[Federal Register Volume 69, Number 26 (Monday, February 9, 2004)]
[Proposed Rules]
[Pages 6056-6121]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-1891]



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Part III





Department of Agriculture





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Farm Service Agency



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7 CFR Parts 761, 762, et al.



Regulatory Streamlining of the Farm Service Agency's Direct Farm Loan 
Programs; Proposed Rule

  Federal Register / Vol. 69 , No. 26 / Monday, February 9, 2004 / 
Proposed Rules  

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DEPARTMENT OF AGRICULTURE

Farm Service Agency

7 CFR Parts 761 through 769

RIN 0560-AF60


Regulatory Streamlining of the Farm Service Agency's Direct Farm 
Loan Programs

AGENCY: Farm Service Agency, USDA.

ACTION: Proposed rule.

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SUMMARY: The Farm Service Agency (FSA) proposes to streamline 
regulations governing the direct Farm Loan Programs. The proposed 
regulatory action will enable FSA to accomplish the following: Simplify 
and clarify direct loan regulations; implement the recommendations of 
the USDA Civil Rights Action Team; meet the objectives of the Paperwork 
Reduction Act of 1995; meet the goals and objectives of the National 
Performance Review; and separate FSA's direct Farm Loan Programs 
regulations from Rural Development mission area loan program 
regulations.

DATES: Comments on this rule and on the information collections must be 
submitted by April 9, 2004 to be assured consideration.

ADDRESSES: Address comments on, and alternatives to, the proposed rule 
to: Deputy Administrator for Farm Loan Programs, USDA/FSA/DAFLP/STOP 
0520, 1400 Independence Avenue SW., Washington, DC 20250-0520. Comments 
on the information collection requirements of this proposed rule must 
be sent to the Office of Management and Budget (OMB) at the address 
listed in the Paperwork Reduction Act section of this preamble and sent 
to the Department address listed after the OMB address.

FOR FURTHER INFORMATION CONTACT: William D. Cobb USDA/FSA/DAFLP/STOP 
0520, 1400 Independence Avenue SW., Washington, DC 20250-0520; 
telephone (202) 720-1059; electronic mail: [email protected].

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This rule has been determined to be significant under Executive 
Order 12866 and was reviewed by OMB.

Regulatory Flexibility Act

    In compliance with the Regulatory Flexibility Act (5 U.S.C. 601-
602), the undersigned has determined and certified by signature of this 
document that this rule will not have a significant economic impact on 
a substantial number of small entities. This rule does not impose any 
new requirements on Agency applicants and borrowers. In some cases, 
existing information collections and regulatory requirements have been 
reduced as a result of streamlining the loan making and servicing 
application processes.

Environmental Impact Statement

    FSA is completing an Environmental Assessment (EA) 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 part 799 and part 1940, subpart G. The 
draft EA will be made available for public comment under a separate 
notice. The final EA will be completed before this rule is published as 
final.

Executive Order 13132

    The policies contained in this rule do not have a 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.

Executive Order 12988

    This rule has been reviewed in accordance with Executive Order 
12988, Civil Justice Reform. In accordance with this 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; and (3) administrative proceedings in accordance with 7 CFR 
parts 11 and 780 must be exhausted before bringing suit in court 
challenging action taken under this rule unless those regulations 
specifically allow bringing suit at an earlier time.

Executive Order 12372

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

Unfunded Mandates

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub. 
L. 104-4, requires Federal agencies to assess the effects of their 
regulatory actions on State, local, and tribal governments or the 
private sector of $100 million or more in any 1 year. When such a 
statement is needed for a rule, section 205 of the UMRA requires FSA to 
prepare a written statement, including a cost benefit assessment, for 
proposed and final rules with ``Federal mandates'' that may result in 
such expenditures for State, local, or tribal governments, in the 
aggregate, or to the private sector. UMRA generally requires agencies 
to consider alternatives and adopt the more cost effective or least 
burdensome alternative that achieves the objectives of the rule.
    This rule contains no Federal mandates, as defined under Title II 
of the UMRA, for State, local, and tribal governments or the private 
sector. Thus, this rule is not subject to the requirements of sections 
202 and 205 of UMRA.

Paperwork Reduction Act

    Information collection requirements for the direct Farm Loan 
Programs are currently approved in numerous information collection 
dockets. Based on the proposed regulations, FSA will reduce the number 
of information collections by consolidating related collections in a 
manner that matches the organizational structure of the proposed CFR 
parts.
    In accordance with the Paperwork Burden Act of 1995, FSA intends to 
request approval of the following information collections.
    Title: General Program Administration.
    OMB Control Number: 0560-New.
    Type of Request: New Collection.
    Abstract: 7 CFR 761, General Program Administration, establishes 
requirements within FSA's Farm Loan Programs that are applicable to 
both making and servicing direct loans. Information collections 
established by the regulation are necessary to ensure that program 
applicants and participants meet statutory eligibility requirements, 
loan funds are used for authorized purposes and the Government's 
interest in security is adequately protected. Specific information 
collection requirements include financial information in the form of a 
balance sheet and cash flow projection used in loan making and 
servicing decisions; information needed to establish joint bank 
accounts in which loan funds, proceeds derived from the sale of loan 
security or insurance proceeds may be deposited; collateral pledges 
from financial institutions when the balance of a supervised bank 
account will exceed $100,000; and documentation that

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construction plans and specifications comply with state and local 
building standards. Existing collections applicable to FSA's Farm Loan 
Programs from OMB Control Numbers 0560-0154, 0575-0042, 0575-0064, and 
0575-0158 will be consolidated in this docket. Burden associated with 
the Rural Development Agencies' information collections will remain 
under Control Numbers 0575-0042, 0575-0064, and 0575-0158.
    Estimate of Burden: Public reporting for this collection of 
information is estimated to average 51 minutes per response.
    Respondents: Individuals or households, businesses or other for 
profit and farms.
    Estimated number of respondents: 70,290.
    Estimated number of responses per respondent: 2.6.
    Estimated total annual burden on respondents: 214,363.
    Title: Direct Loan Making.
    OMB Control Number: 0560-New.
    Type of Request: New Collection.
    Abstract: 7 CFR 764, Direct Loan Making, establishes the 
requirements for FSA's direct Farm Ownership, Operating, and Emergency 
loan programs. Information collections established in the regulation 
are necessary for the Agency to evaluate the loan applicant's request 
and determine if eligibility, loan repayment and security requirements 
can be met. Existing collections pertaining to direct loan making from 
OMB Control Numbers 0560-0157, 0560-0159, 0560-0162, 0560-0166, 0560-
0167, 0560-0178, 0575-0087, 0575-0088, and 0575-0147 will be 
consolidated in this docket. Burden associated with the Rural 
Development Agencies' information collections will remain under Control 
Numbers 0575-0087, 0575-0088, and 0575-0147.
    Estimate of Burden: Public reporting for this collection of 
information is estimated to average 26 minutes per response.
    Respondents: Individuals or households, businesses or other for 
profit and farms.
    Estimated number of respondents: 128,513.
    Estimated number of responses per respondent: 3.38.
    Estimated total annual burden on respondents: 177,150.
    Title: Direct Loan Servicing--Regular.
    OMB Control Number: 0560-New.
    Type of Request: New Collection.
    Abstract: 7 CFR 765, Direct Loan Servicing--Regular, establishes 
the requirements related to routine servicing actions associated with 
direct loans. Information collections established in the regulation are 
necessary for the Agency to monitor and account for loan security, 
including proceeds derived from the sale of security, and to process a 
borrower's requests for subordination or partial release of security. 
Information collections associated with the statutory requirement that 
borrowers be reviewed for graduation to commercial credit are also 
established in the regulation. Existing collections pertaining to 
routine direct loan servicing actions from OMB Control Numbers 0560-
0158, 0560-0171, 0575-0075, and 0575-0093 will be consolidated in this 
docket. Burden associated with the Rural Development Agencies' 
information collections will remain under Control Numbers 0575-0075, 
and 0575-0093.
    Estimate of Burden: Public reporting for this collection of 
information is estimated to average 38 minutes per response.
    Respondents: Individuals or households, businesses or other for 
profit and farms.
    Estimated number of respondents: 58,875.
    Estimated number of responses per respondent: 1.
    Estimated total annual burden on respondents: 105,547.
    Title: Direct Loan Servicing--Special.
    OMB Control Number: 0560-New.
    Type of Request: New Collection.
    Abstract: 7 CFR 766, Direct Loan Servicing--Special, establishes 
the requirements for servicing financially distressed and delinquent 
direct loan borrowers. The information collections established in the 
regulation are necessary for the Agency to evaluate a borrower's 
request for disaster set-a-side, primary loan servicing (including 
reamortization, rescheduling, deferral, write down and conservation 
contracts), and homestead protection. Existing collections pertaining 
to servicing financially distressed and delinquent direct loan 
borrowers from OMB Control Numbers 0560-0160, 0560-0161, and 0560-0164 
will be consolidated in this docket.
    Estimate of Burden: Public reporting for this collection of 
information is estimated to average 31 minutes per response.
    Respondents: Individuals or households, businesses or other for 
profit and farms.
    Estimated number of respondents: 11,595.
    Estimated number of responses per respondent: 2.39.
    Estimated total annual burden on respondents: 14,869.
    Title: Inventory Property Management.
    OMB Control Number: 0560-New.
    Type of Request: New Collection.
    Abstract: 7 CFR 767, Inventory Property Management, establishes the 
requirements for the management, lease and sale of security property 
acquired by the Agency. Information collections established in the 
regulation are necessary for the Agency to determine an applicant's 
eligibility to lease or purchase inventory property; and to ensure 
payment of the lease or purchase amount. Existing collections 
pertaining to the lease and sale of property acquired under FSA's Farm 
Loan Programs from OMB Control Number 0575-0110 will be incorporated in 
this docket. Burden associated with the Rural Development Agencies' 
information collections will remain under Control Number 0575-0110.
    Estimate of Burden: Public reporting for this collection of 
information is estimated to average 40 minutes per response.
    Respondents: Individuals or households, businesses or other for 
profit and farms.
    Estimated number of respondents: 212.
    Estimated number of responses per respondent: 1.
    Estimated total annual burden on respondents: 243.
    The Agency is soliciting comments on the burden of all of the above 
regarding: (a) Whether the collection of information is necessary for 
the proper performance of the functions of the Agency, including 
whether the information will have practical utility; (b) the accuracy 
of the Agency's estimate of burden including the validity of the 
methodology and assumptions used; (c) ways to enhance the quality, 
utility and clarity of the information to be collected; (d) ways to 
minimize the burden of the collection of information on those who are 
to respond, including through the use of appropriate automated, 
electronic, mechanical, or other technological collection techniques or 
other forms of information technology. These comments should be sent to 
the Desk Officer for Agriculture, Office of Information and Regulatory 
Affairs, Office of Management and Budget, Washington, DC 20503 and to 
William D. Cobb, USDA/FSA/DAFLP/STOP 0520, 1400 Independence Avenue, 
SW., Washington, DC 20250-0520. Copies of the information collections 
may be obtained from Mr. Cobb at the above address. All comments will 
become a matter of public record.

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Federal Assistance Programs

    These changes affect the following FSA programs as listed in the 
Catalog of Federal Domestic Assistance:

10.404--Emergency Loans
10.406--Farm Operating Loans
10.407--Farm Ownership Loans

Government Paperwork Elimination Act (GPEA)

    The Agency is committed to compliance with GPEA, which requires 
Government agencies to provide the public the option of submitting or 
transacting business electronically to the maximum extent possible.

Discussion of the Proposed Rule

Background

    FSA proposes to move the majority of its Farm Loan Programs direct 
loan making and servicing rules from Chapter XVIII to Chapter VII of 
the Code of Federal Regulations (CFR). Prior to the Department of 
Agriculture Reorganization Act of 1994 (1994 Act), Chapter XVIII was 
assigned to the Farmers Home Administration (FmHA) and Chapter VII was 
assigned to the Agricultural Stabilization and Conservation Service 
(ASCS). Under the provisions of the 1994 Act, both FmHA and ASCS were 
abolished. FmHA's Farm Loan Programs and ASCS's programs were 
consolidated under the newly created FSA while the remaining FmHA 
programs were transferred to one of the following Rural Development 
mission area agencies: Rural Business Cooperative Service, Rural 
Housing Service, and Rural Utilities Service. Chapter VII of the CFR is 
now assigned to FSA while Chapter XVIII is shared by FSA and the Rural 
Development mission area agencies.
    The following policies are not addressed in this proposed rule but 
will be addressed in separate rulemakings:
    1. Designation of Disaster Areas--The designation of disaster areas 
will be moved from subpart A of 7 CFR 1945 to 7 CFR 791.
    2. Offset of Federal payments--The policies pertaining to the 
offset of Federal payments for application to outstanding Farm Loan 
Programs debts contained in subpart C of 7 CFR 1951 will be 
consolidated with 7 CFR 792.
    3. Environmental Policies--The environmental policies contained in 
subpart G of 7 CFR 1940 will be consolidated with 7 CFR 799. This 
proposed rule makes reference to part 799. If part 799 is not amended 
prior to the rule finalizing this proposed rule, the Agency will 
continue to use part 1940, subpart G.
    4. Debt Settlement Policies--The debt settlement policies contained 
in subpart B of 7 CFR 1956 will be consolidated with 7 CFR 792. This 
proposed rule makes reference to part 792. If part 792 is not amended 
prior to the rule finalizing this proposed rule, the Agency will 
continue to use part 1956, subpart B.

Consolidation and Reorganization

    The Farm Loan Programs direct loan making and servicing rules are 
currently in numerous parts of Chapter XVIII, making their use 
difficult to all but the most well-informed user. The Agency proposes 
to consolidate and reorganize these rules in an orderly and logical 
manner. Part 761 of Chapter VII is entitled General Program 
Administration and contains the rules that, in general, apply either to 
both guaranteed and direct loans, or to both direct loan making and 
direct loan servicing. Part 762, which contains regulations pertaining 
to the Guaranteed Loan Program, was published as a final rule on 
February 12, 1999 (64 FR 7358-7403). Part 763 is reserved for future 
use. Part 764 is entitled Direct Loan Making and consists of the 
regulations governing the origination of direct loans. Part 765, 
Regular Servicing, contains the regulations related to servicing for 
direct loans. Regulation policies for distressed and delinquent 
borrowers with direct loans are contained in part 766, Special 
Servicing. Part 767 is entitled Inventory Property Management and 
contains regulations pertaining to security property that is abandoned 
by the borrower or acquired by the Agency. Parts 768 and 769 are 
reserved for future use. The table shown below illustrates how the 
existing CFR parts will be consolidated within the proposed parts:

------------------------------------------------------------------------
                                            Existing CFR subparts from
           Proposed CFR parts              which FSA provisions will be
                                                   consolidated
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7 CFR 761--General.....................  7 CFR 1806-A, 1806-B, 1901-A,
                                          1901-F, 1902-A, 1924-A, 1924-
                                          B, 1940-Q.
764--Direct Loan Making................  7 CFR 1910-A, 1927-B, 1941-A,
                                          1941-B, 1943-A, 1943-B, 1945-
                                          D.
765--Direct Loan Servicing--Regular....  7 CFR 1925-A, 1950-C, 1951-A,
                                          1951-D, 1951-F, 1951-J, 1962-
                                          A, 1965-A.
766--Direct Loan Servicing--Special....  7 CFR 1951-L, 1951-S, 1951-T,
                                          1962-A.
767--Inventory Property Management.....  7 CFR 1955-A, 1955-B, 1955-C.
------------------------------------------------------------------------

    By reorganizing the loan making and servicing rules in this manner, 
the general public, including loan applicants and borrowers, and the 
Agency can more easily find needed information. In addition, this 
structure helps to eliminate redundancies and, thereby, avoid 
inconsistencies. The proposed rule references rather than repeats other 
parts of the chapter, thereby, making it easier to incorporate future 
policy changes.

Removal of Internal and Administrative Procedures

    The existing regulations often describe in detail the Agency's 
internal and administrative procedures for implementing Farm Loan 
Programs. This approach not only contributes to a lengthy body of 
regulations, but also creates a barrier to quickly improving procedures 
which have no impact on loan applicants and borrowers. The Agency has 
to use the rulemaking process to modify procedures, thereby, adding 
time and expense to prepare and implement such changes. In contrast to 
the current regulations, the proposed rule focuses on Agency policies 
impacting loan applicants and borrowers. The Agency is moving the 
administrative procedures to a series of new handbooks which will 
parallel the topics in this proposed rule and will be issued 
simultaneously with the final rule.

Streamlining of Program Requirements

    While consolidating the loan making and servicing regulation parts, 
the Agency also is streamlining its Farm Loan Programs policies. With 
the aid of working groups of both Headquarters and Field staff, the 
Agency is proposing policy changes consistent with the existing 
statutory authority. The Agency also proposes to clarify certain 
regulations that have multiple interpretations, amend others that have 
led to unintended consequences, and revise policies to reduce burdens 
on loan applicants and borrowers. In

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addition, the proposed rule initiates action toward achieving 
recommendation number 56 of the USDA Civil Rights Action Team Report 
dated August 1997, which mandated that agencies ``streamline program 
regulations and application forms to make USDA programs easily 
accessible to all customers.'' The substantive changes are discussed in 
this preamble by regulation section.

Removal of Obsolete Parts

    As a result of the 1994 Act, some of the CFR subparts published by 
FmHA continue to be used by FSA and one or more of the Rural 
Development mission area agencies, while others are used exclusively by 
FSA. When the final rule for this proposed rule is published, FSA will 
remove the subparts which are used only by FSA. The following subparts 
will be removed in the final rule: 1910-A, 1924-B, 1941-A, 1941-B, 
1943-A, 1943-B, 1951-J, 1951-L, 1951-S, 1951-T, and 1965-A.

National Performance Review Objectives

    Under the National Performance Review initiative, Federal agencies 
were charged with ``creating a government that works better and costs 
less.'' Federal agencies were commissioned to focus on results rather 
than procedures, empower employees, put customers first, and cut red 
tape. The proposed rule responds to this challenge by eliminating 
unnecessary procedural or internal requirements, clarifying regulations 
with multiple interpretations, and adding flexibility to allow 
employees to address each customer's unique needs.

Farm Security and Rural Investment Act of 2002

    The proposed rule contains all the provisions from the Farm 
Security and Rural Investment Act of 2002 applicable to Farm Loan 
Programs. Those provisions were published in the proposed rule of April 
9, 2003, (68 FR 17316-17320), entitled ``2002 Farm Bill Regulations--
Loan Eligibility Provisions,'' and the final rule of February 18, 2003, 
(68 FR 7693-7701), entitled ``2002 Farm Bill Regulations--General 
Credit Provisions.''

Part 761--General Program Administration

Abbreviations and Definitions (Section 761.2)

    The Agency proposes to move all abbreviations and definitions 
applicable to Farm Loan Programs to this section. By including all 
abbreviations and definitions in a single section of the CFR, the 
Agency will eliminate the need for the general public to search 
multiple CFR subparts and parts to determine if and where a term is 
defined. Other CFR parts applicable to Farm Loan Programs will refer 
the reader to this section for an explanation or definition of an 
abbreviation or term.
    The Agency proposes to replace the term ``nonfarm enterprise'' with 
the term ``non-eligible enterprise.'' Existing direct loan making 
regulations identify authorized purposes for which loan funds may be 
used. While the Agency defines the term nonfarm enterprise, the 
regulations do not clearly state that loan funds may not be used to 
finance nonfarm enterprises, nor do they identify purposes for which 
loan funds may not be used. The proposed rule defines the term non-
eligible enterprise and clearly states that loan funds may not be used 
to finance a non-eligible enterprise. In addition, the term non-farm 
enterprise has resulted in confusion as several of the enterprises 
listed in the definition are farm or agriculture related, but are 
simply not an authorized loan purpose. The Agency believes the term 
non-eligible enterprise more accurately reflects that enterprises 
identified in the definition may not be financed with Agency loans 
funds. Furthermore, the Agency proposes to modify the definition by 
categorizing the examples under the production of exotic or non-farm 
animals; production of non-farm goods or services; or processing of 
farm products.
    The Agency also proposes to modify the definition of ``family 
farm.'' The definition contained in the existing regulation provides 
broad guidelines for determining if a farming operation is a family 
farm; however, this has resulted in inconsistencies in applying the 
definition on a nationwide basis. The proposed definition establishes 
that the typical year gross income of the operation cannot exceed at 
the greater of $750,000 in annual sales or the 95 percentile of farms 
in the state with sales in excess of $10,000, based on the most 
recently published farm data and survey of farm economic factors 
published by the National Agricultural Statistics Service, USDA. This 
calculation will be available in each Agency Office. Consideration of 
the typical year annual gross farm income of the particular state 
involved will allow for necessary regional differences in what is 
considered a ``family farm'' but is based on objective, quantifiable 
criteria. The $10,000 gross sales threshold is consistent with 
treatment of farms with gross sales of less than $10,000 as hobby farms 
by the Economic Research Service, USDA. The definition also will be 
clarified to state that daily operational and management decisions must 
be made and substantial labor must be provided by the applicant or 
borrower and persons related to the applicant or borrower by blood or 
marriage. ``Related by blood or marriage'' will be defined as connected 
to one another as husband, wife, parent, child, brother, or sister. The 
current definition of family farm refers to the applicant or borrower 
and ``family members'' of the applicant or borrower. The Agency 
anticipates that these proposed objective criteria will result in 
consistent, equitable, and sound loan making decisions across states.
    In the existing regulations, the Agency utilizes the term ``farm or 
ranch.'' While this wording takes regional terminology into 
consideration, the Agency believes it is unnecessary. In the proposed 
rule, the Agency uses only the term ``farm.'' The definition of 
``farm'' clearly includes ``farm'' or ``ranch'' as appropriate.
    The Agency also proposes to add definitions for the following 
terms: basic part of an applicant's total farming operation, chattel or 
real estate essential to the farming operation, crop allotment or 
quota, debt service margin, essential family household expenses, 
established farmer, false information, farm income, Farm Programs 
payments, foreclosed, foreclosure sale, good faith, household contents, 
joint financing arrangement, production cycle, and working capital.

Planning and Performing Construction and Other Development (Sec. 
761.10)

    The proposed regulations would give loan applicants more 
responsibility and flexibility in planning and completing construction 
and development projects. For example, applicants would have more 
freedom in choosing appropriate construction and repair design 
standards. The existing regulations require applicants to select from 
design standards that have been adopted by the Agency, including 
methods described in the FmHA Manual of Acceptable Practices. To ensure 
that Agency-financed projects have architectural and engineering 
integrity, the revised regulations would require that the design 
standard ``meet or exceed any applicable local or state laws, 
ordinances, codes, and regulations, including building, plumbing, 
mechanical, electrical, water, and waste management'' (proposed section 
761.10(d)(3)). Moreover, the revised rules would allow the Agency to 
request additional technical data, tests, or engineering evaluation, or 
to reject proposals that do not conform with industry-accepted 
construction practices and standards.

[[Page 6060]]

    The revised regulations also would increase the applicant's 
responsibility and flexibility in preparing construction and 
development plans, while decreasing the Agency's role in this task. For 
example, currently the Agency must visit the development site with the 
applicant to identify and agree upon the necessary items of 
development, as well as the dates by which construction will be started 
and completed. Under the revised regulations, the applicant would 
propose the scope and schedule of the development, and the Agency would 
visit the site while evaluating the proposal. In addition, the Agency 
would no longer be required to advise the applicant of ``publications, 
plans, planning aids, engineering data, and other technical advice and 
assistance available though local, state, and Federal agencies, and 
private individuals and organizations'' (7 CFR 1924.5(f)(2)(v)). While 
the Agency would continue to be available to advise applicants, the 
Agency believes that most applicants, as assisted when necessary by 
engineers, architects, other professionals, and state and local 
officials, can assemble acceptable development plans. In addition, the 
Agency would oversee development plans through the review process.
    The proposed regulations would eliminate the Agency's 
responsibility to verify the architectural and engineering proficiency 
of proposed projects. Under current regulations, the Agency reviews a 
construction and development plan, drawings, and specifications to 
determine the technical soundness of proposed developments. In 
addition, the Agency must offer suggestions to the applicant, when 
appropriate, on how the drawings and specifications might be altered 
and assist the applicant in revising the drawings. Under the proposal, 
the Agency could ensure the soundness of proposals by requiring the 
applicant to provide written certification by a licensed architect, 
professional engineer, or other specified professionals that the 
``final drawings and specifications conform with the applicable 
development standard.'' Thus, the applicant and professionals hired by 
the applicant would be responsible for the technical soundness of the 
proposal, not the Agency. The Agency is proposing this policy change 
because it lacks the engineering and architectural staff and expertise 
necessary to adequately review the wide variety of construction and 
development plans financed with Agency funds. This change also will 
give the applicant greater control over the project schedule. While the 
need for a professional certification may increase project costs, these 
costs can be covered as part of the Agency loan for the project.
    Under both the existing and proposed regulations, an applicant is 
responsible for seeking bids and selecting contractors. The proposed 
rule, however, would limit the Agency's responsibilities in this 
process. For example, the existing rules allow the Agency to request 
further negotiations between the applicant and the proposed contractor 
when the Agency determines that the proposed contractor's price is too 
high or is otherwise unreasonable. In addition, the Agency may request 
the applicant to obtain competitive bids if the applicant is unable to 
negotiate a reasonable price or if the Agency considers the contractor 
to be unqualified. Furthermore, under the existing rules, the applicant 
reviews competitive bids with the Agency's assistance and must select 
the lowest responsible bidder (7 CFR 1924.6(a)(10)(iv)). The Agency is 
proposing to eliminate its role in contractor selection to give 
applicants additional discretion and responsibility and will only 
require the applicant to provide an estimate of the total cash cost for 
all planned development prior to loan closing. The Agency believes that 
applicants generally have adequate incentives and information to select 
qualified and reasonably priced contractors.
    The existing regulations require the Agency to inspect developments 
``as frequently as necessary to assure that construction and land 
development conforms to the drawings and specifications'' (7 CFR 
1924.9(b)). At a minimum, the Agency must make final inspections of all 
projects. In many cases, additional inspections are required at certain 
stages of construction. Agency inspections would not be mandatory under 
the proposed regulations. Instead, the Agency would ``inspect 
development work periodically, as appropriate to protect the 
government's security interest'' (proposed Section 761.10(f)(1)). The 
proposal also would make the applicant responsible for inspecting 
development work as necessary to protect the applicant's interest. In 
addition, to protect the Government and applicant's interests, the 
proposal would require the applicant to obtain all lien waivers before 
the Agency would issue final payment and would allow the Agency to 
require a surety bond for construction contracts.
    The Agency is proposing to streamline the inspection requirements 
and increase the responsibility of applicants largely because the 
Agency staff does not have architectural and engineering expertise. 
Thus, the Agency cannot assure that projects conform to drawings and 
specifications or assure the adequacy of actual construction and 
development work. The Agency would increase the applicant's 
responsibility to obtain adequate inspections, such as those by State 
or local code inspectors or inspection services. These professional 
inspections would protect both the applicant and the Government's 
interests. Less Agency involvement in the inspection process may help 
to expedite project completion by giving the applicant more flexibility 
in scheduling inspections. This regulatory change may increase project 
costs for some applicants who obtain professional inspections, instead 
of relying on the Agency's inspections. However, these costs can be 
covered by the Agency loan for the development project.

Part 762--Guaranteed Farm Loans

    The guaranteed loan regulations were published as a final rule on 
February 12, 1999. In this rule, changes made to part 762 are only 
those necessary to correct references to CFR parts or subparts that are 
being revised or replaced, or to remove regulatory text which will now 
be addressed in part 761.

Part 764--Direct Loan Making

Application Requirements (Section 764.51)

    The Agency proposes to reduce the amount of historical 
documentation required to process loan requests. Currently, the Agency 
requires 5 years of financial and production documentation, while the 
traditional commercial lending standard is 3 years. While some 
additional requirements may be justified because of the additional risk 
inherent in a direct loan to an applicant who is unable to obtain 
commercial credit, the Agency does not believe the additional 2 years 
of data significantly improves the quality of loan making decisions; 
therefore, a 3-year data requirement is proposed for financial and 
production documentation.
    The proposed rule clarifies that payment of the applicable credit 
report fee is required from the loan applicant for the application to 
be considered complete. The Agency is only responsible for obtaining 
the credit report after the fee has been paid. Existing regulation, 
published in 7 CFR 1910.4, pertaining to a complete loan application 
lists the credit report under the heading ``FSA Responsibilities for a

[[Page 6061]]

Complete Application''; however, regulations published in 7 CFR 1910.51 
clearly provide that ``a non-refundable fee will be charged to the 
applicant'' for ordering a credit report. This has resulted in 
confusion in determining the loan applicant's responsibilities 
regarding a complete application and will be revised accordingly.
    The proposed rule also would authorize the Agency to collect 
additional information from an applicant that the Agency deems 
necessary to make a decision on the applicant's request. This provision 
would apply to all loan applicants. The additional information might 
include divorce or separation decrees, documentation regarding child 
support payments, or any other information necessary to evaluate the 
loan request. Business loans, including direct farm loans, require an 
assessment of each applicant's request, and there are no one-size-fits-
all templates. Agency staff feels constrained by the existing 
regulations since the regulations do not allow the Agency to identify 
specific information needed for each application. Rather than attempt 
to identify every possible piece of information that could ever be 
needed and then require every applicant to provide that information, 
thereby increasing the burden on all applicants, the Agency proposes to 
allow specific information to be requested as deemed necessary.

Applicant Eligibility (Section 764.101)

    The proposed rule will also set consistent rules for acceptable 
composition of entity applicants. Under the existing rules, an entity 
applicant for an emergency loan must meet the same requirements as 
applicants for other direct loans, except that the applicant may not be 
an estate or trust, or a corporation, partnership, or joint operation 
with over 50 percent of the ownership held by an estate, trust, another 
corporation, another partnership, or another joint operation. The 
proposed rule would extend this requirement to entity applicants for 
all direct loans. The Agency does not foresee that this change would 
have any significant impact on applicants, but it would ease program 
implementation by applying the same requirements across all direct loan 
programs.
    An eligibility requirement has been added to require that the 
applicant, and all entity members in the case of an entity applicant, 
not own real estate subject to a Federal judgment lien. This change is 
made to comply with 28 U.S.C. 3201(e). This statutory provision, in 
part, prohibits debtors with Federal judgment liens on their property 
from receiving any loan made or guaranteed by the United States or 
receiving funds directly from the Federal Government in any program, 
except funds to which the debtor is entitled as beneficiary. The 
prohibition remains until the judgment is paid in full or otherwise 
satisfied.

General Limitations (Section 764.102)

    The proposed rule will add the limitation for all Farm Loan 
Programs direct loans that the tracts to be farmed must be contiguous 
or the distance between the tracts will not prevent an efficient 
farming operation. This is a current loan limitation for farm ownership 
loans and should be applied consistently across loan programs.
    The Agency also proposes to add the clarification that loan funds 
may not be used to establish or support a non-eligible enterprise, even 
if the non-eligible enterprise contributes to the farm. The term ``non-
eligible enterprise'' will be substituted for the current term ``non-
farm enterprise''.
    The proposed rule also would specify that loan funds are to be used 
for farming operations located in the United States, in accordance with 
the Consolidated Farm and Rural Development Act (Act). Sections 302 and 
311 of the Act, in part, limit farm ownership and operating loans, 
respectively, to farmers ``in the United States'' who are United States 
citizens and to farm entities ``engaged primarily and directly in 
farming or ranching in the United States'' whose majority interest is 
held by United States citizens. Section 321 of the Act similarly limits 
emergency loans, in part, to established farmers who are citizens of 
the United States and farm entities in which a majority interest is 
held by United States citizens where the applicants' farm operations 
``have been substantially affected by a natural disaster in the United 
States.''
    The existing regulations contain eligibility requirements that an 
applicant be a United States citizen, or lawfully admitted alien and 
for entity applicants that the operation must ``be controlled by 
farmers or ranchers engaged primarily and directly farming in the 
United States.'' The Agency will add in the proposed rule a limitation 
that loan funds only be used for farm operations in the United States.

Choice of Security (Section 764.103)

    Sometimes an applicant has more assets available than are needed to 
satisfy the Agency's security requirements. The existing regulations 
have been construed by some to allow the applicant to choose which 
assets would secure the Agency's loan. The proposed rule clarifies that 
the Agency has the authority and responsibility to choose the best 
security available when there are several options. However, under the 
proposal, the Agency may honor an applicant's preference that certain 
assets be taken as security over others provided that the quality and 
value of the Agency's security position would not be compromised.

Agency Lien on Non-Essential Assets (Section 764.103)

    Non-essential assets are those assets that are not essential to the 
farming operation and do not contribute net income to pay family living 
expenses. The Agency prefers that an applicant sell non-essential 
assets and reduce the amount of the loan request. However, there are 
circumstances when an applicant cannot or will not convert non-
essential assets to cash.
    Existing regulations require that the Agency take a lien on all 
non-essential assets with an aggregate value exceeding $5,000 as 
security only for emergency loans. The proposed rule would extend this 
requirement to all direct loans for consistency and would change the 
value of the non-essential assets from an ``aggregate value exceeding 
$5,000'' to an individual value for each non-essential asset in excess 
of $5,000. As under the existing regulations, the lien on non-essential 
assets would be taken in addition to the lien on assets obtained to 
meet the adequate or additional security requirements. These changes 
provide consistency between loan programs and ensure that the Agency 
does not invest an inordinate amount of time obtaining a lien on assets 
of minimal value.

Farm Ownership Loan Program (FO) (Subpart D)

    The proposed regulations would clarify the benefits of a joint 
financing arrangement for FO loans. A joint financing agreement is an 
arrangement between two or more lenders that make separate loans 
simultaneously to supply the funds required by one applicant. 
Currently, the regulations describe the joint financing agreement but 
do not clearly state that a lower interest rate will apply. The 
proposed rule states that the joint financing agreement allows the 
Agency to establish a ``more favorable interest rate. This interest 
rate would be at least 4 percent annually.''

Operating Loan Program (OL) (Subpart F)

    The OL loan eligibility requirement that the applicant and any 
persons signing the promissory note may not

[[Page 6062]]

close an OL loan in more than seven calendar years will be modified to 
apply only after December 31, 2002. This change is required by section 
255 of the Agricultural Risk Protection Act of 2000, Pub. L. 106-224, 
enacted on June 20, 2000.
    The Agency proposes to clarify its policy regarding the difference 
between the acceptable use of OL and FO funds. Prior to March 3, 1997, 
(62 FR 9351-9359) the authorized uses for direct OL funds included 
``not more than $15,000 in a fiscal year for real estate improvements 
or repairs.'' The current regulation provides, in part, that OL funds 
may be used for paying costs associated with reorganizing a farm or 
ranch to improve its profitability; purchasing farm or ranch equipment; 
paying annual operating expenses; and paying farm, ranch or home needs. 
Under this language, the Agency permits OL funds to be used for real 
estate improvements or repairs, but the lack of specific guidelines has 
resulted in confusion regarding the intent of the regulation.
    The proposed rule provides that OL funds can be used for minor 
repairs and improvements to buildings, provided the costs do not exceed 
$15,000 per year. More substantial repairs and improvements would have 
to be made under a FO loan. This policy is consistent with the 
statutory loan purposes of OL loans in section 312 of the Act.
    The Agency proposes to remove the requirement of a nonsupervised 
bank account for farm or home needs (7 CFR 1941.16) for OL applicants. 
Prior to the Federal Agriculture Improvement and Reform Act of 1996 
(Pub. L. 104-127) (1996 Act), the Act provided that the Agency ``shall 
reserve not more than 10 percent of any loan made under this title or 
$5,000 of such loan, whichever is less, to be placed in a nonsupervised 
bank account which may be used at the discretion of the applicant for 
necessary family living needs * * *.'' The 1996 Act amended section 312 
of the Act to provide that the Agency ``may reserve a portion of any 
loan * * *.'' While the amended language maintained the maximum limit 
of 10 percent of the loan amount or $5,000, it provides the Agency with 
some flexibility in implementation. The payment of expenses for family 
subsistence is an authorized use of loan funds and in many cases, loan 
funds are provided directly to the applicant to use as specified in the 
operating plan agreed to by both the applicant and the Agency without 
the need of a nonsupervised bank account. The proposed rule only 
requires the use of a supervised bank account when ``special 
supervision is needed.'' This is consistent with the Agency's policy of 
reducing the use of supervised bank accounts. Therefore, the Agency has 
determined that it is no longer necessary to require the use of a 
``nonsupervised bank account'' in its regulations.

Youth Loan Program (Subpart G)

    The Agency proposes to modify the Youth Loan Program regulations in 
order to make the program easier to use and more accessible. The Youth 
Loan Program is part of the direct OL and currently has the same 
regulatory requirements as other OL loans. The Agency proposes to 
establish a separate subpart for youth loan regulations and streamline 
the processing of Youth loans.
    The Agency makes small loans, up to a maximum of $5,000, to youths 
(age 10-21) who likely have no credit background, or at least, have 
less credit history than the typical adult applicant. The risk of loss 
to the Agency is low due to the small loan balance. Additionally, some 
of the information that is routinely required to process loans is 
generally not available. Therefore, under the proposed rule, the Agency 
may waive certain application requirements that will not be applicable 
based on the applicant's age. The Agency is soliciting comments on 
lowering the youth applicant's age limit to 8 years of age to coincide 
with the age limitation in participating in 4-H clubs. The Agency will 
evaluate all comments received on this issue and adopt the age limit 
suggested on most comments.
    The proposed rule also would emphasize the Agency's intention that 
Youth loans support agriculture-related, educational projects. The 
existing regulations state that the objective of the Youth Loan Program 
is to provide credit for rural youths to establish and operate modest, 
income-producing projects in connection with 4-H clubs, FFA, and 
similar organizations. This provision has been interpreted to allow 
Youth loans for projects that are not significantly related to 
agriculture, therefore, a provision on authorized Youth loan users will 
be added.
    The existing definition of ``rural youth'' limits the Youth Loan 
Program to a youth who ``does not reside in any city or town with a 
population of more than 10,000 inhabitants.'' As part of the Agency's 
effort to make the Youth Loan Program more accessible, the proposed 
rule would extend the program to applicants who reside in a rural area, 
or city or town with a population of 50,000 or fewer people. The Youth 
Loan Program provides a valuable, educational opportunity for youth to 
experience farming. By providing supervised loan funds for agriculture-
related projects to a larger pool of youth, the Agency hopes to 
increase the number of motivated, educated farmers in the future.
    The existing security requirements are the same for a Youth loan 
and an OL loan. Under the existing regulations, additional security up 
to 150 percent of the loan amount is required if it is available. In 
the case of a term OL loan, the existing regulations require security 
with a value that will remain relatively constant over time that is 
equal to 100 percent of the loan amount. Youth loan applicants 
generally do not have available security beyond what is purchased or 
produced with loan funds. The proposed rule would require the Youth 
loan be secured by only the asset being purchased or produced with the 
loan funds, unless it is impractical to separately identify the asset 
from the applicant's other assets or the adequate security requirement 
has not been met. This provision would eliminate the requirement for 
additional security in the case of youth loans.

Emergency Loan Program (EM) (Subpart H)

    The Agency published a final rule to streamline the EM loan program 
on January 8, 2002, in 67 FR 791-801. This proposed rule adopts the 
changes addressed in the discussion of the January 8, 2002, rule. 
Therefore, while the Agency will accept comments regarding the EM loan 
program, discussion of the changes is not included in this rule.

Loan Decision and Closing (Subpart I)

    The Agency proposes to clarify the actions to be taken when an 
adverse loan decision is overturned on appeal. Loan approval is not 
automatic after an Agency loan denial is overturned. The Agency must 
reevaluate the request based on the findings of the appeal hearing 
officer and take the next step toward processing the loan application. 
Current regulations do not specify the process that occurs after a loan 
denial is overturned. To avoid confusion, the proposed rule states that 
the Agency will consider the following prior to loan approval: (1) 
Satisfactory review of current financial information and determination 
of whether changes in the applicant's financial and agricultural 
conditions will adversely affect the applicant's operation; (2) 
determination that the applicant will be able to produce a crop in the 
production cycle for which the loan is requested (specifically for crop 
production loans);

[[Page 6063]]

and (3) determination that the applicant's operating plan, as modified 
based on the appeal decision, reflects a feasible plan. The Agency 
expects that this clarification would create a more efficient and 
consistent decision process for both the Agency and applicants.
    The proposed rule states that the Agency will not approve a loan 
unless the applicant demonstrates an ability to satisfy its total 
credit needs. For example, an applicant for a FO loan must demonstrate 
an ability to obtain any additional credit necessary to operate the 
farm. This proposed change recognizes that the Agency's loan may be 
only a part of the applicant's financial needs. It would help ensure 
that the Agency makes loans only to applicants who have viable 
operations and are not undue credit risks.

Borrower Training (Subpart J)

    Under the existing regulations, the Agency must evaluate the need 
for production and financial management training when considering a 
request for a loan or primary loan servicing. Additionally, the Agency 
cannot require applicants ``who have previously received a waiver, or 
who have previously satisfied the training requirements'' to complete 
training (7 CFR 1924.74(b)(2)). Under the proposed regulations, the 
Agency is eliminating the requirement to assess the need for training 
when a borrower requests primary loan servicing. The Agency believes 
that borrower training, if needed, is most helpful early in the loan 
process. It is of little or no benefit to a borrower who is already 
delinquent or in non-monetary default. The Agency, however, would be 
able to require direct loan applicants who have previously received a 
waiver or satisfied training requirements to complete training when: 
(1) The proposed loan is to finance a new enterprise for which the 
applicant has not had production training or (2) information contained 
in the loan assessment or obtained from year-end analyses, farm visits, 
or the borrower's case file indicates that additional production or 
financial management training is needed. This early detection of the 
need for additional training will help borrowers become successful and 
hopefully avoid later delinquencies.

Part 765-- Direct Loan Servicing--Regular

Increasing Limited Resource Interest Rates (Subpart B)

    Section 1951.25 of 7 CFR 1951 provides ``the interest rate may not 
be changed more often than quarterly.'' This limitation is eliminated 
in this proposed rule. The Agency instead will review borrowers with 
limited resource rates annually; however, the Agency may process a 
change in interest rate at any time it becomes aware of a change in the 
borrower's circumstances. This change will reduce unnecessary 
administrative burden and provide for annual limited resource rate 
reviews consistent with the annual process for developing farm 
operating plans.

Borrower Payments (Subpart D)

    The existing regulations are written in a manner that allows 
inconsistencies in applying payments to the borrower's Agency loans. 
The proposed rule clarifies that payments will be applied in the 
following order:
    (1) Annual operating loans;
    (2) Delinquent FLP installments, paying least-secured loans first;
    (3) Non-delinquent FLP installments due in the current operating 
cycle in order of security priority, paying least-secured loans first; 
and
    (4) Any future FLP installments due.
    The Agency believes these changes will assure that regular payments 
are applied to protect the Agency's security interest and preserve the 
financial viability of the borrower's operation.

Protective Advances (Section 765.203)

    The existing regulations allow the Agency to make protective 
advances when necessary to protect its interest in security property. 
The regulations also provide that protective advances will be added to 
the outstanding principal when a loan is rescheduled or reamortized, 
except for advances to pay prior or junior liens other than real estate 
tax liens. This policy reduces the incentive for borrowers to pay costs 
such as real estate taxes. Under the proposed rule, the Agency would 
continue to make protective advances when necessary; however, the 
Agency will consider the payment of protective advances for reasons not 
beyond the borrower's control when determining eligibility for future 
loan and servicing requests. One general loan eligibility requirement 
is that the applicant will honestly endeavor to carry out the 
conditions of the loan. Another general loan servicing eligibility 
requirement is that the borrower has acted in good faith in accordance 
with borrower loan agreements.

Subordination of Chattel Security (Section 765.205)

    Existing regulations published in Sec. 1962.30 of 7 CFR 1962 allow 
for only one subordination to be outstanding ``at any one time in 
connection with the same security.'' Under the proposed rule, the 
Agency will consider a second subordination of chattel security to 
enable the borrower to obtain crop insurance when (1) the creditor with 
the first subordination did not provide for the payment of crop 
insurance and consents in writing to pay insurance premiums from crops 
or insurance proceeds, and (2) the borrower assigns insurance proceeds 
to the Agency or names the Agency in the loss payable clause of the 
policy. In some areas, banks typically do not lend additional money for 
the borrower to obtain crop insurance. In those cases, a second 
subordination is needed for the secured debt on an insurance provider. 
In addition, crop insurance may not yet be available or has not been 
chosen when the borrower obtains the loan requiring the first 
subordination of the Agency's chattel security. The proposed change 
would allow for second subordinations in these cases. The same 
requirements for initial subordinations also will apply to these second 
subordinations.

Unapproved Disposition of Chattel Security (Section 765.304)

    A borrower cannot dispose of chattel security in a manner that is 
inconsistent with the borrower's agreement with the Agency. Under 
current regulations, when an unauthorized disposition occurs, the 
borrower must make restitution by paying the Agency the market value of 
the security, or replacing the security with property of equal or 
greater value. In addition, the borrower may submit information to 
allow the Agency to consider post-approval of the disposition, provided 
the funds were used in accordance with Agency regulations. However, the 
regulation provides that only one post-approval may be granted during 
the period covered by the agreement. If the borrower fails to make 
restitution, provide information to allow for post-approval, or commits 
a second transgression, the Agency may pursue civil or criminal action, 
or both. The proposed rule continues to allow the borrower to make 
restitution or submit information for post-approval; however, the 
requirement establishing a limit of one transgression per period of the 
agreement has been eliminated. The Agency believes that one warning is 
adequate. The proposed rule provides that subsequent violations of the 
agreement and uncured first violations will be considered when 
determining eligibility for future loan or servicing assistance. One 
general loan eligibility requirement is that the applicant will 
honestly endeavor to carry out the conditions of the loan. One general 
loan

[[Page 6064]]

servicing eligibility requirement is that the borrower has acted in 
good faith in accordance with borrower loan agreements.

Disposing of a Portion of Real Estate Security (Subpart H)

    When the borrower proposes to sell, exchange, or otherwise dispose 
of a portion of real estate security, the existing regulations require 
that the portion of real estate security to be disposed of be appraised 
whenever one of several conditions are met. One of these conditions is 
that the estimated value of the portion of real estate security 
proposed for disposition exceeds $10,000. The Agency implemented this 
requirement to ensure that the borrower obtains fair market value for 
the real estate security, and that in turn, the Agency's security 
interest is protected. In cases where an appraisal is not required, the 
Agency estimates the value of the real estate based on current real 
estate values for the area in which the property is located. The 
proposed rule would increase the maximum from an estimated value of 
$10,000 to $25,000, but as with the existing regulations, provide the 
Agency discretion, when in its best interest, to obtain an appraisal 
when the estimated value is below this limit. The Agency proposes 
modifying this requirement because the cost to the Agency of conducting 
an appraisal for portions of properties with a value of $10,000 to 
$25,000 often exceeds the benefit of the appraisal. In addition, the 
proposed rule would require an appraisal of the remaining real estate 
security only when the Agency believes the value of the remaining real 
estate is diminished by an amount greater than the market value of the 
property proposed for disposition. These modifications would reduce the 
administrative burden associated with handling borrower requests for 
disposition of real estate security. It would also expedite the Agency 
approval process for the disposition of real estate security by 
borrowers. These benefits outweigh any risk to the Agency from not 
appraising all remaining real estate security.
    In addition, the Agency proposes to modify the regulations 
pertaining to the use of proceeds received from the sale of real estate 
security. Section 1965.13(e)(4)(iii) of 7 CFR allows the borrower to 
use up to $10,000 to develop land not owned by the borrower. The Agency 
has eliminated this option as an authorized use of proceeds in the 
proposed rule. The Agency does not believe it is prudent to release 
proceeds from the sale of its loan security to develop land on which it 
does not have a lien.

Non-Program Loan Terms (Section 765.404)

    The Agency proposes to extend the term for Non-Program loans when 
an ineligible applicant assumes an outstanding debt or purchases 
inventory property. The existing regulations allow the Agency to 
schedule repayment over 15 years. The Agency proposes to base the term 
on the applicant's repayment ability, with maximum term of 25 years. 
This modification will allow the Agency greater flexibility to resolve 
delinquent accounts through assumption of the indebtedness and when 
selling inventory property.

Part 766 Direct Loan Servicing--Special

Notification of the Availability of Loan Servicing (Section 766.101)

    Section 331D of the Act establishes requirements regarding when the 
Agency must notify a borrower of the availability of loan servicing and 
mandates that the initial notice be ``contained in the regulations 
implementing this title.'' The Agency published a proposed rule (53 FR 
18392-18523) announcing regulations implementing section 331D on May 
23, 1988. An interim rule (53 FR 35639-35798) was published on 
September 14, 1988. In both rules, the Agency published the initial 
loan servicing notification, as well as all subsequent notices 
associated with the loan servicing process. The Agency chose to publish 
notices beyond those mandated in the Act for several reasons. First, 
the Agricultural Credit Act of 1987 provided for substantial changes to 
the Agency's loan servicing policies. Second, at the time the proposed 
rule was published, a significant portion of the Agency's direct loan 
borrowers were delinquent or in some other form of loan default. 
Incorporating the loan servicing notices in the regulation has resulted 
in the need for the Agency to go through the rulemaking process to make 
only minor editorial changes in the notices. Therefore, the Agency is 
proposing to publish only the initial loan servicing notification in 
its regulations as required by the Act. All other loan servicing 
notices will be available to the public in any Agency office.
    In addition, Sec. 1962.17(a)(2) of 7 CFR requires that a notice of 
the availability of loan servicing be provided to the borrower when the 
Agency denies a request for the release of proceeds from the sale of 
chattel security. This notification is not required under Sec. 331D of 
the Act. Section 766.101 of the proposed rule, continues the Agency 
policy of notifying financially distressed and delinquent borrowers of 
the availability of loan servicing. Therefore, the Agency believes that 
the additional notification requirement established in Sec. 1962.17 is 
unnecessary and has removed it.

Financial and Production Records (Section 766.102)

    As with loan applicants, the Agency proposes to reduce the burden 
on borrowers applying for loan servicing by requiring the borrower to 
submit only 3 years of historical financial and production 
documentation when applying for loan servicing. Currently, the Agency 
requires the borrower to submit 5 years of historical financial and 
production records. The guaranteed loan program regulations require 3 
years of financial and production records. To ensure consistency 
between programs and with industry standards, the Agency is proposing 
to change the requirement for the direct program to match the 
guaranteed program requirements, as well as commercial lenders.

Borrower Eligibility for Loan Servicing (Section 766.104)

    Section 353 of the Act requires that to be eligible for loan 
restructuring, the delinquency must be ``due to circumstances beyond 
the control of the borrower, as defined in regulations issued by the 
Secretary.'' The Agency has published the loan servicing eligibility 
requirements in subpart S of 7 CFR part 1951. Section 1951.909(c)(1) 
lists specific causes of reductions in income ``beyond the control of 
the borrower.'' The Agency believes that the existing regulations do 
not adequately address all potential circumstances beyond the control 
of a borrower. Under the proposed rule, the Agency will expand the 
existing language which addresses ``[n]atural disasters, an outbreak of 
uncontrollable disease, or uncontrollable insect damage,'' to include 
``adverse weather,'' thus clarifying that it is not required that the 
farming operation be located in a county designated or declared a 
natural disaster. In addition, the Agency will add reduction in income 
due to ``damage or destruction of property essential to the operation'' 
and clarify the list of examples as inexhaustive.

Agency Offer To Restructure a Delinquent Borrower (Section 766.106)

    Under existing regulations, when the Agency offers to restructure 
the loans of a delinquent borrower, the notification

[[Page 6065]]

includes the right to appeal the Agency offer. If the borrower does not 
respond to the Agency's offer, the Agency then provides the borrower 
with a ``Notice of Intent to Accelerate.'' This notification also 
provides the borrower with appeal rights. Under this rule, the Agency 
proposes to consolidate the borrower's appeal rights. The Agency's 
offer to restructure will no longer include appeal rights. Instead, if 
the borrower does not accept the offer or fails to respond within the 
established timeframe, the Agency will immediately provide a ``Notice 
of Intent to Accelerate'' which will provide the borrower the 
opportunity to appeal either the Agency's offer, notice of intent to 
accelerate, or both. Consolidation of the appeal rights will allow for 
more timely processing of a borrower's request for loan servicing and 
resolution of delinquent accounts.

Deferral Period (Section 766.109)

    The existing regulations stipulate that a deferral period will not 
exceed 5 annual installments, but are unclear on how the length of a 
deferral is determined. As a result, the Agency has often granted 
borrowers 5-year deferrals. In the proposed rule, the maximum deferral 
term would still be 5 years, but the Agency would grant the shortest 
deferral term that would result in a feasible operating plan without 
debt writedown. The length of the deferral period affects the interest 
accrual and the debt payments after deferral. A longer deferral period 
increases the interest accrual and the post-deferral payments. The 
shortest deferral period necessary to generate a feasible plan benefits 
the borrower by minimizing interest accrual.

Appeal of a Conservation Contract Technical Decision (Section 766.110)

    Current regulations are ambiguous regarding the appeal of Natural 
Resources Conservation Service's technical decisions on a Conservation 
Contract. The proposed rule would clarify how a borrower may appeal the 
Natural Resources Conservation Service's technical decisions by stating 
that such appeals will be handled in accordance with 7 CFR part 780.
    This section also will be amended to consider only the present 
market value of the land without any structural improvements in 
determining the appropriate amount of debt reduction. This change is 
needed to prevent inflated conservation contract values based on 
structural improvements that do not have value in promoting 
conservation, recreation, or wildlife on the property.

Softwood Timber Loan Program

    The Agency proposes to eliminate the Softwood Timber Loan Program 
regulations. The Softwood Timber Loan Program allows a borrower to 
convert all or a portion of their debt to a Softwood Timber loan. This 
conversion allows a borrower who is financially distressed or 
delinquent on an Agency direct loan to defer loan payments and generate 
income from planting and harvesting softwood timber to make future loan 
payments. Since the program's inception in 1983, the Agency has 
processed only 35 Softwood Timber loans. The Agency believes the use of 
the Softwood Timber program does not justify the costs associated with 
maintaining the program. The most significant Agency costs associated 
with the Softwood Timber Loan Program include costs for training Agency 
staff, monitoring Softwood Timber loans, maintaining automation 
programs, and publishing Softwood Timber regulations. It should be 
noted that Softwood Timber production is confined to certain limited 
areas within the country as a result of the marginal land requirements. 
Therefore, many borrowers are not eligible for assistance under this 
program.

Homestead Protection eligibility (Section 766.153)

    The Agency proposes to add a property eligibility requirement for 
homestead protection. Where voluntary conveyance of the property to the 
Agency would be required to process homestead protection, the Agency 
proposes to take title to the property only if it can obtain a positive 
recovery after paying any outstanding liens of other creditors on the 
property. This is consistent with the Agency's policy to accept 
voluntary conveyances only if it is in the Government's best financial 
interest. If homestead protection is not offered prior to foreclosure, 
the option is still available after the Agency takes title to the 
property.

Homestead Protection lease (Section 766.155)

    The proposed rule will clarify that homestead protection leases 
will not be less than 3 years and will not exceed 5 years. These 
limitations on terms are required by Sec. 352(b)(3) of the Act. The 
current regulation does not specify the minimum lease term.

Accelerated Repayment Agreements

    The existing regulations allow the Agency to enter into an 
accelerated repayment agreement with a borrower when the Agency 
considers liquidating an account due to the borrower's failure to 
graduate or to use the security as agreed in the operating plan. This 
agreement is used in lieu of foreclosure when it is in the Agency's 
best financial interest and when the borrower can meet the accelerated 
payment schedule. The proposed rule would eliminate accelerated 
repayment agreements for borrowers who fail to graduate to other credit 
when able to do so. The Agency believes the overall impact of this 
change would be minimal as accelerated repayment agreements are rarely 
executed. Eliminating accelerated repayment agreements would allow the 
Agency to treat all borrowers in non-monetary default more 
consistently. The proposed change would encourage qualified borrowers 
to graduate promptly and encourage borrowers who are not farming to 
cure the default or voluntarily liquidate their security.

Unauthorized Assistance (Subpart F)

    The Agency proposes to change its procedures regarding the 
resolution of unauthorized assistance cases where a portion of the loan 
is unauthorized. Under the current regulations, the Agency splits the 
loan into two accounts: one loan account for the authorized portion of 
the loan and a second loan account for the unauthorized portion of the 
loan. The Agency proposes to eliminate this requirement and by internal 
procedure keep one loan account to eliminate the burden on Agency staff 
of creating, tracking, and servicing a second loan account. Under the 
proposed rule, the Agency will attempt to collect the unauthorized 
assistance, or that portion which the borrower is able to pay within 90 
days. If the borrower is unable to repay the entire amount of 
unauthorized assistance, the Agency may enter into an accelerated 
repayment plan with the borrower for such amount if the borrower did 
not intentionally provide incomplete or false information and such 
action is in the best financial interest of the Government. The debt 
under the accelerated repayment plan will be treated as a non-program 
(NP) loan with NP interest rate and terms as short as feasible, but not 
exceeding the remaining term of the FLP loan. The Agency will not 
continue with the borrower at existing rates and terms in any case as 
to the unauthorized portion of the debt. This change in policy is 
necessary to cure errors resulting in unauthorized assistance 
regardless of whether borrower or Agency error is involved. The 
unauthorized amount may be the result of a statutory or a regulatory 
violation, but in either case it never should have been given to the 
borrower. An accelerated repayment

[[Page 6066]]

plan will allow those borrowers who did not intentionally provide 
incomplete or false information to the Agency to pay unauthorized 
assistance over time. If the borrower is able to repay, but refuses to, 
the borrower will receive the primary loan servicing notices for those 
in non-monetary default prior to liquidation.

Part 767--Inventory Property Management

Inventory Property Classification

    An interim rule published at 62 FR 44393-44404, on August 21, 1997, 
implemented provisions of the 1996 Act impacting the management and 
sale of inventory property. The revised regulation provided one method 
of sale of inventory property, and, thus, eliminated the need to 
classify inventory property as suitable or surplus. However, the 
interim rule did not eliminate usage of the terms ``suitable'' and 
``surplus'' properties elsewhere in the CFR. The proposed rule would 
eliminate references to suitable and surplus property as necessary.

Chattel Inventory Property Disposition Methods (Section 767.155)

    The current regulations allow the Agency to sell inventory chattel 
property through a sealed bid or regular sale. The proposed rule would 
eliminate the use of these sale methods and require sale by public 
auction. An auction is the most efficient and common venue for selling 
chattel property.
    The current regulations state that ``[b]eginning farmers or 
ranchers obtaining special OL [Operating] loan assistance * * * will 
receive priority in the purchase of farm equipment held in government 
inventory during the commitment period'' (7 CFR 1955.122(a)). The 
proposed rule eliminates this preference as the Agency's statutory 
authority for giving special Operating loan assistance was eliminated 
by Sec. 616 of the 1996 Act. This change would have a minimal impact on 
the Agency, beginning farmers, and the general public because of the 
limited amount of chattels the Agency takes into inventory.

Inventory Property With Important Resources, Special Hazard Areas, and 
Environmental Risks (Subpart E)

    The proposed rule would clarify the Agency's obligations under the 
National Environmental Policy Act and other Federal environmental laws. 
The current regulations require the Agency to inspect all inventory 
property for hazardous waste contamination and report certain 
underground storage tanks, but they do not specify when the Agency will 
undertake corrective measures. The proposed rule would clarify when the 
Agency is responsible for cleaning up hazardous waste contamination and 
removing or permanently closing underground storage tanks. It would 
clarify that the Agency would undertake corrective measures when: (1) 
Any known contamination or underground storage tank leakage presents an 
immediate threat to the health and safety of neighboring property 
owners or to potential purchasers of the property; and (2) The Agency 
is selling the property to a beginning farmer and providing credit 
assistance through a direct or guaranteed loan. Moreover, the proposed 
rule also states that the Agency would not undertake corrective action 
if the property is being sold back to a potentially responsible party. 
By more clearly defining the Agency's responsibilities, the proposed 
rule would eliminate questions of liability and reduce the Agency's 
risk of being responsible for costly cleanups.

List of Subjects

7 CFR Part 761

    Administrative practice and procedure, Agriculture, Authority 
delegations, Credit, Loan programs--Agriculture.

7 CFR Part 762

    Agriculture, Credit, Loan programs--Agriculture.

7 CFR Part 764

    Agriculture, Agricultural commodities, Credit, Disaster assistance, 
livestock, Loan programs--Agriculture, Mortgages.

7 CFR Part 765

    Agriculture, Agricultural Commodities, Credit, Livestock, Loan 
programs--Agriculture.

7 CFR Part 766

    Agriculture, Agricultural commodities, Credit, Livestock, Loan 
programs--Agriculture.

7 CFR Part 767

    Agriculture, Credit, Government property, Government property 
management, Indians--Loans, Loan Programs--Agriculture.
    Accordingly, it is proposed that 7 CFR chapter VII be amended as 
follows:

7 CFR Chapter VII

    1. Revise part 761 to read as follows:

PART 761--GENERAL PROGRAM ADMINISTRATION

Subpart A--General Provisions

Sec.
761.1 Introduction.
761.2 Abbreviations and definitions.
761.3 Civil rights.
761.4 Conflict of interest.
761.5 Restrictions on lobbying.
761.6 Appeals.
761.7 Appraisals.
761.8 Loan limitations.
761.9 Interest rates for direct loans.
761.10 Planning and performing construction and other development.
761.11-761.50 [Reserved]
Subpart B--Supervised Bank Accounts
761.51 Establishing a supervised bank account.
761.52 Deposits into a supervised bank account.
761.53 Interest bearing accounts.
761.54 Withdrawals from a supervised bank account.
761.55 Closing a supervised bank account.
761.56-761.100 [Reserved]
Subpart C--Supervised Credit
761.101 Applicability of this subpart.
761.102 Borrower recordkeeping, reporting, and supervision.
761.103 Farm assessment.
761.104 Year-end analysis.
761.105-761.200 [Reserved]
Subpart D--Allocation of Farm Loan Programs Funds to State Offices
761.201 Purpose.
761.202 Timing of the allocation of Farm Ownership and Operating 
loan funds.
761.203 National reserves for Farm Ownership and Operating loans.
761.204 Methods of allocating funds to State Offices.
761.205 Computing the formula allocation.
761.206 Pooling of unobligated funds that have been allocated to 
State Offices.
761.207 Distribution of Farm Ownership and Operating loan funds by 
State Offices.
761.208 Target participation rates for socially disadvantaged 
groups.
761.209 Reservation of Farm Ownership and Operating loan funds for 
beginning farmers.
761.210 Transfer of funds.
761.211-761.250 [Reserved]

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

Subpart A--General Provisions


Sec. 761.1  Introduction.

    (a) Parts 761 through 767 describe the Agency's policies for its 
Farm Loan Programs. The objective of these programs is to provide 
supervised credit and management assistance to eligible farmers to 
become owners or operators, or both, of family-sized farms, to continue 
such operations when credit is not available elsewhere, or to return to 
normal farming operations after

[[Page 6067]]

sustaining substantial losses as a result of a designated or declared 
disaster. These regulations apply to loan applicants, borrowers, 
lenders, holders, Agency personnel, and other parties involved in 
making, guaranteeing, holding, servicing, or liquidating such loans.
    (b) This part describes the Agency's general and administrative 
policies for its guaranteed and direct Farm Loan Programs. In general, 
this part addresses issues that affect both guaranteed and direct loan 
programs, or both direct loan making and direct loan servicing.


Sec. 761.2  Abbreviations and definitions.

    The following abbreviations and definitions are applicable to the 
Farm Loan Programs policies addressed in parts 761 through 767 unless 
otherwise noted.
    (a) Abbreviations.

ALP Approved Lender Program
CLP Certified Lender Program
DSA Disaster Set-Aside
EE Economic Emergency loan
EM Emergency loan
FLP Farm Loan Programs of the FSA
FO Farm Ownership loan
FSA Farm Service Agency, an Agency of the USDA, including its personnel 
and any successor Agency.
Lo-Doc Low-Documentation Operating loan
OGC Office of the General Counsel of the USDA
OL Operating loan
PLP Preferred Lender Program
RHF Rural Housing loan for farm service buildings
RL Recreation loan
SAA Shared Appreciation Agreement
SA Shared Appreciation loan
SEL Standard Eligible Lender
ST Softwood Timber loan
SW Soil and Water loan
USDA United States Department of Agriculture
USPAP Uniform Standards of Professional Appraisal Practice.

    (b) Definitions.
    Abandoned security property is security property that a borrower is 
not occupying, is not in possession of, or has relinquished control of 
and has not made arrangements for its care or sale.
    Accrued deferred interest is unpaid interest from past due 
installments posted to a borrower's loan account.
    Act is the Consolidated Farm and Rural Development Act (7 U.S.C. 
1921 et seq.).
    Active borrower is a borrower who has an outstanding account in the 
Agency records, which may include an unsatisfied account balance where 
a voluntary conveyance was accepted without the borrower being released 
from liability or where liquidation did not satisfy the indebtedness.
    Additional security is property which provides security in excess 
of the amount of security value equal to the loan amount.
    Adequate security is property which is required to provide security 
value at least equal to the loan amount.
    Adjustment is a form of settlement that reduces the financial 
obligation to the Agency, conditioned upon the completion of payment of 
a specified amount at a future time. An adjustment is not a final 
settlement until all payments have been made under the agreement.
    Administrative appraisal review is a review of an appraisal to 
determine if the appraisal:
    (1) Meets applicable Agency requirements; and
    (2) Is accurate outside the requirements of standard 3 of USPAP.
    Agency is the FSA.
    Agreement for the use of proceeds is an agreement between the 
borrower and the Agency that reflects how, when, and to whom the 
borrower will sell, exchange, or consume chattel security and the 
planned use of any proceeds during a specific production cycle.
    Agricultural commodity is livestock, livestock products, grains, 
cotton, oilseeds, dry beans, tobacco, peanuts, sugar beets, sugar cane, 
fruit, vegetable, forage, tree farming, nursery crops, nuts, 
aquacultural species, and other plant and animal production, as 
determined by the Agency.
    Allonge is an attachment or an addendum to a promissory note.
    Allowable costs are those costs for replacement or repair that are 
supported by acceptable documentation, including but not limited to 
written estimates, invoices, and bills.
    Applicant, as used in part 762 of this title, is the lender 
requesting the guarantee. Applicant as used in parts 764 through 767 is 
the individual or entity applying for a direct loan or direct loan 
servicing. Applicant as used in subpart H of part 764 is the individual 
or entity (including each member of the entity unless the context 
states that it does not apply to each member of the entity) operating 
the farm at the time of the disaster, who is requesting assistance from 
the Agency. All requirements of individual applicants apply to all 
members of the entity individually and collectively unless the context 
clearly requires otherwise.
    Approval official is a field official who has been delegated 
approval authorities within applicable loan programs.
    Aquaculture is the husbandry of any aquatic organisms (including 
fish, mollusks, crustaceans or other invertebrates, amphibians, 
reptiles, or aquatic plants) raised in a controlled or selected 
environment of which the applicant has exclusive rights to use.
    Assignment of guaranteed portion is a process by which the lender 
transfers the right to receive payments or income on a guaranteed loan 
to another party, usually in return for payment in the amount of the 
loan's guaranteed principal. The lender retains the unguaranteed 
portion in its portfolio and receives a fee from the purchaser or 
assignee to service the loan and receive and remit payments according 
to a written assignment agreement. This assignment can be reassigned or 
sold multiple times.
    Assignment of indemnity is the transfer of rights to compensation 
under an insurance contract.
    Assistance is financial assistance in the form of a direct or 
guaranteed loan or interest subsidy or servicing action.
    Assumption is the act of agreeing to be legally responsible for 
another party's indebtedness.
    Average farm customer is a conventional farm borrower who is 
required to pledge crops, livestock, and other chattel and real estate 
security for the loan. This term does not include a high-risk farmer 
with limited security and management ability who is generally charged a 
higher interest rate by conventional agricultural lenders. Also, this 
term does not include a low-risk farm customer who obtains financing on 
a secured or unsecured basis, who is able to pledge as collateral for a 
loan items such as savings accounts, time deposits, certificates of 
deposit, stocks and bonds, and life insurance.
    Basic part of an applicant's total farming operation is any single 
agricultural commodity or livestock production enterprise of an 
applicant's farming operation which normally generates sufficient 
income to be considered essential to the success of such farming 
operation.
    Basic security is all farm machinery, equipment, vehicles, 
foundation and breeding livestock herds and flocks, including 
replacements, and real estate that serves as security for a loan made 
or guaranteed by the Agency.
    Beginning farmer is an individual or entity who:
    (1) Meets the loan eligibility requirements for a direct or 
guaranteed OL or FO loan as applicable;

[[Page 6068]]

    (2) For OL's, has not operated a farm for more than 10 years. For 
FO's, including Beginning Farmer Downpayment loans, has operated a farm 
for more than three years, but not more than 10 years. These 
requirements apply to all members of an entity;
    (3) Will materially and substantially participate in the operation 
of the farm:
    (i) In the case of a loan made to an individual, individually or 
with the immediate family, material and substantial participation 
requires that the individual provide substantial day-to-day labor and 
management of the farm, consistent with the practices in the county or 
State where the farm is located.
    (ii) In the case of a loan made to an entity, all members must 
materially and substantially participate in the operation of the farm. 
Material and substantial participation requires that the member provide 
some amount of the management, or labor and management necessary for 
day-to-day activities, such that if the individual did not provide 
these inputs, operation of the farm would be seriously impaired;
    (4) Agrees to participate in any loan assessment and borrower 
training required by Agency regulations;
    (5) Except for a direct OL applicant, does not own real farm 
property or who, directly or through interests in family farm entities 
owns real farm property, the aggregate acreage of which does not exceed 
30 percent of the average farm acreage of the farms in the county where 
the property is located. If the farm is located in more than one 
county, the average farm acreage of the county where the applicant's 
residence is located will be used in the calculation. If the 
applicant's residence is not located on the farm or if the applicant is 
an entity, the average farm acreage of the county where the major 
portion of the farm is located will be used. The average county farm 
acreage will be determined from the most recent Census of Agriculture;
    (6) Demonstrates that the available resources of the applicant and 
spouse (if any) are not sufficient to enable the applicant to enter or 
continue farming on a viable scale; and
    (7) In the case of an entity:
    (i) All the members are related by blood or marriage; and
    (ii) All the members are beginning farmers.
    Beginning Farmer Downpayment loan is a type of FO loan made to 
eligible applicants to finance a portion of a real estate purchase 
under part 764, subpart E of this chapter.
    Borrower (or debtor) is an individual or entity that has an 
outstanding obligation to the Agency under any FLP loan, without regard 
to whether the loan has been accelerated. A borrower includes all 
parties liable for such obligation owed to the Agency, including 
collection-only borrowers, except for debtors whose total loans and 
accounts have been voluntarily or involuntarily foreclosed, sold, or 
conveyed, or who have been discharged of all such obligations owed to 
the Agency.
    Cancellation is the final discharge or, and release of liability 
for, a financial obligation to the Agency on which no settlement amount 
has been paid.
    Cash flow budget is a projection listing of all anticipated cash 
inflows (including all farm income, nonfarm income and all loan 
advances) and all cash outflows (including all farm and nonfarm debt 
service and other expenses) to be incurred by the borrower during the 
period of the budget. Cash flow budgets for guaranteed loans under 
$125,000 do not require income and expenses itemized by categories. A 
cash flow budget may be completed either for a 12-month period, a 
typical production cycle, or the life of the loan, as appropriate. It 
may also be prepared with a breakdown of cash inflows and outflows for 
each month of the review period and include the expected outstanding 
operating credit balance for the end of each month. The latter type is 
referred to as a ``monthly cash flow budget.''
    Chattel or real estate essential to the farming operation is 
chattel or real estate that would be necessary for the applicant to 
continue operating the farm after the disaster in a manner similar to 
the manner in which the farm was operated immediately prior to the 
disaster, as determined by the Agency.
    Chattel security is property that may consist of, but is not 
limited to: crops; livestock; aquacultural species; farm equipment; 
inventory; accounts; contract rights; general intangibles; and supplies 
that are covered by financing statements and security agreements, 
chattel mortgages, and other security instruments.
    Civil action is a court proceeding to protect the Agency's 
financial interests. A civil action does not include bankruptcy and 
similar proceedings to impound and distribute the bankrupt's assets to 
creditors and probate or similar proceedings to settle and distribute 
estates of incompetents or of decedents under a will, or otherwise, and 
pay claims of creditors.
    Closing agent is the attorney or title insurance company selected 
by the applicant and approved by the Agency to provide closing services 
for the proposed loan or servicing action. Unless a title insurance 
company provides loan closing services, the term ``title company'' does 
not include ``title insurance company.''
    Coastal Barrier Resources Area is an area of land identified as 
part of the national Coastal Barrier Resources System under the Coastal 
Barrier Resources Act of 1980.
    Commercial classified account is an Agency account of such quality 
that commercial lenders would likely view the loan as a profitable 
investment.
    Compromise is the settlement of an Agency debt or claim by a lump-
sum payment of less than the total amount owed in satisfaction of the 
debt or claim.
    Conditional commitment is the Agency's commitment to a lender that 
the material the lender has submitted is approved subject to the 
completion of all listed conditions and requirements.
    Conservation Contract is a contract under which a borrower agrees 
to set aside land for conservation, recreation or wildlife purposes in 
exchange for reduction of a portion of an outstanding Agency debt.
    Conservation Contract review team is comprised by the appropriate 
offices of FSA, the Natural Resources Conservation Service, U.S. Fish 
and Wildlife Service, State Fish and Wildlife Agencies, Conservation 
Districts, National Park Service, Forest Service, State Historic 
Preservation Officer, State Conservation Agencies, State Environmental 
Protection Agency, State Natural Resource Agencies, adjacent public 
landowner, and any other entity that may have an interest and qualifies 
to be a management authority for a proposed conservation contract.
    Consolidation is the process of combining the outstanding principal 
and interest balance of two or more loans of the same type made for 
operating purposes.
    Construction is work such as erecting, repairing, remodeling, 
relocating, adding to, or salvaging any building or structure, and the 
installing, repairing, or adding to heating and electrical systems, 
water systems, sewage disposal systems, walks, steps, and driveways.
    Controlled is when a director or an employee has more than a 50 
percent ownership in an entity or, the director or employee, together 
with relatives of the director or employee, have more than a 50 percent 
ownership.
    Cooperative is an entity that has farming as its purpose, whose 
members have agreed to share the profits of the farming enterprise, and 
is recognized as a farm cooperative by the laws of the

[[Page 6069]]

state in which the entity will operate a farm.
    Corporation is a private domestic corporation created and organized 
under the laws of the state in which it will operate a farm.
    Cosigner is a party who joins in the execution of a promissory note 
to assure its repayment. The cosigner becomes jointly and severally 
liable to comply with the terms of the note. In the case of an entity 
applicant, the cosigner cannot be a member, partner, joint operator, or 
stockholder of the entity.
    County is a local administrative subdivision of a State or similar 
political subdivision of the United States.
    County average yield is the historical average yield for an 
agricultural commodity in a particular political subdivision, as 
determined or published by a government entity or other recognized 
source.
    Criminal action is the prosecution by the United States to exact 
punishment in the form of fines or imprisonment for alleged violation 
of criminal statutes.
    Crop allotment or quota is a farm's share of an approved national 
tobacco or peanut allotment or quota.
    Current market value buyout is the termination of a borrower's loan 
obligations to the Agency in exchange for payment of the current 
appraised value of the borrower's security property and nonessential 
assets, less any prior liens and liquidation costs.
    Debt forgiveness is a reduction or termination of a debt under the 
Act in a manner that results in a loss to the Agency (excluding a 
consolidation, rescheduling, reamortization, or deferral), through:
    (1) Writing down or writing off a debt pursuant to 7 U.S.C. 2001;
    (2) Compromising, adjusting, reducing, or charging off a debt or 
claim pursuant to 7 U.S.C. 1981; or
    (3) Paying a loss pursuant to 7 U.S.C. 2005 on a FLP loan 
guaranteed by the Agency.
    Debt reduction through a conservation easement or contract is not 
considered debt forgiveness for loan making or servicing purposes.
    Debt instrument is a collective term that includes, but is not 
limited to, promissory notes and assumption agreements.
    Debt settlement is a compromise, adjustment, or cancellation of an 
Agency debt.
    Debt service margin is the difference between all of the borrower's 
expected expenditures in a planning period (including farm operating 
expenses, capital expenses, essential family living expenses, and debt 
payments) and the borrower's projected funds available to pay all 
expenses and payments.
    Debt writedown is the reduction in the amount of the borrower's 
debt to that amount that the Agency determines to be collectible based 
on an analysis of the security value and the borrower's ability to pay.
    Default is the failure of a borrower to observe any agreement with 
the Agency, or the lender in the case of a guaranteed loan, as 
contained in promissory notes, security instruments, and similar or 
related instruments.
    Deferral is a postponement of the payment of interest or principal, 
or both.
    Delinquent borrower is a borrower with any portion of a payment to 
the Agency that is at least 30 days past due.
    Direct loan is a loan funded and serviced by the Agency as the 
lender.
    Disaster is an event of unusual and adverse weather conditions or 
other natural phenomena, or quarantine, that has substantially affected 
producers of agricultural commodities by causing physical property or 
production losses in a county, or similar political subdivision, that 
triggered the inclusion of such county or political subdivision in the 
disaster area as designated by the Agency.
    Disaster area is the county or counties declared or designated as a 
disaster area for EM loan assistance as a result of disaster related 
losses. This area includes counties contiguous to those counties 
declared or designated as disaster areas.
    Disaster set-aside is the deferral of payment of an annual loan 
installment to the Agency to the end of the loan term in accordance 
with part 766, subpart B of this chapter.
    Disaster yield is the per-acre yield of an agricultural commodity 
for the farming operation during the production period when the 
disaster occurred.
    Economic Emergency loan is a loan that was made or guaranteed to an 
eligible applicant to allow for continuation of the operation during an 
economic emergency which was caused by a lack of agricultural credit or 
an unfavorable relationship between production costs and prices 
received for agricultural commodities. EE loans are not currently 
funded, however, such outstanding loans are serviced by the Agency or 
the lender in the case of a guaranteed EE loan.
    Emergency loan is a loan made to eligible applicants who have 
incurred substantial financial losses from a disaster.
    Entity is a corporation, partnership, joint operation, cooperative, 
limited liability company or trust.
    Essential family household expenses are the expenses associated 
with providing food, clothing, and shelter necessary to maintain the 
borrower and the immediate family of the borrower.
    Essential family living and farm operating expenses:
    (1) Essential expenses are those which are basic, crucial or 
indispensable.
    (2) In determining what are essential family living and farm 
operating expenses for a particular family and farm, the Agency will 
consider the following:
    (i) The individual borrower's operation;
    (ii) What is typical for that type of operation in the area; and
    (iii) What is an efficient method of production considering the 
borrower's resources.
    (3) Essential family living and farm operating expenses include, 
but are not limited to essential: household operating expenses; food, 
including lunches; clothing and personal care; health and medical 
expenses, including medical insurance; house repair and sanitation; 
school and church expenses; transportation; hired labor; machinery 
repair; farm building and fence repair; interest on loans and credit or 
purchase agreement; rent on equipment, land, and buildings; feed for 
animals; seed, fertilizer, pesticides, herbicides, spray materials and 
other necessary farm supplies; livestock expenses, including medical 
supplies, artificial insemination, and veterinarian bills; machinery 
hire; fuel and oil; personal property taxes; real estate taxes; water 
charges; personal, property and crop insurance; auto and truck 
operating expenses; and utility payments.
    Established farmer is a farmer who is the operator of the farming 
operation (in the case of a farming operation operated by an entity, 
its members as a group) who:
    (1) Actively participated in the operation and the management, 
including but not limited to, exercising control over, making decisions 
regarding, and establishing the direction of, the farming operation at 
the time of the disaster;
    (2) Spends a substantial portion of time in carrying out the 
farming operation;
    (3) Planted the crop, or purchased or produced the livestock on the 
farming operation;
    (4) In the case of an entity, is primarily engaged in farming and 
has over 50 percent of its gross income from all sources from its 
farming operation based on the farming operation's projected cash flow 
for the next crop

[[Page 6070]]

year or the next 12-month period, as mutually determined; and
    (5) Is not:
    (i) An entity with an ownership interest of 50 percent or more held 
by one or more entities; or
    (ii) An integrated livestock, poultry, or fish processor who 
operates primarily and directly as a commercial business through 
contracts or business arrangements with farmers, except a grower under 
contract with an integrator or processor may be considered an 
established farmer, provided the operation is not managed by an outside 
full-time manager or management service and such loans shall be based 
on the applicant's share of the agricultural production as set forth in 
the contract;
    (iii) An operation which employees a full time farm manager.
    False information is information provided by an applicant, borrower 
or other source to the Agency that the applicant or borrower knows to 
be incorrect.
    Family farm is a farm that:
    (1) Produces agricultural commodities for sale in sufficient 
quantities so that it is recognized as a farm rather than a rural 
residence, and in a typical year generates net cash income that 
improves the family's standard of living;
    (2) Generates or will generate in a typical year annual gross farm 
income which does not exceed the greater of $750,000 or 95 percent of 
the statistical distribution of the income of farms in the State with 
gross sales in excess of $10,000 based on the farm data and survey of 
farm economic factors most recently published by the National 
Agricultural Statistics Service, USDA, or any successor agency;
    (3) Has both physical labor and management provided as follows:
    (i) The majority of day-to-day, operational decisions, and all 
strategic management decisions are made by:
    (A) The borrower and persons related to the borrower by blood or 
marriage, for an individual borrower; or
    (B) The members responsible for operating the farm, in the case of 
an entity.
    (ii) A substantial amount of labor to operate the farm is provided 
by:
    (A) The borrower and persons related to the borrower by blood or 
marriage, for an individual borrower; or
    (B) The members responsible for operating the farm, in the case of 
an entity.
    (4) May use full-time hired labor in amounts only to supplement 
family labor.
    (5) May use reasonable amounts of temporary labor for seasonal peak 
workload periods or intermittently for labor intensive activities.
    Family living expenses are the costs of providing for the needs of 
family members.
    Family members are the immediate members of the family residing in 
the same household with the individual borrower, or, in the case of an 
entity, with the operator.
    Farm is a tract or tracts of land, improvements, and other 
appurtenances that are used or will be used in the production of crops, 
livestock, or aquaculture products for sale in sufficient quantities so 
that the property is recognized as a farm rather than a rural 
residence. The term ``farm'' also includes the term ``ranch.'' It may 
also include land and improvements and facilities used in a non-
eligible enterprise or the residence which, although physically 
separate from the farm acreage, is ordinarily treated as part of the 
farm in the local community.
    Farm income is the proceeds from the sale of agricultural 
commodities that are normally sold annually during the regular course 
of business, such as crops, feeder livestock, and other farm products.
    Farm Loan Programs are Agency programs to make, guarantee, and 
service loans to family farmers authorized under the Act or Agency 
regulations.
    Farm Ownership loan is a loan made to eligible applicants to 
purchase, enlarge, or make capital improvements to family farms, or to 
promote soil and water conservation and protection. It also includes 
the Beginning Farmer Downpayment loan.
    Farm Programs payments are benefits received under FSA for any 
commodity, disaster, or cost share programs.
    Farmer is an individual, corporation, partnership, joint operation, 
cooperative, trust, or limited liability company who is engaged in 
farming.
    Feasible plan is when an applicant or borrower's cash flow budget 
indicates that there is sufficient cash inflow to pay all cash outflow 
each year during the term of the loan. If a loan approval or 
restructuring action exceeds one production cycle and the planned cash 
flow budget is atypical due to cash or inventory on hand, new 
enterprises, carryover debt, atypical planned purchases, important 
operating changes, or other reasons, a cash flow budget must be 
prepared that reflects a typical cycle. If the request is for only one 
cycle, a feasible plan for only one cycle is required for approval.
    Financially distressed borrower is a borrower unable to make 
payments as planned for the current or next business accounting period 
or to project a feasible plan of operation for the next business 
accounting period.
    Financially viable operation is an operation that, with Agency 
assistance, is projected to improve its financial condition over a 
period of time to the point that the operator can obtain commercial 
credit without further Agency assistance. Such an operation must 
generate sufficient income to:
    (1) Meet annual operating expenses and debt payments as they become 
due;
    (2) Meet basic family living expenses to the extent they are not 
met by dependable non-farm income;
    (3) Provide for replacement of capital items; and
    (4) Provide for long-term financial growth.
    Fixture is an item of personal property attached to real estate in 
such a way that it cannot be removed without defacing or dismantling 
the structure, or damaging the item itself.
    Floodplains are lowland and relatively flat areas adjoining inland 
and coastal waters, including flood-prone areas of offshore islands, 
including at a minimum, that area subject to a one percent or greater 
chance of flooding in any given year. The base floodplain shall be used 
to designate the 100-year floodplain (one percent chance floodplain). 
The critical floodplain is defined as the 500-year floodplain (0.2 
percent chance floodplain).
    Foreclosed is the completed act of selling security either under 
the power of sale in the security instrument or through court 
proceedings.
    Foreclosure sale is the act of selling security either under the 
power of sale in the security instrument or through court proceedings.
    Good faith is the borrower's adherence to all written agreements 
with the Agency including, but not limited to, loan application, loan 
agreement, security instruments, operating plans, and agreements for 
use of proceeds. The Agency considers a borrower to act in good faith, 
however, when the borrower is unable to adhere to all agreements due to 
circumstances beyond the borrower's control. Good faith does not 
include fraud, waste, or conversion.
    Graduation is the payment in full of all direct FLP loans made for 
operating, real estate, or both purposes by refinancing with other 
credit sources either with or without an Agency guarantee.
    Guaranteed loan is a loan made and serviced by a lender for which 
the Agency has entered into a Lender's Agreement and for which the 
Agency has issued a Loan Guarantee. This term

[[Page 6071]]

also includes guaranteed lines of credit except where otherwise 
indicated.
    Hazard insurance is insurance covering fire, windstorm, lightning, 
hail, explosion, riot, civil commotion, aircraft, vehicles, smoke, 
builder's risk, public liability, property damage, flood or mudslide, 
workers compensation, or any similar insurance that is available and 
needed to protect the Agency security or that is required by law.
    Holder is a person or organization other than the lender that holds 
all or a part of the guaranteed portion of an Agency guaranteed loan 
but has no servicing responsibilities. When the lender assigns a part 
of the guaranteed loan by executing an assignment form, the assignee 
becomes a holder.
    Homestead protection is the borrower's right to lease with an 
option to purchase the principal residence and up to 10 acres of 
adjoining land which secured an FLP loan.
    Homestead protection property is the principal residence that 
secured an FLP loan and is subject to homestead protection.
    Household contents are essential household items necessary to 
maintain viable living quarters. Household contents exclude all luxury 
items such as jewelry, furs, antiques, paintings, etc.
    Inaccurate information is incorrect information provided by a 
borrower or other source inadvertently without intent to obtain 
benefits fraudulently.
    Indian reservation is all land located within the limits of any 
Indian reservation under the jurisdiction of the United States, 
notwithstanding the issuance of any patent, and including rights-of-way 
running through the reservation; trust or restricted land located 
within the boundaries of a former reservation of a Federally recognized 
Indian Tribe in the State of Oklahoma; or all Indian allotments the 
Indian titles to which have not been extinguished if such allotments 
are subject to the jurisdiction of a Federally recognized Indian Tribe.
    In-house expenses are expenses associated with credit management 
and loan servicing by the lender and the lender's contractor. In-house 
expenses include, but are not limited to, employee salaries, staff 
lawyers, travel, supplies, and overhead.
    Interest Assistance Agreement is the signed agreement between the 
Agency and the lender containing the terms and conditions under which 
the Agency will make interest assistance payments to the lender on 
behalf of the guaranteed loan borrower.
    Interest assistance anniversary date is the date on which interest 
assistance reviews and claims will be effective. This date is 
established by the lender. Once established, it will not change unless 
the loan is restructured.
    Interest assistance review is the yearly review process that 
includes an analysis of the borrower's farming operation and need for 
continued interest assistance, completion of the needs test, and a 
request for continuation of interest assistance.
    Inventory property is real estate and chattel property and related 
rights to which the Federal Government has acquired title.
    Joint financing arrangement is an arrangement in which two or more 
lenders make separate loans simultaneously to supply the funds required 
by one applicant.
    Joint operation is an operation run by individuals who have agreed 
to operate a farm or farms together as an entity, sharing equally or 
unequally land, labor, equipment, expenses, or income, or some 
combination of these items. The real and personal property is owned 
separately or jointly by the individuals.
    Leasehold is a right to use farm property for a specific period of 
time under conditions provided for in a lease agreement.
    Lender is the organization making and servicing a loan, or 
advancing and servicing a line of credit, that is guaranteed by the 
Agency. The lender is also the party requesting a guarantee.
    Lender's Agreement is the appropriate Agency form executed by the 
Agency and the lender setting forth their loan responsibilities when 
the Loan Guarantee is issued.
    Lien is a legally enforceable hold or claim on the property of 
another obtained as security for the repayment of indebtedness or an 
encumbrance on property to enforce payment of an obligation.
    Limited resource interest rate is an interest rate below the 
Agency's regular interest rate available to farmers who are unable to 
develop a feasible plan at regular rates and are requesting:
    (1) FO or OL loan assistance under part 764 of this title; or
    (2) Primary loan servicing on an FO, OL, or SW loan under part 766 
of this title.
    Line of Credit Agreement is a contract between the borrower and the 
lender that contains certain lender and borrower conditions, 
limitations, and responsibilities for credit extension and acceptance 
where loan principal balance may fluctuate throughout the term of the 
contract.
    Liquidation is the act of selling all security for recovery of 
amounts owed to the Agency.
    Liquidation expenses are the costs of an appraisal, due diligence 
evaluation, environmental assessment, outside attorney fees, and other 
costs incurred as a direct result of liquidating the security for a 
direct or guaranteed loan. Liquidation expenses do not include internal 
Agency expenses for a direct loan or in-house expenses for a guaranteed 
loan.
    Livestock is a member of the animal kingdom, or product thereof, as 
determined by the Agency.
    Loan Agreement is a contract between the borrower and the lender 
that contains certain lender and borrower agreements, conditions, 
limitations, and responsibilities for credit extension and acceptance.
    Loan applicant is the party applying to a lender for a guaranteed 
loan or to the Agency for a direct loan.
    Loan servicing programs include primary loan servicing programs, 
conservation contract, current market value buyout, and homestead 
protection.
    Loan transaction is any loan approval or servicing action.
    Loss claim is a request made to the Agency by a lender to receive a 
reimbursement based on a percentage of the lender's loss on a loan 
covered by an Agency guarantee.
    Loss rate is the net amount of loan loss claims paid on guaranteed 
OL, FO, and SW loans made in the past seven years divided by the total 
loan amount of all such loans made in the past seven years.
    Low-Documentation Operating loan is an OL loan made to eligible 
applicants based on reduced documentation.
    Majority interest is more than a 50 percent interest in an entity 
held by an individual or group of individuals.
    Market value is the amount that an informed and willing buyer would 
pay an informed and willing, but not forced, seller in a completely 
voluntary sale.
    Mineral right is an ownership interest in minerals in land, with or 
without ownership of the surface of the land.
    Mortgage is a legal instrument giving the lender a security 
interest or lien on real or personal property of any kind. The term 
``mortgage'' also includes the terms ``deed of trust'' and ``security 
agreement.''
    Natural disaster is unusual and adverse weather conditions or 
natural phenomena that has substantially affected farmers by causing 
severe physical or production, or both, losses.
    Negligent servicing is servicing that fails to include those 
actions that are considered normal industry standards of loan 
management or comply with the lender's agreement or the guarantee.

[[Page 6072]]

Negligent servicing includes failure to act or failure to act in a 
timely manner consistent with actions of a reasonable lender in loan 
making, servicing, and collection.
    Negotiated sale is a sale in which there is a bargaining of price 
or terms, or both.
    Net recovery value of security property is the market value of the 
security property, assuming that the lender in the case of a guaranteed 
loan, or the Agency in the case of a direct loan, will acquire the 
property and sell it for its highest and best use, less the lender's or 
the Agency's costs of property acquisition, retention, maintenance, and 
liquidation. The net recovery value of non-essential assets is the 
appraised market value of the assets less any prior liens and any 
selling costs which may include such items as taxes due, commissions 
and advertising costs. However, no deduction is made for maintenance of 
the property while in inventory.
    Non-capitalized interest is interest on a loan that was not 
reclassified as principal at the time of restructuring. Between October 
10, 1988, and November 27, 1990, the Agency did not capitalize interest 
that was less than 90 days past due when restructuring a direct loan.
    Non-eligible enterprise is a business that meets the criteria in 
any one of the following categories:
    (1) Production of exotic or non-farm animals. An enterprise which 
produces animals, birds, or aquatic organisms or their products which 
are not ordinarily associated with human consumption, fiber, or draft 
use, or for which a ready market does not exist.
    (2) Production or marketing of non-farm goods or services. An 
enterprise which might be agriculturally related but does not produce 
or market products from the farm.
    (3) Processing or marketing of farm products when the majority of 
the commodities processed or marketed are not produced by the farm 
operation.
    Non-essential assets are assets in which the borrower has an 
ownership interest, that:
    (1) Do not contribute to:
    (i) Income to pay essential family living expenses, or
    (ii) The farming operation; and
    (2) Are not exempt from judgment creditors or in a bankruptcy 
action.
    Non-program loan is a loan made to a borrower who does not meet the 
eligibility requirements for a program loan.
    Normal income security is all security not considered basic 
security, including crops, livestock, poultry products, other property 
covered by Agency liens that is sold in conjunction with the operation 
of a farm or other business, and Farm Program payments.
    Normal production yield as used in 7 CFR 764 for EM loans, is:
    (1) The per acre actual production history of the crops produced by 
the farming operation used to determine Federal Crop Insurance payments 
or payment under the Non-Insured Assistance Program for the production 
year during which the disaster occurred;
    (2) The applicant's own production records or the records of 
production on which FSA farm program payments are made contained in the 
applicant's farm program file for the previous three years, when the 
actual production history is not available;
    (3) The county average production yield, when the production 
records outlined in (1) and (2) above are not available.
    Note is written evidence of indebtedness, such as a promissory 
note, bond, or assumption agreement.
    Operating loan is a loan made to an eligible applicant to assist 
with the financial costs of operating a farm.
    Owner-operator is the individual or entity that owns the land on 
which a farm is located and provides the labor, management, and capital 
to operate the farm. An entity may have to receive authorization from 
the State in which the farm is located to be the owner-operator of the 
farm.
    Partnership is any entity consisting of two or more individuals who 
have agreed to operate a farm as one business unit. The entity must be 
recognized as a partnership by the laws of the State in which the 
partnership will operate a farm. It also must be authorized to own both 
real and personal property and to incur debt in its own name.
    Physical loss is verifiable damage or destruction with respect to 
real estate or chattel, excluding annual growing crops.
    Potential liquidation value is the amount of a lender's protective 
bid at a foreclosure sale. Potential liquidation value is determined by 
an independent appraiser using comparables from other forced 
liquidation sales.
    Present value is the present worth of a future stream of payments 
discounted to the current date.
    Presidentially-designated emergency is a major disaster or 
emergency designated by the President under the Robert T. Stafford 
Disaster Relief and Emergency Assistance Act (42 U.S.C. 5121 et seq.).
    Primary loan servicing programs include:
    (1) Loan consolidation and rescheduling, or reamortization;
    (2) Interest rate reduction, including use of the limited resource 
rate program;
    (3) Deferral;
    (4) Write-down of the principal or accumulated interest; or
    (5) Any combination of the above.
    Production cycle is the time it takes to produce an agricultural 
commodity from the beginning of the production process until it 
matures.
    Production loss is verifiable damage or destruction with respect to 
annual growing crops.
    Program loans include FO, OL, and EM. In addition, for loan 
servicing purposes the term includes existing loans for the following 
programs no longer funded: SW, RL, EE, ST, and RHF.
    Prospectus consists of a transmittal letter, a current balance 
sheet and projected year's budget which is sent to commercial lenders 
to determine their interest in financing or refinancing specific Agency 
direct loan applicants and borrowers.
    Protective advance is an advance made by the Agency or a lender to 
protect or preserve the collateral from loss or deterioration.
    Quarantine is a quarantine imposed by the Secretary under the Plant 
Protection Act or animal quarantine laws (as defined in section 2509 of 
the Food, Agriculture, Conservation and Trade Act of 1990).
    Reamortization is the rewriting of rates or terms, or both, of a 
loan made for real estate purposes.
    Reasonable rates and terms are those commercial rates and terms 
that other farmers are expected to meet when borrowing from a 
commercial lender or private source for a similar purpose and similar 
period of time. The ``similar period of time'' of available commercial 
loans will be measured against, but need not be the same as, the 
remaining or original term of the loan.
    Recoverable cost is a loan cost expense chargeable to either a 
borrower or property account.
    Recreation loan is a loan that was made to eligible applicants to 
assist in the conversion of all or a portion of the farm they owned or 
operated to outdoor income producing recreation enterprises to 
supplement or supplant farm income. RL's are no longer funded, however, 
such outstanding loans are serviced by the Agency.
    Redemption right is a Federal or state right to reclaim property 
for a period of time established by law, by paying the amount paid at 
the involuntary sale plus accrued interest and costs.

[[Page 6073]]

    Related by blood or marriage is being connected to one another as 
husband, wife, parent, child, brother, or sister.
    Relative is the spouse and anyone having one the following 
relationships to an applicant or borrower: Parent, son, daughter, 
sibling, stepparent, stepson, stepdaughter, stepbrother, stepsister, 
half brother, half sister, uncle, aunt, nephew, niece, grandparent, 
grandson, granddaughter, or the spouses of the foregoing.
    Repossessed property is security property in the Agency's custody.
    Rescheduling is the rewriting of the rates or terms, or both, of a 
loan made for operating purposes.
    Restructuring see primary loan servicing programs.
    Rural youth is a person who has reached the age of 10 but has not 
reached the age of 21 and resides in a rural area or any city or town 
with a population of 50,000 or fewer people.
    Security is property or right of any kind that is subject to a real 
or personal property lien. Any reference to ``collateral'' or 
``security property'' will be considered a reference to the term 
``security.''
    Security value is the value of real estate or chattel property 
(less the value of any prior liens) used as security for an Agency 
loan.
    Shared Appreciation Agreement is an agreement between the Agency, 
or a lender in the case of a guaranteed loan, and a borrower that 
requires the borrower who has received a writedown on a direct or 
guaranteed loan to repay the Agency or the lender some or all of the 
writedown received, based on a percentage of any increase in the value 
of the real estate securing an SAA at a future date.
    Socially disadvantaged applicant is an applicant who is a member of 
a socially disadvantaged group. For entity applicants, the majority 
interest must be held by socially disadvantaged individuals.
    Socially disadvantaged group is a group whose members have been 
subject to racial, ethnic, or gender prejudice because of their 
identity as members of a group without regard to their individual 
qualities.
    Softwood Timber Program loan was available to eligible financially 
distressed borrowers who would take marginal land, including highly 
erodible land, out of production of agricultural commodities other than 
the production of softwood timber. ST loans are no longer available, 
however, such outstanding loans are serviced by the Agency.
    Soil and Water loan is a loan that was made to an eligible 
applicant to encourage and facilitate the improvement, protection, and 
proper use of farmland by providing financing for soil conservation, 
water development, conservation, and use; forestation; drainage of 
farmland; the establishment and improvement of permanent pasture; 
pollution abatement and control; and other related measures consistent 
with all Federal, State and local environmental standards. SW loans are 
no longer funded, however, such outstanding loans are serviced by the 
Agency.
    Subordination is a creditor's temporary relinquishment of all or a 
portion of its lien priority in favor of another creditor, providing 
the other creditor with a priority right to collect a debt of a 
specific dollar amount from the sale of the same collateral.
    Subsequent loan is any FLP loan processed by the Agency after an 
initial loan of the same type has been made to the same borrower.
    Supervised bank account is an account with a financial institution 
established through a deposit agreement entered into between the 
borrower, the Agency, and the financial institution.
    Technical appraisal review is a review of an appraisal to determine 
if such appraisal meets the requirements of USPAP pursuant to standard 
3 of USPAP.
    Transfer and assumption is the conveyance by a debtor to an 
assuming party of the assets, collateral, and liabilities of a loan in 
return for the assuming party's binding promise to pay the debt 
outstanding or the current market value of the collateral.
    Trust is an entity that under applicable state law meets the 
criteria of being a trust of any kind but does not meet the criteria of 
being a farm cooperative, private domestic corporation, partnership, or 
joint operation.
    Unaccounted for security is security for a direct or guaranteed 
loan that was misplaced, stolen, sold, or otherwise missing, where 
replacement security was not obtained or the proceeds from its sale 
have not been applied to the loan.
    Unauthorized assistance is any loan, loan servicing action, lower 
interest rate, loan guarantee, or subsidy received by a borrower, or 
lender in the case of a loan guarantee, for which the borrower or 
lender was not eligible, or which the Agency obligated from the wrong 
appropriation or fund. Unauthorized assistance may result from 
borrower, lender, or Agency error.
    Uniform Standards of Professional Appraisal Practice (USPAP) are 
standards governing the preparation, reporting, and reviewing of 
appraisals established by the Appraisal Foundation pursuant to the 
Financial Institutions Reform, Recovery, and Enforcement Act of 1989.
    United States is each of the several States, the Commonwealth of 
Puerto Rico, the Virgin Islands of the United States, Guam, American 
Samoa, and the Commonwealth of the Northern Mariana Islands.
    U.S. Attorney is an attorney for the United States Department of 
Justice.
    Veteran is any person who served in the military, naval, or air 
service during any war as defined in section 101(12) of title 38, 
United States Code.
    Wetlands are those lands or areas of land as determined by the 
Natural Resources Conservation Service to meet the requirements 
provided in section 1201(18) of the Food Security Act of 1985.
    Working capital is cash available to conduct normal daily farming 
operations including but not limited to feed, seed, fertilizer, 
pesticides, farm supplies, cooperative stock, and cash rent.
    Youth loan is an operating type loan made to an eligible rural 
youth applicant to finance a modest income-producing agricultural 
project.


Sec. 761.3  Civil rights.

    Part 15d of this title contains applicable regulations pertaining 
to civil rights and filing of discrimination complaints by program 
participants.


Sec. 761.4  Conflict of interest.

    The Agency enforces conflict of interest policies to maintain high 
standards of honesty, integrity, and impartiality in the making and 
servicing of direct and guaranteed loans. These requirements are 
established in 5 CFR parts 2635 and 8301.


Sec. 761.5  Restrictions on lobbying.

    A person who applies for or receives a loan made or guaranteed by 
the Agency must comply with the restrictions on lobbying in 7 CFR 3018.


Sec. 761.6  Appeals.

    A direct loan applicant or borrower, or guaranteed loan applicant 
or borrower and lender, except as provided in 7 CFR 762, may request an 
appeal or review of an adverse decision made by the Agency in 
accordance with 7 CFR 11 and 780.


Sec. 761.7  Appraisals.

    (a) General. This section describes Agency requirements for:
    (1) Real estate and chattel appraisals made in connection with the 
making

[[Page 6074]]

and servicing of direct FLP and Non-program loans; and
    (2) Appraisal reviews conducted on appraisals made in connection 
with the making and servicing of direct and guaranteed FLP and Non-
program loans.
    (b) Appraisal standards. (1) Real estate appraisals, technical 
appraisal reviews and their respective forms must comply with the 
standards contained in USPAP, as well as applicable Agency regulations 
and procedures for the specific FLP activity involved. A current copy 
of USPAP along with other applicable procedures and regulations are 
available for review in each Agency State Office.
    (2) When a chattel appraisal is required it must be completed on an 
applicable Agency form (available in each Agency State Office) or other 
format containing the same information.
    (c) Use of an existing real estate appraisal. When a real estate 
appraisal is required, the Agency will use the existing real estate 
appraisal to reach loan making or servicing decisions under either of 
the following conditions:
    (1) The appraisal was completed within the previous 12 months and 
the Agency determines that:
    (i) The appraisal meets the provisions of this section and the 
applicable Agency loan making or servicing requirements, and
    (ii) Current market values have remained stable since the appraisal 
was completed; or
    (2) The appraisal was not completed in the previous 12 months, but 
has been updated by the appraiser or appraisal firm that completed the 
appraisal, and both the update and original appraisal were completed in 
accordance with USPAP.
    (d) Appraisal reviews. (1) With respect to a real estate appraisal, 
the Agency may conduct a technical appraisal review or an 
administrative appraisal review, or both.
    (2) With respect to a chattel appraisal, the Agency may conduct an 
administrative appraisal review.


Sec. 761.8  Loan limitations.

    (a) Dollar limits. The outstanding principal balances for a farm 
loan applicant or anyone who will sign the promissory note cannot 
exceed any of the following:
    (1) Farm Ownership loans, Beginning Farmer Down payment loans and 
Soil and Water loans:
    (i) Direct--$200,000;
    (ii) Guaranteed--$700,000 (for fiscal year 2000 and increased at 
the beginning of each fiscal year in accordance with paragraph (b) of 
this section);
    (iii) Any combination of a direct Soil and Water loan, direct Farm 
Ownership loan, guaranteed Soil and Water loan, and guaranteed Farm 
Ownership loan--$700,000 (for fiscal year 2000 and increased each 
fiscal year in accordance with paragraph (b) of this section);
    (2) Operating loans:
    (i) Direct--$200,000;
    (ii) Guaranteed--$700,000 (for fiscal year 2000 and increased each 
fiscal year in accordance with paragraph (b) of this section);
    (iii) Any combination of a direct Operating loan and guaranteed 
Operating loan--$700,000 (for fiscal year 2000 and increased each 
fiscal year in accordance with paragraph (b) of this section);
    (3) Any combination of guaranteed Farm Ownership loan, guaranteed 
Soil and Water loan, and guaranteed Operating loan--$700,000 (for 
fiscal year 2000 and increased each fiscal year in accordance with 
paragraph (b) of this section);
    (4) Any combination of direct Farm Ownership loan, direct Soil and 
Water loan, direct Operating loan, guaranteed Farm Ownership loan, 
guaranteed Soil and Water loan, and guaranteed Operating loan--the 
amount in paragraph (a)(1)(ii) of this section plus $200,000;
    (5) Emergency loans--$500,000;
    (6) Any combination of direct Farm Ownership loan, direct Soil and 
Water loan, direct Operating loan, guaranteed Farm Ownership loan, 
guaranteed Soil and Water loan, guaranteed Operating loan, and 
Emergency loan--the amount in paragraph (a)(1)(ii) of this section plus 
$700,000.
    (b) Guaranteed loan limit. The dollar limits of guaranteed loans 
will be increased each fiscal year based on the percentage change in 
the Prices Paid by Farmers Index as compiled by the National 
Agricultural Statistics Service, USDA. The maximum loan limits for the 
current fiscal year are available in any FSA office and on the FSA 
website at http://www.fsa.usda.gov.
    (c) Line of credit advances. The total dollar amount of guaranteed 
line of credit advances and income releases cannot exceed the total 
estimated expenses, less interest expense, as indicated on the 
borrower's cash flow budget, unless the cash flow budget is revised and 
continues to reflect a feasible plan.


Sec. 761.9  Interest rates for direct loans.

    Interest rates for all direct loans are set in accordance with the 
Act. A copy of the current interest rates may be obtained in any Agency 
office.


Sec. 761.10  Planning and performing construction and other 
development.

    (a) Purpose. This section describes Agency policies regarding the 
planning and performing of construction and other development work 
performed with:
    (1) Direct FLP loan funds; or
    (2) Insurance or other proceeds resulting from damage or loss to 
direct loan security.
    (b) Funds for development work. The applicant or borrower:
    (1) Must provide the Agency with an estimate of the total cash cost 
of all planned development prior to loan approval;
    (2) Must show proof of sufficient funds to pay for the total cash 
cost of all planned development at or before loan closing;
    (3) Must not incur any debts for materials or labor or make any 
expenditures for development purposes prior to loan closing with the 
expectation of being reimbursed from Agency loan funds.
    (c) Scheduling, planning, and completing development work. The 
applicant or borrower:
    (1) Is responsible for scheduling and planning development work in 
a manner acceptable to the Agency and must furnish the Agency 
information fully describing the planned development, the proposed 
schedule, and the manner in which it will be accomplished;
    (2) Is responsible for obtaining all necessary State and local 
construction approvals and permits prior to loan closing;
    (3) Must ensure that all development work meets the environmental 
requirements established in 7 CFR 799;
    (4) Must schedule development work to start as soon as feasible 
after the loan is closed and be completed as quickly as practicable;
    (5) Is responsible for obtaining any required technical services 
from qualified technicians, tradespeople, and contractors.
    (d) Construction and repair standards. (1) The construction of a 
new building and the alteration or repair of an existing building must 
conform with industry-acceptable construction practices and standards.
    (2) All improvements to a property must conform to applicable laws, 
ordinances, codes, and regulations.
    (3) The applicant or borrower is responsible for selecting a design 
standard that meets all applicable local and state laws, ordinances, 
codes, and regulations, including building, plumbing, mechanical, 
electrical, water, and waste management.

[[Page 6075]]

    (4) The Agency will require drawings, specifications, and estimates 
to fully describe the work as necessary to protect the Government's 
financial interests. The drawings and specifications must identify any 
specific development standards being used. Such information must be 
sufficiently complete to avoid any misunderstanding as to the extent, 
kind, and quality of work to be performed.
    (5) The Agency will require technical data, tests, or engineering 
evaluations to support the design of the development as necessary to 
protect the Government's financial interests.
    (6) The Agency will require the applicant or borrower to provide 
written certification that final drawings and specifications conform 
with the applicable development standard as necessary to protect the 
Government's financial interests. Certification shall be obtained from 
individuals or organizations trained and experienced in the compliance, 
interpretation, or enforcement of the applicable development standards, 
such as licensed architects, professional engineers, persons certified 
by a relevant national model code organization, authorized local 
building officials, or national code organizations.
    (e) Inspection. (1) The applicant or borrower is responsible for 
inspecting development work as necessary to protect their interest.
    (2) The applicant or borrower must provide the Agency written 
certification that the development conforms to the plans and good 
construction practices, and complies with applicable laws, ordinances, 
codes and regulations.
    (3) The Agency will require the applicant or borrower to obtain 
professional inspection services during construction as necessary to 
protect the Government's financial interests.
    (4) Agency inspections do not create or imply any duty or 
obligation of the Government to the applicant or borrower.
    (f) Warranty and lien waivers. The applicant or borrower must 
obtain and submit all lien waivers on any construction before the 
Agency will issue final payment.
    (g) Surety. The Agency will require surety to guarantee both 
payment and performance for construction contracts as necessary to 
protect the Government's financial interests.
    (h) Changing the planned development. An applicant or borrower must 
request, in writing, Agency approval for any change to a planned 
development. The Agency will approve a change if all of the following 
are met:
    (1) It will not reduce the value of the Agency's security;
    (2) It will not adversely affect the soundness of the operation;
    (3) It complies with all applicable laws and regulations;
    (4) It is for an authorized loan purpose;
    (5) It is within the scope of the original loan proposal;
    (6) If required, documentation that sufficient funding for the full 
amount of the planned development is approved and available;
    (7) If required, surety to cover the full revised development 
amount has been provided; and
    (8) The modification is certified in accordance with Sec. 
761.10(d)(6).


Sec.Sec. 761.11-761.50  [Reserved]

Subpart B--Supervised Bank Accounts


Sec. 761.51  Establishing a supervised bank account.

    (a) The borrower may select the financial institution in which the 
account will be established, provided the institution is Federally 
insured. If the borrower does not select an institution, the Agency 
will choose one.
    (b) Only one supervised bank account will be established for any 
borrower.
    (c) When two co-borrowers sign an FLP note and security agreement, 
the supervised bank account will be established as a joint tenancy 
account with right of survivorship from which either borrower can 
withdraw funds.
    (d) If the funds to be deposited into the account cause the balance 
to exceed $100,000, the financial institution must agree to pledge 
acceptable collateral with the Federal Reserve Bank for the excess over 
$100,000, before the deposit is made.
    (1) If the financial institution is not a member of the Federal 
Reserve System, the institution must pledge acceptable collateral with 
a correspondent bank that is a member of the Federal Reserve System. 
The correspondent bank must inform the Federal Reserve Bank that it is 
holding securities pledged for the supervised bank account in 
accordance with 31 CFR part 202 (Treasury Circular 176).
    (2) When the balance in the account has been reduced, the financial 
institution may request a release of part or all of the collateral, as 
applicable, from the Agency.


Sec. 761.52  Deposits into a supervised bank account.

    (a) Checks or money orders may be deposited into a supervised bank 
account provided they are not payable:
    (1) Solely to the Federal Government or any agency thereof; or
    (2) To the Treasury of the United States as a joint payee.
    (b) Loan proceeds may be deposited electronically.


Sec. 761.53  Interest bearing accounts.

    (a) A supervised bank account shall, if possible, be established as 
an interest bearing deposit account provided that the funds will not be 
immediately disbursed, and the account is held jointly by the borrower 
and the Agency if this arrangement will benefit the borrower.
    (b) Interest earned on a supervised bank account will be treated as 
normal income security.


Sec. 761.54  Withdrawals from a supervised bank account.

    (a) The Agency will authorize a withdrawal from the supervised bank 
account for an approved purpose after ensuring that:
    (1) Sufficient funds in the supervised bank account are available;
    (2) No loan proceeds are disbursed prior to confirmation of proper 
lien position, except to pay for lien search if needed;
    (3) No checks are issued to ``cash''; and
    (4) The use of funds is consistent with the current farm operating 
plan or other agreement with the Agency.
    (b) A check must be signed by the borrower with countersignature of 
the Agency, except as provided in paragraph (c) of this section. All 
checks must bear the legend ``countersigned, not as co-maker or 
endorser.''
    (c) The Agency will withdraw funds from a supervised bank account 
without borrower counter signature only for the following purposes:
    (1) For application on Agency indebtedness;
    (2) To refund Agency loan funds;
    (3) To protect the Agency's lien or security;
    (4) To accomplish a purpose for which such advance was made; or
    (5) In the case of a deceased borrower, continue to pay necessary 
farm expenses to protect Agency security in conjunction with the 
borrower's estate.


Sec. 761.55  Closing a supervised bank account.

    (a) If the supervised bank account is no longer needed and the loan 
account is not paid in full, the Agency will determine the source of 
the remaining funds in the supervised bank account. If the funds are 
determined to be:
    (1) Loan funds and the balance is less than $100, the Agency will 
provide the

[[Page 6076]]

balance to the borrower to use for authorized loan purposes;
    (2) Loan funds and the balance is $100 or greater, the Agency will 
apply the balance to the FLP loan;
    (3) Normal income funds, the Agency will apply the balance to the 
remaining current year's scheduled payments and pay any balance to the 
borrower; and
    (4) Basic security funds, the Agency will apply the balance to the 
FLP loan as an extra payment or the borrower may apply the balance 
toward the purchase of basic security, provided the Agency obtains a 
lien on such security and its security position is not diminished.
    (b) If the borrower is uncooperative in closing a supervised bank 
account, the Agency will make written demand to the financial 
institution for the balance and apply it in accordance with paragraph 
(a) of this section.
    (c) In the event of a borrower's death, the Agency may:
    (1) Apply the balance to the borrower's FLP loan;
    (2) Continue with a remaining borrower, provided the supervised 
bank account was established as a joint tenancy with right of 
survivorship account;
    (3) Refund unobligated balances from other creditors in the 
supervised bank account for specific operating purposes in accordance 
with any prior written agreement between the Agency and the deceased 
borrower; or
    (4) Continue to pay expenses from the supervised bank account in 
conjunction with the borrower's estate.


Sec.Sec. 761.56-761.100  [Reserved]

Subpart C--Supervised Credit


Sec. 761.101  Applicability of this subpart.

    This subpart applies to all direct FLP applicants and borrowers, 
except borrowers with only Non-program loans.


Sec. 761.102  Borrower recordkeeping, reporting, and supervision.

    (a) A borrower must maintain accurate records sufficient to make 
informed management decisions and to allow the Agency to render loan 
making and servicing decisions in accordance with Agency regulations. 
These records must include the following:
    (1) Production (e.g., total and per unit for livestock and crops);
    (2) Revenues, by source;
    (3) Other sources of funds, including borrowed funds;
    (4) Operating expenses;
    (5) Interest;
    (6) Family living expenses;
    (7) Profit and loss;
    (8) Tax-related information;
    (9) Capital expenses;
    (10) Outstanding debt; and
    (11) Debt repayment.
    (b) A borrower also must agree in writing to:
    (1) Cooperate with the Agency and comply with all supervisory 
agreements, farm assessments, farm operating plans, year-end analyses, 
and all other loan-related requirements and documents;
    (2) Submit financial information and an updated farm operating plan 
when requested by the Agency;
    (3) Immediately notify the Agency of any proposed or actual 
significant change in the farming operation;
    (4) Within 30 days, notify the Agency of any significant changes in 
family income, expenses, or the development of problem situations; and
    (5) Immediately report any losses or proposed significant changes 
in the security for Agency loans.
    (c) If the borrower fails to comply with these requirements, unless 
due to reasons outside the borrower's control, the non-compliance will 
be a factor to be considered in determining eligibility for future 
Agency loans, servicing, or both.


Sec. 761.103  Farm assessment.

    (a) The Agency assesses each operation to determine the applicant's 
financial condition, organizational structure, management strengths and 
weaknesses, appropriate levels of Agency oversight, credit counseling 
needs, and training needs. The applicant will participate in developing 
the assessment.
    (b) The initial assessment must evaluate, at a minimum, the:
    (1) Farm organization and key personnel qualifications;
    (2) Type of farming operation;
    (3) Goals for the farming operation;
    (4) Adequacy of real estate, including facilities, to conduct the 
operation;
    (5) Adequacy of chattel property used to conduct the operation;
    (6) Historical performance;
    (7) Farm operating plan;
    (8) Loan evaluation;
    (9) Supervisory plan; and
    (10) Training plan.
    (c) An assessment update must be prepared for each subsequent loan. 
The update must include a farm operating plan, a loan evaluation, and 
any other items discussed in paragraph (b) of this section that have 
significantly changed since the initial assessment.
    (d) The Agency reviews the assessment to determine a borrower's 
progress at least annually. A review will be in the form of an office 
visit, field visit, letter, phone conversation, or year-end analysis, 
as determined by the Agency.


Sec. 761.104  Year-end analysis.

    (a) The Agency conducts a year-end analysis at its discretion or if 
the borrower:
    (1) Has received any direct loan, chattel subordination, or primary 
loan servicing action within the last year;
    (2) Is financially distressed or delinquent;
    (3) Has a loan deferred, excluding deferral of an installment under 
subpart B of part 766; or
    (4) Is receiving a limited resource interest rate on any loan.
    (b) To the extent practicable, the year-end analysis will be 
completed within 60 days after the end of the business year or farm 
budget planning period and must include:
    (1) An analysis comparing actual income, expenses, and production 
to projected income, expenses, and production for the preceding 
production cycle; and
    (2) An updated farm operating plan.


Sec.Sec. 761.105-761.200  [Reserved]

Subpart D--Allocation of Farm Loan Programs Funds to State Offices


Sec. 761.201  Purpose.

    (a) This subpart describes the methods and formulas the Agency uses 
to allocate FLP funds to State Offices. State funding information is 
available for review in any State Office.
    (b) This subpart addresses:
    (1) The allocation of funds for direct and guaranteed:
    (i) FO loans,
    (ii) OL loans;
    (2) The establishment of socially disadvantaged target 
participation rates; and
    (3) The reservation of loan funds for beginning farmers.
    (c) The Agency does not allocate EM loan funds to State Offices but 
makes funds available following a designated or declared disaster. EM 
loan funds are available on a first-come first-served basis.


Sec. 761.202  Timing of the allocation of Farm Ownership and Operating 
loan funds.

    The Agency's National Office allocates funds for FO and OL loans to 
the State Offices on a fiscal year basis, as made available by the 
Office of Management and Budget. However, the National Office will 
retain control over the funds when funding or administrative 
constraints make allocation to State Offices impractical.

[[Page 6077]]

Sec. 761.203  National reserves for Farm Ownership and Operating loans.

    (a) Reservation of funds. At the start of each fiscal year, the 
National Office reserves a portion of the funds available for each 
direct and guaranteed loan program. These reserves enable the Agency to 
meet unexpected or justifiable program needs during the fiscal year.
    (b) Allocation of reserved funds. The National Office distributes 
funds from the reserve to one or more State Offices to meet a program 
need or Agency objective.


Sec. 761.204  Methods of allocating funds to State Offices.

    FO and OL loan funds are allocated to State Offices using one or 
more of the following allocation methods:
    (a) Formula allocation, if data, as specified in Sec. 761.205, is 
available to use the formula for the State.
    (b) Administrative allocation, if the Agency cannot adequately meet 
program objectives with a formula allocation. The National Office 
determines the amount of an administrative allocation on a case-by-case 
basis.
    (c) Base allocation, to ensure funding for at least one loan in 
each State, District, or County Office. In making a base allocation, 
the National Office may use criteria other than those used in the 
formula allocation, such as historical Agency funding information.


Sec. 761.205  Computing the formula allocation.

    (a) The formula allocation for FO or OL loan funds is equal to:
    (1) The amount available for allocation by the Agency minus the 
amounts held in the National Office reserve and distributed by base and 
administrative allocation, multiplied by
    (2) The State Factor, which represents the percentage of the total 
amount of the funds for a loan program that the National Office 
allocates to a State Office.

formula allocation = (amount available for allocation - national 
reserve - base allocation - administrative allocation) x State Factor

    (b) To calculate the State Factor, the Agency:
    (1) Uses the following criteria, data sources, and weights:

----------------------------------------------------------------------------------------------------------------
                                                                                         Weight for
                                                                                            farm      Weight for
              Criteria                 Loan type criterion is        Data source         ownership    operating
                                              used for                                     loans        loans
                                                                                         (percent)    (percent)
----------------------------------------------------------------------------------------------------------------
Farm operators with sales of $2,500-  FO and OL loans........  U.S. Census of                    15           15
 $39,999 and less than 200 days work                            Agriculture.
 off the farm.
Farm operators with sales of $40,000  FO and OL loans........  U.S. Census of                    35           35
 or more and less than 200 days work                            Agriculture.
 off farm.
Tenant farm operators...............  FO and OL loans........  U.S. Census of                    25           20
                                                                Agriculture.
Three-year average net farm income..  FO and OL loans........  USDA Economic Research            15           15
                                                                Service.
Value of farm real estate assets....  FO loans...............  USDA Economic Research            10          N/A
                                                                Service.
Value of farm non-real estate assets  OL loans...............  USDA Economic Research           N/A           15
                                                                Service.
----------------------------------------------------------------------------------------------------------------

    (2) Determines each State's percentage of the national total for 
each criterion;
    (3) Multiplies the percentage for each State determined in 
paragraph (b)(2) of this section by the applicable weight for that 
criterion;
    (4) Sums the weighted criteria for each State to obtain the State 
factor.


Sec. 761.206  Pooling of unobligated funds that have been allocated to 
State Offices.

    The Agency periodically pools unobligated FO and OL loan funds that 
have been allocated to State Offices. When pooling these funds, the 
Agency places all unobligated funds in the appropriate National Office 
reserve. The pooled funds may be retained in the national reserve or be 
reallocated to the States.


Sec. 761.207  Distribution of Farm Ownership and Operating loan funds 
by State Offices.

    A State Office may distribute its allocation of loan funds to 
District or County level using the same allocation methods that are 
available to the National Office. State Offices may reserve a portion 
of the funds to meet unexpected or justifiable program needs during the 
fiscal year.


Sec. 761.208  Target participation rates for socially disadvantaged 
groups.

    (a) General policies. (1) FO and OL loan rates. The Agency 
establishes target participation rates for providing FO and OL loans to 
members of socially disadvantaged groups.
    (2) State and County rates. The Agency sets the target 
participation rates for State and County levels annually.
    (3) Indian Reservations. When distributing loan funds in counties 
within Indian reservations, the Agency will allocate the funds on a 
reservation-wide basis.
    (4) Reservation of funds. The Agency reserves and allocates 
sufficient loan funds to achieve these target participation rates. The 
Agency may also use funds that are not reserved and allocated for 
socially disadvantaged groups to make or guarantee loans to members of 
socially disadvantaged groups.
    (b) FO loan target participation rate for socially disadvantaged 
groups based on ethnicity or race.
    (1) State participation rate. The FO loan target participation rate 
for socially disadvantaged groups based on ethnicity or race in each 
State is equal to the percent of the total rural population in the 
State who are members of such socially disadvantaged groups.
    (2) County participation rate. The FO loan target participation 
rate for socially disadvantaged groups based on ethnicity or race in 
each county is equal to the percent of rural population in the county 
who are members of such socially disadvantaged groups.
    (c) OL loan target participation rate for socially disadvantaged 
groups based on ethnicity or race.
    (1) State participation rate. The OL loan target participation rate 
for socially disadvantaged groups based on ethnicity or race in each 
State is equal to the percent of the total number of farmers in the 
State who are members of such socially disadvantaged groups.
    (2) County participation rate. The OL loan target participation 
rate for socially disadvantaged groups based on ethnicity or race in 
each county is equal to the percent of the total number of farmers in 
the county who are members of socially disadvantaged ethnic groups.
    (d) Target participation rate for women farmers. (1) State 
participation rate. The target participation rate for

[[Page 6078]]

women farmers in each State is equal to the percent of farmers in the 
State who are women.
    (2) County participation rate. The target participation rate for 
women farmers in each county is equal to the percent of farmers in the 
county who are women.
    (3) Consideration of women that are current and potential farmers. 
In developing target participation rates for women, the Agency will 
consider the number of women who are current farmers and potential 
farmers.


Sec. 761.209  Reservation of Farm Ownership and Operating loan funds 
for beginning farmers.

    Each fiscal year, the Agency reserves a portion of direct and 
guaranteed FO and OL loan funds for beginning farmers in accordance 
with section 346(b)(2) of the Act.


Sec. 761.210  Transfer of funds.

    (a) If sufficient unsubsidized guaranteed OL funds are available, 
then beginning on:
    (1) August 1 of each fiscal year, the Agency will use available 
unsubsidized guaranteed OL loan funds to make approved direct FO loans 
to beginning farmers under the Beginning Farmer Downpayment loan 
program; and
    (2) September 1 of each fiscal year the Agency will use available 
unsubsidized guaranteed OL loan funds to make approved direct FO loans 
to beginning farmers.
    (b) On September 1 of each fiscal year, the Agency may utilize 
unused EM loan funds to fund credit sales. The Agency may not transfer 
any EM loan funds resulting from supplemental appropriations.


Sec.Sec. 761.211--761.250  [Reserved]

PART 762--GUARANTEED FARM LOANS

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

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

    3. Amend Sec. 762.101 as follows:
    a. Revise paragraphs (b) and (c) introductory text;
    b. Remove paragraph (c)(1) and redesignate paragraphs (c)(2) as 
(c)(1), (c)(2)(i) through (iii) as (c)(1)(i) through (iii) and (c)(3) 
as (c)(2).
    The revised text reads as follows:


Sec. 762.101  Introduction

* * * * *
    (b) Lender list. The Agency maintains a current list of lenders who 
express a desire to participate in the guaranteed loan program. This 
list is made available to farmers upon request.
    (c) Lender classification.
* * * * *
    4. Revise Sec. 762.102 to read as follows:


Sec. 762.102  Abbreviations and definitions.

    Abbreviations and definitions for terms used in this part are 
provided in Sec. 761.2 of this chapter.
    5. Add paragraph (g) to Sec. 762.110 to read as follows:


Sec. 762.110  Loan applications.

* * * * *
    (g) Market Placement Program. When the Agency determines that a 
direct loan applicant or borrower may qualify for guaranteed credit, 
the Agency may submit the applicant or borrower's financial information 
to one or more guaranteed lenders. If a lender indicates interest in 
providing financing to the applicant or borrower through the guaranteed 
loan program, the Agency will assist in completing the application for 
a guarantee.


Sec. 762.120  [Amended]

    6. In paragraph (a) of Sec. 762.120, remove the word ``CONACT'' and 
add in its place the word ``Act.''


Sec. 762.121  [Amended]

    7. In paragraph (b)(1) of Sec. 762.121, remove the words ``1943, 
subpart A, of this title'' and add in their place, the words ``part 764 
of this chapter.''
    8. Amend Sec. 762.122 by revising paragraph (a).


Sec. 762.122  Loan limitations.

    (a) Dollar limits. Maximum loan limits are published in Sec. 761.8.
* * * * *


Sec. 762.124  [Amended]

    9. In paragraph (e)(3) of Sec. 762.124, remove the words ``1943, 
subpart A, of this title'' and add in their place, the words ``part 764 
of this chapter.''


Sec. 762.128  [Amended]

    10. Amend Sec. 762.128 as follows:
    a. In paragraph (a), remove the words, ``1940, subpart G of this 
title'' and add in their place, the words ``part 799 of this chapter.''
    b. In paragraph (c)(3), remove the words, ``part 1940, subpart G, 
and part 1901, subpart F, of this title'' and add in their place, the 
words ``part 799 of this chapter.''
    c. In paragraph (c)(4), remove the word ``CONACT'' and add in its 
place the word ``Act.''

PART 763--[RESERVED]

    11. Add and reserve part 763.
    12. Revise part 764 to read as follows:

PART 764--DIRECT LOAN MAKING

Subpart A--Overview
Sec.
764.1 Purpose.
764.2 Types of loans.
764.3 Abbreviations and definitions.
764.4-764.50 [Reserved]
Subpart B--Loan Application Process
764.51 Loan application.
764.52 Processing an incomplete application.
764.53 Processing the complete application.
764.54 Acting on complete applications.
764.55 Preferences when there is limited funding.
764.56-764.100 [Reserved]
Subpart C--Requirements for All Direct Program Loans
764.101 General eligibility requirements.
764.102 General limitations.
764.103 General security requirements.
764.104 General real estate security requirements.
764.105 General chattel security requirements.
764.106 Exceptions to security requirements.
764.107 General appraisal requirements for real estate and chattel.
764.108 General insurance requirements.
764.109-764.150 [Reserved]
Subpart D--Farm Ownership Loan Program
764.151 Farm Ownership loan uses.
764.152 Eligibility requirements.
764.153 Limitations.
764.154 Rates and terms.
764.155 Security requirements.
764.156--764.200 [Reserved]
Subpart E--Beginning Farmer Downpayment Loan Program
764.201 Beginning Farmer Downpayment loan uses.
764.202 Eligibility requirements.
764.203 Limitations.
764.204 Rates and terms.
764.205 Security requirements.
764.206-764.250 [Reserved]
Subpart F--Operating Loan Program
764.251 Operating loan uses.
764.252 Eligibility requirements.
764.253 Limitations.
764.254 Rates and terms.
764.255 Security requirements.
764.256-764.300 [Reserved]
Subpart G--Youth Loan Program
764.301 Youth loan uses.
764.302 Eligibility requirements.
764.303 Limitations.
764.304 Rates and terms.
764.305 Security requirements.
764.306-764.350 [Reserved]
Subpart H--Emergency Loan Program
764.351 Emergency loan uses.
764.352 Eligibility requirements.
764.353 Limitations.
764.354 Rates and terms.
764.355 Security requirements.
764.356 Appraisal and valuation requirements.

[[Page 6079]]

764.357-764.400 [Reserved]
Subpart I--Loan Decision and Closing
764.401 Loan decision.
764.402 Loan closing.
764.403-764.450 [Reserved]
Subpart J--Borrower Training and Training Vendor Requirements
764.451 Purpose.
764.452 Borrower training requirements.
764.453 Agency waiver of training requirements.
764.454 Actions that a borrower must take when training is required.
764.455 Potential training vendors.
764.456 Applying to be a vendor.
764.457 Vendor Requirements.
764.458 Vendor approval.
764.459 Evaluation of borrower progress.
764.460-764.500 [Reserved]

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

Subpart A--Overview


Sec. 764.1  Purpose.

    This part describes the Agency's policies for making direct FLP 
loans.


Sec. 764.2  Types of loans.

    The Agency makes the following types of loans:
    (a) FO, including Beginning Farmer Downpayment loans;
    (b) OL, including Youth loans; and
    (c) EM.


Sec. 764.3  Abbreviations and definitions.

    Abbreviations and definitions for terms used in this part are 
provided in Sec. 761.2 of this chapter.


Sec.Sec. 764.4-764.50  [Reserved]

Subpart B--Loan Application Process


Sec. 764.51  Loan application.

    (a) A complete loan application, except as provided in paragraphs 
(b) through (d) of this section, will include:
    (1) The completed Agency application form;
    (2) If the applicant is an entity:
    (i) A complete list of entity members showing the address, 
citizenship, principal occupation, and the number of shares and 
percentage of ownership or stock held in the entity by each member, or 
the percentage of interest in the entity held by each member;
    (ii) A current personal financial statement from each member of the 
entity;
    (iii) A current financial statement from the entity itself;
    (iv) A copy of the entity's charter or any entity agreement, any 
articles of incorporation and bylaws, any certificate or evidence of 
current registration (good standing), and a resolution adopted by the 
Board of Directors or entity members authorizing specified officers of 
the entity to apply for and obtain the desired loan and execute 
required debt, security and other loan instruments and agreements;
    (3) A written description of the applicant's farm training and 
experience, including each entity member who will be involved in 
managing or operating the farm;
    (4) The last 3 years of farm financial records, unless the 
applicant has been farming less than 3 years;
    (5) The last 3 years of farm production records, unless the 
applicant has been farming less than 3 years;
    (6) Documentation that the applicant and each member of an entity 
applicant cannot obtain sufficient credit elsewhere on reasonable rates 
and terms, including a loan guaranteed by the Agency;
    (7) Documentation of compliance with the Agency's environmental 
regulations contained in 7 CFR 799;
    (8) Verification of all non-farm income of the applicant;
    (9) The farm's operating plan, including the projected cash flow 
budget reflecting production, income, expenses, and loan repayment 
plan;
    (10) A legal description of the farm property owned or to be 
acquired and, if applicable, any leases, contracts, options, and other 
agreements with regard to the property;
    (11) Payment to the Agency for ordering a credit report on the 
applicant;
    (12) Verification of all debts of the applicant;
    (13) Any additional information deemed necessary by the Agency to 
effectively evaluate the applicant's eligibility and plan of operation; 
and
    (14) For EM loans, a statement of loss or damage on the appropriate 
Agency form.
    (b) For a Lo-Doc OL request, the applicant must:
    (1) Be current on all payments to all creditors including the 
Agency (if an Agency borrower);
    (2) Have not received primary loan servicing on any Agency debt 
within the past 5 years; and
    (3) Meet one of the following sets of criteria:
    (i) The loan requested is $50,000 or less and the total outstanding 
Agency OL loan debt at the time of loan closing will be less than 
$100,000; or
    (ii) The loan requested is to pay annual operating expenses and the 
applicant is an existing Agency borrower who has received and timely 
repaid at least two previous annual OL loans from the Agency.
    (4) Submit items (1), (2), (7), (9), and (11) of paragraph (a) of 
this section. The Agency may require a Lo-Doc applicant to submit any 
other information listed in paragraph (a) of this section as needed to 
make a determination on the loan application.
    (c) For a youth loan request:
    (1) The applicant must submit items (1), (7), (8), (9) and (10) of 
paragraph (a) of this section.
    (2) Applicants 18 years or older, must also provide items (11) and 
(12) of paragraph (a) of this section.
    (3) The Agency may require a youth loan applicant to submit any 
other information listed in paragraph (a) of this section as needed to 
make a determination on the loan application.
    (d) The applicant need not submit any information under this 
section that already exists in the applicant's Agency file and is still 
current.


Sec. 764.52  Processing an incomplete application.

    (a) Within 10 days of receipt of an incomplete application, the 
Agency will provide the applicant written notice of any additional 
information which must be provided. The applicant must provide the 
additional information within 20 calendar days of the date of this 
notice.
    (b) If the additional information is not received, the Agency will 
provide written notice that the application will be withdrawn if the 
information is not received within 10 calendar days of the date of this 
second notice.


Sec. 764.53  Processing the complete application.

    Upon receiving a complete loan application, the Agency will:
    (a) Consider the loan application in the order received, based on 
the date the application was determined to be complete; and
    (b) Provide written notice to the applicant that the application is 
complete.


Sec. 764.54  Acting on complete applications.

    (a) Within 60 calendar days after receiving a complete loan 
application, the Agency will complete the processing of the loan 
request.
    (b) If, based on the Agency's review of the application, it appears 
the applicant's credit needs could be met through the guaranteed loan 
program, the Agency will assist the applicant in securing guaranteed 
loan assistance under the market placement program in accordance with 
Sec. 762.110(g) of this chapter.
    (c) In the absence of funds for a direct loan program, the Agency 
will keep an approved loan application on file until funding is 
available. At least annually

[[Page 6080]]

the Agency will contact the applicant to determine if the Agency should 
retain the application or if the applicant wants the application 
withdrawn.
    (d) If funding becomes available, the Agency will resume processing 
of approved loans in accordance with this part.


Sec. 764.55  Preferences when there is limited funding.

    (a) First priority. When there is a shortage of loan funds, 
approved applications will be funded in the order of the date the 
application was received, whether or not complete.
    (b) Secondary priorities. If two or more applications were received 
on the same date, the Agency will give preference to:
    (1) First, an applicant who is a veteran of any war, as defined in 
38 U.S.C. 101(12);
    (2) Second, an applicant who is not a veteran, but:
    (i) Has a dependent family;
    (ii) Is able to make a down payment; or
    (iii) Owns livestock and farm implements necessary to farm 
successfully.
    (3) Third, to other eligible applicants.


Sec.Sec. 764.56--764.100  [Reserved]

Subpart C--Requirements for All Direct Program Loans


Sec. 764.101  General eligibility requirements.

    FLP loan applicants must meet all of the following requirements, 
unless otherwise provided in the eligibility requirements for the 
particular type of loan.
    (a) No prior drug convictions. The applicant, and all entity 
members, in the case of an entity applicant, must not have been 
convicted under Federal or state law, within the last five crop years, 
of planting, cultivating, growing, producing, harvesting, or storing a 
controlled substance, as defined at 21 CFR part 1308.
    (b) Legal capacity. The applicant must possess the legal capacity 
to incur the obligation of the loan. A Youth loan applicant will incur 
full personal liability upon execution of the promissory note without 
regard to the applicant's minority status.
    (c) Citizenship. The applicant must be a citizen of the United 
States, United States non-citizen national, or a qualified alien under 
applicable Federal immigration laws. For an entity applicant, the 
majority of the entity must be owned by members meeting the citizenship 
test or other entities that are domestically owned.
    (d) Credit history. The applicant must have acceptable credit 
history demonstrated by debt repayment. A history of failures to repay 
past debts as they came due when the ability to repay was within the 
applicant's control will demonstrate unacceptable credit history. As 
part of the credit history the Agency will determine whether the 
applicant will make a sincere effort to repay the loan, devote the 
effort required to carry out the terms and conditions of the loan, and 
deal with the Agency in good faith. This includes the applicant 
providing current, complete, and truthful information when applying for 
assistance and in all past dealings with the Agency. In making this 
determination, the Agency may examine whether the applicant has 
properly fulfilled its obligations to other parties, including other 
agencies of the Federal Government.
    (e) Availability of credit elsewhere. The applicant, and all entity 
members in the case of an entity applicant, must be unable to obtain 
sufficient credit elsewhere to finance actual needs at reasonable rates 
and terms. The Agency will evaluate the applicant's ability to obtain 
credit based on factors including, but not limited to:
    (1) Loan amounts, rates, and terms available in the marketplace; 
and
    (2) An applicant's property interests, income, and significant 
nonessential assets.
    (f) Not delinquent on Federal debt. Except for EM loan applicants, 
the applicant, and anyone who will execute the promissory note, must 
not be delinquent on any Federal debt, other than a debt under the 
Internal Revenue Code of 1986 at the time of loan closing. However, 
debt under the Internal Revenue Code of 1986, will be considered in 
determining creditworthiness and ability to repay.
    (g) Outstanding judgements. The applicant, and anyone who will 
execute the promissory note, must have no outstanding unpaid judgements 
obtained by the United States in any court. Such judgements do not 
include those filed as a result of action in the United States Tax 
Courts.
    (h) Managerial ability. The applicant must have sufficient 
managerial ability to assure reasonable prospects of loan repayment, as 
determined by the Agency. The applicant must demonstrate this 
managerial ability by education, on-the-job training, or farming 
experience within the last five years. The farming experience must 
cover at least one entire production cycle.
    (i) Borrower training. The applicant must agree to meet the 
training requirements in subpart J of this part.
    (j) Family farm. Depending on the type of loan requested, the 
applicant must be the owner-operator or tenant-operator of a family 
farm after the loan is closed. For an entity applicant:
    (1) All members must be involved in the operation;
    (2) Any other farming operations, in which any of the members are 
owners, must be no larger than a family farm; and
    (3) Except for EM loans, the collective interests of the members 
may be larger than a family farm only if:
    (i) Each member's ownership interest is not larger than a family 
farm; and
    (ii) All of the members of the entity are related by blood or 
marriage.
    (k) Entity composition. If the applicant is an entity, the entity 
must not be:
    (1) An estate or trust, unless the trust would qualify as a joint 
operation;
    (2) A corporation, partnership, or joint operation with 50 percent 
or more of the ownership held solely or in a combination by another 
estate, trust, corporation, a partnership, or a joint operation; and
    (3) An integrated livestock, poultry, or aquaculture processor who 
operates primarily and directly as commercial business through 
contracts or business arrangements with farmers.


Sec. 764.102  General limitations.

    (a) Program limitations. Limitations specific to each loan program 
are contained in subparts D through H of this part.
    (b) General limitations. (1) Maximum loan limits. The total 
principal balance owed to the Agency at any one time by the applicant, 
or any one who will sign the promissory note, cannot exceed the limits 
established in Sec. 761.8.
    (2) Loan funds used in the United States. The funds from the Agency 
loan must be used for farming operations located in the United States.
    (3) Highly erodible land and wetlands conversion. The Agency will 
not make a loan for any purpose that contributes to excessive erosion 
of highly erodible land, as determined by the Agency, or to the 
conversion of wetlands to produce an agricultural commodity.
    (4) Construction. Any construction financed by the Agency must 
comply with the standards established in Sec. 761.10.
    (5) Noncontiguous tracts. The Agency will not make a loan if the 
distance between the tracts to be farmed will prevent an efficient 
farming operation.
    (6) Non-eligible enterprise. Loan funds will not be used to 
establish or support

[[Page 6081]]

a non-eligible enterprise, even if the non-eligible enterprise 
contributes to the farm.


Sec. 764.103  General security requirements.

    (a) Program security requirements. Security requirements specific 
to each loan program are outlined in subparts D through H.
    (b) Security requirements. (1) Adequate security. All loans must be 
secured by assets having a security value equal to 100 percent of the 
loan amount, except for EM loans as provided in subpart H of this part. 
If the applicant's assets do not provide adequate security, the Agency 
may accept:
    (i) A pledge of security from a third party; or
    (ii) Interests in property not owned by the applicant (such as 
leases that provide a mortgageable value, water rights, easements, 
mineral rights, and royalties).
    (2) Additional security. An additional amount of security up to 150 
percent of the loan amount will be taken when available, except for 
beginning farmer downpayment loans and youth loans.
    (3) Choice of security. The Agency will choose the best security 
available when there are several alternatives that meet the Agency's 
security requirements.
    (4) Non-essential assets. The Agency will take a lien on all assets 
that are not essential to the farming operation and are not being 
converted to cash to reduce the loan amount when each such asset has a 
value in excess of $5,000. The value of this security is not included 
in the Agency's additional security requirement stated in paragraph 
(b)(2) of this section. This requirement does not apply to beginning 
farmer downpayment loans and youth loans.


Sec. 764.104  General real estate security requirements.

    (a) Agency lien position requirements. If real estate is pledged as 
security for a loan, the Agency must obtain a first lien, if available. 
When a first lien is not available, the Agency may take a junior lien 
under the following conditions:
    (1) The prior lien does not contain any provisions that may 
jeopardize the Agency's interest or an applicant's ability to repay the 
Agency loan;
    (2) Prior lienholders agree to notify the Agency prior to 
foreclosure;
    (3) The applicant must agree not to increase an existing prior lien 
without the written consent of the Agency; and
    (4) Equity in the collateral exists.
    (b) Real estate held under a purchase contract. If the real estate 
offered as security is held under a recorded purchase contract:
    (1) The applicant must provide a security interest in the real 
estate.
    (2) The applicant and the purchase contract holder must agree in 
writing that any insurance proceeds received for real estate losses 
will be used only for one or more of the following purposes:
    (i) To replace or repair the damaged real estate improvements which 
are essential to the farming operation;
    (ii) To make other essential real estate improvements; or
    (iii) To pay any prior real estate lien, including the purchase 
contract.
    (3) The purchase contract must provide the applicant with 
possession, control and beneficial use of the property, and entitle the 
applicant to marketable title upon fulfillment of the contract terms.
    (4) The purchase contract must not:
    (i) Be subject to summary cancellation upon default;
    (ii) Contain provisions which jeopardize the Agency's security 
position, or the applicant's ability to repay the loan.
    (5) The purchase contract holder must agree in writing:
    (i) Not to sell or voluntarily transfer their interest without 
prior written consent of the Agency;
    (ii) Not to encumber or cause any liens to be levied against the 
property;
    (iii) Not to take any action to accelerate, forfeit, or foreclose 
the applicant's interest in the security property until a specified 
period of time after notifying the Agency of the intent to do so;
    (iv) To consent to the Agency making the loan and taking a security 
interest in the applicant's interest under the purchase contract as 
security for the Agency loan;
    (v) Not to take any action to foreclose or forfeit the interest of 
the applicant under the purchase contract because the Agency has 
acquired the applicant's interest by foreclosure or voluntary 
conveyance, or because the Agency has subsequently sold or assigned the 
applicant's interest to a third party who will assume the applicant's 
obligations under the purchase contract;
    (vi) If the Agency acquires the applicant's interest under the 
purchase contract by foreclosure or voluntary conveyance, the Agency 
will not be deemed to have assumed any of the applicant's obligations 
under the contract, provided that if the Agency fails to perform the 
applicant's obligations while it holds the applicant's interest is 
grounds for terminating the purchase contract;
    (vii) To notify the Agency in writing of any breach by the 
applicant; and
    (viii) To give the Agency the option to rectify the conditions that 
amount to a breach within 30 days after the date the Agency receives 
written notice of the breach.
    (c) Tribal lands held in trust or restricted. The Agency will take 
security on tribal real estate held in trust or of restricted status, 
provided that the United States Bureau of Indian Affairs provides a 
title report and approves the lien.
    (d) Security for more than one loan. The same real estate may be 
pledged as security for more than one direct or guaranteed loan.
    (e) Loans secured by leaseholds. A loan may be secured by a 
mortgage on a leasehold, if the leasehold has negotiable value and can 
be mortgaged.


Sec. 764.105  General chattel security requirements.

    The same chattel may be pledged as security for more than one 
direct or guaranteed loan.


Sec. 764.106  Exceptions to security requirements.

    Notwithstanding any other provision of this part, the Agency will 
not take a security interest:
    (a) When adequate security is otherwise available and the lien will 
prevent the applicant from obtaining credit from other sources;
    (b) When the property could have significant environmental problems 
or costs as described in 7 CFR 799;
    (c) When the Agency cannot obtain a valid lien;
    (d) When the property is the applicant's personal residence and 
appurtenances and:
    (1) They are located on a separate parcel; and
    (2) The real estate that serves as security for the Agency loan 
plus crops and chattels are greater than or equal to 150 percent of the 
unpaid balance due on the loan;
    (e) When the property is subsistence livestock, cash, special 
collateral accounts the applicant uses for the farming operation, 
retirement accounts, personal vehicles necessary for family living, 
household goods, or small equipment such as hand tools and lawn mowers; 
or
    (f) On marginal land and timber that secures an outstanding ST 
loan.


Sec. 764.107  General appraisal requirements for real estate and 
chattel.

    (a) Establishing value for real estate. The value of real estate 
will be established by an appraisal completed in accordance with Sec. 
761.7.
    (b) Establishing value for chattels. The value of chattels will be 
established as follows:

[[Page 6082]]

    (1) Annual production. The security value of annual livestock and 
crop production is presumed to be 100 percent of the projected annual 
income generated from livestock and crop production.
    (2) Livestock and equipment. The value of livestock and equipment 
will be established by an appraisal completed in accordance with Sec. 
761.7.


Sec. 764.108  General insurance requirements.

    (a) The applicant must obtain and maintain insurance equal to the 
lesser of the value of the security at the time of loan closing, or the 
principal of the loan.
    (b) All security, except growing crops, must be covered by hazard 
insurance if it is readily available (sold by insurance agents in the 
applicant's normal trade area) and economically feasible.
    (c) Real estate security located in flood or mudslide prone areas 
must be covered by flood or mudslide insurance.
    (d) Prior to closing the loan, the applicant must have obtained at 
least the catastrophic risk protection level of crop insurance coverage 
for the crop during the crop year for which the loan is sought for each 
crop which is a basic part of the applicant's total farming operation, 
if such insurance is available, unless the applicant executes a written 
waiver of any emergency crop loss assistance with respect to such crop.
    (e) Growing crops used to provide adequate security must be covered 
by crop insurance, if such insurance is available.
    (f) The applicant must:
    (1) List the Agency as loss payee for the insurance indemnity 
payment or as a beneficiary of a mortgagee loss payable clause; and
    (2) In the case of crop insurance, execute an assignment of 
indemnity in favor of the Agency.


Sec.Sec. 764.109-764.150  [Reserved]

Subpart D--Farm Ownership Loan Program


Sec. 764.151  Farm Ownership loan uses.

    FO loan funds may only be used to:
    (a) Acquire or enlarge a farm or make a down payment on a farm;
    (b) Make capital improvements to a farm owned by the applicant, for 
construction, purchase or improvement of farm dwellings, service 
buildings or other facilities and improvements essential to the 
operation. In the case of leased property, the applicant must have a 
lease to ensure use of the improvement over its useful life or to 
ensure that the applicant receives compensation for any remaining 
economic life upon termination of the lease;
    (c) Promote soil and water conservation and protection;
    (d) Pay loan closing costs;
    (e) Refinance a bridge loan if the following conditions are met:
    (1) The applicant obtained the loan to be refinanced to purchase a 
farm after a direct FO was approved;
    (2) Direct FO funds were not available to fund the loan at the time 
of approval;
    (3) The loan to be refinanced is temporary financing; and
    (4) The loan was made by a commercial or cooperative lender.


Sec. 764.152  Eligibility requirements.

    The applicant:
    (a) Must comply with the general eligibility requirements contained 
in Sec. 764.101;
    (b) And anyone who will sign the promissory note, must not have 
received debt forgiveness from the Agency on any direct or guaranteed 
loan;
    (c) Must be the owner and operator of the farm after the loan is 
closed;
    (d) Except as provided in paragraph (f) of this section, must have 
participated in the business operations of a farm if the applicant has:
    (1) Been the owner, manager or operator of a farm business for the 
year's complete production and marketing cycles as evidenced by tax 
returns, FSA farm records or similar documentation;
    (2) Been employed as a farm manager or farm management consultant 
for the year's complete production and marketing cycles; or
    (3) Participated in the operation of a farm by virtue of being 
raised on a farm or having worked on a farm with significant 
responsibility for the day-to-day decisions for the year's complete 
production and marketing cycle, which may include selection of seed 
varieties, weed control programs, input suppliers, or livestock feeding 
programs or decisions to replace or repair equipment.
    (e) And anyone who will sign the promissory note:
    (1) Has never received a direct FO loan; or
    (2) Must not have had direct FO loans outstanding for more than a 
total of 10 years prior to the date that the new direct FO loan is 
closed.
    (f) And anyone who will sign the promissory note had direct FO 
loans outstanding on April 4, 1996:
    (1) For less than five years, then the applicant is eligible for FO 
loans through April 4, 2006.
    (2) For five years or more, then the applicant is no longer 
eligible for direct FO loans.


Sec. 764.153  Limitations.

    The applicant must:
    (a) Comply with the general limitations contained in Sec. 764.102;
    (b) Have dwellings and other buildings necessary for the planned 
operation of the farm available for use after the loan is made.


Sec. 764.154  Rates and Terms.

    (a) Rates. (1) The interest rate is the Agency's Direct Farm 
Ownership rate, available in each Agency office.
    (2) The limited resource Farm Ownership interest rate is available 
to applicants who are unable to develop a feasible plan at regular 
interest rates.
    (3) If the FO loan is part of a joint financing arrangement and the 
amount of the Agency's loan does not exceed 50 percent of the total 
amount financed, the Agency will use the Farm Ownership participation 
rate, available in each Agency office.
    (b) Terms. The Agency schedules repayment of an FO loan based on 
the applicant's ability to repay and the useful life of the security. 
In no event will the term be more than 40 years from the date of the 
note.


Sec. 764.155  Security requirements.

    An FO loan must:
    (a) Be secured in accordance with Sec.Sec. 764.103 through 764.106;
    (b) Be secured, at a minimum, by real estate being purchased or 
improved.


Sec.Sec. 764.156-764.200  [Reserved]

Subpart E--Beginning Farmer Downpayment Loan Program


Sec. 764.201  Beginning Farmer Downpayment loan uses.

    Beginning Farmer Downpayment loan funds may be used to partially 
finance the purchase of a family-sized farm by an eligible beginning 
farmer.


Sec. 764.202  Eligibility requirements.

    The applicant:
    (a) Must comply with the general eligibility requirements 
established at Sec. 764.101;
    (b) And anyone who will sign the promissory note, must not have 
received debt forgiveness from the Agency on any direct or guaranteed 
loan;
    (c) Must be the owner and operator of the farm after the loan is 
closed;
    (d) Must be a beginning farmer.


Sec. 764.203  Limitations.

    (a) The applicant must:
    (1) Comply with the general limitations established at Sec. 
764.102; and
    (2) Must provide a minimum downpayment of 10 percent of the 
purchase price of the farm.

[[Page 6083]]

    (b) The purchase price or appraised value of the farm, whichever is 
lower, must not exceed $250,000.
    (c) Beginning Farmer Downpayment loans will not exceed 40 percent 
of the lesser of the purchase price or appraised value of the farm to 
be acquired.
    (d) Financing provided by the Agency and any other creditor must 
not exceed 90 percent of the lesser of the purchase price or appraised 
value of the farm and may be guaranteed by the Agency under part 762 of 
this chapter.


Sec. 764.204  Rates and terms.

    (a) Rates. The interest rate for Beginning Farmer Downpayment loans 
shall be 4 percent.
    (b) Terms. (1) The Agency schedules repayment of Beginning Farmer 
Downpayment loans in equal, annual installments over a term not to 
exceed 15 years.
    (2) The non-Agency financing must have an amortization period of at 
least 30 years and cannot have a balloon payment due within the first 
15 years of the loan.


Sec. 764.205  Security requirements.

    A Beginning Farmer Downpayment loan must:
    (a) Be secured in accordance with Sec.Sec. 764.103 through 764.106;
    (b) Be secured by a lien on the property being acquired with the 
loan funds and junior only to the party financing the balance of the 
purchase price.


Sec.Sec. 764.206-764.250  [Reserved]

Subpart F--Operating Loan Program


Sec. 764.251  Operating loan uses.

    OL loan funds may only be used for:
    (a) Payment of costs associated with reorganizing a farm to improve 
its profitability;
    (b) Purchase of livestock, including poultry, and farm equipment, 
quotas and bases, and cooperative stock for credit, production, 
processing or marketing purposes;
    (c) Payment of annual farm operating expenses, including but not 
limited to, feed, seed, fertilizer, pesticides, farm supplies, repairs 
and improvements which are to be expensed, cash rent and family 
subsistence;
    (d) Payment of scheduled principal and interest payments on term 
debt provided the debt is for authorized FO or OL purposes;
    (e) Other farm needs;
    (f) Payment of costs associated with land and water development, 
use, or conservation;
    (g) Payment of loan closing costs;
    (h) Payment of costs associated with Federal or State-approved 
standards under the Occupational Safety and Health Act of 1970 (29 
U.S.C. 655 and 667) if the applicant can show that compliance or non-
compliance with the standards will cause substantial economic injury;
    (i) Payment of borrower training costs required or recommended by 
the Agency;
    (j) Refinancing farm-related debts other than real estate to 
improve farm profitability, if the applicant has refinanced direct or 
guaranteed OL loans four times or fewer and one of the following 
conditions is met:
    (1) A designated or declared disaster caused the need for 
refinancing; or
    (2) The debts to be refinanced are owed to a creditor other than 
the USDA;
    (k) Payment of costs for minor real estate repairs or improvements, 
not to exceed $15,000 per year.


Sec. 764.252  Eligibility requirements.

    The applicant:
    (a) Must comply with the general eligibility requirements 
established at Sec. 764.101.
    (b) And anyone who will sign the promissory note, except as 
provided in paragraph (c) of this section, must not have caused the 
Agency a loss by receiving debt forgiveness on all or a portion of any 
direct or guaranteed loan made under the authority of the CONACT by 
debt write-down or write-off; compromise, adjustment, reduction, or 
charge-off under the provision of section 331 of the CONACT; discharge 
in bankruptcy; or through payment of a guaranteed loss claim under the 
same circumstances.
    (c) And anyone who will sign the promissory note may receive direct 
OL loans to pay annual farm operating and family living expenses, 
provided that the applicant meets all other eligibility requirements, 
if the applicant:
    (1) Received a write-down under section 353 of the CONACT;
    (2) Is current on payments under a confirmed reorganization plan 
under Chapter 11, 12, or 13 of Title 11 of the United States Code; or
    (3) Received debt forgiveness on not more than one occasion after 
April 4, 1996, resulting directly and primarily from a Presidentially-
designated emergency for the county in which the applicant operates. 
Only applicants who were current on all existing direct and guaranteed 
FLP loans prior to the beginning date of the incidence period of a 
Presidentially-designated emergency and received debt forgiveness on 
that debt within three years after the designation of such emergency 
meet this exception.
    (d) And anyone who will sign the promissory note, may close an OL 
loan in no more than seven calendar years, either as an individual or 
as a member of an entity, except as provided in paragraph (e) of this 
section. The years may be consecutive or non-consecutive, and there is 
no limit on the number of loans closed in a year. Youth loans are not 
counted toward this limitation.
    (e) And anyone who will sign the note who has closed direct OL 
loans in four or more previous calendar years as of April 4, 1996, is 
eligible to close direct OL loans in any three additional years after 
that date.
    (f) On a case-by-case basis, may request a one-time waiver of OL 
term limits for a period of two years, not subject to administrative 
appeal, if the applicant:
    (1) Has a financially viable operation;
    (2) Applied for commercial credit from at least two lenders;
    (3) Was unable to obtain a commercial loan, including an Agency-
guaranteed loan; and
    (4) Has successfully completed, or will complete within one year, 
borrower training. Previous waivers to the borrower training 
requirements are not applicable under this paragraph.
    (g) Whose land is subject to the jurisdiction of an Indian tribe 
and their loan is secured by one or more security instruments subject 
to the jurisdiction of an Indian tribe may request a waiver of OL term 
limits, provided that other credit is not available at reasonable rates 
and terms.


Sec. 764.253  Limitations.

    The applicant must comply with the general limitations established 
at Sec. 764.102.


Sec. 764.254  Rates and terms.

    (a) Rates. (1) The interest rate is the Agency's Direct Operating 
Loan rate, available in each Agency office;
    (2) The limited resource Operating Loan interest rate is available 
to applicants who are unable to develop a feasible plan at regular 
interest rates.
    (b) Terms. (1) The Agency schedules repayment of annual OL loans 
made for essential family living and farm operating expenses when 
planned income is projected to be available, but not to exceed 18 
months from the date of the note.
    (2) The Agency schedules the repayment of all other OL loans based 
on the applicant's ability to repay and the useful life of the 
security. In no event will the term of the loan exceed seven years from 
the date of the note.


Sec. 764.255  Security requirements.

    An OL loan must be secured:
    (a) In accordance with sections 764.103 through 764.106.

[[Page 6084]]

    (b) By all property or products acquired, produced, or refinanced 
with loan funds.


Sec.Sec. 764.256-764.300  [Reserved]

Subpart G--Youth Loan Program


Sec. 764.301  Youth loan uses.

    Youth loan funds may only be used to finance a modest, income-
producing, agriculture-related, educational project while participating 
in 4-H, FFA, or a similar organization.


Sec. 764.302  Eligibility requirements.

    The applicant must:
    (a) Comply with the general eligibility requirements established in 
section 764.101, paragraphs (a) through (g);
    (b) Be at least 10 but not yet 21 years of age at the time the loan 
is closed;
    (c) Reside in a rural area or any city or town with a population of 
50,000 or fewer people;
    (d) Be recommended and continuously supervised by a project 
advisor, such as a 4-H Club advisor, a vocational teacher, home 
economics teacher, county extension agent, or other agriculture-related 
organizational sponsor; and
    (e) Obtain a written recommendation and consent from a parent or 
guardian if an applicant has not reached the age of majority under 
state law.


Sec. 764.303  Limitations.

    (a) The applicant must comply with the general limitations 
established at Sec. 764.102(b).
    (b) The total principal balance owed by the applicant to the Agency 
on all Youth loans at any one time cannot exceed $5,000.


Sec. 764.304  Rates and terms.

    (a) Rates. (1) The interest rate is the Agency's Direct Operating 
Loan rate, available in each Agency office.
    (2) The limited resource Operating Loan interest rate is not 
available for Youth loans.
    (b) Terms. Youth loan terms are the same as for an OL established 
at Sec. 764.254(b).


Sec. 764.305  Security requirements.

    A first lien will be obtained on property or products acquired or 
produced with loan funds.


Sec.Sec. 764.306-764.350  [Reserved]

Subpart H--Emergency Loan Program


Sec. 764.351  Emergency loan uses.

    (a) Physical losses. (1) Real estate losses. EM loan funds for real 
estate physical losses may only be used to repair or replace property 
damaged or destroyed as a result of a disaster as follows:
    (i) For any FO purpose, as specified in Sec. 764.151, except 
paragraph (e) of that section;
    (ii) To establish a new site for farm dwelling and service 
buildings outside of a flood or mudslide area; and
    (iii) To replace land from the farm that was sold or conveyed, if 
such land is necessary for the farming operation to be effective.
    (2) Chattel losses. EM loan funds for chattel physical losses may 
only be used to repair or replace property damaged or destroyed as a 
result of a disaster as follows:
    (i) Purchase livestock, farm equipment, quotas and bases, and 
cooperative stock for credit, production, processing, or marketing 
purposes;
    (ii) Pay customary costs associated with obtaining and closing a 
loan that an applicant cannot pay from other sources;
    (iii) Repair or replace essential household contents damaged in the 
disaster;
    (iv) Pay the costs to restore perennials, which produce an 
agricultural commodity, to the stage of development the damaged 
perennials had obtained prior to the disaster;
    (v) Pay essential family household expenses, in the case of a 
farming operation that has suffered livestock losses or losses to 
stored crops held for sale; and
    (vi) Refinance farm-related debts other than real estate to improve 
farm profitability, if the applicant has refinanced direct or 
guaranteed loans four times or fewer and one of the following 
conditions is met:
    (A) A designated or declared disaster caused the need for 
refinancing; or
    (B) The debts to be refinanced are owed to a creditor other than 
the USDA.
    (b) Production losses. EM loan funds for production of agricultural 
commodities (except the losses associated with the loss of livestock) 
may be used to:
    (1) Pay costs associated with reorganizing the farm to improve its 
profitability;
    (2) Pay annual operating expenses, which include but are not 
limited to, feed, seed, fertilizer, pesticides, farm supplies, and cash 
rent;
    (3) Payment of costs associated with Federal or State-approved 
standards under the Occupational Safety and Health Act of 1970 (29 
U.S.C. 655 and 667) if the applicant can show that compliance or non-
compliance with the standards will cause substantial economic injury;
    (4) Pay borrower training costs required or recommended by the 
Agency;
    (5) Pay essential family household expenses;
    (6) Refinance farm-related debts other than real estate to improve 
farm profitability, if the applicant has refinanced direct or 
guaranteed loans four times or fewer and one of the following 
conditions is met:
    (i) A designated or declared disaster caused the need for 
refinancing; or
    (ii) The debts to be refinanced are owed to a creditor other than 
the USDA; and
    (7) Replace lost working capital.


Sec. 764.352  Eligibility requirements.

    (a) Eligibility requirements. The applicant:
    (1) Must comply with the general eligibility requirements 
established at Sec. 764.101;
    (2) Must be an established farmer;
    (3) Must be the owner and operator, or operator as follows:
    (i) For a loan made under Sec. 764.351(a)(1), must be:
    (A) The owner and operator of the farm at the time of the disaster; 
or
    (B) The operator of the farm at the time of the disaster whose 
lease on the affected real estate exceeds the term of the loan. The 
operator will provide prior notification to the Agency if the lease is 
proposed to terminate during the term of the loan. The lessor will 
provide the Agency a mortgage on the real estate as security for the 
loan; and
    (ii) For a loan made under Sec. 764.351(a)(2) or (b), must be the 
operator of the farm at the time of the disaster.
    (4) In the case of an entity:
    (i) If the owners holding a majority interest in the entity 
applicant are related by blood or marriage, at least one of such 
related owners must operate the farm; or
    (ii) If the owners holding a majority interest in the entity 
applicant are not related by blood or marriage, the majority interest 
holders must all operate the farm; and
    (iii) If the entity applicant has an owner-operator or operator 
interest in any other farming operation, that farming operation must 
not be larger than a family farm;
    (5) Must demonstrate the intent to continue the farm operation 
after the designated or declared disaster;
    (6) Must be unable to obtain sufficient credit elsewhere at 
reasonable rates and terms. To establish this, the applicant must 
obtain written declinations of credit, specifying the reasons for 
declination, from legally organized

[[Page 6085]]

commercial lending institutions within reasonable proximity of the 
applicant as follows:
    (i) In the case of a loan in excess of $300,000, two written 
declinations of credit are required;
    (ii) In the case of a loan of less than $300,000, one written 
declination of credit is required; and
    (iii) In the case of a loan of $100,000 or less, the Agency may 
waive the requirement for obtaining a written declination of credit, if 
the Agency determines that it would pose an undue burden on the 
applicant, the applicant certifies that they cannot get credit 
elsewhere, and based on the applicant's circumstances credit is not 
likely to be available;
    (7) And any entity member must not have received debt forgiveness 
from the Agency on more than one occasion before April 4, 1996, or any 
time on or after April 4, 1996.
    (b) Additional EM loan eligibility requirements. (1) An EM loan 
application must be received by the Agency not later than eight months 
after the date the designated or declared disaster occurred in the 
county of the applicant's farming operation.
    (2) For production loss loans, an applicant must have a disaster 
yield that is at least 30 percent below the normal production yield of 
the crop, as determined by the Agency, that comprises a basic part of 
an applicant's total farming operation.
    (3) For physical loss loans, an applicant must have suffered 
disaster-related damage to chattel or real estate essential to the 
farming operation, or to household items that must be repaired or 
replaced.
    (4) If the ownership structure of a family farm changes between the 
time of a qualifying loss and the time an EM loan is closed, all of the 
following requirements must be met:
    (i) The applicant, in the new form, including all owners must meet 
all of the eligibility requirements;
    (ii) The new individual applicant, or all owners of a new entity 
applicant, must have had an ownership interest in the farming operation 
at the time of the disaster; and
    (iii) The amount of the loan will be based on the percentage of the 
former farming operation transferred to the new applicant and in no 
event will the individual portions aggregated equal more than would 
have been authorized for the former farming operation.


Sec. 764.353  Limitations.

    (a) EM loans must comply with the general limitations established 
at Sec. 764.102.
    (b) EM loans may not exceed the lesser of:
    (1) The amount of credit necessary to restore the farming operation 
to its pre-disaster condition;
    (2) In the case of a physical loss loan, the total eligible 
physical losses caused by the disaster; or
    (3) In the case of a production loss loan, 100 percent of the total 
actual production loss sustained by the applicant as calculated in 
paragraph (d) of this section.
    (c) For production loss loans, the applicant's actual crop 
production loss will be calculated as follows:
    (1) Subtract the disaster yield from the normal yield to determine 
the per acre production loss;
    (2) Multiply the per acre production loss by the number of acres of 
the farming operation devoted to the crop to determine the volume of 
the production loss;
    (3) Multiply the volume of the production loss by the market price 
for such crop as determined by the Agency to determine the dollar value 
for the production loss; and
    (4) Subtract any other disaster related compensation received by 
the applicant for the production loss.
    (d) For a physical loss loan, the applicant's total eligible 
physical losses will be calculated as follows:
    (1) Add the allowable costs associated with replacing or repairing 
chattel covered by hazard insurance (excluding labor, machinery, 
equipment, or materials contributed by the applicant to repair or 
replace chattel);
    (2) Add the allowable costs associated with repairing or replacing 
real estate, covered by hazard insurance;
    (3) Add the value of replacement livestock for which the applicant 
provided:
    (i) Written documentation of inventory on hand immediately 
preceding the loss;
    (ii) Records of livestock product sales sufficient to allow the 
Agency to establish a value;
    (4) Add the allowable costs to restore perennials to the stage of 
development the damaged perennials had obtained prior to the disaster;
    (5) Add, in the case of an individual applicant, the allowable 
costs associated with repairing or replacing essential household 
contents, not to exceed $20,000; and
    (6) Subtract any other disaster related compensation received by 
the applicant for the loss or damage to the chattel or real estate.
    (e) EM loan funds may not be used for physical loss purposes unless 
that physical property was covered by general hazard insurance at the 
time that the damage caused by the natural disaster occurred. The level 
of the coverage in effect at the time of the disaster must have been 
the tax or cost depreciated value, whichever is less. Chattel property 
must have been covered at the tax or cost depreciated value, whichever 
is less, when such insurance was readily available and the benefit of 
the coverage was greater than the cost of the insurance.
    (f) EM loan funds may not be used to refinance consumer debt, such 
as automobile loans, or credit card debt unless such credit card debt 
is directly attributable to the farming operation.


Sec. 764.354  Rates and terms.

    (a) Rates. The interest rate is the Agency's Emergency Loan Actual 
Loss rate, available in each Agency office.
    (b) Terms. (1) The Agency schedules repayment of EM loans based on 
the useful life of the loan security, the applicant's repayment 
ability, and the type of loss.
    (2) The repayment schedule must include at least one payment every 
year.
    (3) EM loans for annual operating expenses must be repaid within 12 
months. The Agency may extend this term to not more than 18 months to 
accommodate the production cycle of the agricultural commodities.
    (4) EM loans for production losses or physical losses to chattel 
(including but not limited to assets with an expected life between one 
and seven years) may not exceed seven years. The Agency may extend this 
term up to a total length not to exceed 20 years, if necessary to 
improve the applicant's repayment ability and real estate security is 
available.
    (5) The repayment schedule for EM loans for physical losses to real 
estate is based on the applicant's repayment ability and the useful 
life of the security, but in no case will the term exceed 40 years.


Sec. 764.355  Security requirements.

    (a) EM loans made under Sec. 764.351(a)(1) must comply with the 
general security requirements established at Sec.Sec. 764.103, 764.104 
and 764.155(b).
    (b) EM loans made under Sec. 764.351(a)(2) and (b) must comply with 
the general security requirements established at Sec.Sec. 764.103, 
764.104 and 764.255(b).
    (c) When adequate security is not available because of the 
disaster, the loan may be approved if the Agency determines, based on 
an otherwise feasible plan, there is a reasonable

[[Page 6086]]

assurance that the applicant has the ability to repay the loan 
provided:
    (1) The applicant has pledged as security for the loan, all 
available personal and business security, except as provided in Sec. 
764.106;
    (2) The farm plan, approved by the Agency, indicates the loan will 
be repaid based upon the applicant's production and income history; 
addresses applicable pricing risks through the use of marketing 
contracts, hedging, or options and includes a marketing plan or similar 
risk management practice; and
    (3) The applicant has had positive net cash farm income in at least 
3 of the past 5 years.
    (d) For loans over $25,000, title clearance is required when real 
estate is taken as security.
    (e) For loans of $25,000 or less, when real estate is taken as 
security, a certification of ownership in real estate is required. 
Certification of ownership may be in the form of an affidavit which is 
signed by the applicant, names the record owner of the real estate in 
question and lists the balances due on all known debts against the real 
estate. Whenever the loan approving official is uncertain of the record 
owner or debts against the real estate security, a title search is 
required.


Sec. 764.356  Appraisal and valuation requirements.

    (a) In the case of physical losses associated with livestock, the 
applicant must have written documentation of the inventory of livestock 
and records of livestock product sales sufficient to allow the Agency 
to value such livestock or livestock products just prior to the loss.
    (b) In the case of farm assets damaged by the disaster, the value 
of such security shall be established as of the day before the disaster 
occurred.


Sec.Sec. 764.357-764.400  [Reserved]

Subpart I--Loan Decision and Closing


Sec. 764.401  Loan decision.

    (a) Loan approval. (1) The Agency will approve a loan only if it 
determines that:
    (i) The applicant's operating plan reflects a feasible plan, which 
includes repayment of the proposed loan and demonstrates that all other 
credit needs can be met;
    (ii) The proposed use of loan funds is authorized for the type of 
loan requested;
    (iii) The applicant has been determined eligible for the type of 
loan requested;
    (iv) All security requirements for the type of loan requested have 
been, or will be met before the loan is closed;
    (v) The applicant's total indebtedness to the Agency, including the 
proposed loan, will not exceed the maximum limits established in Sec. 
761.8 of this chapter;
    (vi) There have been no significant changes in the plan of 
operation or the applicant's financial condition since the time the 
Agency received a complete application; and
    (vii) All other pertinent requirements have been, or will be met 
before the loan is closed.
    (2) The Agency will place conditions upon loan approval it 
determines necessary to protect its interest and maximize the 
applicant's potential for success.
    (b) Loan denial. The Agency will not approve a loan if it 
determines that:
    (1) The applicant's operating plan does not reflect a feasible 
plan;
    (2) The proposed use of loan funds is not authorized for the type 
of loan requested;
    (3) The applicant does not meet the eligibility requirements for 
the type of loan requested;
    (4) There is inadequate security for the type of loan requested;
    (5) Approval of the loan would cause the applicant's total 
indebtedness to the Agency to exceed the maximum limits established in 
Sec. 761.8;
    (6) The applicant's circumstances may not permit continuous 
operation and management of the farm; or
    (7) The applicant, the applicant's operation, or other 
circumstances surrounding the loan are inconsistent with the 
authorizing statutes, other Federal laws, or Federal credit policies.
    (c) Overturn of an Agency decision by appeal. If an Agency loan 
denial is overturned on administrative appeal, the Agency will not 
automatically approve the loan. Unless prohibited by the final appeal 
determination, the Agency will:
    (1) Request current financial information from the applicant as 
necessary to determine whether any changes in the applicant's financial 
condition or agricultural conditions which occurred after the Agency's 
adverse decision was made will adversely affect the applicant's 
operation;
    (2) Approve a loan for crop production only if the Agency can 
determine that the applicant will be able to produce a crop in the 
production cycle for which the loan is requested;
    (3) The applicant's operating plan, as modified based on the appeal 
decision, reflects a feasible plan, which includes repayment of the 
proposed loan and demonstrates that all other credit needs can be met.


Sec. 764.402  Loan closing.

    (a) General. (1) Signatures on loan documents are required as 
follows:
    (i) For individual applicants, only the applicant is required to 
sign the promissory note.
    (ii) For entity applicants, the promissory note will be executed to 
evidence the liability of the entity and the individual liability of 
all members of the entity.
    (iii) Despite minority status, a youth executing a promissory note 
for a Youth loan will incur full personal liability for the debt.
    (iv) A cosigner will be required to sign the promissory note only 
when the applicant cannot meet the repayment requirements for the loan 
requested.
    (v) All signatures needed for the Agency to acquire the required 
security interests will be obtained according to State law.
    (2) Loan funds will be made available to the applicant within 15 
days of loan approval, subject to the availability of funding.
    (3) If the loan is not closed within 90 days of loan approval or if 
the applicant's financial condition changes significantly, the Agency 
must reconfirm the requirements for loan approval prior to loan 
closing. The applicant may be required to provide updated information 
in order for the Agency to reconfirm approval and proceed with loan 
closing.
    (b) Real estate-secured loans. The Agency will close a real estate 
loan only when it determines that the Agency requirements for the loan 
have been satisfied and when the closing agent can issue a policy of 
title insurance or final title opinion as of the date of closing. The 
title insurance or final title opinion must show title vested as 
required by the Agency, the lien of the Agency's security instrument in 
the priority required by the Agency, and title to the security 
property, subject only to those exceptions approved in writing by the 
Agency.
    (1) The Agency must approve agents who will close Agency loans. In 
order to be approved, closing agents must meet all of the following 
requirements to the Agency's satisfaction:
    (i) Be licensed in the state where the loan will be closed;
    (ii) Not be debarred or suspended from participating in any Federal 
programs;
    (iii) Maintain liability insurance;
    (iv) Have a fidelity bond which covers all employees with access to 
loan funds;

[[Page 6087]]

    (v) Have current knowledge of the requirements of State law in 
connection with the loan closing and title clearance;
    (vi) Not represent both the buyer and seller in the transaction;
    (vii) Not be related as a family member or business associate with 
the applicant; and
    (viii) Act promptly to provide required services.
    (2) Except as provided in Sec. 764.355 for EM loans, title 
clearance and legal services are required for all loans and may be 
completed by the Agency or an approved agent. This requirement may be 
waived:
    (i) For loans of $10,000 or less;
    (ii) When the real estate is considered additional security by the 
Agency; or
    (iii) When the real estate is a non-essential asset.
    (c) Chattel-secured loans. The following requirements apply to 
loans secured by chattel:
    (1) The Agency will not close a loan secured by chattels until it 
is satisfied that the loan has been secured;
    (2) The Agency requires a financing statement for every loan except 
when a filed financing statement covering the applicant's property is 
still effective, covers all types of chattel property that will serve 
as security for the loan, describes the land on which crops and 
fixtures are or will be located, and complies with the law of the 
jurisdiction where filed;
    (3) The Agency requires a new security agreement for all new loans 
prior to the disbursement of loan funds.
    (d) Payment of fees. The applicant, or in the case of a real estate 
purchase, the applicant and seller, must pay all filing, recording, 
notary, lien search, and any other fees necessary to process and close 
a loan.
    (e) Disbursement of funds. The Agency or closing agent will be 
responsible for disbursing loan funds. The Agency may require a 
supervised bank account in accordance with subpart B of part 761 of 
this chapter or disburse funds directly to the applicant.


Sec.Sec. 764.403-764.450  [Reserved]

Subpart J--Borrower Training and Training Vendor Requirements


Sec. 764.451  Purpose.

    The purpose of production and financial management training is to 
help a direct loan borrower develop and improve skills necessary to:
    (a) Successfully operate a farm;
    (b) Build equity in the farm business; and
    (c) Become financially successful and prepared to graduate from 
Agency financing to commercial sources of credit.


Sec. 764.452  Borrower training requirements.

    (a) The Agency will require a loan applicant to agree to complete 
production and financial management training, unless the Agency 
provides a waiver in accordance with Sec. 764.453, or the borrower has 
previously satisfied the training requirements. In the case of an 
entity borrower:
    (1) The Agency will require any individual member holding a 
majority interest in the entity or who is operating the farm to 
complete training on behalf of the entity, except as provided in 
paragraph (a)(2) of this section;
    (2) If one entity member is solely responsible for financial or 
production management, then only that member will be required to 
complete training.
    (b) When the Agency determines that production training is 
required, a borrower must agree to complete course work covering 
production management in each crop or livestock enterprise that the 
Agency determines necessary.
    (c) When the Agency determines that financial management training 
is required, a borrower must agree to complete course work covering all 
aspects of farm accounting and integrating accounting elements into a 
financial management system.
    (d) The Agency will require a borrower who applies for a loan to 
finance a new enterprise, such as a new crop or a new type of 
livestock, to agree to complete production training with regard to that 
enterprise, even if production training requirements were waived or 
satisfied under a previous loan request, unless the Agency provides a 
waiver in accordance with Sec. 764.453.
    (e) If a waiver is granted, the Agency will require borrower 
training as a condition for future loans if Agency supervision provided 
in 7 CFR 761 subpart C, reflects that such training is needed.
    (f) The Agency cannot reject a request for a direct loan based 
solely on a loan applicant's or borrower's need for training.
    (g) Any notification of required training or waiver of training 
must be in writing.


Sec. 764.453  Agency waiver of training requirements.

    (a) The applicant must request the waiver in writing.
    (b) The Agency will grant a waiver for training in production, 
financial management, or both, under the following conditions:
    (1) The applicant submits evidence of successful completion of a 
course similar to a course approved under section Sec. 764.457 and 
additional training is not needed; or
    (2) The applicant submits evidence which demonstrates to the 
Agency's satisfaction the experience and training necessary for a 
successful and efficient operation.
    (c) If the production and financial functions of the farming 
operation are shared among individuals, the Agency will consider the 
collective knowledge and skills of the individuals when determining 
whether to waive training requirements.


Sec. 764.454  Actions that a borrower must take when training is 
required.

    (a) Deadline for completion of training. (1) If the Agency requires 
a borrower to complete training, at loan closing the borrower must 
agree in writing to complete all required training within two years.
    (2) The Agency will grant a one-year extension to complete training 
if the borrower is unable to complete training within the two-year 
period due to circumstances beyond the borrower's control.
    (3) The Agency will grant an extension longer than one year for 
extraordinary circumstances as determined by the Agency.
    (4) A borrower who does not complete the required training within 
the specified time period will be ineligible for additional direct FLP 
loans.
    (b) Arranging training with a vendor. The borrower must select and 
contact an Agency approved vendor and make all arrangements to begin 
training.
    (c) Payment of training fees. (1) A borrower is responsible for the 
cost of training and must include training fees in the farm operating 
plan as a farm operating expense.
    (2) A borrower's payment of training fees is an authorized use of 
OL funds.
    (3) The Agency is not a party to fee or other agreements between 
the borrower and vendor.
    (d) Borrower evaluation of a vendor. Upon completion of the 
required training, the borrower will complete an evaluation of the 
course and submit it to the vendor. The vendor will forward completed 
evaluation forms to the Agency for consideration.


Sec. 764.455  Potential training vendors.

    The Agency will contract for training services with State or 
private providers of production and financial management training 
services.


Sec. 764.456  Applying to be a vendor.

    (a) A vendor for borrower training services must apply to the 
Agency for approval.

[[Page 6088]]

    (b) The vendor application must include:
    (1) A sample of the course materials and a description of the 
vendor's training methods;
    (2) Specific training objectives for each section of the course;
    (3) A detailed course agenda specifying the topics to be covered, 
the time devoted to each topic, and the number of sessions to be 
attended;
    (4) A list of instructors and their qualifications;
    (5) The criteria by which additional instructors will be selected;
    (6) The proposed locations where training will take place;
    (7) The cost per participant and the cost per organization;
    (8) The minimum and maximum class size;
    (9) A description of the vendor's experience in developing and 
administering training to farmers;
    (10) A description of the monitoring and quality control methods 
the vendor will use;
    (11) A description of the policy on allowing Agency employees to 
attend the course for monitoring purposes;
    (12) A description of how the needs of borrowers with physical or 
mental disabilities or learning disabilities will be met; and
    (13) A plan of how the needs of borrowers who do not speak English 
as their primary language will be met.


Sec. 764.457  Vendor requirements.

    Vendors must meet the following requirements.
    (a) Minimum experience. The vendor must demonstrate a minimum of 
three years of experience in conducting training courses or teaching 
the subject matter.
    (b) Training objectives. The courses provided by a vendor must 
enable the borrower to accomplish one or more of the following 
objectives:
    (1) Describe the specific goals of the business, any changes 
required to attain the goals, and outline how these changes will occur 
using present and projected business budgets;
    (2) Maintain and use a financial management information system to 
make financial decisions;
    (3) Understand and use an income statement;
    (4) Understand and use a balance sheet;
    (5) Understand and use a cash flow budget; and
    (6) Use production records and other production information to 
identify problems, evaluate alternatives, and correct current 
production practices to improve efficiency and profitability.
    (c) Curriculum. At least one of the following subjects must be 
covered:
    (1) Business planning courses, covering general goal setting, risk 
management, and planning.
    (2) Financial management courses, covering all aspects of farm 
accounting and focusing on integrating accounting elements into a 
financial management system.
    (3) Crop and livestock production courses focusing on improving the 
profitability of the farm.
    (d) Instructor qualifications. All instructors must have:
    (1) Sufficient knowledge of the material and experience in adult 
education;
    (2) A bachelor's degree or comparable experience in the subject 
area to be taught; and
    (3) A minimum of three years experience in conducting training 
courses or teaching.


Sec. 764.458  Vendor approval.

    (a) Agreement to conduct training. (1) Upon approval, the vendor 
must sign an agreement to conduct training for the Agency's borrowers.
    (2) The agreement to conduct training is valid for three years.
    (3) Any changes in curriculum, instructor, or cost require prior 
approval by the Agency.
    (4) The vendor may revoke the agreement by giving a written 30-day 
notice.
    (5) The Agency may revoke the agreement if the vendor does not 
comply with the responsibilities listed in the agreement by giving a 
written 30-day notice.
    (b) Renewal of agreement to conduct training. (1) To renew an 
agreement to conduct training, a vendor must submit in writing to the 
Agency:
    (i) A request to renew the agreement;
    (ii) Any changes in curricula, instructor, or cost; and
    (iii) Documentation that the vendor is providing effective 
training.
    (2) The Agency will review renewal requests in accordance with Sec. 
764.457.


Sec. 764.459  Evaluation of borrower progress.

    (a) The vendor must provide the Agency with a periodic progress 
report for each borrower enrolled in training in accordance with the 
agreement to complete training. The reports will indicate whether the 
borrower is attending sessions, completing the training program, and 
demonstrating an understanding of the course material.
    (b) Upon borrower completion of the training, the vendor must 
provide the Agency with an evaluation of the borrower's knowledge of 
the course material and assign a score. The following table lists the 
possible scores, the criteria used to assign each score, and Agency 
consideration of each score:

------------------------------------------------------------------------
 Score      Criteria used to determine score      Agency consideration
------------------------------------------------------------------------
     1   If the borrower:                       Training requirement
                                                 associated with course
                                                 is complete.
             Attended
             classroom sessions as agreed,
             Satisfactorily
             completed all assignments, and
             Demonstrated an
             understanding of the course
             material.
     2   If the borrower:                       Training requirement
          Attended classroom   associated with course
          sessions as agreed, and                is complete.
          Attempted to        Additional Agency
          complete all assignments, but          supervision may be
          Does not             necessary.
          demonstrate an understanding of the
          course material.
     3   If the borrower did not:               Training requirement
          Attend classroom     associated with course
          sessions as agreed, or                 is not complete.
          Attempt to          The borrower is
          complete assignments, or               ineligible for future
          Otherwise make a     direct loans.
          good faith effort to complete the
          training.
------------------------------------------------------------------------

Sec.Sec. 764.460-764.500  [Reserved]

    13. Add part 765 to read as follows:

PART 765--DIRECT LOAN SERVICING--REGULAR

Sec.
Subpart A--Overview
765.1 Introduction to Direct Loan Servicing--Regular.
765.2 Abbreviations and definitions.

[[Page 6089]]

765.3-765.50 [Reserved]
Subpart B--Borrowers with Limited Resource Interest Rate Loans
765.51 Annual review.
765.52-765.100 [Reserved]
Subpart C--Borrower Graduation
765.101 Borrower graduation requirements.
765.102 Borrower noncompliance with graduation requirements.
765.103-765.150 [Reserved]
Subpart D--Borrower Payments
765.151 Handling payments.
765.152 Types of payments.
765.153 Application of payments.
765.154 Distribution of payments.
765.155 Final loan payments.
765.156-765.200 [Reserved]
Subpart E--Protecting the Agency's Security Interest
765.201 General policy.
765.202 Borrower responsibilities.
765.203 Protective advances.
765.204 Notifying potential purchasers.
765.205 Subordination of liens.
765.206 Junior liens.
765.207 Conditions for severance agreements.
765.208-765.250 [Reserved]
Subpart F--Required Use and Operation of Agency Security
765.251 General.
765.252 Lease of security.
765.253 Operating security.
765.254-765.300 [Reserved]
Subpart G--Disposal of Chattel Security
765.301 General.
765.302 Use and maintenance of agreement of use of proceeds.
765.303 Use of proceeds from chattel security.
765.304 Unapproved disposition.
765.305 Release of security interest.
765.306-765.350 [Reserved]
Subpart H--Partial Release of Real Estate Security
765.351 Requirements to obtain Agency consent.
765.352 Use of proceeds.
765.353 Determining market value.
765.354-765.400 [Reserved]
Subpart I--Transfer of Security and Assumption of Debt
765.401 Conditions for transfer of real estate and chattel security.
765.402 Transfer of security and loan assumption on same rates and 
terms.
765.403 Transfer of security to and assumption of debt by eligible 
borrowers.
765.404 Transfer of security to and assumption of debt by ineligible 
borrowers.
765.405 Payment of costs associated with transfers.
765.406 Release of transferor from liability.
765.407-765.450 [Reserved]
Subpart J--Deceased Borrowers
765.451 Continuation of FLP debt and transfer of security.
765.452 Borrowers with Non-program loans.
765.453-765.500 [Reserved]
Subpart K--Exception Authority
765.501 Agency exception authority.
765.502-765.550 [Reserved]

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

Subpart A--Overview


Sec. 765.1  Introduction to Direct Loan Servicing--Regular.

    (a) Purpose. This part describes the general policies for servicing 
FLP direct loans, except for borrowers who are delinquent, financially 
distressed, or otherwise in default on their loan.
    (b) Servicing actions described in this part. Servicing actions 
described in this part include:
    (1) Limited resource reviews;
    (2) Graduation to commercial credit;
    (3) Application of payments;
    (4) Maintaining and disposing of security;
    (5) Transfer of security and assumption of debt; and
    (6) Servicing accounts of deceased borrowers.
    (c) Loans covered. The Agency services FLP direct loans under the 
policies contained in this part. This part is not applicable to Non-
program loans, except where noted.


Sec. 765.2  Abbreviations and definitions.

    Abbreviations and definitions for terms used in this part are 
provided in Sec. 761.2 of this chapter.


Sec.Sec. 765.3--765.50  [Reserved]

Subpart B--Borrower With Limited Resource Interest Rate Loans


Sec. 765.51  Annual review.

    (a) A borrower with limited resource interest rate loans is 
required to provide the Agency annually the operation's financial 
information to determine if the borrower can afford to pay a higher 
interest rate on the loan. The Agency will review the information in 
accordance with Sec. 761.104 of this chapter.
    (b) If the borrower's operating plan shows that the debt service 
margin exceeds 110 percent, the Agency will increase the interest rate 
on the loans with limited resource interest rate until:
    (1) A further increase in the interest rate results in a debt 
service margin of less than 110 percent; or
    (2) The interest rate is equal to the interest rate currently in 
effect for the type of loan.
    (c) Except as provided in paragraph (d) of this section, the Agency 
will increase the limited resource interest rate to the current 
interest rate for the type of loan, if the borrower:
    (1) Purchases items not planned during the term of the loan;
    (2) Refuses to submit information the Agency requests for use in 
reviewing the borrower's financial condition; or
    (3) Ceases farming, as described in Sec. 765.253.
    (d) If the borrower has limited resource interest rate loans that 
are deferred, the Agency will not increase the interest rate pursuant 
to paragraph (b) of this section during the deferral period, except 
under paragraph (c) of this section.


Sec.Sec. 765.52-765.100  [Reserved]

Subpart C--Borrower Graduation


Sec. 765.101  Borrower graduation requirements.

    (a) In accordance with the promissory note and security 
instruments, the borrower must graduate to another source of credit if 
the Agency determines that:
    (1) The borrower has the ability to obtain credit from other 
sources; and
    (2) Adequate credit is available from other sources at reasonable 
rates and terms.
    (b) The Agency may require partial or full graduation.
    (1) In a partial graduation, all FLP loans of one type (i.e. all 
chattel loans or all real estate loans) must be paid in full by 
refinancing with other credit with or without an Agency guarantee.
    (2) In a full graduation, all FLP loans are paid in full by 
refinancing with other credit with or without an Agency guarantee.
    (3) A loan made for chattel and real estate purposes will be 
categorized according to how the majority of the loan's funds are 
expended.
    (c) The borrower must submit all information that the Agency 
requests in conjunction with the review of the borrower's financial 
condition in accordance with Sec. 761.102.
    (d) The Agency may provide a borrower's prospectus to lenders in an 
attempt to identify sources of non-Agency credit and assess the 
lenders' interest in refinancing the borrower's loan.
    (e) If a lender expresses an interest in refinancing the borrower's 
FLP loan, the borrower must:
    (1) Apply for a loan from the interested lender within 30 days of 
notice; or
    (2) Seek guaranteed loan assistance under the market placement 
program in accordance with Sec. 762.110(g) of this chapter.
    (f) The borrower will be responsible for any application fees or 
purchase of stock in conjunction with graduation.

[[Page 6090]]

Sec. 765.102  Borrower noncompliance with graduation requirements.

    Borrower failure to fulfill all graduation requirements within the 
time period specified by the Agency constitutes default on the loan. 
The Agency will accelerate the borrower's loan without offering 
servicing options provided under 7 CFR 766.


Sec.Sec. 765.103-765.150  [Reserved]

Subpart D--Borrower Payments


Sec. 765.151  Handling payments.

    (a) Borrower payments. Borrowers must submit their loan payments in 
a form acceptable to the Agency, such as checks, cash, and money 
orders. Forms of payment not acceptable to the Agency include, but are 
not limited to, foreign currency, foreign checks, and sight drafts.
    (b) Crediting account. The Agency credits a borrower's account as 
of the date the Agency receives payment.


Sec. 765.152  Types of payments.

    (a) Regular payments. Regular payments are derived from, but are 
not limited to:
    (1) The sale of normal income security;
    (2) The sale of farm products;
    (3) Lease income, including mineral lease signing bonus;
    (4) Program or disaster-related disbursements from USDA or crop 
insurance entities; and
    (5) Non-farm income.
    (b) Extra payments. Extra payments are derived from any of the 
following:
    (1) Sale of chattel security other than normal income security;
    (2) Sale of real estate security;
    (3) Refinancing of Agency debt;
    (4) Cash proceeds of insurance claims received on Agency 
collateral, if not being used to repair or replace security items;
    (5) Any transaction that results in a loss in the value of any 
Agency basic security;
    (6) Refunds of duplicate disaster program benefits to be applied on 
an EM loan; or
    (7) Refunds of unused loan funds.
    (c) Payments from sale of real estate. Notwithstanding any other 
provision of this section, payments derived from the sale of real 
estate security will be treated as regular payments at the Agency's 
discretion, if the Agency loans will be adequately secured after the 
transaction.


Sec. 765.153  Application of payments.

    (a) Regular payments. A regular payment is credited to a scheduled 
installment on Agency FLP direct and Non-program loans. Regular 
payments are applied to FLP loans in the following order:
    (1) Annual operating loan;
    (2) Delinquent FLP installments, paying FLP least secured loans 
first;
    (3) Non-delinquent FLP installments due in the current operating 
cycle in order of security priority, paying least secured loans first;
    (4) Any future installments due.
    (b) Extra payments. An extra payment is not credited to a scheduled 
installment and does not relieve the borrower's responsibility to make 
scheduled loan installments, but will reduce the borrower's FLP 
indebtedness. Extra payments are applied to FLP loans in order of lien 
priority.


Sec. 765.154  Distribution of payments.

    The Agency applies both regular and extra payments to each loan in 
the following order, as applicable:
    (a) Administrative costs and protective advances plus interest;
    (b) Deferred non-capitalized interest;
    (c) Accrued deferred interest;
    (d) Interest accrued to date of payment; and
    (e) Loan principal.


Sec. 765.155  Final loan payments.

    (a) General. (1) If the borrower makes a final payment by one of 
the following methods, the Agency may release the borrower's security 
instruments at the time payment is made, unless the Agency has 
reservations regarding the validity of the payment:
    (i) Cash;
    (ii) U.S. Treasury check;
    (iii) Cashier's check; or
    (iv) Certified check.
    (2) Security instruments will only be released when all loans 
secured by the instrument have been paid in full or otherwise 
satisfied.
    (3) The Agency will return the paid note and satisfied security 
instruments to the borrower after the Agency processes the final 
payment and determines that the total indebtedness is paid in full.
    (b) Borrower refunds. If the borrower refunds the entire loan after 
the loan is closed, the borrower must pay interest from the date of the 
note to the date the Agency received the funds.
    (c) Overpayments. If an Agency miscalculation of a final payment 
results in an overpayment by the borrower of less than $10, the 
borrower must request a refund from the Agency in writing. Overpayments 
of $10 or more automatically will be refunded by the Agency.
    (d) Underpayments. If an Agency miscalculation of a final payment 
amount results in an underpayment, the Agency attempts to collect all 
account balances resulting from its error unless the outstanding 
balance is less than $10.
    (1) The Agency may initiate court proceedings to collect the 
balance of a loan if it exceeds $1,000 and the Agency believes that the 
borrower has recoverable assets.
    (2) If the Agency cannot collect an underpayment from the borrower, 
the Agency attempts to settle the debt in accordance with 7 CFR 792.


Sec.Sec. 765.156-765.200  [Reserved]

Subpart E--Protecting the Agency's Security Interest


Sec. 765.201  General policy.

    All Agency servicing actions regarding preservation and protection 
of Agency loan security will be consistent with the covenants and 
agreements contained in all the borrower debt and loan security 
instruments.


Sec. 765.202  Borrower responsibilities.

    The borrower must:
    (a) Comply with all provisions of the loan documents;
    (1) Non-compliance with loan provisions, aside from borrower 
failure to meet scheduled loan repayment installments contained in the 
promissory note, constitutes non-monetary default of FLP loans by the 
borrower;
    (2) Borrower failure to keep agreements will be considered by the 
Agency when making eligibility determinations for future requests for 
assistance and may adversely impact such requests;
    (b) Maintain, protect, and account for all loan security;
    (c) Pay the following, unless State law requires the Agency to pay:
    (1) Fees for executing, filing or recording financing statements, 
continuation statements or other security instruments; and
    (2) The cost of lien search reports;
    (d) Pay taxes on property securing FLP loans when they become due;
    (e) Maintain insurance coverage in an amount specified by the 
Agency;
    (f) Protect the interests of the Government when a third party 
brings suit or takes other action that could affect Agency security.


Sec. 765.203  Protective advances.

    When necessary to protect the Agency's security interest, costs 
incurred for the following actions will be charged to the borrower's 
account:
    (a) Maintain abandoned security property;
    (b) Preserve inadequately maintained security;

[[Page 6091]]

    (c) Pay real estate taxes and assessments;
    (d) Pay property, hazard, or flood insurance;
    (e) Pay harvesting costs;
    (f) Maintain Agency security instruments;
    (g) Pay ground rents;
    (h) Pay expenses for emergency measures to protect the Agency's 
collateral; and
    (i) Protect the Agency from actions by third parties.


Sec. 765.204  Notifying potential purchasers.

    (a) States with a Central Filing System (CFS). The Agency 
participates and complies with central filing operations in States 
where CFS have been organized. In a State with a CFS, the Agency is not 
required to additionally notify potential purchasers that the Agency 
has a lien on a borrower's chattel security, unless specifically 
required by State law.
    (b) States without a CFS. In a State without a CFS, the Agency 
follows the filing requirements specified for perfecting a lien on a 
borrower's chattel security under State law. The Agency will distribute 
the list of chattel and crop borrowers to sale barns, warehouses, and 
other businesses that buy or sell chattels or crops. In addition, the 
Agency may provide the list of borrowers to potential purchasers upon 
request.


Sec. 765.205  Subordination of liens.

    (a) Real estate security. For loans secured by real estate, the 
Agency will approve a request for subordination if all of the following 
conditions are met:
    (1) The borrower is not in default or will not be in default on 
Agency FLP loans by the time the subordination closing is complete;
    (2) The loan will be used for an authorized Agency loan purpose or 
is made in conjunction with a guaranteed loan;
    (3) The credit is essential to the operation and the borrower 
cannot obtain the credit without a subordination;
    (4) The borrower can demonstrate, through a current farm operating 
plan, the ability to repay all debt payments scheduled, and to be 
scheduled, during the operating cycle;
    (5) The Agency loan is still adequately secured after the 
subordination, or the value of the loan security will be increased by 
an amount at least equal to the advance to be made under the 
subordination;
    (6) The borrower is not able to graduate;
    (7) If the borrower is an entity and the Agency has taken real 
estate as additional security on property owned by a member, a 
subordination for any authorized Agency loan purpose may be approved 
when it is needed for the entity member to finance a separate 
operation, provided the subordination does not cause the unpaid 
principal and interest on the Agency loans to exceed the value of loan 
security or otherwise adversely affect the security;
    (8) The borrower has not been convicted under Federal or state law, 
within the last five crop years, of planting, cultivating, growing, 
producing, harvesting, or storing a controlled substance, as defined at 
21 CFR part 1308;
    (9) The borrower will not use loan funds in a way that will 
contribute to erosion of highly erodible land or conversion of wetlands 
to produce agricultural commodities as described in 7 CFR part 799;
    (10) There is no other subordination outstanding in connection with 
the same security;
    (11) The subordination is limited to a specific amount and the loan 
made in conjunction with the subordination will be closed within a 
reasonable time;
    (12) In the case of real property purchase or exchange, the Agency 
will obtain a valid mortgage and the required lien position on the real 
property. The Agency will require title clearance and loan closing for 
the property in compliance with Sec. 764.402 of this chapter;
    (13) Any planned development of real estate security will be 
performed as directed by the creditor, approved by the Agency, and will 
comply with the terms and conditions of Sec. 761.10 of this chapter;
    (14) Subordinations of SAA mortgages may only be approved when 
there is no increase in the debt which is prior to the SAA debt; and
    (15) If a borrower has only a Non-program loan, the Agency does not 
permit subordination. The Agency may subordinate Non-program security 
when it is also security for a program loan with the same borrower.
    (b) Chattel security. (1) For loans secured by chattel, the 
subordination must meet conditions contained in paragraphs (a)(1) 
through (11) of this section.
    (2) The Agency will approve a request for a second subordination to 
enable a borrower to obtain crop insurance, if the following conditions 
are met:
    (i) The creditor to whom the first subordination was given did not 
provide for payment of the current year's crop insurance premium, and 
consents in writing to the provisions of the second subordination to 
pay insurance premiums from the crop or insurance proceeds;
    (ii) The borrower assigns the insurance proceeds to the Agency or 
names the Agency in the loss payable clause of the policy; and
    (iii) The subordination meets the conditions under paragraphs 
(a)(1) through (11) of this section.
    (c) Appraisals. An appraisal of the property that secures the 
Agency loan will be required when the Agency determines it necessary to 
protect its interest. Appraisals will be obtained in accordance with 
Sec. 761.7 of this chapter.


Sec. 765.206  Junior liens.

    (a) General policy. The borrower will not give a lien on Agency 
security without the consent of the Agency. Failure to obtain Agency 
consent will be considered by the Agency when making eligibility 
determinations for future requests for assistance and may adversely 
impact such requests.
    (b) Conditions for consent. The Agency will consent to the terms of 
a junior lien if all of the following conditions are met:
    (1) The borrower's ability to make scheduled loan payments is not 
jeopardized;
    (2) The borrower provides the Agency a copy of the operating plans 
submitted to the junior lienholder, and the plans are consistent with 
the Agency operating plan;
    (3) The total debt against the security does not exceed the 
security's market value;
    (4) The junior lienholder agrees in writing not to foreclose the 
security instrument unless written notice is provided to the Agency;
    (5) The borrower is unable to graduate; and
    (6) The junior lien will not otherwise adversely impact the 
Agency's financial interests.


Sec. 765.207  Conditions for severance agreements.

    For loans secured by real estate, a borrower may request Agency 
consent to a severance agreement or similar instrument so that future 
chattel acquired by the borrower will not become part of the real 
estate securing the Agency debt. The Agency will consent to severance 
agreements if all of the following conditions are met:
    (a) The financing arrangements are in the best financial interest 
of the Agency and the borrower;
    (b) The transaction will not adversely affect the Agency's security 
position;
    (c) The borrower is unable to graduate;
    (d) The transaction will not jeopardize the borrower's ability to 
pay all

[[Page 6092]]

outstanding debts to the Agency and other creditors; and
    (e) The property acquired is consistent with authorized loan 
purposes.


Sec.Sec. 765.208-765.250  [Reserved]

Subpart F--Required Use and Operation of Agency Security


Sec. 765.251  General.

    (a) A borrower is required to be the operator of Agency security in 
accordance with loan purposes and agreements contained in the 
provisions of loan security instruments.
    (b) A borrower who fails to operate the security without Agency 
consent is in violation of loan and security agreements.
    (c) The Agency will consider a borrower's request to lease or cease 
to operate the security as provided in Sec.Sec. 765.252 and 765.253.


Sec. 765.252  Lease of security.

    (a) Real estate leases. The borrower may lease real estate security 
provided the following conditions are met:
    (1) The Agency approves the borrower's request to lease;
    (2) The term of consecutive leases does not exceed three years;
    (3) The lease does not contain an option to purchase; and
    (4) The requirements of Sec. 765.253 have been met.
    (b) Mineral leases. The borrower must request Agency consent to 
lease any mineral rights used as security for Agency loans.
    (1) For loans secured by real estate before December 23, 1985, the 
Agency has a security interest in any mineral rights the borrower has 
on the real estate pledged as collateral.
    (2) For loans secured by real estate on or after December 23, 1985, 
the Agency has a security interest in any mineral rights if the mineral 
rights were included in an appraisal.
    (3) The Agency may consent to a mineral lease if the proposed use 
of the leased rights will not adversely affect either:
    (i) The Agency's security interest; or
    (ii) Compliance with any applicable environmental requirements of 7 
CFR 799.
    (c) Lease of chattel security. Lease of chattel security is not 
authorized.
    (d) Lease proceeds. Lease proceeds are considered normal income 
security and may be used in accordance with Sec. 765.303(b).
    (e) Lease of allotments. (1) The Agency will not approve any crop 
allotment lease that will adversely affect its security interest.
    (2) The borrower must assign all rental proceeds from an allotment 
lease to the Agency.


Sec. 765.253  Operating security.

    If the borrower requests Agency consent to cease operating the 
security or if the Agency discovers that the borrower is failing to 
operate the security, the Agency will give consent if:
    (a) Such action is in the Government's best interests;
    (b) The borrower is unable to graduate;
    (c) The borrower is involved in the day-to-day operational 
activities, management decisions, costs and returns of the operation, 
and will continue to reside in the immediate farming community for 
reasonable management and farm operation involvement;
    (d) The borrower's failure to operate the farm is due to age or 
poor health, and the borrower continues to reside in the immediate 
farming community for reasonable management and farm operation 
involvement; or
    (e) The borrower's failure to operate the real estate security is 
beyond the borrower's control, and the borrower will resume the 
operation within three years.


Sec.Sec. 765.254-765.300  [Reserved]

Subpart G--Disposal of Chattel Security


Sec. 765.301  General.

    (a) The borrower must account for all security.
    (b) The borrower may not dispose of chattel security for an amount 
less than its market value. All proceeds, including any amount in 
excess of the market value, must be distributed to lienholders for 
application to the borrower's account in the order of lien priority.
    (1) The Agency considers the market value of normal income security 
to be the prevailing market price of the commodity in the area in which 
the farm is located.
    (2) The market value for basic security is determined by an 
appraisal obtained in accordance with Sec. 761.7 of this chapter.
    (c) When the borrower sells chattel security, the property and 
proceeds remain subject to the Agency lien until the lien is released 
by the Agency.
    (d) The Agency and all other lienholders must provide written 
consent before a borrower may use proceeds for a purpose other than 
payment of lienholders in the order of lien priority.
    (e) The transaction must not interfere with the borrower's 
operation or jeopardize the borrower's ability to repay the Agency 
loan.
    (f) The disposition must enhance the program objectives of the 
Agency loan.
    (g) When the borrower exchanges security property for other 
property or purchases new property with sale proceeds, the acquisition 
must be essential to the operation as well as meet the program 
objectives, purposes, and limitations for the type of loan.
    (h) All checks, drafts, or money orders which the borrower receives 
from the sale of Agency security must be payable to the borrower and 
the Agency, unless all Agency loan installments, and any past due 
installments, for the period of the agreement for the use of proceeds 
have been paid.


Sec. 765.302  Use and maintenance of the agreement for the use of 
proceeds.

    (a) The borrower and the Agency will execute an agreement for the 
use of proceeds for each production cycle, including proceeds from the 
sale of milk, crops on hand or in storage, planned proceeds from 
Government payments, crop insurance and insurance proceeds derived from 
the loss of security.
    (b) The agreement for the use of proceeds will remain in effect 
until the proper disposition of all listed chattel security has been 
accomplished, or the remaining chattel security has been transferred to 
a new agreement for the use of proceeds.
    (c) The borrower must report any disposition of basic or normal 
income security immediately to the Agency.
    (d) If a borrower wants to dispose of chattel security not listed 
or in a way different than provided on the agreement for the use of 
proceeds, the borrower must obtain the Agency's consent before the 
disposition.
    (e) If the borrower sells security to a purchaser not listed in the 
agreement for the use of proceeds, the borrower must immediately notify 
the Agency of what property has been sold and of the name and business 
address of the purchaser.
    (f) The borrower must provide the Agency with the necessary 
information to update the operation's plan and the agreement for the 
use of proceeds in accordance with Sec. 761.102 of this chapter.
    (g) Changes to the agreement on the use of proceeds will be 
recorded, dated and initialed by the borrower and the Agency.
    (h) The borrower must maintain records of dispositions of property 
and the actual use of proceeds. The borrower must make these records 
available to the

[[Page 6093]]

Agency at the end of the period covered by the agreement for the use of 
proceeds.


Sec. 765.303  Use of proceeds from chattel security.

    (a) General. Proceeds from the sale of basic or normal income 
security may be used in accordance with the agreement for the use of 
proceeds as follows:
    (1) Sales proceeds must be remitted to lienholders in order of lien 
priority.
    (2) Proceeds will be applied to the Agency debt if there is no 
prior lienholder.
    (3) Proceeds may be used to pay customary costs appropriate to the 
transaction.
    (4) Security may be consumed as follows:
    (i) Livestock may be used by the borrower's family for subsistence;
    (ii) If crops serve as security and usually would be marketed, the 
Agency may allow such crops to be fed to livestock, if this is 
preferable to marketing, the Agency obtains a lien or assignment on the 
livestock, and livestock products, at least equal to the lien on the 
crops.
    (5) Proceeds may be used to purchase property better suited to the 
borrower's needs if the Agency will acquire a lien on the purchased 
property. The value of the purchased property, together with any 
proceeds applied to the Agency debt, must at least equal the value of 
the Agency lien on the old security.
    (6) Security may be exchanged for property better suited to the 
borrower's needs if the Agency will acquire a lien on the new property 
at least equal in value to the lien held on the property exchanged.
    (b) Additional uses of proceeds from the sale of normal income 
security. (1) The agreement for the use of proceeds will allow for 
release of proceeds from the sale of normal income security to be used 
to pay essential family living and farm operating expenses. Such 
releases will be terminated when an account is accelerated.
    (2) With the concurrence of all lienholders, proceeds may be used 
to preserve the security because of a natural disaster or other severe 
catastrophe, when funds cannot be obtained by other means or with an 
Agency loan in time to prevent the borrower and the Agency from 
suffering a substantial loss.
    (c) Basic security. Proceeds from the sale of basic security may 
not be used for any family living and farm operating expenses.


Sec. 765.304  Unapproved disposition.

    (a) If a borrower disposes of chattel security without Agency 
approval, or misuses proceeds, the borrower must:
    (1) Make restitution to the Agency within 30 days of Agency 
notification; or
    (2) Provide disposition or use information to enable the Agency to 
consider post-approval within 30 days of Agency notification.
    (b) Failure to cure the first unauthorized disposition in 
accordance with paragraph (a) of this section, or a second unauthorized 
disposition, whether or not cured, will adversely impact future 
borrower eligibility for loans or loan servicing, and may result in 
civil or criminal action.


Sec. 765.305  Release of security interest.

    (a) When Agency security is sold, exchanged, or consumed in 
accordance with the agreement for the use of proceeds, the Agency will 
release its security interest to the extent of the value of the 
security disposed.
    (b) Security interests on wool and mohair may be released when the 
security is marketed by consignment, provided all of the following 
conditions are met:
    (1) The borrower assigns to the Agency the proceeds of any advances 
made, or to be made, on the wool or mohair by the broker, less 
shipping, handling, processing, and marketing costs;
    (2) The borrower assigns to the Agency the proceeds of the sale of 
the wool or mohair, less any remaining costs in shipping, handling, 
processing, and marketing, and less the amount of any advance 
(including any interest which may have accrued on the advance) made by 
the broker against the wool or mohair; and
    (3) The borrower and broker agree that the net proceeds of any 
advances on, or sale of, the wool or mohair will be paid by checks made 
payable jointly to the borrower and the Agency.


Sec.Sec. 765.306-765.350  [Reserved]

Subpart H--Partial Release of Real Estate Security


Sec. 765.351  Requirements to obtain Agency consent.

    The borrower must obtain prior consent from the Agency for any 
transactions affecting the real estate security, including but not 
limited to, sale or exchange of security, a right-of-way across 
security, and a partial release. The Agency may consent to such 
transactions provided the conditions in this section are met.
    (a) General. (1) The transaction will enhance the objectives for 
which the Agency loan or loans were made;
    (2) The transaction will not jeopardize the borrower's ability to 
repay the Agency loan, or is necessary to place the borrower's 
operation on a sound basis;
    (3) The amount received for the security being disposed of or the 
rights being granted is not less than the market value;
    (4) Any proceeds in excess of the market value are remitted to 
lienholders in the order of lien priority;
    (5) The transaction must not interfere with the borrower's 
operation;
    (6) The market value of the remaining security is adequate to 
secure the Agency loans, or if the market value of the security before 
the transaction was inadequate to fully secure the Agency loans, the 
Agency's equity in the security is not diminished;
    (7) The environmental requirements of 7 CFR 799 part must be met; 
and
    (8) The borrower cannot graduate to other credit.
    (b) Sale of timber, gravel, oil, gas, coal, or other minerals. (1) 
Agency lien instruments require that the borrower request and receive 
written consent from the Agency prior to certain transactions, 
including but not limited to, cutting, removal, or lease of timber, 
gravel, oil, gas, coal, or other minerals, except small amounts used by 
the borrower for ordinary household purposes.
    (i) The sale of timber from real estate which secures an Agency 
loan will be considered a disposition of a portion of the security.
    (ii) For loans secured by real estate before December 23, 1985, the 
Agency has a security interest in mineral products, gravel, oil, gas, 
coal, or other resources and the sale by unit or lump sum payment will 
be considered a disposition of security.
    (iii) For loans secured by real estate on or after December 23, 
1985, the Agency has a security interest in mineral products, gravel, 
oil, gas, coal, or other resources if the value of such products was 
included in an appraisal. When the Agency has a security interest, the 
sale of such products will be considered a disposition of a portion of 
the security.
    (2) Any compensation the borrower may receive for damages to the 
surface of the real estate security resulting from exploration for, or 
recovery of, minerals must be assigned to the Agency. Such proceeds 
will be used to repair the damage and any remaining funds must be 
remitted to lienholders in the order of lien priority or, with all 
lienholders

[[Page 6094]]

consent, used for an authorized loan purpose.
    (3) The disposition of security for an outstanding ST loan will 
only be authorized if the transaction will result in full repayment of 
the loan.
    (c) Exchange of security property. When an exchange of security 
results in a balance owing to the borrower, the proceeds must be used 
in accordance with Sec. 765.352.
    Property acquired by the borrower must meet program objectives, 
purposes and limitations relating to the type of loan involved as well 
as applicable requirements for appraisal, title clearance and security.
    (d) Sale under contract for deed. A borrower may sell a portion of 
the security for not less than its market value under a contract for 
deed subject to the following:
    (1) Not less than 10 percent of the purchase price will be paid as 
a down payment and remitted to lienholders in the order of lien 
priority;
    (2) Payments will not exceed 10 annual installments of principal 
plus interest. The interest rate will be the current rate being charged 
on a regular FO loan plus 1 percent or the rate on the borrower's 
notes, whichever is greater. Payments may be in equal or unequal 
installments with a balloon final installment;
    (3) The Agency's security rights, including the right to foreclose 
on either the portion being sold or retained, will not be impaired;
    (4) Any subsequent payments must be assigned to the lienholders and 
remitted in order of lien priority, or with lienholder approval, used 
in accordance with Sec. 765.352;
    (5) The mortgage on the property sold will not be released prior to 
either full payment of the borrower's account or receipt of the full 
amount of sale proceeds;
    (6) The sale proceeds applied to the borrower's loan accounts will 
not relieve the borrower from obligations under the terms of the note 
or other agreements approved by the Agency;
    (7) All other requirements of this section are met.
    (e) Transfer of allotments. (1) The Agency will not approve any 
crop allotment lease that will adversely affect its security interest.
    (2) The sale of an allotment must comply with all conditions of 
this subpart.
    (3) The borrower may transfer crop allotments to another farm owned 
or controlled by the borrower. Such transfer will be treated as a lease 
under Sec. 765.252.


Sec. 765.352  Use of proceeds.

    (a) Proceeds from transactions affecting the real estate security 
may only be used as follows:
    (1) Applied on liens in order of priority;
    (2) To pay customary costs appropriate to the transaction, which 
meet the following conditions:
    (i) Are reasonable in amount;
    (ii) Cannot be paid by the borrower;
    (iii) Will not be paid by the purchaser;
    (iv) Must be paid to consummate the transaction; and
    (v) May include postage and insurance when it is necessary for the 
Agency to present the promissory note to the recorder to obtain a 
release of a portion of the real estate from the mortgage.
    (3) For development or enlargement of real estate owned by the 
borrower as follows:
    (i) Development or enlargement must be necessary to improve the 
borrower's debt-payment ability, place the borrower's operation on a 
sound basis, or otherwise enhance the objectives of the loan;
    (ii) Such use will not conflict with the loan purposes, 
restrictions or requirements of the type of loan involved;
    (iii) Funds will be deposited in a supervised bank account in 
accordance with subpart B of part 761 of this chapter;
    (iv) The Agency has, or will obtain, a lien on the real estate 
developed or enlarged;
    (v) Construction and development will be completed in accordance 
with Sec. 761.10 of this chapter.
    (b) When liquidation is pending, the Agency may approve 
transactions only when all the proceeds will be applied to the liens 
against the security in the order of their priority, after deducting 
customary costs appropriate to the transaction. Such approval will not 
cancel or delay liquidation, unless all loan defaults are otherwise 
cured.


Sec. 765.353  Determining market value.

    (a) Security proposed for disposition. (1) The Agency will obtain 
an appraisal of the security proposed for disposition.
    (2) The Agency may waive the appraisal requirement when the 
estimated value is less than $20,000.
    (b) Security remaining after disposition. The Agency will obtain an 
appraisal of the remaining security if it determines that the 
transaction will reduce the value of the remaining security by an 
amount greater than the value of the security proposed for disposition.
    (c) Appraisal requirements. Appraisals, when required, will be 
conducted in accordance with Sec. 761.7 of this chapter.


Sec.Sec. 765.354-765.400  [Reserved]

Subpart I--Transfer of Security and Assumption of Debt


Sec. 765.401  Conditions for transfer of real estate and chattel 
security.

    (a) General conditions. (1) Approval of a security transfer and 
corresponding loan assumption obligates a new borrower to repay an 
existing Agency debt.
    (2) All transferees will become personally liable for the debt and 
assume the full responsibilities and obligations of the debt 
transferred when the transfer and assumption is complete. If the 
transferee is an entity, the entity and each member must assume 
personal liability for the loan.
    (3) A transfer and assumption will only be approved if the Agency 
determines it is in the Agency's best financial interest.
    (b) Agency consent. A borrower must request and obtain written 
Agency consent prior to selling or transferring security to another 
party.


Sec. 765.402  Transfer of security and loan assumption on same rates 
and terms.

    An eligible applicant may assume an Agency loan under the same 
rates and terms as the original note if:
    (a) The original borrower has died and the spouse, other relative, 
or joint tenant who is not obligated on the note inherits the security 
property;
    (b) An immediate family member of the borrower's family or an 
entity comprised solely of immediate family members of the borrower 
assumes the debt along with the original borrower;
    (c) An individual with an ownership interest in the borrower entity 
buys the entire ownership interest of the other members and continues 
to operate the farm in accordance with loan requirements. The new owner 
must assume personal liability for the loan;
    (d) A new entity buys the borrower entity and continues to operate 
the farm in accordance with loan requirements; or
    (e) The original loan is an EM loan for physical or production 
losses and persons who were directly involved in the farm's operation 
at the time of the loss will assume the loan. If the original loan was 
made to:
    (1) An individual borrower, the transferee must be an immediate 
family member of the original borrower or an entity that is comprised 
solely of immediate family members of the original borrower.

[[Page 6095]]

    (2) A trust, partnership or joint operation, the transferee must 
have been a member, partner or joint operator when the Agency made the 
original loan or remain an entity comprised solely of people who were 
original members, partners or joint operators when the entity received 
the original loan.
    (3) A corporation, including limited liability company, or 
cooperative, the transferee must:
    (i) Have been a corporate stockholder or a cooperative member when 
the Agency made the original loan or will be an entity comprised solely 
of people who were corporate stockholders or cooperative members when 
the entity received the loan; and
    (ii) Assume only the portion of the physical or production loss 
loan equal to the transferee's percentage of ownership. In the case of 
entity transferees, the transferee must assume that portion of the loan 
equal to the combined percentages of ownership of the individual 
stockholders or members in the transferee.


Sec. 765.403  Transfer of security to and assumption of debt by 
eligible borrowers.

    (a) Transfer of real estate and chattel security. The Agency may 
approve transfers of security with assumption of Agency debt by 
transferees eligible for the type of loan being assumed if:
    (1) The transferee meets all loan and security requirements in 7 
CFR part 764 for the type of loan being assumed; and
    (2) The outstanding loan balance (principal and interest) does not 
exceed the maximum loan limit for the type of loan as contained in Sec. 
761.8 of this chapter.
    (b) Assumption of Non-program loans. Applicants eligible for FO 
loans under 7 CFR part 764 may assume Non-program loans made for real 
estate purposes if the Agency determines the property meets program 
requirements. In such case, the Agency will reclassify the Non-program 
loan as a FO loan.
    (c) Loan types that the Agency no longer makes. Real estate loan 
types the Agency no longer makes (i.e., EE, SL, EO, RL, RHF) may be 
assumed and reclassified as FO loans if the transferee is eligible for 
a FO loan under 7 CFR part 764 and the property proposed for transfer 
meets program requirements.
    (d) Amount of assumption. The transferee must assume the lesser of:
    (1) The outstanding balance of the transferor's loan; or
    (2) The present market value of the security, less prior liens and 
authorized costs, if the outstanding loan balance exceeds the present 
market value of the property.


Sec. 765.404  Transfer of security to and assumption of debt by 
ineligible borrowers.

    (a) General. (1) The Agency will allow the transfer of real estate 
and chattel security property to borrowers who are ineligible for the 
type of loan being assumed only on Non-program loan rates and terms.
    (2) The Agency will reclassify the assumed loan as a Non-program 
loan.
    (b) Eligibility. Transferees must provide written documentation 
verifying their credit worthiness and debt repayment ability.
    (c) Assumption amount. The transferee must assume the total 
outstanding Agency debt or if the value of the property is less than 
the entire amount of debt, an amount equal to the current market value 
of the security less any prior liens. The total outstanding Agency debt 
will include any unpaid deferred interest that accrued on the loan to 
the extent that the debt does not exceed the security's present market 
value.
    (d) Downpayment. Non-program transferees must make a downpayment to 
the Agency of not less than 10 percent of the lesser of the present 
market value or unpaid debt.
    (e) Interest rate. The interest rate will be the Non-program 
interest rate in effect at the time of loan approval.
    (f) Loan terms. (1) For a Non-program loan secured by real estate, 
the Agency schedules repayment in 25 years or less, based on the 
borrower's repayment ability.
    (2) For a Non-program loan secured by chattel property only, the 
Agency schedules repayment in five years or less, based on the 
borrower's repayment ability.


Sec. 765.405  Payment of costs associated with transfers.

    The transferor and transferee are responsible for paying transfer 
costs such as real estate taxes, title examination, attorney's fees, 
surveys, and title insurance. When the transferor is unable to pay its 
portion of the transfer costs, the transferee, with Agency approval, 
may pay these costs provided:
    (a) Any cash equity due the transferor is applied first to payment 
of costs and the transferor does not receive any cash payment above 
these costs;
    (b) The transferee's payoff of any junior liens does not exceed 
$5,000;
    (c) Fees are customary and reasonable;
    (d) The transferee can verify that personal funds are available to 
pay transferor and transferee fees; and
    (e) Any equity due the transferor is held in escrow by an Agency 
designated closing agent and is disbursed at closing.


Sec. 765.406  Release of transferor from liability.

    (a) General. Agency approval of an assumption does not 
automatically release the transferor from liability.
    (b) Requirements for release. (1) The Agency may release the 
transferor from liability when all of the security is transferred and 
the total outstanding debt is assumed.
    (2) If an outstanding debt balance will remain and only part of the 
transferor's Agency security is transferred, the written request for 
release of liability will not be approved, unless the deficiency is 
otherwise resolved to the Agency's satisfaction.
    (3) If an outstanding balance will remain and all of the 
transferor's security has been transferred, the transferor may pay the 
remaining balance or request debt settlement in accordance with 7 CFR 
part 792.
    (4) Except for loans in default being serviced under 7 CFR part 
766, if an individual who is jointly liable for repayment of an Agency 
loan withdraws from the operation and conveys all of their interest in 
the security to the remaining borrower, the withdrawing party may be 
released from liability under the following conditions:
    (i) A divorce decree or property settlement states that the 
withdrawing party is no longer responsible for repaying the loan;
    (ii) All of the withdrawing party's interests in the security are 
conveyed to the persons with whom the loan will be continued; and
    (iii) The persons with whom the loan will be continued can 
demonstrate the ability to repay all of the existing and proposed debt 
obligations.


Sec.Sec. 765.407-765.450  [Reserved]

Subpart J--Deceased Borrowers


Sec. 765.451  Continuation of FLP debt and transfer of security.

    (a) Individuals who are liable. The Agency will continue the loan 
with any individual who was liable for the indebtedness provided that 
the individual complies with the obligations of the loan and security 
instruments.
    (b) Individuals who are not liable. The Agency will continue the 
loan with a person who is not liable for the indebtedness in accordance 
with subpart I of this part.


Sec. 765.452  Borrowers with Non-program loans.

    (a) Loan continuation. (1) The Agency will continue the loan with a 
jointly liable borrower if the borrower

[[Page 6096]]

continues to pay the deceased's loan in accordance with the terms of 
the loan.
    (2) The Agency may continue the loan with an individual who 
inherits title to the property and is not liable for the indebtedness 
provided the individual makes payments as scheduled and fulfills all 
other responsibilities of the borrower under the promissory note.
    (b) Loan assumption. A deceased borrower's loan may be assumed by 
an individual not liable for the indebtedness in accordance with 
subpart I of this part.
    (c) Loan discontinuation. (1) The Agency will not continue a loan 
for any subsequent transfer of title by the heirs, or sale of interests 
between heirs to consolidate title; and
    (2) The Agency treats any subsequent transfer of title as a sale 
subject to requirements listed in subpart I of this part.


Sec.Sec. 765.453-765.500  [Reserved]

Subpart K--Exception Authority


Sec. 765.501  Agency exception authority.

    On an individual case basis, the Agency may consider granting an 
exception to any regulatory requirement or policy of this part if:
    (a) The exception is not inconsistent with the authorizing statute 
or other applicable law; and
    (b) The Government's financial interest would be adversely affected 
by acting in accordance with published regulations or policies and 
granting the exception would resolve or eliminate the adverse effect 
upon the Government's financial interest.


Sec.Sec. 765.502-765.550  [Reserved]

    14. Add part 766 to read as follows:

PART 766--DIRECT LOAN SERVICING--SPECIAL

Subpart A--Overview
Sec.
766.1 Introduction to direct loan servicing--special.
766.2 Abbreviations and definitions.
766.3-766.50 [Reserved]
Subpart B--Disaster Set-Aside
766.51 General.
766.52 Eligibility.
766.53 Disaster Set Aside amount limitations.
766.54 Borrower application requirements.
766.55 Eligibility determination.
766.56 Security requirements.
766.57 Borrower acceptance of Disaster Set Aside.
766.58 Installment to be set aside.
766.59 Payments toward set-aside installments.
766.60 Canceling a Disaster Set Aside.
766.61 Reversal of a Disaster Set Aside.
766.62-766.100 [Reserved]
Subpart C--Loan Servicing Programs
766.101 Initial Agency notification to borrower of loan servicing 
programs.
766.102 Borrower application requirements.
766.103 Borrower does not respond or does not submit a complete 
application.
766.104 Borrower eligibility requirements.
766.105 Agency consideration of servicing requests.
766.106 Agency notification of decision regarding a complete 
application.
766.107 Consolidation and rescheduling.
766.108 Reamortization.
766.109 Deferral.
766.110 Conservation Contract.
766.111 Writedown.
766.112 Additional security for restructured loans.
766.113 Buyout of loan at current market value.
766.114 State-certified mediation and voluntary meeting of 
creditors.
766.115 Challenging the Agency appraisal.
766.116-766.150 [Reserved]
Subpart D--Homestead Protection Program
766.151 Purpose.
766.152 Applying for Homestead Protection.
766.153 Eligibility.
766.154 Homestead Protection transferability.
766.155 Homestead Protection leases.
766.156 Conflict with State law.
766.157-766.200 [Reserved]
Subpart E--Servicing Shared Appreciation Agreements and Net Recovery 
Buyout Agreements
766.201 Shared Appreciation Agreement.
766.202 Determining the shared appreciation due.
766.203 Payment of recapture.
766.204 Amortization of recapture.
766.205 Shared Appreciation Payment Agreement rates and terms.
766.206 Net Recovery Buyout Recapture Agreement.
766.207-766.250 [Reserved]
Subpart F--Unauthorized Assistance
766.251 Types of unauthorized assistance.
766.252 Repayment of unauthorized assistance.
766.253 Unauthorized assistance resulting from submission of false 
or incomplete information.
766.254 Unauthorized assistance resulting from borrower or Agency 
error.
766.255-766.300 [Reserved]
Subpart G--Bankruptcy
766.301 Notifying borrower in bankruptcy of loan servicing.
766.302 Loan servicing application requirements for borrowers in 
bankruptcy.
766.303 Processing loan servicing requests from borrowers in 
bankruptcy.
766.304-766.350 [Reserved]
Subpart H--Loan Liquidation
766.351 Liquidation.
766.352 Voluntary sale of real property and chattel.
766.353 Voluntary conveyance of real property.
766.354 Voluntary conveyance of chattel.
766.355 Acceleration of loans.
766.356 Involuntary liquidation of real property and chattel.
766.357-766.400 [Reserved]
Subpart I--Exception Authority
766.401 Agency exception authority.
766.402-766.450 [Reserved]

Appendix A to subpart C of 7 CFR 766--FSA 2501, Notice of 
Availability of Loan Servicing to Borrowers Who Are Current or Less 
Than 90 Days Past Due
Appendix B to subpart C of 7 CFR 766--FSA 2503, Notice of 
Availability of Loan Servicing to Borrowers Who Are 90 Days Past Due
Appendix C to subpart C of 7 CFR 766--FSA 2505, Notice of 
Availability of Loan Servicing to Borrowers in Non-Monetary Default

    Authority: 5 U.S.C. 301 and 7 U.S.C. 1981d and 1989.

Subpart A--Overview


Sec. 766.1  Introduction to direct loan servicing--special.

    (a) This part describes the Agency's servicing policies for 
borrowers who:
    (1) Are financially distressed;
    (2) Are delinquent in paying direct loans or otherwise in default;
    (3) Have received unauthorized assistance;.
    (4) Have filed bankruptcy or are involved in other civil or 
criminal cases affecting the Agency; or
    (5) Have loan security being liquidated voluntarily or 
involuntarily.
    (b) The Agency services FLP direct loans under the policies 
contained in this part. The Agency does not service Non-program loans 
under this part except where noted.
    (c) The Agency requires the borrower to make every reasonable 
attempt to make payments and comply with loan requirements before the 
Agency considers special servicing.


Sec. 766.2  Abbreviations and definitions.

    Abbreviations and definitions for terms used in this part are 
provided in Sec. 761.2 of this chapter.


Sec.Sec. 766.3-766.50  [Reserved]

Subpart B--Disaster Set-Aside


Sec. 766.51  General.

    (a) The DSA program is available to borrowers with FLP direct 
program loans who suffered losses as a result of a natural disaster.
    (b) DSA is not intended to circumvent other servicing available 
under this part.
    (c) Non-program loans may be serviced under this subpart for 
borrowers who also have FLP program loans.

[[Page 6097]]

Sec. 766.52  Eligibility.

    (a) Borrower eligibility. The borrower must meet all of the 
following requirements to be eligible for a DSA:
    (1) The borrower must have operated the farm in a county designated 
or declared a disaster area or a contiguous county at the time of the 
disaster. Farmers who have rented out their land base for cash are not 
operating the farm.
    (2) The borrower must have acted in good faith, and the borrower's 
inability to make the upcoming scheduled loan payments must be for 
reasons not within the borrower's control.
    (3) A borrower cannot have more than one installment set aside on 
each loan;
    (4) As a direct result of the natural disaster, the borrower does 
not have sufficient income available to pay all essential family living 
and farm operating expenses, and debt to the Agency. This determination 
will be based on:
    (i) The borrower's actual production, income and expense records 
for the year the natural disaster occurred;
    (ii) Any other records required by the servicing official;
    (iii) Compensation received for losses; and
    (iv) Increased expenses incurred because of the natural disaster.
    (5) For the next business accounting year, the borrower must 
develop a positive cash flow projection showing that the borrower will 
at least be able to pay all operating expenses and taxes due during the 
year, essential family living expenses, and meet scheduled payments on 
all debts, including FLP debts. The borrower must provide any 
documentation required to support the cash flow projection.
    (6) The borrower must not be in non-monetary default.
    (7) The borrower must not become 165 days past due before DSA is 
complete.
    (b) Loan eligibility. (1) Any FLP loan to be considered for DSA 
must have been outstanding at the time the natural disaster occurred.
    (2) All of the borrower's FLP program and Non-program loans must be 
current after the Agency completes a DSA of the scheduled installment.
    (3) All FLP loans must be current or less than 90 days past due at 
the time the application for DSA is complete.
    (4) The Agency has not accelerated or applied any servicing action 
to the loan since the natural disaster occurred.
    (5) For any loan that will receive a DSA, the remaining term of the 
loan must equal or exceed 2 years from the due date of the installment 
set-aside.


Sec. 766.53  Disaster Set Aside amount limitations.

    (a) The DSA amount is limited to:
    (1) The first or second scheduled annual installment on the Agency 
loans due after the disaster occurred; or
    (2) The amount the borrower is unable to pay the Agency due to the 
disaster. Borrowers are required to pay any portion of an installment 
they are able to pay.
    (b) The amount set aside will be the unpaid balance remaining on 
the installment at the time the DSA is complete. This amount will 
include the unpaid interest and any principal that would be credited to 
the account as if the installment were paid on the due date, taking 
into consideration any payments applied to principal and interest since 
the due date.
    (c) Recoverable cost items may not be set aside.


Sec. 766.54  Borrower application requirements.

    (a) Requests for DSA. (1) A borrower must submit a request for DSA 
in writing within eight months from the date the natural disaster was 
designated.
    (2) For an entity, all obligors of the Agency indebtedness must 
sign the DSA request.
    (b) Required financial information. (1) The borrower must submit 
actual production, income, and expense records for the production and 
marketing period in which the disaster occurred unless the Agency 
already has this information.
    (2) The Agency may request other information needed to make an 
eligibility determination.


Sec. 766.55  Eligibility determination.

    Within 30 days of a complete DSA application, the Agency will 
determine if the borrower meets the eligibility requirements for DSA.


Sec. 766.56  Security requirements.

    If the borrower is not current on all FLP loans when the borrower 
executes the appropriate DSA Agency documents, the borrower, and all 
obligors in the case of an entity, must execute and provide to the 
Agency a best lien obtainable on all of their assets except those 
listed under Sec. 766.112 (b).


Sec. 766.57  Borrower acceptance of Disaster Set Aside.

    The borrower must execute the appropriate Agency documents within 
45 days after the borrower receives notification of Agency approval of 
DSA.


Sec. 766.58  Installment to be set aside.

    (a) The Agency will set-aside the first installment due immediately 
after the disaster occurred.
    (b) If the borrower has already paid the installment due 
immediately after the disaster occurred, the Agency will set-aside the 
next annual installment.


Sec. 766.59  Payments toward set-aside installments.

    (a) Interest accrual. (1) Interest will accrue on any principal 
portion of the set-aside installment at the same rate charged on the 
balance of the loan.
    (2) If the borrower's set-aside installment is for a loan with a 
limited resource rate and the Agency modifies that limited resource 
rate, the interest rate on the set-aside portion will be modified 
concurrently.
    (b) Due date. The amount set-aside, including interest accrued on 
the principal portion of the set-aside, is due on or before the final 
due date of the loan.
    (c) Applying payments. The Agency will apply borrower payments 
toward set-aside installments first to interest and then to principal.


Sec. 766.60  Canceling a Disaster Set Aside.

    The Agency will cancel a DSA if:
    (a) The Agency takes any primary loan servicing action on the loan;
    (b) The borrower pays the market value buyout in accordance with 
Sec. 766.113; or
    (c) The borrower pays the set-aside installment.


Sec. 766.61  Reversal of a Disaster Set Aside.

    If the Agency determines that the borrower received an unauthorized 
DSA, the Agency will reverse the DSA after all appeals are concluded.


Sec.Sec. 766.62-766.100  [Reserved]

Subpart C--Loan Servicing Programs


Sec. 766.101  Initial Agency notification to borrower of loan servicing 
programs.

    (a) Borrowers notified. The Agency will provide servicing 
information under this section to borrowers who:
    (1) Have a current operating plan that demonstrates the borrower is 
financially distressed;
    (2) Are 90 days or more past due on loan payments, even if the 
borrower has submitted an application for loan servicing as a 
financially distressed borrower;
    (3) Are in non-monetary default on any loan agreements;
    (4) Have filed bankruptcy;
    (5) Request this information;
    (6) Request voluntary conveyance of security;
    (7) Have only delinquent SA; or
    (8) Are subject to any other collection action except when such 
action is a result of failure to graduate. Borrowers

[[Page 6098]]

who fail to graduate when required and are able to do so, will be 
accelerated without providing notification of loan servicing options.
    (b) Form of notification. The Agency will notify borrowers of the 
availability of primary loan servicing programs, conservation contract, 
current market value buyout, debt settlement programs and homestead 
protection as follows:
    (1) A borrower who is financially distressed, or current and 
requesting servicing will be provided FSA 2501;
    (2) A borrower who is 90 days past due will be sent FSA 2503;
    (3) A borrower who is in non-monetary or both monetary and non-
monetary default will receive FSA 2505;
    (4) A borrower who has only delinquent SA will be notified of 
available loan servicing;
    (5) Notification to a borrower who files bankruptcy will be 
provided in accordance with subpart G of this part.
    (c) Mailing. Notices to delinquent borrowers or borrowers in non-
monetary default will be sent by certified mail to the last known 
address of the borrower.
    (d) Borrower response timeframes. To be considered for loan 
servicing, a borrower who is:
    (1) Current or financially distressed may submit a complete 
application any time prior to becoming 90 days past due;
    (2) Ninety (90) days past due must submit a complete application 
within 60 days from receipt of FSA 2503;
    (3) In non-monetary default with or without monetary default must 
submit a complete application within 60 days from receipt of FSA 2505.


Sec. 766.102  Borrower application requirements.

    (a) Except as provided in paragraph (e) of this section, an 
application for primary loan servicing, conservation contract, current 
market value buyout, homestead protection, or some combination of these 
options, must include the following to be considered complete:
    (1) Completed acknowledgment form provided with the Agency 
notification;
    (2) Completed Agency application form. In the case of an entity, 
all entity members must provide current financial statements;
    (3) Financial records for the three most recent years, including 
income tax returns;
    (4) Farm operation production records for the three most recent 
years or the years the borrower has been farming, whichever is less;
    (5) Documentation of compliance with the Agency's environmental 
regulations contained in 7 CFR 799;
    (6) Verification of all non-farm income;
    (7) The farm's operating plan, including projected cash flow budget 
reflecting production, income, expenses, and debt repayment plan; and
    (8) Verification of all debts and collateral.
    (b) In addition to the requirements contained in paragraph (a) of 
this section, the borrower must submit an aerial photo delineating any 
land to be considered for a conservation contract.
    (c) To be considered for debt settlement, the borrower must provide 
the appropriate Agency form, and any additional information required 
under 7 CFR 792.
    (d) If a borrower who submitted a complete application while 
current or financially distressed is renotified as a result of becoming 
90 days past due, the borrower must only submit a request for servicing 
in accordance with paragraph (a)(1) of this section, provided all other 
information is less than 90 days old and is based on the current 
production cycle. Any information 90 or more days old or not based on 
the current production cycle must be updated.
    (e) The borrower need not submit any information under this section 
that already exists in the Agency's file and is still current as 
determined by the Agency.
    (f) When jointly liable borrowers have been divorced and one has 
withdrawn from the operation, the Agency may release the withdrawing 
individual from liability, provided:
    (1) The remaining individual submits a complete application in 
accordance with this section;
    (2) Both parties have agreed in a divorce decree or property 
settlement that only the remaining individual will be responsible for 
all Agency loan payments;
    (3) The withdrawing individual has conveyed all ownership interest 
in the security to the remaining individual; and
    (4) The withdrawing individual does not have repayment ability and 
does not own any non-essential assets.


Sec. 766.103  Borrower does not respond or does not submit a complete 
application.

    (a) If a borrower who was financially distressed, or current and 
requested loan servicing and received FSA 2501 but fails to timely 
respond and subsequently becomes 90 days past due, the Agency will 
notify the borrower in accordance with Sec. 766.101(a)(2).
    (b) If a borrower who is 90 days past due without non-monetary 
default and received FSA 2503, or is in non-monetary default and 
received FSA 2505 and fails to timely respond or does not submit a 
complete application within the 60-day timeframe, the Agency will 
notify the borrower by certified mail of the following:
    (1) The Agency's intent to accelerate the loan; and
    (2) The borrower's right to request reconsideration, mediation and 
appeal in accordance with 7 CFR part 11 and 7 CFR part 780.


Sec. 766.104  Borrower eligibility requirements.

    (a) A borrower must meet the following eligibility requirements to 
be considered for primary loan servicing:
    (1) Any delinquency or financial distress is due to circumstances 
beyond the borrower's control which reduced repayment ability to the 
extent that scheduled payments cannot be made as a result of one of the 
following circumstances:
    (i) Illness, injury, or death of a borrower or other individual who 
operates the farm;
    (ii) Natural disaster, adverse weather, disease, or insect damage 
which caused severe loss of agricultural production;
    (iii) Widespread economic conditions such as low commodity prices;
    (iv) Damage or destruction of property essential to the operation; 
or
    (v) Loss of, or reduction in, the borrower or spouse's essential 
non-farm income.
    (2) The borrower does not have non-essential assets for which the 
net recovery value is sufficient to resolve the financial distress or 
pay the delinquent portion of the loan.
    (3) If the borrower is in non-monetary default, the borrower will 
resolve the non-monetary default prior to closing the servicing action.
    (4) The borrower has acted in good faith in accordance with the 
borrower's loan agreements.
    (5) Financially distressed or current borrowers requesting 
servicing must pay a portion of the interest due on the loans.
    (b) Debtors with SA only must:
    (1) Be delinquent due to circumstances beyond their control;
    (2) Have acted in good faith.


Sec. 766.105  Agency consideration of servicing requests.

    (a) Order in which Agency considers servicing options. The Agency 
will consider loan servicing options and combinations of options to 
maximize loan repayment and minimize losses to the Agency. The Agency 
will consider loan servicing options in the following order for each 
eligible borrower who requests servicing:

[[Page 6099]]

    (1) Conservation Contract, if requested;
    (2) Consolidation and rescheduling or reamortization;
    (3) Deferral;
    (4) Writedown; and
    (5) Current market value buyout.
    (b) Debt service margin.
    (1) The Agency will attempt to achieve a 110 percent debt service 
margin for the servicing options listed in paragraphs (a)(2) through 
(4) of this section.
    (2) If the borrower cannot develop a feasible plan with the 110 
percent debt service margin, the Agency will reduce the debt service 
margin by one percent and reconsider all available servicing 
authorities. This process will be repeated until a feasible plan has 
been developed or it has been determined that a feasible plan is not 
possible with a 100 percent margin.
    (3) The borrower must be able to develop a feasible plan with at 
least a 100 percent debt service margin to be considered for the 
servicing options listed in paragraphs (a)(1) through (4) of this 
section.
    (c) Appraisal of borrower's assets. The Agency will obtain an 
appraisal on:
    (1) All Agency security, non-essential assets, and real property 
unencumbered by the Agency that does not meet the criteria established 
in Sec. 766.112(b), when:
    (i) A writedown is required to develop a feasible plan;
    (ii) The borrower will be offered current market value buyout.
    (2) The borrower's non-essential assets when their net recovery 
value may be adequate to bring the delinquent loans current.


Sec. 766.106  Agency notification of decision regarding a complete 
application.

    The Agency will notify a borrower of the Agency's decision within 
60 calendar days after receiving a complete application for loan 
servicing.
    (a) Notification to financially distressed or current borrowers. 
(1) If the borrower can develop a feasible plan and is eligible for 
primary loan servicing, the Agency will offer to service the account.
    (i) The borrower will have 45 days to accept the offer of 
servicing. After accepting the Agency's offer, the borrower must 
execute loan agreements and security instruments, as appropriate.
    (ii) If the borrower does not accept the offer, the Agency will 
renotify the borrower of the availability of loan servicing if the 
borrower becomes 90 days past due in accordance with Sec. 
766.101(a)(2).
    (2) If the borrower cannot develop a feasible plan, or is not 
eligible for loan servicing, the Agency will notify the borrower of the 
reasons for the adverse decision.
    (i) The borrower may request reconsideration, mediation and appeal 
in accordance with 7 CFR 11 and 7 CFR 780 of this title.
    (ii) The Agency will renotify the borrower of the availability of 
loan servicing if the borrower becomes 90 days past due in accordance 
with Sec. 766.101(a)(2).
    (b) Notification to borrowers 90 days past due or in non-monetary 
default. (1) If the borrower can develop a feasible plan and is 
eligible for primary loan servicing, the Agency will offer to service 
the account.
    (i) The borrower will have 45 days to accept the offer of 
servicing. After accepting the Agency's offer, the borrower must 
execute loan agreements and security instruments, as appropriate.
    (ii) If the borrower does not accept the offer, or fails to 
respond, the Agency will notify the borrower of its intent to 
accelerate the account.
    (2) If the borrower cannot develop a feasible plan, or is not 
eligible for loan servicing, the Agency will notify the borrower of its 
intent to accelerate the account in accordance with subpart H of this 
part, unless the account is resolved through any of the following 
options:
    (i) The borrower may request reconsideration, mediation or 
voluntary meeting of creditors, or appeal in accordance with 7 CFR part 
11 and 7 CFR part 780.
    (ii) The borrower may request negotiation of appraisal within 30 
days in accordance with Sec. 766.115.
    (iii) If the net recovery value of non-essential assets is 
sufficient to pay the account current, the borrower has 90 days to pay 
the account current.
    (iv) The borrower, if eligible in accordance with Sec. 766.113, may 
buyout the loans at the current market value within 90 days.
    (v) The borrower may request homestead protection if the borrower's 
primary residence was pledged as security by providing the information 
required under Sec. 766.152.


Sec. 766.107  Consolidation and rescheduling.

    (a) Loans eligible for consolidation. The Agency may consolidate OL 
loans if:
    (1) The borrower meets loan servicing eligibility requirements in 
Sec. 766.104;
    (2) The Agency determines that consolidation will assist the 
borrower to repay the loans;
    (3) Consolidating the loans will bring the borrower's account 
current or prevent the borrower from becoming delinquent;
    (4) The Agency has not referred the borrower's account to OGC or 
the U.S. Attorney, and the Agency does not plan to refer the account to 
either of these two offices in the near future;
    (5) The borrower is in compliance with the Highly Erodible Land and 
Wetland Conservation requirements of 7 CFR part 12, if applicable;
    (6) The loans are not secured by real estate;
    (7) The Agency holds the same lien position on each loan;
    (8) The Agency has not serviced the loans for unauthorized 
assistance under subpart F of this part; and
    (9) The loan is not currently deferred, as described in Sec. 
766.109, or set-aside, as described in subpart B of this part. The 
Agency may consolidate loans upon cancellation of the deferral or DSA.
    (b) Loans eligible for rescheduling. The Agency may reschedule 
loans made for chattel purposes, including OL, SW, RL, EE, or EM if:
    (1) The borrower meets loan servicing eligibility requirements in 
Sec. 766.104;
    (2) Rescheduling the loans will bring the borrower's account 
current or prevent the borrower from becoming delinquent;
    (3) The Agency determines that rescheduling will assist the 
borrower to repay the loans;
    (4) The Agency has not referred the borrower's account to OGC or 
the U.S. Attorney, and the Agency does not plan to refer the account to 
either of these two offices in the near future;
    (5) The borrower is in compliance with the Highly Erodible Land and 
Wetland Conservation requirements of 7 CFR 12, if applicable; and
    (6) The loan is not currently deferred, as described in Sec. 
766.109, or set-aside, as described in subpart B of this part. The 
Agency may reschedule loans upon cancellation of the deferral or DSA.
    (c) Consolidated and rescheduled loan terms. (1) The Agency 
determines the repayment schedule for consolidated and rescheduled 
loans according to the borrower's repayment ability.
    (2) The repayment period cannot exceed 15 years from the date of 
the consolidation and rescheduling, except that the repayment schedule 
for RL loans may not exceed 7 years from the date of rescheduling.
    (d) Consolidated and rescheduled loan interest rate. The interest 
rate of consolidated and rescheduled loans will be as follows:
    (1) The interest rate for loans made at the regular interest rate 
will be the lesser of:

[[Page 6100]]

    (i) The lowest interest rate for that type of loan on the date a 
complete servicing application was received;
    (ii) The lowest interest rate for that type of loan on the date of 
restructure; or
    (iii) The lowest original loan note rate on any of the original 
notes being consolidated and rescheduled.
    (2) The interest rate for loans made at the limited resource 
interest rate will be the lesser of:
    (i) The limited resource interest rate for that type of loan on the 
date a complete servicing application was received;
    (ii) The limited resource interest rate for that type of loan on 
the date of restructure; or
    (iii) The lowest original loan note rate on any of the original 
notes being consolidated and rescheduled.
    (3) At the time of consolidation and rescheduling, the Agency may 
reduce the interest rate to a limited resource rate, if available, if:
    (i) The borrower meets the requirements for the limited resource 
interest rate; and
    (ii) A feasible plan cannot be developed at the regular interest 
rate and maximum terms permitted in this section.
    (4) Loans consolidated and rescheduled at the limited resource 
interest rate will be subject to annual limited resource review in 
accordance with Sec. 765.51 of this chapter.
    (e) Capitalizing accrued interest and adding protective advances to 
the loan principal. (1) The Agency capitalizes the amount of 
outstanding accrued interest on the loan at the time of consolidation 
and rescheduling.
    (2) The Agency adds protective advances for the payment of real 
estate taxes to the principal balance at the time of consolidation and 
rescheduling.
    (3) The borrower must resolve all other protective advances not 
capitalized prior to closing the servicing actions.
    (f) Installments. If there are no deferred installments, the first 
installment payment under the consolidation and rescheduling will be at 
least equal to the interest amount which will accrue on the new 
principal between the date the promissory note is processed and the 
next installment due date.


Sec. 766.108  Reamortization.

    (a) Loans eligible for reamortization. The Agency may reamortize 
loans made for real estate purposes, including FO, SW, RL, SA, EE, RHF, 
and EM if:
    (1) The borrower meets the loan servicing eligibility requirements 
listed in Sec. 766.104;
    (2) Reamortization will bring the borrower's account current or 
prevent the borrower from becoming delinquent;
    (3) The Agency determines that reamortization will assist the 
borrower to repay the loan;
    (4) The Agency has not referred the borrower's account to OGC or 
the U.S. Attorney, and the Agency does not plan to refer the account to 
either of these two offices in the near future;
    (5) The borrower is in compliance with the Highly Erodible Land and 
Wetland Conservation provisions of 7 CFR part 12, if applicable; and
    (6) The loan is not currently deferred, as described in Sec. 
766.109, or set-aside, as described in subpart B of this part. The 
Agency may reamortize loans upon cancellation of the deferral or DSA.
    (b) Reamortized loan terms. (1) Except as provided in paragraph 
(b)(2), the Agency will reamortize loans within the remaining term of 
the original loan or assumption agreement unless a feasible plan cannot 
be developed or debt forgiveness will be required to develop a feasible 
plan.
    (2) If the Agency extends the loan term, the repayment period from 
the original loan date may not exceed the maximum number of years for 
the type of loan being reamortized as set forth below, or the useful 
life of the security, whichever is less.
    (i) FO, SW, RL, EE real estate-type, and EM loans made for real 
estate purposes may not exceed 40 years from the date of the original 
note or assumption agreement.
    (ii) EE real estate-type loans secured by chattels only may not 
exceed 20 years from the date of the original note or assumption 
agreement.
    (iii) RHF loans may not exceed 33 years from the date of the 
original note or assumption agreement.
    (iv) SA loans may not exceed 25 years from the date of the original 
Shared Appreciation note.
    (c) Reamortized loan interest rate. The interest rate will be as 
follows:
    (1) The interest rate for loans made at the regular interest rate 
will be the lesser of:
    (i) The lowest interest rate for that type of loan on the date a 
complete servicing application was received;
    (ii) The lowest interest rate for that type of loan on the date of 
restructure; or
    (iii) The original loan note rate of the note being reamortized.
    (2) The interest rate for loans made at the limited resource 
interest rate will be the lesser of:
    (i) The limited resource interest rate for that type of loan on the 
date a complete servicing application was received;
    (ii) The limited resource interest rate for that type of loan on 
the date of restructure; or
    (iii) The original loan note rate of the note being reamortized.
    (3) At the time of reamortization, the Agency may reduce the 
interest rate to a limited resource rate, if available, if:
    (i) The borrower meets the requirements for the limited resource 
interest rate; and
    (ii) A feasible plan cannot be developed at the regular interest 
rate and maximum terms permitted in this section.
    (4) Loans reamortized at the limited resource interest rate will be 
subject to annual limited resource review in accordance with Sec. 
765.51 of this chapter.
    (5) SA payment agreements will be reamortized at the current SA 
amortization rate in effect on the date of approval or the rate on the 
original payment agreement, whichever is less.
    (d) Capitalizing accrued interest and adding protective advances to 
the loan principal. (1) The Agency capitalizes the amount of 
outstanding accrued interest on the loan at the time of reamortization.
    (2) The Agency adds protective advances for the payment of real 
estate taxes to the principal balance at the time of reamortization.
    (3) The borrower must resolve all other protective advances not 
capitalized prior to closing the reamortization.
    (e) Installments. If there are no deferred installments, the first 
installment payment under the reamortization will be at least equal to 
the interest amount which will accrue on the new principal between the 
date the promissory note is processed and the next installment due 
date.


Sec. 766.109  Deferral.

    (a) Conditions for approving deferrals. The Agency will only 
consider deferral of loan payments if:
    (1) The borrower meets the loan servicing eligibility requirements 
of Sec. 766.104;
    (2) Rescheduling, consolidation, and reamortization of all the 
borrower's loans, will not result in a feasible plan with 110 percent 
debt service margin;
    (3) The need for deferral is temporary; and
    (4) The borrower develops feasible first-year deferral and post-
deferral plans subject to the following:
    (i) The deferral will not create excessive net cash reserves beyond 
that necessary to develop a feasible plan.
    (ii) The Agency will consider a partial deferral if deferral of the 
total Agency

[[Page 6101]]

payment would result in the borrower developing more cash availability 
than necessary to meet debt repayment obligations.
    (b) Deferral period. (1) The deferral term will be based on the 
post-deferral plan which results in the greatest improvement over the 
first year cash available to service FLP debt, and in no case will 
exceed 5 years.
    (2) The Agency will distribute interest accrued on the deferred 
principal portion of the loan equally to payments over the remaining 
loan term after the deferral period ends.
    (c) Agency actions when borrower's repayment ability improves. (1) 
If the Agency determines that the borrower's repayment ability has 
increased to allow the borrower to make some payments during the 
deferral period, the borrower must make supplemental payments, as 
determined by the Agency. If the borrower agrees to make supplemental 
payments, but does not do so, the borrower will be considered to be in 
non-monetary default.
    (2) If the Agency determines that the borrower's improved repayment 
ability will allow graduation, the Agency will require the borrower to 
graduate in accordance with part 765, subpart C of this chapter.
    (d) Associated loan servicing. (1) The Agency must cancel an 
existing deferral if the Agency approves any new primary loan servicing 
action.
    (2) Loans deferred will also be serviced in accordance with 
Sec.Sec. 766.107, 766.108 and 766.111, as appropriate.


Sec. 766.110  Conservation Contract.

    (a) General. (1) A debtor with only SA is not eligible for a 
Conservation Contract.
    (2) A current or financially distressed borrower may request a 
Conservation Contract at any time prior to becoming 90 days past due.
    (3) A delinquent borrower may request a Conservation Contract 
during the same 60-day time period in which the borrower may apply for 
primary loan servicing. The borrower eligibility requirements 
established at Sec. 766.104 will apply.
    (4) A Conservation Contract may be established for conservation, 
recreation, and wildlife purposes.
    (5) The land under a Conservation Contract cannot be used for the 
production of agricultural commodities during the term of the contract.
    (b) Eligible lands. The following types of lands are eligible to be 
considered for a Conservation Contract by the Conservation Contract 
review team:
    (1) Wetlands or highly erodible lands, as defined by the Food 
Security Act of 1985; and
    (2) Uplands that meet any one of the following criteria:
    (i) Land containing aquatic life, endangered species, or wildlife 
habitat of local, State, tribal, or national importance;
    (ii) Land in 100-year floodplains;
    (iii) Areas of high water quality or scenic value;
    (iv) Historic or cultural properties listed in or eligible for the 
National Register of Historic Places;
    (v) Aquifer recharge areas of local, regional, State or tribal 
importance;
    (vi) Buffer areas necessary for the adequate protection of proposed 
Conservation Contract areas;
    (vii) Areas that contain soils generally not suited for 
cultivation; or
    (viii) Areas within or adjacent to Federal, State, tribal, or 
locally administered conservation areas.
    (c) Unsuitable acreage. Acreage is unsuitable for a Conservation 
Contract if:
    (1) It is not suited or eligible for the program due to legal 
restrictions;
    (2) It has on-site or off-site conditions that prohibit the use of 
the land for conservation, wildlife, or recreational purposes; or
    (3) The Conservation Contract review team determines that the land 
is not suitable for conservation, wildlife, or recreational purposes.
    (d) Conservation Contract terms. The borrower selects the term of 
the contract, which may be 10, 30, or 50 years.
    (e) Conservation management plan. The Agency, through the 
recommendations of the Conservation Contract review team, is 
responsible for developing a conservation management plan.
    (f) Management authority. The Agency has enforcement authority over 
the Conservation Contract. The Agency, however, may delegate contract 
management to another entity if doing so is in the Agency's interest.
    (g) Limitations. The Conservation Contract must meet the following 
conditions:
    (1) Result in a feasible plan for current borrowers; or
    (2) Result in a feasible plan with or without primary loan 
servicing for financially distressed or delinquent borrowers; and
    (3) Improve the borrower's ability to repay the remaining balance 
of the loan.
    (h) Maximum debt reduction for a financially distressed or current 
borrower. The amount of debt reduction by a Conservation Contract is 
calculated as follows:
    (1) Divide the contract acres by the total acres that secure the 
borrower's FLP loans to determine the contract acres percentage.

 [GRAPHIC] [TIFF OMITTED] TP09FE04.000

    (2) Multiply the borrower's total unpaid FLP loan balance 
(principal, interest and recoverable costs already paid by the Agency) 
by the percentage calculated under (h)(1) of this section to determine 
the amount of Agency debt that is secured by the contract acreage.

 [GRAPHIC] [TIFF OMITTED] TP09FE04.001

    (3) Multiply the borrower's total unpaid FLP loan balance 
(principal, interest and recoverable costs already paid by the Agency) 
by 33 percent. 
[GRAPHIC] [TIFF OMITTED] TP09FE04.002

    (4) The lesser of the amounts calculated in (h)(2) and (h)(3) of 
this section is the maximum amount of debt reduction for a 50-year 
contract.
    (5) The borrower will receive 60 percent of the amount calculated 
in (h)(4) of this section for a 30-year contract.


[[Page 6102]]


[GRAPHIC] [TIFF OMITTED] TP09FE04.003

    (6) The borrower will receive 20 percent of the amount calculated 
in (h)(4) of this section for a 10-year contract.

 [GRAPHIC] [TIFF OMITTED] TP09FE04.004

    (i) Maximum debt reduction for a delinquent borrower. The amount of 
debt reduction by a Conservation Contract is calculated as follows:
    (1) Divide the contract acres by the total acres that secure the 
borrower's FLP loans to determine the contract acres percentage.

 [GRAPHIC] [TIFF OMITTED] TP09FE04.005

    (2) Multiply the borrower's total unpaid FLP loan balance 
(principal, interest and recoverable costs already paid by the Agency) 
by the percentage calculated in (i)(1) of this section to determine the 
amount of FLP debt that is secured by the contract acreage.

 [GRAPHIC] [TIFF OMITTED] TP09FE04.006

    (3) Multiply the present market value of the total acres, less 
contributory value of any structural improvements, that secure the 
borrower's FLP loans by the percent calculated in (i)(1) of this 
section to determine the current value of the acres in the contract.

 [GRAPHIC] [TIFF OMITTED] TP09FE04.007

    (4) Subtract the current market value of the contract acres 
calculated in (i)(3) of this section from the FLP debt secured by the 
contract acres as calculated in (i)(2).

 [GRAPHIC] [TIFF OMITTED] TP09FE04.008

    (5) Select the greater of the amounts calculated in (i)(3) and 
(i)(4) of this section.
    (6) The lesser of the amounts calculated in (i)(2) and (i)(5) of 
this section will be the maximum amount of debt reduction for a 50-year 
contract term.
    (7) The borrower will receive 60 percent of the amount calculated 
in (i)(6) of this section for a 30-year contract term. 
[GRAPHIC] [TIFF OMITTED] TP09FE04.009

    (8) The borrower will receive 20 percent of the amount calculated 
in (i)(6) of this section for a 10-year contract term. 
[GRAPHIC] [TIFF OMITTED] TP09FE04.010

    (j) Conservation Contract Agreement. The borrower must sign the 
Conservation Contract Agreement establishing the contract's terms and 
conditions.
    (k) Transferring title to land under Conservation Contract. If the 
borrower or any subsequent landowner transfers title to the property, 
the Conservation Contract will remain in effect for the duration of the 
contract term.
    (l) Borrower appeals of technical decisions. If the borrower 
appeals any technical decision made in connection with a Conservation 
Contract, the Natural Resources Conservation Service's appeal process 
at 7 CFR part 614 must be followed.


Sec. 766.111  Writedown.

    (a) Eligibility. (1) The Agency will only consider a writedown if 
the borrower:
    (i) Meets the eligibility criteria in Sec. 766.104;
    (ii) Is delinquent;
    (iii) Has not previously received debt forgiveness on any FLP 
direct loan; and
    (iv) Complies with the Highly Erodible Land and Wetland 
Conservation requirements of 7 CFR 12.
    (2) Debtors with SA only are not eligible to receive writedown.
    (b) Conditions. (1) Rescheduling, consolidation, reamortization, 
deferral or some combination of these options on all of the borrower's 
loans would not result in a feasible plan with a 110 percent debt 
service margin. If a feasible plan, including writedown is achieved 
with a debt service margin of 101 percent or more, the Agency will 
determine if a feasible plan can be achieved without a writedown. If a 
feasible plan is achieved with and without a writedown and the borrower 
meets all the eligibility requirements, both options will be offered 
and the borrower may choose one option.

[[Page 6103]]

    (2) The present value of the restructured loan must be greater than 
or equal to the net recovery value of Agency security and any non-
essential assets;
    (3) The writedown amount does not exceed $300,000 excluding debt 
reduction received through Conservation Contract;
    (4) A borrower who owns real estate must execute an SAA in 
accordance with Sec. 766.201.
    (c) Associated loan servicing. Loans written down will also be 
serviced in accordance with Sec.Sec. 766.107 and 766.108, as 
appropriate.


Sec. 766.112  Additional security for restructured loans.

    (a) The borrower, and all obligors in the case of an entity, must 
execute and provide to the Agency a lien on all of their assets, except 
as provided in paragraph (b) of this section, when the Agency is 
servicing a loan.
    (b) The Agency will take the best lien obtainable on all assets the 
borrower owns, except:
    (1) When taking a lien on such property will prevent the borrower 
from obtaining credit from other sources;
    (2) When the property could have significant environmental problems 
or costs as described in 7 CFR 799;
    (3) When the Agency cannot obtain a valid lien;
    (4) When the property is the borrower's personal residence and 
appurtenances and:
    (i) They are located on a separate parcel; and
    (ii) The real estate that serves as collateral for the Agency loan 
plus crops and chattels are valued at greater than or equal to 150 
percent of the unpaid balance due on the loan;
    (5) When the property is subsistence livestock, cash, special 
collateral accounts the borrower uses for the farming operation, 
retirement accounts, personal vehicles necessary for family living, 
household goods, or small equipment such as hand tools and lawn mowers; 
or
    (6) When a contractor holds title to a livestock or crop 
enterprise, or the borrower manages the enterprise under a share lease 
or share agreement.


Sec. 766.113  Buyout of loan at current market value.

    (a) Borrower eligibility. A delinquent borrower who has received 
FSA 2503 may buy out the borrower's Agency loans at the current market 
value of the loan security, including security not in the borrower's 
possession, and all non-essential assets if:
    (1) The borrower has not previously received debt forgiveness on 
any other FLP direct loan;
    (2) The borrower has acted in good faith;
    (3) The borrower does not have non-essential assets for which the 
net recovery value is sufficient to pay the account current;
    (4) The borrower is unable to develop a feasible operating plan 
through primary loan servicing programs or a Conservation Contract, if 
requested;
    (5) The present value of the restructured loans is less than the 
net recovery value of Agency security;
    (6) The borrower pays the amount required in a lump sum without 
guaranteed or direct credit from the Agency; and
    (7) The amount of debt forgiveness does not exceed $300,000.
    (b) Buyout time frame. After the Agency offers current market value 
buyout of the loan, the borrower has 90 days from the date of Agency 
notification to pay that amount.


Sec. 766.114  State-certified mediation or voluntary meeting of 
creditors.

    (a) A borrower who is unable to develop a feasible plan but is 
otherwise eligible for primary loan servicing may request:
    (1) State-certified mediation; or
    (2) Voluntary meeting of creditors when a State does not have a 
certified mediation program.
    (b) Any negotiation of the Agency's appraisal must be completed 
before State-certified mediation or voluntary meeting of creditors.


Sec. 766.115  Challenging the Agency appraisal.

    (a) A borrower considered for primary loan servicing who does not 
agree with the Agency's appraisal of the borrower's assets may:
    (1) Obtain a technical appraisal review of the Agency's appraisal 
and provide it at the appeal hearing;
    (2) Obtain an independent appraisal completed in accordance with 
Sec. 761.7 as part of the appeals process. The borrower must:
    (i) Pay for this appraisal;
    (ii) Choose which appraisal will be used in Agency calculations, if 
the difference between the two appraisals is less than 5 percent.
    (3) Negotiate the Agency's appraisal by obtaining a second 
appraisal.
    (i) If the difference between the two appraisals is less than five 
percent, the borrower will choose the appraisal to be used in Agency 
calculations.
    (ii) If the difference between the two appraisals is greater than 
five percent, the borrower may request a third appraisal. The Agency 
and the borrower will share the cost of the third appraisal equally. 
The average of the two appraisals closest in value will serve as the 
final value.
    (iii) A borrower may request a negotiated appraisal only once in 
connection with an application for primary loan servicing.
    (iv) The borrower may not appeal a negotiated appraisal.
    (b) If the appraised value of the borrower's assets changes as a 
result of the appealed appraisal or the negotiated appraisal, the 
Agency will reconsider its previous loan servicing decision using the 
new appraisal value.
    (c) If the appeal process results in a determination that the 
borrower is eligible for primary loan servicing, the Agency will use 
the information the appeal officer used in making the decision on the 
appeal, unless stated otherwise in the appeal decision letter.


Sec.Sec. 766.116-766.150  [Reserved]

Subpart D--Homestead Protection Program


Sec. 766.151  Purpose.

    The Homestead Protection Program provides an opportunity for 
borrowers to retain their principal residence and up to 10 acres of 
adjoining land to maintain their family, through a lease-purchase 
agreement with the Agency. If the Agency has only chattels as security, 
homestead protection will not apply.


Sec. 766.152  Applying for Homestead Protection.

    (a) Pre-acquisition. (1) Notification. If the borrower requested 
primary loan servicing but cannot develop a feasible plan, the Agency 
will notify the borrower of any additional information needed to 
process the homestead protection request. The borrower must provide 
this information within 30 days of Agency notification.
    (2) Borrower does not respond. If the borrower does not timely 
provide the information requested, the Agency will deny the homestead 
protection request and provide reconsideration and appeal rights.
    (3) Application requirements. A complete application for Homestead 
Protection will include:
    (i) Updates to items required under Sec. 766.102;
    (ii) Information required under Sec. 766.353(b); and
    (iii) Identification of land and buildings to be considered.
    (b) Post-acquisition. (1) Notification. After the Agency acquires 
title to the property, the Agency will notify the

[[Page 6104]]

borrower of the availability of homestead protection. The borrower must 
submit a complete application within 30 days of Agency notification.
    (2) Borrower does not respond. If the borrower does not respond to 
the Agency notice, the Agency will dispose of the property in 
accordance with 7 CFR 767.
    (3) Application requirements. A complete application for Homestead 
Protection will include:
    (i) Updates to items required under Sec. 766.102; and
    (ii) Identification of land and buildings to be considered.


Sec. 766.153  Eligibility.

    (a) Property. (1) The principal residence and the adjoining land of 
up to 10 acres, must have served as real estate security for the FLP 
loan and may include existing farm service buildings.
    (2) The applicant may propose a homestead protection site. Any 
proposed site is subject to Agency approval.
    (3) The proposed homestead protection site must meet all State and 
local requirements for division into a separate legal lot.
    (4) Where voluntary conveyance of the property to the Agency is 
required to process the Homestead Protection request, the Agency will 
take title to the property only if it can obtain a positive recovery 
after paying any outstanding liens of other creditors on the property.
    (b) Applicant. To be eligible for Homestead Protection, the 
applicant:
    (1) Must be the owner, or former owner from whom the Agency 
acquired title of the property pledged as security for an FLP loan;
    (i) Is a member of an entity who is or was personally liable for 
the FLP loan secured by the Homestead Protection property and the 
applicant or entity held fee title to the property;
    (ii) Is an entity and the members of the entity are or were 
personally liable for the FLP loan and have separate homes on the 
security property, each member possessing and occupying a separate home 
may apply for homestead protection.
    (2) Must have earned gross farm income commensurate with:
    (i) The size and location of the farm; and
    (ii) The local agricultural conditions in at least two calendar 
years during the 6-year period immediately preceding the calendar year 
in which the borrower applied for Homestead Protection;
    (3) Must have received 60 percent of gross income from farming in 
at least 2 of the 6 years immediately preceding the year in which the 
borrower applied for Homestead Protection;
    (4) Must have lived in the home during the 6-year period 
immediately preceding the year in which the borrower applied for 
Homestead Protection. The borrower may have left the home for not more 
than 12 months if it was due to circumstances beyond their control; and
    (5) Must demonstrate sufficient income to make rental payments on 
the homestead property for the term of the lease and to maintain the 
property in good condition. The lessee will be responsible for any 
normal maintenance, making any improvements to the property, and 
replacing systems such as:
    (i) Structural;
    (ii) Mechanical;
    (iii) Electrical;
    (iv) Plumbing;
    (v) Well;
    (vi) Water;
    (vii) Septic;
    (viii) Sewage;
    (ix) Appliance;
    (x) Corral;
    (xi) Fences;
    (xii) Windmills;
    (xiii) Outbuildings; and
    (xiv) Any other system that is affixed to or a part of the real 
estate.


Sec. 766.154  Homestead Protection transferability.

    Homestead protection rights are not transferrable or assignable, 
unless the eligible party dies or becomes legally incompetent in which 
case the homestead protection rights may be transferred to the spouse 
only.


Sec. 766.155  Homestead Protection leases.

    (a) General. (1) The Agency may approve a lease-purchase agreement 
subject to obtaining title to the property.
    (2) If a third party obtains title to the property:
    (i) The applicant and the property are no longer eligible for 
homestead protection; and
    (ii) The Agency will not implement any outstanding lease-purchase 
agreement.
    (3) The borrower may request homestead protection for property 
subject to third party redemption rights. In such case, homestead 
protection will not begin until the Agency obtains title to the 
property.
    (b) Lease terms and conditions. (1) The amount of rent will be 
based on equivalent rents charged for similar residential properties in 
the area in which the dwelling is located.
    (2) All leases will include an option to purchase the homestead 
protection property as described in paragraph (c) of this section.
    (3) The lease term will not be less than three years and will not 
exceed five years.
    (4) The lessee must agree to make lease payments on time and 
maintain the property.
    (5) The lessee must cooperate with Agency efforts to sell the 
remaining portion of the farm.
    (c) Lease-purchase options. (1) The lessee may exercise in writing 
the purchase option and complete the homestead protection purchase at 
any time prior to the expiration of the lease provided all lease 
payments are current.
    (2) The purchase price is the current market value of the property 
when the option is exercised as determined by a current appraisal 
obtained by the Agency.
    (3) The lessee may purchase homestead protection property with cash 
or other credit source.
    (4) The lessee may receive Agency Non-program financing provided:
    (i) The lessee has not received previous debt forgiveness;
    (ii) The Agency has funds available to finance the purchase of 
homestead protection property; and
    (iii) The lessee demonstrates an ability to repay such an Agency 
loan.
    (d) Lease terminations. The Agency may terminate the lease if the 
lessee does not cure any lease defaults within 30 days of Agency 
notification.
    (e) Appraisal of Homestead Protection property. The Agency will use 
an appraisal obtained within 6 months from the date of the application 
for considering homestead protection. If a current appraisal does not 
exist, the Agency will acquire an appraisal to determine the current 
market value of the homestead protection property.


Sec. 766.156  Conflict with State law.

    If there is a conflict between a borrower's homestead protection 
rights and any provisions of State law relating to redemption rights, 
the State law prevails.


Sec.Sec. 766.157-766.200  [Reserved]

Subpart E--Servicing Shared Appreciation Agreements and Net 
Recovery Buyout Agreements


Sec. 766.201  Shared Appreciation Agreement.

    (a) When a SAA is required. The Agency requires a borrower to enter 
into a SAA with the Agency when the borrower:
    (1) Owns any real estate that serves or will serve as loan 
security; and
    (2) Accepts a writedown in accordance with Sec. 766.111.
    (b) When SAA is due. The borrower must repay the calculated amount 
of

[[Page 6105]]

shared appreciation after a term of 5 years from the date of the 
writedown, or earlier if:
    (1) The borrower sells or conveys all or a portion of the Agency's 
real estate security, unless real estate is conveyed upon the death of 
a borrower to a spouse who will continue farming;
    (2) The borrower repays or satisfies all FLP loans;
    (3) The borrower ceases farming; or
    (4) The Agency accelerates the borrower's loans.


Sec. 766.202  Determining the shared appreciation due.

    (a) The value of the real estate security at the time of maturity 
of the SAA (current market value) shall be the appraised value of the 
security at the highest and best use, less the increase in the value of 
the security resulting from capital improvements added during the term 
of the SAA (contributory value). The current market value of the real 
estate security property will be determined based on a current 
appraisal obtained in accordance with Sec. 761.7 of this chapter, and 
subject to the following:
    (1) The borrower will identify any capital improvements that have 
been added to the property since the execution of the SAA.
    (2) The appraisal must specifically identify the contributory value 
of capital improvements made to the Agency real estate security during 
the term of the SAA to make deductions for that value.
    (3) For calculation of shared appreciation recapture, the remaining 
contributory value of capital improvements added during the term of the 
SAA will be deducted from the current market value of the property. 
Such capital improvements must also meet at least one of the following 
criteria:
    (i) It is the borrower's primary residence. If the new residence is 
affixed to the real estate security as a replacement for a residence 
which existed on the security property when the SAA was originally 
executed, or, the living area square footage of the original residence 
was expanded, only the value added to the real property by the new or 
expanded portion of the original residence (if it added value) will be 
deducted from the current market value.
    (ii) It is an improvement to the real estate with a useful life of 
over one year and is affixed to the property, the following conditions 
must be met:
    (A) The item must have been capitalized and not taken as an annual 
operating expense on the borrower's Federal income tax returns. The 
borrower must provide copies of appropriate tax returns to verify that 
capital improvements claimed for shared appreciation recapture 
reduction are capitalized.
    (B) If the new item is affixed to the real estate as a replacement 
for an item that existed on the real estate at the time the SAA was 
originally executed, only the value added by the new item will be 
deducted from the current market value.
    (b) In the event of a partial sale, an appraisal of the property 
being sold may be required to determine the market value at the time 
the SAA was signed if such value cannot be obtained through another 
method.


Sec. 766.203  Payment of recapture.

    (a) The borrower must pay on the due date or 30 days from Agency 
notification, whichever is later:
    (1) Seventy-five percent of the appreciation in the real estate 
security if the agreement is triggered within four years or less from 
the date of the writedown; or
    (2) Fifty percent of such appreciation if the agreement is 
triggered more than four years from the date of the writedown or when 
the agreement matures.
    (b) If the borrower sells a portion of the security, the borrower 
must pay shared appreciation only on the portion sold. Shared 
appreciation on the remaining portion will be due in accordance with 
paragraph (a) of this section.
    (c) The amount of recapture cannot exceed the amount of the debt 
written off through debt writedown.


Sec. 766.204  Amortization of recapture.

    (a) The Agency will amortize the recapture into a Shared 
Appreciation Payment Agreement provided the borrower:
    (1) Has not ceased farming and the borrower's account has not been 
accelerated;
    (2) Provides a complete application in accordance with Sec. 
764.51(a), by the recapture due date or within 60 days of Agency 
notification of the amount of recapture due, whichever is later;
    (3) Is unable to pay the recapture and cannot obtain funds from any 
other source;
    (4) Develops a feasible plan that includes repayment of the shared 
appreciation amount;
    (5) Provides a lien on all assets, except those listed in Sec. 
766.112(b); and
    (6) Signs loan agreements and security instruments as required.
    (b) If the borrower later becomes delinquent or financially 
distressed reamortization of the Shared Appreciation Payment Agreement 
can be considered under subpart C of this part.


Sec. 766.205  Shared Appreciation Payment Agreement rates and terms.

    (a) The interest rate for Shared Appreciation Payment Agreements is 
the Agency's SA amortization rate.
    (b) The term of the Shared Appreciation Payment Agreement is based 
on the borrower's repayment ability and the useful life of the 
security. The term will not exceed 25 years.


Sec. 766.206  Net Recovery Buyout Recapture Agreement.

    (a) Servicing existing Net Recovery Buyout Recapture Agreements. 
Prior to July 3, 1996, the Agency was authorized to offer borrowers to 
buy out their loans at the net recovery value. A Net Recovery Buyout 
Agreement was required for borrowers who bought out their loans at the 
net recovery value. The Agency services existing Net Recovery Buyout 
Recapture Agreements as described in this section.
    (b) Requirements and terms. (1) The term of a Net Recovery Buyout 
Recapture Agreement is 10 years. Net Recovery Buyout Recapture 
Agreements are secured by a lien on the former borrower's real estate.
    (2) If the former borrower sells or conveys real estate within the 
10-year term, the former borrower must repay the Agency the lesser of:
    (i) The fair market value of the real estate parcel at the time of 
sale or conveyance, as determined by an Agency appraisal, minus the 
portion of the recovery value of the real estate paid to the Agency in 
the buyout;
    (ii) The fair market value of the real estate parcel at the time of 
the sale or conveyance, as determined by an Agency appraisal, minus:
    (A) The unpaid balance of prior liens at the time of the sale or 
conveyance; and
    (B) The net recovery value of the real estate the borrower paid to 
the Agency in the buyout if this amount has not been accounted for as a 
prior lien;
    (iii) The total amount of the FLP debt the Agency wrote off for 
loans secured by real estate.
    (3) If the former borrower does not pay the amount due, the Agency 
will liquidate the Net Recovery Buyout account in accordance with 
subpart H of this part.
    (4) If the former borrower does not sell or convey the real estate 
within the 10 year term, no recapture is due.

[[Page 6106]]

Sec.Sec. 766.207-766.250  [Reserved]

Subpart F--Unauthorized Assistance


Sec. 766.251  Types of unauthorized assistance.

    (a) Unauthorized loan. An unauthorized loan is any loan, portion of 
a loan, interest rate, or interest subsidy that was not processed and 
approved in accordance with all Agency procedures and requirements.
    (b) Unauthorized loan servicing action. An unauthorized loan 
servicing action is any servicing action not made in accordance with 
all Agency procedures and requirements.


Sec. 766.252  Repayment of unauthorized assistance.

    (a) Except where specified otherwise, the borrower is responsible 
for repaying any unauthorized assistance in full within 90 days of 
Agency notice.
    (b) The borrower has the opportunity to meet with an Agency 
representative to discuss or refute the Agency's findings.


Sec. 766.253  Unauthorized assistance resulting from submission of 
false or incomplete information.

    A borrower is ineligible for continued Agency assistance if the 
borrower, or a third party on the borrower's behalf, submits 
information to the Agency that the borrower knows to be incomplete or 
false.


Sec. 766.254  Unauthorized assistance resulting from borrower or Agency 
error.

    (a) Borrower options. (1) The borrower may repay the amount of the 
unauthorized assistance in a lump sum within 90 days of Agency notice.
    (2) If the borrower is unable to repay the entire amount in a lump 
sum, the Agency will accept partial repayment of the unauthorized 
assistance within 90 days of Agency notice to the extent of the 
borrower's ability to repay. Any remaining balance will be handled in 
accordance with paragraph (a)(3) of this section.
    (3) If the borrower is unable to repay all or part of the 
unauthorized amount, the Agency will enter into an accelerated 
repayment agreement with the borrower for such amount under the 
following conditions:
    (i) The borrower did not intentionally provide incomplete or false 
information;
    (ii) Such agreement is in the best financial interest of the 
Government;
    (iii) The debt under the repayment agreement will be subject to the 
interest rate for Non-program loans;
    (iv) The term of the repayment agreement will be as short as 
feasible, but in no case will exceed:
    (A) The remaining term of the FLP loan;
    (B) Twenty-five (25) years for real estate loans;
    (C) The life of the security for chattel loans.
    (v) The debt under the repayment agreement will be serviced as a 
Non-program loan.
    (b) Borrower refusal to pay. If the borrower is able to pay the 
unauthorized assistance amount but refuses to do so, the Agency will 
notify the borrower of the availability of loan servicing in accordance 
with subpart C of this part.


Sec.Sec. 766.255-766.300  [Reserved]

Subpart G--Bankruptcy


Sec. 766.301  Notifying borrower in bankruptcy of loan servicing.

    If a borrower files for bankruptcy, the Agency will provide written 
notification to the borrower's attorney with a copy to the borrower as 
follows:
    (a) Borrower not previously notified. The Agency will provide 
notice of all loan servicing options available under subpart C of this 
part, if the borrower has not been previously notified of these 
options.
    (b) Borrower with prior notification. If the borrower had received 
monetary or non-monetary notification at the time of bankruptcy filing 
but all loan servicing was not completed, the Agency will provide 
notice of any remaining loan servicing options available under subpart 
C of this part.


Sec. 766.302  Loan servicing application requirements for borrowers in 
bankruptcy.

    (a) Borrower not previously notified. To be considered for loan 
servicing, the borrower or borrower's attorney must sign and return the 
appropriate response form and any forms or information requested by the 
Agency within 60 days of the date of receipt of Agency notice on loan 
servicing options.
    (b) Borrower previously notified. To be considered for continued 
loan servicing, the borrower or borrower's attorney must sign and 
return the appropriate response form and any forms or information 
requested by the Agency within the greater of:
    (1) Sixty days after the borrower's attorney received the 
notification of any remaining loan servicing options; or
    (2) The remaining time from the Agency's previous monetary or non-
monetary notification of all servicing options that the Agency 
suspended when the borrower filed bankruptcy.
    (c) Court approval. The borrower is responsible for obtaining court 
approval prior to exercising any available servicing rights.


Sec. 766.303  Processing loan servicing requests from borrowers in 
bankruptcy.

    (a) Considering borrower requests for servicing. Any request for 
servicing is the borrower's acknowledgment that the Agency will not 
interfere with any rights or protections under the Bankruptcy Code and 
its automatic stay provisions.
    (b) Borrowers with confirmed bankruptcy plans. If a plan is 
confirmed before servicing and any appeal is completed under 7 CFR part 
11, the Agency will complete the servicing or appeals process and may 
consent to a post-confirmation modification of the plan if it is 
consistent with the Bankruptcy Code and subpart C of this part, as 
appropriate.
    (c) Chapter 7 borrowers. A borrower filing for bankruptcy under 
chapter 7 of the Bankruptcy Code may not receive primary loan servicing 
unless the borrower reaffirms the entire Agency debt. A chapter 7 
borrower does not have to reaffirm the debt in order to be considered 
for homestead protection.


Sec.Sec. 766.304-766.350  [Reserved]

Subpart H--Loan Liquidation


Sec. 766.351  Liquidation.

    (a) General. (1) When a borrower cannot or will not meet a loan 
obligation, the Agency will consider liquidating the borrower's account 
in accordance with this subpart.
    (2) The Agency will charge protective advances against the 
borrower's account as necessary to protect the Agency's interests 
during liquidation in accordance with Sec. 765.203 of this chapter.
    (3) The Agency considers liquidation in accordance with paragraph 
(b) of this section, if a borrower has both Program and Non-program 
loans.
    (4) When no surviving family member or third party assumes or 
repays a deceased borrower's loan in accordance with part 765, subpart 
J, of this chapter, or when the estate does not otherwise fully repay 
or sell loan security to repay a deceased borrower's Agency loans, the 
Agency will liquidate the security as quickly as possible in accordance 
with State and local requirements.
    (b) Liquidation for Program borrowers. (1) If the borrower does not 
apply, does not accept, or is not eligible for primary loan servicing, 
conservation contract, market value buyout or homestead protection, and 
all administrative appeals are concluded, the Agency will accelerate 
the borrower's account in accordance with Sec. 766.355.
    (2) Borrowers may voluntarily liquidate their security in 
accordance with Sec.Sec. 766.352, 766.353 and 766.354.

[[Page 6107]]

    (i) The Agency will not delay involuntary liquidation action.
    (ii) If the conditions of (b)(1) of this section have not been met, 
the Agency will notify the borrower in accordance with subpart C of 
this part, prior to acting on the request for voluntary liquidation.
    (c) Liquidation for Non-program borrowers. If a borrower has both 
Program and Non-program loans, the borrower's account will be handled 
in accordance with paragraph (b) of this section. If a borrower with 
only Non-program loans is in default, the borrower may liquidate 
voluntarily, subject to the following:
    (1) The Agency may delay involuntary liquidation actions when in 
the Agency's best financial interest for a period not to exceed 60 
days.
    (2) The borrower must obtain the Agency's consent prior to the sale 
of the property.
    (3) If the borrower will not pay the Agency in full, the minimum 
sales price must be the current market value of the property as 
determined by the Agency.
    (4) The Agency will accept a conveyance offer only when it is in 
the Agency's best financial interest.
    (5) If a Non-program borrower does not cure the default, or cannot 
or will not voluntarily liquidate, the Agency will accelerate the loan.


Sec. 766.352  Voluntary sale of real property and chattel.

    (a) Conditions for voluntary sale of real property and chattel. A 
borrower may voluntarily sell real property or chattel to repay Agency 
debt in lieu of involuntary liquidation. Partial dispositions are 
handled in accordance with part 765, subparts G and H of this chapter.
    (1) The borrower must sell all real property and chattel that 
secure Agency debt until the debt is paid in full or until all security 
has been liquidated.
    (2) The Agency must approve the sale and approve the use of 
proceeds.
    (3) The sale proceeds are applied in order of lien priority, except 
that proceeds may be used to pay customary costs appropriate to the 
transaction as follows:
    (i) The costs must be reasonable in amount;
    (ii) The borrower cannot arrange to pay the costs from personal 
funds or cannot have the purchaser pay;
    (iii) The costs must be paid to consummate the transaction;
    (iv) When it is necessary for the Agency to present the promissory 
note to the recorder to obtain a release of a portion of the real 
property from the mortgage, the borrower must pay any cost for postage 
and insurance of the note while in transit.
    (4) The Agency will approve the sale of property when the proceeds 
do not cover the borrower's full debt only if:
    (i) The sales price must be equal to or greater than the market 
value of the property; and
    (ii) The sale is in the Agency's best financial interest.
    (5) If an unpaid loan balance remains after the sale, the Agency 
will continue to service the loan in accordance with 7 CFR part 792.
    (b) Voluntary sale of chattel. If the borrower complies with 
paragraph (a) of this section, the borrower may sell chattel security 
by:
    (1) Public sale. The borrower must obtain the agreement of 
lienholders as necessary to complete a public sale; or
    (2) Private sale. The borrower may sell chattel security at a 
private sale if the borrower:
    (i) Sells all of the security for not less than the current market 
value;
    (ii) Obtains the agreement of lienholders as necessary to complete 
the sale;
    (iii) Has a buyer who is ready and able to purchase the property; 
and
    (iv) The Agency agrees to the sale.


Sec. 766.353  Voluntary conveyance of real property.

    (a) Requirements for conveying real property. The following 
requirements must be satisfied before the Agency will accept a 
conveyance.
    (1) The borrower must supply the Agency with the following:
    (i) An Agency application form;
    (ii) A current financial statement. If the borrower is an entity, 
all entity members must provide current financial statements;
    (iii) Information on present and future income and potential 
earning ability;
    (iv) A warranty deed or other deed acceptable to the Agency;
    (v) In the case of an entity, a resolution approved by the 
governing body that authorizes the conveyance;
    (vi) Assignment of all leases to the Agency. The borrower must put 
all oral leases in writing;
    (vii) Title insurance or title record for the security, if 
available;
    (viii) Complete debt settlement application in accordance with 7 
CFR part 792 before or in conjunction with the voluntary conveyance 
offer if the value of the property to be conveyed is less than the 
debt; and
    (ix) Any other documentation required by the Agency to evaluate the 
request.
    (2) The Agency will have the property appraised to determine its 
current market value.
    (b) Conditions for conveying real property. The Agency will accept 
voluntary conveyance of real property by a borrower if:
    (1) Conveyance is in the Agency's best financial interest;
    (2) The borrower conveys all real property securing the Agency 
loan; and
    (3) The borrower has received prior notification of the 
availability of loan servicing in accordance with subpart C of this 
part.
    (c) Prior and junior liens. (1) The Agency will pay prior liens to 
the extent consistent with the Agency's best financial interest.
    (2) Before conveyance, the borrower must pay or obtain releases of 
all junior liens, real estate taxes, judgments, and other assessments.
    (d) Charging and crediting the borrower's account. (1) The Agency 
will charge the borrower's account for all recoverable costs incurred 
in connection with a conveyance in accordance with Sec. 765.203 of this 
chapter.
    (2) The Agency will credit the borrower's account for the amount of 
the market value of the property less any prior liens, or the debt, 
whichever is less. In the case of a Native American borrower whose 
loans are secured by real estate located within the boundaries of a 
Federally recognized Indian reservation, however, the Agency will 
credit the borrower's account at the greater of the market value of the 
security or the borrower's Agency debt.


Sec. 766.354  Voluntary conveyance of chattel.

    (a) Requirements for conveying chattel. The borrower must supply 
the Agency with the following:
    (1) An Agency application form;
    (2) A current financial statement. If the borrower is an entity, 
all entity members must provide current financial statements;
    (3) Information on present and future income and potential earning 
ability;
    (4) A bill of sale including each item and titles to all vehicles 
and equipment, as applicable;
    (5) In the case of an entity, a resolution approved by the 
governing body that authorizes the conveyance;
    (6) Complete debt settlement application in accordance with 7 CFR 
part 792 before or in conjunction with the voluntary conveyance offer 
if the value of the property to be conveyed is less than the debt.
    (b) Conditions for conveying chattel. The Agency will accept 
conveyance of chattel only if:
    (1) The borrower has made every possible effort to sell the 
property voluntarily;
    (2) The borrower can convey the chattel free of other liens;

[[Page 6108]]

    (3) The conveyance is in the Agency's best financial interest;
    (4) The borrower conveys all chattel securing the Agency loan; and
    (5) The borrower has received prior notification of the 
availability of loan servicing in accordance with subpart C of this 
part.
    (c) Charging and crediting the borrower's account. (1) The Agency 
will charge the borrower's account for all recoverable costs incurred 
in connection with the conveyance in accordance with Sec. 765.203 of 
this chapter.
    (2) The Agency will credit the borrower's account in the amount of 
the market value of the chattel.


Sec. 766.355  Acceleration of loans.

    (a) General. (1) The Agency accelerates loans in accordance with 
this section, unless State law imposes separate restrictions on 
accelerations.
    (2) The Agency accelerates all of the borrower's loans at the same 
time, regardless of whether each individual loan is delinquent or not.
    (3) All borrowers must receive prior notification in accordance 
with subpart C of this part, except for borrowers who fail to graduate 
in accordance with Sec. 766.101(a)(7).
    (b) Time limitations. The borrower has 30 days from the date of the 
Agency acceleration notice to pay the Agency in full.
    (c) Borrower options. The borrower may:
    (1) Pay cash;
    (2) Transfer the security to a third party in accordance with part 
765, subpart I of this chapter;
    (3) Sell the security property in accordance with Sec. 766.352; or
    (4) Voluntarily convey the security to the Agency in accordance 
with Sec.Sec. 766.353 and 766.354.
    (d) Partial payments. The Agency may accept a payment that does not 
cover the unpaid balance of the accelerated loan if the borrower is in 
the process of selling security, unless acceptance of the payment would 
reverse the acceleration.
    (e) Failure to satisfy the debt. The Agency will liquidate the 
borrower's account in accordance with Sec. 766.356 if the borrower does 
not pay the account in full within the time period specified in the 
acceleration notice.


Sec. 766.356  Involuntary liquidation of real property and chattel.

    (a) General policy. The Agency will liquidate the borrower's 
security if:
    (1) The borrower does not satisfy the account in accordance with 
Sec. 766.355;
    (2) The Agency can obtain a positive recovery on a loan; and
    (3) The involuntary liquidation is in the Agency's best financial 
interest.
    (b) Foreclosure on loans secured by real property. (1) The Agency 
will charge the borrower's account for all recoverable costs incurred 
in connection with the foreclosure and sale of the property in 
accordance with Sec. 765.203.
    (2) If the Agency acquires the foreclosed property, the Agency will 
credit the borrower's account in the amount of the market value of the 
property less the amount of any prior liens on the date of acquisition.
    (3) If the Agency does not acquire the foreclosed property, the 
Agency will credit the borrower's account in accordance with State law 
and guidance from the Regional OGC.
    (4) For a Native American borrower whose real property secures an 
Agency loan and is located within the confines of a Federally 
recognized Indian reservation, the Agency will credit the borrower's 
account in the amount that is the greater of:
    (i) The market value of the security; or
    (ii) The amount of the Agency debt against the property.
    (5) If an unpaid balance on the Agency loan remains after the 
foreclosure sale of the property, the Agency may debt settle the 
account in accordance with 7 CFR part 792.
    (c) Foreclosure of loans secured by chattel. (1) The Agency will 
charge the borrower's account for all recoverable costs incurred by the 
Agency as a result of the repossession and sale of the property.
    (2) The Agency will apply the proceeds from the repossession sale 
to the borrower's account less prior liens and all authorized 
liquidation costs.
    (3) If an unpaid balance on the Agency loan remains after the sale 
of the repossessed property, the Agency may debt settle the account in 
accordance with 7 CFR part 792.


Sec.Sec. 766.357-766.400  [Reserved]

Subpart I--Exception Authority


Sec. 766.401  Agency exception authority.

    On an individual case basis, the Agency may consider granting an 
exception to any regulatory requirement or policy of this part if:
    (a) The exception is not inconsistent with the authorizing statute 
or other applicable law; and
    (b) The Government's financial interest would be adversely affected 
by acting in accordance with published regulations or policies and 
granting the exception would resolve or eliminate the adverse effect 
upon the Government's financial interest.


Sec.Sec. 766.402-766.450  [Reserved]

Appendix A to Subpart C of Part 766--Notice of Availability of Loan 
Servicing to Borrowers Who Are Current or Less Than 90 Days Past Due

FSA 2501

Notice of Availability of Loan Servicing to Borrowers Who Are Current 
or Less Than 90 Days Past Due

    Dear (Borrower's Name)
    This notice informs you of servicing options that may be 
available to financially distressed borrowers or borrowers less than 
90 days past due. The Agency's primary loan servicing programs, 
Conservation Contract Program, Homestead Protection Program, and 
debt settlement programs may help you resolve your financial 
distress, repay your loan, retain your farm property or settle your 
Farm Loan Programs (FLP) debt.

How To Apply

    To apply, you must complete, where applicable, and provide all 
items required in paragraph (e).

Help in Responding to This Notice

    The servicing options available to you may become complicated. 
You may need help to understand them and their impact on your 
operation. You may want to ask an attorney to help you or there are 
organizations that give free or low-cost advice to farmers. You may 
contact your State Department of Agriculture or the USDA Extension 
Service for available services in your State.

    Note: Agency employees cannot recommend a particular attorney or 
organization.

Who Will Decide if You Qualify?

    After you submit a complete application, the Agency will 
determine if you meet all eligibility requirements and can develop a 
farm operating plan which shows that you can pay all debts and 
expenses.

What Happens if You Do Not Apply or Do Not Resolve Your 
Delinquency?

    If you do not timely apply to this notice, or you do not resolve 
your delinquency, and you become 90 days past due on your loans, the 
Agency will notify you of available loan servicing by sending you 
FSA 2503, ``Notice of Availability of Loan Servicing to Borrowers 
Who Are 90 Days Past Due.''
    Included with this notice you will find information on:
    (a) Primary loan servicing programs;
    (b) Conservation Contract Program;
    (c) Homestead Protection Program;
    (d) Debt settlement programs;
    (e) Forms, documentation, and information needed to apply;
    (f) How to get copies of the Agency's handbooks and forms;
    (g) Reconsideration, mediation, negotiation and appeal rights;
    (h) The right not to be discriminated against.

[[Page 6109]]

(a) Primary Loan Servicing Programs

Eligibility

    You must meet the following eligibility requirements to obtain 
primary loan servicing:
    (a) You are financially distressed due to circumstances beyond 
your control which reduced your repayment ability to the extent that 
scheduled payments cannot be made as a result of one the following 
circumstances:
    (1) Illness, injury, or death of a borrower or other individual 
who operates the farm;
    (2) Natural disaster, adverse weather, disease, or insect damage 
which caused severe loss of agricultural production;
    (3) Widespread economic conditions such as low commodity prices;
    (4) Damage or destruction of property essential to the 
operation; or
    (5) Loss of, or reduction in, your or your spouse's essential 
non-farm income.
    (b) You do not have non-essential assets for which the net 
recovery value is sufficient to resolve your financial distress. The 
Agency cannot write down debt that you could pay with the value of 
your equity in these assets.
    (c) If you are in non-monetary default as a result of 
noncompliance with the Agency's loan agreements, you must resolve 
the non-monetary default prior to closing the servicing action.
    (d) You must have acted in good faith in accordance with your 
loan agreements.

Time Limits

    If the Agency determines that you are eligible for primary loan 
servicing and can develop a feasible plan, you will have 45 days 
from notice to accept the Agency's offer for loan servicing.

Lien requirements

    If you are offered loan servicing and accept the offer, you must 
agree to give the Agency a lien on your other assets and you must 
provide this lien at closing.

Payment of interest

    You must pay a portion of the interest that has accrued on your 
loans prior to closing the servicing action.

Loan consolidation

    The unpaid principal and interest of two or more operating loans 
can be combined into one larger operating loan. When loans are 
consolidated, the interest rate will be the lesser of:
    (1) the lowest interest rate for that type of loan on the date a 
complete servicing application was received;
    (2) the lowest interest rate for that type of loan on the date 
of restructure; or
    (3) the lowest original loan note rate on any of the original 
notes being consolidated.
    In addition, the Agency will consider the maximum loan terms.

Loan rescheduling

    The repayment schedule may be changed to cure the financial 
distress or delinquency and give you new terms to repay loans made 
for equipment, livestock, or annual operating purposes. When loans 
are rescheduled, the interest rate will be the lesser of:
    (1) the lowest interest rate for that type of loan on the date a 
complete servicing application was received;
    (2) the lowest interest rate for that type of loan on the date 
of restructure; or
    (3) the lowest original loan note rate on any of the original 
notes being rescheduled.
    In addition, the Agency will consider the maximum loan terms.

Loan reamortization

    The repayment schedule may be changed to cure the financial 
distress or delinquency and give you a new schedule of repayment on 
loans made for real estate purposes. When loans are reamortized, the 
interest rate will be the lesser of:
    (1) the lowest interest rate for that type of loan on the date a 
complete servicing application was received;
    (2) the lowest interest rate for that type of loan on the date 
of restructure; or
    (3) The original loan note rate of the note being reamortized.
    In addition, the Agency will consider the maximum loan terms.

Limited Resource Interest Rate

    Limited resource interest rates are available for certain types 
of loans. If you have existing loans which are not at the limited 
resource rate, and a limited resource rate is available, the Agency 
will consider reducing the rate of the loans. The limited resource 
interest rate can be as low as 5 percent, however, this rate may 
change depending on what it costs the Government to borrow money.
    For information about current interest rates, contact this 
office.

Loan Deferral

    Partial or full payments of principal and interest may be 
temporarily delayed for up to five years. You will only be 
considered for loan deferral if the loan servicing programs 
discussed above will not allow you to pay all essential family 
living and farm operating expenses, maintain your property, and pay 
your debts.
    You must be able to show through a farm operating plan that you 
are unable to pay all essential family living and farm operating 
expenses, maintain your property, and pay your debts. The farm 
operating plan must also show that you will be able to pay your full 
installment at the end of the deferral period.
    The interest that accrues during the deferral period must be 
paid in yearly payments for the rest of the loan term after the 
deferral period ends.

Debt Writedown

    Debt writedown can reduce the principal and interest on your 
loan. The Agency offers a writedown only when the loan servicing 
programs discussed above and the Conservation Contract Program will 
not result in a feasible plan. To receive debt writedown, the value 
of your restructured loan must be equal to or greater than the 
recovery value to the Agency from foreclosure and repossession of 
your security property.
    The recovery value is the market value of:
    (1) The collateral pledged as security for your FLP loans minus 
expenses (such as the sale costs, attorneys' fees, management costs, 
taxes, and payment of prior liens) on the collateral that the Agency 
would have to pay if it foreclosed, or repossessed, and sold the 
collateral;
    (2) Any collateral that is not in your possession and has not 
been released for sale by the Agency in writing; and
    (3) Any other non-essential assets you may own.
    A qualified appraiser determines the value of the collateral and 
any other assets you own. You may receive a writedown only if you 
have not previously received any form of debt forgiveness on any 
other FLP direct loan. The maximum amount of debt that can be 
written down on all direct loans is $300,000.

Shared Appreciation Agreement

    If you own real estate and receive a debt writedown, you must 
sign a Shared Appreciation Agreement. The term of the agreement is 
five years. Under the terms of the agreement you must repay all or a 
part of the amount written down at the maturity of your Shared 
Appreciation Agreement if your real estate collateral increased in 
value. Payment of shared appreciation will be required prior to the 
maturity of your Shared Appreciation Agreement if you:
    (1) Sell or convey the real estate;
    (2) Stop farming;
    (3) Pay off your entire FLP debt; or
    (4) Have your FLP accounts accelerated by the Agency.
    If any of these events occur within the first four years of the 
agreement, you will have to pay 75 percent of the increase in value 
of the real estate. If any of these events occur after the fourth 
anniversary of the agreement, or if the Shared Appreciation 
Agreement matures without having previously been fully triggered, 
you will have to pay only 50 percent of the increase in value. You 
will not have to pay more than the amount of the debt written down.

(b) Conservation Contract Program

    You may request a Conservation Contract to protect highly 
erodible land, wetlands, or wildlife habitats located on your real 
estate property that serves as security for your FLP debt. In 
exchange for such contract, the Agency would reduce your FLP debt. 
The amount of land left after the contract must be sufficient to 
continue your farming operation.

(c) Homestead Protection Program

    Under the Homestead Protection Program, you may repurchase your 
primary residence, certain outbuildings, and up to 10 acres of land. 
If you cannot pay cash or Agency financing is not available, you may 
lease your primary residence. The lease will include an option for 
you to purchase the property you lease.
    This program may apply when primary loan servicing or the 
Conservation Contract Program are not available or are not accepted.
    You must agree to give the Agency title to your land at the time 
the Agency signs the homestead protection agreement with you. The 
Agency will compute the costs of taking title including the cost of 
paying other creditors who have outstanding liens on the

[[Page 6110]]

property. The Agency will take title only if it can obtain a 
positive recovery.

Eligibility Requirements

    (1) Your gross annual income from the farming operation must 
have been similar to other comparable operations in your area in at 
least two of the last six years.
    (2) Sixty percent (60%) of your gross annual income in at least 
two of the last six years must have come from the farming operation.
    (3) You must have lived in your homestead property for six years 
immediately before your application. If you had to leave for less 
than 12 months during the 6-year period and you had no control over 
the circumstances, you may still qualify.
    (4) You must be the owner of the property immediately prior to 
the Agency obtaining title.

Property Restrictions and Easements

    The Agency may place restrictions or easements on your property 
which restrict your use if the property is located in a special area 
or has special characteristics. These restrictions and easements 
will be placed in leases and in deeds on properties containing 
wetlands, floodplains, endangered species, wild and scenic rivers, 
historic and cultural properties, coastal barriers, and highly 
erodible lands.

Leasing the Homestead Property

    (1) You must pay rent to the Agency to lease the property 
determined eligible for homestead protection. The rent the Agency 
charges will be similar to comparable property in your area.
    (2) You must maintain the property in good condition during the 
term of the lease.
    (3) You may lease the property for up to five years but no less 
than three years.
    (4) You cannot sublease the property.
    (5) If you do not make the rental payments to the Agency, the 
Agency will cancel the lease and take legal action to force you to 
leave.
    (6) Lease payments are not applied toward the final purchase 
price of the property.

Purchasing the Homestead Protection Property

    You can repurchase your homestead property at market value at 
any time during the lease. The market value of the property will be 
decided by a qualified appraiser and will reflect the value of the 
land after any placement of a restriction or easement such as a 
wetland conservation easement.

(d) Debt Settlement Programs

    You can apply for debt settlement at any time; however, these 
programs are usually used only after it has been determined that 
primary loan servicing programs and Conservation Contract cannot 
help you. Under the debt settlement programs, the debt you owe the 
Agency under FLP may be settled for less than the amount you owe. 
These programs are subject to the discretion of the Agency and are 
not a matter of entitlement or right.

Settlement Alternatives

    Settlement alternatives include:
    (1) Compromise: A lump-sum payment of less than the total FLP 
debt owed;
    (2) Adjustment: Two or more payments of less than the total 
amount owed to the Agency. Payments can be spread out over a maximum 
of five years if the Agency determines you will be able to make the 
payments as they become due; and
    (3) Cancellation: Satisfaction of Agency debt without payment.

    Note: The Agency will not finance these alternatives.

Processing and Requirements

    If you sell loan collateral, you must apply the proceeds from 
the sale to your FLP loans before you can be considered for debt 
settlement. In the case of compromise or adjustment you may keep 
your collateral, if you pay the Agency the market value of your 
collateral along with any additional amount the Agency determines 
you are able to pay. Debt amounts which are collectible through 
administrative offset, judgment, or by the Department of the 
Treasury will not be settled through debt settlement procedures. You 
must certify that you do not have assets or income in addition to 
what you stated in your application. If you qualify, your 
application must also be approved by the State Executive Director or 
the Administrator, depending on the amount of the debt to be 
settled.

(e) Forms, Documentation, and Information Needed To Apply

    A complete application for primary loan servicing must include 
items 1 through 9. Additional information is required as noted if 
you want to be considered for the Conservation Contract Program or 
for debt settlement programs. If you need help to complete the 
required forms, you may request an Agency official to assist you. 
The forms for requirements (1) through (6) and (10) are included 
with this package.
    (1) FSA 2502, ``Acknowledgment of Available Loan Servicing--Less 
Than 90 Days Past Due.'' All individuals and entities liable for the 
FLP debt must sign FSA 2502 to request servicing.
    (2) FSA 410-1, ``Application for Agency Services.'' In the case 
of an entity borrower, all entity members must provide current 
financial statements.
    (3) FSA 431-2, ``Farm and Home Plan,'' or other acceptable plan 
of operation.
    (4) FSA 440-32, ``Request for Statement of Debts and 
Collateral.'' Complete the name and address of the creditor, account 
number, if applicable, and your name. All parties liable to the 
creditor must sign and date the form. The Agency will mail this form 
to the creditor to obtain the needed information. Any debts less 
than $1,000 can be verified by a credit report. If debts of $1,000 
or more appear on your credit report and no FSA 440-32 is supplied 
to the Agency to mail to the creditor within the 60-day time period, 
the application cannot be considered complete.
    (5) RD 1910-5, ``Request for Verification of Employment.'' If 
you have non-farm income, you must complete employer's name and 
address, employee's name and address, social security number, sign 
and date the form. The Agency will send the form to your employer to 
obtain the needed information.
    (6) FSA 1960-12, ``Financial and Production Farm Analysis 
Summary.'' Complete the form or another similar worksheet to provide 
production and expense history for crops, livestock, livestock 
products, etc., for each of the three years immediately preceding 
the year of application or the years you have been farming, 
whichever is less and if not already in the Agency case file. You 
must be able to support this information with farm records.
    (7) AD-1026, ``Highly Erodible Land Conservation (HELC) and 
Wetland Conservation (WC) Certification.'' You will be required to 
complete this form if the one you have on file does not reflect all 
the land you own and lease.
    (8) SCS-CPA-026, ``Highly Erodible Land and Wetland Conservation 
Determination.'' This form must be obtained from and completed by 
the Natural Resources Conservation Service office, if not already on 
file with the Agency.
    (9) Copies of your income tax records and any supporting 
documents for the last three years immediately preceding the year of 
application. If your copies of tax records are not readily 
available, you can obtain copies from the Internal Revenue Service.
    (10) RD 1956-1, ``Application for Settlement of Indebtedness.'' 
Complete this form only if you wish to apply for debt settlement. 
You must also comply with any Agency request for additional 
information needed to process a debt settlement request.
    (11) If you are applying for a Conservation Contract a map or 
aerial photo of your farm identifying the portion of the land and 
approximate number of acres to be considered.

Divorced Spouses

    If you are an FLP obligor who has left the farm operation due to 
divorce, you may request release of liability. To be released of 
liability after a divorce, you must present the Agency with the 
following within 60 days of receiving this notice:
    (1) A divorce decree or property settlement document which 
states the remaining party will be responsible for all repayment to 
the Agency;
    (2) Evidence that you have conveyed your ownership interest in 
FLP security to the remaining party; and
    (3) Evidence that you do not have any repayment ability for the 
FLP loan through cash, income, or other non-essential assets.
    The Agency will make a determination on your request and will 
inform you of the decision within 60 days of receiving your request.
    If you are not released of liability, you will need to include 
all of your relevant financial information if applying for primary 
loan servicing, homestead protection, or debt settlement program.

(f) How To Get Copies of Agency Handbooks and Forms

    Copies of the forms for requirements (e)(1) through (e)(6) and 
(e)(10) have been included in this notice. You may obtain copies of 
Agency handbooks describing available

[[Page 6111]]

programs or additional copies of forms from this office.

(g) Reconsideration, Mediation, Negotiation, and Appeal Rights

    Reconsideration, mediation, negotiation, and appeal rights will 
be provided to you if the Agency makes an adverse decision on your 
request for loan servicing or prior to acceleration of your FLP 
account. These options will be provided when required to insure that 
you are given the reasons for the Agency decision and complete 
information on how you may request any of these options.

Reconsideration

    If you are determined by the Agency to be ineligible for loan 
servicing, or if you cannot develop a feasible plan, you may request 
a reconsideration meeting with the Agency decision maker. You must 
request reconsideration within 30 days of the date you receive the 
adverse decision. At a reconsideration meeting, you may present 
additional information to the decision maker and explain why you 
believe the adverse decision to be in error. If the meeting does not 
change the Agency decision, you will be notified and provided 30 
days to request mediation, negotiation, or appeal as outlined below.

Mediation

    Mediation is a process for resolution of a disagreement. A 
trained neutral mediator assists two or more parties in dispute to 
look at the issues, consider all available options, and attempt to 
agree on an acceptable solution. If your State has a mediation 
program approved by the USDA, the Agency will participate in 
mediation. If there is no State mediation program, the Agency may 
help you to set up a meeting with your other creditors. If you wish 
to request mediation, you must make such request within 30 days of 
your receipt of an adverse Agency decision. If you request mediation 
prior to requesting an appeal, the 30-day time period for requesting 
an appeal will be temporarily suspended. If mediation fails to 
resolve your dispute with the Agency, only the balance of the 30 
days will remain to request an appeal.

Negotiation of the Appraisal

    If you timely submit a complete application for primary loan 
servicing, but disagree with the appraisal used by the Agency for 
processing your primary loan servicing request, you will have 30 
days to obtain, at your own expense, an independent appraisal which 
conforms to published Agency appraisal standards. If this 
independent appraised value is within 5 percent of the value of the 
Agency appraisal, you must choose one of these two appraisals for 
the Agency to use to continue processing your request. If the 
appraisals differ by more than 5 percent, you may request a third 
appraisal for which you must pay half of the cost, and the average 
of the two appraisals closest in value is taken as the final 
appraised value to be used in considering your request. If you wish 
to request both negotiation and mediation, these should be requested 
at the same time so the negotiation of the appraisal can be 
concluded prior to mediation. If not requested at the same time, 
negotiation of the appraisal must be requested first. Negotiated 
appraisals are not appealable but other issues can still be appealed 
after negotiation. If you request negotiation of the appraisal prior 
to requesting an appeal, the 30-day time period for requesting an 
appeal will be temporarily suspended. If negotiation of the 
appraisal fails to resolve your dispute with the Agency, only the 
balance of the 30-day time frame will remain to request an appeal on 
issues other than the negotiated appraisal.

Appeal

    Appeal is a process under which you present evidence to USDA's 
National Appeals Division which shows that the Agency's adverse 
decision is wrong. Subject to the deadline suspensions discussed 
above, your request for an appeal must be postmarked no later than 
30 days from the date you received the Agency's adverse decision.

(h) The Right Not To Be Discriminated Against

    The Federal Equal Credit Opportunity Act prohibits creditors 
from discriminating against credit applicants on the basis of race, 
color, religion, national origin, sex, marital status, age (provided 
the applicant has the capacity to enter into a binding contract); 
because all or part of the applicant's income derives from any 
public assistance program; or because the applicant has in good 
faith exercised any right under the Consumer Credit Protection Act. 
The Federal agency that administers compliance with this law is the 
Federal Trade Commission, Equal Credit Opportunity, Washington, DC 
20580.
    USDA regulations prohibit discrimination in USDA programs 
because of your race, color, religion, sex, age, national origin, 
marital status, familial status, sexual orientation, disability; 
because all or part of your income is derived from any public 
assistance program; or because you have filed a program complaint, 
participated in any program complaint proceeding, or opposed a 
prohibited practice.
    If you believe that you have been discriminated against for any 
of the reasons stated above, you may file a complaint with the 
Director, Office of Civil Rights, United States Department of 
Agriculture, Room 326-W, Whitten Building, 1400 Independence Avenue 
SW., Washington, DC 20250-9410.
    The servicing programs described by this Notice are subject to 
applicable Agency regulations published at 7 CFR part 766.
    For more information, please contact this office.
-----------------------------------------------------------------------
Title
Office Address
Telephone number

Appendix B to subpart C of part 766--Notice of Availability of Loan 
Servicing to Borrowers Who Are 90 Days Past Due

FSA 2503

Notice of Availability of Loan Servicing to Borrowers Who are 90 Days 
Past Due

    Dear (Borrower's Name)
    This notice informs you that you are seriously delinquent with 
your Farm Loan Programs (FLP) loan payment and notifies you of 
options that may be available to you. The Agency's primary loan 
servicing programs, Conservation Contract Program, current market 
value buyout, Homestead Protection Program, and debt settlement 
programs may help you repay your loan and retain your farm property 
or settle your FLP debt.

How to apply

    To apply, you must complete, where applicable, and provide all 
items required in paragraph (f), within 60 days of the date you 
receive this notice.

Help in responding to this notice

    The servicing options available to you may become complicated. 
You may need help to understand them and their impact on your 
operation. You may want to ask an attorney to help you or there are 
organizations that give free or low-cost advice to farmers. You may 
contact your State Department of Agriculture or the USDA Extension 
Service for available services in your State.

    Note: Agency employees cannot recommend a particular attorney or 
organization.

Who will decide if you qualify?

    After you submit a complete application, the Agency will 
determine if you meet all eligibility requirements and can develop a 
farm operating plan which shows that you can pay all debts and 
expenses.

What happens if you do not bring the account current or apply 
within 60 days?

    The Agency will accelerate your loan if you do not bring the FLP 
account current or timely apply for loan servicing. This means the 
Agency will take legal action to collect all the money you owe to 
the Agency under FLP. After acceleration of your loan accounts, the 
Agency will start foreclosure proceedings. The Agency will repossess 
or take legal action to sell your real estate, personal property, 
crops, livestock, equipment, or any other assets in which the Agency 
has a security interest. The Agency will stop all releases of the 
proceeds from Agency security including, but not limited to, 
releases of your crops, livestock and milk. The Agency will take, by 
administrative offset, money or other program benefits which FSA or 
other Federal Agencies owe you. The Agency will also obtain and file 
judgments against you and your property or refer your account to the 
Department of the Treasury for collection.
    Included with this notice you will find information on:
    (a) Primary loan servicing programs;
    (b) Conservation Contract Program;
    (c) Current market value buyout;
    (d) Homestead Protection Program;
    (e) Debt settlement programs;
    (f) Forms, documentation, and information needed to apply;
    (g) How to get copies of Agency handbooks and forms;
    (h) Reconsideration, mediation, negotiation, and appeal rights;

[[Page 6112]]

    (i) Acceleration and foreclosure;
    (j) The right not to be discriminated against.

(a) Primary Loan Servicing Programs

Eligibility

    You must meet the following eligibility requirements to obtain 
primary loan servicing:
    (a) You cannot repay your FLP debt due to circumstances beyond 
your control which reduced your repayment ability to the extent that 
scheduled payments cannot be made as a result of one of the 
following circumstances:
    (1) Illness, injury, or death of a borrower or another 
individual who operates the farm;
    (2) Natural disaster, adverse weather, disease, or insect damage 
which caused severe loss of agricultural production;
    (3) Widespread economic conditions such as low commodity prices;
    (4) Damage or destruction of property essential to the 
operation; or
    (5) Loss of, or reduction in, your or your spouse's essential 
non-farm income.
    (b) You do not have non-essential assets for which the net 
recovery value is sufficient to pay the delinquent portion of the 
loan. The Agency cannot reduce or write off debt that you could pay 
with the value of your equity in these assets.
    (c) If you are in non-monetary default as a result of 
noncompliance with the Agency's loan agreements, you must resolve 
the non-monetary default prior to closing the servicing action.
    (d) You must have acted in good faith in accordance with your 
loan agreements.

Time Limits

    If the Agency determines that you can develop a feasible plan 
and are eligible for primary loan servicing, you will have 45 days 
from the date you receive the Agency's offer to accept loan 
servicing.

Lien Requirements

    If you are offered loan servicing and accept the offer, you must 
agree to give the Agency a lien on your other assets and you must 
provide this lien at closing.

Loan Consolidation

    The unpaid principal and interest of two or more operating loans 
can be combined into one larger operating loan. When loans are 
consolidated, the interest rate will be the lesser of:
    (1) The lowest interest rate for that type of loan on the date a 
complete servicing application was received;
    (2) The lowest interest rate for that type of loan on the date 
of restructure; or
    (3) The lowest original loan note rate on any of the original 
notes being consolidated.
    In addition, the Agency will consider the maximum loan terms.

Loan Rescheduling

    The repayment schedule may be changed to cure the financial 
distress or delinquency and give you new terms to repay loans made 
for equipment, livestock, or annual operating purposes. When loans 
are rescheduled, the interest rate will be the lesser of:
    (1) The lowest interest rate for that type of loan on the date a 
complete servicing application was received;
    (2) The lowest interest rate for that type of loan on the date 
of restructure; or
    (3) The lowest original loan note rate on any of the original 
notes being rescheduled.
    In addition, the Agency will consider the maximum loan terms.

Loan Reamortization

    The repayment schedule may be changed to cure the financial 
distress or delinquency and give you a new schedule of repayment on 
loans made for real estate purposes. When loans are reamortized, the 
interest rate will be the lesser of:
    (1) The lowest interest rate for that type of loan on the date a 
complete servicing application was received;
    (2) The lowest interest rate for that type of loan on the date 
of restructure; or
    (3) The original loan note rate of the note being reamortized.
    In addition, the Agency will consider the maximum loan terms.

Limited Resource Interest Rate

    Limited resource interest rates are available for certain types 
of loans. If you have existing loans which are not at the limited 
resource rate, but a limited resource rate is available, the Agency 
will consider reducing the rate of the loans. The limited resource 
interest rate can be as low as 5 percent, however, this rate may 
change depending on what it costs the Government to borrow money.
    For information about current interest rates, contact this 
office.

Loan Deferral

    Partial or full payments of principal and interest may be 
temporarily delayed for up to five years. You will only be 
considered for loan deferral if the loan servicing programs 
discussed above will not allow you to pay all essential family 
living and farm operating expenses, maintain your property, and pay 
your debts.
    You must be able to show through a farm operating plan that you 
are unable to pay all essential family living and farm operating 
expenses, maintain your property, and pay your debts. The farm 
operating plan must also show that you will be able to pay your full 
installment at the end of the deferral period.
    The interest that accrues during the deferral period must be 
paid in yearly payments for the rest of the loan term after the 
deferral period ends.

Debt Writedown

    Debt writedown can reduce the principal and interest on your 
loan. The Agency offers a writedown only when the loan servicing 
programs discussed above and the Conservation Contract Program, if 
requested, will not result in a feasible plan. To receive debt 
writedown, the value of your restructured loan must be equal to or 
greater than the recovery value to the Agency from foreclosure and 
repossession of your security property.
    The recovery value is the market value of:
    (1) The collateral pledged as security for FLP loans minus 
expenses (such as the sale costs, attorneys' fees, management costs, 
taxes, and payment of prior liens) on the collateral that the Agency 
would have to pay if it foreclosed, or repossessed, and sold the 
collateral;
    (2) Any collateral that is not in your possession and has not 
been released for sale by the Agency in writing; and
    (3) Any other non-essential assets you may own.
    A qualified appraiser determines the value of the collateral and 
any other assets you own. You may receive a writedown only if you 
have not previously received any form of debt forgiveness on any 
other FLP direct loan. The maximum amount of debt that can be 
written down on all direct loans is $300,000.

Shared Appreciation Agreement

    If you own real estate and receive a debt writedown, you must 
sign a Shared Appreciation Agreement. The term of the agreement is 
five years. Under the terms of the agreement you must repay all or a 
part of the amount written down at the maturity of your Shared 
Appreciation Agreement if your real estate collateral increased in 
value. Payment of shared appreciation will be required prior to the 
maturity of your Shared Appreciation Agreement if you:
    (1) Sell or convey the real estate;
    (2) Stop farming;
    (3) Pay off your entire FLP debt; or
    (4) Have your FLP accounts accelerated by the Agency.
    If any of these events occur within the first four years of the 
agreement, you will have to pay 75 percent of the increase in value 
of the real estate. If any of these events occur after the fourth 
anniversary of the agreement, or if the Shared Appreciation 
Agreement matures without having previously been fully triggered, 
you will have to pay only 50 percent of the increase in value. You 
will not have to pay more than the amount of the debt written down.

(b) Conservation Contract Program

    You may request a Conservation Contract to protect highly 
erodible land, wetlands, or wildlife habitats located on your real 
estate property that serves as security for your FLP debt. In 
exchange for such contract, the Agency would reduce your FLP debt. 
The amount of land left after the contract must be sufficient to 
continue your farming operation.

(c) Current Market Value Buyout

    If the analysis of your debt shows that you cannot achieve a 
feasible plan even if the present value of your FLP debt is reduced 
to the value of the security, the Agency may offer you buyout of 
your Farm Loan Programs debt. You would pay the market value of all 
FLP security and non-essential assets, minus any prior liens. The 
market value is determined by a current appraisal completed by a 
qualified appraiser. In exchange, your loans would be satisfied.

Limits

    To receive a current market value buyout offer:
    (1) You must not have previously received any form of debt 
forgiveness from the Agency on any other direct FLP loan;

[[Page 6113]]

    (2) The maximum debt to be written off with buyout does not 
exceed $300,000; and
    (3) You must not have non-essential assets with a net recovery 
value sufficient to pay your account current.

Eligibility

    To qualify, you must prove that:
    (1) You cannot repay your delinquent FLP debt due to 
circumstances beyond your control; and
    (2) You have acted in good faith in accordance with your loan 
agreements.

Time Limit

    To buyout your FLP debt at the current market value, you must 
pay the Agency within 90 days of the date you receive the offer.

Method of payment

    To buyout your FLP debt at the current market value, you must 
pay by cash, cashier's check, or U.S. Treasury check. The Agency 
will not make or guarantee a loan for this purpose.

(d) Homestead Protection Program

    Under the Homestead Protection Program, you may repurchase your 
primary residence, certain outbuildings, and up to 10 acres of land. 
If you cannot pay cash or Agency financing is not available, you may 
lease your primary residence. The lease will include an option for 
you to purchase the property you lease.
    This program may apply when primary loan servicing, the 
Conservation Contract Program, or current market value buyout is not 
available or not accepted.
    You must agree to give the Agency title to your land at the time 
the Agency signs the homestead protection agreement with you. The 
Agency will compute the costs of taking title including the cost of 
paying other creditors who have outstanding liens on the property. 
The Agency will take title only if it can obtain a positive 
recovery.

Eligibility requirements

    (1) Your gross annual income from the farming operation must 
have been similar to other comparable operations in your area in at 
least two of the last six years.
    (2) Sixty percent (60%) of your gross annual income in at least 
two of the last six years must have come from the farming operation.
    (3) You must have lived in your homestead property for six years 
immediately before your application. If you had to leave for less 
than 12 months during the 6-year period and you had no control over 
the circumstances, you may still qualify.
    (4) You must be the owner of the property immediately prior to 
the Agency obtaining title.

Property restrictions and easements

    The Agency may place restrictions or easements on your property 
which restrict your use if the property is located in a special area 
or has special characteristics. These restrictions and easements 
will be placed in leases and in deeds on properties containing 
wetlands, floodplains, endangered species, wild and scenic rivers, 
historic and cultural properties, coastal barriers, and highly 
erodible lands.

Leasing the homestead property

    (1) You must pay rent to the Agency to lease the property 
determined eligible for homestead protection. The rent the Agency 
charges will be similar to comparable property in your area.
    (2) You must maintain the property in good condition during the 
term of the lease.
    (3) You may lease the property for up to five years but no less 
than three years.
    (4) You cannot sublease the property.
    (5) If you do not make the rental payments to the Agency, the 
Agency will cancel the lease and take legal action to force you to 
leave.
    (6) Lease payments are not applied toward the final purchase 
price of the property.

Purchasing the homestead protection property

    You can repurchase your homestead property at market value at 
any time during the lease. The market value of the property will be 
decided by a qualified appraiser and will reflect the value of the 
land after any placement of a restriction or easement such as a 
wetland conservation easement.

(e) Debt Settlement Programs

    You can apply for debt settlement at any time; however, these 
programs are usually used only after it has been determined that 
primary loan servicing programs and the Conservation Contract 
Program cannot help you. Under the debt settlement programs, the 
debt you owe the Agency under FLP may be settled for less than the 
amount you owe. These programs are subject to the discretion of the 
Agency and are not a matter of entitlement or right. If you do not 
have any Agency security, you may apply for debt settlement only. If 
you do not apply, or do not receive approval of a debt settlement 
request, your FLP loan accounts will be forwarded to the Department 
of the Treasury for collection.

Settlement Alternatives

    Settlement alternatives include:
    (1) Compromise: A lump-sum payment of less than the total FLP 
debt owed;
    (2) Adjustment: Two or more payments of less than the total 
amount owed to the Agency. Payments can be spread out over a maximum 
of 5 years if the Agency determines you will be able to make the 
payments as they become due; and
    (3) Cancellation: Satisfaction of Agency debt without payment.

    Note: The Agency will not finance these alternatives.

Processing and Requirements

    If you sell loan collateral, you must apply the proceeds from 
the sale to your FLP loans before you can be considered for debt 
settlement. In the case of compromise or adjustment you may keep 
your collateral, if you pay the Agency the market value of your 
collateral along with any additional amount the Agency determines 
you are able to pay.
    Debt amounts which are collectible through administrative 
offset, judgment, or by the Department of the Treasury will not be 
settled through debt settlement procedures. You must certify that 
you do not have assets or income in addition to what you stated in 
your application. If you qualify, your application must also be 
approved by the State Executive Director or the Administrator, 
depending on the amount of the debt to be settled.

(f) Forms, Documentation, and Information Needed to Apply

    A complete application for primary loan servicing must include 
items 1 through 9. Additional information is required as noted if 
you want to be considered for the Conservation Contract Program or 
for debt settlement programs. If you need help to complete the 
required forms, you may request an Agency official to assist you. 
The forms for requirements (1) through (6) and (10) are included 
with this package.
    (1) FSA 2504 ``Acknowledgment of Available Loan Servicing--90 
Days Past Due.'' All individuals and entities liable for the FLP 
debt must sign FSA 2504 to request servicing.
    (2) FSA 410-1, ``Application for Agency Services.'' In the case 
of an entity borrower, all entity members must provide current 
financial statements.
    (3) FSA 431-2, ``Farm and Home Plan'', or other acceptable plan 
of operation.
    (4) FSA 440-32, ``Request for Statement of Debts and 
Collateral.'' Complete the name and address of the creditor, account 
number, if applicable, and your name. All parties liable to the 
creditor must sign and date the form. The Agency will mail this form 
to the creditor to obtain the needed information. Any debts less 
than $1,000 can be verified by a credit report. If debts of $1,000 
or more appear on your credit report and no FSA 440-32 is supplied 
to the Agency to mail to the creditor within the 60-day time period, 
the application cannot be considered complete.
    (5) RD 1910-5, ``Request for Verification of Employment.'' If 
you have non-farm income, you must complete employer's name and 
address, employee's name and address, social security number, sign 
and date the form. The Agency will send the form to your employer to 
obtain the needed information.
    (6) FSA 1960-12, ``Financial and Production Farm Analysis 
Summary.'' Complete the form or another similar worksheet to provide 
production and expense history for crops, livestock, livestock 
products, etc., for each of the three years immediately preceding 
the year of application or the years you have been farming, 
whichever is less and if not already in the Agency case file. You 
must be able to support this information with farm records.
    (7) AD-1026, ``Highly Erodible Land Conservation (HELC) and 
Wetland Conservation (WC) Certification.'' You will be required to 
complete this form if the one you have on file does not reflect all 
the land you own and lease.
    (8) SCS-CPA-026, ``Highly Erodible Land and Wetland Conservation 
Determination.'' This form must be obtained from and completed by 
the Natural Resources Conservation Service office, if not already on 
file with the Agency.

[[Page 6114]]

    (9) Copies of your income tax records and any supporting 
documents for the last three years immediately preceding the year of 
application. If your copies of tax records are not readily 
available, you can obtain copies from the Internal Revenue Service.
    (10) RD 1956-1, ``Application for Settlement of Indebtedness.'' 
Complete this form only if you wish to apply for debt settlement. 
You must also comply with any Agency request for additional 
information needed to process a debt settlement request.
    (11) If you are applying for a Conservation Contract a map or 
aerial photo of your farm identifying the portion of the land and 
approximate number of acres to be considered.

Divorced Spouses

    If you are an FLP obligor who has left the farm operation due to 
divorce, you may request release of liability. To be released of 
liability after a divorce, you must present the Agency with the 
following within 60 days of receiving this notice:
    (1) A divorce decree or property settlement document which 
states the remaining party will be responsible for all repayment to 
the Agency;
    (2) Evidence that you have conveyed your ownership interest in 
FLP security to the remaining party; and
    (3) Evidence that you do not have any repayment ability for the 
FLP loan through cash, income, or other non-essential assets.
    The Agency will make a determination on your request and will 
inform you of the decision within 60 days of receiving your request.
    If you are not released of liability, you will need to include 
all of your relevant financial information if applying for primary 
loan servicing, homestead protection, or debt settlement program.

(g) How To Get Copies of Agency Handbooks and Forms

    Copies of the forms for requirements (f)(1) through (f)(6) and 
(f)(10) have been included in this notice. You may obtain copies of 
Agency handbooks describing available programs or additional copies 
of forms from this office.

(h) Reconsideration, Mediation, Negotiation, and Appeal Rights

    Reconsideration, mediation, negotiation, and appeal rights will 
be provided to you if the Agency makes an adverse decision on your 
request for loan servicing or prior to acceleration of your account. 
These options will be provided when required to insure that you are 
given the reasons for the Agency decision and complete information 
on how you may request any of these options.

Reconsideration

    If you are determined by the Agency to be ineligible for loan 
servicing, or if you cannot develop a feasible plan, you may request 
a reconsideration meeting with the Agency decision maker. You must 
request reconsideration within 30 days of the date you receive the 
adverse decision. At a reconsideration meeting, you may present 
additional information to the decision maker and explain why you 
believe the adverse decision to be in error. If the meeting does not 
change the Agency decision, you will be notified and provided 30 
days to request mediation, negotiation, or appeal as outlined below.

Mediation

    Mediation is a process for resolution of a disagreement. A 
trained neutral mediator assists two or more parties in dispute to 
look at the issues, consider all available options, and attempt to 
agree on an acceptable solution. If your State has a mediation 
program approved by the USDA, the Agency will participate in 
mediation. If there is no State mediation program, the Agency may 
help you to set up a meeting with your other creditors. If you wish 
to request mediation, you must make such request within 30 days of 
your receipt of an adverse Agency decision. If you request mediation 
prior to requesting an appeal, the 30 day time period for requesting 
an appeal will be temporarily suspended. If mediation fails to 
resolve your dispute with the Agency, only the balance of the 30 
days will remain to request an appeal.

Negotiation of the Appraisal

    If you timely submit a complete application for primary loan 
servicing, but disagree with the appraisal used by the Agency for 
processing your primary loan servicing request, you will have 30 
days to obtain, at your own expense, an independent appraisal which 
conforms to published Agency appraisal standards. If this 
independent appraised value is within 5 percent of the value of the 
Agency appraisal, you must choose one of these two appraisals for 
the Agency to use to continue processing your request. If the 
appraisals differ by more than 5 percent, you may request a third 
appraisal for which you must pay half of the cost, and the average 
of the two appraisals closest in value is taken as the final 
appraised value to be used in considering your request. If you wish 
to request both negotiation and mediation, these should be requested 
at the same time so the negotiation of the appraisal can be 
concluded prior to mediation. If not requested at the same time, 
negotiation of the appraisal must be requested first. Negotiated 
appraisals are not appealable but other issues can still be appealed 
after negotiation. If you request negotiation of the appraisal prior 
to requesting an appeal, the 30 day time period for requesting an 
appeal will be temporarily suspended. If negotiation of the 
appraisal fails to resolve your dispute with the Agency, only the 
balance of the 30 day time frame will remain to request an appeal on 
issues other than the negotiated appraisal.

Appeal

    Appeal is a process under which you present evidence to USDA's 
National Appeals Division which shows that the Agency's adverse 
decision is wrong. Subject to the deadline suspensions discussed 
above, your request for an appeal must be postmarked no later than 
30 days from the date you received the Agency's adverse decision.

(i) Acceleration and foreclosure

    If you do not appeal an adverse determination, if you appeal, 
but are denied relief on appeal, or if you do not otherwise resolve 
your delinquency, the Agency will accelerate your loan accounts and 
demand payment of the entire debt. You may prevent Agency 
foreclosure on the loan collateral, if with prior Agency approval, 
you:
    (1) Sell all loan collateral for not less than its current 
market value and apply all proceeds to your creditors in order of 
lien priority.
    (2) Transfer the collateral to someone else and have that person 
assume all or part of your FLP debt.
    (3) Transfer the collateral to the Agency.
    If any of these options result in payment of less than you owe, 
you may apply for debt settlement. However, applications for debt 
settlement filed after the 60-day time period provided in this 
notice will not delay acceleration, administrative offset, and 
foreclosure. If the Agency determines that you cannot qualify for 
debt settlement, you can:
    (1) Pay your FLP loan accounts current;
    (2) Pay your FLP loan accounts in full;
    (3) Request reconsideration, mediation or appeal.
    If your real estate security contains your primary residence and 
becomes inventory property of the Agency, Homestead Protection 
rights will be provided.

(j) The right not to be discriminated against

    The Federal Equal Credit Opportunity Act prohibits creditors 
from discriminating against credit applicants on the basis of race, 
color, religion, national origin, sex, marital status, age (provided 
the applicant has the capacity to enter into a binding contract); 
because all or part of the applicant's income derives from any 
public assistance program; or because the applicant has in good 
faith exercised any right under the Consumer Credit Protection Act. 
The Federal agency that administers compliance with this law is the 
Federal Trade Commission, Equal Credit Opportunity, Washington, DC 
20580.
    USDA regulations prohibit discrimination in USDA programs 
because of your race, color, religion, sex, age, national origin, 
marital status, familial status, sexual orientation, disability; 
because all or part of your income is derived from any public 
assistance program; or because you have filed a program complaint, 
participated in any program complaint proceeding, or opposed a 
prohibited practice.
    If you believe that you have been discriminated against for any 
of the reasons stated above, you may file a complaint with the 
Director, Office of Civil Rights, United States Department of 
Agriculture, Room 326-W, Whitten Building, 1400 Independence Avenue 
SW., Washington, DC 20250-9410.
    The servicing programs described by this Notice are subject to 
applicable Agency regulations published at 7 CFR 766.
    For more information, please contact this office.
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Title
Office Address
Telephone number

[[Page 6115]]

Appendix C to subpart C of part 766--Notice of Availability of Loan 
Servicing to Borrowers in Non-Monetary Default

FSA 2505

Notice of Availability of Loan Servicing to Borrowers in Non-Monetary 
Default

    Dear (Borrower's Name):
    The Agency has reviewed your Farm Loan Programs (FLP) loan 
account. Our records show:
    [ ] You have disposed of property used to secure your FLP loan. 
You did not get written approval for this. This property is
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
    (Describe property.)
    [ ] You have stopped farming.
    [ ] A foreclosure action has been filed against you by --------
------------------------.
    [ ] You have
-----------------------------------------------------------------------
-----------------------------------------------------------------------
    (Insert reasons for proposed action.)
    [ ] You are also $---------------- behind on your payments.
    This notice informs you that you are in default on your FLP 
loans. You must resolve this default. The Agency's primary loan 
servicing programs, Conservation Contract Program, current market 
value buyout, Homestead Protection Program, and debt settlement 
programs may assist you in resolving the default.

How to apply

    To apply, you must complete, where applicable, and provide all 
items required in paragraph (f), within 60 days of the date you 
receive this notice.

Help in responding to this notice

    The servicing options available to you may become complicated. 
You may need help to understand them and their impact on your 
operation. You may want to ask an attorney to help you or there are 
organizations that give free or low-cost advice to farmers. You may 
contact your State Department of Agriculture or the USDA Extension 
Service for available services in your State.

    Note: Agency employees cannot recommend a particular attorney or 
organization.

Who will decide if you qualify?

    After you submit a complete application, the Agency will 
determine if you meet all eligibility requirements and can develop a 
farm operating plan which shows that you can pay all debts and 
expenses.

What happens if you do not resolve the default or apply within 60 
days?

    The Agency will accelerate your FLP loan if you do not resolve 
the default, or apply for loan servicing. This means the Agency will 
take legal action to collect all the money you owe. After 
acceleration of your FLP loan accounts, the Agency will start 
foreclosure proceedings. The Agency will repossess or take legal 
action to take any real estate, personal property, crops, livestock, 
equipment, or any other assets in which the Agency has a security 
interest. The Agency will stop all releases of the proceeds from 
Agency security including, but not limited to, releases of your 
crops, livestock, and milk. The Agency will take by administrative 
offset money, or other program benefits, which FSA or other Federal 
Agencies owe you. The Agency will also file judgements against you 
and your property or refer your account to the Department of the 
Treasury for collection.
    Included with this notice you will find information on:
    (a) Primary loan servicing programs;
    (b) Conservation Contract Program;
    (c) Current market value buyout;
    (d) Homestead Protection Program;
    (e) Debt settlement programs;
    (f) Forms, documentation, and information needed to apply;
    (g) How to get copies of Agency handbooks and forms;
    (h) Reconsideration, mediation, negotiation, and appeal rights;
    (i) Acceleration and foreclosure;
    (j) The right not to be discriminated against.

(a) Primary Loan Servicing Programs

Eligibility

    You must meet the following eligibility requirements to obtain 
primary loan servicing:
    (a) You must resolve all non-monetary defaults prior to closing 
the servicing action.
    (b) You must have acted in good faith in accordance with your 
loan agreements.
    (c) If you are also financially distressed or delinquent, it 
must be due to circumstances beyond your control which reduced your 
repayment ability to the extent that scheduled payments cannot be 
made as a result of one of the following circumstances:
    (1) Illness, injury, or death of a borrower or another 
individual who operates the farm;
    (2) Natural disaster, adverse weather, disease, or insect damage 
which caused severe loss of agricultural production;
    (3) Widespread economic conditions such as low commodity prices;
    (4) Damage or destruction of property essential to the 
operation; or
    (5) Loss of, or reduction in, your or your spouse's essential 
non-farm income.
    (d) You do not have non-essential assets for which the net 
recovery value is sufficient to pay any delinquent portion of the 
loan. The Agency cannot reduce or write off debt that you could pay 
with the value of your equity in these assets.

Time limits

    If the Agency determines that you can develop a feasible plan 
and are eligible for primary loan servicing, you will have 45 days 
from the date you receive the Agency's offer to accept loan 
servicing.

Lien requirements

    If you are offered loan servicing and accept the offer, you must 
agree to give the Agency a lien on your other assets and you must 
provide this lien at closing.

Loan consolidation

    The unpaid principal and interest of two or more operating loans 
can be combined into one larger operating loan. When loans are 
consolidated, the interest rate will be the lesser of:
    (1) the lowest interest rate for that type of loan on the date a 
complete servicing application was received;
    (2) the lowest interest rate for that type of loan on the date 
of restructure; or
    (3) the lowest original loan note rate on any of the original 
notes being consolidated.
    In addition, the Agency will consider the maximum loan terms.

Loan rescheduling

    The repayment schedule may be changed to cure the financial 
distress or delinquency and give you new terms to repay loans made 
for equipment, livestock, or annual operating purposes. When loans 
are rescheduled, the interest rate will be the lesser of:
    (1) the lowest interest rate for that type of loan on the date a 
complete servicing application was received;
    (2) the lowest interest rate for that type of loan on the date 
of restructure; or
    (3) the lowest original loan note rate on any of the original 
notes being rescheduled.
    In addition, the Agency will consider the maximum loan terms.

Loan Reamortization

    The repayment schedule may be changed to cure the financial 
distress or delinquency and give you a new schedule of repayment on 
loans made for real estate purposes. When loans are reamortized, the 
interest rate will be the lesser of:
    (1) The lowest interest rate for that type of loan on the date a 
complete servicing application was received;
    (2) the lowest interest rate for that type of loan on the date 
of restructure; or
    (3) the original loan note rate of the note being reamortized.
    In addition, the Agency will consider the maximum loan terms.

Limited Resource Interest Rate

    Limited resource interest rates are available for certain types 
of loans. If you have existing loans which are not at the limited 
resource rate, but a limited resource rate is available, the Agency 
will consider reducing the rate of the loans. The limited resource 
interest rate can be as low as 5 percent, however, this rate may 
change depending on what it costs the Government to borrow money.
    For information about current interest rates, contact this 
office.

Loan Deferral

    Partial or full payments of principal and interest may be 
temporarily delayed for up to five years. You will only be 
considered for loan deferral if the loan servicing programs 
discussed above will not allow you to pay all essential family 
living and farm operating expenses, maintain your property, and pay 
your debts.
    You must be able to show through a farm operating plan that you 
are unable to pay all essential family living and farm operating 
expenses, maintain your property, and pay your debts. The farm 
operating plan must also show that you will be able to pay your full 
installment at the end of the deferral period.

[[Page 6116]]

    The interest that accrues during the deferral period must be 
paid in yearly payments for the rest of the loan term after the 
deferral period ends.

Debt Writedown

    Debt writedown can reduce the principal and interest on your 
loan. The Agency offers a writedown only when the loan servicing 
programs discussed above and the Conservation Contract Program will 
not result in a feasible plan. To receive debt writedown, the value 
of your restructured loan must be equal to or greater than the 
recovery value to the Agency from foreclosure and repossession of 
your security property.
    The recovery value is the market value of:
    (1) The collateral pledged as security for FLP loans minus 
expenses (such as the sale costs, attorneys' fees, management costs, 
taxes, and payment of prior liens) on the collateral that the Agency 
would have to pay if it foreclosed, or repossessed, and sold the 
collateral;
    (2) Any collateral that is not in your possession and has not 
been released for sale by the Agency in writing; and
    (3) Any other non-essential assets you may own.
    A qualified appraiser determines the value of the collateral and 
any other assets you own. You may receive a writedown only if you 
have not previously received any form of debt forgiveness on any 
other FLP direct loan. The maximum amount of debt that can be 
written down on all direct loans is $300,000.

Shared Appreciation Agreement

    If you own real estate and receive a debt writedown, you must 
sign a Shared Appreciation Agreement. The term of the agreement is 
five years. Under the terms of the agreement you must repay all or a 
part of the amount written down at the maturity of your Shared 
Appreciation Agreement if your real estate collateral increased in 
value. Payment of shared appreciation will be required prior to the 
maturity of your Shared Appreciation Agreement if you:
    (1) Sell or convey the real estate;
    (2) Stop farming;
    (3) Pay off your entire FLP debt; or
    (4) Have your FLP accounts accelerated by the Agency.
    If any of these events occur within the first four years of the 
agreement, you will have to pay 75 percent of the increase in value 
of the real estate. If any of these events occur after the fourth 
anniversary of the agreement, or if the Shared Appreciation 
Agreement matures without having previously been fully triggered, 
you will have to pay only 50 percent of the increase in value. You 
will not have to pay more than the amount of the debt written down.

(b) Conservation Contract Program

    You may request a Conservation Contract to protect highly 
erodible land, wetlands, or wildlife habitats located on your real 
estate property that serves as security for your FLP debt. In 
exchange for such contract, the Agency would reduce your FLP debt. 
The amount of land left after the contract must be sufficient to 
continue your farming operation.

(c) Current Market Value Buyout

    If the analysis of your debt shows that you cannot achieve a 
feasible plan even if the present value of your FLP debt is reduced 
to the value of the security, the Agency may offer you buyout of 
your FLP debt. You would pay the market value of all Agency security 
and non-essential assets, minus any prior liens. The market value is 
determined by a current appraisal completed by a qualified 
appraiser. In exchange, your loans would be satisfied.

Limits

    To receive a current market value buyout offer:
    (1) You must not have previously received any form of debt 
forgiveness from the Agency on any other direct FLP loan;
    (2) The maximum debt to be written off with buyout does not 
exceed $300,000; and
    (3) You must not have non-essential assets with a net recovery 
value sufficient to pay your account current if you are delinquent.

Eligibility

    To qualify, you must prove that:
    (1) You cannot repay your delinquent FLP debt due to 
circumstances beyond your control; and
    (2) You have acted in good faith in accordance with your loan 
agreements.

Time Limit

    To buyout your FLP debt at the current market value, you must 
pay the Agency within 90 days of the date you receive the offer.

Method of Payment

    To buyout your FLP debt at the current market value, you must 
pay by cash, cashier's check, or U.S. Treasury check. The Agency 
will not make or guarantee a loan for this purpose.

(d) Homestead Protection Program

    Under the Homestead Protection Program, you may repurchase your 
primary residence, certain outbuildings, and up to 10 acres of land. 
If you cannot pay cash or Agency financing is not available, you may 
lease your primary residence. The lease will include an option for 
you to purchase the property you lease.
    This program may apply when primary loan servicing, the 
Conservation Contract Program, or current market value buyout is not 
available or not accepted.
    You must agree to give the Agency title to your land at the time 
the Agency signs the homestead protection agreement with you. The 
Agency will compute the costs of taking title including the cost of 
paying other creditors who have outstanding liens on the property. 
The Agency will take title only if it can obtain a positive 
recovery.

Eligibility Requirements

    (1) Your gross annual income from the farming operation must 
have been similar to other comparable operations in your area in at 
least two of the last six years.
    (2) Sixty percent (60%) of your gross annual income in at least 
two of the last six years must have come from the farming operation.
    (3) You must have lived in your homestead property for six years 
immediately before your application. If you had to leave for less 
than 12 months during the 6-year period and you had no control over 
the circumstances, you may still qualify.
    (4) You must be the owner of the property immediately prior to 
the Agency obtaining title.

Property Restrictions and Easements

    The Agency may place restrictions or easements on your property 
which restrict your use if the property is located in a special area 
or has special characteristics. These restrictions and easements 
will be placed in leases and in deeds on properties containing 
wetlands, floodplains, endangered species, wild and scenic rivers, 
historic and cultural properties, coastal barriers, and highly 
erodible lands.

Leasing the Homestead Property

    (1) You must pay rent to the Agency to lease the property 
determined eligible for homestead protection. The rent the Agency 
charges will be similar to comparable property in your area.
    (2) You must maintain the property in good condition during the 
term of the lease.
    (3) You may lease the property for up to five years but no less 
than three years.
    (4) You cannot sublease the property.
    (5) If you do not make the rental payments to the Agency, the 
Agency will cancel the lease and take legal action to force you to 
leave.
    (6) Lease payments are not applied toward the final purchase 
price of the property.

Purchasing the Homestead Protection Property

    You can repurchase your homestead property at current market 
value at any time during the lease. The market value of the property 
will be decided by a qualified appraiser and will reflect the value 
of the land after any placement of a restriction or easement such as 
a wetland conservation easement.

(e) Debt Settlement Programs

    You can apply for debt settlement at any time; however, these 
programs are usually used only after it has been determined that 
primary loan servicing programs and Conservation Contract cannot 
help you. Under the debt settlement programs, the debt you owe the 
Agency under FLP may be settled for less than the amount you owe. 
These programs are subject to the discretion of the Agency and are 
not a matter of entitlement or right. If you do not have any Agency 
security, you may apply for debt settlement only. If you do not 
apply, or do not receive approval of a debt settlement request, your 
FLP loan accounts will be forwarded to the Department of the 
Treasury for collection.

Settlement Alternatives

    Settlement alternatives include:
    (1) Compromise: A lump-sum payment of less than the total FLP 
debt owed;
    (2) Adjustment: Two or more payments of less than the total 
amount owed to the Agency. Payments can be spread out over a

[[Page 6117]]

maximum of 5 years if the Agency determines you will be able to make 
the payments as they become due; and
    (3) Cancellation: Satisfaction of Agency debt without payment.

    Note: The Agency will not finance these alternatives.

Processing and Requirements

    If you sell loan collateral, you must apply the proceeds from 
the sale to your FLP loans before you can be considered for debt 
settlement. In the case of compromise or adjustment you may keep 
your collateral, if you pay the Agency the market value of your 
collateral along with any additional amount the Agency determines 
you are able to pay.
    Debt amounts which are collectible through administrative 
offset, judgment, or by the Department of the Treasury will not be 
settled through debt settlement procedures. You must certify that 
you do not have assets or income in addition to what you stated in 
your application.
    If you qualify, your application must also be approved by the 
State Executive Director or the Administrator, depending on the 
amount of the debt to be settled.

(f) Forms, Documentation, and Information Needed To Apply

    A complete application for primary loan servicing must include 
items 1 through 9. Additional information is required as noted if 
you want to be considered for a Conservation Contract or for debt 
settlement programs. If you need help to complete the required 
forms, you may request an Agency official to assist you. The forms 
for requirements 1 through 6 and 10 are included with this package.
    (1) FSA 2506 ``Acknowledgment of Available Loan Servicing--Non-
Monetary Default.'' All individuals and entities liable for the FLP 
debt must sign FSA 2506 to request servicing.
    (2) FSA 410-1, ``Application for Agency Services.'' In the case 
of an entity borrower, all entity members must provide current 
financial statements.
    (3) FSA 431-2, ``Farm and Home Plan'', or other acceptable plan 
of operation.
    (4) FSA 440-32, ``Request for Statement of Debts and 
Collateral.'' Complete the name and address of the creditor, account 
number, if applicable, and your name. All parties liable to the 
creditor must sign and date the form. The Agency will mail this form 
to the creditor to obtain the needed information. Any debts less 
than $1,000 can be verified by a credit report. If debts of $1,000 
or more appear on your credit report and no FSA 440-32 is supplied 
to the Agency to mail to the creditor within the 60-day time period, 
the application cannot be considered complete.
    (5) RD 1910-5, ``Request for Verification of Employment.'' If 
you have non-farm income, you must complete employer's name and 
address, employee's name and address, social security number, sign 
and date the form. The Agency will send the form to your employer to 
obtain the needed information.
    (6) FSA 1960-12, ``Financial and Production Farm Analysis 
Summary.'' Complete the form or another similar worksheet to provide 
production and expense history for crops, livestock, livestock 
products, etc., for each of the three years immediately preceding 
the year of application or the years you have been farming, 
whichever is less and if not already in the Agency case file. You 
must be able to support this information with farm records.
    (7) AD-1026, ``Highly Erodible Land Conservation (HELC) and 
Wetland Conservation (WC) Certification.'' You will be required to 
complete this form if the one you have on file does not reflect all 
the land you own and lease.
    (8) SCS-CPA-026, ``Highly Erodible Land and Wetland Conservation 
Determination.'' This form must be obtained from and completed by 
the Natural Resources Conservation Service office, if not already on 
file with the Agency.
    (9) Copies of your income tax records and any supporting 
documents for the last three years immediately preceding the year of 
application. If your copies of tax records are not readily 
available, you can obtain copies from the Internal Revenue Service.
    (10) RD 1956-1, ``Application for Settlement of Indebtedness.'' 
Complete this form only if you wish to apply for debt settlement. 
You must also comply with any Agency request for additional 
information needed to process a debt settlement request.
    (11) If you are applying for a Conservation Contract a map or 
aerial photo of your farm identifying the portion of the land and 
approximate number of acres to be considered.

Divorced Spouses

    If you are an FLP obligor who has left the farm operation due to 
divorce, you may request release of liability. To be released of 
liability after a divorce, you must present the Agency with the 
following within 60 days of receiving this notice:
    (1) A divorce decree or property settlement document which 
states the remaining party will be responsible for all repayment to 
the Agency;
    (2) Evidence that you have conveyed your ownership interest in 
FLP security to the remaining party; and
    (3) Evidence that you do not have any repayment ability for the 
FLP loan through cash, income, or other non-essential assets.
    The Agency will make a determination on your request and will 
inform you of the decision within 60 days of receiving your request.
    If you are not released of liability, you will need to include 
all of your relevant financial information if applying for primary 
loan servicing, homestead protection, or debt settlement program.

(g) How To Get Copies of Agency Handbooks and Forms

    Copies of the forms for requirements (f)(1) through (f)(6) and 
(f)(10) have been included in this notice. You may obtain copies of 
Agency handbooks describing available programs or additional copies 
of forms from this office.

(h) Reconsideration, Mediation, Negotiation, and Appeal Rights

    Reconsideration, mediation, negotiation, and appeal rights will 
be provided to you if the Agency makes an adverse decision on your 
request for loan servicing or prior to acceleration of your account. 
These options will be provided when required to insure that you are 
given the reasons for the Agency decision and complete information 
on how you may request any of these options.

Reconsideration

    If you are determined by the Agency to be ineligible for loan 
servicing, or if you cannot develop a feasible plan, you may request 
a reconsideration meeting with the Agency decision maker. You must 
request reconsideration within 30 days of the date you receive the 
adverse decision. At a reconsideration meeting, you may present 
additional information to the decision maker and explain why you 
believe the adverse decision to be in error. If the meeting does not 
change the Agency decision, you will be notified and provided 30 
days to request mediation, negotiation, or appeal as outlined below.

Mediation

    Mediation is a process for resolution of a disagreement. A 
trained neutral mediator assists two or more parties in dispute to 
look at the issues, consider all available options, and attempt to 
agree on an acceptable solution. If your State has a mediation 
program approved by the USDA, the Agency will participate in 
mediation. If there is no State mediation program, the Agency may 
help you to set up a meeting with your other creditors. If you wish 
to request mediation, you must make such request within 30 days of 
your receipt of an adverse Agency decision. If you request mediation 
prior to requesting an appeal, the 30 day time period for requesting 
an appeal will be temporarily suspended. If mediation fails to 
resolve your dispute with the Agency, only the balance of the 30 
days will remain to request an appeal.

Negotiation of the Appraisal

    If you timely submit a complete application for primary loan 
servicing, but disagree with the appraisal used by the Agency for 
processing your primary loan servicing request, you will have 30 
days to obtain, at your own expense, an independent appraisal which 
conforms to published Agency appraisal standards. If this 
independent appraised value is within 5 percent of the value of the 
Agency appraisal, you must choose one of these two appraisals for 
the Agency to use to continue processing your request. If the 
appraisals differ by more than 5 percent, you may request a third 
appraisal for which you must pay half of the cost, and the average 
of the two appraisals closest in value is taken as the final 
appraised value to be used in considering your request. If you wish 
to request both negotiation and mediation, these should be requested 
at the same time so the negotiation of the appraisal can be 
concluded prior to mediation. If not requested at the same time, 
negotiation of the appraisal must be requested first. Negotiated 
appraisals are not

[[Page 6118]]

appealable but other issues can still be appealed after negotiation. 
If you request negotiation of the appraisal prior to requesting an 
appeal, the 30 day time period for requesting an appeal will be 
temporarily suspended. If negotiation of the appraisal fails to 
resolve your dispute with the Agency, only the balance of the 30 day 
time frame will remain to request an appeal on issues other than the 
negotiated appraisal.

Appeal

    Appeal is a process under which you present evidence to USDA's 
National Appeals Division which shows that the Agency's adverse 
decision is wrong. Subject to the deadline suspensions discussed 
above, your request for an appeal must be postmarked no later than 
30 days from the date you received the Agency's adverse decision.

(i) Acceleration and Foreclosure

    If you do not appeal an adverse determination, if you appeal, 
but are denied relief on appeal, or if you do not otherwise resolve 
your delinquency, the Agency will accelerate your loan accounts and 
demand payment of the entire debt. You may prevent Agency 
foreclosure on the loan collateral, if with prior Agency approval, 
you:
    (1) Sell all loan collateral for not less than its current 
market value and apply all proceeds to your creditors in lien order.
    (2) Transfer the collateral to someone else and have that person 
assume all or part of your FLP debt.
    (3) Transfer the collateral to the Agency.
    If any of these options result in payment of less than you owe, 
you may apply or reapply for debt settlement even if you applied 
before and were denied. However, applications for debt settlement 
filed after the 60-day time period provided in this notice will not 
delay acceleration, administrative offset, and foreclosure.
    If the Agency determines that you cannot qualify for debt 
settlement, you can:
    (1) Pay your FLP loan accounts current;
    (2) Pay your FLP loan accounts in full;
    (3) Request reconsideration, mediation or appeal.
    If your real estate security contains your primary residence and 
becomes inventory property of the Agency, homestead protection 
rights will be provided.

(j) The right not to be discriminated against

    The Federal Equal Credit Opportunity Act prohibits creditors 
from discriminating against credit applicants on the basis of race, 
color, religion, national origin, sex, marital status, age (provided 
the applicant has the capacity to enter into a binding contract); 
because all or part of the applicant's income derives from any 
public assistance program; or because the applicant has in good 
faith exercised any right under the Consumer Credit Protection Act. 
The Federal agency that administers compliance with this law is the 
Federal Trade Commission, Equal Credit Opportunity, Washington, DC 
20580.
    USDA regulations prohibit discrimination in USDA programs 
because of your race, color, religion, sex, age, national origin, 
marital status, familial status, sexual orientation, disability; 
because all or part of your income is derived from any public 
assistance program; or because you have filed a program complaint, 
participated in any program complaint proceeding, or opposed a 
prohibited practice.
    If you believe that you have been discriminated against for any 
of the reasons stated above, you may file a complaint with the 
Director, Office of Civil Rights, United States Department of 
Agriculture, Room 326-W, Whitten Building, 1400 Independence Avenue 
SW., Washington, DC 20250-9410.
    The servicing programs described by this Notice are subject to 
applicable Agency regulations published at 7 CFR 766.
    For more information, please contact this office.
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Title
Office Address
Telephone number

    15. Add part 767 to read as follows:

PART 767--INVENTORY PROPERTY MANAGEMENT

Sec.
Subpart A--Overview
767.1 Introduction to inventory property management.
767.2 Abbreviations and definitions.
767.3-767.50 [Reserved]
Subpart B--Property Abandonment and Personal Property Removal
767.51 Property abandonment.
767.52 Disposition of personal property from inventory real 
property.
767.53-767.100 [Reserved]
Subpart C--Lease of Inventory Real Property
767.101 Leasing inventory real property.
767.102 Lease of inventory non-real estate property.
767.103 Managing leased inventory real property.
767.104-767.150 [Reserved]
Subpart D--Disposal of Inventory Property
767.151 General requirements.
767.152 Exceptions.
767.153 Sale of inventory real property.
767.154 Conveying easements, rights-of-way, and other interests in 
inventory property.
767.155 Selling chattel property.
767.156-767.200 [Reserved]
Subpart E--Real Property with Important Resources, Special Hazard Areas 
and Environmental Risks
767.201 Inventory real property with important resources.
767.202 Inventory real property located in special hazard areas.
767.203 Inventory real property containing environmental risks.
767.204-767.250 [Reserved]
Subpart F--Exception Authority
767.251 Agency exception authority.
767.252-767.300 [Reserved]

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

Subpart A--Overview


Sec. 767.1  Introduction to inventory property management.

    (a) Purpose. This part describes the Agency's policies for:
    (1) Managing inventory property;
    (2) Selling inventory property;
    (3) Leasing inventory property;
    (4) Managing real and chattel property the Agency takes into 
custody after abandonment by the borrower;
    (5) Selling or leasing inventory property with important resources, 
special hazard areas and environmental risks; and
    (6) Conveying interest in real property for conservation purposes.
    (b) Basic policy. The Agency maintains, manages and sells inventory 
property as necessary to protect the Agency's financial interest.


Sec. 767.2  Abbreviations and definitions.

    Abbreviations and definitions for terms used in this part are 
provided in Sec. 761.2 of this chapter.


Sec.Sec. 767.3-767.50  [Reserved]

Subpart B--Property Abandonment and Personal Property Removal


Sec. 767.51  Property abandonment.

    The Agency will take actions necessary to secure, maintain, 
preserve, manage, and operate the abandoned security property, 
including marketing perishable security property on behalf of the 
borrower when such action is in the Government's best financial 
interest. If the security is in jeopardy, the Agency will take the 
above actions prior to completing servicing actions contained in 7 CFR 
766.


Sec. 767.52  Disposition of personal property from inventory real 
property.

    (a) Preparing to dispose of personal property. If, at the time of 
acquisition, personal property has been left on the inventory real 
property, the Agency will notify the former real estate owner and any 
known lienholders that the Agency will dispose of the personal 
property. Property of value may be sold at a public sale.
    (b) Reclaiming personal property. The owner or lienholder may 
reclaim personal property at any time prior to the property's sale or 
disposal by paying all expenses incurred by the Agency in connection 
with the personal property.
    (c) Use of proceeds from sale of personal property. Proceeds from 
the public sale of personal property will be distributed as follows:
    (1) To lienholders in order of lien priority less a pro rata share 
of the sale expenses;

[[Page 6119]]

    (2) To the inventory account up to the amount of expenses incurred 
by the Agency in connection with the sale of personal property;
    (3) To the outstanding balance on the Agency loan; and
    (4) To the borrower, if the borrower's whereabouts are known.


Sec.Sec. 767.53-767.100  [Reserved]

Subpart C--Lease of Inventory Real Property


Sec. 767.101  Leasing inventory real property.

    (a) When the Agency may lease inventory real property. The Agency 
may lease inventory real property in the following situations:
    (1) To the former owner under the Homestead Protection Program.
    (2) To a beginning farmer who was selected to purchase the property 
but was unable to purchase it because of a lack of Agency direct or 
guaranteed loan funds.
    (3) When the Agency is unable to sell the property because of 
lengthy litigation or appeal processes.
    (b) Condition of property. The Agency will lease inventory real 
property in an ``as is'' condition.
    (c) Lease terms. (1) The Agency will lease property for:
    (i) Homestead protection in accordance with part 766, subpart D, of 
this chapter.
    (ii) A maximum of 18 months to a beginning farmer the Agency 
selected as purchaser when no Agency loan funds are available; or
    (iii) For the shortest possible duration for all other cases 
subject to the following:
    (A) The maximum lease term for such a lease is 12 months.
    (B) The lease is not subject to renewal or extension.
    (2) The lessee may pay:
    (i) A lump sum;
    (ii) On an annual installment basis;
    (iii) On a crop-share basis, if the lessee is a beginning farmer 
under paragraph (a) of this section.
    (3) The Agency leases inventory real property for a market rent 
amount charged for similar properties in the area.
    (4) The Agency may require the lessee to provide a security 
deposit.
    (5) Only leases to a beginning farmer or Homestead Protection 
Program participant will contain an option to purchase the property.


Sec. 767.102  Lease of inventory non-real estate property.

    The Agency does not lease non-real estate property unless it is 
attached as a fixture to inventory real property that is being leased 
and it is essential to the farming operation.


Sec. 767.103  Managing leased inventory real property.

    (a) Repairing leased property. The Agency will pay for repairs to 
leased inventory real property only when necessary to protect the 
Agency's interest.
    (b) Handling income from leased inventory real property. (1) The 
Agency will apply lease proceeds to the inventory property account.
    (2) If the lessee purchases the inventory real property, the Agency 
will not credit lease payments to the purchase price of the property.


Sec.Sec. 767.104-767.150  [Reserved]

Subpart D--Disposal of Inventory Property


Sec. 767.151  General requirements.

    Subject to Sec. 767.152, the Agency will attempt to sell its 
inventory property as follows:
    (a) The Agency will advertise all inventory real property that can 
be used for any authorized FO loan purpose for sale to beginning 
farmers no later than 15 days after the Agency obtains title to the 
property. A beginning farmer may apply up through 135 days after the 
advertisement to purchase inventory property.
    (b) If more than one eligible beginning farmer applies, the Agency 
will select a purchaser by a random selection process open to the 
public.
    (1) All applicants will be advised of the time and place of the 
selection.
    (2) All drawn offers will be numbered.
    (3) Offers drawn after the first will be held in suspense pending 
sale to the successful applicant.
    (4) Random selection shall be final and not subject to 
administrative appeal.
    (c) If there are no offers from beginning farmers, the Agency will 
offer to sell inventory property by auction or sealed bid to the 
general public between days 136 and 165 after the Agency obtains title 
to the property. All bidders will be required to submit a 10 percent 
deposit with their bid.
    (d) If the Agency receives no acceptable bid through an auction or 
sealed bid, the Agency will attempt to sell the property through a 
negotiated sale at the best obtainable price.
    (e) If the Agency is not able to sell the property through 
negotiated sale, the Agency may list the property with a real estate 
broker. The broker must be properly licensed in the State in which the 
property is located.


Sec. 767.152  Exceptions.

    The Agency's disposition procedure under Sec. 767.151 is subject to 
the following:
    (a) If the Agency leases inventory real property to a beginning 
farmer in accordance with Sec. 767.101(a)(2), and the lease expires, 
the Agency will not advertise the property if the beginning farmer is 
approved to purchase the property and the Agency has direct or 
guaranteed loan funds available to finance the transaction.
    (b) The Agency will not advertise a property for sale until the 
Homestead Protection rights have terminated in accordance with part 
766, subpart D of this chapter.
    (c) The Agency may allow an additional 60 days if needed for 
conservation easements or environmental contamination reviews.
    (d) If Agency analysis of farm real estate market conditions 
indicates the sale of Agency farm inventory property will have a 
negative effect on the value of farms in the area, the Agency may 
withhold inventory farm properties in the affected area from the market 
until further analysis indicates otherwise.


Sec. 767.153  Sale of inventory real property.

    (a) Pricing. (1) The Agency will advertise property for sale at its 
current market value, as established by an appraisal obtained in 
accordance with Sec. 761.7, except for properties containing 
environmental risks in accordance with Sec. 767.203(b).
    (2) Property sold by auction or sealed bid will be sold for the 
best obtainable price. The Agency reserves the right to reject any and 
all bids.
    (b) Agency-financed sales. The Agency may finance sales to 
purchasers if:
    (1) The Agency has direct or guaranteed FO loan funds available;
    (2) All applicable loan making requirements are met; and
    (3) All non-beginning farmer purchasers make a 10 percent down 
payment.
    (c) Taxes and assessments. (1) Property taxes and assessments will 
be prorated between the Agency and the purchaser based on the date the 
Agency conveys title to the purchaser.
    (2) The purchaser is responsible for paying all taxes and 
assessments after the Agency conveys title to the purchaser.
    (d) Loss or damage to property. If, through no fault of either 
party, the property is lost or damaged as a result of fire, vandalism, 
or act of God before the Agency conveys the property, the Agency may 
reappraise the property and set the sale price accordingly.

[[Page 6120]]

    (e) Termination of contract. Either party may terminate the sales 
contract. If the contract is terminated, the Agency returns any deposit 
to the bidder or offeror.
    (f) Warranty on title. The Agency will not provide any warranty on 
the title or on the condition of the property.


Sec. 767.154  Conveying easements, rights-of-way, and other interests 
in inventory property.

    (a) Appraisal of real property and real property interests. The 
Agency will determine the value of real property and real property 
interests being transferred in accordance with Sec. 761.7 of this 
chapter.
    (b) Easements and rights-of-way on inventory property. (1) The 
Agency may grant or sell an easement or right-of-way for roads, 
utilities, and other appurtenances if the conveyance is in the public 
interest and does not adversely affect the value of the real property.
    (2) The Agency may sell an easement or right-of-way by negotiation 
for market value to any purchaser for cash without giving public notice 
if:
    (i) The sale would not prevent the Agency from selling the 
property; and
    (ii) The sale would not decrease the value of the property by an 
amount greater than the price received.
    (3) In the case of condemnation proceedings by a State or political 
subdivision, the transfer of title will not be completed until adequate 
compensation and damages have been determined and paid.
    (c) Disposal of other interests in inventory property. (1) If 
applicable, the Agency will sell mineral and water rights, mineral 
lease interests, mineral royalty interests, air rights, and 
agricultural and other lease interests with the surface land except as 
provided in paragraph (b) of this section.
    (2) If the Agency sells the land in separate parcels, any rights or 
interests that apply to each parcel are included with the sale.
    (3) The Agency will assign lease or royalty interests not passing 
by deed to the purchaser at the time of sale.
    (4) Appraisals of property will reflect the value of such rights, 
interests, or leases.


Sec. 767.155  Selling chattel property.

    (a) Method of sale. (1) Public auctions. The Agency will use 
established public auctions for selling chattel. The Agency does not 
require public notice of sale in addition to the notice commonly used 
by the auction facility.
    (2) Concurrent sale of real and chattel inventory property. The 
Agency may sell inventory chattel property, including fixtures, 
concurrently with inventory real estate if, by doing so, the Agency can 
obtain a higher aggregate price. The Agency may accept an offer for 
chattel based upon the combined final sales price of both the chattel 
and real estate.
    (b) Agency-financed sales. The Agency may finance the purchase of 
inventory chattel property if the Agency has direct or guaranteed OL 
loan funds available and all applicable loan making requirements are 
met.


Sec.Sec. 767.156-767.200  [Reserved]

Subpart E--Real Property with Important Resources, Special Hazard 
Areas and Environmental Risks


Sec. 767.201  Inventory real property with important resources.

    In addition to the requirements established in 7 CFR 799, the 
following apply to inventory property with important resources:
    (a) Wetland conservation easements. The Agency will establish 
permanent wetland conservation easements to protect and restore certain 
wetlands that exist on inventory property prior to the sale of such 
property, regardless of whether the sale is cash or credit.
    (1) The Agency establishes conservation easements on all wetlands 
or converted wetlands located on inventory real property that:
    (i) Were not considered cropland on the date the property was 
acquired by the Agency; and
    (ii) Were not used for farming at any time during the five years 
prior to the date of acquisition by the Agency.
    (A) The Agency will consider property to have been used for farming 
if it was used for agricultural purposes including, but not limited to, 
cropland, pastures, hayland, orchards, vineyards, and tree farming.
    (B) In the case of cropland, hayland, orchards, vineyards, or tree 
farms, the Agency must be able to demonstrate that the property was 
harvested for crops.
    (C) In the case of pastures, the Agency must be able to demonstrate 
that the property was actively managed for grazing by documenting 
practices such as fencing, fertilization, and weed control.
    (2) The wetland conservation easement will provide for access to 
other portions of the property as necessary for farming or other uses.
    (b) Mandatory conservation easements. The Agency will establish 
conservation easements to protect 100-year floodplains and other 
Federally designated important resources. Federally designated 
important resources include, but are not limited to:
    (1) Listed or proposed endangered or threatened species;
    (2) Listed or proposed critical habitats for endangered or 
threatened species;
    (3) Designated or proposed wilderness areas;
    (4) Designated or proposed wild or scenic rivers;
    (5) Historic or archeological sites listed or eligible for listing 
on the National Register of Historic Places;
    (6) Coastal barriers included in Coastal Barrier Resource Systems;
    (7) Natural landmarks listed on National Registry of Natural 
Landmarks; and
    (8) Sole source aquifer recharge areas as designated by EPA.
    (c) Discretionary easements. The Agency may grant or sell an 
easement, restriction, development right, or similar legal right to 
real property for conservation purposes to a State government, a 
political subdivision of a State government, or a private non-profit 
organization.
    (1) The Agency may grant or sell discretionary easements separate 
from the underlying fee or property rights.
    (2) The Agency may convey property interests under this paragraph 
by negotiation to any eligible recipient without giving public notice 
if the conveyance does not change the intended use of the property.
    (d) Conservation transfers. The Agency may transfer inventory real 
property to a Federal or State agency provided the following conditions 
are met:
    (1) The transfer of title must serve a conservation purpose;
    (2) A predominance of the property must:
    (i) Have marginal value for agricultural production;
    (ii) Be environmentally sensitive; or
    (iii) Have special management importance;
    (3) The Homestead Protection rights of the previous owner have been 
exhausted;
    (4) The Agency will notify the public of the proposed transfer; and
    (5) The transfer is in the Government's best financial interest.
    (e) Use restrictions on inventory real property with important 
resources. (1) Lessees and purchasers receiving Agency credit must 
follow a conservation plan developed with assistance from NRCS.
    (2) Lessees and purchasers of real property with important 
resources or real property interests must allow the Agency or its 
representative to periodically inspect the real property to

[[Page 6121]]

determine if it is being used for conservation purposes.


Sec. 767.202  Inventory real property located in special hazard areas.

    (a) Special hazard areas. The Agency considers the following to be 
special hazard areas:
    (1) Mudslide hazard areas;
    (2) Special flood areas; and
    (3) Earthquake areas.
    (b) Use restrictions. (1) The Agency will use deed restrictions to 
prohibit residential use of properties determined to be unsafe in 
special hazard areas.
    (2) The Agency will incorporate use restrictions in its leases of 
property in special hazard areas.


Sec. 767.203  Inventory real property containing environmental risks.

    (a) Environmental risks. The Agency considers the following to be 
environmental risks:
    (1) Hazardous waste;
    (2) Petroleum products and underground storage tank systems;
    (3) Medical waste;
    (4) Lead-based paints; and
    (5) Asbestos.
    (b) Remediation of environmental risk. (1) The Agency will comply 
with all applicable Federal, State and local laws, ordinances, codes, 
and regulations.
    (2) The Agency will consult with the appropriate environmental 
regulatory authority to determine State or local requirements for 
cleanup or corrective action.
    (3) For inventory real properties containing hazardous waste and 
underground storage tank systems, the Agency will not conduct cleanup 
or take corrective actions unless:
    (i) Any known contamination or underground storage tank leakage 
presents an immediate threat to the health and safety of neighboring 
property owners or potential purchasers of the property; or
    (ii) The Agency is selling the property to a beginning farmer and 
providing credit assistance through direct or guaranteed loans.
    (4) When the Agency will advertise the property for sale, the sales 
price of the property is the ``as improved value'' as determined by an 
appraisal.
    (5) When the property is being sold back to the former owner-
borrower, the Agency will not undertake corrective action.
    (c) Use restrictions on inventory real property containing 
environmental risks. The Agency will not allow the use of underground 
storage tank systems on leased inventory properties.


Sec.Sec. 767.205-767.250  [Reserved]

Subpart F--Exception Authority


Sec. 767.251  Agency exception authority.

    On an individual case basis, the Agency may consider granting an 
exception to any regulatory requirement or policy of this part if:
    (a) The exception is not inconsistent with the authorizing statute 
or other applicable law; and
    (b) The Government's financial interest would be adversely affected 
by acting in accordance with published regulations or policies and 
granting the exception would resolve or eliminate the adverse effect 
upon the Government's financial interest.


Sec.Sec. 767.252-767.300  [Reserved]

PART 768--[RESERVED]

PART 769--[RESERVED]

    16. Add and reserve parts 768 and 769.

    Signed in Washington, DC, on January 12, 2004.
James R. Little,
Administrator.
[FR Doc. 04-1891 Filed 2-6-04; 8:45 am]
BILLING CODE 3410-05-P