[Federal Register Volume 70, Number 156 (Monday, August 15, 2005)]
[Proposed Rules]
[Pages 47730-47733]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-16107]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 70, No. 156 / Monday, August 15, 2005 / 
Proposed Rules  

[[Page 47730]]



DEPARTMENT OF AGRICULTURE

Farm Service Agency

7 CFR Part 762

RIN 0560-AH07


Guaranteed Loans--Retaining PLP Status and Payment of Interest 
Accrued During Bankruptcy and Redemption Rights Periods

AGENCY: Farm Service Agency, USDA.

ACTION: Proposed rule.

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SUMMARY: This action proposes several amendments to the regulations 
governing the Farm Service Agency (FSA) guaranteed farm loan program. 
First, this rule proposes to allow Preferred Lender Program (PLP) 
lenders, under certain conditions, to retain their PLP status for a 
period not to exceed one year after their loss ratio exceeds the 
standard established by the Agency, currently set at three percent. 
Secondly, FSA proposes to pay lenders additional interest on a final 
loss claim if a bankruptcy prevents the lender from taking liquidation 
action or a state's mandatory redemption law prevents the lender from 
disposing of property acquired through foreclosure. The changes 
proposed are intended to improve the services the Agency provides to 
its customers.

DATES: Comments concerning this proposed rule must be submitted by 
October 14, 2005 to be assured of consideration.

ADDRESSES: Interested persons are invited to submit written comments 
concerning this rule. Comments should reference the volume, date and 
page number of this issue of the Federal Register. Comments may be 
submitted by any of the following methods:
    E-Mail: Send comments to [email protected].
    Fax: Submit comments by facsimile transmission to (202) 690-1196.
    Mail: Submit comments to Branch Chief, Guaranteed Loan Servicing 
and Inventory Property Branch, Loan Servicing and Property Management 
Division, FSA, USDA, 1400 Independence Avenue, STOP 0523, Washington, 
DC 20250-0523.
    Hand Delivery or Courier: USDA FSA DAFLP LSPMD, Suite 500, 1250 
Maryland Avenue, SW., Washington, DC 20024.
    Federal eRulemaking Portal: Go to http://www.regulations.gov. 
Follow the online instructions for submitting comments.

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: 

Discussion of the Proposed Rule

    This rule proposes changes to the FSA guaranteed farm loan program. 
FSA guaranteed loans provide conventional agricultural lenders with up 
to a 95 percent guarantee of the principal loan amount, and accrued 
interest. The lender is responsible for servicing a borrower's account 
for the life of the loan. All loans must meet certain qualifying 
criteria to be eligible for guarantees, and FSA has the right and 
responsibility to monitor the lender's servicing activities. Farmers 
interested in these loans must apply to a conventional lender, which 
then arranges for the FSA guarantee. When a farmer does not fully repay 
the loan from the lender that FSA guaranteed, the lender will submit a 
formal request to the Agency for payment of the guaranteed percentage 
of the unpaid debt. This rule proposes changes to provisions that 
govern such loss claims and related loan servicing issues.

Retaining PLP status

    The first change proposed is to amend 7 CFR 762.106(g)(2)(ii) 
regarding the revocation of PLP status for failure to maintain 
eligibility, specifically with regard to the maximum loss percentage. 
The status of ``preferred lender'' is awarded by FSA to lenders with 
demonstrated expertise in agricultural lending and experience with the 
FSA Guaranteed Loan Program. This section, in part, requires that PLP 
lenders maintain eligibility established in 7 CFR 762.106(c)(4) 
governing the losses that a PLP lender may have incurred, currently 
three percent for loans made in the previous 7 years. The amendment 
will allow a PLP lender to maintain its status as a PLP lender for up 
to one year after its loss ratio exceeds, for reasons explained below 
which are beyond its control, the maximum allowable PLP loss rate. 
Lenders would be required to explain the reason their loss rate exceeds 
the allowable limit, and develop and implement a plan to reduce the 
loss rate below the allowable limit within the one year period. A 
lender that does not submit such a request to retain their PLP status 
for the one-year period, will not retain their status as a PLP lender. 
The proposed waiver will not apply to Certified Lenders, because their 
loss criteria is already generous compared to the requirements for PLP 
lenders.
    This amendment also would broaden the conditions under which FSA 
may grant a waiver to existing PLP lenders for exceeding the maximum 
loss ratio. Present regulations at 7 CFR 762.106(c)(4) provide that the 
Agency may waive the maximum PLP loss ratio if the applicable lender's 
loss rate was substantially affected by a disaster (such as storms, 
earthquakes, drought, flooding, and freezes) as defined in 7 CFR part 
1945, subpart A. This provision only covers natural disasters that are 
widespread enough to be declared a disaster. Conditions, such as a 
freeze with only local impact, may not be declared a disaster but may 
cause excessive losses for one or two lenders in a community. Further, 
lender loss ratios may be affected by an unforeseeable economic 
downturn, drops in land value, industry moving into or out of an area, 
a loss of access to a market, biological or chemical damage, or other 
circumstances beyond the lender's control. Such one-occasion losses may 
have an inordinate affect on a lender in that local area, or a lender 
with a concentration of loans to producers of a commodity suffering 
localized reduction in production and market prices. The proposal would 
allow the Agency more flexibility in granting a waiver to an existing 
PLP lender for exceeding the maximum loss ratio for reasons beyond 
their control. A lender requesting a 1-year waiver of the maximum loss 
ratio must provide a satisfactory explanation of why it's losses 
suddenly increased, and a realistic plan detailing the actions they 
plan to take to reduce their loss ratio to the requisite level. Whether 
losses could

[[Page 47731]]

have been controlled by the lender and whether a plan for loss 
reduction is acceptable will be determined in each case by FSA. If the 
Agency grants a 1-year waiver, and the lender's loss ratio does not 
meet the maximum PLP loss ratio at the end of the 1-year period, the 
lender's PLP status will be revoked.

Interest Accrual on Loan Liquidations

    FSA also proposes to amend the amount of interest accrual that the 
Agency will pay lenders on loss claims. Specifically, this rule 
proposes changes to the way loss claims are handled when liquidation is 
delayed by a Chapter 7 bankruptcy filing, a Chapter 7 bankruptcy 
results in a lower estimated loss claim due to an over-estimation of 
security value, or where a mandatory state right of redemption prevents 
a lender from disposing of property acquired through foreclosure.
    Loss claims in case of a Chapter 7 bankruptcy. This rule proposes 
to amend 7 CFR 762.148(d)(1) to clarify that, in Chapter 7 bankruptcy 
cases, the date of the decision to liquidate, for the purposes of 
calculating total interest due on a final loss claim under Sec.  
762.149, is the date the borrower files for Chapter 7 bankruptcy. This 
will preclude any misunderstanding as to the date beyond which the 
Agency will not pay accruing interest. Currently, 7 CFR 762.148(d)(1) 
requires the lender with such a borrower who to proceed under section 
762.149 and submit a liquidation plan and estimated loss claim within 
30 days of the decision to liquidate, if liquidation is expected to 
exceed 90 days. That policy exists because collateral or property 
mortgaged for a debt discharged under Chapter 7 of the Bankruptcy Code 
is subject to repossession or sale by the secured creditor. Thus, a 
Chapter 7 discharge of an FSA guaranteed farm loan typically results in 
sale of the security for the guaranteed loan. Although the decision to 
liquidate is not actually made by the lender, as is commonly the case 
where defaults cannot be cured and the borrower does not file for 
bankruptcy, the bankruptcy petition of the borrower is, in effect, a 
``decision to liquidate.''
    The Agency also is proposing to amend Sec.  762.149 so that in the 
case of a Chapter 7 bankruptcy, a lender will not be penalized for 
submitting an estimated loss claim that later proves to be 
underestimated, based on the final loss claim. The estimated loss claim 
submitted with the liquidation plan is calculated based on the 
remaining principal and interest of the loan, less the estimated value 
of the remaining security for the loan. In a bankruptcy case, lenders 
often lack reliable information regarding the value of the remaining 
collateral, their appraisals are outdated, and the bankruptcy schedules 
may not yet be available for the lenders to use for a liquidation plan 
and estimated loss claim. Also, when the borrower files bankruptcy the 
borrower and lender are often in an adverse relationship and the lender 
cannot inspect or accurately evaluate the security property. Other 
problems may cause the estimated claim in a Chapter 7 case to vary from 
the final claim, such as depreciation, missing security property, or an 
inaccurate estimate of the time required to complete liquidation. Thus, 
at the time of the bankruptcy filing and submission of the estimated 
loss claim, the lender's valuation of its remaining loan security may 
be far from what the liquidation sale actually brings. Regardless, for 
purposes of calculating final loss claims, present Agency regulations 
allow no further interest on the loan after payment of the estimated 
loss claim. Therefore, this rule proposes that 7 CFR 762.149(d)(2) be 
amended to provide that a lender receive the guaranteed percentage of 
the interest that accrued on the amount that had been estimated to be 
secure, but upon final disposition of collateral was found to be 
unsecured. Interest will not be paid on the amount estimated to be 
unsecured, and will not be paid if the lender did not submit an 
estimated loss claim within the established timeframe. The Agency 
proposes to pay the additional interest up to a maximum of 45 days 
after the earlier of the relief from stay, or discharge of the Chapter 
7 Bankruptcy. This is a reasonable period of time for a lender to 
accomplish liquidation after the relief from stay or discharge.
    Redemption rights. This rule proposes that lenders will be paid the 
guaranteed portion of interest that accrues during a redemption period 
on the additional unsecured debt if the lender submitted an estimated 
loss claim as required. State right of redemption statutes provide the 
former owner of the property, and, in some states, parties with any 
interest in the property such as subordinate lien holders, with a time 
period, typically six months to one year, during which they may redeem 
the property by paying the obligations secured by it. Numerous states 
provide that redemption rights continue after foreclosure proceedings. 
Therefore, these rights may frustrate creditors, including FSA 
guaranteed lenders, when they are attempting to enforce their liens on 
mortgaged property. A creditor who submits successful bids at 
foreclosure sales cannot get a clear deed to the property until the 
debtor's redemption period has passed. Such lenders cannot convey clear 
title to a buyer, and if they do sell it, the final sales price could 
be depressed because of the uncertainty of the finality of the 
transaction. Further, any successful bidder at a foreclosure sale in a 
state with a redemption period cannot take title to the property until 
the end of the redemption period. A winning bidder who improves the 
property, such as erecting buildings or fences, risks losing his or her 
investment if the former owner ``redeems'' it and retains title by 
paying the redemption amount. This discourages bidding on property and 
may reduce the amount potential purchasers are willing to bid. For this 
reason, lenders rarely sell properties prior to the expiration of the 
redemption period. Many factors beyond the lender's control, such as 
actions of the former owner, economic conditions, and even the weather 
may affect the real estate value during the redemption period. 
Currently, FSA loss claim regulation, 7 CFR 762.149, prohibits paying 
the lender interest that accrues beyond 90 days from the date of the 
decision to liquidate. However, borrower redemption rights are 
circumstances beyond the lender's control, and the Agency has 
determined that the lender is entitled to the guaranteed portion of the 
interest that accrues during the redemption period on the additional 
portion of the loan that is unsecured. The Agency is proposing to pay 
the additional interest during the time of the redemption period, plus 
up to an additional 45 days, which is considered sufficient time for 
the lender to dispose of the property.
    There will be some additional cost to the Agency for the above 
proposed changes, but based on an analysis of losses paid during fiscal 
years 2002 through 2004, the total costs to the Agency should be 
minimal. The analysis indicated that the proposals will result in an 
increase of only one-sixth of one percent of the amount currently paid 
in loss claims.

Executive Order 12866

    This rule has been determined 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. This rule 
does not require any specific actions on the part of the subject 
program's borrowers or lenders, except for a PLP lender that is

[[Page 47732]]

requesting the Agency to grant an exception to the loss rate criteria, 
to allow them to retain their PLP status for a year while they attempt 
to reduce their loss ratio to an acceptable level. In the six year 
period since the Agency has been granting PLP status, an average of 
less than one lender a year has had their status removed due to their 
loss ratio exceeding the established standard. When a PLP lender 
decides to request that their PLP status be maintained for an 
additional year, the Agency anticipates that request will require 
minimal submission of information, no more than a page or two of 
narrative explaining why their loss rate is high, and their plans to 
bring it down, further justifying the conclusion that a Regulatory 
Flexibility Analysis is not required. The Agency, therefore, concludes 
that it is not required to perform a Regulatory Flexibility Analysis as 
required by the Regulatory Flexibility Act, Public Law 96-534, as 
amended (5 U.S.C. 601).

Environmental Evaluation

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

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 to the extent 
permitted by existing contracts; 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

    Agriculture, Banks, Credit, Loan programs--agriculture.

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

PART 762--GUARANTEED FARM LOANS

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

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

    2. Amend Sec.  762.106 by revising paragraph (g)(2)(ii) to read as 
follows:


Sec.  762.106  Preferred and certified lender programs.

* * * * *
    (g) * * *
    (2) * * *
    (ii) Failure to maintain PLP or CLP eligibility criteria. The 
Agency, however, may allow a PLP lender with a loss rate which exceeds 
the maximum PLP loss rate, as provided by the Agency periodically in a 
Federal Register notice, to retain its PLP status if:
    (A) The Agency determines that exceeding the maximum PLP loss rate 
standard was beyond the control of the lender (Examples include, but 
are not limited to, a freeze with only local impact, economic downturn 
in a local area, drop in local land values, industries moving into or 
out of an area, loss of access to a market, and biological or chemical 
damage);
    (B) The lender documents in writing why the excessive loss rate is 
beyond their control; and
    (C) The lender provides a written plan that will reduce the loss 
rate to the PLP maximum rate within one year from the date of the plan. 
PLP status will be revoked if the maximum PLP loss rate is not met at 
the end of the one year grace period.
* * * * *
    3. Amend Sec.  762.148(d)(1) by adding a sentence to the end of the 
paragraph to read as follows:


Sec.  762.148  Bankruptcy.

* * * * *
    (d) * * *
    (1) * * * For purposes of calculating the time frames required 
under Sec.  762.149 of this part, the date the borrower files for 
bankruptcy protection under Chapter 7 shall be the date of the decision 
to liquidate.
* * * * *
    4. Amend Sec.  762.149 by revising paragraph (d)(2) to read as 
follows:


Sec.  762.149  Liquidation.

* * * * *
    (d) * * *
    (2) The lender generally will discontinue interest accrual on the 
defaulted loan at the time the estimated loss claim is paid by the 
Agency. If the lender estimates that there will be no loss after 
considering the costs of liquidation, interest accrual will cease 90 
days after the decision to liquidate. However, in the case of a Chapter 
7 bankruptcy, the Agency will pay the lender interest which accrues 
during and up to 45 days after the date of discharge on the portion of 
the debt that was estimated to be secured but was found to be unsecured 
upon final disposition, in cases where the lender filed an estimated 
loss claim. The Agency also will pay the lender interest which accrues 
during and up to 45 days after the time period the lender is unable to 
dispose of acquired property due to state imposed redemption rights on 
any unsecured portion of the loan during the redemption period, if an 
estimated loss claim was timely filed during the liquidation action.
* * * * *


[[Page 47733]]


    Signed at Washington, DC, on July 22, 2005.
James R. Little,
Administrator, Farm Service Agency.
[FR Doc. 05-16107 Filed 8-12-05; 8:45 am]
BILLING CODE 3410-05-P