[Federal Register Volume 69, Number 143 (Tuesday, July 27, 2004)]
[Rules and Regulations]
[Pages 44576-44580]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-17046]


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DEPARTMENT OF AGRICULTURE

Farm Service Agency

7 CFR Part 762

RIN 0560-AG53


Guaranteed Loans--Rescheduling Terms and Loan Subordinations

AGENCY: Farm Service Agency, USDA.

ACTION: Final rule.

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SUMMARY: The Farm Service Agency (FSA) is amending its regulations 
governing servicing of loans made under the guaranteed farm loan 
program. FSA is making these changes as a result of input from program 
participants and problems in the administration of current provisions. 
This rule will allow loans to be rescheduled with balloon payments 
under certain circumstances and allow the approval of certain low-risk 
subordinations at the field office level instead of the National 
Office. It will also allow lenders to make debt installment payments in 
accordance with lien priorities, payment due dates, and clarify that 
packager and consultant

[[Page 44577]]

fees for servicing of guaranteed loans are not covered by the 
guarantee.

DATES: This rule is effective August 26, 2004.

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

SUPPLEMENTARY INFORMATION:

Background

    FSA published a proposed rule on August 19, 2003, (68 FR 49723-
49726) to amend its regulations governing the servicing of loans made 
under the guaranteed farm loan program. The comment period ended 
October 20, 2003.

Summary of Public Comments

    Comments addressed all of the issues related to the proposed rule. 
FSA considered the comments and incorporates several of the 
recommendations and suggestions in this rule. The following is a review 
of the comments and the changes made in the final rule in response to 
the comments.

Payment of Loan Installments

    FSA proposed to allow loan installments to be paid in accordance 
with lien priority, due date and cash flow projection in the normal 
course of business, but when it became evident that the borrower would 
be unable to make all installments, the lender had to apply payments to 
the guaranteed loan first. One respondent suggested that the proposal 
was too subjective and the Agency should adopt a policy that would 
require loans to be paid according to lien priority, and any exceptions 
would require Agency approval. The respondent also pointed out that the 
risk of guaranteed loans not being paid in an orderly manner is not 
only at liquidation and that the determination of when guaranteed loan 
payments would be required to be made first was extremely subjective. 
Two respondents generally agreed with the proposal, but one pointed 
out, however, that the risk to the government is not only at 
liquidation and questioned whether the proposal would work in practice. 
One respondent believed the rule should specify that a lender must 
apply payments to the loan as the borrower specified. Another 
respondent stated that the normal course of business rule should be 
expanded to include all situations.
    The Agency agrees that the proposal was too subjective and that 
loan installments should be paid in lien priority in certain cases 
while understanding that exceptions are required so that lenders can 
conduct routine business practices. As a result, the agency will 
require a lender to pay loan installments in the order of lien priority 
only when the lender receives a payment from the sale of encumbered 
property. This policy is consistent with current practice under state 
laws. In other situations, where payment is received from the sale of 
unencumbered property or other sources of income, loan installments 
will be paid in order of their due date. This is consistent with 
typical routine business practices. This objective and simple policy 
should be consistently carried out by lenders. Any deviations will 
require Agency approval.
    Regarding the comment that would allow the borrower to tell the 
lender which loan a payment should be applied to, the Agency has always 
maintained that the lender/borrower relationship is not something the 
Agency should interfere in, as the Agency has no authority or 
inclination to specify that a lender has to apply payments to whichever 
loan their borrower chooses. Based on the comments received, which were 
generally supportive, the Agency will implement the proposed change as 
modified.

Approval of Subordinations

    FSA proposed to place authority for subordination approval at the 
local level when the lender is refinancing existing debt secured by a 
lien superior to the guaranteed loan and no additional debt is being 
incurred. Two respondents supported the proposal, but suggested that 
the Agency allow additional subordinations to be approved at the local 
and State level. The proposal was fully supported by four respondents.
    The Agency will not adopt additional changes to allow all 
subordinations of guaranteed loans to be approved at local and State 
levels. Subordinating guaranteed loan security is rarely in the 
Government's best interest and, therefore, it is necessary for top 
level management to be informed of all requests where additional debt 
is being incurred by guaranteed borrowers. Based on the unanimous 
support of the other respondents, the Agency adopts its proposed policy 
on subordinations as final.

Payment of Interest on Repurchased Loans

    FSA proposed to correct wording concerning interest payments to 
specify that the holder, not the lender, would request Agency 
repurchase of the loan after unsuccessfully requesting the lender to do 
so. Two comments were received regarding this change. One supported the 
change, while the other acknowledged that it is simply a correction in 
wording. The present language has the words ``lender'' and ``holder'' 
reversed, and the change will correct the error. The proposed 
correction is adopted in the final rule as a result of the comments 
received.

Balloon Payments

    The proposal to allow balloon payments in restructuring guaranteed 
loans generated several comments, mostly positive. One respondent was 
opposed to all balloon payments, and viewed them as a way to guarantee 
nonpayment of the loan. Another respondent generally supported the 
proposal but did not believe it was necessary to have an appraisal 
showing the loan would be secured when the balloon payment was due. 
This respondent also suggested that the Agency set a minimum number of 
years before the balloon payment comes due and that a lien on all 
assets be taken when restructuring with balloon payments. One 
respondent supported the proposal but was concerned that lenders use of 
appraisals would vary widely. One respondent wondered if lenders, at 
the time of the restructuring, would have to develop a positive cash 
flow projection for the time when the balloon payment came due and 
noted that foundation livestock herds were not specifically discussed.
    Three respondents fully supported the proposal. Another respondent 
also supported the proposal, but recommended that the appraisal 
requirement should only apply to loans with an unequal or graduating 
amortization, which would be more risky to the Agency.
    The Agency believes the balloon payment option is a necessary tool 
that lenders can use to salvage operations that would otherwise be 
liquidated. With the proper controls in place, this servicing option 
can be very beneficial to users of the guaranteed loan program. In 
response to concerns regarding lenders conducting a wide range of 
appraisals, FSA has added more direction in Sec. 762.145(b)(4). The 
paragraph explains that the projected value for real estate will be 
derived from a current appraisal adjusted for depreciation of 
depreciable property such as buildings and other improvements that 
occurs until the balloon payment is due. A current appraisal is 
required for equipment security. The lender will project the value of 
the equipment at the time the

[[Page 44578]]

balloon payment is due based on the remaining life of the equipment or 
the depreciation schedule on the borrower's Federal income tax return. 
The Agency does not agree that appraisals are not necessary, or should 
be required only when there is unequal or graduating amortization. An 
appraisal will always be necessary when restructuring with a balloon 
payment in order to provide some assurance that there is adequate 
security for the debt. Lenders, however, will not have to develop long-
term cash flow projections as the volatility of the agricultural sector 
and changing nature of individual farming operations often render long-
term projections meaningless.
    Foundation livestock was not mentioned in the proposed rule because 
balloon payments for guaranteed loans secured by livestock or crops 
alone will not be authorized. Unlike real estate and equipment, 
livestock and crops are perishable, and balloon payments on such 
operations are extremely risky.
    The Agency does agree with the suggestion that it should set a 
minimum number of years before the balloon payment comes due, the time 
depending on the type of loan being restructured. Therefore, Sec.  
762.145 provides that balloon payments for loans secured by real estate 
will have a minimum of 5 years before the balloon comes due. For other 
loans, there will be minimum of 3 years. If statutory term limits 
prevent such terms, balloon payments will not be used. As suggested, to 
further protect the Government's interest when a balloon payment is set 
up, a lien on all assets will be required.

Revised Security Requirements for Loans Rescheduled With Balloon 
Payments

    FSA proposed to require loans restructured with balloon payments to 
be fully secured when the balloon payment became due. Three comments 
were received addressing the issue of security requirements. One 
respondent agreed with the requirements, but believes they should be 
more specific as to how a lender is to arrive at the value of the 
security used to protect the balloon installment. Two respondents fully 
supported the proposal, while one questioned if Preferred Lender 
Program lenders would be allowed to use their in-house appraisals to 
support the fully secured claim.
    Additional guidance has been provided on appraisal values as 
discussed above. Current Agency policy on lenders not being allowed to 
use in-house real estate appraisals will not change. The potential for 
conflict of interest is too great to entertain such a proposal.

Payment of Packager and Outside Consultant Fees

    Five comments, all positive, were received regarding the proposed 
clarification that packager fees and outside consultant fees for 
servicing are not covered by the guarantee. One respondent believed the 
Agency should allow for the payment of in-house fees. The respondent 
stated that inside legal counsel may have knowledge of cases, which 
could actually make the process more efficient, thereby saving on legal 
expenses. Two respondents support the proposal, but believe it should 
be clarified to state that the costs also cannot be passed on to the 
borrower.
    No changes will be made in the final rule as a result of these 
comments. The Agency agrees in theory that inside legal counsel's 
knowledge of individual cases may lead to greater efficiency, and the 
intent of the regulation is that, if available, this counsel may be 
used by the lender. However, the guarantee was never intended to cover 
costs incurred by employees of the lender, including staff legal 
counsel. The Agency disagrees that it should regulate what fees lenders 
can pass on to their customers. It is not the mandate of the Agency to 
dictate terms between lenders and their customers. However, neither is 
the guarantee intended to cover lender labor costs for services the 
lender agreed to perform when obtaining the guarantee. Therefore, the 
Agency will not cover these costs when passed on to the lender's 
borrower as part of any loss claim.

Lender Bids at Foreclosure Sales

    The proposal to specify the amount a lender will bid at foreclosure 
sales generated numerous comments. FSA proposed that the lender's bid 
would be the lesser of the net recovery value plus the prior lien 
amount, and the unpaid balance of the loan plus the prior lien amount. 
One respondent fully supported the proposal and believes it is good 
business practice and is consistent with what is done for the Agency's 
direct loans.
    Two respondents were in favor of the proposal, but believe it 
should be strengthened by stating that the limits are actual limits and 
lenders will not be able to claim losses due to excess bids. They 
stated that, as written, there are too many maybes, and the wording 
should state that loss claims will be reduced, not that they may be 
reduced due to improper bidding. One comment suggested that the 
proposed change would not always lead to the result that was 
anticipated. It was pointed out that a bid is sometimes made subject to 
a prior lien, in which case the lender would not want to bid the net 
recovery value. It was also pointed out that the proposal does not 
contain a definition of net recovery value, which could lead to 
confusion. The definition of net recovery value is included among the 
definitions in 7 CFR 762.102.
    One respondent requested that the Agency reconsider the proposal. 
The respondent believes the lender knows best the individual 
circumstances of each loan and could best determine the amount they 
should bid and that the proposal could actually have the opposite 
result of what is intended. Also, since several states have their own 
unique laws regarding foreclosures, redemption, and time periods which 
a lender must consider, the proposal would possibly hamper the lender's 
liquidation of the account.
    Another respondent also believes the proposal is too restrictive 
and limits the flexibility provided by the current regulations. The 
respondent provided several examples of situations where bidding as 
proposed may not be in the best interest of the lender, the Government, 
or the borrower, and may lead to a borrower losing their right of first 
refusal. The respondent recommended that the final rule give the 
creditor the option to bid net recovery value, appraised value, or 
investment, whichever is the most advantageous in the particular 
circumstance, as approved by the Agency's State Office. If a prior lien 
has a very low interest rate, it would not make sense to require the 
lender to pay that debt off when acquiring the property, especially if 
there is a redemption period involved. Also, in some states, it is very 
difficult to obtain a deficiency judgment, and bidding the net recovery 
value or appraised value has not been a common practice.
    After considering the comments received, the Agency has determined 
that it will remove the proposal regarding bidding at foreclosure 
sales. No changes will be made to the current language in 7 CFR 762.149 
regarding this item. In the vast majority of cases, lenders make 
reasonable bids at foreclosure sales, and it is a rare occurrence when 
a lender makes an inaccurate bid, leading to a large increase in loss 
to the lender upon final disposition of the collateral. In those cases, 
the Agency will continue to use the option to reduce or completely deny 
loss claims as necessary and appropriate. Differences in state laws 
regarding foreclosure proceedings, redemption laws, and obtaining

[[Page 44579]]

deficiency judgments make it difficult to cover all possible scenarios 
in one rule. It would also reduce a lender's options and flexibility in 
servicing loans.

Executive Order 12866

    This rule has been determined to be not significant and was not 
reviewed by the Office of Management and Budget under Executive Order 
12866.

Regulatory Flexibility Act

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

Environmental Evaluation

    The environmental impacts of this final rule have been considered 
in accordance with the provisions of the National Environmental Policy 
Act of 1969 (NEPA), 42 U.S.C. 4321 et seq., the regulations of the 
Council on Environmental Quality (40 CFR parts 1500-1508), and the FSA 
regulations for compliance with NEPA, 7 CFR part 1940, subpart G. FSA 
concluded that the rule does not require preparation of an 
environmental assessment or Environmental Impact Statement.

Executive Order 12988

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

Executive Order 12372

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

Unfunded Mandates

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

Executive Order 13132

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

Paperwork Reduction Act

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

Federal Assistance Programs

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

List of Subjects in 7 CFR part 762

    General--Agriculture, Loan programs--Agriculture.

0
Accordingly, 7 CFR is amended as follows:

PART 762--GUARANTEED FARM LOANS

0
1. The authority citation for part 762 continues to read as follows:

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

0
2. Amend Sec.  762.140 by revising paragraph (d) to read as follows:


Sec.  762.140  General servicing responsibilities.

* * * * *
    (d) Loan installments. When a lender receives a payment from the 
sale of encumbered property, loan installments will be paid in the 
order of lien priority. When a payment is received from the sale of 
unencumbered property or other sources of income, loan installments 
will be paid in order of their due date. Agency approval is required 
for any other proposed payment plans.
* * * * *

0
3. Amend Sec.  762.142 by redesignating paragraph (c)(3)(ii) as 
(c)(3)(iii) and adding new paragraph (c)(3)(ii) to read as follows:


Sec.  762.142  Servicing related to collateral.

* * * * *
    (c) * * *
    (3) * * *
    (ii) The lender may, with written Agency approval, subordinate its 
interest in basic security in cases where the subordination is required 
to allow another lender to refinance an existing prior lien, no 
additional debt is being incurred, and the lender's security position 
will not be adversely affected by the subordination.?>
* * * * *

0
4. Amend Sec. 762.144 by revising paragraph (c)(3)(iii) to read as 
follows:


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

* * * * *
    (c) * * *
    (3) * * *
    (iii) In the case of a request for Agency purchase, the Agency will 
only pay interest that accrues for up to 90 days from the date of the 
demand letter to the lender requesting the repurchase. However, if the 
holder requested repurchase from the Agency within 60 days of the 
request to the lender and for any reason not attributable to the holder 
and the lender, the Agency cannot make payment within 30 days of the 
holder's demand to the Agency, the holder will be entitled to interest 
to the date of payment.
* * * * *

0
5. Amend Sec.  762.145 by revising paragraphs (b)(4) and (b)(7) to read 
as follows:


Sec.  762.145  Restructuring guaranteed loans.

* * * * *
    (b) * * *
    (4) Loans secured by real estate and/or equipment can be 
restructured using a balloon payment, equal installments, or unequal 
installments. Under no circumstances may livestock or crops alone be 
used as security for a loan to be rescheduled using a balloon payment. 
If a balloon payment is used, the projected value of the real estate 
and/or equipment security must indicate that the loan will be fully 
secured when the balloon payment becomes due. The projected value will 
be derived from a current appraisal adjusted for depreciation of 
depreciable property, such as buildings and other improvements, that 
occurs until the balloon payment is due. For equipment security, a 
current appraisal is required. The lender is required to project the 
security value of the equipment at the time the balloon payment is due 
based

[[Page 44580]]

on the remaining life of the equipment, or the depreciation schedule on 
the borrower's Federal income tax return. Loans restructured with a 
balloon payment that are secured by real estate will have a minimum 
term of 5 years, and other loans will have a minimum term of 3 years 
before the scheduled balloon payment. If statutory limits on terms of 
loans prevent the minimum terms, balloon payments may not be used. If 
the loan is rescheduled with unequal installments, a feasible plan, as 
defined in Sec.  762.102(b), must be projected for when installments 
are scheduled to increase.
* * * * *
    (7) The lender's security position will not be adversely affected 
because of the restructuring. New security instruments may be taken if 
needed, but a loan does not have to be fully secured in order to be 
restructured, unless it is restructured with a balloon payment. When a 
loan is restructured using a balloon payment the lender must take a 
lien on all assets and project the loan to be fully secured at the time 
the balloon payment becomes due, in accordance with paragraph (b)(4) of 
this section.
* * * * *

0
6. Amend Sec.  762.149 by adding paragraph (d)(3), and amending 
paragraph (i)(2) by adding a new last sentence to read as follows:


Sec.  762.149  Liquidation.

* * * * *
    (d) * * *
    (3) Packager fees and outside consultant fees for servicing of 
guaranteed loans are not covered by the guarantee, and will not be paid 
in an estimated loss claim.
* * * * *
    (i) * * *
    (2) * * * Packager fees and outside consultant fees for servicing 
of guaranteed loans are not covered by the guarantee, and will not be 
paid in a final loss claim.
* * * * *

    Signed at Washington, DC, on July 2, 2004.
James R. Little,
Administrator, Farm Service Agency.
[FR Doc. 04-17046 Filed 7-26-04; 8:45 am]
BILLING CODE 3410-05-P