitable for restructuring. The notice 
must inform the borrower that the qualified lender will review any 
suitable loan for possible restructuring and must include a copy of the 
policy and the materials described in Sec.  617.7410(b). The notice 
must also state that if the loan is restructured, the borrower must 
perform under this restructured loan agreement. If the borrower does 
not perform, the qualified lender may initiate foreclosure.
    (a) Does the notice have to inform the borrower that foreclosure is 
possible? The notice must inform the borrower that the alternative to 
restructuring may be foreclosure. If the notice does not inform the 
borrower of potential foreclosure, then the qualified lender must send 
a second notice at least 45 days before foreclosure is initiated.
    (b) How are borrowers who are debtors in a bankruptcy proceeding 
notified? A qualified lender must restate the language from the 
automatic stay provision to emphasize that the notice is not intended 
to be an attempt to collect, assess, or recover a claim. The qualified 
lender should send the notice to the borrower's counsel.
    (c) May a qualified lender foreclose on a loan when there is a 
restructuring application on file? No qualified lender may foreclose or 
continue any foreclosure proceeding with respect to a distressed loan 
before the lender has completed consideration of any pending 
application for restructuring and CRC consideration, if applicable. 
This section does not prevent a lender from taking any action necessary 
to avoid the dissipation of assets or the destruction, diversion, or 
deterioration of collateral if the lender has reasonable grounds to 
believe that such dissipation, destruction, diversion, or deterioration 
may occur.


Sec.  617.7430  Are institutions required to participate in state 
agricultural loan mediation programs?

    (a) If initiated by a borrower, System institutions must 
participate in state mediation programs certified under section 501 of 
the Agricultural Credit Act of 1987, and present and explore debt 
restructuring proposals advanced in the course of such mediation. If 
provided in the certified program, System institutions may initiate 
mediation at any time.
    (b) System institutions must cooperate in good faith with requests 
for information or analysis of information made in the course of 
mediation under any loan mediation program.
    (c) No System institution may make a loan secured by a mortgage or 
lien on agricultural property to a borrower on the condition that the 
borrower waive any right under the agricultural loan mediation program 
of any state.
    (d) A state mediation may proceed at the same time as the loan 
restructuring process of Sec.  617.7415 or at any other appropriate 
time.
Subpart F--Distressed Loan Restructuring Directive
Sec.
617.7500 What is a directive used for and what may it require?
617.7505 How will the qualified lender know when FCA is considering 
issuing a distressed loan restructuring directive?
617.7510 What should the qualified lender do when it receives notice 
of a distressed loan restructuring directive?
617.7515 How does the FCA decide whether to issue a directive?
617.7520 How does the FCA issue a directive and when will it be 
effective?
617.7525SUBJECTMay FCA use other enforcement actions?

Subpart F--Distressed Loan Restructuring Directive


Sec.  617.7500  What is a directive used for and what may it require?

    (a) A distressed loan restructuring directive is an order issued to 
a qualified lender when FCA has determined that the lender has violated 
section 4.14A of the Act.
    (b) A distressed loan restructuring directive requires the 
qualified lender to comply with the specific distressed loan 
restructuring requirements in the Act.
    (c) A distressed loan restructuring directive is enforceable in the 
same manner and to the same extent as an effective and outstanding 
cease and desist order that has become final. Any violation of a 
distressed loan restructuring directive may result in FCA assessing 
civil money penalties or seeking a court order pursuant to section 5.31 
or 5.32 of the Act.


Sec.  617.7505  How will the qualified lender know when FCA is 
considering issuing a distressed loan restructuring directive?

    When FCA intends to issue a distressed loan restructuring 
directive, it will notify the qualified lender in writing. The notice 
will state:
    (a) The reasons FCA intends to issue a distressed loan 
restructuring directive;
    (b) The proposed contents of the distressed loan restructuring 
directive; and
    (c) Any other relevant information.


Sec.  617.7510  What should the qualified lender do when it receives 
notice of a distressed loan restructuring directive?

    (a) A qualified lender should respond to the notice by stating why 
FCA should not issue a distressed loan restructuring directive, by 
proposing changes to the directive, or by seeking other suitable 
relief. The response must include any information, documentation, or 
other relevant evidence that supports the qualified lender's position. 
The response may include a plan for achieving compliance with the 
distressed loan restructuring requirements of the Act. The response 
must be in writing and delivered to FCA within 30 days after the date 
on which the qualified lender received the notice. In its discretion, 
FCA may extend the time period for good cause. FCA may shorten the 30-
day period with the consent of the qualified lender or when FCA 
determines that providing the full 30 days would result in a borrower 
not receiving distressed loan restructuring rights.
    (b) If the qualified lender fails to respond within 30 days or such 
other time period specified by FCA, this failure shall constitute a 
waiver of any objections to the proposed distressed loan restructuring 
directive.


Sec.  617.7515  How does the FCA decide whether to issue a directive?

    After the closing date of the qualified lender's response period, 
or following receipt of the qualified lender's response, FCA must 
decide if there is sufficient information to support the issuance of a 
directive or if additional information is necessary. Once FCA has 
received sufficient information, it must decide whether to issue a 
directive as originally proposed or as modified.

[[Page 5609]]

Sec.  617.7520  How does the FCA issue a directive and when will it be 
effective?

    A distressed loan restructuring directive is effective immediately 
on receipt by the qualified lender, or on such later date as may be 
specified by FCA, and shall remain effective and enforceable until it 
is stayed, modified, or terminated by FCA.


Sec.  617.7525  May FCA use other enforcement actions?

    FCA may issue a distressed loan restructuring directive in addition 
to, or instead of, any other action allowed by law, including cease and 
desist proceedings, civil money penalties, or the granting or 
conditioning of any application or other requests by the System 
institution.
Subpart G--Right of First Refusal
Sec.
617.7600 What are the definitions used in this subpart?
617.7605 How should System institutions document whether the 
borrower had the financial resources to avoid foreclosure?
617.7610 What should the System institution do when it decides to 
sell acquired agricultural real estate?
617.7615 What should the System institution do when it decides to 
lease acquired agricultural real estate?
617.7620 What should the System institution do when it decides to 
sell acquired agricultural real estate at a public auction?
617.7625 Whom should the System institution notify?
617.7630 Does this Federal requirement affect any state property 
laws?

Subpart G--Right of First Refusal


Sec.  617.7600  What are the definitions used in this subpart?

    In addition to the definitions in Sec.  617.7000, the following 
definitions apply to this subpart.
    Acquired agricultural real estate or property means agricultural 
real estate acquired by a System institution as a result of a loan 
foreclosure or a voluntary conveyance by a borrower who, as determined 
by the institution, does not have the financial resources to avoid 
foreclosure.
    Previous owner means:
    (1) The prior record owner who was a borrower from a System 
institution and did not have the financial resources, as determined by 
the institution, to avoid foreclosure on acquired agricultural real 
estate; or
    (2) The prior record owner who is not a borrower and whose acquired 
agricultural real estate was used as collateral for a loan to a System 
borrower.
    System institution means a System institution, except a bank for 
cooperatives, that makes loans as defined in Sec.  617.7000.


Sec.  617.7605  How should System institutions document whether the 
borrower had the financial resources to avoid foreclosure?

    The right of first refusal applies only to borrowers who did not 
have the financial resources to avoid foreclosure or voluntary 
conveyance. A System institution must clearly document in its files 
whether the borrower had the resources to avoid foreclosure or 
voluntary conveyance.


Sec.  617.7610  What should the System institution do when it decides 
to sell acquired agricultural real estate?

    (a) Notify the previous owner,
    (1) By certified mail and within 15 days of the System 
institution's decision to sell acquired agricultural real estate, the 
institution must notify the previous owner, of the property's appraised 
fair market value as established by an accredited appraiser and of the 
previous owner's right to:
    (i) Buy the property at the appraised fair market value, or
    (ii) Offer to buy the property at a price less than the appraised 
value.
    (2) That any offer must be received within 30 days of receipt of 
the notice.
    (b) Act on an offer to buy the acquired agricultural real estate at 
the appraised value. Within 15 days after the receipt of the previous 
owner's offer to buy the acquired agricultural real estate at the 
appraised value, the System institution must accept the offer and sell 
the property to the previous owner, if the offer was received within 30 
days of the notice required in paragraph (a)(2) of this section.
    (c) Act on an offer to buy the acquired agricultural real estate at 
less than the appraised value.
    (1) The System institution must consider the offer if it was 
received within 30 days of the notice required in paragraph (a) of this 
section.
    (2) If the System institution accepts this offer, it must notify 
the previous owner of the decision and sell the acquired agricultural 
real estate to the previous owner within 15 days of receiving the offer 
to buy the acquired agricultural real estate at a value less than the 
appraised value.
    (3) If the System institution rejects this offer, it must notify 
the previous owner of the decision within 15 days of receiving the 
offer to buy the acquired agricultural real estate at a value less than 
the appraised value. The previous owner has 15 days from receipt of the 
notice to submit an offer to buy at such price or under such terms and 
conditions. The System institution may not sell the acquired 
agricultural real estate to any other person:
    (i) At a price equal to, or less than, that offered by the previous 
owner; or
    (ii) On different terms or conditions than those extended to the 
previous owner without first notifying the previous owner by certified 
mail and providing an opportunity to buy the property at such price or 
under such terms and conditions.
    (d) For purposes of this section, financing by the System 
institution is not a term or condition of the sale of acquired 
agricultural real estate. A System institution is not required to 
provide financing to the previous owner for purchase of acquired 
agricultural real estate.


Sec.  617.7615  What should the System institution do when it decides 
to lease acquired agricultural real estate?

    (a) Notify the previous owner,
    (1) Within 15 days of the System institution's decision to lease, 
it must notify the previous owner, by certified mail, of the property's 
appraised rental value, as established by an accredited appraiser, and 
of the previous owner's right to:
    (i) Lease the property at a rate equivalent to the appraised rental 
value of the property, or
    (ii) To offer to lease the property at rate that is less than the 
appraised rental value of the property.
    (2) The notice must inform the previous owner that any offer must 
be received within 15 days of receipt of the notice.
    (b) Act on an offer to lease the acquired agricultural real estate 
at a rate equivalent to the appraised rental value of the property.
    (1) Within 15 days after receipt of such offer, the System 
institution may accept the offer to lease the property at the appraised 
rental value and lease the property to the previous owner, or
    (2) Within 15 days after receipt of such offer, the System 
institution may reject the offer to lease the property at the appraised 
rental value when the institution determines that the previous owner:
    (i) Does not have the resources available to conduct a successful 
farming or ranching operation; or
    (ii) Cannot meet all the payments, terms, and conditions of such 
lease.
    (c) Act on an offer to lease the acquired agricultural real estate 
at a rate that is less than the appraised rental value of the property.
    (1) The System institution must consider the offer to lease the 
property at a rate that is less than the appraised rental value of the 
property. Notice of

[[Page 5610]]

the decision to accept or reject such offer must be provided to the 
previous owner within 15 days of receipt of the offer.
    (2) If the System institution accepts the offer to lease the 
property at less than the appraised rental value, it must notify the 
previous owner and lease the property to the previous owner.
    (3) If the institution rejects the offer, the System institution 
must notify the previous owner of this decision. The previous owner has 
15 days after receipt of the notice in which to agree to lease the 
property at such rate or under such terms and conditions. The System 
institution may not lease the property to any other person:
    (i) At a rate equal to or less than that offered by the previous 
owner; or
    (ii) On different terms and conditions than those that were 
extended to the previous owner without first informing the previous 
owner by certified mail and providing an opportunity to lease the 
property at such rate or under such terms and conditions.


Sec.  617.7620  What should the System institution do when it decides 
to sell acquired agricultural real estate at a public auction?

    System institutions electing to sell or lease acquired agricultural 
real estate or a portion of it through a public auction, competitive 
bidding process, or other similar public offering:
    (a) Must notify the previous owner, by certified mail, of the 
availability of such property. The notice must contain the minimum 
amount, if any, required to qualify a bid as acceptable to the 
institution and any terms or conditions to which such sale or lease 
will be subject;
    (b) If the System institution receives two or more qualified bids 
in the same amount, the bids are the highest received, and one of the 
qualified bids is from the previous owner, the institution must accept 
the offer by the previous owner; and
    (c) The System institution must not discriminate against a previous 
owner in these proceedings.


Sec.  617.7625  Whom should the System institution notify?

    Each certified mail notice requirement in this section is fully 
satisfied by mailing one certified mail notice to the last known 
address of the previous owner or owners.


Sec.  617.7630  Does this Federal requirement affect any state property 
laws?

    The rights provided under section 4.36 of the Act and this section 
do not affect any right of first refusal under the law of the state in 
which the property is located.

    Dated: January 29, 2003.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 03-2506 Filed 2-3-03; 8:45 am]
BILLING CODE 6705-01-P