22444 Federal Register / Vol. 77, No. 72 / Friday, April 13, 2012 / Proposed Rules 

DEPARTMENT OF AGRICULTURE 

Farm Service Agency 

7 CFR Parts 761, 762, 765, 766, and 772 

RIN 0560–AI14 

Farm Loan Programs; Clarification and 

Improvement 

AGENCY: Farm Service Agency, USDA. 

ACTION: Proposed rule. 

SUMMARY: The Farm Service Agency 

(FSA) is proposing to amend the Farm 

Loan Programs (FLP) regulations for 

loan making and servicing, specifically 

those on real estate appraisals, lease, 

subordination and disposition of 

security, and Conservation Contract 

requirements. FSA is proposing the 

changes to streamline the loan making 

and servicing process and give the 

borrower greater flexibility while 

protecting the financial interests of the 

Government. 

DATES: We will consider comments that 

we receive by June 12, 2012. 

ADDRESSES: We invite you to submit 

written comments on this proposed 

rule. In your comment, include the 

Regulation Identifier Number (RIN) and 

volume, date, and page number of this 

issue of the Federal Register. You may 

submit comments by any of the 

following methods: 

• Federal eRulemaking Portal: Go to 

http://www.regulations.gov. Follow the 

online instructions for submitting 

comments. 

• Mail: Director, Loan Servicing and 

Property Management Division, FLP, 

FSA, U.S. Department of Agriculture, 

1400 Independence Avenue SW., Stop 

0523, Washington, DC 20250–0523. 

Comments will be available for 

inspection online at 

www.regulations.gov and at the mail 

address listed above between 8 a.m. and 

4:30 p.m., Monday through Friday, 

except holidays. A copy of this 

proposed rule is also available through 

the FSA home page at http:// 

www.fsa.usda.gov/. 

FOR FURTHER INFORMATION CONTACT: 

Michael C. Cumpton, telephone: (202) 

690–4014. Persons with disabilities or 

who require alternative means for 

communications should contact the 

USDA Target Center at (202) 720–2600 

(voice and TDD). 

SUPPLEMENTARY INFORMATION: 

Background 

This rule proposes changes 

concerning certain loan making and 

servicing provisions of FSA’s direct and 

guaranteed loan programs. FSA direct 

loans and loan guarantees are a means 

of providing credit to farmers whose 

financial risk exceeds a level acceptable 

to commercial lenders. Through direct 

and guaranteed Farm Ownership (FO), 

Operating Loans (OL), and Conservation 

Loans (CL), as well as direct Emergency 

Loans (EM), FSA assists tens of 

thousands of family farmers each year in 

starting and maintaining profitable farm 

businesses. FSA loan funds may be used 

to pay normal operating or family living 

expenses; make capital improvements; 

refinance certain debts; and purchase 

farmland, livestock, equipment, feed 

and other materials essential to farm 

and ranch operations. FSA services 

extend beyond the typical loan by 

offering customers ongoing 

consultation, advice, and creative ways 

to make their farm successful. These 

programs are a temporary source of 

credit. Direct borrowers generally are 

required to graduate to other credit 

when their financial condition will 

allow them to do so. 

FSA proposes to amend the FSA 

regulations for several FLP loan making 

and servicing issues, including real 

estate appraisals, leases, disposition, 

and release of security, and 

Conservation Contracts. FSA is 

proposing the changes to streamline the 

loan making and servicing process and 

give the borrower greater flexibility 

while protecting the financial interests 

of the Government. 

First, FSA proposes changes for 

various issues related to appraisals. 

Section 307(d) of the Consolidated Farm 

and Rural Development Act (CONACT, 

7 U.S.C. 1927(d)) requires that in order 

for FSA to have the rights to oil, gas, or 

other minerals as FO loan collateral, the 

products’ value must have been 

considered in the appraised value of 

collateral securing the loan. The section 

only applies to FO loans made after the 

date of enactment (December 23, 1985), 

but FSA administratively extended this 

requirement to any type of FLP loan. 

FSA now proposes to modify its 

regulations to mirror the CONACT by 

applying the requirement only to FO 

loans. 

FSA also proposes to clarify its 

regulation on appraisal appeal rights by 

specifying that the appeal of real estate 

appraisals used by FSA in non-primary 

loan servicing contexts is limited to the 

question of whether the appraisal is 

compliant with the Uniform Standards 

of Professional Appraisal Practice 

(USPAP), and that the appellant must 

submit a technical appraisal review of 

the appraisal that has been prepared by 

a State Certified General Appraiser. 

Appeals of real estate appraisals in the 

primary loan servicing context can 

include either a technical appraisal 

review prepared by a State Certified 

General Appraiser or an independent 

appraisal. For chattel appeal appraisals, 

FSA proposes to amend the regulation 

to reflect current policy that the 

borrower may obtain an independent 

appraisal to help determine the question 

of whether the appraisal in question is 

consistent with present market values of 

similar items in the area. 

Furthermore, FSA proposes to not 

require a new appraisal for guaranteed 

loans if updates can be made to an 

existing appraisal, or if the guaranteed 

loan amount is less than $250,000. 

Second, FSA proposes changes 

related to leases of borrowers’ property 

for mineral production, communication 

towers, and wind and solar energy 

installations. The revisions and 

clarifications proposed by this rule 

would provide flexibility for these 

leases while also implementing 

standards for consistent treatment by 

FSA. 

Third, for borrowers with chattel 

security, FSA proposes limiting the 

tracking of chattel proceeds to those that 

will be applied to FSA loans, instead of 

having detailed agreements on the use 

of all chattel proceeds. FSA also 

proposes giving the State Executive 

Director (SED) the authority to release 

security in certain situations if stringent 

security and graduation requirements 

are met. 

Fourth, on Conservation Contracts, in 

which a borrower’s debt is reduced for 

taking certain conservation actions, FSA 

proposes changes that will reduce the 

costs to FSA and the time needed to 

administer the program while still 

ensuring the conservation intent is met. 

These changes are discussed in more 

detail below. 

Appraisals 

Section 307(d) of the CONACT (7 

U.S.C. 1927(d)), requires that for farm 

ownership loans made after December 

23, 1985 (the date of enactment), the 

value of oil, gas, or other minerals must 

be included in the appraised value of 

the security collateral in order for FSA 

to have a valid security interest in those 

products. FSA administratively 

extended this requirement in the 

regulations to require that real estate 

appraisals used by FSA for any type of 

FLP loan include the value of any oil, 

gas, or other minerals. This has resulted 

in the following issues: 

• In loan making, FSA’s general 

policy is to obtain and pay for an 

appraisal. This may occur even when a 

third party appraisal, completed by a 

qualified appraiser, may already be 

available. Not only does this 


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substantially increase the cost to FSA, 

but it can also delay application 

processing and increase the applicant’s 

wait for loan funds. 

• In loan servicing, this mineral 

appraisal requirement puts FSA security 

at risk on non-FO loans because not 

stating the value of minerals in an 

appraisal, usually because they have no 

known value at the time of the 

appraisal, could prevent FSA from 

getting the mineral security interest in 

special loan servicing, where the best 

lien obtainable is taken on the 

borrower’s security, or in a voluntary 

conveyance or foreclosure. This could 

increase FSA program losses. 

This rule therefore proposes to 

remove this mineral appraisal 

requirement in 7 CFR 761.7, 765.252, 

and 765.351 for all future FLP loans 

except direct FO loans, where it is 

required by law. This change would not 

be retroactive. For all non-FO loans 

made after the effective date of this rule, 

FSA will have a security interest in oil, 

gas, or other minerals on or under the 

property regardless of whether the value 

of those products were included in the 

appraisal value of the property. This 

security interest is reflected in the FSA 

mortgage forms. 

Appeals of Appraisals 

In making direct loans, FSA obtains 

real estate appraisals to ensure adequate 

security for the loan. If FSA makes an 

adverse decision that involves the 

appraisal, applicants generally have the 

right to appeal the decision and the 

appraisal under 7 CFR part 11. When an 

applicant appeals the decision regarding 

the appraised value, it has been FSA’s 

policy to limit the appeal to the 

question of whether the appraisal 

complied with USPAP, and the 

borrower or applicant who filed the 

appeal may obtain a technical appraisal 

review prepared by a State Certified 

General Appraiser to help determine 

USPAP compliance. FSA proposes to 

amend 7 CFR 761.7 to reflect this 

policy. The change is proposed because 

submission of an independent appraisal 

by an applicant or borrower is not 

useful as two appraisals that both 

comply with USPAP can still differ, but 

there is no basis for the appeal hearing 

officer to choose one over the other, or 

some other value. The proposed change 

will allow the borrower or applicant to 

submit a technical appraisal review 

prepared by a State Certified General 

Appraiser to determine if FSA’s 

appraisal complies with USPAP. The 

proposed change would also require 

that the technical appraisal review be 

prepared in accordance with USPAP, 

and paid for by the borrower or 

applicant. 

For appeals of real estate appraisals in 

primary loan servicing cases, FSA 

proposes to amend 7 CFR 766.115 to 

clarify that the technical appraisal 

reviews must be prepared by a State 

Certified General Appraiser. The 

borrower in a primary loan servicing 

case may still obtain an independent 

appraisal as provided for by 7 CFR 

766.115(a)(2) and CONACT section 

353(j) (7 U.S.C. 2001). 

For appeals of chattel appraisals, 

FSA’s current policy is to limit the 

question to whether FSA’s appraisal is 

consistent with present market value of 

similar items in the area, and to allow 

the applicant or borrower to submit an 

independent appraisal review to help 

determine that question. FSA proposes 

amending 7 CFR 761.7 to reflect this 

policy. 

FSA proposes to remove 7 CFR 

761.7(d) regarding FSA’s internal 

administrative appraisal and technical 

reviews since the provisions are for 

internal procedures and therefore not 

required to be in the Code of Federal 

Regulations. 

Appraisal Requirements for 

Guaranteed Loans 

FSA currently requires an appraisal of 

the security for all guaranteed loans in 

excess of $50,000 in accordance with 7 

CFR 762.127. The $50,000 threshold has 

not changed since the start of the 

program in the early 1980’s. FSA 

proposes to increase the minimum 

guaranteed loan amount for which a real 

estate appraisal will be required. 

OMB Circular A–129 states, 

‘‘Agencies should ensure that a State 

licensed or certified appraiser prepares 

an appraisal for all credit transactions 

over $100,000 ($250,000 for business 

loans).’’ The lending industry’s 

regulators, such as the Federal Deposit 

Insurance Corporation and the Farm 

Credit Administration, currently allow 

$250,000 as their threshold for business 

type (agricultural purpose) loans. 

Therefore, FSA proposes to increase the 

minimum guaranteed loan amount 

required for a real estate appraisal from 

$50,000 to the minimum level of 

$250,000. There is no comparable 

proposal to raise the limit for direct FSA 

loans because direct loans typically 

display more serious financial stress, 

pose significantly more risk of loss to 

FSA, and warrant stricter safeguards. 

For loans of $250,000 or less, lenders 

may document value in the same 

manner as for their unguaranteed loans, 

for example statement of value, tax 

assessment, automated valuation model, 

and so on. If an appraisal is completed 

voluntarily for loans of $250,000 or less, 

it is not required to be USPAP 

compliant. The security for the loan 

must still meet the requirements 

specified in 7 CFR 762.126 to ensure 

that proper and adequate security is 

obtained to protect the interests of the 

lender and FSA. This change will 

merely allow lenders to follow industry 

standards to document collateral value. 

Amending the appraisal regulations to 

increase the minimum loan amount to 

$250,000 will benefit lenders, 

guaranteed loan applicants, and FSA. 

Some of the applicants are small or 

family farms for whom appraisal fees 

can be a significant burden. Due to the 

relatively small size of these loans, FSA 

can expeditiously provide financial 

assistance to these borrowers. Appraisal 

fees will be reduced, if not eliminated, 

as there will be no cost for an appraisal 

on loans under $250,000. 

Application processing times also are 

expected to be reduced because of the 

proposed change, due to the fact that the 

appraisal will not need to be conducted 

under the new threshold, and this will 

also help make FSA’s guaranteed loan 

program more attractive to lenders and 

their applicants. Faster access to capital 

is expected to promote operation 

viability and a higher probability of loan 

repayment. 

Guaranteed loans greater than 

$250,000 still require a current appraisal 

completed by a State Certified General 

Appraiser in accordance with USPAP in 

the previous 12 months. As an 

alternative, FSA also proposes to revise 

7 CFR 762.127 to allow FSA to waive 

the requirement for loans greater than 

$250,000 if there is an existing appraisal 

that is more than 12 months old and: 

• Overall market conditions have 

remained stable or improved; 

• The condition of the property in 

question is comparable to the time of 

the appraisal; and 

• The value of the property has 

remained the same or increased. 

This change would relieve the 

applicant of the cost of a new appraisal. 

Further, with stable or improving 

market conditions, there would be no 

additional risk to FSA when 

collateralizing a loan with security that 

has not had an updated appraisal. No 

appeal will be available on FSA’s 

decision to waive this regulatory 

requirement. 

The proposed increase from $50,000 

to $250,000 would apply to real estate 

appraisals, not chattel appraisals. FSA’s 

policy to not require chattel appraisals 

for loans of $50,000 or less where a 

strong equity position exists would 

remain. 


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FSA also proposes clarifying in 7 CFR 

762.127 that while a formal appraisal is 

not necessary for chattel or real estate 

that will serve as additional security, an 

estimated value is still required. 

Lastly, the terms ‘‘complete’’ and 

‘‘limited appraisal’’ have been 

determined to be obsolete in the 

industry. Therefore, FSA proposes to 

remove the references of ‘‘complete’’ 

and ‘‘limited appraisal’’ from the 

regulations in 7 CFR part 762. 

Leases 

With the increased emphasis on 

wireless communication, finding 

traditional energy sources, and 

developing alternative energy sources, 

FSA is receiving more requests to allow 

borrowers to lease portions of their farm 

for communication towers, wind energy 

installations, and mineral exploration. 

While usually beneficial to landowners 

and their lenders, these leases may 

create a financial burden to the 

borrower as a result of unanticipated 

costs, such as removal of the equipment 

or mitigation of damages. The 

installations can also make the land 

difficult or impossible to farm, and FSA 

farm loan borrowers are required by law 

to operate, not lease, the farmland they 

own and use as security. 

Such leases, however, can provide 

flexibility for farm loan borrowers in the 

form of increased cash flows, reduced 

debt load, and quicker debt reduction 

that can lead to graduation from FSA 

credit to commercial credit. Each of 

these situations is unique, and legal 

counsel is often required. Therefore, 

instructions to cover every circumstance 

cannot be issued in this rule; however, 

FSA proposes certain revisions and 

clarifications to 7 CFR 765.205(b), 

765.252(a), and 765.252(b) to allow 

consistent treatment of such lease 

requests. For example, the proposed 

change provides that a lease must not 

adversely affect FSA’s security interest 

or the successful operation of the farm, 

and requires FSA review of contracts or 

agreements related to the lease. 

FSA also proposes changes in 7 CFR 

765.252 to allow these nonfarm type 

leases be made for any term, instead of 

the 3- to 5-year limit in the present 

regulations. FSA proposes removing the 

time limit in order to allow qualified 

nonfarm leases to continue for longer 

periods since these leases provide 

flexibility and cash flow to the 

borrower, but do not interfere with the 

successful operation of the farm or 

adversely affect the Government’s 

interest. These standards are central to 

FSA’s mission as FSA is required to 

supply agricultural financing to farm 

operators who cannot obtain funds 

elsewhere until they are in a position to 

move to commercial credit. 

Subordinations 

In a subordination, a lender will give 

another entity, often another lender, its 

superior lien position. FSA often 

executes subordinations for its direct 

loans so another lender can provide 

financing to an FSA borrower. This 

subordination of the lien on FSA 

security allows the borrower to produce 

a crop, build a house on the farm, or do 

other things that are beneficial to the 

family farm. These FSA subordinations 

are almost always to another lender that 

is making a loan to the borrower, and 

the present FSA regulations address this 

circumstance. However, FSA proposes 

expanding the definition in 7 CFR 

761.2(b) to allow for leases to companies 

who want to use the land for purposes 

such as alternative energy. 

Subordinations of real estate to a lessee 

must meet the following conditions (all 

of which also apply to subordinations of 

real estate to creditors): 

• The borrower is not in default or 

will not be in default on FLP loans by 

the time the subordination closing is 

complete; 

• The borrower can demonstrate, 

through a current farm operating plan, 

the ability to repay all debt payments 

scheduled, and to be scheduled, during 

the production cycle; 

• Except for CL, the borrower is 

unable to partially or fully graduate; 

• The borrower must not be ineligible 

as a result of a conviction for controlled 

substances according to 7 CFR part 718; 

• The borrower must not be ineligible 

due to disqualification resulting from 

Federal crop insurance violation 

according to 7 CFR part 718; 

• The borrower will not use loan 

funds in a way that will contribute to 

erosion of highly erodible land or 

conversion of wetlands as described in 

subpart G of 7 CFR part 1940; 

• Any planned development of real 

estate security will be performed as 

directed by the lessor or creditor, as 

approved by FSA, and will comply with 

the terms and conditions of 7 CFR 

761.10; 

• Subordinations of shared 

appreciation agreement (SAA) 

mortgages may only be approved when 

there is no increase in the debt that is 

prior to the SAA debt; and 

• FSA may subordinate non-program 

security only when it is also security for 

a program loan with the same borrower. 

FSA proposes amending 7 CFR 

765.205(b) to extend subordination 

authority to include leases, as the 

contracts presented to borrowers by 

companies who want to use the land for 

alternative energy or communication 

towers often contain subordination 

language in addition to the terms of the 

lease. 

FSA also proposes amending 7 CFR 

765.205(b)(1) to allow a subordination 

of real estate security to creditors if the 

loan will be used to refinance a loan 

originally made for an authorized loan 

purpose by FSA or another creditor. 

This will allow FSA to help an existing 

borrower refinance a farm loan with 

another loan more beneficial to the 

operation. This type of financing is 

often used when a lower interest rate 

becomes available. 

Disposition of Chattel Proceeds 

Section 335(f)(6) of the CONACT (7 

U.S.C. 1985(f)(6)) allows FSA to require 

borrowers to plan for, or report on, how 

proceeds from the sale of collateral 

property will be used. Currently, FSA 

requires borrowers with chattel security 

to sign detailed annual agreements on 

the use of all chattel proceeds, even 

beyond those required for payment of 

FLP loans, and to immediately report to 

FSA all proceeds from the sale of chattel 

security. FSA proposes to limit these 

agreements to proceeds from the 

disposition of normal income security 

and will be applied to the FSA 

indebtedness in order to save time for 

both the borrower and FSA. This change 

would mean that for proceeds that will 

not be applied to FSA loans, borrowers 

who live some distance from the nearest 

FSA office could save time and expense 

required for ‘‘in person’’ reporting and 

submission of chattel proceeds. FSA 

personnel will also be free to perform 

other duties instead of tracking proceeds 

used to pay other creditors. The 

borrower will still be informed of their 

rights and responsibilities regarding the 

security. FSA will continue to comply 

with the statutory release requirements 

in Section 335(f) of the CONACT, 

including release of normal income 

security prior to acceleration in an 

amount sufficient to pay for essential 

household and farm operating expenses, 

while not reducing the oversight of 

chattel security. FSA proposes to change 

7 CFR 765.302 to track only normal 

income security proceeds that are 

planned for release or applied to FSA 

FLP payments instead of attempting real 

time monitoring of all proceeds. This 

will be accomplished with the use of an 

agreement for each production cycle 

(with revisions as necessary) on which 

the borrower and FSA agree to the use 

of proceeds that will be used to make 

payments. With the proposed change, 

FSA will use an internal form that 

records the proceeds of both normal 

income and basic security as they are 


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submitted. To reflect this change to the 

regulation, FSA proposes to conform the 

current definition of the agreement for 

the use of proceeds in 7 CFR 761.2(b). 

FSA further proposes removing 7 CFR 

765.302(b), which provides that an 

agreement for the use of proceeds is in 

effect until the proper disposition of all 

listed chattel security has been 

accomplished or a new agreement is 

executed. The duration of the agreement 

is specified in the agreement itself and 

7 CFR 765.302(b) is unnecessary. 

FSA also proposes to remove 7 CFR 

765.302(h), which requires the borrower 

to maintain documentation of all 

dispositions of chattel proceeds, 

because it goes beyond the scope of the 

new proposed definition of the 

agreement, which is limited to proceeds 

that will be applied to loan payments. 

The recordkeeping requirement of all 

chattel proceeds, regardless of whether 

applied to loan payments, is still 

important for annual planning purposes, 

however, so FSA proposes to 

incorporate the recordkeeping 

requirement into 7 CFR 765.301(a). 

Release 

Due the changing needs of many in 

the rural community, FSA is proposing 

to amend 7 CFR 765.305 and 765.351(f) 

to expand releases of its liens. The 

proposed change would allow FSA to 

release some security without 

compensation for borrowers who have 

not had primary loan servicing within 

the last 3 years if the loan security 

margin would be 150 percent or more 

after the release, and the borrower is: 

• Graduating on all chattel or all real 

estate debt (that is, partial graduation); 

• Using the security to obtain other 

credit; or 

• Transferring a small tract of real 

estate to a person related by blood or 

marriage. 

Loans of borrowers in these 

circumstances have a low risk of loss to 

the Government, and the partial release 

of security without compensation would 

be acceptable when weighed against the 

benefits that would accrue to the 

borrower. In addition, supporting this 

change is the fact that at the end of fiscal 

year 2010, the dollar delinquency on the 

FLP direct loan program as a whole was 

5.9 percent and the loss rate was 1.2 

percent. These are remarkably positive 

statistics in light of FSA’s mission to 

serve those who cannot get credit 

elsewhere. This success is, of course, 

partially due to the nature and 

resilience of farmers, but beyond that, 

there have been several policies that 

have brought the delinquencies and 

losses down: 

• The extensive servicing options 

originally made available through the 

Agricultural Credit Act of 1987; 

• The Treasury Offset Program (TOP) 

brought about by the Debt Collection 

and Improvement Act of 1996 and the 

continuation of administrative offsets; 

• Continued financial support by the 

various FSA farm programs (commodity 

and price support); 

• Stable FLP credit policies; and 

• Continued emphasis on looking at 

cash flow and not just collateral when 

making credit decisions. 

As the average age for farmers 

increases and their numbers diminish, 

FSA is encountering instances where 

farmers with loans that have security 

margins of 150 percent or more are 

requesting releases of security for partial 

graduations (when a borrower obtains 

commercial credit on all real estate or 

all chattel loans), to obtain financing for 

non-farm businesses, to facilitate 

gradual generational transfers of farm 

property to family members, or to 

manage future taxes by transferring 

assets to family members. These 

proposed changes may allow successful 

farmers to expand into businesses such 

as selling seed and feed retail, trucking 

or welding, that while not eligible for 

FSA financing, still contribute to their 

income and provide services to the local 

community. Further, the proposed 

changes allow borrowers to transfer 

small tracts to family members related 

by blood or marriage to start a business, 

or build a house, or any number of 

things that could spur economic activity 

in the area. Although these borrowers 

have successful operations and their 

loans are better secured than most direct 

borrowers, graduation requirements will 

still ensure that they are unable to move 

entirely to commercial credit before 

FSA releases security. This policy will 

help support the rural population while 

still protecting the Government. 

Conservation Contracts 

The Conservation Contract Program 

provides debt cancellation for FLP 

borrowers in exchange for them taking 

land out of production for conservation 

purposes. The proposed changes noted 

below will reduce the costs to FSA and 

the burden of administering the 

Conservation Contract Program while 

still ensuring the conservation objective 

is met by clarifying and revising the 

Conservation Contract Program 

regulations in 7 CFR 766.110. 

There are many instances where land 

proposed for a Conservation Contract is 

encumbered under another conservation 

program for which the borrower 

receives compensation. If the 

conservation program, whether 

administered by Federal, State, or local 

government, compensates the borrower 

for similar conservation, wildlife or 

recreation benefits on the same land, 

FSA proposes that the land generally 

will not be eligible for a Conservation 

Contract. The borrower, who has 

already received payment for the 

conservation benefit, should not receive 

additional payments on land in the form 

of a debt cancellation with a 

Conservation Contract. This change 

would, thus, eliminate inadvertent 

duplicative payments, sometimes 

referred to as ‘‘double-dipping.’’ 

However, cost-share payments from 

other sources for practices that improve 

the property as opposed to solely 

conserving the property, such as 

pesticide application, diking, or noxious 

weed removal, are not considered a 

duplication of benefits as long as such 

practices are consistent with with the 

Conservation Contract management 

plan. Borrowers would be required to 

certify on the Conservation Contract as 

to any participation in other 

conservation programs for the 

Conservation Contract land. Any 

portion of the land that was already 

encumbered by another conservation 

program would be ineligible for a 

Conservation Contract. 

FSA also proposes to clarify in 7 CFR 

766.110(m) that FSA would not grant 

subordinations of the Conservation 

Contract. This will ensure that the 

contract is not lost through foreclosure 

of a lien by a holder who obtains a 

superior lien through a subordination. 

FSA proposes to require in 7 CFR 

766.110(c) a legal right-of-way or other 

legal, permanent access to the 

Conservation Contract property for the 

life of the Conservation Contract. The 

current regulation is silent on this issue. 

On Conservation Contract properties 

that are land-locked with no legal right 

of access, FSA officials or the 

management authority cannot verify 

compliance with the Conservation 

Contract. The Conservation Contract 

form FSA–2535 includes the following 

statement in paragraph 11.B: ‘‘Grantee 

has a right of reasonable ingress and 

egress to the contract area over the 

Grantor’s property, whether or not the 

property is adjacent to the contract area, 

for the exercise of any of the rights of 

Grantee under this contract,’’ but this 

does not give FSA or the management 

authority the legal right to access the 

property through a third party’s 

property. In addition, if the land is 

transferred to a subsequent landowner, 

it is possible that access may be refused 

by the subsequent landowner despite 

the contract’s language. A legal right-ofway that is recorded, in addition to the 


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Conservation Contract, will assure that 

FSA or the management authority will 

have access to inspect the property for 

the life of the Conservation Contract. 

FSA is proposing to change 7 CFR 

766.110 to require a minimum parcel 

size of 10 contiguous acres to better 

manage Conservation Contracts. 

Presently, there are numerous small 

parcels with Conservation Contracts that 

are not suitable for the purposes of the 

program as they are too small for 

conservation, recreation, or wildlife 

purposes. In addition, they are difficult 

to identify, access, and manage. 

Establishing a minimum size as a 

general requirement has minimal 

adverse effect on the borrowers or FSA, 

and FSA or the management authority 

will be better able to inspect the 

property for contract compliance, to 

ensure protection of the natural resource 

and recreational areas. 

Further, FSA proposes to require 

subordinations from prior lienholders 

before approval of the Conservation 

Contract. Under the existing regulations, 

if a borrower with a Conservation 

Contract defaults on a debt with another 

lender that is secured by the same land 

as that subject to the Conservation 

Contract, that creditor could foreclose 

on the property and effectively remove 

the Conservation Contract. The intent of 

the program is to establish long-term 

conservation, wildlife, or recreation 

benefits. Requiring a subordination from 

a prior lienholder would ensure that the 

Conservation Contract will stay with the 

land for the duration of the contract. 

FSA is proposing new damages for a 

breach of contract in this rule. Currently 

a grantor who breaches the Conservation 

Contract by using the land in a manner 

not permitted under the contract, such 

as building an unauthorized structure or 

cutting down timber, must either restore 

damaged or altered land, or repay the 

amount of the debt cancellation. FSA 

has determined that this does not 

provide sufficient incentive to ensure 

the grantor’s compliance with the terms 

of the Conservation Contract as the 

original debt is reinstated, but the 

public still loses the benefit of the 

conservation of the land. The purpose of 

the Conservation Contract Program is to 

place at-risk land under a conservation 

contract for a set period of time, protect 

the land, and enhance its conservation, 

wildlife or recreation value. The 

consequences of a breach of the 

Conservation Contract must discourage 

violations and abuse of the program. 

Therefore, FSA proposes to require any 

violator to restore damaged or altered 

areas or, if the land is not restored 

within 90 days, pay FSA the amount of 

the debt previously cancelled, plus 

interest to the date of payment, plus any 

actual expenses incurred by FSA in 

enforcing the Conservation Contract, 

plus a penalty in the amount of 25 

percent of the amount of the debt 

cancelled. Such interest will accrue 

either at the note rate for a grantor 

indebted to FSA or at the non-program 

interest rate for a grantor who is no 

longer indebted to FSA or a successorin-interest. Also, grantors who still have 

an FSA loan and breach a Conservation 

Contract will be considered to be in 

non-monetary default on their loan if 

the violation is not timely cured, and 

FSA will take collection actions 

accordingly. These changes are expected 

to reduce the number of Conservation 

Contract breaches and help to ensure 

that the Conservation Contract Program 

accomplishes its important purpose of 

protecting the land and enhancing its 

conservation, wildlife, or recreation 

value. Conservation Contracts executed 

prior to the implementation of this rule 

will be enforced according to the terms 

and regulations in force at the time of 

their execution. 

Lastly, FSA proposes to clarify that 

uplands eligible for Conservation 

Contracts include buffer areas necessary 

not only for the protection of proposed 

Conservation Contract areas, but also for 

protection of the area enrolled in other 

conservation programs. 

Technical Amendments 

FSA proposes to remove 

§ 761.103(b)(8) requiring loan evaluation 

as part of the farm assessment. The farm 

assessment helps determine the 

appropriate level of FSA oversight, 

credit counseling, and training needs of 

the applicant. A loan evaluation is also 

completed by FSA when a loan request 

is processed and is intended to be a 

narrative to address eligibility, 

collateral, capacity, capital, and loan 

conditions of the specific loan. 

Therefore, it is duplicative to include a 

loan evaluation as part of the farm 

assessment. A loan evaluation also 

should not be a burden on the applicant. 

Therefore, FSA proposes to remove the 

requirement for a loan evaluation to be 

part of the initial farm assessment. 

Appendix A to Subpart C of part 766, 

Notice of Availability of Loan Servicing 

to Borrowers who are Current, 

Financially Distressed, or Less Than 90 

Days Past Due, does not match the 

requirement established in 

§ 766.104(a)(5). The paragraph requires 

borrowers who are financially distressed 

or current to pay a portion of the 

interest due on their loans to qualify for 

primary loan servicing. Appendix A 

section (a)(4), paragraph entitled 

‘‘payment of interest,’’ however, implies 

that the borrower will always have to 

pay a portion of the interest that has 

accrued on FLP loans when a 

restructuring is closed. FSA proposes to 

revise Appendix A to remove this 

inconsistency and reflect that the 

requirement to pay some interest on the 

account only applies to borrowers who 

are not delinquent at closing. 

Previously, definitions applicable to 7 

CFR parts 761 through 767 were moved 

to 7 CFR 761.2(b); however, several 

conforming changes to 7 CFR part 762 

were not made at that time. FSA 

proposes conforming changes to 7 CFR 

part 762 to properly cite the location of 

the definitions and remove ‘‘or 

ranching’’ from 7 CFR 762.146(b)(1). 

Lastly, this rule proposes to remove 

obsolete CFR references for FLP and to 

replace them with current references 

that were missed when FSA published 

the Regulatory Streamlining regulation 

on November 8, 2007 (72 FR 63242– 

63361). 

Executive Orders 12866 and 13563 

Executive Order 12866, ‘‘Regulatory 

Planning and Review,’’ and Executive 

Order 13563, ‘‘Improving Regulation 

and Regulatory Review,’’ direct agencies 

to assess all costs and benefits of 

available regulatory alternatives and, if 

regulation is necessary, to select 

regulatory approaches that maximize 

net benefits (including potential 

economic, environmental, public health 

and safety effects, distributive impacts, 

and equity). Executive Order 13563 

emphasized the importance of 

quantifying both costs and benefits, of 

reducing costs, of harmonizing rules, 

and of promoting flexibility. 

The Office of Management and Budget 

(OMB) designated this rule as not 

significant under Executive Order 12866 

and, therefore, OMB was not required to 

review this proposed rule. 

Clarity of the Regulation 

Executive Order 12866, as 

supplemented by Executive Order 

13563, requires each agency to write all 

rules in plain language. In addition to 

your substantive comments on these 

proposed rules, we invite your 

comments on how to make them easier 

to understand. For example: 

• Are the requirements in the rule 

clearly stated? Are the scope and intent 

of the rule clear? 

• Does the rule contain technical 

language or jargon that is not clear? 

• Is the material logically organized? 

• Would changing the grouping or 

order of sections or adding headings 

make the rule easier to understand? 

• Could we improve clarity by adding 

tables, lists, or diagrams? 


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• Would more, but shorter, sections 

be better? Are there specific sections 

that are too long or confusing? 

• What else could we do to make the 

rule easier to understand? 

Regulatory Flexibility Act 

In accordance with the Regulatory 

Flexibility Act (5 U.S.C. 601), FSA is 

certifying that there would not be a 

significant economic impact on a 

substantial number of small entities. All 

FSA direct loan borrowers and all farm 

entities affected by this rule are small 

businesses according to the North 

American Industry Classification 

System and the U.S. Small Business 

Administration. There is no diversity in 

size of the entities affected by this rule, 

and the costs to comply with it are the 

same for all entities. 

In this rule, FSA is proposing to 

revise regulations that affect both loan 

making and loan servicing. FSA does 

not expect these changes to impose any 

additional cost to the borrowers, and in 

fact, FSA expects some Government, 

borrower, and lender costs could be 

saved because: 

• Third party appraisals could be 

used in some cases in which FSA 

currently has to pay for new appraisals 

that include the mineral’s value in real 

estate appraisals. 

• A waiver for some guaranteed loan 

appraisals will save lenders and 

guaranteed borrowers the expense of 

ordering new appraisals when it is not 

necessary to protect Government 

interests. 

• FSA will allow the release of 

security for other credit or generational 

transfers when FSA is very well 

secured. 

• Planning for the disposition of 

chattel proceeds will be simplified, 

while FSA still tracks all proceeds to be 

applied on FLP loans. 

• Elimination of double-dipping and 

strengthening the oversight of the real 

estate entered into the Conservation 

Contract program will allow the 

Government to fairly compensate the 

owners of the valuable natural resources 

without the risk of losing usage 

restrictions which have been paid for by 

the taxpayers. 

Therefore, FSA certifies that this rule 

will not have a significant economic 

impact on a substantial number of small 

entities. 

Environmental Review 

The environmental impacts of this 

proposed rule have been considered in 

a manner consistent with the provisions 

of the National Environmental Policy 

Act (NEPA, 42 U.S.C. 4321–4347), 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 7 CFR part 1940, subpart G). FSA 

concluded that the changes to 

streamline the servicing process and 

give the borrower greater flexibility 

explained in this proposed rule are 

administrative in nature and will not 

have a significant impact on the quality 

of the human environment either 

individually or cumulatively. The 

environmental responsibilities for each 

prospective applicant will not change 

from the current process followed for all 

Farm Loan Program actions (7 CFR 

1940.309). Therefore FSA will not 

prepare an environmental impact 

statement on this proposed rule. 

Executive Order 12372 

Executive Order 12372, 

‘‘Intergovernmental Review of Federal 

Programs,’’ requires consultation with 

State and local officials. The objectives 

of the Executive Order are to foster an 

intergovernmental partnership and a 

strengthened Federalism, by relying on 

State and local processes for State and 

local government coordination and 

review of proposed Federal Financial 

assistance and direct Federal 

development. 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. 

Executive Order 12988 

This proposed rule has been reviewed 

in accordance with Executive Order 

12988, ‘‘Civil Justice Reform.’’ As 

proposed, this rule preempts State and 

local laws and regulations that are in 

conflict with this rule. Before any 

judicial action may be brought 

concerning the provisions of this rule 

the administrative appeal provisions of 

7 CFR parts 11 and 780 must be 

exhausted. 

Executive Order 13132 

This rule has been reviewed under 

Executive Order 13132, ‘‘Federalism.’’ 

The policies contained in this rule do 

not have any substantial direct effect on 

States, the relationship between the 

Federal government and the States, or 

the distribution of power and 

responsibilities among the various 

levels of government. Nor does this 

proposed rule impose substantial direct 

compliance costs on State and local 

governments. Therefore, consultation 

with the States is not required. 

Executive Order 13175 

This rule has been reviewed for 

compliance with Executive Order 

13175, ‘‘Consultation and Coordination 

with Indian Tribal Governments.’’ The 

Executive Order imposes requirements 

on the development of regulatory 

policies that have Tribal implications or 

preempt Tribal laws. The policies 

contained in this rule do not impose 

substantial unreimbursed direct 

compliance costs on Indian Tribal 

governments or have Tribal implications 

that preempt Tribal law. USDA will 

undertake, within 6 months after this 

rule becomes effective, a series of 

regulation Tribal consultation sessions 

to gain input by Tribal officials 

concerning the impact of this rule on 

Tribal governments, communities, and 

individuals. These sessions will 

establish a baseline of consultation for 

future actions, should any become 

necessary, regarding this rule. Reports 

from these sessions for consultation will 

be made part of the USDA annual 

reporting on Tribal Consultation and 

Collaboration. USDA will respond in a 

timely and meaningful manner to all 

Tribal government requests for 

consultation concerning this rule and 

will provide additional venues, such as 

Webinars and teleconferences, to 

periodically host collaborative 

conversations with Tribal leaders and 

their representatives concerning ways to 

improve this rule in Indian country. 

Unfunded Mandates 

Title II of the Unfunded Mandates 

Reform Act of 1995 (UMRA, Pub. L. 

1044) requires Federal agencies to assess 

the effects of their regulatory actions on 

State, local, or Tribal governments or 

the private sector. Agencies generally 

must prepare a written statement, 

including a cost benefit analysis, 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 under the 

regulatory provisions of Title II of the 

Unfunded Mandates Reform Act of 1995 

(UMRA, Pub. L. 104–4) for State, local, 

or Tribal governments, or private sector. 

Therefore, this rule is not subject to the 

requirements of sections 202 and 205 of 

UMRA. 


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Paperwork Reduction Act 

The proposed amendments are either 

revisions of internal operations or 

modifications to existing responses that 

will have no net effect on paperwork 

burden. For example, the proposed new 

requirement for documentation to 

permit the use of guaranteed loan 

appraisals over 12 months old in certain 

situations is offset by waiving the 

requirement for a new appraisal in every 

situation where the current appraisal is 

more than 12 months old. 

The borrower certification regarding 

double dipping in the Conservation 

Contract is a statement on an existing 

form that does not add burden. 

Therefore, the amendments proposed 

for 7 CFR parts 761, 762, 765, 766, and 

772 require no changes or new 

collection to the currently approved 

information collections by OMB under 

the control numbers of 0560–0155, 

0560–0233, 0560–0236, 0560–0237, 

0560–0238 and 0560–0230. 

E-Government Act Compliance 

FSA is committed to complying with 

the E-Government Act, to promote the 

use of the Internet and other 

information technologies to provide 

increased opportunities for citizen 

access to Government information and 

services and other purposes. 

Federal Assistance Programs 

The title and number of the Federal 

assistance programs, as found in the 

Catalog of Federal Domestic Assistance, 

to which this proposed rule would 

apply are: 

10.099 Conservation Loans 

10.404 Emergency Loans 

10.406 Farm Operating Loans 

10.407 Farm Ownership Loans 

List of Subjects 

7 CFR Part 761 

Accounting, Loan programs— 

agriculture, Rural areas. 

7 CFR Part 762 

Agriculture, Banks, banking, Credit, 

Loan programs—agriculture. 

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 772 

Agriculture, Credit, Loan programs— 

agriculture, Rural areas. 

For the reasons discussed above, FSA 

proposes to amend 7 CFR chapter VII as 

follows: 

PART 761—FARM LOAN PROGRAM; 

GENERAL PROGRAM 

ADMINISTRATION 

1. The authority citation for part 761 

continues to read as follows: 

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

Subpart A—General Provisions 

2. In § 761.2(b) revise the definitions 

of ‘‘Agreement for the use of proceeds’’ 

and ‘‘Subordination’’ to read as follows: 

§ 761.2 Abbreviations and definitions. 

* * * * * 

(b) * * * 

Agreement for the use of proceeds is 

an agreement between the borrower and 

the Agency for each production cycle 

that reflects the proceeds from the sale 

of normal income security that will be 

used to pay scheduled FLP loan 

installments, including any past due 

installments, during the production 

cycle covered by the agreement. 

* * * * * 

Subordination is a creditor’s 

temporary relinquishment of all or a 

portion of its lien priority to another 

party providing the other party with a 

priority lien on the collateral. 

* * * * * 

3. Amend § 761.7 as follows: 

a. Revise paragraph (b)(1); 

b. Add paragraph (b)(3); and 

c. Revise paragraph (d). 

The revisions and addition read as 

follows: 

§ 761.7 Appraisals. 

* * * * * 

(b) * * * 

(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. Applicable appraisal 

procedures and regulations are available 

for review in each Agency State Office. 

* * * * * 

(3) For direct FO loans secured by real 

estate after December 23, 1985, the 

appraisal must include the value of oil, 

gas, and other minerals even if the 

minerals have no known or nominal 

value. 

* * * * * 

(d) Appraisal appeals. Challenges to 

an appraisal used by the Agency are 

limited as follows: 

(1) When an applicant or borrower 

challenges a real estate appraisal used 

by the Agency for any loan making or 

loan servicing decision, except primary 

loan servicing decisions as specified in 

§ 766.115 of this chapter, the issue for 

review is limited to whether the 

appraisal used by the Agency complies 

with USPAP. The applicant or borrower 

must submit a technical appraisal 

review prepared by a State Certified 

General Appraiser that will be used to 

determine whether the Agency’s 

appraisal complies with USPAP. The 

applicant or borrower is responsible for 

obtaining and paying for the technical 

appraisal review. 

(2) When an applicant or borrower 

challenges a chattel appraisal used by 

the Agency for any loan making or loan 

servicing decision, except for primary 

loan servicing decisions as specified in 

§ 766.115 of this chapter, the issue for 

review is limited to whether the 

appraisal used by the Agency is 

consistent with present market values of 

similar items in the area. The applicant 

or borrower must submit an 

independent appraisal that will be used 

to determine whether the appraisal is 

consistent with present market values of 

similar items in the area. The applicant 

or borrower is responsible for obtaining 

and paying for the independent 

appraisal. 

Subpart C—Supervised Credit 

§ 761.103 [Amended] 

4. Amend § 761.103 by removing 

paragraph (b)(8) and redesignating 

paragraphs (b)(9), (10), and (11) as 

paragraphs (b)(8), (9), and (10), 

respectively. 

PART 762—GUARANTEED FARM 

LOANS 

5. The authority citation for part 762 

continues to read as follows: 

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

§ 762.120 [Amended] 

6. Amend § 762.120 as follows: 

a. In paragraph (a)(2) introductory 

text, remove the phrase ‘‘and ranch’’; 

b. In paragraphs (k)(3) and (l)(2), 

remove the phrase ‘‘or ranching’’; and 

c. In paragraph (m), remove the 

phrase ‘‘or ranchers’’. 

§ 762.121 [Amended] 

7. In § 762.121(a)(1)(v), remove the 

words ‘‘and ranch’’. 

8. Revise § 762.127 to read as follows: 

§ 762.127 Appraisal requirements. 

(a) General. The general requirements 

for an appraisal are: 

(1) Value of collateral. The lender is 

responsible for ensuring that the value 

of chattel and real estate pledged as 


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collateral is sufficient to fully secure the 

guaranteed loan. 

(2) Additional security. The lender is 

not required to complete an appraisal of 

chattel or real estate that will serve as 

additional security, but the lender must 

provide an estimated value. 

(3) Appraisal cost. Except for 

authorized liquidation expenses, the 

lender is responsible for all appraisal 

costs, which may be passed on to the 

borrower, or transferee in the case of a 

transfer and assumption. 

(b) Chattel security. The requirements 

for chattel appraisals are: 

(1) Need for chattel appraisal. A 

current appraisal (not more than 12 

months old) of primary chattel security 

is required on all loans except loans or 

lines of credit for annual production 

purposes secured by crops, which 

require an appraisal only when the 

guarantee is requested late in the 

current production year and actual 

yields can be reasonably estimated. An 

appraisal is not required for loans of 

$50,000 or less if a strong equity 

position exists. 

(2) Basis of value. The appraised 

value of chattel property will be based 

on public sales of the same or similar 

property in the market area. In the 

absence of such public sales, reputable 

publications reflecting market values 

may be used. 

(3) Appraisal form. Appraisal reports 

may be on the Agency’s appraisal of 

chattel property form or on any other 

appraisal form containing at least the 

same information. 

(4) Experience and training. Chattel 

appraisals will be performed by 

appraisers who possess sufficient 

experience or training to establish 

market (not retail) values as determined 

by the Agency. 

(c) Real estate security. The 

requirements for real estate appraisals 

are: 

(1) Loans of $250,000 or less. The 

lender must document the value of the 

real estate in the same manner as their 

non-guaranteed loans. If an appraisal is 

used, it does not have to be USPAP 

compliant. 

(2) Loans greater than $250,000. The 

lender must document the value of real 

estate using a current appraisal (not 

more than 12 months old) completed by 

a State Certified General Appraiser. The 

Agency may allow an appraisal more 

than 12 months old to be used only if 

documentation provided by the lender 

reflects each of the following: 

(i) Market conditions have remained 

stable or improved based on sales of 

similar properties, 

(ii) The property in question remains 

in the same or better condition, and 

(iii) The value of the property has 

remained the same or increased. 

(3) Agency determinations under 

paragraph (c)(2) of this section to permit 

appraisals more than 12 months old are 

not appealable. 

§ 762.145 [Amended] 

9. In § 762.145(b)(4) and (e)(1), 

remove the citation ‘‘§ 762.102(b)’’ and 

add in its place the citation ‘‘§ 761.2(b) 

of this chapter’’. 

§ 762.146 [Amended] 

10. In § 762.146(b)(6) and (e)(1), 

remove the citation ‘‘§ 762.102(b)’’ and 

add in its place the citation ‘‘§ 761.2(b) 

of this chapter’’ and in paragraph (b)(1) 

by removing the text ‘‘or ranching’’. 

§ 762.149 [Amended] 

11. In § 762.149(b)(1)(iii) introductory 

text, remove the citation ‘‘§ 762.102’’ 

and add in its place the citation 

‘‘§ 761.2(b) of this chapter’’. 

§ 762.150 [Amended] 

12. In § 762.150(b)(5) and (d)(2), 

remove the text ‘‘and ranchers’’ and 

remove the citation ‘‘§ 762.102’’ and add 

in its place the citation ‘‘§ 761.2(b) of 

this chapter’’. 

PART 765—DIRECT LOAN 

SERVICING—REGULAR 

13. The authority citation for part 765 

continues to read as follows: 

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

Subpart E—Protecting the Agency’s 

Security Interest 

§ 765.205 Subordination of liens. 

14. Revise § 765.205(b), (c) 

introductory text, and (c)(1) to read as 

follows: 

* * * * * 

(b) Subordination of real estate 

security. (1) If a lender requires that the 

Agency subordinate its lien position on 

the borrower’s existing property in order 

for the borrower to acquire new 

property, the Agency will obtain a valid 

mortgage and the required lien position 

on the new property. The Agency will 

require title clearance and loan closing 

for the property in accordance with 

§ 764.402 of this chapter. 

(2) 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 loan purpose may be 

approved when it meets the 

requirements in paragraph (b)(3) of this 

section and it is needed for the entity 

member to finance a separate farming 

operation. The subordination must not 

cause the unpaid principal and interest 

on the FLP loans to exceed the value of 

loan security or otherwise adversely 

affect the security. 

(3) The Agency will approve a request 

for subordination of real estate to a 

creditor if: 

(i) The loan will be used for an 

authorized loan purpose or is to 

refinance a loan made for an authorized 

loan purpose by the Agency or another 

creditor; 

(ii) The credit is essential to the 

farming operation, and the borrower 

cannot obtain the credit without a 

subordination; 

(iii) The FLP 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; 

(iv) Except as authorized by paragraph 

(c)(2) of this section, there is no other 

subordination outstanding with another 

lender in connection with the same 

security; 

(v) The subordination is limited to a 

specific amount; 

(vi) The loan made in conjunction 

with the subordination will be closed 

within a reasonable time and has a 

definite maturity date; 

(vii) If the loan is made in conjunction 

with a guaranteed loan, the guaranteed 

loan meets the requirements of 

§ 762.142(c) of this chapter; 

(viii) The borrower is not in default or 

will not be in default on FLP loans by 

the time the subordination closing is 

complete; 

(ix) The borrower can demonstrate, 

through a current farm operating plan, 

the ability to repay all debt payments 

scheduled, and to be scheduled, during 

the production cycle; 

(x) Except for CL, the borrower is 

unable to partially or fully graduate; 

(xi) The borrower must not be 

ineligible as a result of a conviction for 

controlled substances according to part 

718 of this chapter; 

(xii) The borrower must not be 

ineligible due to disqualification 

resulting from Federal crop insurance 

violation according to part 718 of this 

chapter; 

(xiii) The borrower will not use loan 

funds in a way that will contribute to 

erosion of highly erodible land or 

conversion of wetlands as described in 

part 1940, subpart G of this title; 

(xiv) Any planned development of 

real estate security will be performed as 

directed by the lessor or creditor, as 

approved by the Agency, and will 

comply with the terms and conditions 

of § 761.10 of this chapter; 

(xv) If a borrower with an SAA 

mortgage is refinancing a loan held by 


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a lender, subordination of the SAA 

mortgage may only be approved when 

the refinanced loan does not increase 

the amount of debt; and 

(xvi) In the case of a subordination of 

non-program loan security, the nonprogram loan security also secures a 

program loan with the same borrower. 

(4) The Agency will approve a request 

for subordination of real estate to a 

lessee if the conditions in paragraphs 

(b)(3)(viii) through (b)(3)(xvi) of this 

section are met. 

(c) Chattel security. The requirements 

for chattel subordinations are as follows: 

(1) For loans secured by chattel, the 

subordination must meet the conditions 

contained in paragraphs (b)(3)(i) 

through (xiii) of this section. 

* * * * * 

Subpart F—Required Use and 

Operation of Agency Security 

15. Amend § 765.252 as follows: 

a. Revise paragraphs (a) heading and 

introductory text, (a)(1), (a)(2), (a)(4), 

(b)(1), and (b)(2); and 

b. Add paragraphs (a)(5) and (b)(4). 

The revisions and additions read as 

follows: 

§ 765.252 Lease of security. 

(a) Real estate surface leases. The 

borrower must request prior approval to 

lease the surface of real estate security. 

The Agency will approve requests 

provided the following conditions are 

met: 

(1) The lease will not adversely affect 

the Agency’s security interest; 

(2) The term of consecutive leases for 

agricultural purposes does not exceed 3 

years, or 5 years if the borrower and the 

lessee are related by blood or marriage. 

The term of surface leases for nonfarm 

purposes, such as wind turbines, 

communication towers, or similar 

installations can be for any term; 

* * * * * 

(4) The lease does not hinder the 

future operation or success of the farm, 

or, if the borrower has ceased to operate 

the farm, the requirements specified in 

§ 765.253 are met; and 

(5) The lease and any contracts or 

agreements in connection with the lease 

must be reviewed and approved by the 

Government. 

(b) * * * 

(1) For FO loans secured by real estate 

on or after December 23, 1985, and 

loans other than FO loans secured by 

real estate and made from December 23, 

1985, to (effective date of the final rule), 

the value of the mineral rights must 

have been included in the original 

appraisal in order for the Agency to 

obtain a security interest in any oil, gas, 

and other mineral associated with the 

real estate security. 

(2) For all other loans not covered by 

paragraph (b)(1) of this section, the 

Agency will obtain a security interest in 

any oil, gas, and other mineral on or 

under the real estate pledged as 

collateral in accordance with the 

applicable security agreement, 

regardless of whether such minerals 

were included in the original appraisal. 

* * * * * 

(4) The term of the mineral lease is 

not limited. 

* * * * * 

§ 765.253 [Amended] 

16. Amend § 765.253 by removing 

paragraph (d) and redesignating 

paragraph (e) as paragraph (d). 

Subpart G—Disposal of Chattel 

Security 

17. Revise § 765.301(a) to read as 

follows: 

§ 765.301 General. 

(a) The borrower must account for all 

chattel security, and maintain records of 

dispositions of chattel security and the 

actual use of proceeds. The borrower 

must make these records available to the 

Agency upon request. 

* * * * * 

18. Amend § 765.302 as follows: 

a. Revise paragraph (a); 

b. Remove paragraphs (b) and (h); 

c. Redesignate paragraphs (c), (d), (e), 

(f), and (g) as paragraphs (b), (c), (d), (e), 

and (f) respectively; and 

d. Revise newly redesignated 

paragraphs (b) through (e). 

The revisions read as follows: 

§ 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. 

(b) The borrower must report any 

disposition of basic or normal income 

security to the Agency as specified in 

the agreement for the use of proceeds. 

(c) If a borrower wants to dispose of 

normal income security in a way 

different than provided by the 

agreement for the use of proceeds, the 

borrower must obtain the Agency’s 

consent before the disposition unless all 

FLP payments planned on the 

agreement have been paid. 

(d) If the borrower sells normal 

income 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. 

(e) The borrower must provide the 

Agency with the necessary information 

to update the agreement for the use of 

proceeds. 

* * * * * 

19. Amend § 765.305 by adding 

paragraph (c) to read as follows: 

§ 765.305 Release of security interest. 

* * * * * 

(c) The Agency will release its lien on 

chattel security without compensation, 

upon borrower request provided: 

(1) The borrower has not received 

primary loan servicing within the last 3 

years; 

(2) The borrower will retain the 

security and use it as collateral for other 

credit, including partial graduation as 

specified in § 765.101; 

(3) The security margin on each FLP 

direct loan will be 150 percent or more 

after the release. The value of the 

retained and released security will 

normally be based on appraisals 

obtained as specified in § 761.7 of this 

chapter; however, well documented 

recent sales of similar properties can be 

used if the Agency determines a 

supportable decision can be made 

without current appraisals; and 

(4) Except for CL, the borrower is 

unable to fully graduate as specified 

§ 765.101. 

Subpart H—Partial Release of Real 

Estate Security 

20. Amend § 765.351 as follows: 

a. Revise paragraph (a)(3); 

b. Remove paragraph (a)(4) and 

redesignate paragraphs (a)(5) through 

(10) as (a)(4) through (a)(9), respectively; 

c. Revise paragraph (b)(1)(ii); 

d. Remove paragraph (b)(1)(iii); and 

e. Add paragraph (f). 

The revisions and addition read as 

follows: 

§ 765.351 Requirements to obtain Agency 

consent. 

* * * * * 

(a) * * * 

(3) Except for releases in paragraph (f) 

of this section, the amount received by 

the borrower for the security being 

disposed of, or the rights being granted, 

is not less than the market value and 

will be remitted to the lienholders in the 

order of lien priority; 

* * * * * 

(b) * * * 

(1) * * * 

(ii) When the Agency has a security 

interest in oil, gas, or other minerals as 

provided by § 765.252(b), the sale of 

such products will be considered a 

disposition of a portion of the security 

by the Agency. 

* * * * * 


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(f) Release without compensation. 

Real estate security may be released by 

FSA without compensation when the 

requirements of paragraph (a) of this 

section, except paragraph (a)(3) of this 

section, are met, and: 

(1) The borrower has not received 

primary loan servicing within the last 3 

years; 

(2) The security is: 

(i) To be retained by the borrower and 

used as collateral for other credit, 

including partial graduation as specified 

in § 765.101; or 

(ii) No more than 10 acres, or the 

minimum size that meets all State and 

local requirements for a division into a 

separate legal lot, whichever is greater, 

and is transferred without compensation 

to a person who is related to the 

borrower by blood or marriage; 

(3) The security margin on each FLP 

direct loan will be above 150 percent 

after the release. The value of the 

retained and released security will 

normally be based on appraisals 

obtained as specified in § 761.7 of this 

chapter; however, well documented 

recent sales of similar properties can be 

used if the Agency determines the 

criteria have been met and a sound 

decision can be made without current 

appraisals; and 

(4) Except for CL, the borrower is 

unable to fully graduate as specified in 

§ 765.101. 

PART 766—DIRECT LOAN 

SERVICING—SPECIAL 

21. The authority citation for part 766 

continues to read as follows: 

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

and 1981d(c). 

Subpart C—Loan Servicing Programs 

22. Amend § 766.110 as follows: 

a. Revise paragraphs (a)(6), (b)(2)(vi), 

(c) introductory text, and (c)(3); 

b. Add paragraphs (c)(4) through (7); 

c. Revise paragraph (e); 

d. Amend paragraph (f), second 

sentence, by adding the word ‘‘best’’ 

before the word ‘‘interest’’; and 

e. Add paragraphs (m) and (n). 

The revisions and additions read as 

follows: 

§ 766.110 Conservation Contract. 

(a) * * * 

(6) Only loans secured by the real 

estate that will be subject to the 

Conservation Contract may be 

considered for debt reduction under this 

section. 

(b) * * * 

(2) * * * 

(vi) Buffer areas necessary for the 

adequate protection of proposed 

Conservation Contract areas, or other 

areas enrolled in other conservation 

programs; 

* * * * * 

(c) Unsuitable acreage. 

Notwithstanding paragraph (b) of this 

section, acreage is unsuitable for a 

Conservation Contract if: 

* * * * * 

(3) The Conservation Contract review 

team determines that the land does not 

provide measurable conservation, 

wildlife, or recreational benefits; 

(4) There would be a duplication of 

benefits as determined by the 

Conservation Contract review team 

because the acreage is encumbered 

under another Federal, State, or local 

government program for which the 

borrower has been or is being 

compensated for conservation, wildlife, 

or recreation benefits; 

(5) The acreage subject to the 

proposed Conservation Contract is 

encumbered under a Federal, State, or 

local government cost share program 

that is inconsistent with the purposes of 

the proposed Conservation Contract, or 

the required practices of the cost share 

program are not identified in the 

conservation management plan; 

(6) The tract does not contain a legal 

right of way or other permanent access 

for the term of the contract that can be 

used by the Agency or its designee to 

carry out the contract; or 

(7) The tract, including any buffer 

areas, to be included in a Conservation 

Contract is less than 10 acres. 

* * * * * 

(e) Conservation management plan. 

The Agency, with the recommendations 

of the Conservation Contract review 

team, is responsible for developing a 

conservation management plan. The 

conservation management plan will 

address the following: 

(1) The acres of eligible land and the 

approximate boundaries, and 

(2) A description of the conservation, 

wildlife, or recreation benefits to be 

realized. 

* * * * * 

(m) Subordination. For real estate 

with a Conservation Contract: 

(1) Subordination will be required for 

all liens that are in a prior lien position 

to the Conservation Contract. 

(2) The Agency will not subordinate 

Conservation Contracts to liens of other 

lenders or other Governmental entities. 

(n) Breach of Conservation Contract. 

If the borrower or a subsequent owner 

of the land under the Conservation 

Contract fails to comply with any of its 

provisions, the Agency will declare the 

Conservation Contract breached. If the 

Conservation Contract is breached, the 

borrower or subsequent owner of the 

land must restore the land to be in 

compliance with the Conservation 

Contract and all terms of the 

conservation management plan within 

90 days. If this cure is not completed, 

the Agency will take the following 

actions: 

(1) For borrowers who have or had a 

loan in which debt was exchanged for 

the Conservation Contract and breach 

the Conservation Contract, the Agency 

may reinstate the debt that was 

cancelled, plus interest to the date of 

payment at the rate of interest in the 

promissory note, and assess liquidated 

damages in the amount of 25 percent of 

the debt cancelled, plus any actual 

expenses incurred by the Agency in 

enforcing the terms of the Conservation 

Contract. The borrower’s account will 

be considered in non-monetary default; 

and 

(2) Subsequent landowners who 

breach the Conservation Contract must 

pay the Agency the amount of the debt 

cancelled when the contract was 

executed, plus interest at the nonprogram interest rate to the date of 

payment, plus liquidated damages in 

the amount of 25 percent of the 

cancelled debt, plus any actual expenses 

incurred by the Agency in enforcing the 

terms of the Conservation Contract. 

23. Revise § 766.115(a)(1) and (b) to 

read as follows: 

§ 766.115 Challenging the Agency 

appraisal. 

(a) * * * 

(1) Obtain a USPAP compliant 

technical appraisal review prepared by 

a State Certified General Appraiser of 

the Agency’s appraisal and provide it to 

the Agency prior to reconsideration or 

the appeal hearing; 

* * * * * 

(b) If the appraised value of the 

borrower’s assets change as a result of 

the challenge, the Agency will 

reconsider its previous primary loan 

servicing decision using the new 

appraisal value. 

* * * * * 

24. Revise Appendix A to read as 

follows: 

Appendix A to Subpart C of Part 766— 

FSA–2512, Notice of Availability of 

Loan Servicing to Borrowers Who Are 

Current, Financially Distressed, or Less 

Than 90 Days Past Due 

BILLING CODE P 


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PART 772—SERVICING MINOR 

PROGRAM LOANS 

25. Revise the authority citation for 

part 772 continues to read as follows: 

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

and 25 U.S.C. 490. 

§ 772.5 [Amended] 

26. Amend § 772.5 as follows: 

a. In paragraph (c)(1), remove the 

reference ‘‘7 part 1962, subpart A’’ and 

add in its place the reference ‘‘part 765 

of this chapter’’; and 

b. In paragraph (c)(3), remove the 

reference ‘‘7 CFR part 1965, subpart A’’ 

and add in its place the reference ‘‘part 

765 of this chapter’’. 

27. Revise § 772.8(b) to read as 

follows: 

§ 772.8 Sale or exchange of security 

property. 

* * * * * 

(b) For IMP loans, a sale or exchange 

of real estate or chattel that is serving as 

security is governed by part 765 of this 

chapter. 

Signed on April 5, 2012. 

Bruce Nelson, 

Administrator, Farm Service Agency. 

[FR Doc. 2012–8827 Filed 4–12–12; 8:45 am] 

BILLING CODE C 


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