[Federal Register Volume 70, Number 185 (Monday, September 26, 2005)]
[Rules and Regulations]
[Pages 56105-56107]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-19126]



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  Federal Register / Vol. 70, No. 185 / Monday, September 26, 2005 / 
Rules and Regulations  

[[Page 56105]]



DEPARTMENT OF AGRICULTURE

Farm Service Agency

7 CFR Part 762

RIN: 0560-AG65


Guaranteed Farm Ownership and Operating Loan Requirements

AGENCY: Farm Service Agency, USDA.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Farm Service Agency (FSA) is amending its regulations 
governing loans made under the guaranteed farm loan program to 
specifically allow lenders to use the loans as security for loans to 
the lenders, remove certain documentation and designation requirements 
for lenders, and modify security restrictions as to refinancing and 
junior liens.

DATES: This rule is effective September 26, 2005.

FOR FURTHER INFORMATION CONTACT: Galen VanVleet, Senior Loan Officer, 
Farm Service Agency; telephone: (202) 720-3889; Facsimile: (202) 720-
6797; E-mail: [email protected].

SUPPLEMENTARY INFORMATION:

Background

    FSA published a proposed rule on May 4, 2004, (69 FR 24537-24539) 
to amend its regulations governing loans made under the guaranteed farm 
loan program. The comment period ended July 6, 2004.

Summary of Public Comments

    In response to the proposed rule, 125 respondents from 25 States 
and the District of Columbia commented. The following is a summary of 
the comments and the changes made in the final rule in response to the 
comments.

Certified Lender Program

    FSA proposed to remove the requirement that lenders applying for 
Certified Lender Program (CLP) status submit copies of forms to be used 
for farm loan processing and servicing, such as financial statements, 
cash-flow plans, and budgets. One respondent noted that the existing 
requirement was of little burden and recommended that no change be 
made. However, 75 respondents endorsed the change; based on this 
response, the Agency adopts its proposed rule on CLP as final.

Preferred Lender Program

    FSA proposed to remove the requirement that Preferred Lender 
Program (PLP) lenders designate a person or persons, approved by the 
Agency, to process and service PLP loans. Under the proposed rule PLP 
lenders would designate the responsible party by name, title, or 
position. All respondents supported this change, therefore, the Agency 
adopts its proposed rule on PLP as final.

Interest Rates and Fees

    The existing rule at Sec.  762.124(e)(1) provides that the lender 
may charge fees provided they are no greater than those charged to 
unguaranteed customers for similar transactions. FSA proposed that the 
lender not charge, or cause to be charged, any processing, servicing, 
or packaging fees that are not charged to nonguaranteed customers for 
similar transactions. Only three respondents supported the change, 
while 100 respondents opposed it because they interpreted that the 
change would disallow ``packager'' fees and they believed fewer 
guaranteed loans would be made as a result. Because of the overwhelming 
opposition, the proposal was not adopted nor the existing regulation 
changed.

Security Requirements

    The existing rule at Sec.  762.126(e) establishes restrictions on 
acceptable lien positions for security on guaranteed loans. The Agency 
proposed removing a restriction requiring that, when a loan is made for 
refinancing purposes, the guaranteed loan must hold a security position 
no lower than that on the refinanced loan. One respondent expressed 
concern that removal of the restriction would greatly increase the 
Government's risk of loss without any direct benefit to the loan 
applicant. That respondent suggested that in any case where the 
guaranteed loan debt is greater than or equal to 75 percent of the 
proposed security, the security position must be the same or better 
lien position than on the refinanced loan. Another respondent 
recommended that removal of the restriction be limited to situations 
where real estate loans are made to refinance operating carry-over 
debt. Another respondent recommended that the lender must hold a 
security position in the same or better collateral than on the 
refinanced loan. The other 74 respondents who commented on this section 
supported the change because it will help reduce confusion about proper 
lien positions and give lenders additional flexibility. The Agency does 
not agree that the removal of this restriction will greatly increase 
the risk of loss since the lenders are still responsible for ensuring 
that proper and adequate security is obtained to fully secure the loan, 
protect the interest of the lender and the Agency and assure repayment 
of the loan. Accordingly, the proposal is adopted as final.
    Another restriction under the same section limits junior lien 
positions to situations where equity position is strong. Because this 
restriction has been confusing due to varying interpretations of 
``strong,'' the Agency proposed clarifying the equity requirement by 
limiting junior liens to situations where the amount of debt is less 
than or equal to 75 percent of the value of the security. One 
respondent, who strongly supported the revision, recommended that the 
Agency clarify that this change applies to all lender types, including 
PLP. The Agency agrees with the point of this comment, but made no 
specific change to the regulation because all of Sec.  762.126 already 
applies to all lender types.
    Five respondents opposed the establishment of the 75-percent 
criterion. One respondent expressed concern that the requirement was 
too restrictive and recommended that no specific requirement be 
required for real estate, and a less restrictive requirement of 20 
percent equity (80 percent debt-to-value of security) be established 
for chattels. Similarly, another respondent stated that the proposed 
requirement would be excessive when dealing with real estate security. 
A third respondent pointed out that the 75-percent loan-to-

[[Page 56106]]

value limit is more restrictive than supervisory limits established by 
Federal banking regulatory agencies. The fourth respondent opposed the 
change because it would be, in their view, detrimental to borrowers. 
The respondent stated that they, as a lender, would not take a second 
lien behind a large guaranteed loan. The final opposing respondent 
expressed concern that the establishment of a 75 percent requirement 
overemphasizes collateral while capacity and capital evaluation should 
be the deciding factors. The Agency agrees that the 75 percent 
requirement may be too restrictive and has increased the maximum loan 
to value limit to 85 percent accordingly.

Restructuring Guaranteed Loans

    The existing regulation at Sec.  762.145 (b)(6)(i) contains an 
incorrect citation to the loan limits, which the proposed rule 
corrected. No respondent commented on this provision and the proposed 
correction is adopted as final.

Sale, Assignment, and Participation

    A new section, Sec.  762.159, was proposed to address the use of 
guaranteed loans as security for lender funding. Many lenders routinely 
borrow money from Federal Home Loan Banks or Federal Reserve Banks to 
meet funding or liquidity needs. They are usually required to pledge 
loan assets, which may include guaranteed loans, as security for the 
loans. The existing regulation's restrictions on assignments have led 
to confusion as to how or whether a lender can pledge guaranteed loans. 
The proposed rule explicitly allowed the pledging to Federal Home Loan 
Banks or Federal Reserve Banks. The Agency received 93 comments 
concerning this proposal. While all respondents supported the goal of 
clarifying that guaranteed loans can be pledged as security for 
collateral, they also expressed some concerns. The respondents 
recommended that the proposed language saying that the guarantee would 
be unenforceable until a new eligible lender is substituted be removed. 
They correctly pointed out that other parts of the regulation provide 
protection to the Agency due to negligent servicing. The lender will 
remain responsible for properly servicing the account until an eligible 
lender is substituted, and deductions otherwise will be made according 
to Sec.  762.149 as appropriate. The Agency agrees and has deleted the 
last two sentences in the final rule as unnecessary.
    Respondents also recommended that the Agency provide users with any 
information about how to make the pledge; specifically, the respondents 
recommended that there be a proposed format to follow. The Agency 
determined that it is not appropriate to dictate a format or advise the 
lenders how to make a pledge because the Agency will not be a direct 
party to the pledging activity. Therefore, no change has been made in 
response to these comments.
    Two respondents recommended that additional language be added to 
provide that a Federal Home Loan Bank or Federal Reserve Bank, as 
pledgee, be deemed a ``holder.'' These respondents correctly pointed 
out that, under the regulations, a holder may enforce the guarantee 
even if it is contestable, or unenforceable by the lender. There are 
other rights that holders have, in particular, the right to require 
purchase, however, that cannot accrue to a pledgee. Therefore, the 
Agency did not add language to deem the pledgee a holder.
    One respondent pointed out that Farm Credit System institutions are 
required to, and routinely do, pledge all their loan assets, including 
those with Federal guarantees, to their funding bank. For clarity and 
consistency, in the final rule Farm Credit System Banks were added to 
the institutions that may pledge guaranteed loans, as well as other 
funding sources determined acceptable by the Agency.
    Section Sec.  762.160 deals with the sale, assignment, and 
participation of guarantees. The proposed rule clarified confusing 
portions and removed unnecessarily restrictive provisions. As used in 
the existing section and as defined in Sec.  762.102, ``sale of 
guarantee'' and ``assignment of guarantee'' are synonymous. To reduce 
confusion, reference to ``sale of guarantee'' is removed. The one 
respondent who commented on the proposed changes to Sec.  762.160 
supported the changes; therefore, the Agency adopts this portion of the 
proposed rule as final.

Executive Order 12866

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

Regulatory Flexibility Act

    FSA certifies that this rule will not have a significant economic 
effect on a substantial number of small entities and 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). An insignificant number of guaranteed loan borrowers and no 
lenders are small entities. This rule does not impact the small 
entities to a greater extent than large entities.

Environmental Impact Statement

    FSA has determined that this action is not a major Federal action 
significantly affecting the environment. Therefore, in accordance with 
the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.), 
neither an Environmental Impact Statement nor an environmental 
assessment is required.

Executive Order 12988

    This rule has been reviewed in accordance with E.O. 12988, Civil 
Justice Reform. All State and local laws and regulations that are in 
conflict with this rule will be preempted. No retroactive effect will 
be given to this rule. It will not affect agreements entered into prior 
to the effective date of the rule. The administrative appeal provisions 
published at 7 CFR parts 11 and 780 must be exhausted before bringing 
any action for judicial review.

Executive Order 12372

    For reasons set forth in the Notice 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

    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. Agencies generally must prepare a written statement, 
including a cost-benefit assessment, for proposed and final rules with 
Federal mandates that may result in expenditures of $100 million or 
more in any 1 year 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 by 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

    The amendments to 7 CFR part 762 contained in this final rule 
require no

[[Page 56107]]

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, Loan programs--Agriculture.

0
Accordingly, 7 CFR chapter VII 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.


Sec.  762.102  [Amended]

0
2. In Sec.  762.102 remove the definitions of ``Financially viable 
operation'', ``Participation'' and ``Sale of guaranteed portion.''

0
3. Amend Sec.  762.106 by removing paragraph (b)(8) and revising 
paragraph (c)(8) to read as follows:


Sec.  762.106  Preferred and certified lender programs.

* * * * *
    (c) * * *
    (8) Designate a person or persons, either by name, title, or 
position within the organization, to process and service PLP loans for 
the Agency.
* * * * *

0
4. In Sec.  762.126, remove paragraph (e)(1), redesignate paragraphs 
(e)(2), (e)(3), and (e)(4) as (e)(1), (e)(2), and (e)(3), respectively, 
and revise newly designated (e)(2) to read as follows:


Sec.  762.126  Security requirements.

    (e) * * *
    (2) Junior lien positions are acceptable only if the total amount 
of debt with liens on the security, including the debt in junior lien 
position, is less than or equal to 85 percent of the value of the 
security. Junior liens on crops or livestock products will not be 
relied upon for security unless the lender is involved in multiple 
guaranteed loans to the same borrower and also has the first lien on 
the collateral.
* * * * *

0
5. Revise Sec.  762.145 (b)(6)(i) to read as follows:


Sec.  762.145  Restructuring guaranteed loans.

* * * * *
    (b) * * *
    (6) * * *
    (i) As a result of the capitalization of interest, a rescheduled 
promissory note may increase the amount of principal the borrower is 
required to pay. However, in no case will such principal amount exceed 
the statutory loan limits contained in Sec.  761.8 of this chapter.
* * * * *

0
6. Add Sec.  762.159 to read as follows:


Sec.  762.159  Pledging of guarantee.

    A lender may pledge all or part of the guaranteed or unguaranteed 
portion of the loan as security to a Federal Home Loan Bank, a Federal 
Reserve Bank, a Farm Credit System Bank, or any other funding source 
determined acceptable by the Agency.

0
7. Revise Sec.  762.160 to read as follows:


Sec.  762.160  Assignment of guarantee.

    (a) The following general requirements apply to assigning 
guaranteed loans:
    (1) Subject to Agency concurrence, the lender may assign all or 
part of the guaranteed portion of the loan to one or more holders at or 
after loan closing, if the loan is not in default. However, a line of 
credit cannot be assigned. The lender must always retain the 
unguaranteed portion in their portfolio, regardless of how the loan is 
funded.
    (2) The Agency may refuse to execute the Assignment of Guarantee 
and prohibit the assignment in case of the following:
    (i) The Agency purchased and is holder of a loan that was assigned 
by the lender that is requesting the assignment.
    (ii) The lender has not complied with the reimbursement 
requirements of Sec.  762.144(c)(7), except when the 180 day 
reimbursement or liquidation requirement has been waived by the Agency.
    (3) The lender will provide the Agency with copies of all 
appropriate forms used in the assignment.
    (4) The guaranteed portion of the loan may not be assigned by the 
lender until the loan has been fully disbursed to the borrower.
    (5) The lender is not permitted to assign any amount of the 
guaranteed or unguaranteed portion of the loan to the loan applicant or 
borrower, or members of their immediate families, their officers, 
directors, stockholders, other owners, or any parent, subsidiary, or 
affiliate.
    (6) Upon the lender's assignment of the guaranteed portion of the 
loan, the lender will remain bound to all obligations indicated in the 
Guarantee, Lender's Agreement, the Agency program regulations, and to 
future program regulations not inconsistent with the provisions of the 
Lenders Agreement. The lender retains all rights under the security 
instruments for the protection of the lender and the United States.
    (b) The following will occur upon the lender's assignment of the 
guaranteed portion of the loan:
    (1) The holder will succeed to all rights of the Guarantee 
pertaining to the portion of the loan assigned.
    (2) The lender will send the holder the borrower's executed note 
attached to the Guarantee.
    (3) The holder, upon written notice to the lender and the Agency, 
may assign the unpaid guaranteed portion of the loan. The holder must 
assign the guaranteed portion back to the original lender if requested 
for servicing or liquidation of the account.
    (4) The Guarantee or Assignment of Guarantee in the holder's 
possession does not cover:
    (i) Interest accruing 90 days after the holder has demanded 
repurchase by the lender, except as provided in the Assignment of 
Guarantee and Sec.  762.144(c)(3)(iii).
    (ii) Interest accruing 90 days after the lender or the Agency has 
requested the holder to surrender evidence of debt repurchase, if the 
holder has not previously demanded repurchase.
    (c) Negotiations concerning premiums, fees, and additional payments 
for loans are to take place between the holder and the lender. The 
Agency will participate in such negotiations only as a provider of 
information.

    Signed in Washington, DC, on September 1, 2005.
James R. Little,
Administrator, Farm Service Agency.
[FR Doc. 05-19126 Filed 9-23-05; 8:45 am]
BILLING CODE 3410-05-P