[Federal Register Volume 68, Number 160 (Tuesday, August 19, 2003)]
[Proposed Rules]
[Pages 49723-49726]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-21040]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 68, No. 160 / Tuesday, August 19, 2003 / 
Proposed Rules  

[[Page 49723]]



DEPARTMENT OF AGRICULTURE

Farm Service Agency

7 CFR Part 762

RIN 0560-AG53


Guaranteed Loans--Rescheduling Terms and Loan Subordinations

AGENCY: Farm Service Agency, USDA.

ACTION: Proposed rule.

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SUMMARY: This action proposes to revise the regulations governing the 
Farm Service Agency (FSA) guaranteed farm loan program. This rule 
proposes to allow guaranteed loans to be rescheduled with a balloon 
payment under certain circumstances. Proposed also are provisions to 
allow low-risk subordinations to be approved by the appropriate Agency 
personnel at the field level rather than the National Office, allow 
lenders to make debt installment payments in accordance with lien 
priorities, payment due dates and cash flow projections, correct a 
wording error, clarify that packager and consultant fees for servicing 
of guaranteed loans are not covered by the guarantee, and clarify the 
amount a lender can bid at a foreclosure sale. The Agency is proposing 
these changes as a result of input from program participants and 
problems in administering current provisions. The changes proposed will 
improve Agency regulations without increasing risk to the Government.

DATES: Comments concerning this proposed rule must be submitted by 
October 20, 2003 to be assured of consideration.

ADDRESSES: Interested persons are invited to submit written comments 
concerning this rule. Address all comments on the rule to Craig Nehls, 
Branch Chief, Guaranteed Loan Servicing and Inventory Property Branch, 
Loan Servicing and Property Management Division, FSA, USDA, 1400 
Independence Avenue, STOP 0523, Washington, DC 20250-0523; Fax: (202) 
690-1196. Comments should reference the volume, date and page number of 
this issue of the Federal Register. You may submit comments via 
electronic mail to [email protected], or at http://www.regulations.gov. Public inspection of this rule and all comments 
are available during regular business hours by contacting the Branch 
Chief at (202) 720-1984.

FOR FURTHER INFORMATION CONTACT: Joseph Pruss, Senior Loan Officer, 
Farm Service Agency; telephone: (202) 690-2854; Facsimile: (202) 690-
1196; e-mail: [email protected].

SUPPLEMENTARY INFORMATION:

Executive Order 12866

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

Regulatory Flexibility Act

    The Agency certifies that this rule will not have a significant 
economic effect on a substantial number of small entities, because it 
does not require any specific actions on the part of the borrower or 
the lenders. The Agency, therefore, is not required to perform a 
Regulatory Flexibility Analysis as required by the Regulatory 
Flexibility Act, Public Law 96-534, as amended (5 U.S.C. 601).

Environmental Evaluation

    The environmental impacts of this proposed rule have been 
considered in accordance with the provisions of the National 
Environmental Policy Act of 1969 (NEPA), 42 U.S.C. 4321 et seq., the 
regulations of the Council on Environmental Quality (40 CFR parts 1500-
1508), and the FSA regulations for compliance with NEPA, 7 CFR parts 
799, and 1940, subpart G. FSA completed an environmental evaluation and 
concluded that the rule requires no further environmental review. No 
extraordinary circumstances or other unforeseeable factors exist which 
would require preparation of an environmental assessment or 
environmental impact statement. A copy of the environmental evaluation 
is available for inspection and review upon request.

Executive Order 12988

    This rule has been reviewed in accordance with E.O. 12988, Civil 
Justice Reform. In accordance with that Executive Order: (1) All State 
and local laws and regulations that are in conflict with this rule will 
be preempted; (2) no retroactive effect will be given to this rule 
except that lender servicing under this rule will apply to loans 
guaranteed prior to the effective date of the rule; and (3) 
administrative proceedings in accordance with 7 CFR part 11 must be 
exhausted before requesting judicial review.

Executive Order 12372

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

Unfunded Mandates

    This rule contains no Federal mandates, as defined by title II of 
Unfunded Mandates Reform Act of 1995 (UMRA), Public Law 104-4, for 
State, local, and tribal governments or the private sector. Therefore, 
this rule is not subject to the requirements of sections 202 and 205 of 
UMRA.

Executive Order 13132

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

Paperwork Reduction Act

    The amendments to 7 CFR part 762 contained in this rule require no 
revisions to the information collection requirements that were 
previously approved by OMB under control number 0560-0155.

Federal Assistance Programs

    These changes affect the following FSA programs as listed in the 
Catalog of Federal Domestic Assistance:
    10.406 Farm Operating Loans
    10.407 Farm Ownership Loans

[[Page 49724]]

Discussion of the Proposed Rule

    The first proposed change is in section 762.140(d), regarding 
payment of loan installments. Currently, the regulations require that 
guaranteed loan installments always be paid before unguaranteed loans 
held by the same lender. The Agency has found that this requirement is 
very difficult to implement. In practice the only way the FSA 
guaranteed loan payment can be made first is if all the payments come 
due at the same time. A typical farming operation may have payments 
coming due from several different creditors throughout the year. It is 
virtually impossible to get all payments structured so that they come 
due at the same time. The Agency recognizes that in the normal course 
of business, lien priority, payment due dates and cash flow are the 
determining factors in deciding the order in which loans are paid. The 
Agency's original intent was to assure that lenders were not paying 
non-guaranteed loans at the expense of the guaranteed loan. However, 
this risk only occurs at liquidation where proceeds will be applied in 
accordance with lien priority. Outside of a liquidation scenario, all 
installments would be paid since the loan would usually be in a current 
status. FSA proposes to change the wording in this section, to allow 
loan installments to be paid in accordance with lien priority, the due 
date, and the cash flow projection, in the normal course of business, 
which is in accordance with actual commercial lending practices. 
Therefore, the proposed rule states that when it becomes evident that a 
borrower will be unable to make all installments, the lender will be 
required to apply payments to the guaranteed loan before unguaranteed 
loans held by the same lender. The effect will be to maximize 
collection on the guaranteed loan, and minimize any loss claim. Lenders 
are responsible for servicing the entire loan in a reasonable manner.
    The second proposed change is section 762.142(c)(3)(ii), regarding 
the Agency's approval requirements for certain subordinations. 
Currently, the regulations allow the lender to subordinate its interest 
in crops, feeder livestock, livestock offspring, or livestock products 
when no funds have been advanced from the guaranteed loan for their 
production, so another lender can make a loan for annual production 
expenses. Approval of subordinations for real estate, machinery, and 
other basic security can only be granted by the Agency's National 
Office, if such action is in the Agency's best interest. However, there 
are situations where devolution of this approval authority is justified 
and would lead to more prompt service to Agency borrowers and lenders. 
The Agency proposes to place the approval authority at the local level 
for situations when a lender is simply refinancing existing 
indebtedness secured by a lien superior to the guaranteed loan, and no 
additional debt is being incurred. This is often done to allow a 
borrower to obtain better rates and/or terms on the loan, which in turn 
helps the borrower meet all of the borrower's loan obligations. There 
is no additional risk to the guaranteed loan, which remains in the same 
exact lien and security position after the subordination as it was 
before the subordination. It is not necessary for subordination 
requests of this nature to be routed to the Agency's national office, 
which may result in a time lag for approval or rejection.
    The third proposed change is in section 762.144(c)(3)(iii), which 
discusses the payment of interest on loans which the Agency has 
repurchased. The proposed change will correct the second sentence where 
the words ``holder'' and ``lender'' were inadvertently reversed. The 
holder, not the lender would be requesting the Agency to repurchase the 
loan, after requesting the lender to repurchase the loan.
    The fourth change proposed would allow balloon payments in 
restructuring guaranteed loans. Section 762.145 governs the 
restructuring of guaranteed loans, and paragraph (b)(4) of this section 
specifically prohibits the use of balloon payments in the restructuring 
process. FSA is proposing to lift this restriction and allow a lender 
to restructure a guaranteed loan with a balloon payment. This is 
standard practice in the lending industry, and lenders participating in 
the guaranteed program have requested the ability to use balloon 
payments in restructuring. FSA has made numerous administrative policy 
changes to enable lenders to service guaranteed loans in the same 
manner they service their non-guaranteed loans. This proposed change 
would provide lenders with another tool to use in servicing loans 
guaranteed by FSA, consistent with tools utilized for non-guaranteed 
loans.
    Current regulations allow lenders to use balloon payments when 
originating loans, but not in loan servicing. Unequal installments can 
be used in both loan making and loan servicing, and lenders can use 
both unequal installments and balloon payments in originating a new 
loan. These tools are used primarily when establishing new enterprises 
or building facilities, situations where cash flow would be inadequate 
to support full amortization of the loan for some period of time. These 
same tools would be helpful, and may be necessary in a rescheduling 
situation such as recovering from a natural disaster, or a barn fire or 
other calamity, for instance. Definitions of unequal installments and 
balloon payments will be added in the FSA Handbook 2-FLP upon 
publication of the final rule.
    To insure that this proposal would not result in additional 
exposure or loss to the Government, a provision requiring adequate 
security to be available at the time the balloon payment comes due will 
be included, in 7 CFR 762.145(b)(4). For real estate security a current 
appraisal would be required, with depreciation projected to the time 
the balloon payment is due for depreciable property such as buildings 
and improvements. Also, for equipment security, a current appraisal 
will be required. The lender will be required to project the security 
value of the equipment at the time the balloon payment is due, based on 
the remaining life of the equipment, or using the depreciation schedule 
on the borrower's Federal income tax return. Under no circumstances may 
livestock or crops alone be used as security for a guaranteed loan that 
is to be rescheduled using a balloon payment.
    Allowing the restructuring of loans using a balloon payment 
schedule does not unduly increase the Government's risk. This change 
will allow more delinquent borrowers to achieve a feasible plan and 
ultimately be successful in paying their loans in full. FSA estimates 
that less than 200 loans per year will be rescheduled with a balloon 
payment. Currently, when a borrower becomes delinquent, a lender may 
choose to not continue with the loan since a balloon payment schedule 
is prohibited. Therefore, a viable operation may have to be liquidated 
due to limited loan servicing alternatives. Use of a balloon payment 
under those circumstances will reduce the likelihood that FSA will pay 
a loss under the guarantee and allow the lender to retain the 
guarantee. As in the current rule, 7 CFR 762.145(b)(4) permits the 
lender to allow unequal installments so long as a feasible plan can be 
projected when the installments are scheduled to increase.
    As to the fifth change, FSA proposes to revise the security 
requirements in section 762.145(b)(7) for loans restructured with 
balloon payments. This change is necessary to prevent undue risk to the 
Government from adding balloon payment options as a loan servicing 
tool. Revising the rule to

[[Page 49725]]

permit balloon payments, but retaining the not fully secured position 
(or no security as long as the lender's security position is not 
diminished) of the current rule would increase FSA's exposure on loss 
claims and would be inconsistent with Government policy as expressed in 
Office of Management and Budget Circular A-129, November 29, 2000, 
Appendix A, II 3 (OMB Circular A-129). OMB Circular A-129 requires that 
agencies control the risk and cost of their credit programs and follow 
sound financial practices which include requiring lenders to have a 
substantial stake in full repayment in accordance with the loan. See 65 
FR 71215. Therefore, FSA proposes to require loans restructured with 
balloon payments to be fully secured when the balloon payment becomes 
due.
    The sixth proposed change would clarify Sec.  762.149(d) and (i), 
to provide that packager fees and outside consultant fees for servicing 
guaranteed loans are not covered by the guarantee, and will not be paid 
in either the estimated or final loss claim.
    Lenders should note that Sec. Sec.  762.105 and 762.106 contain 
eligibility requirements for lenders participating in the guaranteed 
loan program, as well as a description of the classifications of 
lenders, and specific requirements for lenders in each classification. 
Under these sections, all lenders are required to have experience in 
making and servicing agricultural loans and have the capability to make 
and service the loan for which a guarantee is requested. A lender 
participating in the guaranteed loan program, therefore, should have 
adequately trained loan officers and analysts on staff to make and 
service guaranteed loans and should not usually have to rely on outside 
or contracted individuals to service their loans. Therefore, FSA will 
not pay any packager or servicing fees for guaranteed loans. At times, 
a lender may find it necessary to hire outside help to service its loan 
portfolio, or may find it financially advantageous to have someone from 
outside the lender analyze the loan portfolio; however the cost of 
these services will not be passed on to the Government in the event of 
a loss. It was never the intent of the Agency to cover such fees, and 
if the Agency were to cover such fees it would be tantamount to paying 
the lender's labor costs. The Lender's Agreement specifies that 
liquidation costs do not include the lender's in-house expenses.
    The seventh proposed change would clarify Sec.  762.149(h)(3) to 
specify that if a lender bids at a foreclosure sale, their bid will be 
either the net recovery value plus the prior lien amount, or the unpaid 
balance of the loan plus the prior lien amount, whichever is less. 
Under current regulations the lender has the authority to determine the 
amount it will bid at the foreclosure sale, starting at the amount 
which is the lesser between the net recovery value or the unpaid loan 
balance. Because the lender eventually could bid more than the net 
recovery value of the property, other potential bidders are discouraged 
from bidding, thus increasing the probability that the lender will take 
title to the property. If a lender is then unable to sell the security 
for at least the net recovery value, plus the expenses of holding and 
selling the property, under current regulations the lender's loss claim 
increases accordingly. After this excess bid amount is applied to the 
borrower's account, the loss claim amount is negotiated, which 
discourages the lender from taking responsibility for the excess bid.
    The proposed rule, which limits the bid amount to the lesser of the 
net recovery value plus the prior lien or the unpaid loan balance plus 
the prior lien, will result in decreasing the Government's losses. 
Decreasing the bid amount will encourage potential bidders to bid on 
the property, thus increasing the likelihood of reducing the lender's 
loss claim. In situations where the lender bids an amount more than the 
lesser of the net recovery plus the prior lien, or the unpaid balance 
of the debt plus the prior lien, this action may be considered 
negligent servicing. To the extent that negligent servicing reduces the 
recovery on the loan, the resulting loss claim will be reduced. The 
Agency believes that the proposed rule will give lenders the incentive 
to maximize recovery, thus decreasing Government losses.

List of Subjects in 7 CFR Part 762

    Agriculture, Loan programs--agriculture, Reporting and 
recordkeeping requirements.

    Accordingly, 7 CFR part 762 is proposed to be amended as follows:

PART 762--GUARANTEED FARM LOANS

    1. The authority citation for part 762 continues to read as 
follows:

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

    2. Amend Sec.  762.140 by revising paragraph (d) to read as 
follows:


Sec.  762.140  General servicing responsibilities.

* * * * *
    (d) Loan installments. In the normal course of business, loan 
installments may be paid according to lien priority, payment due date, 
and where applicable, in accordance with an approved cash flow 
projection. When it becomes evident that a borrower will be unable to 
make all installments, guaranteed loan installments will be paid before 
unguaranteed loans held by the same lender.
    3. Amend Sec.  762.142 by designating paragraph (c)(3)(ii) as 
(c)(3)(iii) and adding a new paragraph (c)(3)(ii) to read as follows:


Sec.  762.142  Servicing related to collateral.

* * * * *
    (c) * * *
    (3) * * *
    (ii) The lender may, with written Agency approval, subordinate its 
interest in basic security in cases where the subordination is required 
to allow another lender to refinance an existing prior lien, no 
additional debt is being incurred, and the lender's security position 
will not be adversely affected by the subordination.
* * * * *
    4. Amend Sec.  762.144 by revising paragraph (c)(3)(iii) to read as 
follows:


Sec.  762.144  Repurchase of guaranteed portion from a secondary market 
holder.

* * * * *
    (c) * * *
    (3) * * *
    (iii) In the case of a request for Agency purchase, the government 
will only pay interest that accrues for up to 90 days from the date of 
the demand letter to the lender requesting the repurchase. However, if 
the holder requested repurchase from the Agency within 60 days of the 
request to the lender and for any reason not attributable to the holder 
and the lender, the Agency cannot make payment within 30 days of the 
holder's demand to the Agency, the holder will be entitled to interest 
to the date of payment.
* * * * *
    5. Amend Sec.  762.145 by revising paragraphs (b)(4) and (b)(7) to 
read as follows:


Sec.  762.145  Restructuring guaranteed loans.

* * * * *
    (b) * * *
    (4) Loans secured by real estate and/or equipment can be 
restructured using a balloon payment, equal installments, or unequal 
installments. Under no circumstances may livestock or crops alone be 
used as security for a loan to be rescheduled using a balloon payment. 
If a balloon payment is used, the projected value of security must 
indicate that the loan will be fully secured when the balloon payment 
becomes due. The projected value will

[[Page 49726]]

be derived from a current appraisal adjusted for depreciation that 
occurs until the balloon payment is due. If the loan is rescheduled 
with unequal installments, a feasible plan, as defined in Sec.  
762.102(b), must be projected for when installments are scheduled to 
increase.
* * * * *
    (7) The lender's security position will not be adversely affected 
because of the restructuring. New security instruments may be taken if 
needed, but a loan does not have to be fully secured in order to be 
restructured, unless it is restructured with a balloon payment. A loan 
restructured with a balloon payment must be projected to be fully 
secured at the time the balloon payment becomes due, in accordance with 
paragraph (b)(4) of this section.
* * * * *
    6. Amend Sec.  762.149 by adding paragraph (d)(3), revising 
paragraph (h)(3) and amending paragraph (i)(2) by adding a sentence as 
follows:


Sec.  762.149  Liquidation.

* * * * *
    (d) * * *
    (3) Packager fees and outside consultant fees for servicing of 
guaranteed loans are not covered by the guarantee, and will not be paid 
in an estimated loss claim.
* * * * *
    (h) * * *
    (3) When it is necessary to enter a bid at a foreclosure sale, the 
lender will bid the lesser of the net recovery value plus the prior 
lien or the unpaid guaranteed loan balance plus the prior lien. A 
lender bid for other than the lesser of the net recovery value plus the 
prior lien or the unpaid balance of the debt plus the prior lien may be 
considered negligent servicing, and the resulting loss claim may be 
reduced to the extent that the negligent servicing reduced the recovery 
on the loan.
    (i) * * *
    (2) * * * Packager fees and outside consultant fees for servicing 
of guaranteed loans are not covered by the guarantee, and will not be 
paid in a final loss claim.
* * * * *

    Signed at Washington, DC on August 5, 2003.
James R. Little,
Administrator, Farm Service Agency.
[FR Doc. 03-21040 Filed 8-18-03; 8:45 am]
BILLING CODE 3410-05-P