[Federal Register Volume 71, Number 149 (Thursday, August 3, 2006)]
[Rules and Regulations]
[Pages 43955-43958]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-12503]



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  Federal Register / Vol. 71, No. 149 / Thursday, August 3, 2006 / 
Rules and Regulations  

[[Page 43955]]



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: Final rule.

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

SUMMARY: The Farm Service Agency (FSA) is amending its regulations 
pertaining to the retention of Preferred Lender Program (PLP) status by 
lenders in certain situations, and the payment of interest in cases 
where the lender is unable to take action due to bankruptcy or state 
redemption laws. This rule will allow PLP lenders, under certain 
conditions, to retain their PLP status for a period, not to exceed two 
years, after their loss ratio exceeds the standard established by the 
Agency. It will also allow for the payment of 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.

DATES: Effective Date: September 5, 2006.

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 15, 2005, (70 FR 47730-
47733) to amend its regulations governing the servicing of loans made 
under the guaranteed farm loan program. The comment period ended 
October 14, 2005.

Summary of Public Comments

    All of the issues related to the proposed rule were commented on. 
FSA considered the comments and incorporated some of the 
recommendations and suggestions in this rule. Following is a review of 
the comments and the changes made in the final rule in response to the 
comments.

Retaining PLP Status

    Six comments were received regarding the proposal to amend 7 CFR 
762.106(g)(2)(ii). The proposal would recognize additional situations 
where a PLP lender could be allowed to retain their status as a PLP 
lender if, due to circumstances beyond their control they no longer met 
the eligibility requirements concerning loss ratios. All of the 
commenters were in favor of the proposal, with one specifically 
mentioning that the current regulation is inadequate without any 
change. One comment suggested that the Agency should enlarge the 
maximum period of waiver from one year to three years, subject to 
earlier revocation by the Agency if the lender was not making progress 
toward meeting the requirements of its approved loss reduction plan. 
Another commenter favored the extension of the one year period only in 
cases of extreme disasters. One commenter also suggested that the 
decision on whether or not the extension was to be granted should be 
made administratively final, since it is subjective and could subject 
the Agency to appeals and litigation.
    In consideration of the comments received, the Agency is making 
changes in the final rule. Because recovery from disasters can take 
several years to accomplish, the Agency is going to extend the time 
period for which an exception can be granted from one year to two 
years. Past experience shows that one year is an inadequate amount of 
time to fully recover.
    Present regulations allow the Agency to grant a waiver to PLP 
lenders to allow them to retain their PLP status when they exceed the 
maximum loss ratio, currently set at three percent, but only under 
natural disasters that are widespread enough to be declared a disaster. 
There are many other reasons that are totally beyond the control of the 
lender that could cause a lender's loss ratio to exceed three percent, 
even if the lender normally does an outstanding job in making and 
servicing loans guaranteed by the Agency. Some of the possibilities 
could include an untimely freeze of only local impact, an economic 
downturn in a local area, or perhaps very low commodity prices for a 
specialty crop only grown in one or two localities. Land values could 
drop drastically in a local area only, possibly due to industry moving 
in or out of an area, loss of access to markets, or biological or 
chemical damage that is not widespread, but negatively affects a small 
area. A limited area may experience localized flooding due to locally 
severe thunderstorms, or a large amount of hail in a small area.
    Smaller banks that make and service loans in a local area only are 
more likely to incur losses above the three percent maximum loss ratio 
because all of their portfolio is concentrated in a small area and the 
volume of their portfolio is such that as little as one or two loans 
incurring large loss claims could cause their loss ratio to go up 
greatly. Larger lenders with loans spread out over a large area would 
not suffer as greatly and it would take more losses before they would 
reach the maximum loss limit. Whether a large or small lender, either 
one would suffer the loss for reasons totally beyond their control.
    PLP Lenders who exceed the maximum loss ratio and want to retain 
their status will contact their FSA State Office and explain why they 
believe their excessive losses are beyond their control. They will be 
required to develop a plan to reduce their losses below the three 
percent loss ratio, the current maximum allowed by regulations to 
retain PLP status. If the FSA State Office determines there is adequate 
justification for allowing the lender to retain PLP status, the State 
Office will make their recommendation and send an exception request to 
the Deputy Administrator of Farm Loan Programs, who will make the final 
decision on granting the exception. If the State Office determines that 
an exception is not justified, they will decline to send a request for 
an exception. If granted, the exception may be renewed at the end of 
the two year period for another two year period if the lender is making 
satisfactory progress toward reducing their loss ratio below the 
standard, currently set at three

[[Page 43956]]

percent. No further renewals or extensions would be granted.
    The Deputy Administrator for Farm Loan Programs would not 
automatically grant the request for retention of PLP status. A careful 
analysis would be performed on the information provided by the lender 
and the State Office of the Agency. A comparison would be made with 
loss ratios of other lenders in the same area. If there are several 
local lenders, and only one is experiencing excessive loss claims, the 
request would be denied, unless there were other extenuating 
circumstances that would justify the request.
    The Agency does not adopt the suggestion that the decision on 
granting an exception be administratively final in order to avoid 
appeals. The Agency anticipates that such exceptions rarely will be 
made, and any denials will be upheld in an appeal.

Interest Accrual on Loan Liquidations

    Nine comments were received on this subject; all were supportive of 
the proposal, and saw it as a good start, but some believe it does not 
go far enough. One mentioned that they appreciated that FSA is 
responding to the concerns of the commercial lenders on the issue of 
interest accrual in Chapter 7 bankruptcies and in redemption rights 
cases. Several commenters believed the Agency should relax its 
requirements further than proposed, to pay interest for a longer 
period. These comments stated that while 45 days is enough time to 
liquidate chattel security, 45 days in some cases is not enough time to 
liquidate real estate.
    In response to these comments, the Agency will pay interest on the 
unsecured amount for up to 90 days, instead of the 45 days originally 
proposed, after the earlier of the relief from stay or discharge of the 
Chapter 7 bankruptcy for real estate secured loans. The Agency still 
believes that, when the security is chattels, paying interest on the 
unsecured amount for up to 45 days after the earlier of the relief from 
stay or discharge of the Chapter 7 bankruptcy is adequate. Forty five 
days is generally enough time to accomplish liquidation after the 
relief from stay or discharge since, for chattels there should be few 
legal impediments; however, this amount of time often is inadequate 
when real estate serves as collateral. That is because lenders are 
typically unable to liquidate real estate in the same timeframe as 
chattels. Thus, the Agency has amended this final rule accordingly.
    One comment indicated that the Agency was establishing the date of 
filing a Chapter 7 bankruptcy as the date from which the 90 day time 
limit on interest was to be paid. That, in fact, is already the current 
policy of FSA, and the revision is simply stating this more clearly in 
Sec.  762.148 in order to reduce confusion.
    Another suggestion was that the time period should be based on the 
unique circumstances of each case, and suggested that Farm Credit is at 
a disadvantage because they are required to offer a right of first 
refusal in all states, regardless of whether or not redemption rights 
apply. Establishing an indefinite period of time to pay interest based 
on the particulars of each case would not be appropriate, as lenders 
would not all be treated equally, so the Agency does not adopt this 
comment.
    The suggestion also was made that the additional interest should 
apply to the entire amount of the debt and not just the unsecured 
portion. The Agency does not adopt this comment as the process of the 
estimated loss claim allows the lender to receive immediate 
compensation upon which they can invest to offset any earnings 
reductions.
    Another commenter assumed that the filing of Chapter 7 bankruptcy 
would serve as the lender's liquidation plan. This is not the case. 
Lenders shall continue to follow those existing regulations at 7 CFR 
762.149(b). This section makes very clear the requirements a lender 
must follow in developing a liquidation plan, including timeframes and 
submission requirements to the Agency. A lender is still required to 
appraise the collateral, determine the method to obtain the greatest 
return, and submit an estimated loss claim if liquidation cannot be 
completed within 90 days.
    Other comments were that the Agency should use some other date for 
starting the 90 day clock, such as the date the bankruptcy is closed, 
when the trustee abandons the security, or the date of discharge. The 
Agency carefully considered these comments, but believes using the date 
of filing for Chapter 7 bankruptcy as the date of the decision to 
liquidate is most reasonable as previously explained. When a borrower 
files for a Chapter 7 bankruptcy, the lender can immediately submit an 
estimated loss claim, even with incomplete information concerning the 
collateral. There is limited justification in using the date the 
bankruptcy is closed, when the trustee abandons the security, or the 
date of discharge, as the starting date of the 90 day interest accrual 
the Agency will pay, because there is no reason a lender cannot file an 
estimated loss claim upon notification of the borrower filing for a 
Chapter 7 Bankruptcy.
    The proposal to pay additional interest on the amount that was 
estimated to be secured but was eventually found to be unsecured 
removes the penalty that a lender effectively receives for 
underestimating their loss under existing regulations. This rule will 
encourage the lender to file an estimated loss claim since the lender 
will be paid additional interest on any unsecured debt remaining only 
if the lender filed an estimated loss claim. Thus the lender will not 
lose interest due to an inaccurate estimated loss claim.
    Another commenter suggested that the Agency include Chapter 11 
bankruptcies along with Chapter 7 bankruptcies in the proposal to pay 
additional interest. The existing regulations concerning Chapter 11 
bankruptcies are adequate to cover those situations, so no changes will 
be made in response to this comment.
    Another comment was that the Agency should put some reasonable caps 
on default interest rates and attorney fees that lenders charge. The 
Agency has no authority to establish maximum default interest rates. 
Default interest rates are often spelled out in the promissory note 
and, by signing promissory notes, borrowers agree to the default 
interest rate. The Agency is not involved in negotiating loan terms 
between lenders and their customers beyond the term limits imposed for 
guaranteed loan origination and rescheduling, and no change will be 
made in response to the comment. In addition, the Agency does not cover 
default interest as part of any loss claims.
    As for the comment suggesting a particular limitation on attorney 
fees, the Agency has no authority to establish what reasonable legal 
fees are. The Agency does often negotiate with lenders to reduce loss 
claims that include attorney fees that seem unreasonable in a 
particular case. Explicitly stating in the regulation what is 
reasonable, is not necessary or appropriate and no change will be made 
in response to the comment.
    Several comments were received which addressed the proposed payment 
of interest in cases where state redemption rights apply. Commenters 
generally combined comments concerning interest where state redemption 
rights apply with the comments on Chapter 7 Bankruptcy. No commenter 
was opposed to the proposal, but, just as in the case of Chapter 7 
bankruptcies, several thought the 45 day proposal was inadequate in 
some cases, and should be longer. The Agency agrees with the 
suggestions and

[[Page 43957]]

amending the final regulation to allow for the payment of interest for 
a period of up to 90 days after the end of the redemption period for 
real estate secured loans.
    One commenter suggested that there has been an increasing 
marginalization of borrowers in the program in recent years, and 
objects to the use of the language that identifies lenders as the 
Agency's customers. The guaranteed loan program was created to make 
credit available to farmers and ranchers who may not have credit 
available to them. This is accomplished by providing a guarantee to a 
commercial lender to reduce most of their risk of loss on the loan they 
make to the farmer/rancher. The loans guaranteed are those that the 
lender would not have made without a guarantee. Thus, farmers and 
ranchers are ultimate beneficiaries of the program by being able to 
obtain credit, or credit at competitive rates and better terms. In 
making and servicing guaranteed loans, no direct contact between the 
farmer and the Agency is required; the Agency conducts its program by 
dealing with the lenders. For guaranteed loans, the farm borrowers make 
application to, and are customers of the lender. The lender makes 
application to the Agency for the guarantee, and thus is the customer 
of the Agency. No changes were made to the rule as a result of this 
comment.

Executive Order 12866

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

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 made this certification in the proposed rule 
and no comments were received in this area. The Agency, therefore, is 
not required to perform a Regulatory Flexibility Analysis as required 
by the Regulatory Flexibility Act, Public Law 96-534, as amended (5 
U.S.C. 601).

Environmental Evaluation

    The environmental impacts of this 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

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

0
Accordingly, Title 7 of the Code of Federal Regulations 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.  762.106 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 may allow a PLP lender with a loss rate which exceeds the 
maximum PLP loss rate, to retain its PLP status for a two-year period, 
if:
    (A) The lender documents in writing why the excessive loss rate is 
beyond their control;
    (B) The lender provides a written plan that will reduce the loss 
rate to the PLP maximum rate within two years from the date of the 
plan, and
    (C) 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.
    (D) The Agency will revoke PLP status if the maximum PLP loss rate 
is not met at the end of the two-year period, unless a second two year 
extension is granted under this subsection.
* * * * *

0
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, for a borrower who is or will be 
liquidated, the date the borrower files for bankruptcy protection under 
Chapter 7 shall be the date of the decision to liquidate.
* * * * *

0
4. Amend Sec.  762.149 by revising paragraph (d)(2) to read as follows:


Sec.  762.149  Liquidation.

* * * * *
    (d) * * *

[[Page 43958]]

    (2) The lender generally will discontinue interest accrual on the 
defaulted loan at the time the estimated loss claim is paid by the 
Agency. The following exceptions apply:
    (i) 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,
    (ii) In the case of a Chapter 7 bankruptcy, in cases where the 
lender filed an estimated loss claim, 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 chattel only secured debt that was 
estimated to be secured but upon final liquidation was found to be 
unsecured, and up to 90 days after the date of discharge on the portion 
of real estate secured debt that was estimated to be secured but was 
found to be unsecured upon final disposition,
    (iii) The Agency will pay the lender interest which accrues during 
and up to 90 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 paid by the Agency during the liquidation 
action.
* * * * *

    Signed at Washington, DC, on July 18, 2006.
Teresa C. Lasseter,
Administrator, Farm Service Agency.
 [FR Doc. E6-12503 Filed 8-2-06; 8:45 am]
BILLING CODE 3410-05-P