63242 Federal Register / Vol. 72, No. 216 / Thursday, November 8, 2007 / Rules and Regulations 

DEPARTMENT OF AGRICULTURE 

Farm Service Agency 

7 CFR Parts 718, 761, 762, 763, 764, 

765, 766, 767, 768, and 769 

Commodity Credit Corporation 

7 CFR Part 1405 

RIN 0560–AF60 

Regulatory Streamlining of the Farm 

Service Agency’s Direct Farm Loan 

Programs 

AGENCY: Farm Service Agency, USDA. 

ACTION: Final rule. 

SUMMARY: This rule streamlines the 

Farm Service Agency’s (FSA) 

regulations governing its direct Farm 

Loan Programs. The final rule simplifies 

and clarifies FSA’s direct loan 

regulations; implements the 

recommendations of the USDA Civil 

Rights Action Team; meets the 

objectives of the Paperwork Reduction 

Act of 1995; and separates FSA’s direct 

Farm Loan Programs regulations from 

the Rural Development mission area’s 

loan program regulations. 

DATES: Effective Date: December 31, 

2007. 

FOR FURTHER INFORMATION CONTACT: 

William D. Cobb; USDA/FSA/DAFLP/ 

STOP 0520, 1400 Independence 

Avenue, SW., Washington, DC 20250– 

0520; telephone (202) 720–1059; 

electronic mail: bill.cobb@wdc.usda.gov. 

SUPPLEMENTARY INFORMATION: 

Discussion of the Final Rule 

On February 9, 2004, the agency 

published a proposed rule (69 FR 6056– 

6121) to streamline regulations 

governing its direct Farm Loan Programs 

(FLP). The comment period closed on 

April 9, 2004. The agency received 

several comments requesting the 

comment period to be reopened. The 

agency reopened the comment period 

until May 4, 2004 (69 FR 20834). In 

response to the proposed rule the 

agency received 1,583 comments from 

593 individuals and organizations, 

including 181 banks or banking 

organizations, 168 individuals, 81 FSA 

employees, 71 Farm Credit 

Administration offices or employees, 42 

agricultural organizations, 18 state 

agencies or officials, 13 Farm Bureaus, 

five State representatives, three Federal 

agencies, two FSA County Committee 

members, one tribal association, one 

university and one loan packager. In 

addition, six comment letters signed by 

multiple Members of the United States 

Congress were received. 

Seven comments addressed the 

agency’s decision to move the 

administrative provisions of program 

delivery from the Code of Federal 

Regulations (CFR) to a series of agency 

handbooks. Three comments opposed 

the agency’s decision while four 

comments supported it. In accordance 

with the Administrative Procedures Act, 

both the proposed and the final rules 

provide the substantive requirements 

applicable to the public requesting 

assistance or benefits from FSA, not 

internal agency procedures and 

processes. The agency will issue its 

internal guidance in handbooks 

simultaneously with the final rule, since 

internal guidance only describes the 

operating procedures of the agency and 

does not impact services provided to 

applicants and borrowers. Further, the 

agency is working on making all its 

handbooks available on the internet so 

that any interested party may view, 

download, and print agency handbooks 

as appropriate. Therefore, these 

comments were not adopted. 

Four comments were received 

requesting the agency reopen the 

comment period. As noted above, the 

agency reopened and extended the 

comment period from April 9, 2004, to 

May 4, 2004, and published a Federal 

Register notice to that effect on April 

19, 2004. 

Eleven comments provided general 

comments not related to any specific 

part, section, or policy of the proposed 

rule. Therefore, the agency did not take 

any action regarding these comments. 

The following provides a summary of 

the comments received and the agency’s 

response by CFR part. 

Part 761—General Program 

Administration 

The following discussion addresses 

the comments received on Part 761. 

Section 761.2 Abbreviations and 

Definitions 

Three comments were received on the 

‘‘active borrower’’ and ‘‘borrower’’ 

definitions. Two comments stated the 

definitions as written are very similar, 

and therefore, the definition of ‘‘active 

borrower’’ should be removed from the 

CFR. The other comment stated the term 

‘‘active borrower’’ is not used in the 

proposed rule. The agency agrees with 

the comments and has removed the 

definition. 

One comment was received on the 

‘‘agreement for the use of proceeds’’ 

definition. The comment stated the 

agreement for the use of proceeds has 

not benefited borrowers or the agency 

since its inception. Further, the 

comment stated if the comment is not 

adopted, the agency should initiate a 

study on how the agreement for the use 

of proceeds has benefited the agency’s 

borrowers. Section 335(f) of the 

Consolidated Farm and Rural 

Development Act (Act) (7 U.S.C. 

1985(f)) requires the agency to release 

normal income security proceeds to 

borrowers for essential family living and 

farm operating expenses until the loan 

is accelerated. Further, Section 335(f)(6) 

of the Act provides if a borrower is 

required to plan or report how proceeds 

from the sale of security will be used, 

the agency must notify the borrower of 

(a) the reporting requirement; (b) the 

right to release proceeds; and (c) how to 

request such funds. The agency 

implemented the Act’s requirement 

with the agreement for the use of 

proceeds that provides a means for 

reaching a consensus with a borrower 

regarding the use of proceeds from the 

sale of security property when the farm 

operating plan is developed. In 

addition, the agency delegates the 

authority to release proceeds to 

borrowers according to an established 

agreement for the use of proceeds to 

agency officials who do not have loan 

approval authority. Further, the agency 

utilizes the agreement for the use of 

proceeds to account for the agency’s 

security. Moreover, the agency 

continuously evaluates forms utilized in 

administering its programs for 

effectiveness. Therefore, based on this 

comment as well as the comments 

received on § 765.302, the agency may 

conduct further analysis to determine if 

changes are warranted. Lastly, the 

agency did not propose to make changes 

to the agreement for the use of proceeds; 

therefore, the agency will not take any 

action on this comment at this time. 

One comment stated the term 

‘‘agribusiness’’ is not defined in the 

proposed rule. The agency does not use 

the term in the CFR; therefore, it does 

not need to include a definition for 

‘‘agribusiness.’’ 

Two comments were received on the 

‘‘agricultural commodity’’ definition. 

One comment stated the agency must 

define ‘‘agriculture’’ in general to clarify 

and distinguish that agriculture does not 

solely consist of commodities and largescale operations. The definition as 

written, the comment stated, will make 

many Indian farm operators ineligible 

for loans. The other comment stated that 

the narrow definition of ‘‘agricultural 

commodity’’ adversely impacts the 

definition of ‘‘basic part of the 

applicant’s total farming operation’’ and 

urged that the definition of ‘‘agricultural 

commodity’’ be broadened to include a 


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specific list of agricultural products. 

The agency believes the definition is 

reasonably broad and provides the 

agency discretion in determining what 

constitutes an agricultural commodity. 

The agency does not use this term in the 

regulations to suggest that agriculture 

consists only of commodities and largescale operations. Furthermore, the 

definitions of both ‘‘agricultural 

commodity’’ and ‘‘basic part of an 

applicant’s total farming operation’’

included in the proposed rule are 

identical to existing definitions 

established in the agency’s emergency 

loan regulations by a final rule (67 FR 

791–801) published on January 8, 2002, 

after considering public comments. 

Based on reviews of assistance provided 

since the implementation of that final 

rule, the agency believes both 

definitions have resulted in the 

achievement of the program’s mission 

and the agency is not aware of any 

adverse impact on the public. Therefore, 

neither comment is adopted. 

Two comments were received on the 

‘‘applicant’’ definition. One comment 

stated the definition is not clear if 

husband and wife applicants are 

considered as a joint operation. Further, 

the comment objected to husband and 

wife applicants being considered joint 

operations. The agency has not revised 

the definition based on this comment, 

but, the agency has revised the 

applicant eligibility requirements under 

§ 764.51, as discussed under that section 

heading. The other comment stated the 

agency should eliminate the definition 

and use ‘‘lender applicant’’ in the 

guaranteed loan program. The agency 

clarified the definition of ‘‘applicant’’ to 

be applicable to both direct and 

guaranteed loan programs. The agency 

believes using the terms ‘‘lender 

applicant’’ and ‘‘lender’’ in the 

guaranteed loan program, however, 

would be confusing, therefore, the 

comment is not adopted. Further, to 

avoid confusion, the agency removed 

the definition ‘‘loan applicant’’ in the 

final rule. Therefore, the comment is not 

adopted. 

One comment was received on the 

‘‘approval official’’ definition. The 

comment stated the definition as written 

is confusing, because it contains the 

term ‘‘field official’’ which is not 

defined. The agency agrees with the 

comment, and removed the definition 

and replaced the term in the text with 

the word ‘‘Agency.’’

One comment was received on the 

‘‘aquaculture’’ definition. The comment 

stated the agency should work with 

Tribes in the Northwestern, 

Northeastern and Midwestern United 

States to ensure the definition covers 

aquaculture on Tribal reservations. The 

agency believes the definition as written 

is broad enough to cover aquaculture 

operations in every part of the country. 

Further, the agency evaluates each 

operation on its merits. Therefore, the 

comment is not adopted. 

Three comments were received on the 

‘‘average farm customer’’ definition. 

Two comments supported the definition 

as written. One comment stated the 

definition as proposed eliminates Indian 

producers with niche markets who farm 

traditionally and practice sustainable 

agriculture. The agency does not foresee 

that Indian producers will be impacted 

by the definition since producers 

eligible to receive guaranteed loans will 

remain eligible. Therefore, the comment 

is not adopted. 

One comment was received on the 

‘‘basic part of an applicant’s total 

farming operation’’ definition. The 

comment stated the definition as written 

is narrowly based on the definition of 

‘‘agricultural commodity’’ without a 

definition of agriculture. Section 329 of 

the Act (7 U.S.C. 1970), in part, provides 

the agency may make emergency loans 

to applicants based on production losses 

if the applicant shows that a single 

enterprise that is a ‘‘basic part of the 

applicant’s farming, ranching, or 

aquaculture operation’’ has suffered at 

least a 30 percent loss of normal per 

acre or per animal production. The 

definition clarifies the agency’s 

implementation of the Act’s provisions 

and as discussed in the agency’s 

response to comments on the definition 

of ‘‘agricultural commodity,’’ the agency 

does not believe either definition as 

written, has an adverse impact on an 

applicant’s eligibility. Therefore, the 

comment is not adopted. 

Five comments were received on the 

‘‘beginning farmer’’ definition. Three 

comments stated that the definition 

precludes applicants with less than 3 

years of experience from meeting the 

conditions of the beginning farmer 

definition. Further, the comments stated 

an applicant with less than 3 years of 

experience is eligible for a direct farm 

ownership loan, but is not eligible for a 

beginning farmer downpayment farm 

ownership loan. The agency agrees with 

the comments and has revised the 

definition accordingly. One comment 

stated the agency should revise the 

definition to remove the word ‘‘direct’’

in describing ‘‘OL applicant’’ from 

subparagraph (5). The subparagraph is 

not applicable to direct or guaranteed 

operating loans (OL) under the statutory 

definition, therefore, the agency agrees 

and has revised the definition 

accordingly. Further, the comment 

stated the agency should use the median 

acreage, as provided in Section 

343(a)(11)(F) (7 U.S.C. 1991(a)(11)(F)) of 

the Act, to determine if an applicant is 

a beginning farmer. Section 

343(a)(11)(F) of the Act was enacted 

under the provisions of the Agricultural 

Credit Improvement Act of 1992. As 

addressed in the preamble of the 

agency’s 1993 final rule (58 FR 48275) 

published on September 15, 1993, 

implementing the regulatory definition 

of ‘‘beginning farmer,’’ while the statute 

referred to ‘‘the median acreage of farm 

* * * as reported in the most recent 

census of agriculture,’’ the agency 

utilized the term ‘‘average acreage’’ in 

its regulations as the census of 

agriculture did not capture ‘‘median 

acreage’’ at that time. The National 

Agricultural Statistics Service now 

publishes both the median and average 

farm size by county. Analysis of the data 

reveals that the median acreage is 

typically lower than the average acreage. 

Adoption of the comment may result in 

some applicants, who meet the existing 

requirements of the definition, not being 

considered a ‘‘beginning farmer.’’

However, the comment is correct in that 

both the existing and proposed 

regulations do not match the statute. 

Therefore, the comment is adopted and 

the definition has been revised 

accordingly. 

One comment stated the agency 

should remove the requirement that all 

members of an entity must materially 

and substantially participate in the 

operation. Section 343(a)(11) (7 U.S.C. 

1991(a(11)) of the Act defines the term 

‘‘qualified beginning farmer or rancher’’

and provides that for loans made to 

entities, the entity members must 

materially and substantially participate 

in the operation of the farm. The 

definition was based on the Act’s 

provision, therefore, the comment 

cannot be adopted. 

Three comments were received on the 

‘‘borrower’’ definition. One comment 

stated the definition does not seem to be 

applicable to the guaranteed loan 

program. The agency agrees with the 

comment and has revised the definition 

accordingly. Another comment stated 

the agency should revise the definition 

to exclude cosigners since cosigners 

merely sign the promissory note to 

assure repayment of the loan and are not 

program borrowers as defined in the 

agency’s regulations. The agency does 

not agree with the comment because a 

cosigner has the same liability for the 

debt as any other borrower who signed 

the promissory note. Therefore, the 

comment is not adopted. The last 

comment stated the agency should 

clarify the definition to provide if the 

borrower’s name should match the 


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operator’s name utilized by Farm 

Programs in their internal agency 

systems. The agency believes the 

definition as written is clear; signature 

requirements are a separate issue. 

Further, as stated in § 761.2, the 

definitions included in this part are 

applicable to FLP only. Therefore, the 

comment is not adopted. 

One comment was received on the 

‘‘cash flow budget’’ definition. The 

comment stated that commercial lenders 

have adopted the practice of not 

including advances or principal 

repayments on lines of credit in the cash 

flow, since they are considered cash 

flow neutral. The comment stated the 

agency should revise the definition to 

match commercial lenders’ standards. 

The agency agrees with the comment 

and has revised the definition 

accordingly. 

One comment was received on the 

‘‘chattel security’’ definition. The 

comment stated the agency should 

clarify the definition to state that chattel 

is non-real estate property. The agency 

obtains a security interest using 

mortgages, deeds of trust, financing 

statements and security agreements. The 

agency believes the comment is 

proposing to delineate between chattels 

and real estate which cannot be done 

uniformly in all cases, especially for 

loans for which security is growing 

crops and fixtures. Further, the agency 

believes the definition as written is 

reasonably clear. Therefore, the 

comment is not adopted. 

One comment stated the term 

‘‘commercial classified account’’ is not 

used in the rule, while the terms 

‘‘immediate family’’ and ‘‘immediate 

family member’’ even though they are 

used, are not defined. The agency agrees 

and, in the final rule, the agency has 

removed the term ‘‘commercial 

classified account’’ and replaced the 

terms ‘‘immediate family’’ and 

‘‘immediate family member’’ with the 

defined ‘‘family member’’ term. 

Two comments were received on the 

‘‘conservation contract review team’’

definition. Both comments stated the 

agency should remove the adjacent 

public landowners from the definition. 

The comments did not provide any 

reason for removing public landowners 

from the conservation contract review 

team. The agency has utilized the 

definition, as published in the proposed 

rule, since September 14, 1988, and has 

not encountered any difficulties or 

concerns. Further, the agency believes 

public landowners may have concerns 

or relevant information regarding the 

potential easement that may affect the 

agency’s decision. Therefore, the 

comments are not adopted. 

One comment was received on the 

‘‘cosigner’’ definition. The comment 

stated the agency should revise the 

definition to state that cosigners are not 

eligible to receive loan servicing. The 

agency agrees that cosigners do not have 

independent rights to receive loan 

servicing, but may submit a joint 

application for servicing with all other 

liable parties. Therefore, the definition 

is revised accordingly. 

One comment was received on the 

‘‘current market value buyout’’

definition. The comment stated the 

agency should revise the definition to 

remove liquidation costs as the 

definition conflicts with the explanation 

of current market value buyout included 

in Appendix B of 7 CFR part 766. The 

agency agrees with the comment and 

has revised the definition as the 

provisions of Appendix B are identical 

to existing regulations published in 

subpart S of 7 CFR part 1951. 

Furthermore, the Agency did not 

address a revision to the existing 

regulations in the preamble of the 

proposed rule. 

One comment was received on the 

‘‘debt forgiveness’’ definition. The 

comment stated the agency should 

include in the definition the Act’s 

provision, found in Section 

343(a)(12)(B)(ii), which provides that 

‘‘any write-down provided as part of a 

resolution of a discrimination complaint 

against the Secretary’’ is not considered 

debt forgiveness. The agency agrees 

with the comment and has revised the 

definition. The agency also has clarified 

the definition to state that the term does 

not include prior debt forgiveness that 

is repaid in full and debt reduction in 

exchange for a conservation contract. 

One comment was received on the 

‘‘debt service margin’’ definition. The 

comment stated the proposed 

calculation would take a borrower off of 

limited resource rates if the borrower 

has atypical or one-time high 

inventories or cash. Therefore, the 

comment stated the agency should use 

the term debt and capital lease coverage 

ratio, which is the industry standard to 

calculate the debt service margin. The 

agency uses a typical plan to calculate 

the debt service margin and does not 

consider atypical high inventories or 

cash when running the Debt and Loan 

Restructuring System (DALR$) for 

primary loan servicing. Further, the 

definition of ‘‘feasible plan’’ provides 

that the farm operating plan will not be 

based on atypical or one-time high 

inventories, or cash on hand. Therefore, 

the comment is not adopted. 

Six comments were received on the 

‘‘delinquent borrower’’ definition. All 

comments stated the definition 

contained in the proposed rule did not 

match the definition in the agency’s 

final rule published on February 4, 2004 

(69 FR 5264–5267). The agency agrees 

with the comments, and has revised the 

definition accordingly. 

Three comments were received on the 

‘‘entity’’ definition. One comment stated 

that the term ‘‘trust,’’ as used in the 

definition, must be more clearly defined 

‘‘so that it includes trusts established in 

treaties’’ making tribal farms eligible for 

assistance. Two comments stated that it 

was not clear in the proposed rule how 

less than traditional entity structures 

would be handled. Act section 302(a) (7 

U.S.C. 1922(a)) for farm ownership 

loans, section 311(a) (7 U.S.C. 1941(a)) 

for operating loans, and section 321(a) 

(7 U.S.C. 1961(a)) for emergency loans 

specifically provide the types of entities 

eligible to receive loans; entity 

applicants must fit within at least one 

of the types listed. The agency does not 

believe the definition, as written, limits 

the type of trust, or other organization 

listed, that are considered an entity 

under the Act’s provisions. However, 

entity applicants must meet the 

statutory eligibility requirement of being 

the owner-operator or tenant-operator of 

a family farm, as well as all other 

applicable eligibility and loan making 

requirements. The agency believes the 

definition, as written, will not result in 

the adverse impacts suggested in the 

comments; therefore, the comments are 

not adopted. 

Two comments were received on the 

‘‘essential family household expenses’’

definition. One comment stated that the 

definition, along with the definition of 

‘‘essential family living and farm 

operating expenses,’’ makes the rule 

unclear. The agency believes the 

‘‘essential family household expenses’’

and the ‘‘essential family living and 

farm operating expenses’’ definitions are 

similar, and has therefore, removed the 

definition of ‘‘essential family 

household expenses’’ in the final rule as 

unnecessary and replaced the term 

throughout the CFR. The other comment 

stated the agency should revise the text 

‘‘the borrower and the immediate family 

of the borrower’’ to read ‘‘the borrower, 

spouse, and immediate family 

members’’ since the agency defined the 

term ‘‘family member.’’ Since the 

agency removed the definition of 

‘‘essential family household expenses,’’

the agency revised the definition of 

‘‘family living expenses’’ to include 

expenses for the borrower’s spouse and 

immediate family members. 

Two comments were received on the 

‘‘essential family living and farm 

operating expenses’’ definition. One 

comment stated that the agency should 


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revise the definition to provide that the 

agency will consider the expenses 

typical for the local community, instead 

of expenses typical for that type of 

operation in the area. Further, the 

comment stated the agency should 

remove the provision that the agency 

will consider what constitutes an 

efficient method of production for the 

borrower’s resources because it is 

ambiguous. The agency believes using 

the term ‘‘local community’’ will make 

the definition unclear when applied to 

a rural area. Further, the agency believes 

the provision, as written, furthers the 

agency’s mission of providing 

supervised credit and allowing the 

agency and the applicant to adjust to the 

needs of the operation. Therefore, this 

part of the comment is not adopted. The 

comment also stated the agency should 

include in the definition nursing care of 

immediate family members not living in 

the same household. The agency has 

revised the definition of ‘‘family living 

expenses’’ to include the costs of 

providing for the needs of family 

members and those for whom the 

borrower has a financial obligation, 

such as alimony, child support, or 

nursing care of an elderly parent. The 

agency agrees that nursing care of 

immediate family members is a family 

living expense, but the agency believes 

it is not always an essential family 

living expense. Therefore, this part of 

the comment is not adopted. Lastly, the 

comment stated the agency should 

remove the reference to church 

expenses from the definition and 

replace it with religious expenses. The 

other comment stated the agency should 

revise the definition to remove the 

reference to ‘‘church.’’ The agency 

agrees with the comments and has 

revised the definition accordingly. 

Eight comments were received on the 

‘‘established farmer’’ definition. Two 

comments stated the agency should 

remove the subparagraph describing 

entity eligibility from the definition 

because it limits the use of different 

legal structures for families attempting 

to transfer the farm to a new generation. 

The term ‘‘established farmer’’ is used 

only in subpart H of 7 CFR part 764 

which addresses requirements specific 

to emergency loans in accordance with 

section 321 of the Act (7 U.S.C. 1961). 

The authorized uses for emergency loan 

funds include the repair or replacement 

of essential property damaged or 

destroyed as a result of a disaster; 

however, emergency loan funds would 

not be used to finance the transfer of a 

farm to a new generation. The agency 

does not agree that the provision of the 

definition adversely impacts intergenerational transfers and therefore, the 

comments are not adopted. 

Similar concerns regarding the impact 

of entity eligibility requirements were 

received in response to regulations at 

§ 764.101. As described in the agency’s 

response to those comments, the agency 

revised the entity eligibility 

requirements contained in that section, 

and as a result made conforming 

changes to the definition of ‘‘established 

farmer’’ by revising the provision that 

an established farmer is not ‘‘an entity 

with an ownership interest of 50 percent 

or more held by one or more entities’’

to require that an entity cannot be ‘‘an 

entity whose members are themselves 

entities.’’

One comment stated that the 

‘‘established farmer’’ definition should 

be revised to recognize that Tribal farms 

have sovereign rights that allow for 

complex land issues, which often 

require the use of a full time farm 

manager. As discussed in the response 

to comments for the definition of entity, 

the agency does not believe the 

regulations, as written, impose any 

additional limitations on a particular 

type of entity. However, agency 

assistance is only available to entity 

operations that are family farms and, 

therefore, must have a majority of the 

day-to-day operational and strategic 

management decisions made by the 

members operating the farm, as well as 

meet all other requirements established 

within the definition of family farm. 

Therefore, this portion of the comment 

is not adopted. Further, the comment 

stated that the ‘‘established farmer’’

definition requirement that 50 percent 

or more of the ownership in the entity 

cannot be held by another entity will 

exclude Tribal farms. As discussed in 

the response to comments received on 

the general eligibility requirements for 

loan making (§ 764.101), the agency has 

revised the eligibility requirements 

regarding entities to provide that an 

entity applicant cannot be composed of 

members that are themselves entities. 

Therefore, appropriate conforming 

changes have been made in the CFR, 

and this portion of the comment is not 

adopted. 

Two comments stated the requirement 

in the ‘‘established farmer’’ definition 

that the entity is primarily engaged in 

farming and has over 50 percent of its 

gross income from all sources from 

farming, is detrimental to small or 

beginning farmers who rely on non-farm 

income to meet operating and family 

living expenses. This requirement is 

supported by the ‘‘family farm’’

requirement that the farm produce 

‘‘agricultural commodities for sale in 

sufficient quantities to be recognized as 

a farm rather than a rural residence.’’

Furthermore, the 50 percent gross 

income requirement is included in 

existing regulations published in 7 CFR 

764.2 and the agency is not aware of any 

adverse impacts on the public; 

therefore, the comments are not 

adopted. One comment stated it is not 

clear what the term ‘‘such loans’’ refers 

to in subparagraph (5)(ii) of the 

definition. The agency agrees with the 

comment and has revised the definition 

to refer to ‘‘Agency loans.’’ Two 

comments suggested that the word 

‘‘employees’’ in the last sentence of the 

definition be replaced with the word 

‘‘employs.’’ The agency agrees with the 

comments and has revised the 

definition accordingly. 

Two comments were received on the 

‘‘false information’’ definition. One 

comment stated the agency should 

revise the definition to include 

information the applicant or borrower 

should have known to be false, because 

it is difficult for the agency to prove the 

information the applicant or borrower 

submitted to the agency was false. 

While the agency agrees with the 

comment, the agency believes it is even 

more difficult to prove the applicant or 

borrower should have known 

information submitted to the agency 

was false. Therefore, the comment is not 

adopted. The other comment stated the 

agency should revise the definition to 

include information the applicant or 

borrower chose to withhold from the 

agency. The term is used only in subpart 

F of 7 CFR part 766 for the submission 

of false information. Since the proposal 

concerns information not submitted to 

the agency, and therefore not relied on, 

the comment is not adopted. Practically, 

however, in such cases the information 

submitted to the agency may be false in 

light of conflicting information not 

submitted and would, therefore, be 

covered by the definition. 

Five hundred sixty-four comments 

were received on the ‘‘family farm’’

definition. Of the comments received, 

12 supported the definition as proposed 

while 552 comments opposed it. The 

proposed definition would establish 

that the typical year gross income of the 

operation could not exceed the greater 

of $750,000 in annual sales, or the 95th 

percentile of the statistical distribution 

of the income of farms in the state with 

gross sales in excess of $10,000, based 

on the farm data and survey of farm 

economic factors published by the 

National Agricultural Statistics Service. 

The opposing comments stated the 

proposed definition would make a large 

number of family farms ineligible for 

direct and guaranteed agency loans. One 

hundred seventy comments 


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recommended the gross income limit be 

increased from $750,000 to $1,000,000, 

$1,500,000, or $2,500,000. Seventy-four 

comments opposed the use of any gross 

income limit. Fifty-two comments stated 

that the use of annual sales to determine 

eligibility was arbitrary. Thirty-one 

comments stated the proposed 

definition would exclude high value 

crop producing farms. Seventy 

comments stated the agency provided 

little justification in the proposed rule 

for using a gross farm income cap. 

Fourteen comments stated the agency 

does not have a statutory basis for 

changing the family farm definition. 

Thirteen comments opposed using a 

gross income limit that was not indexed 

to inflation. Therefore, because of the 

overwhelming opposition to the 

proposed requirement, the agency will 

not include a gross annual income in its 

family farm definition. However, as 

noted in the discussion of the proposed 

rule published on February 9, 2004, the 

broad guidelines contained within the 

existing definition have resulted in 

inconsistencies in applying the 

definition on a nationwide basis. The 

agency believes that the ‘‘family farm’’

definition in this final rule will 

minimize inconsistencies regarding 

management and labor requirements. 

Based upon comments received, the 

Office of Management and Budget 

recommends the agency seek public 

input as part of a further analysis 

regarding the inclusion of an 

appropriate nation-wide income 

limitation, which may necessitate future 

action. It is important to note that the 

definition of a ‘‘family farm’’ as stated 

in this final rule only applies to farm 

loan program eligibility requirements. 

Further, the proposed ‘‘family farm’’

definition included the provision that 

the majority of the day-to-day 

operational and management decisions 

are made by the applicant and persons 

related to the applicant by blood or 

marriage. One hundred sixteen 

comments were received on the ‘‘related 

by blood or marriage’’ definition. All 

comments stated the definition as 

written excludes certain relationships, 

including, but not limited to, cousins, 

uncles, aunts, and grandparents and that 

as a result, partnerships or entities 

comprised of these individuals would 

not be considered a family farm. The 

agency agrees with the comments and 

revised the definition to include the 

relationships except cousins. In 

addition, in response to the concerns 

expressed, the agency revised the 

definition of ‘‘relative’’ to include 

cousin in the covered relationships. 

Furthermore, the agency revised the 

‘‘family farm’’ definition to provide that 

the day-to-day operational and 

management decisions be made by the 

applicant and persons related to the 

applicant by blood or marriage or a 

relative of the applicant. 

One comment expressed concern 

regarding the provision in the ‘‘family 

farm’’ definition that the farm ‘‘in a 

typical year generates net cash income 

that improves the family’s standard of 

living’’ as the term ‘‘typical year’’ is not 

defined in the rule. The agency agrees 

that the provision is subject to different 

interpretations and could adversely 

impact applicants that have been subject 

to recent disasters. Therefore, the 

agency removed the provision from the 

definition. 

One comment was received on the 

‘‘family living expenses’’ definition. The 

comment stated the agency should 

remove the definition because the CFR 

already includes the ‘‘essential family 

living and farm operating expenses’’

definition. The agency believes the 

terms are not synonymous as all family 

living expenses are not considered 

essential. Further, the terms are utilized 

under different circumstances in the 

loan making and servicing process when 

the distinction is necessary. Therefore, 

the comment is not adopted. 

One comment was received on the 

‘‘family member’’ definition. The 

comment stated the agency should 

revise the definition to provide family 

members include the immediate 

members of the family for whom the 

borrower has a financial obligation, e.g., 

child support payments, alimony, 

nursing care for an elderly parent. The 

agency revised the definition of ‘‘family 

living expenses’’ to include the 

expenses provided in the comment, for 

family members who are the borrower’s 

responsibility, as revising that definition 

is more appropriate. 

One comment was received on the 

‘‘farmer’’ definition. The comment 

stated the agency should revise the 

definition to provide that farmer is an 

individual or entity who is a family 

farmer. The agency believes the 

definition as written is adequate as not 

every farmer in the United States is a 

family farmer. Therefore, the comment 

is not adopted. 

Two comments were received on the 

‘‘feasible plan’’ definition. One 

comment stated the agency should 

revise the definition to state ‘‘feasible 

plan is when the cash flow budget 

shows total income equals or exceeds 

total cash outflow.’’ The agency does 

not agree with the comment to limit the 

evaluation of feasibility to include only 

‘‘total income’’ as there may be other 

non-income sources of cash inflows, 

such as cash on hand, that impact the 

borrower’s repayment ability. Therefore, 

the comment is not adopted. The other 

comment stated the agency should 

clarify the definition to provide that the 

margin after debt service and ending 

cash, depending on the loan requested, 

determine if the operation projects a 

feasible plan. The agency agrees that the 

feasibility for an annual operating loan 

should be evaluated differently than for 

a term loan. However, ‘‘margin after 

debt service’’ and ‘‘ending cash’’ are 

terms that apply to the Farm Business 

Plan, a software application utilized by 

the agency to determine feasibility for 

direct loan making and servicing 

requests. ‘‘Feasible plan’’ is a term 

applicable to regulations for both the 

direct and guaranteed loan programs. 

While the term ‘‘ending cash’’ refers to 

the applicant or borrower having 

‘‘sufficient cash inflow to pay all cash 

outflow’’ and the term ‘‘margin after 

debt service’’ applies to consideration of 

a typical plan when the ‘‘loan approval 

or servicing action exceeds one 

production cycle,’’ the agency believes 

the definition, as written, adequately 

describes the requirements for both the 

direct and guaranteed loan programs. 

Therefore, the comment is not adopted. 

One comment was received on the 

‘‘financially distressed borrower’’

definition. The comment stated the 

definition should include borrowers 

who do not have a 110 percent debt 

service margin to match the DALR$ 

software program. The agency disagrees. 

The agency notifies financially 

distressed borrowers of the availability 

of loan servicing programs as provided 

under § 766.101. The agency does not 

consider a borrower who can develop a 

feasible plan, which does not require a 

margin, with less than 10 percent 

margin to be financially distressed. 

However, a borrower who is not 

delinquent, but cannot develop a 

feasible plan for the current or next 

production cycle, is considered 

financially distressed and in need of 

loan servicing. Further, § 766.105(b)(1) 

provides the agency will attempt to 

achieve a 110 percent of debt service 

margin; however, under § 766.105(b)(3) 

the agency only requires the borrower 

‘‘be able to develop a feasible plan with 

at least 100 percent of debt service 

margin’’ to be considered for loan 

servicing programs. If the agency revises 

the definition as provided in the 

comment, the agency would have to renotify all borrowers restructured with a 

debt service margin of less than 110 

percent immediately after the 

restructuring is complete. Therefore, the 

comment is not adopted. However, the 


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agency did revise the definition by 

removing the text, ‘‘unable to make 

payments as planned for the current or 

next business accounting period or to 

project a feasible plan of operation for 

the next business accounting period’’ as 

the term ‘‘business accounting period’’

is not defined. The removed text was 

replaced by the text, ‘‘unable to develop 

a feasible plan for the current or next 

production cycle’’ as the term 

‘‘production cycle’’ is defined in the 

rule, and is more easily understood. 

Six comments were received on the 

‘‘financially viable operation’’

definition. One comment recommended 

the words ‘‘basic family living 

expenses’’ in the definition be revised to 

read ‘‘essential family living expenses.’’

One comment stated the agency should 

revise the definition to provide the 

operation must generate sufficient 

income to meet essential family living 

expenses to the extent they are not met 

by dependable non-farm income. The 

agency agrees with the comments and 

has revised the definition accordingly. 

In addition, the agency clarified the 

definition further to provide that it is 

applicable only under § 764.252, which 

provides the conditions applicants have 

to meet to request a waiver of the 

operating loan term limit. Four 

comments stated the definition requires 

the operation to generate sufficient 

income to provide for replacement of 

capital items and long-term financial 

growth, and that such an operation 

should qualify for commercial credit, 

with no agency assistance. Therefore, 

the comments stated the agency should 

either remove the definition or make it 

identical to the ‘‘feasible plan’’

definition. In addition, one of the 

comments stated the definition seems to 

provide that non-farm income can only 

be used to meet family living expenses, 

but that non-farm income is used to 

make debt payments, replace capital 

items and supplement working capital. 

Section 311(c)(4)(B) of the Act (7 U.S.C. 

1941(c)(4)(B)) requires the applicant to 

have a financially viable operation for 

the agency to consider granting a onetime 2-year waiver of operating loan 

limits. The agency believes the 

definition as revised to refer to essential 

family living expenses should allow 

flexibility to small operations while 

meeting the statutory requirements; 

therefore, the comments are not 

adopted. 

One comment was received on the 

‘‘foreclosed’’ definition. The comment 

stated the agency should revise the 

definition to provide ‘‘foreclosed’’ is the 

completed act of selling real estate 

security under the power of sale in the 

security instrument or through judicial 

proceedings. The agency agrees with the 

comment and has revised the definition 

to refer to judicial proceedings. 

One similar comment was received on 

the ‘‘foreclosure sale’’ definition. The 

comment stated the agency should 

revise the definition to provide 

‘‘foreclosure sale’’ is the act of selling 

real estate security. The agency believes 

the definition as written is adequate 

since the agency can also foreclose on 

loans secured by chattels. Therefore, the 

comment is not adopted. 

Two comments were received on the 

‘‘good faith’’ definition. One comment 

supported the definition as written. 

Further, it stated it is not necessary for 

the agency to consult the Office of 

General Counsel to determine findings 

of fraud, waste or conversion. The other 

comment stated the agency should 

retain the requirement for a written 

Office of General Counsel opinion that 

has been a regulatory requirement since 

September of 1988, as such 

determinations have ‘‘grave 

consequences for the rights and interest 

of FLP borrowers***’’ The agency 

recognizes the seriousness of allegations 

of fraud, waste, and conversion and 

therefore has revised the definition to 

include the requirement that an opinion 

be obtained form the Office of the 

General Counsel. Further, the comment 

stated the ‘‘good faith’’ definition 

should allow for inadvertent departures 

from the agreements with the agency 

because good faith deals with the 

borrower’s state of mind at the time the 

violation of the agreement occurs. The 

agency does not believe its staff can 

make determinations regarding a 

borrower’s state of mind. The text, ‘‘The 

Agency considers a borrower to act in 

good faith, however, when the borrower 

is unable to adhere to all agreements 

due to circumstances beyond the 

borrower’s control’’ adequately 

addresses this concern; therefore, the 

comment is not adopted. In addition, 

the comment stated the statutory 

requirement that a borrower who 

disposed of security and used proceeds 

for essential household and operating 

expenses prior to October 14, 1988, is 

not considered to lack good faith is not 

included in the definition. While the 

agency agrees with the comment, the 

agency does not believe a borrower will 

be determined to lack good faith based 

on events that occurred more than 15 

years prior to a current loan or servicing 

application. However, as an added 

precaution, the agency handbook will 

provide guidance on dealing with 

applicants and borrowers who disposed 

of security and used proceeds for 

essential family living and farm 

operating expenses prior to October 14, 

1988. Therefore, the comment is not 

adopted. 

Lastly, the agency made an 

administrative revision to the ‘‘good 

faith’’ definition by clarifying that good 

faith requires an applicant or borrower 

to provide ‘‘current, complete, and 

truthful information when applying for 

assistance and in all past dealings with 

the Agency.’’ This text supports the 

acknowledgment currently included on 

each loan or servicing application. 

One comment was received on the 

‘‘graduation’’ definition. The comment 

stated the agency should revise the 

definition as the payment in full of one 

or more direct FLP loans. The agency 

believes the payment in full of one or 

more loans of the same type, when the 

borrower has several outstanding loans, 

cannot be considered as graduation 

because the borrower is still depending 

on the agency to obtain necessary credit 

for the operation. As agency loans are a 

temporary source of credit for 

borrowers, for the agency to measure its 

borrowers’ success, borrowers have to 

obtain their credit needs from another 

source with or without an agency 

guarantee. Therefore, the comment is 

not adopted. 

One comment was received on the 

‘‘homestead protection’’ definition. The 

comment stated the agency should 

clarify that homestead protection 

applies to direct loan borrowers only. 

The agency agrees with the comment 

and has revised the definition 

accordingly. 

One comment was received on the 

‘‘homestead protection property’’

definition. The comment stated the 

agency should revise the definition to 

clarify that homestead protection 

property secured direct loans only. The 

agency agrees with the comment and 

has revised the definition accordingly. 

One comment was received on the 

‘‘household contents’’ definition. The 

comment stated the agency should 

remove the second sentence of the 

proposed definition with exclusions for 

luxury items. The agency believes the 

definition as written is reasonable. The 

term is used in Parts 764 and 766 in 

relation to disaster-related damages and 

taking additional security refers to 

needed, not luxury household items. 

Therefore, the comment is not adopted. 

One comment was received on the 

‘‘inaccurate information’’ definition. 

The comment stated the agency should 

revise the definition to include 

information provided by an applicant 

without the intent of fraudulently 

obtaining benefits. The agency agrees 

with the comment and has revised the 

definition to refer to applicants, 

borrowers, lenders, and other sources. 


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Two comments were received on the 

‘‘inventory property’’ definition. One 

comment stated the definition as written 

includes all Federal property, such as 

Federal buildings and public land. 

Further, the comment stated the agency 

should clarify the definition to include 

real estate property held by guaranteed 

lenders after liquidation of guaranteed 

loans. The other comment stated the 

agency should revise the definition as 

real estate and chattel property to which 

the United States has acquired 

ownership rights. In response to the 

comments, the agency has clarified that 

the term covers such property that 

formerly secured an FLP loan and to 

which the Government has acquired 

title. The definition would not cover 

former security property held by the 

guaranteed lender. 

One comment was received on the 

‘‘joint operation’’ definition. The 

comment stated the agency should 

remove the definition. Section 343(a)(7) 

of the Act (7 U.S.C. 1991(a)(7)) defines 

the term ‘‘joint operation’’ and this type 

of entity is specifically listed as an 

eligible entity for farm loans. The 

proposed rule was based on the Act’s 

provision; therefore, the comment 

cannot be adopted. 

One comment was received on the 

‘‘lien’’ definition. The comment stated 

the agency should revise the definition 

as a legally enforceable claim against 

real or chattel property. The agency 

agrees with the comment and has 

revised the definition to refer to real or 

chattel property. 

One comment was received on the 

‘‘line of credit agreement’’ definition. 

The comment stated the agency should 

revise the definition as a contract 

between the lender and the borrower 

that contains certain lender and 

borrower conditions, limitations, and 

responsibilities for revolving or nonrevolving credit. The agency’s current 

guaranteed regulations and handbook 

have contained the definition as 

published in the proposed rule since 

February 12, 1999, without causing 

adverse impacts on the program. The 

agency believes the less technical 

definition is reasonable and easily 

understood. Therefore, the comment is 

not adopted. 

One comment was received on the 

‘‘loss rate’’ definition. The comment 

stated the agency should revise the 

definition as the net amount of loan loss 

claims paid on loans made in the 

previous 7 years divided by the total 

loan amount guaranteed during the 

same period. The agency’s current 

guaranteed regulations and handbook 

have contained the definition as 

published in the proposed rule since 

February 12, 1999, without causing 

adverse impacts on the program. 

Therefore, the comment is not adopted. 

The agency did however make an 

administrative revision to the definition 

to replace the text ‘‘guaranteed OL, 

Farm Ownership (FO), and Soil and 

Water (SW) loans’’ with the text ‘‘FSA 

guaranteed loans’’ as the agency has not 

made guaranteed SW loans in the last 7 

years. 

One comment was received on the 

‘‘mortgage’’ definition. The comment 

stated the agency should revise the 

definition as a security instrument. The 

agency defines the term ‘‘mortgage’’ to 

clarify that it is synonymous with the 

term ‘‘deed of trust’’ in those States that 

use a deed of trust to obtain a lien on 

real estate. Further, the agency has 

added the definition for the term 

‘‘security instrument’’ to describe any 

document that provides the agency with 

a security interest in real or personal 

property. Therefore, the comment is not 

adopted. 

One comment was received on the 

‘‘net recovery value of security 

property’’ definition. The comment 

stated the agency should include a 

separate definition for the term ‘‘net 

recovery value of non-essential assets’’

instead of including it in the definition 

of ‘‘net recovery value of security 

property.’’ The agency agrees with the 

comment. Therefore, the agency defined 

the term ‘‘net recovery value of nonessential assets’’ and revised the ‘‘net 

recovery value of security property’’

definition accordingly. 

Seventeen comments were received 

on the ‘‘non-eligible enterprise’’

definition. Four comments supported 

the agency’s proposed definition as 

written. One comment stated the agency 

should remove the definition and 

provide the eligible enterprises under 

the applicable loan purpose sections. 

The agency believes enumerating all the 

eligible enterprises will make the 

applicable loan purpose sections 

voluminous. Further, by not 

enumerating the eligible enterprises in 

the rule the agency eliminates the 

possibility of inadvertently omitting an 

eligible enterprise. Therefore, the 

comment is not adopted. 

Another comment stated the ‘‘noneligible enterprise’’ definition as written 

could be confusing to the public. The 

agency believes that by defining the 

term and providing in the CFR text that 

loan funds may not be used to finance 

a non-eligible enterprise, it eliminates 

confusion. Therefore, the comment is 

not adopted. One comment, while it 

supported the definition, stated the 

agency should provide that an 

economically viable transportation 

situation does not exist for the noneligible enterprise’s products. The 

agency believes that it is not the 

expenses associated with the enterprise 

that makes the enterprise ineligible for 

agency loans, it is the products the 

enterprise produces. Further, when 

considering any enterprise, the agency 

includes transportation expenses when 

it determines the operation’s feasibility, 

since transportation costs can vary 

greatly from locality to locality. It is not 

the agency’s intent to allow financing of 

non-eligible enterprises in one area and 

not in other areas based on 

transportation costs. Therefore, the 

comment is not adopted. 

Five comments opposed the ‘‘noneligible enterprise’’ definition as 

proposed because it eliminates tropical 

fish farming, the equine industry, 

llamas, alpacas, and ratites from being 

eligible for agency loans. The agency 

has a long-standing policy not to finance 

the production of animals kept solely 

for pleasure or companionship. This 

policy will continue. Therefore, the 

comments are not adopted. Two 

comments stated it is not clear if the 

definition includes products bought and 

further grown, and then resold, or 

otherwise having value added to the 

products. ‘‘Non-eligible enterprise’’

would not include common farming 

operations that buy chickens, piglets, 

seedling, etc., and resell them when 

fully grown; it would include operations 

that purchase ripened fruit and resell it 

as jam, for example. No change is being 

made in relation to the comments. 

Further, the comments stated it is not 

clear if the requirement that the 

‘‘majority of the commodities processed 

or marketed’’ by the enterprise is based 

on dollar sales or the number of items. 

The agency believes the requirement as 

written is applicable only to the number 

of items processed or sold. Therefore, 

the comments are not adopted. 

Another comment stated the ‘‘noneligible enterprise’’ definition adds 

another tier of inquiry in determining if 

a particular enterprise is eligible for 

agency loans. Further, the comment 

stated the definition provides 

enterprises that produce exotic or nonfarm animals are not eligible for loans, 

however, the terms ‘‘exotic’’ and ‘‘nonfarm animals’’ are not defined. In 

response to the comment, the agency 

revised the definition to clarify what the 

agency considers exotic or non-farm 

animal; however, the term is still 

needed. The Federal Agriculture 

Improvement and Reform Act of 1996 

(Public Law 104–127), removed 

financing of non-farm enterprises as an 

authorized use of loan funds. The 

agency needs to specify the type of 


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enterprises that will not be financed to 

avoid confusion and inconsistent 

application of this restriction. Further, 

financing enterprises producing animals 

or products for which there is not an 

established market is inconsistent with 

prudent lending objectives. 

Another comment stated the agency 

must allow Tribal input to determine 

what tribal agricultural enterprises 

consist of, and set guidelines to 

recognize traditional tribal markets. 

Further, the comment stated the 

production of leeches, vermiculture and 

aquaculture must not be included in the 

non-eligible enterprise definition. The 

agency believes the definition as 

revised, along with the definitions of 

agricultural commodity and 

aquaculture, adequately identify the 

enterprises eligible for receiving loans. 

Further, the agency evaluates each 

individual operation requesting 

assistance on its own merits. Therefore, 

the comment is not adopted. 

One comment was received on the 

‘‘non-essential assets’’ definition. The 

comment stated the agency should 

revise the definition to include assets 

that may contribute a small amount of 

income to the farming operation but are 

clearly non-essential for the operation to 

function. The agency believes the 

definition as written is adequate, 

especially when read in the context of 

the CFR text. Therefore, the comment is 

not adopted. 

One comment was received on the 

‘‘non-program loan’’ definition. The 

comment stated the definition as written 

is too narrow and the agency should 

continue to use the definition found in 

current § 1951.451. The agency agrees 

with the comment and has revised CFR 

accordingly. 

One comment was received on the 

‘‘normal production yield’’ definition. 

The comment stated the definition as 

written is confusing and that the current 

definition, found in § 764.2, provides 

the priority for the types of records the 

agency will use. The proposed 

definition made no substantive changes 

from current § 764.2. Some clarifying 

language has been added in response to 

the comment. 

One comment was received on the 

‘‘note’’ definition. The comment stated 

the agency should remove the 

definition, as the term ‘‘note’’ is 

included in the ‘‘debt instrument’’

definition. The agency believes the term 

‘‘debt instrument’’ does not adequately 

describe the instruments the agency 

uses to evidence debt and therefore, the 

agency removed it in the final rule. 

However, the agency added the term 

‘‘promissory note’’ which is used in 

several sections of the CFR to replace 

the term ‘‘note,’’ and further added the 

term ‘‘assumption agreement’’ for clarity 

since it is distinguished from the term 

‘‘promissory note’’ in the text. 

The agency revised the definition of 

‘‘Operating loan’’ to include a youth 

loan as provided in § 764.1(b). 

One comment was received on the 

‘‘owner-operator’’ definition. The 

comment stated the definition should be 

revised to read ‘‘* * *is the individual 

or entity that owns the farm and 

provides the labor, management, and 

capital to operate the farm. An entity 

must have one or more members 

operating the farm.’’ The terms ‘‘owneroperator’’ and ‘‘tenant-operator’’ are 

used in the general eligibility 

requirements established in 7 CFR 

764.101, as well as the additional 

eligibility requirements established for 

specific loan types in the applicable 

subparts. While the proposed rule 

included a definition of the term 

‘‘owner-operator,’’ the terms ‘‘tenantoperator’’ and ‘‘operator’’ were not 

defined. The agency believes the key 

term that should be defined is 

‘‘operator,’’ and has, therefore, removed 

the definition of ‘‘owner-operator’’ in 

the final rule and has added ‘‘operator.’’

The agency defined the term ‘‘operator’’

to include both an ‘‘owner-operator’’ or 

‘‘tenant-operator’’ as applicable under 

each loan program. The agency does not 

believe that a definition of either of 

these terms is necessary as they are self 

explanatory. Further, the agency 

believes that the new definition of 

‘‘operator’’ uses the abbreviated text 

suggested by the comment; therefore, 

this portion of the comment is adopted. 

However, the agency did not adopt the 

portion of the comment suggesting the 

inclusion of the text ‘‘An entity must 

have one or more members operating 

the farm’’ as this requirement is 

adequately addressed in the revisions 

made to the eligibility requirement 

established in 7 CFR 764.101(k) 

requiring the applicant be the operator 

of a family farm. 

One comment was received on the 

‘‘partnership’’ definition. The comment 

stated the agency’s requirement that 

partnerships must be formally organized 

is out of date and unnecessary. The 

agency believes the definition as written 

does not require a formal partnership 

agreement, but instead it provides the 

agency will comply with State 

requirements pertaining to partnerships. 

Therefore, the agency does not believe 

a change to the definition is necessary. 

One comment was received on the 

‘‘protective advance’’ definition. The 

comment stated since the definition will 

be applicable to the guaranteed loan 

program also, the agency should 

continue to use the definition found in 

current § 762.102(b). The agency 

believes the definition as written in the 

proposed rule is adequate to cover both 

the direct and guaranteed loan 

programs. Further, under §§ 765.203 

and 762.149, respectively, the agency 

specifies the conditions for making 

protective advances for the direct and 

guaranteed loan programs. Therefore, 

the comment is not adopted. 

One hundred sixteen comments were 

received on the ‘‘related by blood or 

marriage’’ definition. As noted in the 

agency’s response to comments received 

on the definition of ‘‘family farm,’’ all 

comments stated the definition as 

written excludes certain relationships, 

including, but not limited to, cousins, 

uncles, aunts, and grandparents. The 

agency agreed and revised the definition 

accordingly. 

One comment was received on the 

‘‘relative’’ definition. The comment 

recommended the word ‘‘of’’ be inserted 

between the words ‘‘one’’ and ‘‘the.’’

The agency agrees and has revised the 

definition accordingly. In addition, as 

discussed in the agency’s response to 

comments received on the definition of 

‘‘family farm,’’ the definition of 

‘‘relative’’ was revised to include the 

term ‘‘cousin.’’

Two comments were received on the 

‘‘restructuring’’ definition. Both 

comments stated the definition as 

written does not cover the guaranteed 

loan programs. The agency agrees with 

the comments and has revised the CFR 

accordingly to adopt the definition from 

current § 762.102. 

Three comments were received on the 

‘‘rural youth’’ definition. Two 

comments supported the definition as 

written and opposed lowering the age 

limit for youth loans from the proposed 

10 years to 8 years of age. One comment, 

while it supported the definition, stated 

the population limit should not exceed 

20,000 inhabitants. The agency 

disagrees. The agency believes rural 

youth residing in areas of up to 50,000 

inhabitants can benefit from the youth 

loan program and that the age minimum 

should remain at 10 years of age. 

Seven comments were received on the 

‘‘socially disadvantaged applicant’’

definition. Six comments stated that 

applicants who are spouses are 

penalized under the definition when the 

wife is the operator and owns 50 

percent of the farming operation, 

because they do not meet the majority 

ownership interest test. The agency 

agrees there are circumstances where a 

spouse’s ability to own the majority 

interest in property is prohibited by 

State laws governing spousal rights. 

Therefore, the agency revised the 


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definition to allow married couples to 

be considered socially disadvantaged 

when the socially disadvantaged spouse 

owns 50 percent of the farming 

operation and makes most of the 

management decisions, contributes a 

significant amount of labor and is 

generally recognized as the operator of 

the farm. Such construction of the term 

as used in section 355 of the Act is 

reasonable under these circumstances. 

Another comment stated the 

requirement for entities that the socially 

disadvantaged member must have a 

majority ownership interest in the 

operation to receive targeted funds 

reduces access to targeted funds by 

eligible socially disadvantaged 

applicants. The Act’s section 302(a) for 

farm ownership loans, section 311(a) for 

operating loans, and 321(a) for 

emergency loans provide the eligibility 

requirements for loans to entities. The 

statutory eligibility requirements apply 

to members holding a majority interest 

in the entity. The proposed rule is 

consistent with the Act’s provisions in 

focusing on the majority interest holder. 

The agency is taking a more lenient 

approach only in the case of spouses as 

discussed above. Therefore, the 

comment is not adopted. 

One comment was received on the 

‘‘socially disadvantaged group’’

definition. The comment stated the 

socially disadvantaged groups are not 

specified in the proposed rule. The 

agency agrees with the comment and 

has revised the definition to include the 

groups currently listed in § 1943.4. 

One comment was received on the 

‘‘trust’’ definition. The comment stated 

the agency should revise the definition 

to reflect that Tribes, as sovereign 

nations, have the ability to create and 

enforce laws to regulate businesses 

conducted within their boundaries. The 

requirement that a trust is recognized by 

the state in which it conducts business 

is the same as the requirement 

applicable to all other entities. Agency 

regulations cannot address every Tribe’s 

unique situation; therefore, state offices 

may develop guidance according to 

applicable state and tribal laws in 

consultation with the Regional Office of 

General Counsel. The agency believes 

the definition as written is adequate; 

therefore, the comment is not adopted. 

One comment was received on the 

‘‘United States’’ definition. The 

comment stated the definition as written 

excludes the Republic of Palau, the 

Federated States of Micronesia, and the 

Republic of the Marshall Islands. 

Further, the comment stated the Free 

Association Treaty provides that the 

agency may enter into loan agreements 

with citizens of the countries mentioned 

above. The agency agrees with the 

comment and has revised the definition 

accordingly. 

One comment was received on the 

‘‘working capital’’ definition. The 

comment stated the agency should 

revise the definition for clarity to 

provide ‘‘* * * including, but not 

limited to, paying for feed, seed * * *’’

The agency agrees and has revised the 

definition accordingly. 

Four comments were received on the 

‘‘youth loan’’ definition. Three 

comments stated youth loans should not 

be restricted to agricultural projects 

only. One comment stated that changing 

the youth loan purposes to include 

financing agriculturally-related projects 

only will have a devastating effect on 

Tribal youth. As stated in the discussion 

of comments received under § 764.301, 

the agency believes that youth loan 

funds should be used for modest, 

income producing, agriculture-related 

projects. Therefore, the comments are 

not adopted. 

Section 761.6 Appeals 

Five comments were received on the 

appeals provisions. Three comments 

stated the agency should clarify the 

provision that an adverse decision 

involving a guaranteed loan may be 

appealed by either the lender or the 

applicant or borrower. One comment 

stated the agency should revise § 761.6 

as well as § 762.104 to provide a 

guaranteed applicant or borrower may 

appeal an adverse agency decision 

without the lender appealing. Requests 

for appeal are handled in accordance 

with 7 CFR parts 11 and 780; therefore, 

the agency removed the provisions 

regarding who may request an appeal 

from § 761.6 and revised § 762.104 to 

remove the joint appeal requirement. 

One comment stated that while § 761.6 

provides appeals will be handled 

according to 7 CFR parts 11 and 780, 

§ 766.110 provides appeals of NRCS’

technical determinations on 

conservation contracts will be handled 

according to 7 CFR part 614. The 

comment stated the rule as written is 

not clear. The agency agrees with the 

comment and has revised § 766.110 to 

refer to 7 CFR parts 11 and 780. 

Section 761.8 Loan Limitations 

Thirty-two comments were received 

on the direct loan limits. One comment 

stated that the agency should work with 

Congress to increase the direct loan 

limit and include an inflation 

percentage increase as provided for 

guaranteed loans under section 313(b) of 

the Act (7 U.S.C. 1943(b)). The agency 

believes that the impact of any 

legislative change to increase the direct 

loan limits must be carefully analyzed 

as funds provided for direct farm 

ownership and operating loans are 

usually exhausted early in the fiscal 

year, and the Office of Management and 

Budget (OMB), along with the President 

play a role in the appropriations 

process. Therefore, the agency is 

limiting this rule to revising its 

regulations within its current statutory 

authority. However, the 

Administration’s 2007 Farm Bill 

proposal recommends that the loan 

limit for the direct loans be increased. 

The Agency will make the appropriate 

regulatory changes in the future, in the 

event the Administration’s proposal is 

adopted. 

All other comments on this section 

stated that the direct loan limit of 

$200,000 is not adequate to cover the 

credit needs of socially disadvantaged 

and limited resource applicants because 

they are denied commercial loans more 

often. The proposed rule was based on 

Section 313(a)(1), limits for direct loans, 

therefore, the comments cannot be 

adopted. 

Section 761.9 Interest Rates for Direct 

Loans 

One comment was received on the 

interest rate charged limited resource 

borrowers. The comment stated the 

agency should reduce the limited 

resource interest rate to three percent 

from five percent. Section 316(a)(2) of 

the Act (7 U.S.C. 1946(a)(2)) sets the 

limited resource interest rate minimum 

at five percent; therefore, the comment 

cannot be adopted. 

Section 761.10 Planning and 

Performing Construction and Other 

Development 

Five comments were received on the 

planning and performing construction 

and other development provisions. Two 

comments supported the agency’s 

proposal to make the applicant or 

borrower responsible for ensuring 

compliance with local construction 

standards. One comment stated the 

agency should require the applicant to 

provide the plans and specifications 

prior to the agency’s loan approval and 

inspect the planned development at 

least once. The agency believes the rule 

as written is adequate as it requires the 

applicant to provide the plans and 

specifications to the agency. The 

applicant or borrower must inspect 

development work, as needed, to protect 

their financial interest and provide 

written certification to the agency that 

the development conforms to the plans 

and good construction practices, 

applicable laws, ordinances, codes and 

regulations. Under § 761.10(e)(4), the 


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agency inspections of the planned 

construction and development do not 

create or imply any duty or obligation 

of the agency to the applicant or 

borrower. The agency inspects the 

planned construction and development 

solely to protect its financial interest. 

The agency’s inspection process is 

internal policy and will be addressed in 

the appropriate agency handbook. 

Therefore, the comment is not adopted. 

Another comment stated the agency 

should not require the same process for 

insurance proceeds less than $5,000 as 

it requires for direct loan funds, because 

the process is not cost-effective. In 

accordance with 7 CFR 764.108, all 

security except growing crops must be 

covered by hazard insurance, and the 

agency must be listed as the beneficiary 

of a mortgage loss payable clause. 

Further, 7 CFR 765.152 provides that 

‘‘cash proceeds of insurance claims 

received on Agency collateral, if not 

being used to repair or replace security 

items’’ will be considered an ‘‘extra 

payment.’’ Therefore, the agency 

believes it is essential that the 

provisions of 7 CFR 761.10 be adhered 

to, regardless of the amount of insurance 

proceeds. To do otherwise would 

expose the agency to potential losses as 

its security may deteriorate in value. 

Therefore, the comment is not adopted. 

One comment stated the provision 

that requires applicants not to incur any 

debts for material, labor or other 

expenditures prior to loan closing is 

unduly burdensome to applicants who 

may be able to begin the project while 

waiting on loan funds. The comment 

further stated applicants are informed at 

the beginning of the loan process that 

agency funds may not be available to 

close the loan, and as such, applicants 

are aware that they are responsible for 

any pre-loan development work. It is 

important to highlight that the applicant 

shall not be reimbursed for expenditures 

incurred prior to loan closing. Further, 

agency assistance is only available to 

applicants unable to obtain the needed 

credit from another source. Therefore, it 

is unlikely that an applicant would have 

personal funds available or be able to 

incur debts to initiate development 

prior to agency funds becoming 

available. Therefore, the comment is not 

adopted. 

Section 761.51 Establishing a 

Supervised Bank Account 

Six comments were received on 

establishing a supervised bank account. 

One comment stated the agency should 

clarify whether or not an applicant has 

to consent to the establishment of a 

supervised bank account. The agency 

agrees with the comment and has 

revised the section to state that the 

account will be used to assist borrowers 

with limited financial skills only when 

the borrower agrees. Three comments 

stated it is not clear when the agency 

will use the supervised bank accounts. 

The agency agrees with the comments 

and has revised the section to list the 

conditions under which the agency will 

use supervised bank accounts. In 

addition, one of these comments stated 

the requirement the agency provide 

applicants $5,000 or 10 percent of the 

loan funds for family living and 

operating expenses in a non-supervised 

bank account was not included in the 

CFR. One comment supported the 

agency’s decision not to include the 

provision of providing $5,000 or 10 

percent of loan funds in a nonsupervised bank account. As stated in 

the proposed rule, Section 312 of the 

Act provides that the agency ‘‘may 

reserve a portion of the loan * * *’’ but 

it is not required. The payment of family 

living and operating expenses is an 

authorized use of loan funds, and the 

agency provides loan funds directly to 

the applicant to use as specified in the 

farm operating plan. Therefore, 

supervised bank accounts for such use 

are not needed and no change has been 

made based on these comments. One 

comment stated the agency should add 

a section to explain the agency’s 

policies regarding disbursement of 

funds from a supervised bank account, 

use of electronic funds transfer instead 

of supervised bank accounts, and the 

necessity of supervised bank accounts. 

The agency believes the disbursement of 

funds from a supervised bank account is 

already adequately addressed in 

§ 761.54. Section 764.402 requires the 

agency to use electronic funds transfer 

when feasible, so supervised bank 

accounts are not expected to be 

routinely used. Therefore, these parts of 

the comment are not adopted. Lastly, as 

stated above, the agency has added 

language in § 761.51 on when 

supervised bank accounts are necessary. 

Section 761.52 Deposits Into a 

Supervised Bank Account 

One comment was received on the 

deposits into a supervised bank account 

provisions. The comment stated it is not 

clear if a check made jointly payable to 

the agency and the borrower can be 

deposited in a supervised bank account. 

The agency believes the CFR as written 

is clear as it only excludes checks made 

solely to the agency or the Federal 

Government, or if it lists the Treasury of 

the United States as joint payee. The 

jointly payable check to the agency and 

borrower could be deposited in the 

supervised bank account. Therefore, the 

comment is not adopted. 

Section 761.54 Withdrawals From a 

Supervised Bank Account 

Two comments were received on the 

withdrawals from a supervised bank 

account provisions. Both comments 

stated the agency should clarify the CFR 

to provide the borrower’s account must 

be accelerated before the agency can 

withdraw funds from a supervised bank 

account without the borrower’s 

signature. The proposed, as well as the 

final rule provide the conditions under 

which the agency will withdraw funds 

from the supervised bank account 

without the borrower’s signature. It has 

been the agency’s policy to withdraw 

funds from the supervised bank account 

when it is in the agency and the 

borrower’s financial interests. The 

borrower’s account need not be 

accelerated; the agency may withdraw 

such funds at any time to apply to the 

account or protect its lien as necessary. 

The agency believes the limited 

withdrawals by the agency are 

reasonable. Therefore, the comments are 

not adopted. 

Section 761.55 Closing a Supervised 

Bank Account 

One comment was received on closing 

supervised bank accounts. The 

comment stated the agency should 

clarify the CFR to provide the 

borrower’s account must be accelerated 

before the agency can close the 

supervised bank account. The proposed, 

as well as the final rule, provide the 

conditions under which the agency will 

close the supervised bank account. The 

supervised bank account can be closed 

when it is no longer needed; the 

borrower’s account need not be 

accelerated. The agency believes the 

CFR as written is reasonable. Therefore, 

the comment is not adopted. 

Even though no comments were 

received on the provision, the agency 

increased, from $100 to $1,000, the 

amount of loan funds remaining in the 

supervised bank account that can be 

released to the borrower to use for 

authorized loan purposes, at the time 

the account is closed. This action is in 

the best interest of both the borrower 

and the agency, as accounts with small 

loan balances remaining will not be 

maintained. The agency, however, did 

not extend this provision to youth loans. 

Section 761.104 Developing the Farm 

Operating Plan (As Numbered in Final 

Rule) 

One comment stated the agency must 

include in the final rule the provisions 

of current § 1924.56 that address the 


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development of farm and home plans 

used for loan making and servicing 

actions. Further, the comment stated the 

agency did not address the farm and 

home plan utilized by the agency. The 

agency inadvertently omitted the 

provisions addressing the development 

of farm operating plans, and has 

incorporated them in the final rule. The 

farm and home plan has not been 

incorporated, however. As provided in 

the proposed rule, the agency is 

removing all internal and administrative 

provisions, which include identification 

of specific forms, from its regulations. 

While specific form numbers are not 

included in the CFR, both the proposed 

and final rules address the information 

collection requirements. The agency no 

longer uses FSA 431–2 and therefore, it 

did not include any references to, nor 

did it discuss the use of, the farm and 

home plan form in the proposed rule. 

The agency has developed new forms to 

replace the farm and home plan, 

however, the agency accepts any format 

that provides the information required. 

Section 761.105 Year-End Analysis 

(§ 761.104 in the Proposed Rule) 

One comment was received on the 

year-end analysis provisions. The 

comment stated the agency should 

require a year-end analysis for 

borrowers who have received disaster 

set-aside. The agency utilizes disaster 

set-aside to resolve borrowers’

temporary financial set-backs due to a 

natural disaster. Further, the agency 

requires that borrowers who receive 

disaster set-aside be able to develop a 

feasible plan for the next production 

cycle and provide the appropriate 

documentation to support it. Since the 

agency will obtain the documentation 

needed during the disaster set-aside 

determination, it does not believe an 

annual year-end analysis is required. 

Therefore, the comment is not adopted. 

Section 761.208 Target Participation 

Rates for Socially Disadvantaged Groups 

Two comments were received on the 

target participation rates for socially 

disadvantaged groups. Both comments 

questioned why the agency sets the 

target participation rates for Farm 

Ownership (FO) loans based on the total 

rural population in the State that are 

members of socially disadvantaged 

groups but the target participation rates 

for farm Operating loans (OL) are based 

on the total number of farmers in the 

State that are members of socially 

disadvantaged groups. In addition, one 

comment suggested that to achieve 

equality, all participation rates should 

be based on the number of farmers in a 

State that are members of a socially 

disadvantaged group. Section 355 of the 

Act (7 U.S.C. 2003) establishes these 

different calculations for FO (subtitle A) 

and OL (subtitle B) target participation 

rates. Therefore, the comments cannot 

be adopted. 

Section 761.210 Transfer of Funds 

Section 346(b)(4) of the Act (7 U.S.C. 

1994) provides that beginning on 

September 1 of each FY, Emergency 

loan (EM) funds, not resulting from 

supplemental appropriations, may be 

used to fund the credit sale of real estate 

security in the agency’s inventory. In 

the last several FY’s, the agency has 

received insufficient initial 

appropriations to fund EM loan requests 

and has relied on supplemental 

appropriations to meet the demand. 

Further, the agency does not anticipate 

future appropriations actions to reverse 

this trend. Moreover, the agency has not 

taken a large number of real estate 

properties in inventory in the last 

several years. Lastly, other sections of 

the Act mandate that real estate in the 

agency’s inventory be sold to beginning 

farmers. Therefore, the agency has not 

utilized this authority and is removing 

§ 761.210(b) in the final rule. 

Part 764—Direct Loan Making 

The following discussion addresses 

the comments received on part 764. One comment stated the provision 

from current § 1910.3 that provides 

persons wishing to apply for loans will 

be encouraged to do so and that agency 

staff will explain available programs to 

applicants and assist applicants as 

needed in completing farm operating 

plans, should be included in the final 

rule. Further, the comment stated the 

agency should include the provision 

from current § 1943.11 that states the 

agency will provide socially 

disadvantaged applicants with technical 

assistance necessary when applying for 

farm ownership loans or other 

assistance to acquire inventory 

farmland. The agency believes, through 

outreach efforts, it provides explanation 

of available programs and invites 

persons wishing to apply for loans to do 

so. Further, agency personnel, as well as 

Extension agents, assist all applicants 

who request it, in completing agency 

forms and farm operating plans. It is the 

agency’s mission to provide any 

necessary assistance, including 

technical assistance, to all applicants 

and borrowers. It is not necessary to 

publish the agency’s mission or internal 

practices in the CFR. Therefore, the first 

part of the comment is not adopted. 

Section 623 of the Agricultural Credit 

Act of 1987 (7 U.S.C. 1985 note), stated 

the agency should inform socially 

disadvantaged applicants of the 

possibility of acquiring inventory 

farmland and provide technical 

assistance to such applicants, while 

section 335(c) of the Act (7 U.S.C. 1985 

(c)) mandates the agency to offer to sell 

its inventory property to beginning 

farmers. The agency advertises available 

inventory property, provides priority to 

all beginning farmers to buy the 

property, and assists applicants in 

completing forms and information 

necessary to acquire real estate in the 

agency’s inventory, as required by the 

Act. 

Section 764.51 Loan Application 

One comment stated that it is not 

clear if the agency is maintaining the 

requirement currently contained in 7 

CFR 1910.3(c) that provides ‘‘For farmer 

program loans, there will only be one 

applicant. If a husband and wife insist 

on applying as co-applicants for a 

farmer program loan and the farming 

operation is a sole proprietorship, they 

will be considered a joint operation and 

they both will have to meet the 

eligibility requirements applicable to 

the joint operation.’’ This comment, as 

well as one other comment, stated the 

Internal Revenue Service allows married 

couples operating a farm to file a joint 

tax return and does not mandate they be 

considered a joint operation; therefore, 

the agency should not treat them as joint 

operations either. The agency’s 

longstanding policy of considering 

spouses applying jointly as a joint 

operation when a formal type of entity 

does not exist is based on amendments 

to sections 302 and 311 of the Act. 

Many of the general loan making 

requirements established at 7 CFR 

764.101 are based on the provisions of 

sections 302 and 311 of the Act, which 

specifically provide ‘‘To be eligible for 

such loans, applicants who are 

individuals, or in the case of 

cooperatives, corporations partnerships, 

joint operations, trusts, and limited 

liability companies, individuals holding 

a majority interest in such entity, must 

* * *.’’ Based on this text, each 

member of an entity applying for 

assistance may not be required to meet 

all eligibility requirements, whereas 

applicants applying as an individual 

must meet all the eligibility 

requirements. Changing the agency’s 

current policy to allow spouses 

applying jointly to be considered an 

individual applicant, rather than as an 

entity applicant in the form of a joint 

operation, would require that each 

spouse meet all eligibility requirements. 

The agency believes such a change 

would result in a more restrictive 

application of eligibility requirements 

for spouses applying 


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jointly and could result in an increased 

number of these applicants being 

determined ineligible. Therefore, while 

the comments are not adopted, the 

agency did revise § 764.51 to clarify its 

policy that ‘‘Two or more applicants 

applying jointly will be considered an 

entity applicant.’’ In addition, the 

agency revised its application form to 

clarify its policy, and for applicants 

applying as a joint operation, the 

application form will serve as the entity 

agreement required as part of a complete 

application under 7 CFR 

764.51(a)(2)(iv), unless State law 

requires otherwise. 

One comment stated the agency 

should not require that a husband and 

wife who apply for a loan together be 

treated as a joint operation. The 

comment pointed out that almost all 

married individuals file taxes as a 

married couple, not a joint operation. 

The agency agrees that applicants 

should apply in the form of business 

organization that is most consistent with 

the actual operating and financial 

structure of the farm business. However, 

the Act does not permit the agency to 

make loans to multiple individuals as 

one applicant. In situations where more 

than one individual is applying for the 

same loan, the applicant will be treated 

as an entity. The agency acknowledges 

that this requirement may be confusing 

and burdensome for married couples in 

particular, since many of them will file 

income tax returns and conduct other 

business affairs as a married couple. To 

ease this burden, the agency revised this 

section to recognize the existence of a 

marriage as sufficient documentation of 

a joint operation and its structure. 

Information beyond that required of an 

individual applicant will be required 

only when necessary to evaluate 

specific financial situations or contracts 

such as prenuptial agreements, which 

are unique to the marriage, and 

pertinent to the evaluation of the loan 

request. 

Twenty-two comments were received 

on the requirement for applicants to 

provide 3 years of production and 

financial records (§ 764.51(a)(4) and (5), 

renumbered to § 764.51(b)(4) and (5)). 

Eight comments supported the agency’s 

proposal as written. Seven comments, 

while they supported the agency’s 

proposal, suggested the agency retain 

the ability to request additional years of 

records, if needed, to evaluate properly 

the applicant’s operation. The 

comments stated there are 

circumstances beyond the applicant’s 

control, such as adverse weather, 

prolonged drought, and disease, which 

would require the agency to have 

additional records at its disposal to 

accurately evaluate the applicant’s 

operation. Three comments, while they 

agreed with the proposal, stated using 

only 3 years of records may not reflect 

the farming operation’s true capabilities. 

One comment opposed the agency’s 

proposal and further stated the CFR 

does not provide that for years an 

applicant suffered a disaster, State or 

County records may be substituted for 

the applicant’s records. The agency 

believes the provision as written is 

adequate. The agency requirements 

match those of commercial lenders and 

at the same time reduce the burden 

imposed on the public. In developing an 

accurate farm operating plan, § 761.104 

excludes the production year with the 

lowest actual or county average yield if 

the applicant’s yields were affected by 

disasters during at least 2 of the 3 years. 

Therefore, no changes need to be made 

to the records requirement, and the 

comments are not adopted. 

Two other comments stated the 

agency should require applicants submit 

3 years of Federal tax returns to match 

commercial lenders’ requirements as 

well as the agency’s loan servicing 

requirements. In addition, one of the 

comments stated that by providing 

copies of Federal tax returns, the agency 

will be able to verify other information 

submitted by the applicant and will 

reduce the paperwork burden the 

agency imposes. Further, the comment 

stated errors on the applicants’ part will 

be eliminated since applicants will no 

longer have to copy information from 

their tax returns to the agency forms. 

The agency agrees with the comments 

and has revised the section to require 3 

years of farm financial records, 

including Federal tax returns, unless the 

applicant has been farming for less than 

3 years. 

One comment stated the records 

requirements under § 764.355(c)(3) 

should be revised to match the 

requirements under § 764.51(b) 

(renumbered from § 764.51(a)). The 

agency believes that the requirements 

should remain as proposed. Section 

764.355(c) is applicable only to 

emergency loan applicants, who lack 

security because of a disaster. Section 

324(d)(2) of the Act (7 U.S.C. 1964(d)(2)) 

provides that the agency may not deny 

an emergency loan because the 

applicant lacks a particular amount of 

security; however, the agency is 

authorized to make the loan provided 

the applicant has the ability to repay the 

loan. For the agency to determine if an 

applicant who lacks security has the 

ability to repay the loan, the agency 

needs access to additional records, 

beyond what is required in § 764.51(b) 

(renumbered from § 764.51(a)), to assess 

the applicant’s income generated by the 

farming operation. Therefore, the 

comment is not adopted. 

One comment supported the agency’s 

clarification that the payment of the 

credit report fee is the applicant’s 

responsibility as part of a complete 

application (§ 764.51(b)(11), 

renumbered from § 764.51(a)(11)). No 

comments were received opposing this 

clarification; therefore, no change was 

made to this paragraph. 

Three comments were received on the 

verification of an applicant’s debts 

requirement (§ 764.51(b)(12), 

renumbered from § 764.51(a)(12)). All 

comments stated it is not cost-effective 

for the agency to verify debts under 

$1,000 (two comments), or $500 (one 

comment). The agency handbook 

implementing the CFR will provide 

additional guidance regarding 

alternatives available to verify an 

applicant’s debts. Therefore, the 

comments are not adopted. 

Two comments were received on the 

‘‘additional information deemed 

necessary by the agency’’ provision 

(§ 764.51(b)(13), renumbered from 

§ 764.51(a)(13)). One comment stated 

the CFR should provide that the agency 

requires the additional information to 

better evaluate the feasibility of the 

operation and identify any possible 

security issues. The other comment 

stated the agency should identify 

general categories of information that 

may be required to evaluate an 

applicant’s operation instead of 

including a general statement that the 

agency may request additional 

information deemed necessary. The 

agency believes the provision as written 

is adequate, as adoption of the 

comments may limit the reasons 

additional information could be 

requested. As stated in the preamble of 

the proposed rule, because every 

farming operation is unique, different 

information is required from each 

applicant for the agency to assess 

properly its risk. The agency handbook 

implementing the CFR will provide 

examples of additional information that 

may be requested. Therefore, the 

comments were not adopted. 

Three comments were received on the 

Low-Documentation Operating loan (LoDoc) requirements § 764.51(c), 

renumbered from § 764.51(b)). All 

comments stated that certain 

information under § 764.51(a) 

(§ 764.51(b) in final rule) should be 

required for Lo-Doc applicants. Two of 

the comments stated the applicant 

should provide documentation that 

other credit is not available; the other 

comment stated the applicant should 

provide the legal description of the farm 


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property owned or to be acquired, when 

applicable. Section 764.51(b)(4) 

(§ 764.51(c)(4) in final rule) states the 

agency may require a Lo-Doc applicant 

to provide any other information listed 

in § 764.51(a) (§ 764.51(b) in final rule), 

as needed to make a loan determination 

in a particular case. In addition, the 

agency handbook implementing the CFR 

will provide further guidance on when 

additional information may be needed. 

Therefore, the comments are not 

adopted. 

Nine comments were received on the 

youth loan application requirements 

(§ 764.51(d) renumbered from 

§ 764.51(c)). One comment supported 

the agency’s decision to implement an 

abbreviated application process for 

youth loans. Five comments stated that 

since verification of non-farm income is 

not a requirement for Lo-Doc applicants, 

it should not be required from youth 

loan applicants either. In addition, one 

of the comments stated that since the 

youth loan project is expected to 

generate sufficient income to repay the 

loan, the agency does not need to obtain 

non-farm income information. Further, 

two of the comments stated the agency 

official should have discretion to 

determine if verification of non-farm 

income is needed for youth loan 

applicants. The agency agrees with the 

comments and has revised the CFR to 

remove the requirement for verification 

of non-farm income for youth loan 

applicants. The flexibility to require 

additional information as needed 

remains. 

Two comments stated the requirement 

found in § 764.51(a)(13) (§ 764.51(b)(13) 

in final rule) pertaining to the agency’s 

ability to request additional 

information, as needed, to evaluate an 

applicant’s eligibility and plan of 

operation should also be applicable to 

youth applicants. In addition, the 

comments stated that, for applicants less 

than 18 years old, the agency should 

require written permission from a 

parent or guardian, and require 

documentation from the project advisor 

for all youth loan applicants. Under 

§ 764.51(c)(3) (§ 764.51(d)(3) in final 

rule), the agency can request any 

information deemed necessary to 

evaluate a youth loan applicant’s 

operation. Further, under § 764.302(f), 

the agency requires the parent or 

guardian’s written permission, so it is 

not necessary to specifically list it under 

the general requirements for all youth 

loans. Therefore, the comments are not 

adopted. 

One comment stated that Indian 

youths have not purchased on credit by 

the time they are 18 years old. 

Therefore, the comment stated if the 

agency determines that additional 

information is needed, or the youth may 

be able to obtain other credit, then the 

agency should process the application 

as a guaranteed loan, as well as inquire 

with other sources of credit before 

involving a youth already intimidated 

by the process. The agency believes the 

youth loan requirements, as written, are 

adequate. In most states, individuals 

reach the age of majority at 18, 

therefore, youth loan applicants who 

have reached the age of 18, are required 

to submit the credit report fee and 

verification of debts, if any. 

Additionally, § 764.302(a) provides the 

eligibility requirements youth loan 

applicants must meet as mandated by 

Section 311(b)(1) of the Act (7 U.S.C. 

1941 (b)(1)) and includes the ‘‘no credit 

elsewhere’’ requirement. There is no 

guaranteed loan program specifically for 

youths. Therefore, the comment is not 

adopted. 

Lastly, the agency added the 

provision requiring applicants to 

provide a current financial statement as 

part of a complete application. This is 

a longstanding requirement that existed 

under the loan making and loan 

servicing regulations. The agency’s 

application form contained the financial 

statement; however, due to agency’s 

paperwork reduction efforts, the 

financial statement part was removed 

from the application form. 

Section 764.52 Processing an 

Incomplete Application 

Two comments were received on the 

provisions for processing an incomplete 

application. Both comments stated the 

CFR provides that the information 

requested by the agency must be 

received within 10 calendar days from 

the day the agency sent the second 

incomplete application notification to 

the applicant. However, the notice the 

agency uses provides applicants must 

submit the information requested or 

contact the agency within 10 days. The 

comments stated the CFR and the 

agency notice should be consistent. The 

agency agrees with the comments and 

has revised its notice accordingly. 

Section 764.53 Processing the 

Complete Application 

One comment was received on the 

processing the complete application 

provisions. The comment stated the 

agency must include in the CFR the 

requirement found in Section 333A(a)(1) 

of the Act which states the agency shall 

approve or disapprove an application 

and notify the applicant no later than 60 

days after a complete application has 

been received. In addition, the comment 

stated the reasons for the disapproval 

must be included in the notification, as 

provided in Section 333A(a)(3) of the 

Act. The agency agrees with the 

comment and has revised the section to 

add that the agency will notify the 

applicant of the decision reached and 

the reasons for any disapproval. 

Section 764.54 Preferences When 

There Is Limited Funding (Renumbered 

in the Final Rule) 

One comment was received on the 

preferences when there is limited 

funding. The comment stated the agency 

should consider funding applications 

based on the date the application was 

determined to be complete, regardless of 

whether there is a shortage of funds. 

Section 764.53 provides the order in 

which the agency processes loan 

applications and states the agency 

considers applications in the order 

received, based on the date the 

application is determined to be 

complete. The agency cannot consider a 

loan application until all the 

information required is received. 

Section 764.54 provides the preference 

order in funding complete and approved 

loan applications. The agency funds 

applications based on the date the 

application was received, whether 

complete or incomplete, because that 

date provides an easily identifiable 

benchmark that can be consistently 

applied. Therefore, the comment is not 

adopted. 

Section 764.101 General Eligibility 

Requirements 

One comment on the general 

eligibility requirements suggested that 

the requirements of sections 302 and 

311 of the Act (7 U.S.C. 1922 and 1941) 

for Farm Ownership and Operating 

loans, which allow the agency to make 

loans to entities engaged primarily and 

directly in farming in the United States, 

be added. The agency agrees and has 

revised §§ 764.152(c) and 764.252(d) to 

incorporate the requirement. In 

addition, a similar provision is 

contained in section 321 of the Act for 

emergency loans. Therefore, the agency 

revised § 764.352(c) (§ 764.352(a)(4) in 

the proposed rule) accordingly. 

Two comments were received on the 

no prior drug convictions provisions 

under § 764.101(a). One comment stated 

that, unless the agency commences 

background checks on applicants, the 

requirement should be removed from 

the CFR. Section 1764 of the Food 

Security Act of 1985 (21 U.S.C. 889) 

provides, in part, that an applicant for 

certain Federal loans or benefits cannot 

have been convicted under Federal or 

State law of planting, cultivating, 

growing, producing, harvesting or 


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storing a controlled substance within 

the previous 5 crop years. The agency 

has complied with this provision since 

it was incorporated into the law. 

Applicants are required to self-certify, 

on the agency’s application form, that 

they have not been convicted of 

controlled substance violations. If it is 

later determined the applicant provided 

false or inaccurate information on the 

application form, the agency can deny 

further benefits and take other 

appropriate action. Lastly, the proposed 

rule was based on the Food Security 

Act’s requirements; therefore, the 

comment cannot be adopted. 

The other comment stated the agency 

should add in the CFR the requirement 

that applicants have not been convicted 

of possession or distribution of a 

controlled substance. Section 862 of 21 

U.S.C. provides, in part, that applicants 

may be made ineligible for Federal 

benefits by court order as a result of a 

conviction for the distribution of 

controlled substances or any offense 

involving the possession of a controlled 

substance. Ineligibility is not automatic. 

As stated above, applicants self-certify 

that they have not been convicted of 

controlled substance violations. Further, 

both provisions are applicable to 

multiple agency programs and are 

already addressed, in part, in 7 CFR 

718.6. The agency has modified 7 CFR 

part 718 to clarify the impact of the 

statutory provisions on FLP. The 

comment, therefore, is not adopted. 

Five comments were received on the 

credit history provisions of the general 

eligibility requirements (§ 764.101(d)). 

One comment, while it agreed with the 

clause that unacceptable credit history 

is history of failures to repay past debts 

when the ability to repay was within the 

applicant’s control, stated the agency 

should incorporate an objective 

measurement of the criteria to protect 

the agency and avoid the appearance of 

disparate treatment. The proposed rule 

reiterated the agency’s established 

policy. In addition, the agency finds it 

impossible to anticipate every credit 

history scenario that may be 

encountered. An inflexible and absolute 

standard, such as a minimum credit 

score, would remove the agency’s ability 

to consider the reasons for an 

applicant’s prior credit problems. 

Therefore, the comment is not adopted. 

Another comment stated the agency 

should include in the final rule the 

circumstances currently found in 

§ 1910.5(c) that the agency does not 

automatically consider unacceptable 

credit history. The agency agrees with 

the comment and has revised the CFR 

for clarity. One comment supported the 

removal of the requirement that the 

Office of the General Counsel be 

involved when the agency believes 

applicants have not dealt with the 

agency in good faith. The agency 

addressed this issue under the ‘‘good 

faith’’ definition discussion. 

Two comments stated the agency 

should remove the requirement that an 

applicant will make a sincere effort to 

repay the loan and will devote the effort 

required to carry out the terms and 

conditions of the loan. The agency 

agrees, as it will be difficult to assess the 

efforts the applicant will make. 

However, the agency believes the 

objective requirement that the applicant 

will carry out the terms and conditions 

of the loan should remain in the CFR. 

Therefore, that part of the comment is 

not adopted. 

Six comments were received on the 

not delinquent on Federal debt 

provisions of the general eligibility 

requirements (§ 764.101(f)). Two 

comments stated the agency should 

include a definition of Federal debt in 

the CFR for clarification purposes. The 

agency agrees that a clarification is 

needed to determine if an applicant or 

borrower is in delinquent status of a 

Federal debt for purposes of automatic 

ineligibility under 31 U.S.C. 3720B. 

However, the Department of Treasury 

has responsibility to publishing 

standards determining delinquent status 

on a Federal debt, under this Debt 

Collection Improvement Act provision. 

Therefore, the agency simply has 

incorporated a reference to the 

applicable Department of Treasury 

regulation (31 CFR 285.13) in its CFR. 

Further, the agency handbook will 

clarify application of this provision in 

the consideration of loan applications. 

Three comments stated the Federal 

debt rule as written is more restrictive 

than it needs to be because the term 

‘‘delinquent borrower’’ is defined under 

§ 761.2(b) as a borrower with any 

portion of a payment to the agency that 

is at least 30 days past due. As 

addressed above on § 761.2(b), the 

agency revised the ‘‘delinquent 

borrower’’ definition to match the 

definition included in the final rule 

published on February 4, 2004. Further, 

as stated above, the Department of 

Treasury’s regulations provide when the 

borrower’s Federal debt is in 

‘‘delinquent status’’ for purposes of loan 

eligibility only. This rule incorporates 

the Department of Treasury’s statutory 

and regulatory requirements applicable 

to Federal agencies. Therefore, the 

comments are not adopted. 

One comment stated the agency 

should extend the prohibition to 

emergency loans as well to ensure 

consistency between loan programs. 

Section 3720B of the Debt Collection 

Improvement Act of 1996 (DCIA) 

generally provides that, except for 

emergency loans, borrowers who are in 

delinquent status on any non-tax 

Federal debt are not eligible to obtain 

any Federal financial assistance. The 

proposed rule was based on the DCIA; 

therefore, the comment cannot be 

adopted. 

Three comments were received on the 

managerial ability provisions of 

proposed § 764.101(h) (§ 764.101(i) in 

final rule). One comment stated the 

applicant’s managerial experience 

should be in an operation similar to the 

one the applicant proposes, as there are 

vast differences between types of 

operations. The agency believes it is not 

possible to differentiate between skills 

required by various enterprises to draw 

the distinction the comment suggested. 

In addition, the agency can require an 

applicant to take borrower training in 

areas the agency considers the applicant 

to lack adequate experience. Therefore, 

the comment is not adopted. 

One comment disagreed with the 

provision that the applicant’s 

managerial experience must have been 

obtained within the last 5 years. The 

agency believes recent training or 

experience is important for an applicant 

to have a reasonable prospect for 

success, as farming is a rapidly changing 

business and experience acquired more 

than 5 years ago may no longer be 

relevant. Therefore, the comment is not 

adopted. 

One comment stated the agency 

should add examples of documentation 

necessary to demonstrate the applicant’s 

managerial ability and clarify whether 

managerial ability covers production 

only or all aspects of the operation. The 

agency has provided extensive internal 

administrative guidance on acceptable 

documentation to demonstrate 

managerial ability, and believes 

examples of acceptable documentation 

are more appropriate for inclusion in 

the agency handbook, available on the 

agency’s website. Further, the agency 

does not want to limit applicants to a 

specific form of acceptable 

documentation and cannot provide an 

exhaustive list of acceptable 

documentation to demonstrate 

managerial ability in the CFR. The 

agency considers managerial ability to 

cover both production and financial 

management because both are required 

to ensure the applicant has reasonable 

prospects for loan repayment. Therefore, 

the comment is not adopted. 

Twenty-three comments were 

received on the general eligibility 

requirements for loans to entity 

applicants (§ 764.101(k), renamed and 


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renumbered to § 764.101(l)). Fifteen 

comments stated that the general 

eligibility requirements for entity 

applicants are unduly restrictive, 

complicated, and may prevent the 

transfer of farms to beginning farmers. 

Two comments stated that the 

requirement that all entity members 

must be involved in the operation is 

restrictive and does not take into 

consideration age and health issues. The 

comments stated the agency should 

require that only the members of the 

entity holding the majority interest be 

involved in the farming operation. One 

comment stated the requirement is too 

restrictive especially in cases where one 

family member becomes physically 

unable to assist in the farming operation 

but the other members are not able to 

buy out the physically unable member’s 

share and suggested the agency only 

require members holding a majority 

interest be involved in the operation of 

the farm. The agency agrees and has 

revised the CFR accordingly. 

Two comments stated that the 

requirement for entity members 

involved in other farming operations, 

that the other operations must not be 

larger than a family farm, is too 

restrictive because it does not take into 

consideration that entity members may 

have an interest in cooperatives to 

ensure a market for the farming 

operation’s crop. Further, the comments 

stated it would be difficult for the 

agency to obtain income information on 

the other entities in which the member 

is a participant, unless the agency 

revises the requirements applicable to 

individuals to require all entity 

members provide income information 

for any other farming operation in 

which they are participating. The 

agency agrees with the comments and 

has revised the CFR accordingly to 

clarify requirements for majority interest 

holders, members’ collective interests, 

and entity interests. 

One comment stated it is not clear if 

each farming operation must generate 

less than the maximum gross income 

threshold, as proposed in the family 

farm definition, or if the member’s 

combined share in all entities they are 

participating in must be under the 

threshold, or the combined gross 

income of all the farms must be under 

the threshold. Further, the comment 

stated the CFR appears to prohibit 

financing an applicant entity that has an 

ownership interest in another entity 

such as a finishing cooperative. As 

stated above, the agency is not adopting 

the proposed gross income requirement 

of the family farm definition. Further, 

the agency revised § 764.101(j) 

(§ 764.101(k) in final rule) in response to 

comments received on proposed 

§ 764.101(j) and (k) (§ 764.101(k) in final 

rule). Therefore, the agency believes the 

comments are no longer applicable. 

Two comments stated the family farm 

requirements for entities as stated in 

§ 764.101(j) (renamed and renumbered 

to § 764.101(k) in final rule) do not 

match the eligibility requirements for 

EM loans at § 764.352. Both comments 

stated the agency should make 

§ 764.101(j) and § 764.352 consistent. As 

stated above, the agency revised 

§ 764.101(j) and (k) extensively. In the 

final rule, § 764.101(k) provides the 

operator requirements for entities 

applicable to all loan types, except that 

paragraph (k)(3) on collective interests 

does not apply to EM loans. The 

statutory basis for this paragraph is 

found in sections 302 and 311 of the 

Act, but not in section 321 for EM loans. 

Section 764.352(j) provides EM loan 

eligibility requirements if the entity 

composition changes between the time 

the disaster occurred and the time the 

loan is closed. One EM loan eligibility 

requirement applicable to entities is that 

the entity members operated the farm at 

the time of the disaster. This 

requirement and other § 764.352 

requirements are based on section 321 

of the Act (7 U.S.C. 1961) and do not 

apply to any other loan type; therefore, 

the comments are not adopted. 

Twenty-nine comments were received 

on the entity eligibility requirements 

under the general requirements 

provisions (§ 764.101(j) and (k)). Five 

comments supported the provisions as 

written. Twenty-two comments opposed 

the provisions and stated the provisions 

as written are difficult to understand 

and follow. The agency agrees with the 

comments and has clarified the 

paragraph and further revised § 764.352 

for consistency. Two comments 

recommended that the family farm and 

entity composition requirements under 

the general requirements provisions be 

eliminated, as the requirements would 

have a negative impact on the transition 

plans for some farm families. The 

agency believes the revisions discussed 

above will address these comments and 

that elimination of the requirements is 

not necessary. Furthermore, the 

regulations as revised mirror existing 

regulatory requirements for guaranteed 

loans, as well as direct farm ownership 

and operating loans. The final rule, as 

written, eliminates inconsistencies in 

existing regulations governing 

emergency loans. 

Section 764.102 General Limitations 

One comment was received on the 

general limitations requirement that 

loan funds must be used by farms 

located in the United States 

(§ 764.102(b)(2) renumbered to 

§ 764.102(c) in final rule). The comment 

agrees that funds should not be used to 

obtain or improve land not in the 

United States, but does not agree with 

making applicants with farms split by 

the United States and Canadian border 

that have been in operation or existence 

for years ineligible for loans. Sections 

302(a) and 311(a) of the Act (7 U.S.C. 

1922 and 1941) for farm ownership and 

operating loans, respectively, provide 

that loans may be made to applicants in 

the United States. The proposed rule 

was based on the Act’s provisions; 

therefore, the comment cannot be 

adopted. 

Three comments were received on the 

highly erodible land and wetlands 

conversion provision (§ 764.102(b)(3) 

renumbered to § 764.102(d) in final 

rule). All comments stated the agency 

should include the prohibition found in 

section 363 of the Act (7 U.S.C. 2006e), 

which provides loan funds may not be 

used to drain, dredge, fill, level or 

otherwise manipulate a wetland, or in 

any activity that will impair or reduce 

the flow, circulation, or reach of water, 

except for an activity related to the 

maintenance of a previously converted 

wetland. In addition, one of the 

comments stated the words ‘‘to produce 

an agricultural commodity’’ should be 

removed. The agency agrees with the 

comments, and has revised this section 

and § 765.205(b)(10) accordingly. 

Further, a definition of ‘‘highly erodible 

land’’ has been added to § 761.2. 

Eleven comments were received on 

the noncontiguous tracts provision 

(§ 764.102(b)(5)). Three of the comments 

supported the provision while eight 

comments either opposed it in its 

entirety or stated reasons the agency 

cannot realistically apply this specific 

provision nation-wide. The agency 

considered the comments opposing the 

provision and concluded that it is not 

possible to clarify the proposed 

limitation in the CFR sufficiently, 

without making it overly burdensome 

on the agency and applicants. 

Furthermore, the agency concluded that 

there is not a policy concern associated 

with operating non-contiguous tracts. 

The changing structure of agriculture 

and increased urban uses of farmland in 

many localities require some operators 

to farm widely-dispersed tracts in order 

to assemble an economically viable 

operation. The concern addressed by the 

proposed requirement is actually that of 

financial impact. Any increased costs 

and financial inefficiencies resulting 

from operating non-contiguous tracts are 

most appropriately addressed through 

the business planning process and the 


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loan feasibility analysis, however, rather 

than being a separate limitation. 

Therefore, the agency agrees with the 

comments and has removed the 

paragraph. 

Section 764.103 General Security 

Requirements 

Twenty comments were received on 

the general security requirements 

provisions. One comment was in favor 

of requiring a lien on non-essential 

assets for all loans except beginning 

farmer downpayment and youth loans. 

The comment stated that by adopting 

this provision, the agency will eliminate 

confusion on what liens have to be 

obtained for what type loans. One 

comment stated the agency should 

apply the lien on non-essential assets 

requirement to beginning farmer 

downpayment loans, as these loans 

should not be made to borrowers with 

a significant accumulation of nonessential assets. One comment stated all 

agency direct loans, including beginning 

farmer downpayment and youth loans 

should have the same security 

requirements and that such loans are 

often the most poorly collateralized. The 

agency believes the downpayment 

requirement and the short repayment 

term for beginning farmer downpayment 

loans result in a better collateral 

position than most agency loans. Due to 

the statutorily-mandated 10 percent 

downpayment requirement, beginning 

farmers do not normally have significant 

non-essential assets. The time spent in 

monitoring non-essential assets is better 

spent in providing guidance and 

oversight to beginning farmer borrowers. 

Therefore, the suggested changes are not 

adopted. 

One comment stated the agency 

should clarify that it is the agency’s 

choice of what constitutes ‘‘best security 

available’’ when there are several 

options and that this determination is 

appealable. The comment suggested the 

agency make the loan and obtain the 

best security available to protect the 

taxpayer and the agency’s financial 

interests. The agency disagrees. The 

security requirements in part 764 

adequately describe the required and 

preferred items of security. In the rare 

cases where there are security options 

and the agency provides financing based 

on the best security available, no 

appealable adverse decision results. 

Applicants, however, can request 

National Appeals Division (NAD) 

review of the agency’s determination of 

appealability of any issue. Therefore, 

the comment is not adopted. 

One comment stated the agency 

should consider, in addition to value, 

the lien position when choosing 

between available security. The agency’s 

handbook will provide guidance to 

agency officials in considering lien 

position when choosing between 

available security. Therefore, the 

comment is not adopted. 

One comment suggested the agency 

obtain a lien on all titled assets the 

applicant owns, and provided examples 

of non-titled assets on which the agency 

should obtain a security interest. Two 

comments stated the agency should 

replace the 150 percent additional 

security requirement with a lien on all 

farm real estate for farm ownership 

loans and a lien on all chattel property 

for operating loans. In addition, one of 

the comments stated the agency should 

take a blanket lien appropriate for the 

type of loan. The agency believes these 

proposals are overly restrictive and do 

not provide the agency or applicants 

sufficient flexibility. Further, a blanket 

requirement for liens on all titled 

property would be overly burdensome 

on the agency to administer and could 

prevent qualified applicants from 

receiving credit or from obtaining part 

of their credit needs from other sources. 

Therefore, the comments are not 

adopted. 

One comment stated the agency 

should have discretion in obtaining 

more than 150 percent of security, if 

available, and if the agency’s lien will 

not prevent the applicant from obtaining 

other credit. The agency has determined 

that the existing 150 percent loan to 

value ratio is adequate. Most agency 

applicants rely on other creditors for 

part of their credit needs. A greater 

security requirement could weaken the 

applicant’s ability to obtain credit from 

other sources and would increase 

administrative burden on agency staff 

unnecessarily. Therefore, the comment 

is not adopted. 

One comment stated the non-essential 

asset value should be increased from 

$5,000 to $15,000 because taking a lien 

on an asset valued at $5,000 is a burden 

for the agency to track and adds no 

value to the agency loans. The agency 

believes that taking a lien on nonessential assets of $5,000 is worthwhile. 

The average direct operating loan is 

between $45,000 and $50,000. Assets 

that may provide a secondary source of 

loan repayment of 10 percent or more of 

the loan amount are considered 

significant, and the agency will 

continue to require liens on such assets 

to reduce potential losses. Therefore, the 

comment is not adopted. 

One comment stated the agency 

should make liquidation of nonessential assets a loan approval 

condition as an applicant unable to 

obtain other credit may realize a greater 

financial benefit from the liquidation of 

an asset than from retaining it. The 

agency believes making liquidation of 

non-essential assets a mandatory loan 

condition would potentially create 

additional financial obligations for 

applicants due to tax consequences. In 

addition, the applicant may not be able 

to sell the non-essential assets timely, 

and therefore, the applicant’s access to 

loan funds may be delayed for a 

considerable amount of time and have a 

negative impact on the farming 

operation. Therefore, the comment is 

not adopted. 

One comment stated adequate 

security should have a ‘‘market value of 

at least 100 percent of the loan amount’’

instead of ‘‘security value equal to 100 

percent of the loan amount’’. The 

agency defines both ‘‘market value’’ and 

‘‘security value’’. The difference 

between the two is that the definition of 

‘‘market value’’ does not include 

reduction for any prior liens. Therefore, 

the agency believes the provision as 

written is correct, and the comment is 

not adopted. 

One comment stated the agency 

should add in the adequate security 

provision that a guarantee from a 

Government or quasi-governmental 

organization in the case of the Pacific 

Basin where lands are held in 

communal, rather than fee simple, and 

where the U.S. Department of Justice 

lacks jurisdiction will be acceptable. 

The agency believes the provision as 

written, which allows the pledge of 

security from a third party, permits the 

agency to accept the quasi-governmental 

guarantees. Therefore, the agency 

believes no change is necessary. 

One comment stated the agency 

should replace the 150 percent security 

requirement with a lien on all assets 

used in or essential to the farming 

operation. The comment stated if the 

comment is not adopted, the agency 

should allow its officials discretionary 

authority to waive the agency’s lien on 

crops if the 150 percent requirement is 

met and the agency is not providing 

annual operating credit to produce the 

crops. Another comment stated agency 

officials should have discretionary 

authority to waive a lien on crops if the 

150 percent security requirement is met 

and the agency is not providing annual 

operating credit to produce the crops. 

As stated above, the agency believes that 

obtaining a lien on all the applicant’s 

assets may prevent the applicant from 

obtaining needed credit from other 

sources. Further, if the 150 percent 

requirement is met by other security and 

the agency does not provide funds for 

crop production, the agency does not 

obtain a lien on the crops under the 


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final rule. Therefore, the comments are 

not adopted. 

One comment stated the agency, with 

applicant input, should make the final 

decision on taking a lien on the 

applicant’s non-essential assets. The 

agency retains the discretion to 

administratively allow for applicant 

input; however, the agency needs to 

make the final decision as to the 

acceptability of loan collateral to protect 

its financial interest. Therefore, the 

comment is not adopted. 

Two comments stated it is not clear 

when the agency will take a lien on each 

non-essential asset that has a value in 

excess of $5,000. Both comments stated 

there are circumstances under which 

the agency may not be able to obtain a 

lien if the CFR text is interpreted 

literally. The agency agrees with the 

comments and has revised the CFR to 

require a lien on such assets when each 

or the aggregate value of like assets 

(such as stocks) has a value in excess of 

$5,000. 

Section 764.104 General Real Estate 

Security Requirements 

Three comments were received on the 

general real estate security requirements 

provisions. One comment stated the 

provision that the applicant must agree 

not to increase an existing prior lien 

without the written consent of the 

agency should be removed because the 

agency increases its debt by capitalizing 

interest, so other lenders should not be 

held to a higher standard. It is agency 

policy to accept junior lien positions as 

adequate collateral while other lenders, 

generally, do not. The prohibition on 

increasing a prior lien holder’s debt 

without agency consent is critical to 

limiting the agency’s loss and assuring 

that loan objectives are met. Therefore, 

the comment is not adopted. 

One comment stated the agency 

should not take leaseholds as security, 

because when the agency has taken 

leaseholds as security it has suffered 

inordinate losses and that very few 

other lenders engage in the practice. 

While the agency agrees that leaseholds 

may decline in value during the term of 

the loan, it has determined leaseholds 

serve as security for only a small 

percentage of its portfolio. Therefore, 

the comment is not adopted. 

One comment objected to the 

provision on Tribal lands held in trust. 

The comment stated the agency should 

use the current provision in § 764.8(j) 

that provides the agency will take 

Indian trust lands as security. Further, 

the comment stated if the applicant is 

required to request title reports from the 

Bureau of Indian Affairs (BIA), it should 

be stated in the CFR. Current § 764.8(j) 

incorporates BIA title status reports and 

approval requirements from 

§ 1943.19(a)(7). The agency agrees with 

the latter part of the comment and has 

revised the CFR to require the applicant 

to request BIA to furnish title status 

reports and BIA provides them and 

approves the lien. 

Section 764.105 General Chattel 

Security Requirements 

Three comments were received on the 

general chattel security requirements 

provisions. All comments stated the 

provision is too broad and requested the 

agency clarify if the same chattel 

security can be pledged for a direct and 

a guaranteed loan at the same time. The 

agency believes the provision is 

adequate as written, and it allows the 

agency flexibility needed to best meet 

the needs of applicants. The same 

chattel security could be pledged for a 

direct and a guaranteed loan. Therefore, 

the comments are not adopted. 

Section 764.106 Exceptions to Security 

Requirements 

Nine comments were received on the 

exceptions to security requirements 

provisions. Three comments stated the 

agency should take a lien on a non-farm 

residence only when other security 

property does not provide a security 

value equal to 100 percent of the loan 

amount. The comments stated that a 

lien on the non-farm residence may 

leave a family homeless if the farming 

operation is not successful. In addition, 

the comments stated the lien on the 

non-farm residence would make it 

difficult for applicants to take advantage 

of low housing interest rates and further 

impede their financial progress. One 

comment stated the agency is 

inconsistent in its security requirements 

because the agency will not obtain a lien 

on the non-farm residence but will 

obtain a lien on crops and chattels to 

meet the 150 percent security 

requirement for long-term loans. The 

comment stated crops and chattels are 

typically considered short or 

intermediate term assets for loan 

underwriting purposes. In addition, the 

comment stated the agency’s regulatory 

limits on security do not seem to be 

consistent with the Debt Collection 

Improvement Act (DCIA). Therefore, the 

comment stated the agency should 

remove § 764.106(d). The agency 

disagrees. The DCIA does not dictate 

appropriate types of loan security but 

provides collection remedies upon 

delinquency. The proposed rule 

continued the agency’s existing policy 

in protecting its financial interest as 

well as not imposing overly burdensome 

conditions on applicants. The 

requirement, as published, provides for 

some collateral margin, when available, 

to mitigate the agency’s risk. The agency 

does not want to encumber the 

applicant’s home unnecessarily for the 

reasons raised, but if the applicant 

becomes delinquent and loan servicing 

under 7 CFR part 766 is required to 

bring the account current, the agency 

will take a lien on the non-farm 

residence at that time if it has not 

already. Therefore, the comments are 

not adopted. 

One comment stated the agency 

should use, in place of § 764.106(d)(2), 

the language from existing 7 CFR 

1941.19(c) because it provides 

safeguards for applicants’ non-farm 

residence. The agency believes 

proposed § 764.106(d)(2) provides the 

same safeguards as 7 CFR 1941.19(c); 

therefore, the comment is not adopted. 

Three comments stated the agency 

should clarify the exception applicable 

to special collateral accounts the 

applicant uses for the farming operation. 

Two of the comments stated the 

provision as proposed, can include 

almost any asset of the applicant. The 

agency agrees with the comments and 

has revised § 764.106(e) to refer to 

working capital accounts the applicant 

uses for the farming operation. 

One comment stated the agency 

should add the following to the security 

exception provision: ‘‘when the U.S. 

Department of Justice has no 

jurisdiction or has advised the agency 

that they will not litigate civil cases in 

areas lacking a Federal District Court.’’

The agency believes the existing 

provision under § 764.106(c), which 

states the agency will not take as 

security property on which it cannot 

obtain a valid lien adequately addresses 

this concern. Therefore, the comment is 

not adopted. 

Section 764.107 General Appraisal 

Requirements for Real Estate and 

Chattel 

Four comments were received on the 

general appraisal requirements for real 

estate and chattel provisions. All 

comments stated the security value of 

livestock and crop production should 

remain 100 percent of the amount 

loaned for annual operating and family 

living expenses instead of 100 percent 

of the projected annual income 

generated from livestock and crop 

production. The agency agrees that the 

loan amount is a known value, while 

the projected annual income from 

livestock and crops is an estimate, 

which may be overstated. Use of the 

projected annual income may 

significantly overstate the security value 

of the anticipated production and result 


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in additional risk and higher loan losses 

to the agency in the event the operation 

fails. The agency agrees with the 

comments and has revised the CFR 

accordingly. 

Section 764.108 General Insurance 

Requirements 

Six comments were received on the 

general insurance requirements 

provisions. One comment stated the 

term ‘‘economically feasible’’ under 

§ 764.108(b) is not clear. In addition, the 

comment stated chattel security need 

only be covered by hazard insurance if 

it is available, and the cost of the 

insurance does not exceed its benefit. 

The agency agrees with the comment 

and has revised the CFR text 

accordingly. 

Three comments stated § 764.108(d) 

and (e) seem to conflict since 

subparagraph (d) requires crop 

insurance unless the applicant signs a 

waiver for emergency crop loss 

assistance and subparagraph (e) requires 

crop insurance must be obtained for 

crops providing adequate security. The 

agency has revised the CFR to clarify 

that these are separate requirements. 

The catastrophic risk protection level of 

crop insurance is a minimum 

requirement under 7 U.S.C. 1508 (b)(7) 

and section 371 of the Act. Insurance for 

adequate security is an additional 

administrative requirement. 

One comment stated the proposed 

rule did not provide guidance on the 

type of insurance required, amount of 

insurance or insurance waiver 

conditions. In addition, the comment 

stated it is not clear if including the 

crop insurance premium does not result 

in a feasible plan, would the decision to 

deny a loan be upheld if a feasible plan 

can be developed without crop 

insurance. As stated above, the agency 

has revised the insurance requirements 

for clarification and elimination of 

conflicts. Therefore, this part of the 

comment is not adopted. The agency 

considers crop insurance premiums to 

be essential farm operating expenses 

and the applicant can utilize operating 

loan funds to pay the premiums. 

Further, the agency requires the 

applicant to obtain crop insurance for 

growing crops used to provide adequate 

security for the agency loan. There is no 

economic feasibility condition. 

Therefore, no change has been made in 

response to the latter part of the 

comment. 

One comment stated there is a conflict 

between the requirements for FLP loans 

and Farm Program disaster benefits 

regarding insurance. The comment 

stated that for FLP loans an applicant 

must either have crop insurance or sign 

a crop insurance waiver, but to receive 

Farm Program benefits after a disaster, 

an applicant must either have crop 

insurance or not have insurance. The 

agency believes the CFR as written 

provides clear guidance on the 

insurance requirements applicable to 

FLP loans under the applicable statutes 

noted above. Therefore, the comment is 

not adopted. 

Section 764.151 Farm Ownership Loan 

Uses 

One comment stated the agency 

should extend the provision of 

refinancing a temporary bridge loan, 

made by a commercial lender for the 

acquisition of a farm, to loans made 

under a private contract for deed. The 

comment stated contracts for deed are a 

major source of funds for beginning 

farmers and the restriction does not 

benefit the agency. Section 303(a)(1)(E) 

of the Act provides that farm ownership 

loan funds can be used to refinance 

temporary bridge loans made by 

commercial or cooperative lenders to 

farmers to acquire a farm in certain 

instances. In addition, section 310F of 

the Act authorizes the Secretary to 

establish a pilot program to provide 

guarantees of loans made by private 

sellers on a contract land-sale basis to 

qualified beginning farmers. The agency 

implemented Section 310F in a Notice 

of Funds Availability published in the 

Federal Register on September 4, 2003 

(68 FR 52557–52562). The proposed 

rule was based on the Act’s provisions, 

which do not authorize refinancing 

contracts for deed on a permanent basis; 

therefore, the comment cannot be 

adopted. 

Section 764.152 Eligibility 

Requirements (Farm Ownership Loans) 

Three comments were received on the 

prior debt forgiveness provisions 

(§§ 764.152(b) and 764.252(b)). One 

comment stated the agency should 

revise § 764.152(b) to include all the 

debt forgiveness conditions found under 

§ 764.252(b) to make the requirements 

for farm ownership and farm operating 

applicants the same. One comment 

stated that applicants that have caused 

losses to the agency through debt 

forgiveness should not be eligible for 

loans. The comment stated the agency 

receives limited funding each year and 

it should direct it to applicants who 

have not received debt forgiveness. In 

addition, the comment stated the 

agency’s reputation and integrity is 

harmed from the policy of allowing any 

applicants who received previous debt 

forgiveness to be eligible for loans. The 

third comment objected to the provision 

that applicants that have received debt 

forgiveness due to a Presidentiallydesignated emergency are still eligible 

for operating loans. The comment stated 

that the determination if the debt 

forgiveness was due to a Presidentiallydesignated emergency would be very 

subjective and ripe for appeals. The 

agency disagrees. Section 373(b)(1)(A) of 

the Act provides that borrowers that 

have received debt forgiveness on a 

direct or guaranteed loan, generally are 

no longer eligible for farm ownership or 

operating loans. In addition, section 373 

(b)(2) of the Act provides limited 

exceptions under which an annual 

operating loan may be made to 

borrowers that received debt 

forgiveness. The proposed rule was 

based on the Act’s provisions; therefore, 

the comments cannot be adopted. 

Two comments stated changes to 

Federal and State laws on property 

ownership have made the agency’s 

owner-operator requirement a barrier for 

some applicants. The comments stated 

if owners of the real estate are the same 

persons who own the entity operating 

the real estate, the agency should 

consider the owner-operator 

requirement to be met. The agency 

understands that the entity ownership 

requirement may be a barrier in some 

cases; however, the agency’s application 

of the owner-operator requirement to 

entity applicants is consistent with 

section 302 of the Act. The agency does 

not choose to make a policy change at 

this time. 

In the proposed rule, the agency 

inadvertently incorporated the 

definition of ‘‘participated in the 

business operation of a farm’’ under 

§ 764.152(d). The agency received nine 

comments requesting the definition be 

moved to § 761.2(b) and § 764.152 

should only provide FO loan eligibility 

requirements. The agency agrees with 

the comments and has revised the CFR 

accordingly. 

Four comments were received on 

acceptable documentation of an 

applicant’s participation in the business 

operations of a farm (§ 764.152(d)). One 

comment stated the agency should 

either publish guidelines in the CFR on 

what it considers acceptable 

documentation or develop a form for 

applicants to provide documentation. 

One comment stated the agency should 

publish in the CFR acceptable 

documentation required for applicants 

to establish participation in the business 

operation of a farm. The comment stated 

the agency requires applicants to 

provide tax returns, with no alternative 

form, to verify the applicant’s 

participation in the business operation 

of a farm. In addition, the comment 

stated the agency should develop a 


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standard form for applicants to 

complete when applicants claim 

participation in the business operation 

of a farm by virtue of being raised on a 

farm. The agency believes the rule as 

written provides the flexibility needed 

for applicants to document their 

participation in the business operation 

of a farm. Typically, documents include 

tax returns, FSA records, or W–2’s. In 

addition, because of the different skills 

acquired through participation in 

diverse agricultural enterprises by the 

applicant, it will be difficult for the 

agency to develop a standard form to 

cover all potential farming 

participations that may occur 

throughout the country. Applicants can 

address their participation in the 

business operations of a farm when 

documenting their farming experience. 

Moreover, in the agency’s experience, 

applicants have not had difficulty in 

meeting the requirement as is included 

in current § 1943.12(a)(6). Therefore, the 

comments are not adopted. 

One comment stated the example of 

participation by the applicant having 

been raised on a farm should be 

removed, as it may have occurred more 

than 50 years ago. The agency believes 

it is unlikely the situation the comment 

stated will occur, because as stated 

under the general eligibility requirement 

provisions, the applicant must possess 

managerial ability by farming 

experience obtained within the last 5 

years. Therefore, the comment is not 

adopted. 

One comment stated the eligibility 

requirements should require timely 

experience relevant to the proposed 

operation to insure a greater success rate 

for applicants as they will have recent 

experience in the ever-changing 

agricultural technology and practices. In 

addition, the comment stated the 

requirement the applicant must have 

participated in the business operation of 

a farm in 3 out of the last 10 years 

currently in effect is often 

misunderstood by applicants, who 

believe they are eligible for farm 

ownership loans if they farmed 8, 9, and 

10 years ago. The agency believes the 

farm ownership requirements as written 

are clear and accurately reflect the 

statutory requirements in section 302 of 

the Act. As stated previously, the 

agency does not differentiate between 

the skills required to operate various 

types of farms. The agency cannot make 

the farming experience timeframe any 

different than specified in section 

302(b)(1) of the Act and does not choose 

to make the requirements overly 

burdensome to beginning farmers. 

Therefore, the comment is not adopted. 

One comment was received on the 

provision that an applicant for a farm 

ownership loan must not have received 

a farm ownership loan. The comment 

stated the provision as written implies 

that an applicant is only eligible for one 

farm ownership loan. The agency 

disagrees. The proposed language sets 

out alternatives. The agency, however, 

has clarified that an applicant must 

‘‘satisfy at least one of the following 

conditions’’, and lists the alternative 

requirements from section 302 of the 

Act. Generally, the applicant may have 

received a prior farm ownership loan, 

but such loan may not have been 

outstanding for more than a total of 10 

years prior to the new closing date. 

Two comments were received on the 

requirement that an applicant for a farm 

ownership loan had been the operator of 

a farm. One comment stated that 

changing the requirement is contrary to 

wise supervised credit and will be a 

disservice to young individuals since, 

under the new rule they will be eligible 

for loans without the necessary ability 

to make wise financial decisions, as 

evidenced by filing Schedule F with 

their Federal tax returns. The other 

comment stated that the 3-year 

requirement for owning, managing or 

operating a farm should not just be 

stated as ‘‘a year’s complete production 

and marketing cycle.’’ Section 302(b)(1) 

of the Act provides that eligible 

applicants for farm ownership loans are 

farmers who have participated in the 

business operations of a farm for not 

less than 3 years. The proposed rule was 

based on the Act’s provisions; therefore, 

the comments cannot be adopted. 

The agency inadvertently omitted in 

the proposed rule the current 

requirement that the entity must be 

authorized to own and operate a farm in 

the state in which the farm is located. 

Therefore, the agency is adding the 

requirement in the final rule at 

§ 764.152(c). 

Lastly, the agency revised § 764.152(e) 

in the final rule because the transition 

rule established under section 302(b)(2) 

of the Act (7 U.S.C. 1922) is no longer 

applicable. 

Section 764.154 Rates and Terms 

(Farm Ownership Loans) 

Three comments were received on the 

rates and terms provision pertaining to 

the joint financing agreements. One 

comment supported the joint financing 

agreement provision stating that the 

lower interest rate offered through the 

joint financing agreements benefits 

beginning farmers. Two comments 

stated the agency should extend it to all 

loan types. Section 307(a)(3)(D) of the 

Act (7 U.S.C. 1927(a)(3)(D)) provides the 

minimum interest rate for a direct farm 

ownership loan made as part of a joint 

financing arrangement. The Act does 

not specifically authorize joint financing 

agreements with different interest rates 

for any other type loans. The proposed 

rule was based on the Act’s provisions; 

therefore, the comments cannot be 

adopted. 

Section 764.203 Limitations 

(Beginning Farmer Downpayment Loan) 

Three comments were received on the 

limitations provisions under the 

beginning farmer downpayment loan. 

One comment stated the Agency should 

work with Congress to raise the limit 

from $250,000 to $500,000. The agency 

believes the impact of any legislative 

change to increase the beginning farmer 

downpayment loan limit must be 

carefully analyzed as the Office of 

Management and Budget (OMB), along 

with the President play a role in the 

appropriations process. Therefore, the 

agency is limiting this rule to revising 

its regulations within its current 

statutory authority. However, the 

Administration’s 2007 Farm Bill 

proposal recommends that the loan 

limit for the direct loans be increased. 

The Agency will make the appropriate 

regulatory changes in the future, in the 

event the Administration’s proposal is 

adopted. Two comments stated that this 

limit is too low for their areas since 

buying adequate acreage to operate a 

farm efficiently far exceeds the limit. 

Section 310E(c)(2) of the Act (7 U.S.C. 

1935(c)(2)) provides the maximum 

beginning farmer downpayment loan 

limit. The proposed rule was based on 

the Act’s current provision; therefore, 

the comments cannot be adopted. 

However, as provided above, the agency 

will make the appropriate regulatory 

changes should the Administration’s 

proposal to increase the direct loan 

limits be adopted. 

Section 764.251 Operating Loan Uses 

Fifteen comments were received on 

the operating loan uses. One comment 

stated the operating loan uses should be 

clarified to indicate whether income 

taxes can be paid for the current or prior 

year and personal residence or personal 

car payments can be made with 

operating loan funds. The operating 

loan uses as written provide for the 

payment of family living and farm 

operating expenses. The term ‘‘family 

living expenses,’’ as defined in 

§ 761.2(b), includes ‘‘the cost of 

providing for the needs of family 

members.’’ The agency believes that 

income taxes, personal residence and 

personal car payments are considered a 

‘‘cost of providing for the needs of 


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family members’’ and can, therefore, be 

paid using operating loan funds. The 

agency believes no additional revisions 

to the operating loan uses are necessary 

since it would be impossible to develop 

an all-inclusive list of family living 

expenses. 

Three comments supported the 

provision that up to $15,000 of 

operating loan funds may be used for 

real estate repairs or improvements. 

Eleven comments either wanted to raise 

the limit of operating loan funds to 

$20,000 (1 comment), $25,000 (1 

comment), $30,000 (2 comments), 

$50,000 (3 comments), or did not want 

to impose a limit as long as the farming 

operation’s cash flow will sustain the 

amount used for a 7 year term without 

balloon payments (3 comments). 

Further, one of the comments stated the 

direct loan program should match the 

guaranteed loan program, as there is no 

limit on the amount of guaranteed 

operating loan funds that can be used 

for real estate repairs. In response, the 

agency revised the CFR to provide that 

direct operating loan funds can be used 

to pay costs for minor real estate repairs 

or improvements, provided the loan can 

be repaid within 7 years. The agency 

agrees that the direct loan provision 

should be consistent with the 

guaranteed loan provision. 

Lastly, the agency inadvertently 

omitted the current provision that the 

applicant may not use Lo-Doc loan 

funds for refinancing debt. Therefore, 

the agency added the provision under 

§ 764.251(j)(1). 

Section 764.252 Eligibility 

Requirements (Operating Loans) 

Nine comments were received on the 

eligibility requirements for operating 

loans. One comment stated the agency 

should change ‘‘CONACT’’ to ‘‘Act’’ and 

remove the definition of ‘‘debt 

forgiveness’’ found in § 764.252(b). In 

addition, the comment stated the 

applicant should be eligible for loans by 

paying the amount of the debt 

forgiveness the applicant received. The 

agency agrees. The agency changed the 

references from ‘‘CONACT’’ to ‘‘Act’’

throughout the final rule, wherever they 

occurred, and revised the definition of 

‘‘debt forgiveness’’ in § 761.2 to provide 

that the term does not include prior debt 

forgiveness that is repaid in its entirety. 

One comment stated the one-time 

debt forgiveness exception due to a 

Presidentially-declared disaster is also 

available to applicants farming in 

contiguous counties. The agency agrees 

with the comment and has revised the 

CFR accordingly. This change is 

allowed by section 373(b) of the Act (7 

U.S.C. 2008h(b)) and is consistent with 

the agency’s policy of providing EM 

loans in these contiguous counties. 

Seven comments were received 

requesting the agency clarify that 

applicants who had reached the 

statutory limits were no longer eligible 

for OL. In the preamble of the proposed 

rule, the agency provided ‘‘The OL loan 

eligibility requirement that the 

applicant and any persons signing the 

promissory note may not close an OL 

loan in more than 7 calendar years will 

be modified to apply only after 

December 31, 2002. This change is 

required by section 255 of the 

Agricultural Risk Protection Act of 

2000, Public Law 106–224, enacted on 

June 20, 2002.’’ However, the agency 

removed the appropriate regulatory text 

since the agency’s authority to make 

operating loans to applicants that had 

reached the statutory term limits 

expired on December 31, 2002. As 

acknowledged in the preamble, the 

agency attempted to incorporate all the 

regulatory and statutory revisions 

required since calendar year 1999. It 

was due to agency oversight the above 

text was included in the proposed rule 

even though the regulatory text was 

removed. Therefore, the agency will 

take no further action on these 

comments. 

One comment stated the agency 

should revise § 764.252(d) (§ 764.252(e) 

in the final rule) to provide that 

beginning farmers are eligible for direct 

operating loans for 10 years as provided 

under section 311 of the Act. The 

agency agrees that beginning farmers are 

not subject to the 7-year limitation 

under that statutory provision and has 

revised the CFR accordingly. 

Five comments were received on the 

one time waiver for operating loan term 

limits under the eligibility requirements 

provisions. One comment disagreed 

with the continuous waivers of the 

operating loan term limits enacted by 

Congress. The comment stated the term 

limits either need to be removed 

completely or implemented fully as 

required by section 311(c) of the Act. 

Two comments supported the removal 

of the term limits and stated eligibility 

for loans should be based on the 

applicant’s credit worthiness instead of 

on the number of years an applicant has 

obtained loans. Both comments, as well 

as an additional comment, stated that if 

the term limits remain in effect, the 

agency should use the term ‘‘financially 

viable operation’’ instead of ‘‘feasible 

plan’’ in § 764.252(f)(1) 

(§ 764.252(e)(4)(i) in final rule). Sections 

311(c)(1) and (4) of the Act (7 U.S.C. 

1941 (c)(1) and (4)) provide the term 

limits and waiver provisions for 

operating loans. Paragraph (c)(4)(B)(i) 

specifically allows a borrower to receive 

a one time waiver of 2 years, if ‘‘the 

borrower has a viable farm...operation.’’

The agency has interpreted the 

‘‘financially viable operation’’ to mean 

an operation that will improve over time 

so that agency assistance is no longer 

needed. The term ‘‘feasible plan’’

indicates the operation will generate 

inflows to cover outflows but it is not 

necessarily reflective of a borrower’s 

ability to graduate to commercial credit 

or to provide for replacement of capital 

items and long-term growth. The 

proposed rule was based on the Act’s 

provisions; therefore, the comments 

cannot be adopted. 

One comment stated section 

311(c)(4)(A) of the Act (7 U.S.C. 

1941(c)(4)(A)) provides the Secretary 

shall waive the operating loan term 

limits for farmers whose farm and 

security instruments are subject to the 

jurisdiction of an Indian tribe if the 

Secretary determines that commercial 

credit is not generally available; 

therefore, the comment stated 

§ 764.252(g) (renumbered to 

§ 764.252(e)(2)) needs to reflect the 

statutory requirement. The agency 

agrees with the comment and has 

revised § 764.252(e) accordingly. 

In the proposed rule, the agency 

inadvertently stated that applicants 

‘‘may request a one-time waiver of OL 

term limits * * *’’ However, the 

agency’s current policy is to 

automatically consider a waiver for 

applicants who have reached the OL 

term limits and does not require a 

formal waiver request. Therefore, the 

agency revised § 764.252(e)(4) to 

provide that ‘‘On a case-by-casis basis, 

[the applicant] may be granted a onetime waiver of OL term limits * * *’’

Lastly, the agency believes the Act’s 

provisions regarding waiver of the 

operating term limit were not clearly 

stated in the proposed rule for entity 

applicants. Section 311 of the Act, 

which addresses eligibility requirements 

for operating loans, including both the 

term limit and the one-time waiver, 

specifically provides ‘‘To be eligible for 

such loans, applicants who are 

individuals, or, in the case of 

cooperatives, corporations, 

partnerships, joint operations, trusts, 

and limited liability companies, 

individuals holding a majority interest 

in such entity, must * * *’’ Proposed 

§ 764.252(f)(2) provided that one 

condition for obtaining a waiver is the 

applicant ‘‘Applied for commercial 

credit from at least two lenders.’’ As 

proposed, the rule could be interpreted 

to imply that the applicant and all 

members of the entity must ‘‘be unable 

to obtain commercial credit’’ when the 


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Act clearly provides the requirement 

applies only to the entity applicant and 

entity members holding a majority 

interest. Therefore, the Agency clarified 

the waiver requirements in the final rule 

by revising § 764.252(e)(4)(ii) to read the 

applicant ‘‘And in the case of an entity, 

the members holding the majority 

interest, applied for commercial credit 

from at least two lenders and were 

unable to obtain a commercial loan, 

including an Agency-guaranteed loan.’’

Section 764.254 Rates and Terms 

(Operating Loans) 

Three comments were received on the 

rates and terms provisions for operating 

loans. One comment stated that balloon 

installments should be authorized 

specifically for direct operating loans as 

they are for guaranteed operating loans. 

One comment stated the rule establishes 

a 7-year maximum term for operating 

loans; however, the current agency 

regulations permit unequal and balloon 

installments. In addition, the comment 

stated it is not clear if unequal and 

balloon installments will be allowed 

under the new rule. The last comment 

stated the agency should incorporate the 

conditions currently in regulations 

under which the agency will allow 

longer annual operating loan repayment 

terms. The agency agrees with the 

comments and has added 

§ 764.254(b)(2)(i) and (ii) to continue 

existing policies in these areas. 

Section 764.255 Security 

Requirements (Operating Loans) 

Two comments were received on the 

operating loan security provisions. Both 

comments stated the agency omitted the 

requirement to obtain a first lien on all 

property or products acquired or 

produced with loan funds and the 

requirement to keep the same lien 

position when refinancing secured 

debts. The comments are correct, in 

part, as the proposed rule simply 

required a lien, rather than a ‘‘first lien’’

as provided in existing regulations at 7 

CFR 1941.19(a)(1). However, existing 

regulations require ‘‘a first lien on all 

property or products acquired, 

produced, or refinanced with loan 

funds,’’ not just ‘‘property or products 

produced and acquired.’’ The agency 

does believe, however, that the 

comments have merit, as it may not be 

possible for an applicant to ensure the 

agency can obtain a higher lien position 

than the creditor being refinanced. 

Therefore, the agency is adopting the 

comments as recommended and has 

revised the CFR accordingly. 

Section 764.301 Youth Loan Uses 

Twenty comments were received on 

the youth loan uses. Four comments 

supported the provisions as proposed. 

Four comments stated the agency 

should continue making youth loans 

under the same provisions currently 

utilized. Eleven comments opposed the 

agency’s proposal and stated that since 

the project advisors are involved in 

agriculture, the youth loan project will 

be agriculture-related. In addition, some 

of the comments stated that even if the 

project advisor is not involved in 

agriculture, youth loans provide 

practical business skills and educational 

experience. Further, two of the 

comments stated youth loan funds 

should also be used for community 

projects and help children ‘‘stay out of 

trouble’’ after school. One comment 

stated it is not clear if the youth loan 

project should meet all of the following: 

be a modest, income-producing, 

agriculture-related, educational project. 

The agency disagrees. As stated in the 

preamble of the proposed rule, the 

Youth Loan Program’s objective is to 

provide credit to rural youths to 

establish and operate modest, incomeproducing projects in connection with 

4-H clubs, FFA, and similar 

organizations. However, through the 

years, the objectives of the Youth Loan 

Program have been interpreted 

inconsistently to allow loan funds to be 

used for projects not related to 

agriculture. The agency’s proposal was 

intended to clarify that section 311(b)(1) 

of the Act (7 U.S.C. 1941(b)(1)) 

specifically waives only the managerial 

ability and borrower training 

requirements applicable to operating 

loans. The statute does not waive the 

loan purposes authorized in section 312 

(a) of the Act; therefore, projects should 

be agriculture-related. Therefore, the 

comments are not adopted. 

Section 764.302 Eligibility 

Requirements (Youth Loans) 

Fifty comments were received on the 

eligibility requirements for youth loans. 

In the preamble of the proposed rule, 

the agency solicited comments on 

lowering the youth applicant’s age limit 

to 8 years to coincide with the age 

limitation to participate in 4–H clubs 

(proposed § 764.302(b)). The agency 

received 35 comments. Twenty-three 

comments opposed lowering the youth 

applicant’s age limit, while seven 

comments supported it. Three 

comments stated the agency should not 

change the youth applicant age limit. 

Two comments stated the agency should 

not lower the age limit but instead 

should increase it from 10 years of age 

to 12 or 14. In addition, one of the 

comments stated the loan limit for 

youth applicants younger than 14 years 

old should be $1,000 instead of $5,000. 

The agency considered all comments 

received and determined that lowering 

the age for youth loan applicants will 

not enhance applicants’ chances of 

becoming successful farmers. Therefore, 

the agency is not lowering the youth 

loan applicants’ age limit. 

Twelve comments were received on 

the provision that youth loan applicants 

reside in a rural area, city, or town with 

a population of 50,000 or fewer people 

(proposed § 764.302(c)). Four comments 

supported the agency’s proposal as 

written. Two comments stated the 

provision is unnecessarily restrictive 

and will prevent minority children 

living in urban areas, whose parents 

own or operate farms outside of the 

urban area, from participating in this 

valuable program. One comment stated 

youth loans should be available to 

youths residing in towns with 

populations of less than 10,000. One 

comment supported increasing the 

population’s limit to 20,000 because 

cities with larger populations are not 

considered rural areas. In addition, the 

comment stated that by increasing the 

population limit, demand for youth 

loans will increase and fewer funds will 

be available to make operating loans to 

farmers. One comment opposed 

increasing the population to 50,000 

inhabitants for youth loans. One 

comment stated the limitation should be 

removed. One comment stated there is 

no need to impose additional 

population restrictions since youth loan 

funds will be used for agriculturally 

related projects only. One comment 

stated that by increasing the population 

limit to 50,000 or fewer inhabitants and 

restricting the use of youth loan funds 

to agricultural projects only, the agency 

is not making the Youth Loan Program 

more accessible than it currently is. 

These opposing comments do not 

consistently support a specific 

alternative to the proposed Youth Loan 

Program provisions. The agency 

believes that the Youth Loan Program, 

as proposed, will provide valuable 

educational opportunities for youths to 

experience farming. Therefore, no 

changes have been made in response to 

these comments. 

One comment stated the agency 

should remove the home economics 

teacher as an acceptable project advisor 

since the agency proposed to finance 

only agriculture-related projects through 

the youth loan program. The agency 

agrees with the comment and has 

revised the CFR accordingly. 


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One comment stated the agency 

should include a definition for a youth 

loan project. The comment stated that 

sometimes the project advisor provides 

a written statement that the project 

under consideration is educational, 

agriculture-related and beneficial to the 

applicant; however, the project advisor 

does not monitor the applicant’s 

progress with the project. The comment 

stated, if the applicant has difficulties, 

the project advisor is not available to 

provide advice as required or needed. 

The project advisor mainly helps the 

youth loan applicant develop the 

project. The agency cannot predict in 

advance the advisor’s willingness to 

provide assistance at a future date and 

has no available means to exercise any 

authority over the advisor. However, the 

agency provides assistance to youth 

loan borrowers experiencing difficulties. 

The agency believes a definition for a 

youth loan project is not needed since 

§ 764.301 provides the types of projects 

for which a youth loan may be made; 

therefore, the comment is not adopted. 

One comment stated the word 

‘‘supervised’’ should be replaced by the 

word ‘‘mentored’’ in proposed 

§ 764.302(d). The agency believes the 

term used in the CFR and the term 

provided in the comment are largely the 

same, so the change would not make a 

meaningful difference. Therefore, the 

comment is not adopted. 

The agency inadvertently omitted in 

the proposed rule the eligibility 

requirement that a youth loan applicant 

not have caused the Agency a loss by 

receiving debt forgiveness currently 

established in 7 CFR 1941.12(a)(8). The 

agency, therefore, has incorporated the 

provision in the final rule by adding 

new § 764.302(b) and redesignating 

proposed § 764.302 paragraphs (b) 

through (e) as paragraphs (c) through (f). 

Section 764.305 Security 

Requirements (Youth Loans) 

Nine comments were received on the 

youth loan security requirements 

provisions. One comment supported the 

agency’s proposal not to continue the 

150 percent security requirement for 

youth loans. One comment stated the 

agency should require a cosigner for 

youth loans. One comment stated if the 

agency will not continue the 150 

percent security requirement, the 

agency should require a cosigner for 

youth loans like the Department of 

Education for student loans. Six 

comments stated the security 

requirements for youth loans should 

remain the same as for operating loans. 

The agency believes youth loan 

applicants have minimal assets beyond 

those acquired with loan funds. In 

addition, the agency has a limited loss 

exposure for youth loans because of the 

$5,000 loan limit; therefore, the 

additional security requirements for 

operating loans would impose a 

disproportional administrative burden 

on the agency. Further, DCIA provisions 

provide more effective and less costly 

collection tools than disposition of 

collateral when the loan amount is 

small. Lastly, youth loans are made to 

finance income producing, agriculturerelated projects unlike student loans for 

which repayment of principal is 

generally deferred until a date in the 

future. Therefore, the agency does not 

believe a cosigner is necessary when the 

cash flow projection reflects a feasible 

plan. However, the agency may still 

require a cosigner for youth loans when 

the agency determines there is not 

adequate cash flow for the proposed 

loan otherwise. Therefore, the 

comments are not adopted. 

Section 764.351 Emergency Loan Uses 

Two comments stated it is not clear if 

an agency direct loan can be refinanced 

with chattel physical loss loan funds or 

production loss loan funds. Proposed 

§ 764.351 contains the conditions for 

refinancing debts, including agency 

debt. The agency did not propose to 

make policy changes to the existing 

emergency loan regulation. Therefore, 

the comments are not adopted. 

Three comments stated the agency 

should clarify in the final rule that only 

essential property will be repaired or 

replaced with emergency loan funds. 

The agency agrees with the comments 

and has revised the CFR accordingly. 

One comment stated the agency 

should revise § 764.351(a)(2)(v) to 

provide for ‘‘essential farm operating 

and family living expenses’’ instead of 

‘‘essential household expenses.’’ The 

agency agrees with the comment and 

has revised the CFR accordingly. Lastly, 

the agency added the words ‘‘not from 

breeding stock’’ from current 

§ 764.3(a)(2)(v) that were inadvertently 

omitted in the proposed rule. 

The agency inadvertently omitted the 

words ‘‘except that such costs shall not 

include the payment of bankruptcy 

expenses’’ from current § 764.3(b)(1). 

Therefore, the agency revised 

§ 764.351(b)(1) accordingly. 

Section 764.352 Eligibility 

Requirements (Emergency Loans) 

Seven comments were received on the 

eligibility requirements for emergency 

loans. One comment suggested that only 

the primary operators should meet the 

eligibility requirements if the ownership 

structure of a family farm changes from 

the time a qualified loss occurred to the 

time the emergency loan is closed. The 

agency believes adoption of the 

comment will result in more permissive 

requirements for entities that underwent 

a change in their ownership structure 

than for entities that remained the same. 

Further, the agency believes that change 

in the ownership structure does not 

justify treating those entities any 

different from entities that did not 

change ownership structure. Therefore, 

the comment is not adopted. 

Two comments stated the agency 

should make an eligibility requirement, 

instead of a limitation, that the physical 

property must have been covered by 

general hazard insurance at the time the 

disaster occurred. The agency disagrees. 

The property insurance requirement 

should not be made an eligibility 

requirement because applicants may 

have insured only the most valuable 

physical property, and, therefore, would 

be disqualified for assistance. Therefore, 

the comments are not adopted. 

One comment stated the agency 

should require the applicant to obtain a 

formal denial on a loan application that 

specifies the commercial lender’s 

reasons for denying credit to the 

applicant. The comment stated written 

declinations are not formal denials of 

credit nor do they represent true 

analysis of the applicant’s credit 

worthiness. In addition, the comment 

stated commercial lenders provide 

written declinations to their clients as a 

customer service. Another comment 

stated the agency should remove the 

requirement that applicants, depending 

on the amount of the loan request, 

provide up to 3 written declinations of 

credit. The comment stated if applicants 

seem to be able to obtain credit 

elsewhere, they should apply for a loan 

from a commercial lender. The agency 

disagrees. Section 322(b) of the Act (7 

U.S.C. 1962(b)) provides the specific 

number of written declinations, based 

on the loan amount requested, 

applicants for emergency loans have to 

provide the agency. Further, section 

322(b) states the specific reasons that 

have to be included in the declination 

letter provided by the commercial 

lender. The agency has incorporated 

these statutory provisions in 

§ 764.352(e). While there may be cases 

where commercial lenders provide 

declinations of credit letters to their 

customers, the agency has the flexibility 

under § 764.352(e)(4) to contact other 

commercial lenders within reasonable 

proximity of the applicant and make an 

independent determination of the 

applicant’s ability to obtain credit 

elsewhere. Lastly, the agency based both 

the proposed as well as the final rule on 

the Act’s provisions; therefore, no 


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policy changes have been made in 

response to the comments. 

One comment stated the test for credit 

requirement will keep a wealthy partner 

from receiving disaster benefits. 

Therefore, the comment stated the 

requirement that owners holding a 

majority interest in the entity applicant, 

if not related by blood or marriage, must 

all operate the farm, should be removed. 

Section 321 of the Act (7 U.S.C. 1961) 

provides the entity eligibility 

requirements for emergency loans. The 

proposed rule was based on the Act’s 

provisions; therefore, the comment 

cannot be adopted. 

One comment stated the agency 

should correct § 764.352(b)(1) to state 

the application for an emergency loan 

must be received within 8 months after 

the date the disaster is declared or 

designated. In addition, the comment 

stated the agency should correct 

paragraph (a)(7) to state an emergency 

loan applicant may have had one 

occasion of debt forgiveness on or before 

April 4, 1996, but none after April 4, 

1996. The agency agrees with the 

comment and has revised the CFR. 

Another comment suggested that 

proposed § 764.352(b)(3) be revised to 

provide that the applicant ‘‘must have 

suffered disaster-related damage to 

chattel or real estate essential to the 

farming operation, or to household 

contents that must be repaired or 

replaced, to harvested or stored crops, 

or to perennial crops for physical loss 

loans.’’ The agency agrees that this 

language from current § 764.4(b)(2)(iii) 

was inadvertently omitted and has 

included the provision in § 764.352(i). 

Further, the agency added the 

provision that applicants that receive 

duplicative Federal assistance based on 

the same disaster must agree to repay it 

to the agency that provided such 

assistance. This provision is in current 

§ 764.4(a)(15) and was omitted in the 

proposed rule. Lastly, the agency 

reorganized this section by removing the 

subparagraph headings and 

renumbering the paragraphs. 

Section 764.353 Limitations 

(Emergency Loans) 

Two comments were received on the 

limitations for emergency loans 

provisions. The comments stated 

section 321(b)(3) of the Act contains 

specific provisions for hazard insurance 

requirements applicable to poultry 

farmers requesting emergency loans that 

were not included in the proposed rule. 

The agency agrees with the comments 

and has revised paragraph (e) 

accordingly. 

Another comment suggested that 

proposed § 764.353(d)(3) on calculating 

eligible physical losses be revised to 

include the value of replacement 

livestock products as well as 

replacement livestock. The agency 

agrees that such losses are covered 

under current § 764.3 and has revised 

the paragraph accordingly. 

Lastly, the agency added in 

§ 764.353(c)(4) and (d)(6) the words ‘‘or 

insurance indemnities received or to be 

received’’ from current § 764.5(c)(4) and 

(e)(1)(vi) that were inadvertently 

omitted in the proposed rule. 

Section 764.354 Rates and Terms 

(Emergency Loans) 

One comment suggested that 

§ 764.354(b)(3) be revised to provide 

‘‘EM loans for annual operating 

expenses, except expenses associated 

with establishing a perennial crop, must 

be repaid within 12 months.’’ The 

agency agrees that this provision in 

current § 764.7(c) was inadvertently 

omitted, in part, and has revised the 

paragraph accordingly. 

The agency inadvertently omitted in 

the proposed rule the provision for 

expenses associated with establishing a 

perennial crop found in current 

764.7(c). The agency has therefore, 

incorporated the provision in the final 

rule and has revised the CFR 

accordingly. 

Section 764.355 Security 

Requirements (Emergency Loans) 

Three comments were received on the 

security requirements for emergency 

loans provisions. One comment stated 

the requirement the applicant has had 

positive net cash farm income in at least 

three of the past 5 years should be 

removed for applicants with no security 

other than repayment ability, as it 

would prevent start-up and struggling 

limited resource operations from 

obtaining needed assistance. The agency 

believes that relying on the applicant’s 

repayment ability in lieu of chattel or 

real estate security significantly 

increases the agency’s level of risk 

associated with the loan. Therefore, the 

agency believes the requirement as 

written is essential to limit the agency’s 

potential losses. In addition, the existing 

regulation includes an identical 

requirement when the applicant will 

utilize repayment ability as security. 

Further, the agency has not experienced 

significant problems with the provision 

as it currently exists and does not 

expect that it will in the future. 

Two comments stated there is an 

inconsistency between the requirement 

that applicants provide copies of 

records to show they had positive net 

cash farm income in at least three of the 

past 5 years to obtain an emergency loan 

based on their repayment ability, and 

the requirement for applicants to 

provide records for only 3 years for any 

other loan. Therefore, the comments 

stated the records requirements under 

§ 764.355(c)(3) should be revised to 

match the requirements under 

§ 764.51(a). For the reasons stated above 

as well as in addressing comments for 

§ 764.51(a), the agency believes that the 

requirements are reasonable. Therefore, 

the comments are not adopted. 

Lastly, in § 764.355(c)(4) the agency 

added the provision from current 

§ 764.8(f)(4) that was inadvertently 

omitted in the proposed rule. 

Section 764.401 Loan Decision 

Fourteen comments were received on 

the loan decision provisions. Three 

comments stated the agency should 

clarify that the maximum loan limits 

may be exceeded at the time of loan 

approval, however, loan limits cannot 

be exceeded at the time of loan closing. 

The agency agrees with the comments 

and has revised the CFR, at § 761.8, 

accordingly. In addition, the agency 

revised the guaranteed loan regulation 

at § 762.122 to incorporate the 

maximum loan limit of § 761.8. 

One comment stated the CFR text 

does not address the requirement to 

notify the applicant of loan denial. Such 

notification is covered under 

§ 764.54(a), which provides that within 

60 calendar days after receiving a 

complete loan application, the agency 

must complete the processing of the 

loan request and notify the applicant of 

the decision reached. Further, the 

agency handbook provides guidance 

and information needed to be included 

in the notification to the applicant of 

loan denial. Therefore, the comment is 

not adopted. 

Two comments stated the provisions 

on loan denial should be removed 

because they are redundant with the 

loan approval provisions. The agency 

disagrees. The loan denial provisions 

enumerate the conditions under which 

loan denial is appropriate. Therefore, 

the comments are not adopted. 

One comment stated the CFR contains 

vague and not easily measurable 

standards because the agency will not 

make a loan if the applicant’s 

circumstances may not permit 

continuous operation and management 

of the farm or the applicant, the 

operation, or other circumstances 

surrounding the loan are inconsistent 

with the authorizing statutes, other 

Federal laws or Federal credit policies. 

The comment stated loan denial should 

be based on objective standards. The 

agency has responsibility, under 

sections 302, 311 and 321 of the Act, to 


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ensure it assists owner-operators or 

tenant-operators of family-sized farms; 

providing financial assistance to 

applicants who may not be available to 

continually operate the farm is not 

consistent with program objectives. 

Loan denials based on the applicant’s 

availability to operate the farm are rare. 

The agency cannot anticipate every 

possible scenario that may be 

encountered since each operation, and 

the circumstances surrounding each 

one, in the country is unique, so some 

flexibility is needed. Applicants denied 

financial assistance will be advised of 

the reasons and provided appeal rights. 

In addition, the agency has a 

responsibility to implement Federal 

laws and Federal credit policies 

applicable to the Federal Government as 

a whole, not just its authorizing statute. 

Therefore, the comment is not adopted. 

One comment stated the agency 

should make the National Appeals 

Division (NAD) official responsible for 

making a loan to an applicant the 

agency cannot certify meets all the 

conditions for loan approval. While the 

agency may not agree with all NAD final 

decisions, it is responsible for 

implementing them. A reversal of loan 

denial by NAD, however, does not 

automatically result in loan approval. 

The agency is still responsible for 

administering the applicable rules in 

light of the NAD decision and making 

a loan decision based on the particulars 

of the case and the NAD determination. 

Therefore, the comment is not adopted. 

One comment stated the agency 

should establish timelines for requiring 

additional information when an agency 

loan denial is overturned in an appeal. 

The agency believes reasonable 

timelines for requiring information from 

an applicant when the agency’s loan 

denial is overturned in an appeal are 

appropriate to be included in the agency 

handbook and in direct notices to the 

applicant. Therefore, the comment is 

not adopted. 

Two comments stated the agency 

must implement the NAD decision 

when the agency’s loan denial is 

overturned in an appeal and not request, 

what is in effect, a new application. The 

agency disagrees that updated financial 

data may never be requested to 

implement a NAD decision. The agency 

has the responsibility to make financial 

assistance available to eligible 

applicants with feasible operations in 

accordance with statutory and 

regulatory limitations, and at the same 

time protect the taxpayer and agency’s 

financial interest. In most cases, from 

the time the agency denied a loan 

application to the time a final NAD 

decision is granted several months have 

passed. The actual age of the 

information would be substantially 

older in many cases. During that time, 

applicants’ circumstances can and do 

change significantly so that the old 

financial information would 

inaccurately represent the current 

financial condition of the appellant and 

could result in significant losses to the 

agency. The amount of time that has 

passed may impact the applicant’s 

yields or the ability to even produce a 

crop. Therefore, agency implementation 

of a final NAD decision without 

obtaining and evaluating recent 

financial information is irresponsible 

and contrary to sound loan making 

principles. The agency, however, will 

consider making a loan for crop 

production if the applicant can produce 

a crop in the production cycle in which 

the loan was requested or for the next 

production cycle, upon review of 

current financial data and a farm 

operating plan for the next production 

cycle, if the agency determines the loan 

can be repaid. 

One comment supported the 

requirements that must be met for the 

loan to be approved after an agency 

decision is overturned in an appeal. One 

comment stated the loan approval 

section should follow the loan 

application section in the CFR. The 

proposed and final rules follow the loan 

process step-by-step from the 

application stage, through evaluation, to 

loan decision and closing. If the agency 

moves the loan approval section to 

follow the loan application section the 

step-by-step process will be broken, and 

thus, the rule will be more difficult to 

follow and understand. Therefore, the 

comment is not adopted. 

Section 764.402 Loan Closing 

Ten comments were received on the 

loan closing provisions. One comment 

supported the agency’s proposal as 

written. One comment suggested that for 

entity applicants, all individuals with at 

least 10 percent ownership interest in 

the entity should be required to sign the 

promissory note to evidence individual 

liability. The agency believes the rule as 

written provides adequate and clear 

guidance on who is required to sign the 

promissory note in the case of an entity 

applicant. While the guaranteed 

regulation at § 762.130 provides for a 

waiver of individual liability in some 

cases for members with less than 10 

percent ownership interest, direct loans 

inherently carry additional risk for the 

agency. Therefore, the comment is not 

adopted. 

One comment stated the agency must 

provide additional guidance for States 

with community property laws 

regarding who is required to sign the 

promissory note. The comment stated it 

is not fair for a spouse in community 

property States to be required to sign the 

promissory note. Further, the comment 

stated the agency is vulnerable to 

lawsuits because it does not provide 

guidance to spouses in such States on 

how they can avoid signing the 

promissory note. Section 764.402(a) 

provides the signatures required on the 

promissory note. However, marital 

property rights and the requirements for 

obtaining a valid lien on property are 

governed by State law; therefore, the 

agency relies on its Regional Offices of 

General Counsel for guidance on 

compliance with State laws and 

regulations. Requirements for valid liens 

are required for all applicants. The 

agency does not provide legal advice to 

applicants. Therefore, the comment is 

not adopted. 

One comment stated the CFR text 

should specify the minimum insurance 

and bonding requirements for closing 

agents. The agency believes the rule as 

written provides adequate protection 

against malfeasance or error by a closing 

agent. In the agency’s experience, 

closing agents carry adequate insurance 

and fidelity bond to protect the integrity 

of the service they provide. Further, the 

documents closing agents execute for 

providing services for the agency’s 

applicants specify the amount of 

insurance required. Therefore, the 

comment is not adopted. 

Four comments stated the 

requirement that a new security 

agreement be obtained for each new 

loan prior to funds disbursement is 

overly restrictive. All comments stated a 

new security agreement should be 

required for each initial loan, when 

required under State law governing 

secured lender transactions, when there 

were substantial changes to the security, 

or the operation. In addition, one of the 

comments stated some new loans, such 

as annual operating loans, do not result 

in new security being taken. The agency 

agrees with the comments and has 

revised the CFR to require a new chattel 

security agreement for new loans as 

necessary to secure the loan under State 

law. 

Two comments were received on the 

provision for making loan funds 

available to applicants within 15 days of 

loan approval, subject to funds 

availability. Both comments requested 

that the timeframe be changed to 30 

days. Section 333A(b) of the Act (7 

U.S.C. 1983a(b)) provides that loan 

funds will be available to applicants 

within 15 days of loan approval, unless 

the applicants agree otherwise or funds 

are unavailable. The proposed rule was 


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based on the Act’s provisions; therefore, 

the comments cannot be adopted. 

Section 764.451 Purpose (Borrower 

Training) 

In the preamble of the proposed rule, 

the agency stated it was eliminating the 

requirement to assess the need for 

borrower training when a borrower 

requests primary loan servicing. Nine 

comments were received on the 

agency’s decision to eliminate borrower 

training in primary loan servicing. Four 

comments fully supported the agency 

decision. One of the supporting 

comments stated borrowers who failed 

to complete borrower training as 

required, and have therefore become 

ineligible for direct loan assistance, 

should become eligible again under the 

provisions of the final rule. The agency 

will not retroactively reinstate direct 

loan eligibility for borrowers who were 

clearly required to complete borrower 

training but failed to do so. Therefore, 

this part of the comment is not adopted. 

One comment stated it is not clear 

how the agency will handle delinquent 

borrowers applying for primary loan 

servicing who were required to 

complete borrower training and did not 

do so. Further, the comment stated it is 

not fair for borrowers who are currently 

delinquent and have not completed 

borrower training because they are not 

eligible for primary loan servicing, 

while borrowers who become 

delinquent after the final rule is 

effective will still be eligible for primary 

loan servicing even if they did not 

complete borrower training as required. 

After the final rule becomes effective, 

the agency will assess a borrower’s 

training needs through the initial loan 

making stage and continuously evaluate 

the borrower’s training needs with the 

year-end analysis, farm visits and 

information contained in the borrower’s 

case file. If there are indications the 

borrower may need training, the agency 

may require the borrower to complete 

training when evaluating subsequent 

requests for direct loan assistance. 

Therefore, the comment is not adopted. 

One comment stated delinquent 

borrowers requesting primary loan 

servicing are prime candidates for 

borrower training since delinquency 

indicates need for training. In addition, 

the comment stated primary loan 

servicing provides a great incentive for 

the borrower to complete required 

training. One comment stated borrower 

training can be helpful in primary loan 

servicing since borrowers can see that 

recordkeeping is a tool in the decision 

making process. The agency believes 

borrower training is most effective and 

beneficial at the beginning of the loan 

relationship with the borrower. The 

reason for eliminating the requirement 

in primary loan servicing is that 

borrower training is most beneficial in 

the loan making stages. When the 

borrower becomes delinquent, borrower 

training actually hinders the agency’s 

ability to provide effective and timely 

primary loan servicing because the 

borrower’s training needs have to be 

assessed before primary loan servicing 

can be considered. Moreover, eligibility 

requirements established in § 766.104 

provide a borrower is eligible for 

primary loan servicing when the 

financial distress or delinquency is due 

to circumstances beyond the borrower’s 

control. Therefore, the comments are 

not adopted. 

One comment stated the agency 

should develop a workbook/DVD 

combination and provide it to all 

borrowers along with appropriate 

software. Further, the comment stated 

the agency should not provide any 

further direct assistance until borrowers 

complete all the assignments included 

in the workbook. Section 359 of the Act 

(7 U.S.C. 2006a) contains the agency’s 

specific responsibilities for providing 

financial and farm management training 

to its borrowers. The requirements as 

stated in the Act cannot be met by a 

workbook/DVD combination as the 

comment provides. Therefore, the 

comment is not adopted. 

One comment stated the provisions 

under § 764.452(f) and § 764.454(a)(4), if 

taken together, can be construed to 

conflict with each other. Therefore, the 

comment stated the agency should 

clarify the provisions to ensure 

borrowers required to take borrower 

training complete it. The provision 

under § 764.452(f) states the agency 

cannot reject an initial loan application 

based solely on the applicant’s need for 

training, while the provision under 

§ 764.454(a)(4) states that a borrower 

who is required to complete training 

and does not do so within the required 

timeframe, will be ineligible for 

additional FLP loans. This ineligibility 

is not based on the need for training but 

the failure to meet a loan condition. The 

agency does not believe the two 

provisions conflict with each other, 

since they are applicable under different 

circumstances. Therefore, the comment 

is not adopted. 

Section 764.453 Agency Waiver of 

Borrower Training Requirements 

Two comments were received on the 

agency waiver of borrower training 

requirements. One comment stated the 

agency should clarify whether or not a 

waiver of financial management training 

requires evidence of formal coursework. 

The other comment stated the agency 

should provide objective requirements 

that applicants must meet to obtain a 

waiver of borrower training instead of 

the broad provision that the applicant 

submit evidence to demonstrate to the 

agency’s satisfaction the applicant 

possesses experience and training 

necessary for a waiver. The agency 

believes the rule as written provides 

adequate flexibility for applicants to 

provide evidence of financial 

management training through 

completion of a course as required by 

§ 764.453(b)(1) or other means. Further, 

the agency evaluates each case based on 

its individual merits, since it is 

impossible to identify all possible 

means through which financial 

management training can be 

accomplished. Any additional 

specificity would limit the applicant 

and the agency’s flexibility. Lastly, rigid 

guidelines would place excessive 

burden on some applicants and not 

require others who may benefit from 

borrower training to take the 

opportunity. Therefore, the comments 

are not adopted. 

Section 764.454 Actions That an 

Applicant Must Take When Training Is 

Required 

Four comments were received on the 

actions an applicant must take when 

training is required. Three comments 

stated it is not clear if a borrower who 

completes the required training outside 

of the allowed timeframe remains 

eligible for additional direct loans. The 

comments suggested language to be 

added clarifying whether or not this will 

affect the borrower’s eligibility for 

primary loan servicing. The agency 

agrees with the first part of the 

comments and has revised the CFR to 

state that if such borrower later 

completes the training, the borrower 

will then become eligible for additional 

direct loans. However, the agency 

believes the impact on the borrower’s 

eligibility for primary loan servicing is 

adequately addressed above. While the 

agency does not evaluate the need for 

borrower training when a borrower 

requests primary loan servicing, the 

eligibility requirements under § 766.104 

provide the borrower has acted in good 

faith. The definition of good faith 

includes the borrower’s adherence with 

all written agreements with the agency. 

Therefore, the second part of the 

comments is not adopted. 

One comment stated the agency 

should replace the words ‘‘direct FLP 

loans’’ with the words ‘‘direct FLP 

assistance’’ in § 764.454(a)(4) to 

strengthen the lack of good faith denial 

when delinquent borrowers request 


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primary loan servicing. The agency 

believes the comment’s concern is 

sufficiently addressed above. Therefore, 

the comment is not adopted. 

Section 764.458 Vendor Approval 

One comment was received on the 

vendor approval provisions. The 

comment stated the agreement to 

conduct training should be for five 

instead of 3 years. The comment stated 

Certified and Preferred Lender 

agreements are valid for 5 years, and 

lenders have greater fiscal responsibility 

as opposed to borrower training vendors 

that only provide training. In addition, 

the comment stated administrative time 

spent on renewing vendors’ agreements 

will be cut in half. The agency believes 

the existing process is adequate. Vendor 

renewals require minimal time in most 

cases, and while the vendor is being 

reviewed for renewal, it is a great 

opportunity for the agency to assess the 

vendor’s performance. Further, because 

agriculture is a fast-changing field, the 

agency needs to ensure that vendors 

provide cutting-edge training to its 

borrowers. Therefore, the comment is 

not adopted. 

Miscellaneous Comments in Part 764 

Three comments stated the lack of the 

Administrator’s exception provision in 

the loan making CFR may adversely 

affect the agency’s ability to deal with 

unique issues for which action outside 

of the CFR’s provisions may be in the 

agency’s financial interest. The agency 

must administer its loan programs 

according to the Act and all other 

Federal laws and regulations. Most loan 

making requirements are required by 

law and exceptions would primarily be 

for the benefit of the applicant only. In 

addition, the agency believes both the 

proposed and the final rule have 

adequately addressed mandatory loan 

making provisions and provided 

flexibility where needed. Further, 

existing regulations applicable to loan 

servicing only contain the suggested 

exception authority where exceptions 

may be needed to protect the agency’s 

financial interest in an existing loan, if 

not prohibited by statute. Therefore, the 

comments are not adopted. 

One comment stated the agency must 

implement the provision of the Federal 

Agriculture Improvement and Reform 

Act of 1996 authorizing a direct 

operating line of credit. The OMB has 

advised the agency that for budgetary 

purposes, under the provisions of the 

Credit Reform Act of 1992, a multi-year 

line of credit loan is treated as a series 

of individual loans. As a result, a 5-year 

operating line of credit requires the 

agency to obligate five times the budget 

authority as it would for a 1-year 

operating loan. Program funding levels 

have been limited so that the agency has 

exhausted or nearly exhausted operating 

loan funds over the past several fiscal 

years. Implementation of an operating 

line of credit, while it would benefit 

those who receive it, would consume 

excessive budget authority and prevent 

others in need of operating loan 

assistance from receiving it. As a 

compromise, the agency implemented 

the Lo-Doc program in 2002, which with 

the exception of a multi-year 

commitment, is similar in most respects 

to a line of credit. Therefore, the 

comment is not adopted. 

One comment stated the agency must 

not provide any loan funds to 

agribusinesses that mistreat animals, but 

only to operations that grow animals 

humanely. The agency relies on local 

and state authorities to make 

determinations in cases of mistreatment 

of animals. Enforcement actions against 

such operations would prevent them 

from submitting a viable loan 

application. Moreover, the agency does 

not have authority to impose certain 

animal husbandry practices on 

applicants and borrowers. However, the 

agency does require production training 

for applicants that lack experience or 

education. Therefore, the comment is 

not adopted. 

One comment stated the agency must 

include that an applicant must request 

the lower of the interest rates in effect 

at the time of loan approval or loan 

closing. In addition, the comment stated 

the provision should be clearly offered 

on the agency loan application form. 

The agency revised Part 764 to state the 

interest rate will be the lower at the time 

of loan approval or loan closing. 

Therefore, the agency will not take any 

further action on this comment. 

Part 765—Direct Loan Servicing—

Regular 

The following discussion addresses 

the comments received on Part 765. 

Section 765.51 Annual Review 

Four comments were received on the 

provision for increasing a borrower’s 

limited resource interest rate. One 

comment stated that if the regular 

interest rate becomes lower than the 

limited resource rate charged on the 

borrower’s loans, the agency should 

change the borrower’s interest rate from 

limited resource to the regular rate 

without notifying the borrower. One 

comment stated the agency should be 

allowed to change a borrower’s limited 

resource interest rate to the regular rate 

if the regular interest rate is lower than 

the limited resource rate, as has 

occurred in recent years, and should not 

provide appeal rights when notifying 

the borrower, since lowering the 

borrower’s interest rate is not an adverse 

action. The third comment stated that 

there should be a mechanism for the 

agency to provide the borrower with the 

lower interest rate when the regular 

interest rate drops below the limited 

resource interest rate. The fourth 

comment indicated that the proposed 

rule does not provide guidance to 

employees performing limited resource 

reviews when the regular interest rates 

are lower than the limited resource 

rates. The authority for limited resource 

interest rates was established by 

Congress during a period of high regular 

interest rates. The intent was to address 

high delinquency rates and help farmers 

stay on the farm. Congress did not 

anticipate that the regular interest rate 

would be lower than limited resource; 

therefore, this situation was not 

anticipated or addressed in the Act. The 

agency has established internal 

procedures to be followed in the 

unusual situation where the limited 

resource interest rate is higher than the 

regular interest rate. The lower of the 

regular or limited resource interest rate 

has been used while conducting normal 

limited resource reviews, year-end 

analyses, and primary loan servicing. 

Agency borrowers with limited resource 

rate loans have been positively 

impacted by the agency’s internal 

procedures and the agency will 

continue this established internal 

guidance in the future. Therefore, the 

comments are not adopted. 

Section 765.101 Borrower Graduation 

Requirements 

Five comments were received on 

borrower graduation requirements. One 

comment stated that requiring all loans 

of the same type be refinanced 

undercuts graduation rates; therefore, 

the agency should count any loan 

refinanced as partial graduation. In 

accordance with the Act, the agency 

serves as a temporary source of credit. 

The agency does not believe its mission 

of assisting its borrowers to obtain 

commercial credit has been achieved 

unless all loans of the same type have 

been refinanced as part of the 

graduation process. Therefore, the 

comment is not adopted. 

Three comments stated that, due to 

loan making and servicing 

requirements, most borrowers’ loans are 

cross-collateralized which makes it 

virtually impossible for borrowers to 

partially graduate. Further, all 

comments stated the State Executive 

Director should be granted authority, in 

partial graduation cases, to release the 


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security typically associated with the 

loans under graduation provided the 

remaining security is at least 150 

percent of the remaining debt. The 

agency disagrees. In loan making, the 

agency requires, except as provided in 

§ 764.106, security up to 150 percent of 

the loan amount, if available. The 

security value for loan making purposes 

is established by an appraisal. In loan 

servicing under 7 CFR part 766, the 

agency requires the best lien obtainable 

on all the borrower’s assets, except as 

provided in § 766.112(b). Graduation 

generally occurs a number of years after 

a loan is made. The borrower’s assets 

securing the agency loans are not 

appraised as part of the graduation 

process; therefore, the agency would be 

basing the release of its liens solely on 

the security’s estimated value. The 

additional costs the agency would incur 

by obtaining appraisals for such partial 

releases would offset any benefits 

achieved by the partial graduation. 

Therefore, the comments are not 

adopted. 

One comment stated the agency 

should revise § 765.101(d) to include 

the statutory borrower notification 

requirement when the agency provides 

the borrower’s prospectus to lenders. 

The agency agrees with the comment 

and has revised this paragraph 

accordingly. 

Section 765.102 Borrower 

Noncompliance With Graduation 

Requirements 

One comment was received on the 

provisions regarding borrower 

noncompliance with graduation 

requirements. The comment stated that 

only borrowers actually able to obtain 

commercial credit but refuse to do so 

should be considered as failing to 

graduate, and will, therefore, be in nonmonetary default. In addition, the 

comment stated the agency should add 

that a borrower, for good cause, may 

request additional time to apply for 

commercial credit. The agency requires 

the borrower to provide the information 

needed to determine if commercial 

credit may be available, apply for a loan 

if a lender indicates interest in 

refinancing the borrower’s agency loan, 

and refinance the agency loan if the 

lender extends credit. All of these 

requirements are well within the 

borrower’s control. The agency’s 

determination of non-monetary default, 

therefore, is not dependent on the 

borrower’s successful graduation. To 

add the provision that a borrower for 

good cause may take additional time to 

apply for commercial credit 

unnecessarily requires additional 

criteria and subjective decisions from 

the agency. In addition, Section 319 of 

the Act (7 U.S.C. 1949) requires that 

borrowers graduate to commercial credit 

when able to do so. Therefore, the 

comment is not adopted. 

Section 765.103 Transfer and 

Assignment of Agency Liens 

In some States, graduation 

requirements are impeded by State laws 

preventing a lender from obtaining a 

valid lied on homestead property unless 

the lender has a purchase money 

interest in the property. As a result, 

approval of the transfer and assignment 

of the agency’s lien to the lender 

refinancing the FLP loan must be 

approved on a case-by-case basis using 

the exception authority currently 

published in 7 CFR 1965.35. The agency 

inadvertently failed to address this issue 

in the proposed rule. The agency 

believes a provision allowing transfer 

and assignment of its lien should be 

included in the final rule as it will 

enable borrowers to graduate to 

commercial credit in a timely manner. 

Section 765.152 Types of Payments 

Five comments were received 

regarding types of payments. Three 

comments stated the agency should 

expand the provision allowing proceeds 

from the sale of real estate security to be 

applied as regular payments to also 

include proceeds from the sale of basic 

chattel security. In addition, the 

comments stated that the use of 

proceeds from real estate and basic 

chattel security as regular payments 

should be limited to only a delinquent 

and or current year’s payments to 

prevent basic security proceeds from 

being used to pay ahead several years. 

The proposal limiting the use of 

proceeds from the sale of basic security 

to only real estate security conforms to 

the agency’s existing regulations at 

§ 1965.13. Allowing the use of proceeds 

from the sale of chattel basic security to 

be used as regular payments increases 

the risk of loss to the agency because, 

unlike real estate security, the value of 

chattel security generally declines each 

year due to depreciation. Approval to 

use the proceeds from the sale of real 

estate basic security as a regular 

payment is at the discretion of the 

agency; and each situation will be 

evaluated on its merits. The agency 

believes the CFR as written provides 

adequate clarification of its policy for 

classifying proceeds a ‘‘regular’’ or 

‘‘extra’’ payment. Further, the agency 

clarified the authorized use for each 

type of payment it receives. Therefore, 

the comments are not adopted. 

Two comments stated the agency 

should specify in the CFR the agency 

employee with the authority to 

determine if proceeds from the sale of 

real estate can be applied as regular 

payments. It is the agency’s policy not 

to provide employee-specific titles in 

the CFR since they are internal matters. 

The agency handbook will delegate 

necessary responsibility. Therefore, the 

comments are not adopted. 

Section 765.153 Application of 

Payments 

Nine comments were received on the 

application of payments. Eight 

comments stated publishing the order in 

which payments will be applied to 

borrowers’ accounts limits the borrower 

and agency official’s flexibility and 

discretion to apply payments in a 

manner each feels is most beneficial. In 

addition, one comment suggested the 

agency consider the borrower’s 

preference on which loan payments are 

applied. The agency believes that 

publishing the order in which payments 

are applied removes inconsistencies, 

ensures all borrowers are treated the 

same, and ensures payments are applied 

in a manner which best protects the 

agency’s financial interest. Therefore, 

the comments are not adopted. 

One comment stated that it is not 

clear what happens to proceeds after all 

payments due on FLP loans are made 

for the year. Sections 765.152, 765.153 

and 765.154 describe the distinction 

between regular and extra payments and 

the order in which proceeds will be 

applied to agency loans. Release of 

proceeds after all FLP loan payments 

have been paid is addressed in 

§ 765.301(h). The agency has modified 

that paragraph to clarify that in those 

circumstances all proceeds from the sale 

of normal income security will be 

released to the borrower. Therefore, the 

clarification suggested by the comment 

has already been adequately addressed. 

Section 765.154 Distribution of 

Payments 

Two comments were received on the 

distribution of payments. One comment 

stated that it is not clear what 

percentage of each payment will be 

applied to each of the items listed in 

§ 765.154. The agency cannot assign a 

percentage to each of the items listed in 

§ 765.154 because outstanding 

recoverable costs and protective 

advances must be paid in full before any 

of the other items listed can be paid. 

Therefore, the comment is not adopted. 

The other comment stated the agency 

should revise the provision on the 

payment of accrued deferred interest to 

state ‘‘only a pro-rata portion of accrued 

deferred interest will be paid before 

loan principal is paid.’’ Accrued 


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deferred interest is scheduled for 

payment on an annual basis and 

borrower payments received are applied 

accordingly. Therefore, the comment is 

not adopted. 

Section 765.155 Final Loan Payments 

One comment was received on final 

loan payment provisions. The comment 

stated that it is not clear how the agency 

will settle underpayments of less than 

$10. The rule provides that the agency 

will not attempt to collect amounts less 

than $10, and since there is no impact 

on borrowers, guidance will be provided 

only in the agency handbook. Therefore, 

the comment is not adopted. 

Section 765.202 Borrower 

Responsibilities 

One comment was received on 

borrower’s responsibilities. The 

comment stated that the agency should 

revise § 765.202(a)(2) to provide 

‘‘Borrower failure to keep agreements 

for reasons not beyond the borrower’s 

control, will be considered* * *’’ The 

agency believes that the provision as 

written allows the agency to consider 

circumstances for the borrower’s failure 

to keep agreements. Therefore, the 

comment is not adopted. 

Section 765.205 Subordination of 

Liens 

Sixteen comments were received on 

subordination of liens. Two comments 

stated the agency should approve 

subordinations made in conjunction 

with a guaranteed loan only in a 

sufficient amount to cover what is 

currently ahead of the agency loan. 

Section 762.142(c) provides the 

conditions under which the agency will 

subordinate its liens to a guaranteed 

lender. Therefore, no change is needed 

to § 765.205, and the comments are not 

adopted. 

One comment stated that the 

application form required for chattel 

subordinations is not referenced in the 

CFR. Another comment stated the 

agency should provide the general 

information needed for any 

subordination since the agency treats 

subordinations as a method to meet 

borrowers’ annual operating needs, and 

subordinations are an important tool in 

assisting its borrowers to obtain 

commercial credit. As provided in the 

preamble of the proposed rule, it is the 

agency’s policy not to publish form 

numbers in the CFR, except as provided 

by the Act. The agency handbook will 

provide the forms needed to complete 

requests for real estate and chattel 

subordinations, so that comment is not 

adopted. However, the agency agrees the 

subordination application requirements 

were inadvertently omitted in the 

proposed rule and has included them in 

the final rule. 

One comment stated that it is not 

clear what the term ‘‘operating cycle’’

means under the subordination 

requirement that the borrower’s farm 

business plan shows that all debts 

scheduled during the operating cycle 

will be paid. The agency agrees that the 

term ‘‘operating cycle’’ is not clear. 

Thus, the agency decided for 

consistency to use the term ‘‘production 

cycle’’ in place of ‘‘operating cycle’’

throughout the final rule. Further, in the 

final rule the agency clarified the 

definition of ‘‘production cycle’’ at 

§ 761.2. 

One comment stated that borrowers 

with partial or complete deferrals 

should not be eligible for 

subordinations. Further, the comment 

stated that while a borrower’s loans are 

deferred, the borrower’s payments are 

artificially low, and therefore, the 

operation shows a feasible plan whereas 

a feasible plan might not be achieved if 

the deferral is taken into consideration. 

The agency agrees the deferral may have 

a significant impact on the borrower’s 

repayment ability. However, the agency 

makes decisions based on the 

borrower’s current farm operating plan. 

It would not be in the agency’s best 

interest to deny a subordination request 

if the subordination would allow the 

operation to continue, thus increasing 

the probability of repayment of the 

agency loan. Should the borrower 

experience financial difficulty after the 

deferral period expires, the agency will 

consider all available loan servicing 

options. Adoption of the comment 

would change a longstanding policy that 

the agency did not propose to change. 

Therefore, the comment is not adopted. 

One comment stated the CFR should 

provide that the agency ‘‘may’’ approve 

a subordination, instead of ‘‘will’’

approve a subordination. The agency 

cannot use ‘‘may’’ in this instance 

because it would indicate that there are 

additional requirements beyond the 

requirements published. In addition, the 

agency has no basis on which to deny 

the subordination request if all 

conditions have been met. Therefore, 

the comment is not adopted. 

One comment stated the agency 

should clarify § 765.205(a)(11) 

(§ 765.205(b)(12) as renumbered in the 

final rule) to provide the subordination 

has a definite maturity date. The agency 

agrees with the comment and has 

revised the CFR accordingly. 

Three comments stated the agency 

should allow multiple subordinations 

on the same security to the same lender. 

The agency agrees with the comments 

and has revised the CFR accordingly. 

Two comments stated the agency 

should be able to subordinate its lien a 

second time for the borrower to obtain 

crop insurance. This provision is 

authorized under proposed 

§ 765.205(b)(2) (renumbered to 

§ 765.205(c)(2) in final rule); therefore, 

no action is required regarding the 

comments. 

One comment stated the agency 

should allow multiple subordinations of 

the same security to different lenders as 

the current regulations allow. The 

agency believes allowing multiple 

subordinations to multiple lenders on 

the same security increases the agency’s 

risk because the complexities of 

servicing the account would be 

increased. When subordinations are 

granted to multiple lenders, agreements 

on responsibilities and lien priorities, as 

well as lines of communication, have to 

be established between all the lenders 

before subordination is provided. The 

agency cannot become involved in these 

agreements as a matter of course, nor 

can it be perceived as the mediator in 

any future possible disagreement 

between multiple lenders. Lastly, the 

agency has not allowed multiple 

subordinations of the same security to 

multiple lenders in the past and did not 

propose to change this longstanding 

policy. Therefore, the comment is not 

adopted. 

One comment stated the agency 

should adopt a limited documentation 

subordination application similar to the 

Lo-Doc application. The agency believes 

Lo-Doc loans and subordinations are not 

similar actions since subordination may 

be considered for any authorized loan 

purpose, whereas Lo-Doc loan proceeds 

may only be utilized under limited 

specific circumstances. Therefore, the 

comment is not adopted. 

One comment stated the agency 

should require the lender, to whom 

subordination is granted, to execute a 

prior lienholder’s agreement. Further, 

the comment stated the agency should 

not grant a subordination, if agency 

calculations at the time the 

subordination is being considered 

indicate the agency would not make a 

protective advance to pay the prior 

lienholders, should default occur on the 

subordinated loan. The agency believes 

its interests are adequately protected as 

the provision was proposed. It is 

impracticable to approve subordinations 

and protective advances using similar 

requirements. Protective advances are 

generally necessary when a borrower’s 

financial condition has severely 

deteriorated, and are used to protect 

agency security, while subordinations 


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are generally considered for borrowers 

able to meet commercial lenders’

requirements and demonstrate 

repayment ability. Further, the agency 

believes adoption of the comment 

would impose unnecessary collections 

of information on its borrowers. 

Therefore, the comment is not adopted. 

Section 765.252 Lease of Security 

Two comments were received on the 

provisions regarding lease of security. 

One comment stated the agency should 

remove the provision that the term of 

consecutive leases cannot exceed 3 

years, and allow additional years for the 

property to be leased if a generational 

transfer is involved. The agency agrees 

with the comment and has revised 

paragraph (a)(2) to allow lease of 

security for up to 5 years when the 

lessee and the borrower are related by 

blood or marriage. This will allow the 

lessee additional time to obtain the 

farming experience and managerial 

ability necessary to operate the farm 

with the elder farmer’s guidance and 

help address the difficulties of affording 

increasing real estate costs and 

inadequate farm ownership loan 

funding. The 5-year limit should be 

sufficient time for agency funds to 

become available or the lessee to obtain 

a commercial loan to finance the 

purchase of the existing farm. Some 

lease limit is necessary in the case of 

such leases because the borrower agreed 

to operate the farm as a condition in 

obtaining the loan. 

One comment stated the agency 

should provide the state level with 

authority to approve lease of security for 

more than 3 years under certain 

circumstances. The agency no longer 

includes in the CFR the office 

responsible for approving leases of 

security. A consistent, nation-wide 

policy is preferred. Further, the agency 

believes that by adopting the first 

comment, it has addressed this 

comment’s concerns. Therefore, the 

comment is not adopted. 

Section 765.253 Ceasing To Operate 

Security (Renamed in Final Rule) 

One comment stated the provisions 

are not clear since it seems the borrower 

must meet all conditions under 

§ 765.253. Further, the comment stated 

the provisions do not allow the agency 

to consent to a borrower’s failure to 

operate the farm where the borrower 

transfers the operation to an S 

corporation in which the borrower is the 

sole member. The agency revised the 

CFR to provide that borrowers must 

meet the conditions specified under 

subparagraphs (a) through (d) and any of 

the conditions under subparagraph (e). 

However, the agency believes the 

example the comment provided does 

not fit conditions for the agency to 

consent to the borrower ceasing 

operating the security, as the borrower 

would continue operating the security 

with a different composition. In the 

example, the agency would proceed 

with a transfer and assumption and 

allow the new borrower entity to 

continue the loan and operate the 

security. Therefore, this part of the 

comment is not adopted. 

Section 765.301 General 

Six comments were received on the 

general requirements for disposing of 

chattel security. One comment stated 

that, instead of requiring the borrower to 

sell chattel security for the market 

value, the agency should require that 

‘‘the borrower may not dispose of 

normal income security for less than its 

market value and basic security for not 

less than its recovery value.’’ Further, 

the comment stated that the net 

recovery value of basic security should 

be determined by an appraisal, less sales 

expenses. When determining whether or 

not adequate security is available at the 

time of loan approval, the agency uses 

the market value of potential security. 

Therefore, the agency cannot allow 

disposition of chattel security for less 

than its market value. Nation-wide 

agency devaluation of security will 

increase losses and is not in the 

agency’s and the taxpayer’s financial 

interests. In addition, under regular 

servicing circumstances the agency has 

no reason to calculate or accept 

estimated involuntary liquidation 

amounts. Therefore, the comment is not 

accepted. 

Five comments stated the agency 

should revise § 765.301(h) to state that 

if all agency loan installments and any 

past due installments have been paid, 

checks from the sale of normal income 

security may be payable solely to the 

borrower. The agency agrees with the 

comments, and has revised the CFR 

accordingly. 

Section 765.302 Use and Maintenance 

of Agreement for the Use of Proceeds 

Three comments were received on the 

use and maintenance of the agreement 

for the use of proceeds. One comment 

stated that completing the agreement for 

the use of proceeds is time consuming 

and confusing. In addition, for the 

agreement to be properly completed, the 

borrower must plan each expense for 

the year and identify the source of 

income to pay for it. Then, at the end 

of the year, the agency needs to 

reconcile each expense paid with the 

source of income. The agency believes 

that the rule provides clear guidelines 

on when the agreement for the use of 

proceeds will be completed. Further, as 

stated in the agency’s response to 

comments received on the definition of 

‘‘agreement for the use of proceeds,’’ the 

agency may conduct further analysis to 

determine if changes are warranted. 

Therefore, the agency will take no 

further action on these comments at this 

time. 

Two comments stated that the 

requirement for the borrower to date 

and initial changes made on the 

agreement for the use of proceeds 

should be eliminated. The agency 

believes that since the agreement for the 

use of proceeds is completed by both 

the borrower and the agency, any 

changes made should be concurred with 

by both. Therefore, the comments are 

not adopted. 

Section 765.303 Use of Proceeds From 

Chattel Security 

Three comments were received 

regarding the use of proceeds from the 

sale of chattel security. One comment 

stated that the guidance provided in the 

existing regulations under § 1962.17 is 

confusing as to when proceeds from the 

sale of normal income and basic 

security can be released. The agency 

believes that both the proposed and 

final rules clarified the use of proceeds 

from the sale of normal income and 

basic chattel security without changing 

current policy. Therefore, the agency 

believes the comment’s concern is 

adequately addressed. 

One comment stated the agency 

should add a provision to protect its 

interests when crop security is used as 

feed for a third party’s livestock. This 

section allows for crop security that 

normally would be sold, to be fed to 

livestock the borrower owns, if the 

agency obtains a lien or an assignment 

on the livestock and the livestock 

products equal to the lien on the crops. 

If the borrower feeds agency crop 

security to a third party’s livestock, the 

borrower has converted agency security 

and is in non-monetary default with the 

borrower’s agreements with the agency. 

Agency actions when the borrower is in 

non-monetary default are addressed in 7 

CFR part 766. Therefore, the comment is 

not adopted. 

One comment stated the agency 

should clarify that proceeds from the 

sale of chattel security will not be used 

to acquire real estate but may be used 

to acquire property that meets the 

operating loan program’s objectives. The 

agency agrees with the comment and 

has revised the CFR accordingly. 


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Section 765.304 Unapproved 

Disposition 

Ten comments were received on 

unapproved disposition of chattel 

security. Six comments supported the 

provision as written. One comment 

stated that there are no standards 

established on what information the 

borrower has to provide for postapproval. In addition, the comment 

stated that the agency has to release 

proceeds for family living and farm 

operating expenses until the account is 

accelerated, implying that the borrower 

does not need to provide any 

information to the agency for postapproval. The agency disagrees. It is 

impossible to list all possible sources of 

documentation that a borrower could 

submit to provide evidence that 

proceeds were used for an authorized 

purpose. Further, the essential family 

living and farm operating expenses 

definition (§ 761.2(b)) establishes a list 

of expenses the agency considers to be 

essential and states that the agency will 

consider each expense on the list as it 

applies to each operation. Moreover, the 

agency and the borrower complete the 

agreement for the use of proceeds at the 

beginning of the production cycle. By 

establishing the conditions under which 

proceeds can be released, a borrower 

should be able to determine the type of 

documentation appropriate for postapproval. Therefore, the comment is not 

adopted. 

Three comments stated the agency 

does not clearly provide that 

unauthorized dispositions of security 

are considered non-monetary defaults. 

The agency agrees with the comments 

and has revised the CFR accordingly. 

Section 765.351 Requirements To 

Obtain Agency Consent 

Six comments were received on the 

requirements to obtain agency consent 

to a partial release of real estate security. 

Two comments stated the agency should 

accept ‘‘no less than the agency-defined 

recovery value’’ or ‘‘95 percent of the 

market value’’ for the real estate 

proposed for partial release. Loan 

approvals are based on evaluation of the 

loan security at its market value. 

Approving real estate security releases 

for less than market value would be 

inconsistent with loan making 

provisions and fiscally irresponsible as 

doing so could increase the agency’s 

losses. Therefore, the comments are not 

adopted. 

Three comments stated that because 

many loans are cross-collateralized due 

to loan making or servicing actions, the 

agency should allow exchange of real 

estate security for ‘‘any authorized loan 

purpose.’’ The agency believes the loan 

purposes are broad enough to 

accommodate the few cases where 

exchange of property is considered. 

Therefore, the comments are not 

adopted. 

One comment stated the agency 

should clarify that terms for contracts 

for deed will not exceed the remaining 

loan term. The agency agrees with the 

comment and has revised the CFR 

accordingly. 

Section 765.352 Use of Proceeds 

Eight comments were received on the 

use of proceeds from the partial release 

of real estate. Two comments supported 

the agency’s decision not to allow 

proceeds from the sale of real estate to 

be used for developing land not owned 

by the borrower. One comment 

disagreed with the agency’s decision to 

not allow borrowers to use proceeds 

from the sale of real estate security to 

make improvements on rented land, on 

which the agency does not have a lien. 

The comment stated in § 764.151(b) the 

agency provides the conditions under 

which loan funds can be used to make 

improvements on rented land. 

Moreover, the comment stated the 

agency accepts security interests in 

property not owned by the applicant, 

including leases that provide a 

mortgageable value. Therefore, the 

comment stated, the agency should not 

eliminate the provision. The agency 

disagrees. The agency accepts as 

security leases that provide a 

mortgageable value as well as security 

pledged by third parties to satisfy the 

agency’s security requirements. Further, 

§ 764.151(b) provides that for the agency 

to make a farm ownership loan, the 

applicant must have a lease to ensure 

the applicant will have use of the 

improvement over its useful life or to 

ensure the applicant will be 

compensated for any remaining 

economic life when the lease 

terminates. In those cases, the agency 

has a security interest in the land; 

therefore, loan funds can be used to 

make improvements. The agency 

removed the provision that allowed 

borrowers to use sale proceeds from 

agency security to make improvements 

on rented land, because the majority of 

the applicants found it difficult to meet 

the lease requirement. In addition, it is 

not prudent to release proceeds from the 

sale of agency security to improve land 

on which the agency does not have a 

lien. Therefore, the comment is not 

adopted. 

One comment stated that the agency 

should not release proceeds from the 

partial release of real estate to pay other 

creditors, unless the amount is small 

and the agency debt to security ratio is 

over 1/1 after the transaction is 

completed. Another comment expressed 

concern about not allowing proceeds 

from partial real estate releases to be 

paid to other creditors ‘‘to the extent 

needed to establish a basis for 

continuation of the other creditor’s 

account.’’ One comment stated that the 

agency should allow for SED discretion 

as to how proceeds from the partial 

release of real estate will be applied. 

The agency believes that allowing 

proceeds to be distributed outside of 

established lien priorities usually occurs 

at the expense of the agency, decreases 

the agency’s equity in the security, and 

increases the taxpayers’ risk. Therefore, 

the comments are not adopted. 

One comment inquired about the 

interaction between § 765.152(c) and 

§ 765.352. Section 765.152(c) establishes 

that proceeds from the sale of real estate 

security may be applied to the 

borrower’s account as a regular 

payment, in which case it is credited 

toward the borrower’s annual payment 

as opposed to an extra payment, which 

simply reduces the unpaid loan balance, 

if the agency’s loans will be adequately 

secured after the transaction. 

Furthermore, §§ 765.152 and 765.153 

only address the order in which 

payments are applied against agency 

loans, whereas § 765.352 establishes the 

use of proceeds from transactions 

affecting the real estate security. The 

agency sees no conflict between these 

provisions; therefore, no change has 

been made. 

One comment stated the agency 

should replace the words, ‘‘When 

liquidation is pending,’’ with the words, 

‘‘After acceleration’’ in § 765.352(b) to 

explain when the agency will approve 

transactions only in accordance with 

lien priorities and customary costs. The 

agency agrees with the comment and 

has revised the CFR accordingly. 

Section 765.353 Determining Market 

Value 

In the preamble of the proposed rule, 

the agency proposed to increase the 

estimated value of real estate security 

considered for partial release to $25,000 

before obtaining an appraisal. However, 

the regulatory text provided that the 

agency would require an appraisal for a 

partial release of real estate when its 

estimated value exceeded $20,000. The 

agency’s intent was to include in the 

regulatory text $25,000 as evidenced by 

the final rule published by the agency 

on June 2, 2004 (69 FR 30997–30999). 

Fourteen comments were received on 

the appraisal requirement for partial 

releases. Several comments pointed out 

the discrepancy between the preamble 


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and the regulatory text; however, 10 

comments supported the change, while 

three comments stated the $25,000 limit 

is too low and should be increased to 

$35,000 (one comment) or $50,000 (two 

comments). The agency believes that 

changing the limit to $35,000 or 

$50,000, as suggested, would increase 

the agency’s risk to a level the agency 

cannot accept. Therefore, the comments 

are not adopted and the $25,000 limit 

has been adopted. 

One comment stated it was not clear 

who will determine the real estate’s 

estimated value and what qualifications 

are required to make the determination, 

since agency personnel are no longer 

qualified. The agency assigns employee 

responsibilities in its administrative 

procedures. The agency handbook will 

provide the agency official authorized to 

determine estimated value for real 

estate; therefore, the comment is not 

adopted. 

One comment was received on the 

provision not to appraise the remaining 

security when only part of the security 

is released (§ 765.353(b)). The comment 

stated it is sometimes not possible to 

determine the effect the security being 

released may have on the value of the 

remaining security. The rule provides 

that the agency will obtain an appraisal 

if the agency believes that the 

transaction will reduce the remaining 

security’s value. In addition, the 

agency’s handbook will provide further 

guidance, which will address the 

comment’s concern. Therefore, the 

comment is not adopted. 

Section 765.402 Transfer of Security 

and Loan Assumption on Same Rates 

and Terms 

Five comments were received on the 

transfer of security and loan assumption 

on same rates and terms. Three 

comments stated that the process for 

releasing an entity member from 

liability in cases of transfer and 

assumption should be similar to the 

process of releasing a divorced spouse 

under § 765.406(b). The agency 

disagrees. The agency considers a 

change in the composition of the entity 

as a change in the entity, while a sole 

proprietorship remains the same sole 

proprietorship when a debtor leaves the 

farming operation. In addition, this 

section provides guidance for situations 

where the agency debt is being assumed 

by a party not currently liable for the 

debt. Section 765.406(b) is applicable in 

situations where both spouses are 

individually liable for the debt, but one 

is withdrawing from the operation. 

Therefore, the comments are not 

adopted. 

Two comments stated the agency 

should allow assumptions by eligible 

applicants on new rates and terms. 

Assumption of debt by eligible 

borrowers is addressed in § 765.403; 

however, in reviewing this section, the 

agency determined that it failed to 

address the rates and terms for this type 

of assumption. Therefore, the agency 

added new paragraph (e) in the final 

rule to refer to the rates and terms in 

part 764 for the type of loan being 

assumed. The agency also revised 

paragraph (a) to clarify that EM loans for 

physical and production losses cannot 

be assumed under § 765.403. These 

loans may only be assumed by persons 

who were directly involved in the 

operation at the time of the loss as 

provided in § 765.402(e). 

Section 765.404 Transfer of Security to 

and Assumption of Debt by Ineligible 

Applicants (Renamed in Final Rule) 

Three comments were received on the 

transfer of security to and assumption of 

debt by ineligible applicants. Two 

comments supported the agency’s 

decision to change the term for Nonprogram loans secured by real estate to 

25 years or less, based on the applicant’s 

repayment ability. One comment stated 

the agency should prohibit transfer and 

assumption by transferees who have 

received debt forgiveness from the 

agency. The agency agrees with the 

comment and has revised the CFR 

accordingly. This is a continuation of 

existing policy from 7 CFR 1962.34(b). 

Section 765.451 Continuation of FLP 

Debt and Transfer of Security 

Three comments were received on the 

continuation of FLP debt and transfer of 

security when a borrower is deceased. 

All comments stated the administrative 

processes the agency uses to continue 

FLP debt of deceased borrowers are not 

clearly established in the CFR. The 

agency disagrees. Section 765.451(a) 

provides the agency will continue the 

loan with any individual who is liable 

for the debt. In addition, § 765.451(b) 

provides the agency will continue the 

loan with any individual not liable for 

the debt in accordance with the transfer 

and assumption provisions established 

in § 765.401 through § 765.404. 

Therefore, the comments are not 

adopted. 

Section 765.501 Agency Exception 

Authority 

Two comments were received on the 

exception authority provisions. The 

comments stated the agency should 

provide in the CFR the internal process 

utilized by agency employees to request 

an exception. As stated above, the 

agency, like most Federal agencies, does 

not promulgate internal processes in the 

CFR. However, the agency handbook 

will provide administrative guidance for 

agency staff to process requests. 

Therefore, the comments are not 

adopted. 

Miscellaneous Comments on Part 765 

Six comments were received on the 

agency’s decision to eliminate 

accelerated repayment agreements for 

borrowers able to graduate to 

commercial credit. One comment 

supported the agency’s decision, while 

the remaining opposed it. The opposing 

comments stated accelerated repayment 

agreements are cost-efficient, because 

the agency collects the funds loaned 

faster and without incurring additional 

costs, that may result when taking 

action against a borrower for nonmonetary default. In addition, the 

comments stated that the United States 

Attorney’s offices usually will not 

pursue foreclosure on these cases. The 

agency believes that accelerated 

repayment agreements for borrowers 

who are able to graduate are not 

appropriate, since the agency has 

limited enforcement ability for these 

agreements, and the agreements cannot 

be applied consistently nation-wide. 

Therefore, the comments are not 

adopted. 

Part 766—Direct Loan Servicing—

Special 

The following discussion addresses 

the comments received on part 766. 

Section 766.1 Introduction 

While loan making regulations in 7 

CFR 764.304 clearly establish that the 

limited resource operating loan interest 

rate is not available for youth loans, 

loan servicing limitations for youth 

loans were not so clearly articulated. 

The agency is authorized under 311(b) 

of the Act to use operating loan funds 

for youths, who are rural residents, to 

enable them to operate enterprises in 

connection with their participation in 

4–H Clubs, Future Farmers of America, 

and similar organizations. Youth loan 

enterprises are not the typical farming 

operations financed with other types of 

agency farm loans and, therefore, are 

treated differently in many respects. For 

example, section 311(c)(2) of the Act 

does not count youth loans against the 

applicant seeking a direct operating loan 

that are limited to beginning farmers or 

farmers with 6 years or less of previous 

direct operating loans. Section 302(b)(2) 

further provides that operation of a 

youth enterprise does not count towards 

the required 3 years of participation in 

a farm operation for a direct farm 


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ownership loan. Section 353(a)(2) of the 

Act provides one goal of restructuring 

delinquent debts is ‘‘to ensure that 

borrowers are able to continue farming 

or ranching operations.’’ Considering 

these sections together, the Congress did 

not intend youth loan borrowers to be 

treated like other delinquent loan 

borrowers and receive full servicing 

rights under section 353 of the Act. The 

agency will continue its current policy 

that provided youth loan borrowers may 

not receive Disaster Set-Aside and may 

only be considered for rescheduling and 

deferral under the primary loan 

servicing process. Therefore, the agency 

has revised § 766.1(b) to clearly reflect 

this existing policy. 

Section 766.51 General (Disaster SetAside) 

Two comments were received on the 

general Disaster Set-Aside (DSA) 

provisions. The comments stated the 

agency should not allow a borrower to 

obtain DSA on Non-program loans, even 

if the borrower also has program loans. 

The intent of DSA is to relieve the 

borrower’s immediate financial stress 

caused by a natural disaster. The agency 

believes it is in both its and the 

borrower’s financial interest to allow 

FLP borrowers that also have Nonprogram loans to obtain DSA. In 

addition, this policy has been in effect 

for several years without additional loss 

to the agency. Therefore, the comments 

are not adopted. 

Section 766.52 Eligibility 

Five comments were received on the 

DSA eligibility provisions. Two 

comments stated that it may be difficult 

for borrowers to meet the requirement 

that all program and Non-program loans 

be current or less than 90 days past due 

at the time the application for DSA is 

complete. Borrowers with January 1st 

scheduled payments may become 90 

days past due before notice of DSA 

availability is published in local 

newspapers. The agency disagrees. 

Under § 766.101, borrowers are notified 

of primary loan servicing when they 

become 90 days past due, and those 

servicing options are designed to assist 

the borrower in resolving the financial 

distress and provide long-term financial 

viability. DSA is not intended to replace 

or supplant the statutorily mandated 

primary loan servicing for financially 

distressed or delinquent borrowers. 

Thus, DSA does not apply to the 

situation mentioned in the comments. 

Therefore, the comments are not 

adopted. 

One comment stated the agency 

should provide that borrowers must not 

become 165 days past due before the 

appropriate agency documents for DSA 

are executed. The agency agrees with 

the comment and has revised the CFR 

accordingly. DSA must not interfere 

with statutory primary loan servicing 

requirements. Allowing the agency 15 

days to send notices to borrowers 90 

days past due and 60 days for the 

borrowers to submit a complete 

application for primary loan servicing, 

the DSA needs to be considered and 

closed prior to the borrower becoming 

165 days past due (90+15+60=165 days). 

Two comments stated the agency 

should clarify that the borrower’s 

account may not have been accelerated 

or subject to any special servicing. DSA 

may not interfere with other available 

statutory loan servicing options. DSA is 

intended to be a temporary solution to 

address the borrower’s financial distress 

due to a natural disaster. Distressed and 

delinquent borrower loan servicing 

options attempt to address the 

borrower’s financial distress and 

delinquency, which are outside the 

borrower’s control, and financially 

stabilize the operation for the long term. 

The agency agrees with the comments 

and has revised the CFR accordingly. 

Section 766.54 Borrower Application 

Requirements 

One comment was received on the 

borrower application requirements for 

DSA. The comment stated the agency 

should require borrowers to submit 3 

years of Federal tax returns as part of 

the application for DSA, since in many 

instances analysis of the account has not 

been completed in several years. The 

agency believes that the rule as written 

provides the flexibility needed for 

agency officials to request information 

necessary to evaluate a borrower’s 

application. Therefore, the comment is 

not adopted. 

Section 766.56 Security Requirements 

Four comments were received on the 

DSA security requirements. Two 

comments stated the requirements 

conflict with the requirements of 

§ 766.52(b)(2). Two comments stated the 

security requirements are not clear. The 

agency disagrees. Sections 766.52(b)(2) 

and 766.56 do not conflict. The prior 

provision requires the loans to be 

current after DSA; the latter provision 

requires certain security if the loans are 

not current before and when the DSA is 

executed. The agency believes the 

security requirements are adequate; 

therefore, the comments are not 

adopted. 

Section 766.57 Borrower Acceptance 

of Disaster Set-Aside 

One comment was received on the 

borrower acceptance of DSA. The 

comment stated the agency should 

retain the provisions from the current 

regulations that allow: If a borrower 

repaid all previous DSA or all the 

borrower’s previous DSA were 

cancelled through primary loan 

servicing, the loan is again eligible for 

DSA; if the borrower has more than one 

DSA outstanding, payments received 

will be applied to the oldest DSA until 

it is paid in full, before payments are 

applied to the second DSA; and, 

borrowers receive additional time to 

accept DSA for extenuating 

circumstances. The agency has clarified 

§ 766.52 to state that to be eligible, the 

loan must not have a DSA outstanding. 

To avoid confusion, because a second 

DSA on the same loan has not been 

allowed since 2000, the agency did not 

include in the proposed rule how 

payments to multiple DSA will be 

applied. However, the agency handbook 

will provide guidance on such payment 

application and allow borrowers 

additional time to accept DSA for 

extenuating circumstances. Therefore, 

those portions of the comment are not 

adopted. 

Section 766.101 Initial Agency 

Notification to Borrower of Loan 

Servicing Programs 

Eleven comments were received on 

the initial agency notification to 

borrowers of loan servicing programs. 

Two comments stated the agency should 

spell out the abbreviation ‘‘SA’’

throughout this part. In the preamble of 

the proposed rule, the agency stated that 

all abbreviations and definitions 

applicable to FLP will be included in a 

single section of the CFR (§ 761.2) to 

eliminate the need for the public to 

search multiple CFR parts to determine 

if and where a term is defined, this 

includes Shared Appreciation loan. The 

abbreviation ‘‘SA’’ is included in 

§ 761.2. Therefore, the comments are not 

adopted. 

Two comments stated that the process 

of notifying borrowers with only 

delinquent SA is not published in the 

CFR. One comment inquired on the 

servicing available to borrowers with 

only SA. Borrowers with only SA debt 

are considered Non-program borrowers 

and may only be considered for 

reamortization under § 766.108 as under 

current policy. In addition, section 331D 

of the Act (7 U.S.C. 1981d) only requires 

the agency to publish the initial 

notification provided to program 

borrowers. The agency will address the 


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form of notification to borrowers with 

SA only in its handbook. Therefore, the 

comments are not adopted. 

Two comments stated that FSA–2512, 

FSA–2510, and FSA–2514 do not 

identify their content. These notices are 

published in their entirety as 

appendices to 7 CFR part 766 and are 

identified as such in the table of 

contents. Therefore, no changes have 

been made in response to these 

comments. 

Two comments stated the CFR does 

not include notification of loan 

servicing for borrowers who want to 

liquidate voluntarily. The agency will 

no longer send primary loan servicing to 

borrowers who, while current, request 

agency permission to voluntary 

liquidate the operation. Current 7 CFR 

1965.26(a) requires the agency to send 

primary loan servicing notices under 

those circumstances and wait 60 days 

(within which time the borrower has to 

provide a complete primary loan 

servicing application) before the agency 

can process or consider the request for 

voluntary liquidation. By that time, the 

prospective buyer may no longer be 

interested and the borrower may be 

unable to sell the security. Under those 

circumstances, the agency believes that 

forced consideration of primary loan 

servicing would hinder the borrower’s 

effort to liquidate and could be 

detrimental to the Government, 

especially if the agency loans will be 

paid in full with the transaction. 

Furthermore, voluntary conveyance is 

not a forced collection action by the 

agency requiring such notice under 

section 331D of the Act (7 U.S.C. 

1981d). Therefore, the comments are not 

adopted. 

Two comments stated the CFR does 

not mention that if the borrower does 

not accept the notice by certified mail, 

the agency will send it by regular mail. 

The agency agrees with the comments 

and has revised the CFR accordingly. 

One comment stated that since FSA–

2512 does not provide a deadline for the 

borrower to submit a loan servicing 

application, the CFR should state that 

borrowers who received an FSA–2512 

and did not submit a loan servicing 

application, will be renotified if they 

become 90 days past due. This is 

covered in § 766.103(a) and in FSA–

2512 under the paragraph heading 

‘‘What Happens if You Do Not Apply?’’

Therefore, the comment is not adopted. 

Section 766.102 Borrower Application 

Requirements 

Sixteen comments were received on 

the borrower application requirements 

for loan servicing. One comment stated 

the CFR should specify that in the case 

of an entity, all entity members must 

sign the acknowledgment form. The 

agency agrees with the comments and 

has revised the CFR accordingly. 

Two comments supported the 

reduction in the amount of production 

and financial records requirement to 3 

years. Four comments stated the agency 

should be allowed the flexibility to 

request additional years of records to 

properly evaluate the borrower’s request 

and assess the agency’s risk position. 

One comment stated that due to the 

number of natural disasters that have 

occurred throughout the country, 3 

years of records may not be sufficient in 

providing an accurate assessment of a 

borrower’s operation, so the agency 

should require the borrower submit 

records from ‘‘normal’’ years. For 

consistency, the agency desires to have 

the same records requirements for both 

loan making and loan servicing actions. 

In addition, the agency added in 

§ 761.104 the methodology used by the 

agency to project yields and prices on 

farm operating plans for both loan 

making and servicing purposes. As 

mandated by section 331E(b) of the Act 

(7 U.S.C. 1981e), appropriate 

adjustments to projected yields are 

made when the borrower’s production 

history has been substantially affected 

by a disaster. The agency believes this 

addresses the concerns expressed in the 

comments and, therefore, the comments 

are not adopted. 

One comment stated that a complete 

application for loan servicing should 

include all items required for a 

complete loan making application, 

including legal description of property, 

leases, contracts, etc. The agency 

disagrees. Borrowers provide copies of 

legal description of property owned or 

operated, leases, and contracts at the 

time they apply for a loan. The agency 

maintains the loan making application 

records in the borrower’s file and any 

updates as changes in the borrower’s 

operation occur. Therefore, the 

comment is not adopted. However, the 

agency added the provision requiring 

borrowers to provide a current financial 

statement as part of a complete loan 

servicing application. This is a 

longstanding requirement that existed 

under the loan making and loan 

servicing regulations. The agency’s 

application form contained the financial 

statement; however, due to agency’s 

paperwork reduction efforts, the 

financial statement part was removed 

from the application form. 

Two comments were received 

recommending that to be considered for 

a conservation contract, the borrower 

must submit an aerial photograph 

delineating the land proposed for a 

conservation contract and provide the 

term of the conservation contract in 

writing when applying for primary loan 

servicing. In § 766.102(b), the agency 

already proposed that the borrower 

must submit an aerial photograph 

delineating the land for the proposed 

conservation contract. The agency, with 

direct input of the borrower, utilizes a 

computer software program known as 

the Debt and Loan Restructuring System 

(DALRS) to evaluate each borrower’s 

request for primary loan servicing. The 

agency and the borrower can, and do, 

consider different terms offered in 

combination with other servicing 

options available. Consequently, the 

agency and the borrower need the 

flexibility to evaluate all possible 

options, including conservation 

contracts, and enable the borrower to 

choose the best loan servicing option 

possible for the operation. Therefore, 

there would be no benefit from 

requiring the borrower to specify the 

conservation contract term at the point 

of application. No changes have been 

made in response to these comments. 

Three comments suggested the 

requirement be added that, in cases 

where jointly liable borrowers have 

been divorced and one has withdrawn 

from the operation, to release the 

withdrawing individual from liability 

the remaining individual must develop 

a feasible plan. In many loan servicing 

cases, a feasible plan cannot be 

developed, yet it is not in the financial 

interest of the agency to keep a divorced 

spouse who has no repayment ability or 

non-essential assets liable for the loan, 

since all future servicing can become 

unduly complicated. Therefore, the 

comments are not adopted. 

Two comments stated the agency 

should clarify that the financial records 

requirement is applicable to the entity 

as well as the entity members 

themselves. The agency does not agree. 

The agency believes the provision as 

written is adequate and does not believe 

that further clarification is needed, so 

no change has been made in response to 

these comments. 

Section 766.103 Borrower Does Not 

Respond or Does Not Submit a 

Complete Application 

Two comments were received on the 

provisions for notification requirements 

for borrowers who do not respond or do 

not submit a complete application. One 

comment supported the identical 

treatment of borrowers in monetary and 

non-monetary default. One comment 

stated that the agency’s current internal 

policy of reminding borrowers that the 

agency had not received a complete loan 

servicing application was not included 


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in the CFR. The agency handbook will 

continue this policy. Therefore, the 

comment is not adopted. 

Section 766.104 Borrower Eligibility 

Requirements 

One comment was received on the 

requirement that borrowers use the net 

recovery value of any non-essential 

assets to resolve their financial distress 

or pay the delinquent portion of the 

loan (§ 766.104(a)(2)). The comment 

stated the requirement is harsh for a 

simple debt-restructuring request, may 

be overly burdensome, and may 

discourage borrowers from applying for 

servicing to resolve the financial 

distress or delinquency. Section 

353(c)(2)(A)(ii) of the Act (7 U.S.C. 

200h) requires that the net recovery 

value of all non-essential assets will be 

considered to determine if the 

borrower’s loans may be restructured. 

Therefore, the comment cannot be 

adopted. 

One comment suggested the words, 

‘‘in accordance with all loan 

agreements’’ be dropped after the words, 

‘‘the borrower has acted in good faith’’

in § 766.104(a)(4), since they are 

included in the definition of good faith. 

The agency agrees with the comment, 

and has revised the CFR accordingly. 

One comment was received on the 

requirement that current or financially 

distressed borrowers requesting primary 

loan servicing must pay a portion of the 

interest due on the loans 

(§ 766.104(a)(5)). The comment 

disagreed with this requirement and 

stated that it seems the requirement is 

new. The requirement is currently 

published under § 1951.908(c)(5) and is 

not new. Further, Section 372 of the Act 

(7 U.S.C. 2008g) requires that to obtain 

servicing, non-delinquent borrowers 

must pay a portion of the interest due 

on the loan. Therefore, the comment 

cannot be adopted. 

One comment stated the agency 

process of consulting the Office of 

General Counsel (OGC) when the agency 

determines that a borrower has not 

acted in good faith should be removed. 

The agency does not agree. Therefore, 

the agency will continue its current 

policy of considering acts of fraud, 

waste or conversion of security, when 

substantiated by a legal opinion from 

OGC, when determining if an applicant 

or borrower has acted in good faith. The 

comment is not adopted. 

One comment supported the agency’s 

inclusion of the list of circumstances 

beyond the borrower’s control that may 

result in a borrower’s failure to make 

payments as agreed. Another comment 

stated the agency should clarify that the 

list of circumstances beyond the control 

of the borrower is not exhaustive. In 

addition, the comment stated the agency 

should state in § 765.202(a)(2) that the 

borrower’s failure to keep agreements 

will be considered when making 

eligibility determinations only when the 

failure is ‘‘for reasons not beyond the 

borrower’s control.’’ The agency 

believes the circumstances as listed in 

§ 765.202(a)(2) encompass all causes for 

a borrower to not make payments for 

reasons beyond their control. The 

agency believes that the suggested 

language for § 765.202(a)(2) is 

unnecessary as all aspects of the 

borrower’s failure are to be 

‘‘considered’’ and ‘‘may’’ adversely 

impact future requests for loans or 

servicing. Furthermore, a borrower’s 

failure to keep agreements with the 

agency is evaluated when determining if 

the borrower has ‘‘acted in good faith’’

as required under the loan making and 

servicing eligibility requirements. The 

definition of ‘‘good faith’’ provides, ‘‘the 

Agency considers a borrower to act in 

good faith, however, when the borrower 

is unable to adhere to all agreements 

due to circumstances beyond the 

borrower’s control.’’ Therefore, the 

comment is not adopted. 

Two comments stated the agency 

should spell out the abbreviation ‘‘SA.’’

As noted previously, all abbreviations 

and definitions used are published in 

§ 761.2. Therefore, the comments are not 

adopted. 

One comment stated the agency 

should continue to assess a delinquent 

borrower’s need for training to 

determine the reasons for not being able 

to pay. In cases where the delinquency 

is due to lack of financial management 

knowledge, the comment stated the 

agency should require financial 

management training. The agency 

initially evaluates a borrower’s need for 

training in the loan making process 

according to § 764.452. As provided in 

§ 761.103, as part of the farm assessment 

initiated in the loan making process, the 

agency reviews the borrower’s progress 

at least annually to evaluate training 

needs. While the agency may 

recommend additional training, 

requiring training as a condition of loan 

servicing only hinders debt 

restructuring. Restructure of debt is a 

benefit to the borrower as they develop 

a payment plan based on past history 

and is a benefit to the agency as the debt 

continues to be repaid as serviced 

without liquidation. Therefore, the 

comment is not adopted. 

One comment stated subparagraph 

(a)(1) as written is not clear. The agency 

agrees with the comment and has 

clarified the subparagraph introduction 

to state that the delinquency or financial 

distress is the result of reduced 

repayment ability due to one of the 

listed circumstances beyond the 

borrower’s control. 

Section 766.105 Agency Consideration 

of Servicing Requests 

Three comments were received on the 

appraisal of a borrower’s assets. All 

comments stated the agency should 

clarify if an appraisal of the borrower’s 

assets is needed only when a feasible 

plan cannot be developed with a 110 

percent debt service margin or when a 

write down is required to achieve at 

least a 100 percent debt service margin. 

The agency believes the rule as written 

specifies that the agency will not forgive 

debt, through write down or current 

market value buyout, before obtaining 

an appraisal of all the borrower’s assets, 

without regard to debt service margin. 

In addition, the agency handbook will 

provide guidance on when the agency 

will obtain appraisals in loan servicing. 

Therefore, the comments are not 

adopted. 

Section 766.106 Agency Notification 

of Decision Regarding a Complete 

Application 

Nine comments were received on the 

agency notification of the decision 

regarding a complete application. Three 

comments stated the agency must 

continue to request mediation or 

voluntary meeting of creditors if the 

borrower cannot develop a feasible plan. 

One comment stated the agency should 

continue to initiate mediation 

proactively, otherwise the number of 

appeals and foreclosures will increase. 

Two comments stated section 353(d) of 

the Act (7 U.S.C. 2001) mandates the 

agency to initiate mediation when a 

borrower cannot develop a feasible plan 

for restructuring. The agency disagrees. 

This Section is applicable only when 

write down is being considered as a 

restructuring option. The section also 

provides that before eliminating the 

option for writedown, the Secretary will 

make a reasonable effort to contact the 

borrower’s creditors, either directly or 

through the borrower to encourage 

restructuring. This statutory 

requirement is met by the agency’s 

notification to the borrower of the 

availability of mediation or voluntary 

meeting of creditors, as applicable. 

Further, the agency participates in StateCertified mediation when available. 

Therefore, the comments are not 

adopted. 

Two comments stated the agency 

should replace the terms ‘‘the agency 

will notify the borrower’’ and ‘‘the 

agency will renotify the borrower’’ with 

the terms ‘‘the agency will send the 


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borrower a notification’’ and ‘‘the 

agency will send the borrower another 

notification.’’ The agency agrees with 

this clarification and has revised the 

CFR accordingly. 

One comment stated the statutory 

requirements to provide the borrower 

the agency’s calculations and notify the 

borrower within 15 days of determining 

the borrower’s ineligibility for loan 

servicing was not included in the 

proposed CFR. The agency agrees with 

the comment and has revised the CFR 

accordingly. 

Section 766.109 Deferral 

Five comments were received on the 

deferral provisions. Three comments 

supported the agency’s clarification that 

the deferral term will be the shortest 

possible that provides a feasible plan. 

One comment stated the agency should 

not grant deferrals to borrowers who 

have accumulated excessive debt for 

non-essential expenses. The agency 

agrees that in some cases, a borrower’s 

financial distress or delinquency may be 

the result of the borrower incurring 

excessive debt for non-essential 

expenses. The eligibility requirement 

that the financial distress or 

delinquency be the result of reduced 

repayment ability due to circumstances 

beyond the borrower’s control, however, 

adequately addresses the concern. 

Therefore, the comment is not adopted. 

One comment stated deferrals should 

be cancelled when a borrower files for 

bankruptcy protection, since by filing 

for bankruptcy, the borrower has elected 

to restructure the agency debt. When the 

agency restructures a borrower’s loans 

with deferral of debt, the borrower 

executes the promissory note 

establishing the repayment schedule. 

The terms established by the promissory 

note take the deferral into consideration. 

If a borrower files for bankruptcy 

protection, the agency is not authorized 

to modify the repayment schedule 

without obtaining the prior approval of 

the court. Therefore, the comment is not 

adopted. 

Section 766.110 Conservation Contract 

Eighteen comments were received on 

the conservation contract provisions. 

Three comments stated the agency 

should include SA debt when 

calculating debt to be written down by 

a conservation contract. The agency 

agrees with the comments, provided the 

borrower has other outstanding program 

loans, and has revised the CFR 

accordingly. SA-only debt may not be 

serviced with a conservation contract. 

SA-only debt is classified as Nonprogram debt for borrowers who have 

no remaining program loans. The 

purposes of conservation contracts 

include allowing the borrower to timely 

repay the agency loans. Since those 

borrowers have no program loans 

remaining, this particular purpose of the 

conservation contract cannot be met. 

Therefore, the agency cannot offer 

conservation contracts to those 

borrowers. The section has been revised 

to provide that for borrowers who have 

at least one program loan outstanding, 

the Non-program debt can be considered 

for conservation contract because the 

conservation contract’s purpose will be 

fulfilled as the borrower will be in a 

better position to repay the debt timely. 

Three comments stated the agency 

should clarify that borrowers can appeal 

technical decisions made by NRCS 

according to NRCS’s appeal process. 

The agency agrees with the comments 

and has revised the section to state that 

NRCS technical decisions will be 

handled in accordance with applicable 

NRCS regulations. At this time, the 

applicable NRCS regulations are 

published at 7 CFR part 614. Other 

aspects of a denial of conservation 

contract by the agency would be 

appealable under normal agency rules at 

7 CFR parts 11 and 780. 

Two comments stated the 

abbreviation ‘‘SA’’ should be spelled 

out; the agency loan under 

consideration for conservation contract 

must be secured by real estate; and that 

Non-program loans cannot be 

considered for conservation contracts. 

As noted previously, all abbreviations 

and definitions used are published in 

§ 761.2. Therefore, this part of the 

comments is not adopted. The agency 

agrees that the loan under consideration 

for conservation contract has to be 

secured by real estate and has revised 

the CFR accordingly. The agency 

believes the benefit of conserving the 

nation’s precious natural resources 

cannot be limited to program loans only. 

At least one program loan must be 

involved, however, for the agency to 

enter into a conservation contract with 

a Non-program borrower because the 

Act provides that only ‘‘qualified’’

borrowers may enter into conservation 

contracts. The CFR has been revised to 

accurately reflect this requirement and 

therefore, this part of the comments is 

not adopted. 

Two comments suggested that the 

borrower select in writing the term of 

the conservation contract. As previously 

explained in the response to comments 

under § 766.102, the agency and the 

borrower can, and do, consider different 

options or combinations of options that 

will allow the borrower’s account to be 

restructured. Consequently, the agency 

and the borrower need the flexibility to 

choose the best loan servicing option 

possible for the borrower’s operation. 

Therefore, the comments are not 

adopted. 

Two comments stated that NRCS 

should develop the conservation 

management plan and the agency 

should approve it, as specified in the 

Memorandum of Understanding 

between the agencies. The agency agrees 

and has revised the CFR accordingly. 

Two comments stated the CFR does 

not state the borrower has to sign the 

conservation contract agreement nor 

does it provide the form number for the 

conservation contract agreement. 

Section 766.109(j) requires the borrower 

to sign the Conservation Contract 

Agreement. As stated previously, the 

agency does not publish form numbers 

in the CFR; however, the agency 

handbook will provide guidance for 

employees. Therefore, the comments are 

not adopted. 

Two comments suggested the agency 

include required servicing for 

conservation contracts and agency 

actions if the borrower is not following 

the management plan or if the borrower 

sells the property under the 

conservation contract. One comment 

stated the penalties for violating the 

conservation contract agreement must 

be more severe than currently provided, 

because, if the only penalty the agency 

will assess is the reinstatement of the 

debt, it is sometimes to the borrower’s 

economic benefit to violate the 

conservation contract. The agency did 

not propose to make substantive 

changes to the conservation contract 

requirements, but will do so through 

separate rulemaking procedures. 

Therefore, the comments are not 

adopted. 

One comment stated the agency 

should require subordination of any 

prior liens and title clearance on the 

property under consideration for a 

conservation contract and that the 

conservation contract should not be 

renegotiated during its term or removed 

before expiration. The agency requires 

the real estate property under a 

conservation contract to be security for 

agency loans. Therefore, the agency 

would already have a lien on the 

property and additional title clearance 

is not required. Further, the agency, as 

a matter of policy, does not renegotiate 

the terms of the conservation contract, 

nor does it remove the conservation 

contract from the property until it 

expires. Some flexibility, however, 

should remain in the contract for 

unusual cases. Therefore, the comment 

is not adopted. 

Two comments were received on the 

maximum debt reduction calculation by 


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a conservation contract used for current 

or financially distressed and delinquent 

borrowers (§ 766.110(h) and (i)). Both 

comments stated that the calculations 

should be the same for all. Section 

349(e) of the Act (7 U.S.C. 1997) 

however, provides different calculations 

to be used for debt reduction by 

conservation contract for delinquent 

borrowers than non-delinquent 

borrowers. Therefore, the comments 

cannot be adopted. 

Section 766.111 Writedown 

Two comments stated the reference to 

the 101 percent debt service margin for 

writedown as provided in § 766.111(b) 

should be changed to 110 percent. The 

101 percent reference is correct as used. 

When the agency calculations in DALR$ 

reflect that a feasible plan can be 

developed with writedown, the agency 

will determine if a feasible plan and a 

debt service margin of 101 percent or 

more can be achieved without a 

writedown. If so, the agency will 

provide the borrower the option to 

choose the plan used in the 

restructuring. Therefore, the comments 

are not adopted. 

Three comments stated the agency 

should remove subparagraph (a)(2), 

excluding debtors with SA only, since 

subparagraph (a)(1)(iii) provides the 

borrower must not have received a 

previous debt forgiveness to be eligible 

for writedown. The agency agrees with 

the comments and has revised the CFR 

accordingly. 

One comment stated the agency 

should clarify on FSA–2512 (Appendix 

A to part 766, subpart C) that to receive 

writedown, the borrower must be 

delinquent on the agency loans. The 

agency agrees with the comment and 

has revised FSA–2512 accordingly. 

Section 766.112 Additional Security 

for Restructured Loans 

Eight comments were received on the 

additional security for restructured 

loans provision. Two comments stated 

the agency should continue its current 

policy of requiring a lien on all assets 

when servicing delinquent borrowers’

loans only. Three comments stated the 

agency should not require a lien on all 

the borrower’s assets when servicing a 

financially distressed borrower’s loans, 

but instead require the borrower to 

provide security of up to 150 percent of 

the agency loans. The comments stated 

that requiring a lien on all assets may 

make financially distressed borrowers 

not apply for loan servicing even when 

such servicing may move their 

operation towards financial viability. 

The agency agrees and has revised the 

proposed language to require a lien on 

all assets only when the borrower is 

delinquent prior to restructuring. The 

agency does not agree with the 

comments on requiring such borrowers 

to provide security of up to 150 percent 

of the agency loans when servicing 

loans. This is consistent with current 

policy. 

Two comments suggested agency 

employees be granted authority to waive 

the agency’s lien on crops when the 

agency is not providing an annual 

operating loan because a lien on crops 

in a subordinate position frustrates 

lenders, borrowers, and employees 

when trying to secure new crop 

production financing. The agency 

believes that the lien on crops should 

continue to be taken as it helps secure 

the agency’s interests and provides a 

valid lien on future crops. In addition, 

it ensures that crop proceeds, which are 

normal income security, are used to pay 

agency debt, after the prior lien holder 

has been paid. Therefore, the comments 

are not adopted. 

One comment stated that when 

servicing loans, the agency should 

obtain a lien on the borrower’s personal 

residence, even if the residence is not 

located on the farm, as the agency 

obtains a lien on chattels and crops for 

long-term loans. When the agency 

provides primary loan servicing to 

delinquent borrowers, the potential for 

loss to the agency is increased due to 

the borrowers’ deteriorated financial 

position. Further, the agency will 

continue to obtain a lien on crops to 

ensure that normal income is applied to 

the agency debt after prior lien holders 

have been paid. Therefore, the agency 

agrees with the comment and has 

revised the CFR to remove the security 

exception for personal residences. 

Section 766.113 Buyout of Loan at 

Current Market Value 

One comment was received on the 

buyout of loan at current market value 

provisions. The comment stated it is not 

clear if buyout of loans at current 

market value is available for borrowers 

who are 90 days past due only. The 

agency agrees with the comment and 

has clarified the CFR to reflect its 

current policy making market value 

buyout is available to delinquent 

borrowers. Further, the agency clarified 

FSA–2512 and FSA–2514 to state that 

current market value buyout is available 

to delinquent borrowers. 

Section 766.115 Challenging the 

Agency Appraisal 

Three comments were received on the 

appraisal options available to a 

borrower requesting primary loan 

servicing. Two comments stated that a 

borrower who does not agree with the 

agency’s appraisal should only be 

offered the option of a technical 

appraisal review. Further, one of the 

comments stated that borrowers should 

only be allowed to obtain a technical 

appraisal review to determine if the 

agency’s appraisal meets the Uniform 

Standards of Professional Appraisal 

Practice (USPAP) requirements and if 

there are flaws in the agency’s appraisal 

that would change the appraised value 

of the property. In addition, the 

comment stated if there are no flaws in 

the agency’s appraisal there should be 

no further challenge to the appraisal and 

no need for a second appraisal. Section 

353(c)(7) and (j) of the Act (7 U.S.C. 

2001) requires negotiation of appraisals 

and appellant rights to independent 

appraisals. Therefore, the comments 

cannot be adopted. 

Another comment stated that since 

the Act does not specify any percentage 

that the appraisals may differ in the 

negotiation process, the agency should 

not limit the borrower’s right to have a 

third appraisal conducted. While the 

agency agrees the Act does not specify 

the percentage the appraisals may differ, 

the use of the five percent difference is 

reasonable and does not create 

limitations on the borrower’s rights. If 

the appraisals differ by less than five 

percent, the agency provides the 

borrower the option to choose the 

appraisal to be used, thus saving the 

borrower and the agency the expense of 

a third appraisal. It would be unrealistic 

and cost prohibitive not to include any 

limit, and it would not be in the 

borrower and the agency’s financial 

interest if the limit were any lower than 

five percent. Lastly, the agency has 

found that since its implementation, the 

provision has worked well for both the 

borrowers and the agency. Therefore, 

the comment is not adopted. However, 

the agency revised this section to correct 

that the borrower selects the appraisal to 

be used when the two appraisals differ 

by five percent or less (rather than by 

less than five percent) to reflect the 

agency’s current policy. 

Section 766.151 Purpose (Homestead 

Protection) 

Two comments were received on the 

homestead protection program purpose 

provision. Both comments stated the 

agency should clarify that the former 

borrower possesses no statutory right to 

remain in possession of the acquired 

property. In addition, both comments 

stated the agency should replace the 

word ‘‘retain’’ with the word ‘‘reacquire.’’ The agency agrees with the 

first part of the comments, however, it 

believes they are more applicable under 


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the liquidation provisions. The agency, 

therefore, has added § 766.353(e) to 

adopt the comments. This section has 

been removed as unnecessary. 

Section 766.152 Applying for 

Homestead Protection (Renumbered to 

766.151 in the Final Rule) 

Two comments were received on the 

provision for applying for homestead 

protection. One comment stated that 

appeal rights should not be provided to 

borrowers who do not submit a 

complete application. When borrowers 

initially apply for loan servicing, 

homestead protection is included in the 

loan servicing options for which 

borrowers may be considered, and 

therefore, must automatically be 

considered for pre-acquisition 

homestead protection. If that option is 

denied for any reason, appeal rights will 

be provided. Therefore, the comment is 

not adopted. 

The other comment stated section 

352(c)(6) of the Act (7 U.S.C. 2000) 

provides for notice ‘‘no later than the 

date of acquisition of the property’’ but 

that the proposed rule requires notice 

‘‘After the agency acquires title to the 

property.’’ The comment stated the 

agency should revise the CFR to comply 

with the Act’s requirement. There is no 

substantive difference between these 

provisions. The proposed and final rule 

language mirrors existing language at 7 

CFR 1951.911. Therefore, the comment 

is not adopted. 

Section 766.153 Eligibility 

(Renumbered to 766.152 in the Final 

Rule) 

Seven comments were received on the 

eligibility requirements for homestead 

protection. Two comments stated the 

former owner should be responsible for 

paying costs associated with obtaining 

and meeting all state and local 

requirements for dividing the 

homestead property; otherwise the 

agency should deny the homestead 

protection request. After the former 

owner’s property becomes the agency’s 

inventory property, the agency is the 

legal owner and is responsible for the 

costs associated with separating the 

homestead protection property. This 

furthers the intent of the Act requiring 

that the agency offer this benefit. 

Therefore, the comments are not 

adopted. 

One comment stated the agency 

should only pay junior liens when a 

positive recovery can be made and 

when the cost of foreclosure will exceed 

the amount of the prior lien. The agency 

agrees, in part, with the comment and 

has revised § 766.152(a)(4) to reference 

the voluntary conveyance requirements 

in § 766.353. Further, § 766.353 was 

revised to provide that the agency may 

attempt to negotiate a settlement with 

the junior lienholder if it is in the 

agency’s financial interest; however, the 

agency’s attempt to negotiate with the 

junior lienholder does not imply or 

create a right for the borrower. 

One comment stated the agency 

should clarify the homestead protection 

provisions applicable to entities. The 

agency agrees with the comment and 

has revised the CFR accordingly. 

Three comments stated the agency 

should further clarify the lessee’s 

responsibilities regarding making 

improvements to the property under the 

homestead protection lease provisions. 

The agency agrees with the comments 

and has revised the CFR accordingly. 

Three comments were received on the 

former owner eligibility requirements 

for homestead protection. The 

comments stated that borrowers 

requesting servicing are required to 

provide 3 years of financial information, 

and, therefore, the Agency will not have 

financial records available to it to make 

the proposed 60 percent income 

determination from at least two of the 

preceding 6 years. Section 352(c)(1)(B) 

and (C) of the Act (7 U.S.C. 2000) 

provide the former owner eligibility 

requirements for homestead protection. 

Additionally, borrowers requesting 

homestead protection will have received 

assistance from the agency for a number 

of years and as a result, prior years’

income records are likely to be in the 

borrower’s agency file. If additional 

information is needed to satisfy this 

eligibility requirement, it must be 

submitted with the application under 

§ 766.152. Therefore, no changes have 

been made in response to these 

comments. 

Section 766.155 Homestead Protection 

Leases (Renumbered to 766.154 in the 

Final Rule) 

Three comments were received on 

homestead protection leases. All 

comments stated the CFR does not 

specify that applicants can select the 

appraiser to conduct the independent 

appraisal to determine the property’s 

market value. The agency agrees with 

the comments and has revised the CFR 

accordingly. 

Further, one of the comments stated 

the agency should incorporate the Act’s 

provisions requiring the agency to 

provide notice with appeal rights to 

former owners for failing to make rental 

payments and to comply with state and 

local laws governing evictions. The 

agency, at § 761.6, provided that review 

or appeal of adverse agency decisions 

will be handled in accordance with 7 

CFR parts 11 and 780. In addition, the 

agency handbook will provide guidance 

for employees to implement notice 

requirements. Moreover, the agency 

already consults with OGC for the 

proper process to follow for evictions, 

due to the differences in state and local 

requirements. Therefore, these 

comments are not adopted. 

The comment finally stated, the 

agency should not require borrowers 

with homestead protection leases to 

make costly improvements or replace 

systems during the lease term. The 

agency revised § 766.152(b)(5) to 

provide lessees will be responsible for 

the normal maintenance of the 

homestead protection property. 

One comment was received on the 

requirement that a homestead protection 

lease term be no less than three and no 

more than 5 years. The comment stated 

that the requirement should read ‘‘the 

lease term must be less than 5 years.’’

Section 352(b)(3) of the Act provides 

that a homestead protection lease may 

not exceed 5 years, but in no case 

should it be less than 3 years. Therefore, 

the comment cannot be adopted. 

Section 766.201 Shared Appreciation 

Agreement 

One comment questioned the term of 

the Shared Appreciation Agreement as 

being 5 years instead of 10 years. The 

agency published a final rule on August 

18, 2000 (65 FR 50401–50405) and 

revised the term for Shared 

Appreciation Agreements from 10 years 

to 5 years. The agreement may be 

triggered earlier by one of the events 

described in the agreement. Therefore, 

no change was made based on the 

comment. 

Section 766.202 Determining Shared 

Appreciation Due 

Five comments were received on 

determining the shared appreciation 

due. One comment stated the agency 

should clarify the term ‘‘remaining 

contributory value’’ as used in 

§ 766.202(a)(3). The agency agrees 

inclusion of the word ‘‘remaining’’ in 

the phrase causes confusion and has 

removed it. 

Two comments stated that an 

appraisal completed according to 

§ 761.7 and within one year of the 

maturity date or the triggering event of 

the shared appreciation agreement, is 

timely. The agency agrees with the 

comments and has clarified the CFR 

accordingly. 

Two comments stated the agency 

should clarify that the borrower is 

responsible for providing the capital 

improvements added during the term of 

the shared appreciation agreement and 


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should provide the information before 

the agency obtains the appraisal. The 

agency agrees with the comments and 

has clarified the CFR accordingly. 

Section 766.203 Payment of Recapture 

One comment was received regarding 

the payment of recapture. The comment 

stated it is not clear what happens if the 

borrower does not pay the recapture 

amount due within the timeframe 

provided. Section 766.204 describes the 

actions the agency will take if the 

borrower is not able to pay the recapture 

amount due. Other internal collection 

remedies available need not be 

discussed in the rule. Therefore, no 

change has been made in response to 

the comment. 

Section 766.252 Unauthorized 

Assistance Resulting From Submission 

of False Information (Renumbered and 

Renamed in Final Rule) 

Proposed § 766.251 (types of 

unauthorized assistance) was removed 

in the final rule as unnecessary 

One comment was received regarding 

unauthorized assistance resulting from 

false information (§ 766.253 in proposed 

rule). The comment stated the agency 

should revise the section to state that 

false information includes information 

the borrower should have known to be 

false. As stated in the response to a 

similar comment regarding the 

definition of ‘‘false information,’’ it 

would be very difficult for the agency to 

prove the applicant or borrower should 

have known the information submitted 

to the agency was false. Therefore, the 

comment is not adopted. 

Section 766.253 Unauthorized 

Assistance Resulting From Submission 

of Inaccurate Information by Borrower 

or Agency Error (Renumbered and 

Renamed in Final Rule) 

Nine comments were received on the 

treatment of unauthorized assistance 

received by borrowers (§ 766.254 in 

proposed rule). Three comments stated 

that borrowers should be able to 

continue with the loan under program 

rates and terms if they are unable to 

repay the entire amount of unauthorized 

assistance in a lump sum. In addition, 

two comments stated borrowers may not 

be able to repay the loan under Nonprogram rates and terms. While the 

agency is willing to work with such 

borrowers on a repayment plan, the 

unauthorized debt must be repaid. The 

Act does not authorize the agency to 

allow borrowers who have received 

unauthorized assistance to continue 

with the loan on below market program 

rates and terms. Therefore, the 

comments are not adopted. 

Another comment stated that the 

agency’s proposal to reclassify the entire 

loan as a Non-program loan if a portion 

of the loan is unauthorized seems to be 

extreme, if the unauthorized loan was 

the result of employee 

misunderstanding. While the agency 

understands the concern expressed in 

the comment, it does not have the 

authority to allow continued assistance 

to an applicant or borrower that does 

not meet statutory program 

requirements. Therefore, the comment is 

not adopted. 

One comment questioned the ability 

of the agency’s Finance Office to process 

an accelerated repayment agreement. 

Two comments stated the provisions 

outlining possible resolutions needed to 

be clarified. Two comments stated the 

agency should specify if the terms of 

current accelerated repayment 

agreements (5 years or less), will be 

changed according to the proposed 

provisions. In evaluating the comments, 

the agency determined that use of an 

accelerated repayment agreement does 

not resolve the unauthorized assistance 

received, but rather allows for 

continued assistance during the period 

established by the agreement without 

program compliance. Therefore, the 

agency removed accelerated repayment 

agreements as an option for 

unauthorized assistance repayment. In 

cases where the unauthorized assistance 

is the result of borrower or agency error, 

the agency retained the option allowing 

the borrower to repay the unauthorized 

assistance in a lump sum. If the 

borrower is unable to repay all or part 

of the unauthorized amount in a lump 

sum and has repayment ability, the 

agency may convert the loan to a Nonprogram loan, using rates and terms 

identical to those proposed for 

accelerated repayment agreements. In 

addition, the agency revised § 766.251 

to provide that the agency may reverse 

any unauthorized loan servicing 

received by the borrower, where 

possible. The agency believes this action 

provides those borrowers whose 

unauthorized assistance is the result of 

an error with reasonable alternatives, 

ensures borrowers do not retain benefits 

for which they are not entitled to, and 

establishes enforceable loan and 

security instruments ensuring 

repayment of the debt. 

Section 766.351 Liquidation 

Two comments were received on the 

general liquidation provision. Both 

comments stated the proposed rule did 

not provide for notification of loan 

servicing for borrowers who want to 

liquidate voluntarily. The agency 

disagrees. Section 766.351(b)(2)(ii) 

provides ‘‘if the conditions of (b)(1) of 

this section have not been met, the 

agency will notify the borrower in 

accordance with subpart C of this part, 

prior to acting on the request for 

voluntary liquidation.’’ No changes, 

therefore, are necessary. 

Section 766.352 Voluntary Sale of Real 

Property and Chattel 

Three comments were received 

regarding the voluntary sale of real 

property and chattel. One comment 

stated that allowing borrowers to sell 

security voluntarily in lieu of 

involuntary liquidation should stop 

once the involuntary liquidation process 

has begun, otherwise the remaining 

security has to continually be updated 

through the court as the security 

changes with each partial sale. Sections 

766.352(a)(1) and (2) provide that a 

borrower must sell all security until the 

debt is paid in full or all security is 

liquidated, if the agency approves the 

sale. Further, paragraph (b)(4)(ii) 

provides the agency will only approve 

a sale that does not result in full 

payment of the debt only when it is in 

the agency’s financial interest. In 

addition, as stated in § 766.351(b)(2)(i), 

the agency will not delay involuntary 

liquidation for a voluntary sale to close. 

Therefore, the agency believes the 

comment’s concerns are adequately 

addressed in the CFR and no action is 

required. 

Two comments stated the sales 

proceeds in voluntary liquidation 

situations, for both real estate and 

chattel security, should be ‘‘equal to or 

greater than either the agency debt or 

the agency-defined recovery value’’

instead of ‘‘equal to or greater than the 

market value of the property.’’ The 

comments stated that often the agency 

receives only the recovery value if the 

agency has to liquidate the borrower’s 

security. The agency disagrees. When 

the agency evaluates a loan request, the 

adequacy of the security is based on the 

market value of the property, therefore, 

allowing liquidation of security for less 

than its market value is not reasonable. 

Such policy would increase losses and 

is not in the agency and the taxpayers’

financial interest. Therefore, the 

comments are not adopted. 

Section 766.353 Voluntary 

Conveyance of Real Property 

Four comments were received 

regarding the voluntary conveyance of 

real property. Three comments stated 

the agency form for voluntary 

conveyance is not addressed in the CFR. 

Two comments stated the same as to 

chattel property. The agency does not 

publish form numbers in the CFR; 


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however, the agency handbook will 

provide the form numbers required for 

voluntary conveyance of chattel and real 

property. Therefore, no changes have 

been made in response to the comments. 

Two of the comments also stated 

junior liens, real estate taxes, and 

judgments can be charged to the 

borrower’s account as recoverable costs. 

Recoverable costs may include 

administrative costs associated with the 

agency’s acquisition of the property 

such as lien search or recording fees. 

The agency agrees that recoverable costs 

can be charged to the borrower’s 

account as provided in the proposed 

rule. 

One comment stated there was a 

conflict between § 766.353(c)(2) that 

provides the borrower has to pay junior 

liens, real estate taxes, judgments, and 

other assessments before the agency will 

accept a voluntary conveyance of real 

property and paragraph (d)(1) that 

provides the agency will charge the 

borrower’s account for recoverable costs 

incurred in connection with a voluntary 

conveyance. As stated above, the agency 

has revised the CFR as proposed. 

Therefore, no further action is required. 

Section 766.357 Involuntary 

Liquidation of Real Property and Chattel 

(as Renumbered in Final Rule) 

Three comments were received 

regarding involuntary liquidation of real 

property and chattel (§ 766.356 in 

proposed rule). Two comments stated 

the agency should clarify that the 

borrower does not retain statutory or 

implied or inherent regulatory right of 

possession of the real estate property 

after the date of the foreclosure sale. The 

agency agrees with the comments and 

has revised the CFR accordingly. 

One comment stated the agency 

should incorporate the requirement 

found in 25 U.S.C. Section 483a(a) 

which provides, in part, that foreclosure 

proceedings involving Indian land will 

be in accordance with Tribal laws, or if 

Tribal foreclosure laws are absent, 

according to State laws. Further, the 

comment stated the agency should 

recognize Indian reservations as 

political subdivisions and Tribal entities 

as State-approved entities. Foreclosure 

proceedings differ from state to state, 

thus, it would make for exceptionally 

voluminous regulations for the agency 

to include all internal foreclosure 

procedures in its regulations. The 

agency has adhered to Tribal and Statespecific foreclosure laws, as applicable, 

and will continue to do so. Furthermore, 

the agency does not impose different 

requirements on entities approved by 

States or by Tribes. Therefore, no 

changes have been made in response to 

the comment. 

One comment stated the agency 

should incorporate the provisions found 

in Section 335(e) of the Act that provide 

detailed guidance for disposition and 

administration of inventory property 

located within an Indian reservation 

where the borrower is a member of the 

Tribe. Furthermore, section 335(e) of the 

Act provides detailed guidance 

regarding the acceleration of loans to 

Native American borrowers that was not 

addressed in the proposed rule. The 

agency redesignated proposed § 766.356 

as § 766.357 in the final rule and added 

a new § 766.356 addressing statutory 

provisions regarding the acceleration of 

loans to Native American borrowers in 

the final rule. These policies are 

consistent with those currently 

addressed in internal agency notices. 

While no comment was received 

regarding § 766.357(b)(2), the agency 

determined that the proposed rule 

modified existing regulations currently 

published in 7 CFR 1955.18(e)(2)(ii). 

Modification of the existing policy was 

unintended and was not addressed in 

the discussion of changes in the 

preamble of the proposed rule. 

Therefore, the agency revised 

§ 766.357(b)(2) to provide that the 

agency will credit a borrower’s account 

after a foreclosure sale based on the 

amount of its bid as provided in existing 

regulations, rather than the market 

value, less prior liens, as provided in 

the proposed rule. No substantive 

change was intended. 

Appendices to 7 CFR Part 766 

The agency renumbered all the 

Appendices in the final rule to 

accommodate its new numbering system 

for all forms used in loan servicing. 

Therefore, FSA–2501 has been 

renumbered to FSA–2512; FSA–2503 

has been renumbered to FSA–2510; and 

FSA–2505 has been renumbered to 

FSA–2515. Further, under paragraph (f) 

in all appendices, the agency rearranged 

the forms comprising a complete 

primary loan servicing application in 

numerical order. Under current rules, 

applicants for primary loan servicing are 

required to provide multiple copies of a 

form to the agency to verify debts and 

assets of the applicant. Under the final 

rule, applicants will sign only one 

authorization to release information and 

provide it to the agency. The agency, in 

turn, will use the authorization to verify 

debts and assets as well as non-farm 

income. This process closely matches 

commercial lenders’ practices. 

Therefore, paragraph (f) in all 

appendices is revised to reflect the 

agency’s new policy. 

Eight comments were received on the 

Appendices to 7 CFR part 766. One 

comment stated the agency should 

replace the word ‘‘mediation’’ with the 

words ‘‘Alternative Dispute Resolution 

(ADR)’’ because ADR is the term used in 

the agency’s handbook and describes 

the agency’s informal process for 

resolving disputes. The agency uses the 

term ‘‘mediation’’ in all the Appendices 

sent to the borrowers because the term 

covers both the formal and informal 

mediation process for resolving 

disputes. In addition, agency borrowers 

are familiar with the term ‘‘mediation,’’

while ADR encompasses a wider variety 

of techniques not used by the agency. 

Therefore, the comment is not adopted. 

Two comments stated the title for 

FSA–2512 should be revised to ‘‘Notice 

of Availability of Loan Servicing to 

Borrowers Who Are Current, Financially 

Distressed or Less Than 90 Days Past 

Due.’’ In addition, both comments stated 

FSA–2512 should not include the 

option for writedown and shared 

appreciation agreement and inquired if 

a lien on all assets will be required for 

current or financially distressed 

borrowers. The agency agrees and has 

revised the Appendix’s title as 

suggested. The agency published a final 

rule on February 4, 2004 (69 FR 5264–

5267), that eliminated the 30-day past 

due period prior to a determination that 

a borrower is delinquent. As a result, 

borrowers are eligible for writedown, 

and therefore, shared appreciation 

agreement, the day after they miss a 

payment. Therefore, that part of the 

comments is not adopted. The agency 

did, however, revise FSA–2512 to 

clarify that writedown is only available 

to delinquent borrowers. The agency 

will not require current or financially 

distressed borrowers to provide a lien 

on all assets. 

Three comments stated the agency 

should revise FSA–2510 to clarify that 

after the agency sends it to the borrower, 

along with the separate notice of 

administrative offset, administrative 

offset may occur at any time. Offset of 

payments are initiated according to the 

timeframes established in the offset 

notice and applicable regulations. 

Generally, offset may begin prior to the 

timeframe provided to the borrower to 

request loan servicing or pay the 

account current. As a result, inclusion 

of the reference to administrative offset 

in the notice of availability of primary 

and preservation loan servicing is 

misleading. Therefore, the agency 

removed the administrative offset 

provision from FSA–2510. 

One comment stated the agency 

should revise the CFR to incorporate the 

property restrictions and easement 


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provisions found in the Appendices. As 

stated in the preamble of the proposed 

rule, the agency is eliminating the 

redundancy found in its current 

regulations. Once the agency has 

acquired a property into inventory, the 

property is subject to the provisions of 

7 CFR 767, including Subpart E, 

pertaining to real property with 

important resources, or special hazard 

areas; therefore, the first part of the 

comment is not adopted. 

The comment also stated the agency 

should revise the Appendices to inform 

borrowers that they can request a copy 

of the regulations and agency 

handbooks. The agency agrees with the 

second part of the comment and has 

revised the Appendices to state that 

regulatory text is included in the agency 

handbooks. The information had 

already been included on the 

availability of handbooks and forms. 

Regulations also are published in the 

Code of Federal Regulations. 

Further, the comment stated the 

agency should inform borrowers that the 

negotiated appraisal non-appealability 

determination is appealable to the NAD 

Director. The comment stated the nonappealability determination of the 

negotiated appraisal is not statutory, 

and it should therefore be removed. 

Moreover, the comment stated the 

agency should remove the provision 

that only the balance of the 30 days will 

be available to the borrower to request 

an appeal on issues other than the 

negotiated appraisal since it is not 

statutory. According to section 353(c)(7) 

of the Act (7 U.S.C. 2001), the 

negotiated appraisal value by the 

appraiser mutually agreed upon 

becomes the final appraisal of the 

borrower’s assets. Therefore, the 

negotiated appraisals are not appealable. 

The agency provides the borrower the 

opportunity to request a NAD Director 

review of non-appealability 

determinations in subsequent notices. In 

addition, 7 CFR 11.4(c)(1) provides if a 

borrower requests mediation prior to 

requesting an appeal to NAD, this stops 

the running of the 30-day period during 

which the borrower may appeal to NAD, 

and the borrower will have the balance 

of days remaining in that period to 

appeal to NAD once mediation has 

concluded. The agency, for consistency 

reasons, provides the borrower the 

balance of days remaining to request an 

appeal to NAD after the negotiation of 

the appraisal has concluded. Therefore, 

the comment is not adopted. 

Another comment stated the agency 

should revise the Appendices by 

removing the last sentence under the 

reconsideration, mediation, negotiation 

and appeal rights subparagraph and 

include in FSA–2510 that the borrower 

may apply for debt settlement even if 

already applied for and rejected. The 

agency agrees with the first part of the 

comment and has revised all the 

Appendices accordingly. Further, the 

agency agrees with the last part of the 

comment and has revised FSA–2510, 

paragraph (i), accordingly. 

One comment stated the agency 

should expressly provide, where not 

clear, that timeframes for borrower 

response commence from the time the 

agency’s notice is received by the 

borrower. The agency believes that the 

borrower response timeframes are 

clearly stated in all the Appendices, so 

no change has been made in response to 

the comment. 

Miscellaneous Comments on Part 766 

Two comments were received 

requesting the agency continue to 

provide notification of primary loan 

servicing when a borrower’s request to 

release proceeds of chattel security is 

denied. In addition, the comments 

stated that the agency has to release 

proceeds for essential family living and 

farm operating expenses until the loan 

is accelerated. The agency may deny a 

borrower’s request to release proceeds of 

chattel security for expenses not 

considered essential family living or 

farm operating expenses. The agency is 

committed to helping borrowers resolve 

their financial distress at the earliest 

opportunity, before the financial 

condition of the operation deteriorates 

to the point that primary loan servicing 

is required. Such notification is not 

required by the Act; however, it was the 

agency’s intent to continue notifying 

financially distressed and delinquent 

borrowers of primary loan servicing 

availability under § 766.101. However, 

the agency believes that initiating 

primary loan servicing in cases not 

related to financial distress or 

delinquency is a disservice to borrowers 

since the primary loan servicing process 

can be lengthy and complicated, when 

the benefits are not needed. Therefore, 

the comments are not adopted. 

Three comments were received in 

support of the agency’s decision not to 

provide appeal rights in the offer to 

restructure the account. The comments 

stated that the borrowers’ rights are 

protected because borrowers are 

provided with appeal rights when the 

agency proposes to take adverse action. 

In addition, the comments stated that 

the agency and the taxpayers are 

benefiting from the change since it 

eliminates the inefficiencies and 

administrative expenses associated with 

multiple appeals. Two comments were 

received requesting the agency provide 

appeal rights with the offer to 

restructure a borrower’s account. The 

agency’s offer to restructure the account 

is a direct result of the borrower’s 

request for loan servicing and the 

agency is granting the benefit. If a 

delinquent borrower does not accept the 

agency’s offer to restructure the account, 

the agency will send notification of its 

intent to accelerate the account and will 

provide appeal rights. The borrower can 

then appeal both the offer to restructure 

and the intent to accelerate. Further, the 

borrower may seek NAD Director’s 

review of the appealability 

determination or otherwise attempt to 

appeal without an adverse decision. 

Therefore, the comments are not 

adopted. 

Part 767—Inventory Property 

Management 

The following discussion addresses 

the comments received on Part 767. 

Section 767.52 Disposition of Personal 

Property From Real Estate Inventory 

Property 

One comment was received on the 

disposition of personal property from 

real estate inventory property. The 

comment stated the agency should 

clarify in the CFR how the former owner 

and any known lienholders will be 

notified when personal property has 

been left on the real estate inventory 

property. The agency believes the CFR 

as written adequately addresses the 

agency’s obligation to provide notice, 

and the agency handbook will provide 

further guidance to agency personnel 

regarding the method for notifying 

former owners and prior lienholders. 

Therefore, the comment is not adopted. 

Section 767.101 Leasing Real Estate 

Inventory Property 

Two comments were received on 

leasing real estate inventory property. 

Both comments stated the agency 

should add that when the borrower or 

any other party remains in possession of 

the real estate property after the agency 

acquires the title to the property, that 

person does so without the benefit of a 

written lease agreement with the 

agency. Further, the comments stated, 

the agency, at its sole discretion, can 

remove such parties and property, 

pursue civil or criminal action, and 

pursue claims for use and occupancy of 

the agency’s property. The agency 

agrees with the concerns expressed in 

the comments, and has revised 

§ 766.357 to clarify that after the date of 

foreclosure, the former owner of the 

property does not retain any rights, 

except rights granted under state law. 

Since property can become inventory 


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only through foreclosure or voluntary 

conveyance, the agency believes it is 

more appropriate to revise § 766.353 

similarly. Section 767.52 adequately 

addresses the removal of personal 

property. Lastly, 7 CFR 1955.61 

provides that the agency will request 

OGC assistance when eviction is 

necessary. The agency will continue this 

policy in its handbook, since procedures 

may vary from state to state. Therefore, 

no change has been made to this section 

in response to these comments. 

Section 767.151 General Requirements 

Three comments were received on the 

general requirements for disposal of 

inventory property. All comments stated 

the proposed rule requires nonbeginning farmers to make a 10 percent 

downpayment when purchasing 

inventory property. The comments 

stated non-beginning farmer applicants 

eligible for farm ownership loans should 

be able to purchase inventory property 

and the agency provide 100 percent of 

the financing as when a non-beginning 

farmer purchases real estate from a third 

party. The agency disagrees. Section 335 

of the Act (7 U.S.C. 1985) requires the 

agency to ensure prompt sale of 

acquired inventory property, as well as 

the availability of acquired property to 

beginning farmers. The purchase of 

inventory property by beginning farmers 

may be financed with the agency’s 

direct farm ownership loan allocation. 

As provided in section 346 of the Act (7 

U.S.C. 1994), farm ownership funds are 

targeted for beginning farmers. 

Historically, non-targeted farm 

ownership funds are exhausted early in 

the fiscal year. While beginning farmer 

targeted farm ownership funds may also 

become exhausted, section 335(c)(5) of 

the Act authorizes the lease of inventory 

property only to beginning farmers 

when funds are not available to 

consummate the sale. Further, section 

335(c)(1)(C) of the Act requires the sale 

of the property within 30 days after it 

is determined an acceptable offer has 

not been received from a qualified 

beginning farmer. To meet this 

timeframe, the purchaser generally is 

required to have funds available from 

sources other than the agency since nontargeted farm ownership funds are 

usually exhausted quickly. The 10 

percent deposit is required to ensure 

only those with the necessary funds 

submit offers. Therefore, the comments 

are not adopted. 

One comment stated the requirement 

in section 335(c)(1)(iv) of the Act that 

the Secretary will combine or subdivide 

inventory property, as appropriate, to 

maximize the opportunity for beginning 

farmers to purchase inventory property, 

was not included in the proposed rule. 

The agency agrees with the comment 

and has added the requirement in 

paragraph (a). 

Lastly, the agency revised § 767.151(b) 

(renumbered from § 767.151(a)) by 

removing the last sentence of the 

paragraph that provided beginning 

farmers may apply up through 135 days 

after the advertisement to purchase 

inventory property. Section 335(c) of the 

Act, as well as existing regulations at 7 

CFR 1955.107(a)(2)(i), provide that the 

agency has 135 days from acquisition to 

complete the sale to a beginning farmer. 

By providing beginning farmers up 

through 135 days after the 

advertisement to apply to purchase the 

inventory property, the proposed rule 

text would prohibit the agency from 

meeting the statutory deadline for 

closing the sale. 

In addition, the agency revised 

§ 767.151(d) (renumbered from 

767.151(c)) which provided if no 

acceptable offer was received from a 

beginning farmer, the agency would 

offer to sell inventory property to the 

general public between days 136 and 

165 after the agency obtained title to the 

property, As written, this requirement 

would prohibit the agency from selling 

the inventory property within the 165- 

day requirement as mandated under 

Section 335(c) of the Act. 

Section 767.155 Selling Chattel 

Property 

Five comments were received on 

selling chattel property. Three 

comments stated it may be in the 

agency’s financial interest to sell 

specialty livestock and equipment by 

private contract instead of public 

auction. In addition, all three comments 

did not support the removal of the 

sealed bid method for selling chattel 

inventory property. One comment stated 

the agency should not make any 

changes to the way it currently sells 

chattel inventory property. The 

comment stated some small items must 

be sold through methods other than 

auction as the transportation costs to the 

auction site may be more than the value 

of the items to be auctioned. The agency 

believes its financial interests are 

protected when chattel inventory 

property is sold by public auction. 

However, the agency recognizes that a 

greater recovery may occur by selling 

specialty livestock and equipment by 

private contract. The agency agrees with 

the comments and has revised the 

section to provide for sealed bids. 

One comment stated the agency 

should be prohibited from accepting 

chattels into inventory as the agency 

does not have the resources to manage 

the property and the property will 

depreciate while being held by the 

agency. As provided in § 766.354(b), the 

agency will only accept a conveyance of 

chattel property if the borrower has 

made every effort possible to sell the 

property voluntarily, the property is free 

of other liens, and it is in the agency’s 

financial interest. Based on these 

requirements, the agency believes that 

the agency will rarely accept chattels 

into inventory. Therefore, the comment 

is not adopted. 

Section 767.203 Inventory Real 

Property Containing Environmental 

Risks (Removed in Final Rule) 

Three comments were received on the 

real estate inventory property 

containing environmental risks 

provisions. All comments stated the 

agency’s proposed rule went far beyond 

the lender liability responsibilities as 

provided in applicable Federal and 

State laws. The comments stated the 

agency seems to take on the prior 

owner’s responsibility for 

environmental problems and hazardous 

waste cleanup and provided the final 

rule should afford the lender liability 

protection to the agency as stated in all 

applicable statutes. The Comprehensive 

Environmental Response, 

Compensation, and Liability Act and 

other applicable laws specify actions the 

agency has to undertake when property 

held in inventory contains hazardous 

wastes and materials. The agency 

recognizes that this law provides some 

protection from lender liability for 

clean-up of hazardous waste. The 

agency, however, may choose to do 

more than legally required when such 

action is in the agency’s best financial 

interests. The agency believes this 

matter is internal policy and has 

removed the section in the final rule. 

The agency handbook, however, will 

provide guidance to employees. 

Miscellaneous Comments 

Two comments were received 

supporting the elimination of the 

definitions for suitable and surplus 

property from the CFR. The comments 

stated the elimination of the definitions 

will help reduce unnecessary 

administrative burden placed on the 

agency and free employees’ time to 

provide assistance to young and 

beginning farmers. 

Miscellaneous CFR Parts 

As stated in the preamble of the 

proposed rule, the agency intends to 

amend 7 CFR part 799 to incorporate 

environmental policies currently found 

in subpart G of 7 CFR part 1940. 

However, 7 CFR part 799 has not been 


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amended yet, therefore, the agency will 

refer to subpart G of 7 CFR part 1940 

when environmental policies are 

discussed in the final rule. The agency 

will make conforming changes to 

subpart G when the final rule amending 

7 CFR part 799 is published. 

Further, as stated in the preamble of 

the proposed rule, the agency intends to 

amend 7 CFR part 792 to incorporate 

offset of Federal payments and debt 

settlement policies currently found in 

subpart C of 7 CFR part 1951 and 

subpart B of 7 CFR part 1956, 

respectively. However, 7 CFR part 792 

has not been amended yet; therefore, the 

agency refers to subpart C of 7 CFR part 

1951 and subpart B of 7 CFR part 1956 

when offset of Federal payments and 

debt settlement policies are discussed in 

the final rule. The agency will make 

conforming changes to subpart C of 7 

CFR part 1951 and subpart B of 7 CFR 

1956 when the final rule amending 7 

CFR part 792 is published. 

The agency’s policies on controlled 

substances and disqualification for 

Federal benefits due to Federal crop 

insurance violations are currently 

addressed in 7 CFR part 718. However, 

the agency determined that Farm Loan 

Programs were not adequately covered; 

therefore, the agency revised 7 CFR part 

718 where appropriate. In addition, 

conforming changes were made to 

Commodity Credit Corporation 

regulations in 7 CFR 1405.8. 

Executive Order 12866 

This rule has been determined to be 

significant under Executive Order 12866 

and was reviewed by OMB. 

Regulatory Flexibility Act 

In compliance with the Regulatory 

Flexibility Act (5 U.S.C. 601–602), the 

undersigned has determined and 

certified by signature of this document 

that this rule will not have a significant 

economic impact on a substantial 

number of small entities. This rule does 

not impose any new requirements on 

Agency applicants and borrowers. In 

some cases, existing information 

collections and regulatory requirements 

have been reduced as a result of 

streamlining the loan making and 

servicing application processes. 

Environmental Assessment 

FSA has completed an Environmental 

Assessment (EA) 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. A finding of no 

significant impact (FONSI) was 

determined as a result of the EA 

process. The final EA and FONSI are 

available for review at http://www.fsa.

usda.gov/FSA/webapp?area=home

&subject=ecrc&topic=enl-ea. The 

agency will accept comments on the 

final EA and FONSI for a period of 30 

days from the date of publication of this 

rule. 

Executive Order 13132 

The policies contained in this rule do 

not have a 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. 

Executive Order 12988 

This rule has been reviewed in 

accordance with Executive Order 12988, 

Civil Justice Reform. In accordance with 

this 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; and (3) 

administrative proceedings in 

accordance with 7 CFR parts 11 and 780 

must be exhausted before bringing suit 

in court challenging action taken under 

this rule unless those regulations 

specifically allow bringing suit at an 

earlier time. 

Executive Order 12372 

For reasons contained in the Notice to 

7 CFR part 3015, subpart V (48 FR 

29115, June 24, 1983), the programs 

within this rule are excluded from the 

scope of E.O. 12372, which requires 

intergovernmental consultation with 

State and local officials. 

Unfunded Mandates 

Title II of the Unfunded Mandates 

Reform Act of 1995 (UMRA), Pub. L. 

104–4, requires Federal agencies to 

assess the effects of their regulatory 

actions on State, local, and tribal 

governments or the private sector of 

$100 million or more in any one year. 

When such a statement is needed for a 

rule, section 205 of the UMRA requires 

FSA to prepare a written statement, 

including a cost benefit assessment, for 

proposed and final rules with ‘‘Federal 

mandates’’ that may result in such 

expenditures for State, local, or tribal 

governments, in the aggregate, or to the 

private sector. UMRA generally requires 

agencies to consider alternatives and 

adopt the more cost effective or least 

burdensome alternative that achieves 

the objectives of the rule. 

This rule contains no Federal 

mandates, as defined under Title II of 

the UMRA, for State, local, and tribal 

governments or the private sector. Thus, 

this rule is not subject to the 

requirements of sections 202 and 205 of 

UMRA. 

Paperwork Reduction Act 

The Information Collection Packages 

for the amendments to 7 CFR parts 761, 

764, 765, 766, and 767 contained in this 

final rule have been submitted to OMB 

for approval. A proposed rule 

containing an estimate of the burden 

impact of the rule was published on 

February 9, 2004 (69 FR 6055–6121). No 

comments regarding the burden 

estimates were received. 

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 for other purposes. 

The agency has posted online at 

http://www.sc.egov.usda.gov all the 

forms an applicant or borrower either 

has to complete in their entirety or 

review and execute. For forms the 

applicant or borrower is required to 

complete in their entirety, the fillable 

version of the form, as well as detailed 

instructions on completing the form, are 

included online. Forms prepared by the 

agency, that applicants or borrowers 

simply review and sign, are also 

provided on the e-Gov Web site, 

however, in lieu of detailed instructions 

for completing those forms, the 

instructions state that the forms are 

provided on the Web site for 

information purposes only. Applicants 

or borrowers may download and review 

forms required to apply for benefits 

from the agency. 

Lastly, the agency provides access to 

the handbooks that implement the CFR 

parts included in the final rule and 

provide internal and administrative 

guidance to its employees, at http://

www.fsa.usda.gov/FSA/webapp?area=

home&subject=lare&topic=hbk. 

Applicants or borrowers may download 

and review any agency handbook and 

become familiar with the requirements 

for applying for benefits. 

Federal Assistance Programs 

These changes affect the following FSA 

programs as listed in the Catalog of Federal 

Domestic Assistance: 

10.404—Emergency Loans 


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10.406—Farm Operating Loans 

10.407—Farm Ownership Loans 

List of Subjects 

7 CFR Part 718 

Acreage allotments, Agricultural 

commodities, Reporting and 

recordkeeping requirements. 

7 CFR Part 761 

Administrative practice and 

procedure, Agriculture, Authority 

delegations, Credit, Loan programs—

Agriculture. 

7 CFR Part 762 

Agriculture, Credit, Loan programs—

Agriculture. 

7 CFR Part 764 

Agriculture, Agricultural 

commodities, Credit, Disaster 

assistance, Livestock, Loan programs—

Agriculture, Mortgages. 

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 767 

Agriculture, Credit, Government 

property, Government property 

management, Indians—loans, Loan 

programs—Agriculture. 

7 CFR Part 1405 

Agricultural commodities, Feed 

grains, Grains, Loan programs 

‘‘Agriculture, Oilseeds, Price support 

programs, Reporting and record keeping 

requirements. 

■ Accordingly, 7 CFR chapters VII and 

XIV are amended as follows: 

7 CFR Chapter VII 

PART 718—PROVISIONS APPLICABLE 

TO MULTIPLE PROGRAMS 

■ 1. The authority citation for part 718 

continues to read as follows: 

Authority: 7 U.S.C. 1311 et seq., 1501 et 

seq., 1921 et seq., 7201 et seq., 15 U.S.C. 

714b. 

■ 2. Revise § 718.1 to read as follows: 

§ 718.1 Applicability. 

(a) This part: 

(1) Is applicable to all programs set 

forth in chapters VII and XIV of this title 

which are administered by the Farm 

Service Agency (FSA), except that only 

§§ 718.6 and 718.11 are applicable to 

parts 761 through 774 of this chapter; 

(2) Governs how FSA monitors 

marketing quotas, allotments, base acres 

and acreage reports. The regulations 

affected are those that establish 

procedures for measuring allotments 

and program eligible acreage, and 

determining program compliance. 

(b) For all programs, except for those 

administered under parts 761 through 

774 of this chapter: 

(1) The provisions of this part will be 

administered under the general 

supervision of the Administrator, FSA, 

and carried out in the field by State and 

county FSA committees (State and 

county committees); 

(2) State and county committees, and 

representatives and employees thereof, 

do not have authority to modify or 

waive any regulations in this part; 

(3) No provisions or delegation herein 

to a State or county committee will 

preclude the Administrator, FSA, or a 

designee, from determining any 

question arising under the program or 

from reversing or modifying any 

determination made by a State or county 

committee; 

(4) The Deputy Administrator, FSA, 

may authorize State and county 

committees to waive or modify 

deadlines and other requirements in 

cases where lateness or failure to meet 

such other requirements does not 

adversely affect the operation of the 

program. 

(c) The programs under parts 761 

through 774 will be administered 

according to the part, or parts, 

applicable to the specific program. 

■ 3. Revise § 718.6 to read as follows: 

§ 718.6 Controlled substance. 

(a) The following terms apply to this 

section: 

(1) USDA benefit means the issuance 

of any grant, contract, loan, or payment 

by appropriated funds of the United 

States. 

(2) Person means an individual. 

(b) Notwithstanding any other 

provision of law, any person convicted 

under Federal or State law of: 

(1) Planting, cultivating, growing, 

producing, harvesting, or storing a 

controlled substance in any crop year is 

ineligible during the crop year of 

conviction and the four succeeding crop 

years, for any of the following USDA 

benefits: 

(i) Any payments or benefits under 

the Direct and Counter Cyclical Program 

(DCP) in accordance with part 1412 of 

this title; 

(ii) Any payments or benefits for 

losses to trees, crops, or livestock 

covered under disaster programs 

administered by FSA; 

(iii) Any price support loan available 

in accordance with part 1421 of this 

title; 

(iv) Any price support or payment 

made under the Commodity Credit 

Corporation Charter Act; 

(v) A farm storage facility loan made 

under section 4(h) of the Commodity 

Credit Corporation Charter Act or any 

other Act; 

(vi) Crop Insurance under the Federal 

Crop Insurance Act; 

(vii) A loan made or guaranteed under 

the Consolidated Farm and Rural 

Development Act or any other law 

administered by FSA’s Farm Loan 

Programs. 

(2) Possession or trafficking of a 

controlled substance, is ineligible for 

any or all USDA benefits: 

(i) At the discretion of the court, 

(ii) To the extent and for a period of 

time the court determines. 

(c) If a person denied benefits under 

this section is a shareholder, 

beneficiary, or member of an entity or 

joint operation, benefits for which the 

entity or joint operation is eligible will 

be reduced, for the appropriate period, 

by a percentage equal to the total 

interest of the shareholder, beneficiary, 

or member. 

■ 4. Revise § 718.11 to read as follows: 

§ 718.11 Disqualification due to Federal 

crop insurance violation. 

(a) Section 515(h) of the Federal Crop 

Insurance Act (FCIA) provides that a 

person who willfully and intentionally 

provides false or inaccurate information 

to the Federal Crop Insurance 

Corporation (FCIC) or to an approved 

insurance provider with respect to a 

policy or plan of FCIC insurance, after 

notice and an opportunity for a hearing 

on the record, will be subject to one or 

more of the sanctions described in 

section 515(h)(3). In section 515(h)(3), 

the FCIA specifies that in the case of a 

violation committed by a producer, the 

producer may be disqualified for a 

period of up to 5 years from receiving 

any monetary or non-monetary benefit 

under a number of programs. The list 

includes, but is not limited to, benefits 

under: 

(1) The FCIA. 

(2) The Agricultural Market 

Transition Act (7 U.S.C. 7201 et seq.), 

including the Noninsured Crop Disaster 

Assistance Program under section 196 of 

that Act (7 U.S.C. 7333). 

(3) The Agricultural Act of 1949 (7 

U.S.C. 1421 et seq.). 

(4) The Commodity Credit 

Corporation Charter Act (15 U.S.C. 714 

et seq.). 

(5) The Agricultural Adjustment Act 

of 1938 (7 U.S.C. 1281 et seq.). 


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(6) Title XII of the Food Security Act 

of 1985 (16 U.S.C. 3801 et seq.). 

(7) The Consolidated Farm and Rural 

Development Act (7 U.S.C. 1921 et seq.). 

(8) Any law that provides assistance 

to a producer of an agricultural 

commodity affected by a crop loss or a 

decline in prices of agricultural 

commodities. 

(b) Violation determinations are made 

by FCIC. However, upon notice from 

FCIC to FSA that a producer has been 

found to have committed a violation to 

which paragraph (a) of this section 

applies, that person will be ineligible for 

payments under the programs specified 

in paragraph (a) of this section that are 

funded by FSA for the same period of 

time for which, as determined by FCIC, 

the producer will be ineligible for crop 

insurance benefits of the kind referred 

to in paragraph (a)(1) of this section. 

Appeals of the determination of 

ineligibility will be administered under 

the rules set by FCIC. 

(c) Other sanctions may also apply. 

■ 5. Revise part 761 to read as follows: 

PART 761—GENERAL PROGRAM 

ADMINISTRATION 

Subpart A—General Provisions 

Sec. 

761.1 Introduction. 

761.2 Abbreviations and definitions. 

761.3 Civil rights. 

761.4 Conflict of interest. 

761.5 Restrictions on lobbying. 

761.6 Appeals. 

761.7 Appraisals. 

761.8 Loan limitations. 

761.9 Interest rates for direct loans. 

761.10 Planning and performing 

construction and other development. 

761.11–761.50 [Reserved] 

Subpart B—Supervised Bank Accounts 

761.51 Establishing a supervised bank 

account. 

761.52 Deposits into a supervised bank 

account. 

761.53 Interest bearing accounts. 

761.54 Withdrawals from a supervised bank 

account. 

761.55 Closing a supervised bank account. 

761.56–761.100 [Reserved] 

Subpart C—Supervised Credit 

761.101 Applicability. 

761.102 Borrower recordkeeping, reporting, 

and supervision. 

761.103 Farm assessment. 

761.104 Developing the farm operating 

plan. 

761.105 Year-end analysis. 

761.106–761.200 [Reserved] 

Subpart D—Allocation of Farm Loan 

Programs Funds to State Offices 

761.201 Purpose. 

761.202 Timing of allocations. 

761.203 National reserves for Farm 

Ownership and Operating loans. 

761.204 Methods of allocating funds to 

State Offices. 

761.205 Computing the formula allocation. 

761.206 Pooling of unobligated funds 

allocated to State Offices. 

761.207 Distribution of loan funds by State 

Offices. 

761.208 Target participation rates for 

socially disadvantaged groups. 

761.209 Loan funds for beginning farmers. 

761.210 Transfer of funds. 

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

Subpart A—General Provisions 

§ 761.1 Introduction. 

(a) The Administrator delegates the 

responsibility to administer Farm Loan 

Programs of the Consolidated Farm and 

Rural Development Act (7 U.S.C. 1921 

et seq.) to the Deputy Administrator for 

Farm Loan Programs subject to any 

limitations established in 7 CFR 

2.16(a)(2) and 7 CFR 2.42. 

(b) The Deputy Administrator may: 

(1) Redelegate authorities received 

under subparagraph (a); and 

(2) Establish procedures for further 

redelegation of authority. 

(c) Parts 761 through 767 describe the 

Agency’s policies for its Farm Loan 

Programs. The objective of these 

programs is to provide supervised credit 

and management assistance to eligible 

farmers to become owners or operators, 

or both, of family farms, to continue 

such operations when credit is not 

available elsewhere, or to return to 

normal farming operations after 

sustaining substantial losses as a result 

of a designated or declared disaster. 

These regulations apply to loan 

applicants, borrowers, lenders, holders, 

Agency personnel, and other parties 

involved in making, guaranteeing, 

holding, servicing, or liquidating such 

loans. 

(d) This part describes the Agency’s 

general and administrative policies for 

its guaranteed and direct Farm Loan 

Programs. In general, this part addresses 

issues that affect both guaranteed and 

direct loan programs. 

§ 761.2 Abbreviations and definitions. 

The following abbreviations and 

definitions are applicable to the Farm 

Loan Programs addressed in parts 761 

through 767 unless otherwise noted. 

(a) Abbreviations. 

CLP Certified Lender Program. 

DSA Disaster Set-Aside. 

EE Economic Emergency loan. 

EM Emergency loan. 

FLP Farm Loan Programs. 

FO Farm Ownership loan. 

FSA Farm Service Agency, an Agency 

of the USDA, including its personnel 

and any successor Agency. 

Lo-Doc Low-Documentation 

Operating loan. 

OGC Office of the General Counsel of 

the USDA. 

OL Operating loan. 

PLP Preferred Lender Program. 

RHF Rural Housing loan for farm 

service buildings. 

RL Recreation loan. 

SAA Shared Appreciation Agreement. 

SA Shared Appreciation loan. 

SEL Standard Eligible Lender. 

ST Softwood Timber loan. 

SW Soil and Water loan. 

USDA United States Department of 

Agriculture. 

USPAP Uniform Standards of 

Professional Appraisal Practice. 

(b) Definitions. 

Abandoned security property is 

security property that a borrower is not 

occupying, is not in possession of, or 

has relinquished control of and has not 

made arrangements for its care or sale. 

Accrued deferred interest is unpaid 

interest from past due installments 

posted to a borrower’s loan account. 

Act is the Consolidated Farm and 

Rural Development Act (7 U.S.C. 1921 

et seq.). 

Additional security is property which 

provides security in excess of the 

amount of security value equal to the 

loan amount. 

Adequate security is property which 

is required to provide security value at 

least equal to the direct loan amount. 

Adjustment is a form of settlement 

that reduces the financial obligation to 

the Agency, conditioned upon the 

completion of payment of a specified 

amount at a future time. An adjustment 

is not a final settlement until all 

payments have been made under the 

agreement. 

Administrative appraisal review is a 

review of an appraisal to determine if 

the appraisal: 

(1) Meets applicable Agency 

requirements; and 

(2) Is accurate outside the 

requirements of standard 3 of USPAP. 

Agency is the FSA. 

Agreement for the use of proceeds is 

an agreement between the borrower and 

the Agency that reflects how, when, and 

to whom the borrower will sell, 

exchange, or consume chattel security 

and the planned use of any proceeds 

during a specific production cycle. 

Agricultural commodity is livestock, 

livestock products, grains, cotton, 

oilseeds, dry beans, tobacco, peanuts, 

sugar beets, sugar cane, fruit, vegetable, 

forage, tree farming, nursery crops, nuts, 

aquaculture species, and other plant and 

animal production, as determined by 

the Agency. 

Allonge is an attachment or an 

addendum to a promissory note. 

Allowable costs are those costs for 

replacement or repair that are supported 


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by acceptable documentation, 

including, but not limited to, written 

estimates, invoices, and bills. 

Applicant is the individual or entity 

applying for a loan or loan servicing 

under either the direct or guaranteed 

loan program. 

Aquaculture is the husbandry of any 

aquatic organisms (including fish, 

mollusks, crustaceans or other 

invertebrates, amphibians, reptiles, or 

aquatic plants) raised in a controlled or 

selected environment of which the 

applicant has exclusive rights to use. 

Assignment of guaranteed portion is a 

process by which the lender transfers 

the right to receive payments or income 

on a guaranteed loan to another party, 

usually in return for payment in the 

amount of the loan’s guaranteed 

principal. The lender retains the 

unguaranteed portion in its portfolio 

and receives a fee from the purchaser or 

assignee to service the loan and receive 

and remit payments according to a 

written assignment agreement. This 

assignment can be reassigned or sold 

multiple times. 

Assignment of indemnity is the 

transfer of rights to compensation under 

an insurance contract. 

Assistance is financial assistance in 

the form of a direct or guaranteed loan 

or interest subsidy or servicing action. 

Assumption is the act of agreeing to 

be legally responsible for another party’s 

indebtedness. 

Assumption agreement is a written 

agreement on the appropriate Agency 

form to pay the FLP debt incurred by 

another. 

Average agricultural loan customer is 

a conventional farm borrower who is 

required to pledge crops, livestock, 

other chattel and/or real estate security 

for the loan. This term does not include 

a high-risk farmer with limited security 

and management ability who is 

generally charged a higher interest rate 

by conventional agricultural lenders. 

Also, this term does not include a lowrisk farm customer who obtains 

financing on a secured or unsecured 

basis, who is able to pledge as collateral 

for a loan items such as savings 

accounts, time deposits, certificates of 

deposit, stocks and bonds, and life 

insurance. 

Basic part of an applicant’s total 

farming operation is any single 

agricultural commodity or livestock 

production enterprise of an applicant’s 

farming operation which normally 

generates sufficient income to be 

considered essential to the success of 

such farming operation. 

Basic security is all farm machinery, 

equipment, vehicles, foundation and 

breeding livestock herds and flocks, 

including replacements, and real estate 

that serves as security for a loan made 

or guaranteed by the Agency. 

Beginning farmer is an individual or 

entity who: 

(1) Meets the loan eligibility 

requirements for a direct or guaranteed 

OL or FO loan, as applicable; 

(2) Has not operated a farm for more 

than 10 years. This requirement applies 

to all members of an entity; 

(3) Will materially and substantially 

participate in the operation of the farm: 

(i) In the case of a loan made to an 

individual, individually or with the 

family members, material and 

substantial participation requires that 

the individual provide substantial dayto-day labor and management of the 

farm, consistent with the practices in 

the county or State where the farm is 

located. 

(ii) In the case of a loan made to an 

entity, all members must materially and 

substantially participate in the 

operation of the farm. Material and 

substantial participation requires that 

the member provide some amount of the 

management, or labor and management 

necessary for day-to-day activities, such 

that if the individual did not provide 

these inputs, operation of the farm 

would be seriously impaired; 

(4) Agrees to participate in any loan 

assessment and borrower training 

required by Agency regulations; 

(5) Except for an OL applicant, does 

not own real farm property or who, 

directly or through interests in family 

farm entities owns real farm property, 

the aggregate acreage of which does not 

exceed 30 percent of the acreage of the 

farms in the county where the property 

is located. If the farm is located in more 

than one county, the median farm 

acreage of the county where the 

applicant’s residence is located will be 

used in the calculation. If the 

applicant’s residence is not located on 

the farm or if the applicant is an entity, 

the median farm acreage of the county 

where the major portion of the farm is 

located will be used. The median 

county farm acreage will be determined 

from the most recent Census of 

Agriculture; 

(6) Demonstrates that the available 

resources of the applicant and spouse (if 

any) are not sufficient to enable the 

applicant to enter or continue farming 

on a viable scale; and 

(7) In the case of an entity: 

(i) All the members are related by 

blood or marriage; and 

(ii) All the members are beginning 

farmers. 

Beginning Farmer Downpayment 

Loan is a type of FO loan made to 

eligible applicants to finance a portion 

of a real estate purchase under part 764, 

subpart E of this chapter. 

Borrower (or debtor) is an individual 

or entity that has an outstanding 

obligation to the Agency or to a lender 

under any direct or guaranteed FLP 

loan, without regard to whether the loan 

has been accelerated. The term 

‘‘borrower’’ includes all parties liable 

for such obligation, including 

collection-only borrowers, except for 

debtors whose total loans and accounts 

have been voluntarily or involuntarily 

foreclosed, sold, or conveyed, or who 

have been discharged of all such 

obligations owed to the Agency or 

guaranteed lender. 

Cancellation is the final discharge of, 

and release of liability for, a financial 

obligation to the Agency on which no 

settlement amount has been paid. 

Cash flow budget is a projection 

listing all anticipated cash inflows 

(including all farm income, nonfarm 

income and all loan advances) and all 

cash outflows (including all farm and 

nonfarm debt service and other 

expenses) to be incurred during the 

period of the budget. Advances and 

principal repayments of lines of credit 

may be excluded from a cash flow 

budget. Cash flow budgets for 

guaranteed loans under $125,000 do not 

require income and expenses itemized 

by categories. A cash flow budget may 

be completed either for a 12-month 

period, a typical production cycle, or 

the life of the loan, as appropriate. It 

may also be prepared with a breakdown 

of cash inflows and outflows for each 

month of the review period and include 

the expected outstanding operating 

credit balance for the end of each 

month. The latter type is referred to as 

a ‘‘monthly cash flow budget.’’

Chattel or real estate essential to the 

operation is chattel or real estate that 

would be necessary for the applicant to 

continue operating the farm after the 

disaster in a manner similar to the 

manner in which the farm was operated 

immediately prior to the disaster, as 

determined by the Agency. 

Chattel security is property that may 

consist of, but is not limited to: Crops; 

livestock; aquaculture species; farm 

equipment; inventory; accounts; 

contract rights; general intangibles; and 

supplies that are covered by financing 

statements and security agreements, 

chattel mortgages, and other security 

instruments. 

Civil action is a court proceeding to 

protect the Agency’s financial interests. 

A civil action does not include 

bankruptcy and similar proceedings to 

impound and distribute the bankrupt’s 

assets to creditors, or probate or similar 

proceedings to settle and distribute 


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estates of incompetents or decedents, 

and pay claims of creditors. 

Closing agent is the attorney or title 

insurance company selected by the 

applicant and approved by the Agency 

to provide closing services for the 

proposed loan or servicing action. 

Unless a title insurance company 

provides loan closing services, the term 

‘‘title company’’ does not include ‘‘title 

insurance company.’’

Coastal barrier is an area of land 

identified as part of the national Coastal 

Barrier Resources System under the 

Coastal Barrier Resources Act of 1980. 

Compromise is the settlement of an 

FLP debt or claim by a lump-sum 

payment of less than the total amount 

owed in satisfaction of the debt or 

claim. 

Conditional commitment is the 

Agency’s commitment to a lender that 

the material the lender has submitted is 

approved subject to the completion of 

all listed conditions and requirements. 

Conservation Contract is a contract 

under which a borrower agrees to set 

aside land for conservation, recreation 

or wildlife purposes in exchange for 

reduction of a portion of an outstanding 

FLP debt. 

Conservation Contract review team is 

comprised by the appropriate offices of 

FSA, the Natural Resources 

Conservation Service, U.S. Fish and 

Wildlife Service, State Fish and Wildlife 

Agencies, Conservation Districts, 

National Park Service, Forest Service, 

State Historic Preservation Officer, State 

Conservation Agencies, State 

Environmental Protection Agency, State 

Natural Resource Agencies, adjacent 

public landowner, and any other entity 

that may have an interest and qualifies 

to be a management authority for a 

proposed conservation contract. 

Consolidation is the process of 

combining the outstanding principal 

and interest balance of two or more 

loans of the same type made for 

operating purposes. 

Construction is work such as erecting, 

repairing, remodeling, relocating, 

adding to, or salvaging any building or 

structure, and the installing, repairing, 

or adding to heating and electrical 

systems, water systems, sewage disposal 

systems, walks, steps, and driveways. 

Controlled is when a director or an 

employee has more than a 50 percent 

ownership in an entity or, the director 

or employee, together with relatives of 

the director or employee, have more 

than a 50 percent ownership. 

Controlled substance is the term as 

defined in 21 U.S.C. 812. 

Cooperative is an entity that has 

farming as its purpose, whose members 

have agreed to share the profits of the 

farming enterprise, and is recognized as 

a farm cooperative by the laws of the 

state in which the entity will operate a 

farm. 

Corporation is a private domestic 

corporation created and organized 

under the laws of the state in which it 

will operate a farm. 

Cosigner is a party, other than the 

applicant, who joins in the execution of 

a promissory note to assure its 

repayment. The cosigner becomes 

jointly and severally liable to comply 

with the repayment terms of the note, 

but is not authorized to severally receive 

loan servicing available under 7 CFR 

parts 765 and 766. In the case of an 

entity applicant, the cosigner cannot be 

a member of the entity. 

County is a local administrative 

subdivision of a State or similar 

political subdivision of the United 

States. 

County average yield is the historical 

average yield for an agricultural 

commodity in a particular political 

subdivision, as determined or published 

by a government entity or other 

recognized source. 

Criminal action is the prosecution by 

the United States to exact punishment 

in the form of fines or imprisonment for 

alleged violation of criminal statutes. 

Crop allotment or quota is a farm’s 

share of an approved national tobacco or 

peanut allotment or quota. 

Current market value buyout is the 

termination of a borrower’s loan 

obligations to the Agency in exchange 

for payment of the current appraised 

value of the borrower’s security 

property and non-essential assets, less 

any prior liens. 

Debt forgiveness is a reduction or 

termination of a debt under the Act in 

a manner that results in a loss to the 

Agency, through: 

(1) Writing down or writing off a debt 

pursuant to 7 U.S.C. 2001; 

(2) Compromising, adjusting, 

reducing, or charging off a debt or claim 

pursuant to 7 U.S.C. 1981; or 

(3) Paying a loss pursuant to 7 U.S.C. 

2005 on a FLP loan guaranteed by the 

Agency. 

Debt forgiveness does not include: 

(1) Debt reduction through a 

conservation contract; 

(2) Any writedown provided as part of 

the resolution of a discrimination 

complaint against the Agency; 

(3) Prior debt forgiveness that has 

been repaid in its entirety; and 

(4) Consolidation, rescheduling, 

reamortization, or deferral of a loan. 

Debt settlement is a compromise, 

adjustment, or cancellation of an FLP 

debt. 

Debt service margin is the difference 

between all of the borrower’s expected 

expenditures in a planning period 

(including farm operating expenses, 

capital expenses, essential family living 

expenses, and debt payments) and the 

borrower’s projected funds available to 

pay all expenses and payments. 

Debt writedown is the reduction of the 

borrower’s debt to that amount the 

Agency determines to be collectible 

based on an analysis of the security 

value and the borrower’s ability to pay. 

Default is the failure of a borrower to 

observe any agreement with the Agency, 

or the lender in the case of a guaranteed 

loan, as contained in promissory notes, 

security instruments, and similar or 

related instruments. 

Deferral is a postponement of the 

payment of interest or principal, or 

both. 

Delinquent borrower, for loan 

servicing purposes, is a borrower who 

has failed to make all scheduled 

payments by the due date. 

Direct loan is a loan funded and 

serviced by the Agency as the lender. 

Disaster is an event of unusual and 

adverse weather conditions or other 

natural phenomena, or quarantine, that 

has substantially affected the 

production of agricultural commodities 

by causing physical property or 

production losses in a county, or similar 

political subdivision, that triggered the 

inclusion of such county or political 

subdivision in the disaster area as 

designated by the Agency. 

Disaster area is the county or counties 

declared or designated as a disaster area 

for EM loan assistance as a result of 

disaster related losses. This area 

includes counties contiguous to those 

counties declared or designated as 

disaster areas. 

Disaster set-aside is the deferral of 

payment of an annual loan installment 

to the Agency to the end of the loan 

term in accordance with part 766, 

subpart B of this chapter. 

Disaster yield is the per-acre yield of 

an agricultural commodity for the 

operation during the production cycle 

when the disaster occurred. 

Economic Emergency loan is a loan 

that was made or guaranteed to an 

eligible applicant to allow for 

continuation of the operation during an 

economic emergency which was caused 

by a lack of agricultural credit or an 

unfavorable relationship between 

production costs and prices received for 

agricultural commodities. EE loans are 

not currently funded; however, such 

outstanding loans are serviced by the 

Agency or the lender in the case of a 

guaranteed EE loan. 

Emergency loan is a loan made to 

eligible applicants who have incurred 


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substantial financial losses from a 

disaster. 

Entity is a corporation, partnership, 

joint operation, cooperative, limited 

liability company or trust. 

Essential family living and farm 

operating expenses: 

(1) Are those that are basic, crucial or 

indispensable. 

(2) Are determined by the Agency 

based on the following considerations: 

(i) The specific borrower’s operation; 

(ii) What is typical for that type of 

operation in the area; and 

(iii) What is an efficient method of 

production considering the borrower’s 

resources. 

(3) Include, but are not limited to, 

essential: Household operating 

expenses; food, including lunches; 

clothing and personal care; health and 

medical expenses, including medical 

insurance; house repair and sanitation; 

school and religious expenses; 

transportation; hired labor; machinery 

repair; farm building and fence repair; 

interest on loans and credit or purchase 

agreement; rent on equipment, land, and 

buildings; feed for animals; seed, 

fertilizer, pesticides, herbicides, spray 

materials and other necessary farm 

supplies; livestock expenses, including 

medical supplies, artificial 

insemination, and veterinarian bills; 

machinery hire; fuel and oil; taxes; 

water charges; personal, property and 

crop insurance; auto and truck 

expenses; and utility payments. 

Established farmer is a farmer who 

operates the farm (in the case of an 

entity, its members as a group) who: 

(1) Actively participated in the 

operation and the management, 

including, but not limited to, exercising 

control over, making decisions 

regarding, and establishing the direction 

of, the farming operation at the time of 

the disaster; 

(2) Spends a substantial portion of 

time in carrying out the farming 

operation; 

(3) Planted the crop, or purchased or 

produced the livestock on the farming 

operation; 

(4) In the case of an entity, is 

primarily engaged in farming and has 

over 50 percent of its gross income from 

all sources from its farming operation 

based on the operation’s projected cash 

flow for the next crop year or the next 

12-month period, as mutually 

determined; and 

(5) Is not: 

(i) An entity whose members are 

themselves entities; 

(ii) An integrated livestock, poultry, 

or fish processor who operates primarily 

and directly as a commercial business 

through contracts or business 

arrangements with farmers, except a 

grower under contract with an integrator 

or processor may be considered an 

established farmer, provided the 

farming operation is not managed by an 

outside full-time manager or 

management service and Agency loans 

shall be based on the applicant’s share 

of the agricultural production as set 

forth in the contract; or 

(iii) An operation which employs a 

full time farm manager. 

False information is information 

provided by an applicant, borrower or 

other source to the Agency that the 

applicant or borrower knows to be 

incorrect. 

Family farm is a farm that: 

(1) Produces agricultural commodities 

for sale in sufficient quantities so that it 

is recognized as a farm rather than a 

rural residence; 

(2) Has both physical labor and 

management provided as follows: 

(i) The majority of day-to-day, 

operational decisions, and all strategic 

management decisions are made by: 

(A) The borrower and persons who 

are either related to the borrower by 

blood or marriage, or are a relative, for 

an individual borrower; or 

(B) The members responsible for 

operating the farm, in the case of an 

entity. 

(ii) A substantial amount of labor to 

operate the farm is provided by: 

(A) The borrower and persons who 

are either related to the borrower by 

blood or marriage, or are a relative, for 

an individual borrower; or 

(B) The members responsible for 

operating the farm, in the case of an 

entity. 

(3) May use full-time hired labor in 

amounts only to supplement family 

labor. 

(4) May use reasonable amounts of 

temporary labor for seasonal peak 

workload periods or intermittently for 

labor intensive activities. 

Family living expenses are the costs of 

providing for the needs of family 

members and those for whom the 

borrower has a financial obligation, 

such as alimony, child support, and care 

expenses of an elderly parent. 

Family members are the immediate 

members of the family residing in the 

same household with the borrower. 

Farm is a tract or tracts of land, 

improvements, and other appurtenances 

that are used or will be used in the 

production of crops, livestock, or 

aquaculture products for sale in 

sufficient quantities so that the property 

is recognized as a farm rather than a 

rural residence. The term ‘‘farm’’ also 

includes the term ‘‘ranch.’’ It may also 

include land and improvements and 

facilities used in a non-eligible 

enterprise or the residence which, 

although physically separate from the 

farm acreage, is ordinarily treated as 

part of the farm in the local community. 

Farmer is an individual, corporation, 

partnership, joint operation, 

cooperative, trust, or limited liability 

company that is the operator of a farm. 

Farm income is the proceeds from the 

sale of agricultural commodities that are 

normally sold annually during the 

regular course of business, such as 

crops, feeder livestock, and other farm 

products. 

Farm Loan Programs are Agency 

programs to make, guarantee, and 

service loans to family farmers 

authorized under the Act or Agency 

regulations. 

Farm Ownership loan is a loan made 

to eligible applicants to purchase, 

enlarge, or make capital improvements 

to family farms, or to promote soil and 

water conservation and protection. It 

also includes the Beginning Farmer 

Downpayment loan. 

Farm Program payments are benefits 

received from FSA for any commodity, 

disaster, or cost share program. 

Feasible plan is when an applicant or 

borrower’s cash flow budget or farm 

operating plan indicates that there is 

sufficient cash inflow to pay all cash 

outflow. If a loan approval or servicing 

action exceeds one production cycle 

and the planned cash flow budget or 

farm operating plan is atypical due to 

cash or inventory on hand, new 

enterprises, carryover debt, atypical 

planned purchases, important operating 

changes, or other reasons, a cash flow 

budget or farm operating plan must be 

prepared that reflects a typical cycle. If 

the request is for only one cycle, a 

feasible plan for only one production 

cycle is required for approval. 

Financially distressed borrower is a 

borrower unable to develop a feasible 

plan for the current or next production 

cycle. 

Financially viable operation, for the 

purposes of considering a waiver of OL 

term limits under § 764.252 of this 

chapter, is a farming operation that, 

with Agency assistance, is projected to 

improve its financial condition over a 

period of time to the point that the 

operator can obtain commercial credit 

without further Agency assistance. Such 

an operation must generate sufficient 

income to: 

(1) Meet annual operating expenses 

and debt payments as they become due; 

(2) Meet essential family living 

expenses to the extent they are not met 

by dependable non-farm income; 

(3) Provide for replacement of capital 

items; and 


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(4) Provide for long-term financial 

growth. 

Fixture is an item of personal property 

attached to real estate in such a way that 

it cannot be removed without defacing 

or dismantling the structure, or 

damaging the item itself. 

Floodplains are lowland and 

relatively flat areas adjoining inland and 

coastal waters, including flood-prone 

areas of offshore islands, including at a 

minimum, that area subject to a one 

percent or greater chance of flooding in 

any given year. The base floodplain is 

used to designate the 100-year 

floodplain (one percent chance 

floodplain). The critical floodplain is 

defined as the 500-year floodplain (0.2 

percent chance floodplain). 

Foreclosed is the completed act of 

selling security either under the power 

of sale in the security instrument or 

through judicial proceedings. 

Foreclosure sale is the act of selling 

security either under the power of sale 

in the security instrument or through 

judicial proceedings. 

Good faith is when an applicant or 

borrower provides current, complete, 

and truthful information when applying 

for assistance and in all past dealings 

with the Agency, and adheres to all 

written agreements with the Agency 

including, but not limited to, loan 

agreement, security instruments, farm 

operating plans, and agreements for use 

of proceeds. The Agency considers a 

borrower to act in good faith, however, 

if the borrower’s inability to adhere to 

all agreements is due to circumstances 

beyond the borrower’s control. In 

addition, the Agency will consider 

fraud, waste, or conversion actions, 

when substantiated by a legal opinion 

from OGC, when determining if an 

applicant or borrower has acted in good 

faith. 

Graduation is the payment in full of 

all direct FLP loans made for operating, 

real estate, or both purposes by 

refinancing with other credit sources 

either with or without an Agency 

guarantee. 

Guaranteed loan is a loan made and 

serviced by a lender for which the 

Agency has entered into a Lender’s 

Agreement and for which the Agency 

has issued a Loan Guarantee. This term 

also includes guaranteed lines of credit 

except where otherwise indicated. 

Guarantor is a party not included in 

the farming operation who assumes 

responsibility for repayment in the 

event of default. 

Hazard insurance is insurance 

covering fire, windstorm, lightning, hail, 

explosion, riot, civil commotion, 

aircraft, vehicles, smoke, builder’s risk, 

public liability, property damage, flood 

or mudslide, workers compensation, or 

any similar insurance that is available 

and needed to protect the Agency 

security or that is required by law. 

Highly erodible land is land as 

determined by Natural Resources 

Conservation Service to meet the 

requirements provided in section 1201 

of the Food Security Act of 1985. 

Holder is a person or organization 

other than the lender that holds all or 

a part of the guaranteed portion of an 

Agency guaranteed loan but has no 

servicing responsibilities. When the 

lender assigns a part of the guaranteed 

loan by executing an Agency assignment 

form, the assignee becomes a holder. 

Homestead protection is the previous 

owner’s right to lease with an option to 

purchase the principal residence and up 

to 10 acres of adjoining land which 

secured an FLP direct loan. 

Homestead protection property is the 

principal residence that secured an FLP 

direct loan and is subject to homestead 

protection. 

Household contents are essential 

household items necessary to maintain 

viable living quarters. Household 

contents exclude all luxury items such 

as jewelry, furs, antiques, paintings, etc. 

Inaccurate information is incorrect 

information provided by an applicant, 

borrower, lender, or other source 

without the intent of fraudulently 

obtaining benefits. 

Indian reservation is all land located 

within the limits of any Indian 

reservation under the jurisdiction of the 

United States, notwithstanding the 

issuance of any patent, and including 

rights-of-way running through the 

reservation; trust or restricted land 

located within the boundaries of a 

former reservation of a Federally 

recognized Indian Tribe in the State of 

Oklahoma; or all Indian allotments the 

Indian titles to which have not been 

extinguished if such allotments are 

subject to the jurisdiction of a Federally 

recognized Indian Tribe. 

In-house expenses are expenses 

associated with credit management and 

loan servicing by the lender and the 

lender’s contractor. In-house expenses 

include, but are not limited to, 

employee salaries, staff lawyers, travel, 

supplies, and overhead. 

Interest Assistance Agreement is the 

appropriate Agency form executed by 

the Agency and the lender containing 

the terms and conditions under which 

the Agency will make interest assistance 

payments to the lender on behalf of the 

guaranteed loan borrower. 

Inventory property is real estate or 

chattel property and related rights that 

formerly secured an FLP loan and to 

which the Federal Government has 

acquired title. 

Joint financing arrangement is an 

arrangement in which two or more 

lenders make separate loans 

simultaneously to supply the funds 

required by one applicant. 

Joint operation is an operation run by 

individuals who have agreed to operate 

a farm or farms together as an entity, 

sharing equally or unequally land, labor, 

equipment, expenses, or income, or 

some combination of these items. The 

real and personal property is owned 

separately or jointly by the individuals. 

Leasehold is a right to use farm 

property for a specific period of time 

under conditions provided for in a lease 

agreement. 

Lender is the organization making and 

servicing a loan, or advancing and 

servicing a line of credit that is 

guaranteed by the Agency. The lender is 

also the party requesting a guarantee. 

Lender’s Agreement is the appropriate 

Agency form executed by the Agency 

and the lender setting forth their loan 

responsibilities when the Loan 

Guarantee is issued. 

Lien is a legally enforceable claim 

against real or chattel property of 

another obtained as security for the 

repayment of indebtedness or an 

encumbrance on property to enforce 

payment of an obligation. 

Limited resource interest rate is an 

interest rate normally below the 

Agency’s regular interest rate, which is 

available to applicants unable to 

develop a feasible plan at regular rates 

and are requesting: 

(1) FO or OL loan assistance under 

part 764 of this title; or 

(2) Primary loan servicing on an FO, 

OL, or SW loan under part 766 of this 

title. 

Line of Credit Agreement is a contract 

between the borrower and the lender 

that contains certain lender and 

borrower conditions, limitations, and 

responsibilities for credit extension and 

acceptance where loan principal 

balance may fluctuate throughout the 

term of the contract. 

Liquidation is the act of selling 

security for recovery of amounts owed 

to the Agency or lender. 

Liquidation expenses are the costs of 

an appraisal, due diligence evaluation, 

environmental assessment, outside 

attorney fees, and other costs incurred 

as a direct result of liquidating the 

security for a direct or guaranteed loan. 

Liquidation expenses do not include 

internal Agency expenses for a direct 

loan or in-house expenses for a 

guaranteed loan. 


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Livestock is a member of the animal 

kingdom, or product thereof, as 

determined by the Agency. 

Loan Agreement is a contract between 

the borrower and the lender that 

contains certain lender and borrower 

agreements, conditions, limitations, and 

responsibilities for credit extension and 

acceptance. 

Loan servicing programs include any 

primary loan servicing program, 

conservation contract, current market 

value buyout, and homestead 

protection. 

Loan transaction is any loan approval 

or servicing action. 

Loss claim is a request made to the 

Agency by a lender to receive a 

reimbursement based on a percentage of 

the lender’s loss on a loan covered by 

an Agency guarantee. 

Loss rate is the net amount of loan 

loss claims paid on FSA guaranteed 

loans made in the previous 7 years 

divided by the total loan amount of all 

such loans guaranteed during the same 

period. 

Low-Documentation Operating loan is 

an OL loan made to eligible applicants 

based on reduced documentation. 

Major deficiency is a deficiency that 

directly affects the soundness of the 

loan. 

Majority interest is more than a 50 

percent interest in an entity held by an 

individual or group of individuals. 

Market value is the amount that an 

informed and willing buyer would pay 

an informed and willing, but not forced, 

seller in a completely voluntary sale. 

Mineral right is an ownership interest 

in minerals in land, with or without 

ownership of the surface of the land. 

Minor deficiency is a deficiency that 

violates Agency regulations, but does 

not affect the soundness of the loan. 

Mortgage is a legal instrument giving 

the lender a security interest or lien on 

real or personal property of any kind. 

The term ‘‘mortgage’’ also includes the 

terms ‘‘deed of trust’’ and ‘‘security 

agreement.’’

Natural disaster is unusual and 

adverse weather conditions or natural 

phenomena that have substantially 

affected farmers by causing severe 

physical or production, or both, losses. 

Negligent servicing is servicing that 

fails to include those actions that are 

considered normal industry standards of 

loan management or comply with the 

lender’s agreement or the guarantee. 

Negligent servicing includes failure to 

act or failure to act in a timely manner 

consistent with actions of a reasonable 

lender in loan making, servicing, and 

collection. 

Negotiated sale is a sale in which 

there is a bargaining of price or terms, 

or both. 

Net recovery value of security is the 

market value of the security property, 

assuming that the lender in the case of 

a guaranteed loan, or the Agency in the 

case of a direct loan, will acquire the 

property and sell it for its highest and 

best use, less the lender’s or the 

Agency’s costs of property acquisition, 

retention, maintenance, and liquidation. 

Net recovery value of non-essential 

assets is the appraised market value of 

the non-essential assets less any prior 

liens and any selling costs that may 

include such items as taxes due, 

commissions, and advertising costs. 

However, no deduction is made for 

maintenance of the property while in 

inventory. 

Non-capitalized interest is accrued 

interest on a loan that was not 

reclassified as principal at the time of 

restructuring. Between October 10, 

1988, and November 27, 1990, the 

Agency did not capitalize interest that 

was less than 90 days past due when 

restructuring a direct loan. 

Non-eligible enterprise is a business 

that meets the criteria in any one of the 

following categories: 

(1) Produces exotic animals, birds, or 

aquatic organisms or their products 

which may be agricultural in nature, but 

are not normally associated with 

agricultural production, e.g. there is no 

established or stable market for them or 

production is speculative in nature. 

(2) Produces non-farm animals, birds, 

or aquatic organisms ordinarily used for 

pets, companionship, or pleasure and 

not typically associated with human 

consumption, fiber, or draft use. 

(3) Markets non-farm goods or 

provides services which might be 

agriculturally related, but are not 

produced by the farming operation. 

(4) Processes or markets farm 

products when the majority of the 

commodities processed or marketed are 

not produced by the farming operation. 

Non-essential assets are assets in 

which the borrower has an ownership 

interest, that: 

(1) Do not contribute to: 

(i) Income to pay essential family 

living expenses, or 

(ii) The farming operation; and 

(2) Are not exempt from judgment 

creditors or in a bankruptcy action. 

Non-program loan is a loan on terms 

more stringent than terms for a program 

loan that is an extension of credit for the 

convenience of the Agency, because the 

applicant does not qualify for program 

assistance or the property to be financed 

is not suited for program purposes. Such 

loans are made or continued only when 

it is in the best interest of the Agency. 

Normal income security is all security 

not considered basic security, including 

crops, livestock, poultry products, other 

property covered by Agency liens that is 

sold in conjunction with the operation 

of a farm or other business, and FSA 

Farm Program payments. 

Normal production yield as used in 7 

CFR part 764 for EM loans, is: 

(1) The per acre actual production 

history of the crops produced by the 

farming operation used to determine 

Federal crop insurance payments or 

payment under the Noninsured Crop 

Disaster Assistance Program for the 

production year during which the 

disaster occurred; 

(2) The applicant’s own production 

records, or the records of production on 

which FSA Farm Program payments are 

made contained in the applicant’s Farm 

Program file, if available, for the 

previous 3 years, when the actual 

production history in paragraph (1) of 

this definition is not available; 

(3) The county average production 

yield, when the production records 

outlined in paragraphs (1) and (2) of this 

definition are not available. 

Operating loan is a loan made to an 

eligible applicant to assist with the 

financial costs of operating a farm. The 

term also includes a Youth loan. 

Operator is the individual or entity 

that provides the labor, management, 

and capital to operate the farm. The 

operator can be either an owneroperator or tenant-operator. Under 

applicable State law, an entity may have 

to receive authorization from the State 

in which the farm is located to be the 

owner and/or operator of the farm. 

Participated in the business 

operations of a farm requires that an 

applicant has: 

(1) Been the owner, manager or 

operator of a farming operation for the 

year’s complete production cycle as 

evidenced by tax returns, FSA farm 

records or similar documentation; 

(2) Been employed as a farm manager 

or farm management consultant for the 

year’s complete production cycle; or 

(3) Participated in the operation of a 

farm by virtue of being raised on a farm 

or having worked on a farm with 

significant responsibility for the day-today decisions for the year’s complete 

production cycle, which may include 

selection of seed varieties, weed control 

programs, input suppliers, or livestock 

feeding programs or decisions to replace 

or repair equipment. 

Partnership is any entity consisting of 

two or more individuals who have 

agreed to operate a farm as one business 

unit. The entity must be recognized as 


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a partnership by the laws of the State in 

which the partnership will operate a 

farm. It also must be authorized to own 

both real and personal property and to 

incur debt in its own name. 

Past due is when a payment is not 

made by the due date. 

Physical loss is verifiable damage or 

destruction with respect to real estate or 

chattel, excluding annual growing 

crops. 

Potential liquidation value is the 

amount of a lender’s protective bid at a 

foreclosure sale. Potential liquidation 

value is determined by an independent 

appraiser using comparables from other 

forced liquidation sales. 

Present value is the present worth of 

a future stream of payments discounted 

to the current date. 

Presidentially-designated emergency 

is a major disaster or emergency 

designated by the President under the 

Robert T. Stafford Disaster Relief and 

Emergency Assistance Act (42 U.S.C. 

5121 et seq.). 

Primary loan servicing programs 

include: 

(1) Loan consolidation and 

rescheduling, or reamortization; 

(2) Interest rate reduction, including 

use of the limited resource rate program; 

(3) Deferral; 

(4) Write-down of the principal or 

accumulated interest; or 

(5) Any combination of paragraphs (1) 

through (4) of this definition. 

Production cycle is the time it takes to 

produce an agricultural commodity 

from the beginning of the production 

process until it is normally disposed of 

or sold. 

Production loss is verifiable damage 

or destruction with respect to annual 

growing crops. 

Program loans include FO, OL, and 

EM. In addition, for loan servicing 

purposes the term includes existing 

loans for the following programs no 

longer funded: SW, RL, EE, ST, and 

RHF. 

Promissory note is a written 

agreement to pay a specified sum on 

demand or at a specified time to the 

party designated. The terms 

‘‘promissory note’’ and ‘‘note’’ are 

interchangeable. 

Prospectus consists of a transmittal 

letter, a current balance sheet and 

projected year’s budget which is sent to 

commercial lenders to determine their 

interest in financing or refinancing 

specific Agency direct loan applicants 

and borrowers. 

Protective advance is an advance 

made by the Agency or a lender to 

protect or preserve the collateral from 

loss or deterioration. 

Quarantine is a quarantine imposed 

by the Secretary under the Plant 

Protection Act or animal quarantine 

laws (as defined in section 2509 of the 

Food, Agriculture, Conservation and 

Trade Act of 1990). 

Reamortization is the rewriting of 

rates or terms, or both, of a loan made 

for real estate purposes. 

Reasonable rates and terms are those 

commercial rates and terms that other 

farmers are expected to meet when 

borrowing from a commercial lender or 

private source for a similar purpose and 

similar period of time. The ‘‘similar 

period of time’’ of available commercial 

loans will be measured against, but need 

not be the same as, the remaining or 

original term of the loan. 

Recoverable cost is a loan cost 

expense chargeable to either a borrower 

or property account. 

Recreation loan is a loan that was 

made to eligible applicants to assist in 

the conversion of all or a portion of the 

farm they owned or operated to outdoor 

income producing recreation enterprises 

to supplement or supplant farm income. 

RL’s are no longer funded, however, 

such outstanding loans are serviced by 

the Agency. 

Redemption right is a Federal or state 

right to reclaim property for a period of 

time established by law, by paying the 

amount paid at the involuntary sale plus 

accrued interest and costs. 

Related by blood or marriage is being 

connected to one another as husband, 

wife, parent, child, brother, sister, 

uncle, aunt, or grandparent. 

Relative is the spouse and anyone 

having one of the following 

relationships to an applicant or 

borrower: parent, son, daughter, sibling, 

stepparent, stepson, stepdaughter, 

stepbrother, stepsister, half brother, half 

sister, uncle, aunt, nephew, niece, 

cousin, grandparent, grandson, 

granddaughter, or the spouses of the 

foregoing. 

Repossessed property is security 

property in the Agency’s custody. 

Rescheduling is the rewriting of the 

rates or terms, or both, of a loan made 

for operating purposes. 

Restructuring is changing the terms of 

a debt through rescheduling, 

reamortization, deferral, writedown, or a 

combination thereof. 

Rural youth is a person who has 

reached the age of 10 but has not 

reached the age of 21 and resides in a 

rural area or any city or town with a 

population of 50,000 or fewer people. 

Security is property or right of any 

kind that is subject to a real or personal 

property lien. Any reference to 

‘‘collateral’’ or ‘‘security property’’ will 

be considered a reference to the term 

‘‘security.’’

Security instrument includes any 

document giving the Agency a security 

interest on real or personal property. 

Security value is the market value of 

real estate or chattel property (less the 

value of any prior liens) used as security 

for an Agency loan. 

Shared Appreciation Agreement is an 

agreement between the Agency, or a 

lender in the case of a guaranteed loan, 

and a borrower on the appropriate 

Agency form that requires the borrower 

who has received a writedown on a 

direct or guaranteed loan to repay the 

Agency or the lender some or all of the 

writedown received, based on a 

percentage of any increase in the value 

of the real estate securing an SAA at a 

future date. 

Socially disadvantaged applicant is 

an applicant who is a member of a 

socially disadvantaged group. For entity 

applicants, the majority interest must be 

held by socially disadvantaged 

individuals. For married couples, the 

socially disadvantaged individual must 

have at least 50 percent ownership in 

the farm business and make most of the 

management decisions, contribute a 

significant amount of labor, and 

generally be recognized as the operator 

of the farm. 

Socially disadvantaged group is a 

group whose members have been 

subject to racial, ethnic, or gender 

prejudice because of their identity as 

members of a group without regard to 

their individual qualities. These groups 

consist of: American Indians or Alaskan 

Natives, Asians, Blacks or African 

Americans, Native Hawaiians or other 

Pacific Islanders, Hispanics, and 

women. 

Softwood Timber Program loan was 

available to eligible financially 

distressed borrowers who would take 

marginal land, including highly erodible 

land, out of production of agricultural 

commodities other than the production 

of softwood timber. ST loans are no 

longer available, however, such 

outstanding loans are serviced by the 

Agency. 

Soil and Water loan is a loan that was 

made to an eligible applicant to 

encourage and facilitate the 

improvement, protection, and proper 

use of farmland by providing financing 

for soil conservation, water 

development, conservation, and use; 

forestation; drainage of farmland; the 

establishment and improvement of 

permanent pasture; pollution abatement 

and control; and other related measures 

consistent with all Federal, State and 

local environmental standards. SW 

loans are no longer funded, however, 

such outstanding loans are serviced by 

the Agency. 


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Subordination is a creditor’s 

temporary relinquishment of all or a 

portion of its lien priority in favor of 

another creditor, providing the other 

creditor with a priority right to collect 

a debt of a specific dollar amount from 

the sale of the same collateral. 

Subsequent loan is any FLP loan 

processed by the Agency after an initial 

loan of the same type has been made to 

the same borrower. 

Supervised bank account is an 

account with a financial institution 

established through a deposit agreement 

entered into between the borrower, the 

Agency, and the financial institution. 

Technical appraisal review is a review 

of an appraisal to determine if such 

appraisal meets the requirements of 

USPAP pursuant to standard 3 of 

USPAP. 

Transfer and assumption is the 

conveyance by a debtor to an assuming 

party of the assets, collateral, and 

liabilities of a loan in return for the 

assuming party’s binding promise to pay 

the debt outstanding or the market value 

of the collateral. 

Trust is an entity that under 

applicable state law meets the criteria of 

being a trust of any kind but does not 

meet the criteria of being a farm 

cooperative, private domestic 

corporation, partnership, or joint 

operation. 

Unaccounted for security is security 

for a direct or guaranteed loan that was 

misplaced, stolen, sold, or otherwise 

missing, where replacement security 

was not obtained or the proceeds from 

its sale have not been applied to the 

loan. 

Unauthorized assistance is any loan, 

loan servicing action, lower interest 

rate, loan guarantee, or subsidy received 

by a borrower, or lender, for which the 

borrower or lender was not eligible, 

which was not made in accordance with 

all Agency procedures and 

requirements, or which the Agency 

obligated from the wrong appropriation 

or fund. Unauthorized assistance may 

result from borrower, lender, or Agency 

error. 

Uniform Standards of Professional 

Appraisal Practice are standards 

governing the preparation, reporting, 

and reviewing of appraisals established 

by the Appraisal Foundation pursuant 

to the Financial Institutions Reform, 

Recovery, and Enforcement Act of 1989. 

United States is any of the 50 States, 

the Commonwealth of Puerto Rico, the 

Virgin Islands of the United States, 

Guam, American Samoa, the 

Commonwealth of the Northern Mariana 

Islands, Republic of Palau, Federated 

States of Micronesia, and the Republic 

of the Marshall Islands. 

U. S. Attorney is an attorney for the 

United States Department of Justice. 

Veteran is any person who served in 

the military, naval, or air service during 

any war as defined in section 101(12) of 

title 38, United States Code. 

Wetlands are those lands or areas of 

land as determined by the Natural 

Resources Conservation Service to meet 

the requirements provided in section 

1201 of the Food Security Act of 1985. 

Working capital is cash available to 

conduct normal daily operations 

including, but not limited to, paying for 

feed, seed, fertilizer, pesticides, farm 

supplies, cooperative stock, and cash 

rent. 

Youth loan is an operating type loan 

made to an eligible rural youth 

applicant to finance a modest incomeproducing agricultural project. 

§ 761.3 Civil rights. 

Part 15d of this title contains 

applicable regulations pertaining to civil 

rights and filing of discrimination 

complaints by program participants. 

§ 761.4 Conflict of interest. 

The Agency enforces conflict of 

interest policies to maintain high 

standards of honesty, integrity, and 

impartiality in the making and servicing 

of direct and guaranteed loans. These 

requirements are established in 5 CFR 

parts 2635 and 8301. 

§ 761.5 Restrictions on lobbying. 

A person who applies for or receives 

a loan made or guaranteed by the 

Agency must comply with the 

restrictions on lobbying in 7 CFR part 

3018. 

§ 761.6 Appeals. 

Except as provided in 7 CFR part 762, 

appeal of an adverse decision made by 

the Agency will be handled in 

accordance with 7 CFR parts 11 and 

780. 

§ 761.7 Appraisals. 

(a) General. This section describes 

Agency requirements for: 

(1) Real estate and chattel appraisals 

made in connection with the making 

and servicing of direct FLP and Nonprogram loans; and 

(2) Appraisal reviews conducted on 

appraisals made in connection with the 

making and servicing of direct and 

guaranteed FLP and Non-program loans. 

(b) Appraisal standards. (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. A current 

copy of USPAP along with other 

applicable procedures and regulations 

are available for review in each Agency 

State Office. 

(2) When a chattel appraisal is 

required, it must be completed on an 

applicable Agency form (available in 

each Agency State Office) or other 

format containing the same information. 

(c) Use of an existing real estate 

appraisal. Except where specified 

elsewhere, when a real estate appraisal 

is required, the Agency will use the 

existing real estate appraisal to reach 

loan making or servicing decisions 

under either of the following conditions: 

(1) The appraisal was completed 

within the previous 12 months and the 

Agency determines that: 

(i) The appraisal meets the provisions 

of this section and the applicable 

Agency loan making or servicing 

requirements; and 

(ii) Market values have remained 

stable since the appraisal was 

completed; or 

(2) The appraisal was not completed 

in the previous 12 months, but has been 

updated by the appraiser or appraisal 

firm that completed the appraisal, and 

both the update and the original 

appraisal were completed in accordance 

with USPAP. 

(d) Appraisal reviews. (1) With 

respect to a real estate appraisal, the 

Agency may conduct a technical 

appraisal review or an administrative 

appraisal review, or both. 

(2) With respect to a chattel appraisal, 

the Agency may conduct an 

administrative appraisal review. 

§ 761.8 Loan Limitations. 

(a) Dollar limits. The outstanding 

principal balances for an applicant or 

anyone who will sign the promissory 

note cannot exceed any of the following 

at the time of loan closing or 

assumption of indebtedness. If the 

outstanding principal balance exceeds 

any of the limits at the time of approval, 

the farm operating plan must reflect that 

funds will be available to reduce the 

indebtedness prior to loan closing or 

assumption of indebtedness. 

(1) Farm Ownership loans, Beginning 

Farmer Down payment loans and Soil 

and Water loans: 

(i) Direct—$200,000; 

(ii) Guaranteed—$700,000 (for fiscal 

year 2000 and increased at the 

beginning of each fiscal year in 

accordance with paragraph (b) of this 

section); 

(iii) Any combination of a direct Soil 

and Water loan, direct Farm Ownership 

loan, guaranteed Soil and Water loan, 

and guaranteed Farm Ownership loan—

$700,000 (for fiscal year 2000 and 

increased each fiscal year in accordance 

with paragraph (b) of this section); 


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(2) Operating loans: 

(i) Direct—$200,000; 

(ii) Guaranteed—$700,000 (for fiscal 

year 2000 and increased each fiscal year 

in accordance with paragraph (b) of this 

section); 

(iii) Any combination of a direct 

Operating loan and guaranteed 

Operating loan—$700,000 (for fiscal 

year 2000 and increased each fiscal year 

in accordance with paragraph (b) of this 

section); 

(3) Any combination of guaranteed 

Farm Ownership loan, guaranteed Soil 

and Water loan, and guaranteed 

Operating loan—$700,000 (for fiscal 

year 2000 and increased each fiscal year 

in accordance with paragraph (b) of this 

section); 

(4) Any combination of direct Farm 

Ownership loan, direct Soil and Water 

loan, direct Operating loan, guaranteed 

Farm Ownership loan, guaranteed Soil 

and Water loan, and guaranteed 

Operating loan—the amount in 

paragraph (a)(1)(ii) of this section plus 

$200,000; 

(5) Emergency loans—$500,000; 

(6) Any combination of direct Farm 

Ownership loan, direct Soil and Water 

loan, direct Operating loan, guaranteed 

Farm Ownership loan, guaranteed Soil 

and Water loan, guaranteed Operating 

loan, and Emergency loan—the amount 

in paragraph (a)(1)(ii) of this section 

plus $700,000. 

(b) Guaranteed loan limit. The dollar 

limits of guaranteed loans will be 

increased each fiscal year based on the 

percentage change in the Prices Paid by 

Farmers Index as compiled by the 

National Agricultural Statistics Service, 

USDA. The maximum loan limits for the 

current fiscal year are available in any 

FSA office and on the FSA website at 

http://www.fsa.usda.gov. 

(c) Line of credit advances. The total 

dollar amount of guaranteed line of 

credit advances and income releases 

cannot exceed the total estimated 

expenses, less interest expense, as 

indicated on the borrower’s cash flow 

budget, unless the cash flow budget is 

revised and continues to reflect a 

feasible plan. 

§ 761.9 Interest rates for direct loans. 

Interest rates for all direct loans are 

set in accordance with the Act. A copy 

of the current interest rates may be 

obtained in any Agency office. 

§ 761.10 Planning and performing 

construction and other development. 

(a) Purpose. This section describes 

Agency policies regarding the planning 

and performing of construction and 

other development work performed 

with: 

(1) Direct FLP loan funds; or 

(2) Insurance or other proceeds 

resulting from damage or loss to direct 

loan security. 

(b) Funds for development work. The 

applicant or borrower: 

(1) Must provide the Agency with an 

estimate of the total cash cost of all 

planned development prior to loan 

approval; 

(2) Must show proof of sufficient 

funds to pay for the total cash cost of all 

planned development at or before loan 

closing; 

(3) Must not incur any debts for 

materials or labor or make any 

expenditures for development purposes 

prior to loan closing with the 

expectation of being reimbursed from 

Agency loan funds. 

(c) Scheduling, planning, and 

completing development work. The 

applicant or borrower: 

(1) Is responsible for scheduling and 

planning development work in a 

manner acceptable to the Agency and 

must furnish the Agency information 

fully describing the planned 

development, the proposed schedule, 

and the manner in which it will be 

accomplished; 

(2) Is responsible for obtaining all 

necessary State and local construction 

approvals and permits prior to loan 

closing; 

(3) Must ensure that all development 

work meets the environmental 

requirements established in subpart G of 

7 CFR part 1940; 

(4) Must schedule development work 

to start as soon as feasible after the loan 

is closed and complete work as quickly 

as practicable; 

(5) Is responsible for obtaining any 

required technical services from 

qualified technicians, tradespeople, and 

contractors. 

(d) Construction and repair standards. 

(1) The construction of a new building 

and the alteration or repair of an 

existing building must conform with 

industry-acceptable construction 

practices and standards. 

(2) All improvements to a property 

must conform to applicable laws, 

ordinances, codes, and regulations. 

(3) The applicant or borrower is 

responsible for selecting a design 

standard that meets all applicable local 

and state laws, ordinances, codes, and 

regulations, including building, 

plumbing, mechanical, electrical, water, 

and waste management. 

(4) The Agency will require drawings, 

specifications, and estimates to fully 

describe the work as necessary to 

protect the Agency’s financial interests. 

The drawings and specifications must 

identify any specific development 

standards being used. Such information 

must be sufficiently complete to avoid 

any misunderstanding as to the extent, 

kind, and quality of work to be 

performed. 

(5) The Agency will require technical 

data, tests, or engineering evaluations to 

support the design of the development 

as necessary to protect its financial 

interests. 

(6) The Agency will require the 

applicant or borrower to provide written 

certification that final drawings and 

specifications conform with the 

applicable development standard as 

necessary to protect its financial 

interests. Certification must be obtained 

from individuals or organizations 

trained and experienced in the 

compliance, interpretation, or 

enforcement of the applicable 

development standards, such as 

licensed architects, professional 

engineers, persons certified by a 

relevant national model code 

organization, authorized local building 

officials, or national code organizations. 

(e) Inspection. (1) The applicant or 

borrower is responsible for inspecting 

development work as necessary to 

protect their interest. 

(2) The applicant or borrower must 

provide the Agency written certification 

that the development conforms to the 

plans and good construction practices, 

and complies with applicable laws, 

ordinances, codes, and regulations. 

(3) The Agency will require the 

applicant or borrower to obtain 

professional inspection services during 

construction as necessary to protect its 

financial interests. 

(4) Agency inspections do not create 

or imply any duty or obligation of the 

Agency to the applicant or borrower. 

(f) Warranty and lien waivers. The 

applicant or borrower must obtain and 

submit all lien waivers on any 

construction before the Agency will 

issue final payment. 

(g) Surety. The Agency will require 

surety to guarantee both payment and 

performance for construction contracts 

as necessary to protect its financial 

interests. 

(h) Changing the planned 

development. An applicant or borrower 

must request, in writing, Agency 

approval for any change to a planned 

development. The Agency will approve 

a change if all of the following are met: 

(1) It will not reduce the value of the 

Agency’s security; 

(2) It will not adversely affect the 

soundness of the farming operation; 

(3) It complies with all applicable 

laws and regulations; 

(4) It is for an authorized loan 

purpose; 


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(5) It is within the scope of the 

original loan proposal; 

(6) If required, documentation that 

sufficient funding for the full amount of 

the planned development is approved 

and available; 

(7) If required, surety to cover the full 

revised development amount has been 

provided; and 

(8) The modification is certified in 

accordance with paragraph (d) (6) of this 

section. 

§§ 761.11–761.50 [Reserved] 

Subpart B—Supervised Bank 

Accounts 

§ 761.51 Establishing a supervised bank 

account. 

(a) Supervised bank accounts will be 

used to: 

(1) Assure correct use of funds 

planned for capital purchases or debt 

refinancing and perfection of the 

Agency’s security interest in the assets 

purchased or refinanced when 

electronic funds transfer or treasury 

check processes are not practicable; 

(2) Protect the Agency’s security 

interest in insurance indemnities or 

other loss compensation resulting from 

loss or damage to loan security; or 

(3) Assist borrowers with limited 

financial skills with cash management, 

subject to the following conditions: 

(i) Use of a supervised bank for this 

purpose will be temporary and 

infrequent; 

(ii) The need for a supervised bank 

account in this situation will be 

determined on a case-by-case basis; and 

(iii) The borrower agrees to the use of 

a supervised bank account for this 

purpose by executing the deposit 

agreement. 

(b) The borrower may select the 

financial institution in which the 

account will be established, provided 

the institution is Federally insured. If 

the borrower does not select an 

institution, the Agency will choose one. 

(c) Only one supervised bank account 

will be established for any borrower. 

(d) If both spouses sign an FLP note 

and security agreement, the supervised 

bank account will be established as a 

joint tenancy account with right of 

survivorship from which either 

borrower can withdraw funds. 

(e) If the funds to be deposited into 

the account cause the balance to exceed 

$100,000, the financial institution must 

agree to pledge acceptable collateral 

with the Federal Reserve Bank for the 

excess over $100,000, before the deposit 

is made. 

(1) If the financial institution is not a 

member of the Federal Reserve System, 

the institution must pledge acceptable 

collateral with a correspondent bank 

that is a member of the Federal Reserve 

System. The correspondent bank must 

inform the Federal Reserve Bank that it 

is holding securities pledged for the 

supervised bank account in accordance 

with 31 CFR part 202 (Treasury Circular 

176). 

(2) When the balance in the account 

has been reduced, the financial 

institution may request a release of part 

or all of the collateral, as applicable, 

from the Agency. 

§ 761.52 Deposits into a supervised bank 

account. 

(a) Checks or money orders may be 

deposited into a supervised bank 

account provided they are not payable: 

(1) Solely to the Federal Government 

or any agency thereof; or 

(2) To the Treasury of the United 

States as a joint payee. 

(b) Loan proceeds may be deposited 

electronically. 

§ 761.53 Interest bearing accounts. 

(a) A supervised bank account, if 

possible, will be established as an 

interest bearing deposit account 

provided that the funds will not be 

immediately disbursed, and the account 

is held jointly by the borrower and the 

Agency if this arrangement will benefit 

the borrower. 

(b) Interest earned on a supervised 

bank account will be treated as normal 

income security. 

§ 761.54 Withdrawals from a supervised 

bank account. 

(a) The Agency will authorize a 

withdrawal from the supervised bank 

account for an approved purpose after 

ensuring that: 

(1) Sufficient funds in the supervised 

bank account are available; 

(2) No loan proceeds are disbursed 

prior to confirmation of proper lien 

position, except to pay for lien search if 

needed; 

(3) No checks are issued to ‘‘cash;’’

and 

(4) The use of funds is consistent with 

the current farm operating plan or other 

agreement with the Agency. 

(b) A check must be signed by the 

borrower with countersignature of the 

Agency, except as provided in 

paragraph (c) of this section. All checks 

must bear the legend ‘‘countersigned, 

not as co-maker or endorser.’’

(c) The Agency will withdraw funds 

from a supervised bank account without 

borrower counter-signature only for the 

following purposes: 

(1) For application on Agency 

indebtedness; 

(2) To refund Agency loan funds; 

(3) To protect the Agency’s lien or 

security; 

(4) To accomplish a purpose for 

which such advance was made; or 

(5) In the case of a deceased borrower, 

to continue to pay necessary farm 

expenses to protect Agency security in 

conjunction with the borrower’s estate. 

§ 761.55 Closing a supervised bank 

account. 

(a) If the supervised bank account is 

no longer needed and the loan account 

is not paid in full, the Agency will 

determine the source of the remaining 

funds in the supervised bank account. If 

the funds are determined to be: 

(1) Loan funds: 

(i) From any loan type, except Youth 

loan, and the balance is less than 

$1,000, the Agency will provide the 

balance to the borrower to use for 

authorized loan purposes; 

(ii) From a Youth loan, and the 

balance is less than $100, the Agency 

will provide the balance to the borrower 

to use for authorized loan purposes; 

(2) Loan funds: 

(i) From any loan type, except Youth 

loan, and the balance is $1,000 or 

greater, the Agency will apply the 

balance to the FLP loan; 

(ii) From a Youth loan, and the 

balance is $100 or greater, the Agency 

will apply the balance to the FLP loan; 

(3) Normal income funds, the Agency 

will apply the balance to the remaining 

current year’s scheduled payments and 

pay any remaining balance to the 

borrower; and 

(4) Basic security funds, the Agency 

will apply the balance to the FLP loan 

as an extra payment or the borrower 

may apply the balance toward the 

purchase of basic security, provided the 

Agency obtains a lien on such security 

and its security position is not 

diminished. 

(b) If the borrower is uncooperative in 

closing a supervised bank account, the 

Agency will make written demand to 

the financial institution for the balance 

and apply it in accordance with 

paragraph (a) of this section. 

(c) In the event of a borrower’s death, 

the Agency may: 

(1) Apply the balance to the 

borrower’s FLP loan; 

(2) Continue with a remaining 

borrower, provided the supervised bank 

account was established as a joint 

tenancy with right of survivorship 

account; 

(3) Refund unobligated balances from 

other creditors in the supervised bank 

account for specific operating purposes 

in accordance with any prior written 

agreement between the Agency and the 

deceased borrower; or 


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(4) Continue to pay expenses from the 

supervised bank account in conjunction 

with the borrower’s estate. 

§§ 761.56–761.100 [Reserved] 

Subpart C—Supervised Credit 

§ 761.101 Applicability. 

This subpart applies to all direct 

applicants and borrowers, except 

borrowers with only Non-program 

loans. 

§ 761.102 Borrower recordkeeping, 

reporting, and supervision. 

(a) A borrower must maintain 

accurate records sufficient to make 

informed management decisions and to 

allow the Agency to render loan making 

and servicing decisions in accordance 

with Agency regulations. These records 

must include the following: 

(1) Production (e.g., total and per unit 

for livestock and crops); 

(2) Revenues, by source; 

(3) Other sources of funds, including 

borrowed funds; 

(4) Operating expenses; 

(5) Interest; 

(6) Family living expenses; 

(7) Profit and loss; 

(8) Tax-related information; 

(9) Capital expenses; 

(10) Outstanding debt; and 

(11) Debt repayment. 

(b) A borrower also must agree in 

writing to: 

(1) Cooperate with the Agency and 

comply with all supervisory agreements, 

farm assessments, farm operating plans, 

year-end analyses, and all other loanrelated requirements and documents; 

(2) Submit financial information and 

an updated farm operating plan when 

requested by the Agency; 

(3) Immediately notify the Agency of 

any proposed or actual significant 

change in the farming operation, any 

significant changes in family income, 

expenses, or the development of 

problem situations, or any losses or 

proposed significant changes in 

security. 

(c) If the borrower fails to comply 

with these requirements, unless due to 

reasons outside the borrower’s control, 

the non-compliance may adversely 

impact future requests for assistance. 

§ 761.103 Farm assessment. 

(a) The Agency assesses each farming 

operation to determine the applicant’s 

financial condition, organizational 

structure, management strengths and 

weaknesses, appropriate levels of 

Agency oversight, credit counseling 

needs, and training needs. The 

applicant will participate in developing 

the assessment. 

(b) The initial assessment must 

evaluate, at a minimum, the: 

(1) Farm organization and key 

personnel qualifications; 

(2) Type of farming operation; 

(3) Goals for the operation; 

(4) Adequacy of real estate, including 

facilities, to conduct the farming 

operation; 

(5) Adequacy of chattel property used 

to conduct the farming operation; 

(6) Historical performance; 

(7) Farm operating plan; 

(8) Loan evaluation; 

(9) Supervisory plan; and 

(10) Training plan. 

(c) An assessment update must be 

prepared for each subsequent loan. The 

update must include a farm operating 

plan, a loan evaluation, and any other 

items discussed in paragraph (b) of this 

section that have significantly changed 

since the initial assessment. 

(d) The Agency reviews the 

assessment to determine a borrower’s 

progress at least annually. The review 

will be in the form of an office visit, 

field visit, letter, phone conversation, or 

year-end analysis, as determined by the 

Agency. 

§ 761.104 Developing the farm operating 

plan. 

(a) An applicant or borrower must 

submit a farm operating plan to the 

Agency, upon request, for loan making 

or servicing purposes. 

(b) An applicant or borrower may 

request Agency assistance in developing 

the farm operating plan. 

(c) The farm operating plan will be 

based on accurate and verifiable 

information. 

(1) Historical information will be used 

as a guide. 

(2) Positive and negative trends, 

mutually agreed upon changes and 

improvements, and current input prices 

will be taken into consideration when 

arriving at reasonable projections. 

(3) Projected yields will be calculated 

according to the following priorities: 

(i) The applicant or borrower’s own 

production records for the previous 3 

years; 

(ii) The per-acre actual production 

history of the crops produced by the 

farming operation used to determine 

Federal crop insurance payments, if 

available; 

(iii) FSA Farm Program actual yield 

records; 

(iv) County averages; 

(v) State averages. 

(4) If the applicant or borrower’s 

production history has been 

substantially affected by a disaster 

declared by the President or designated 

by the Secretary of Agriculture, or the 

applicant or borrower has had a 

qualifying loss from such disaster but 

the farming operation was not located in 

a declared or designated disaster area, 

the applicant or borrower may: 

(i) Use county average yields, or state 

average yields if county average yields 

are not available, in place of the disaster 

year yields; or 

(ii) Exclude the production year with 

the lowest actual or county average 

yield if their yields were affected by 

disasters during at least 2 of the 3 years. 

(d) Unit prices for agricultural 

commodities established by the Agency 

will generally be used. Applicants and 

borrowers that provide evidence that 

they will receive a premium price for a 

commodity may use a price above the 

price established by the Agency. 

(e) Except as provided in paragraph (f) 

of this section, the applicant or 

borrower must sign the final farm 

operating plan prior to approval of any 

loan or servicing action. 

(f) If the Agency believes the 

applicant or borrower’s farm operating 

plan is inaccurate, or the information 

upon which it is based cannot be 

verified, the Agency will discuss and try 

to resolve the concerns with the 

applicant or borrower. If an agreement 

cannot be reached, the Agency will 

make loan approval and servicing 

determinations based on the Agency’s 

revised farm operating plan. 

§ 761.105 Year-end analysis. 

(a) The Agency conducts a year-end 

analysis at its discretion or if the 

borrower: 

(1) Has received any direct loan, 

chattel subordination, or primary loan 

servicing action within the last year; 

(2) Is financially distressed or 

delinquent; 

(3) Has a loan deferred, excluding 

deferral of an installment under subpart 

B of part 766; or 

(4) Is receiving a limited resource 

interest rate on any loan. 

(b) To the extent practicable, the yearend analysis will be completed within 

60 days after the end of the business 

year or farm budget planning period and 

must include: 

(1) An analysis comparing actual 

income, expenses, and production to 

projected income, expenses, and 

production for the preceding production 

cycle; and 

(2) An updated farm operating plan. 

§§ 761.106–761.200 [Reserved] 

Subpart D—Allocation of Farm Loan 

Programs Funds to State Offices 

§ 761.201 Purpose. 

(a) This subpart addresses: 


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(1) The allocation of funds for direct 

and guaranteed FO and OL loans; 

(2) The establishment of socially 

disadvantaged target participation rates; 

and 

(3) The reservation of loan funds for 

beginning farmers. 

(b) The Agency does not allocate EM 

loan funds to State Offices but makes 

funds available following a designated 

or declared disaster. EM loan funds are 

available on a first-come first-served 

basis. 

(c) State funding information is 

available for review in any State Office. 

§ 761.202 Timing of allocations. 

The Agency’s National Office 

allocates funds for FO and OL loans to 

the State Offices on a fiscal year basis, 

as made available by the Office of 

Management and Budget. However, the 

National Office will retain control over 

the funds when funding or 

administrative constraints make 

allocation to State Offices impractical. 

§ 761.203 National reserves for Farm 

Ownership and Operating loans. 

(a) Reservation of funds. At the start 

of each fiscal year, the National Office 

reserves a portion of the funds available 

for each direct and guaranteed loan 

program. These reserves enable the 

Agency to meet unexpected or 

justifiable program needs during the 

fiscal year. 

(b) Allocation of reserved funds. The 

National Office distributes funds from 

the reserve to one or more State Offices 

to meet a program need or Agency 

objective. 

§ 761.204 Methods of allocating funds to 

State Offices. 

FO and OL loan funds are allocated to 

State Offices using one or more of the 

following allocation methods: 

(a) Formula allocation, if data, as 

specified in § 761.205, is available to 

use the formula for the State. 

(b) Administrative allocation, if the 

Agency cannot adequately meet 

program objectives with a formula 

allocation. The National Office 

determines the amount of an 

administrative allocation on a case-bycase basis. 

(c) Base allocation, to ensure funding 

for at least one loan in each State, 

District, or County Office. In making a 

base allocation, the National Office may 

use criteria other than those used in the 

formula allocation, such as historical 

Agency funding information. 

§ 761.205 Computing the formula 

allocation. 

(a) The formula allocation for FO or 

OL loan funds is equal to: 

(1) The amount available for 

allocation by the Agency minus the 

amounts held in the National Office 

reserve and distributed by base and 

administrative allocation, multiplied by 

(2) The State Factor, which represents 

the percentage of the total amount of the 

funds for a loan program that the 

National Office allocates to a State 

Office. 

formula allocation = (amount available for 

allocation¥national reserve¥base 

allocation¥administrative allocation) × 

State Factor 

(b) To calculate the State Factor, the 

Agency: 

(1) Uses the following criteria, data 

sources, and weights: 

Criteria Loan type criterion is used 

for Data source 

Weight for 

FO loans 

(percent) 

Weight for 

OL loans 

(percent) 

Farm operators with sales of $2,500–$39,999 and less 

than 200 days work off the farm.

FO and OL loans ............... U.S. Census of Agriculture 15 15 

Farm operators with sales of $40,000 or more and less 

than 200 days work off farm.

FO and OL loans ............... U.S. Census of Agriculture 35 35 

Tenant farm operators .................................................... FO and OL loans ............... U.S. Census of Agriculture 25 20 

3-year average net farm income .................................... FO and OL loans ............... USDA Economic Research 

Service.

15 15 

Value of farm real estate assets .................................... FO loans ............................ USDA Economic Research 

Service.

10 N/A 

Value of farm non-real estate assets ............................. OL loans ............................ USDA Economic Research 

Service.

N/A 15 

(2) Determines each State’s percentage 

of the national total for each criterion; 

(3) Multiplies the percentage for each 

State determined in paragraph (b)(2) of 

this section by the applicable weight for 

that criterion; 

(4) Sums the weighted criteria for 

each State to obtain the State factor. 

§ 761.206 Pooling of unobligated funds 

allocated to State Offices. 

The Agency periodically pools 

unobligated FO and OL loan funds that 

have been allocated to State Offices. 

When pooling these funds, the Agency 

places all unobligated funds in the 

appropriate National Office reserve. The 

pooled funds may be retained in the 

national reserve or reallocated to the 

States. 

§ 761.207 Distribution of loan funds by 

State Offices. 

A State Office may distribute its 

allocation of loan funds to District or 

County level using the same allocation 

methods that are available to the 

National Office. State Offices may 

reserve a portion of the funds to meet 

unexpected or justifiable program needs 

during the fiscal year. 

§ 761.208 Target participation rates for 

socially disadvantaged groups. 

(a) General. (1) The Agency 

establishes target participation rates for 

providing FO and OL loans to members 

of socially disadvantaged groups. 

(2) The Agency sets the target 

participation rates for State and County 

levels annually. 

(3) When distributing loan funds in 

counties within Indian reservations, the 

Agency will allocate the funds on a 

reservation-wide basis. 

(4) The Agency reserves and allocates 

sufficient loan funds to achieve these 

target participation rates. The Agency 

may also use funds that are not reserved 

and allocated for socially disadvantaged 

groups to make or guarantee loans to 

members of socially disadvantaged 

groups. 

(b) FO loans based on ethnicity or 

race. The FO loan target participation 

rate based on ethnicity or race in each: 

(1) State is equal to the percent of the 

total rural population in the State who 

are members of such socially 

disadvantaged groups. 

(2) County is equal to the percent of 

rural population in the county who are 

members of such socially disadvantaged 

groups. 


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(c) OL loans based on ethnicity or 

race. The OL loan target participation 

rate based on ethnicity or race in each: 

(1) State is equal to the percent of the 

total number of farmers in the State who 

are members of such socially 

disadvantaged groups. 

(2) County is equal to the percent of 

the total number of farmers in the 

county who are members of socially 

disadvantaged ethnic groups. 

(d) Women farmers. (1) The target 

participation rate for women farmers in 

each: 

(i) State is equal to the percent of 

farmers in the State who are women. 

(ii) County is equal to the percent of 

farmers in the county who are women. 

(2) In developing target participation 

rates for women, the Agency will 

consider the number of women who are 

current farmers and potential farmers. 

§ 761.209 Loan funds for beginning 

farmers. 

Each fiscal year, the Agency reserves 

a portion of direct and guaranteed FO 

and OL loan funds for beginning farmers 

in accordance with section 346(b)(2) of 

the Act. 

§ 761.210 Transfer of funds. 

If sufficient unsubsidized guaranteed 

OL funds are available, then beginning 

on: 

(a) August 1 of each fiscal year, the 

Agency will use available unsubsidized 

guaranteed OL loan funds to make 

approved direct FO loans to beginning 

farmers under the Beginning Farmer 

Downpayment loan program; and 

(b) September 1 of each fiscal year the 

Agency will use available unsubsidized 

guaranteed OL loan funds to make 

approved direct FO loans to beginning 

farmers. 

PART 762—GUARANTEED FARM 

LOANS 

■ 6. The authority citation for part 762 

continues to read as follows: 

Authority: 5 U.S.C. 301, 7 U.S.C. 1989, 42 

U.S.C. 1480. 

PART 762—[AMENDED] 

■ 7. Amend part 762 to read as follows: 

■ a. Remove the phrase ‘‘farm or ranch’’

each time it appears and add in its place 

the term ‘‘farm’’. 

■ b. Remove the phrase ‘‘farmer or 

rancher’’ each time it appears and add 

in its place the term ‘‘farmer’’. 

■ c. Remove the phrase ‘‘farmers or 

ranchers’’ each time it appears and add 

in its place the term ‘‘farmers’’. 

■ d. Remove the phrase ‘‘Loan 

Applicant’’ each time it appears and add 

in its place the term ‘‘Applicant’’. 

■ e. Remove the phrase ‘‘loan 

applicant’’ each time it ppears and add 

in its place the term ‘‘applicant’’

■ f. Remove the phrase ‘‘loan 

applicant’s’’ each time it appears and 

add in its place the term ‘‘applicant’s’’. 

■ g. Remove the phrase ‘‘loan 

applicants’’ each time it appears and 

add in its place the term ‘‘applicants’’. 

■ h. Remove the phrase ‘‘Non-farm 

enterprises’’ each time it appears and 

add in its place the term ‘‘Non-eligible 

enterprises’’. 

■ 8. Amend § 762.101 by revising 

paragraphs (b) and (c) to read as follows: 

§ 762.101 Introduction. 

* * * * * 

(b) Lender list. The Agency maintains 

a current list of lenders who express a 

desire to participate in the guaranteed 

loan program. This list is made available 

to farmers upon request. 

(c) Lender classification. Lenders who 

participate in the Agency guaranteed 

loan program will be classified into one 

of the following categories: 

(1) Standard Eligible Lender under 

§ 762.105; 

(2) Certified Lender, or 

(3) Preferred Lender under § 762.106. 

* * * * * 

■ 9. Revise § 762.102 to read as follows: 

§ 762.102 Abbreviations and definitions. 

Abbreviations and definitions for 

terms used in this part are provided in 

§ 761.2 of this chapter. 

§ 762.104 [Amended] 

■ 10. Amend § 762.104 by removing 

paragraph (a) and redesignating 

paragraphs (b) through (d) as (a) through 

(c). 

■ 11. Amend § 762.110 by adding a new 

paragraph (g) to to read as follows: 

§ 762.110 Loan applications. 

* * * * * 

(g) Market Placement Program. When 

the Agency determines that a direct loan 

applicant or borrower may qualify for 

guaranteed credit, the Agency may 

submit the applicant or borrower’s 

financial information to one or more 

guaranteed lenders. If a lender indicates 

interest in providing financing to the 

applicant or borrower through the 

guaranteed loan program, the Agency 

will assist in completing the application 

for a guarantee. 

■ 12. Amend § 762.120 as follows: 

■ a. In paragraph (a), remove the word 

‘‘CONACT’’ everywhere it appears and 

add the word ‘‘Act’’ in its place. 

■ b. Revise paragraph (l) to read as 

follows: 

§ 762.120 Applicant eligibility. 

* * * * * 

(l) Controlled substances. The 

applicant, and anyone who will sign the 

promissory note, must not be ineligible 

as a result of a conviction for controlled 

substances according to 7 CFR part 718 

of this chapter. If the lender uses the 

lender’s Agency approved forms, the 

certification may be an attachment to 

the form. 

§ 762.121 [Amended] 

■ 13. Amend § 762.121(b)(1) by 

removing the words ‘‘1943, subpart A of 

this title’’ and adding the words ‘‘764 of 

this chapter’’ in their place. 

■ 14. Amend § 762.122 by redesignating 

paragraphs (a) through (d) as (b) through 

(e) and adding a new paragraph (a) to 

read as follows. 

§ 762.122 Loan limitations. 

(a) Dollar limits. The Agency will not 

guarantee any loan that would result in 

the applicant’s total indebtedness 

exceeding the limits established in 

§ 761.8 of this chapter. 

* * * * * 

§ 762.123 [Amended] 

■ 15. Amend § 762.123(a)(2)(ii) by 

removing the words ‘‘1945, subpart D, of 

this title’’ and adding the words ‘‘764 of 

this chapter’’ in their place. 

§ 762.124 [Amended] 

■ 16. Amend § 762.124(e)(3) by 

removing the words ‘‘1943, subpart A, 

of this title’’ and adding the words ‘‘764 

of this chapter’’ in their place. 

§ 762.128 [Amended] 

■ 17. Amend § 762.128 as follows: 

■ a. In paragraph (c)(3), remove the 

words, ‘‘and part 1901, subpart F, of this 

title.’’

■ b. In paragraph (c)(4), remove the 

word ‘‘CONACT’’ and add the word 

‘‘Act’’ in its place. 

§ 762.129 [Amended] 

■ 18. Amend § 762.129(b)(1) by 

removing the words ‘‘farm credit 

program’’ in the second sentence. 

§ 762.130 [Amended] 

■ 19. Amend § 762.130(d)(4)(iii)(C) by 

removing the words ‘‘beginning farmers 

or ranchers,’’ and adding the words 

‘‘beginning farmers’’ in their place. 

■ 20. Revise § 762.130(e) by removing 

the words ‘‘in Louisiana and Puerto 

Rico.’’

§ 762.143 [Amended] 

■ 21. Revise § 762.143(b)(3)(ii) by 

removing the words ‘‘credit officer,’’

wherever they appear and adding the 

word, ‘‘official’’ in their place. 


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63298 Federal Register / Vol. 72, No. 216 / Thursday, November 8, 2007 / Rules and Regulations 

PART 763—[RESERVED] 

■ 22. Add and reserve part 763. 

■ 23. Revise part 764 to read as follows: 

PART 764—DIRECT LOAN MAKING 

Subpart A—Overview 

Sec. 

764.1 Introduction. 

764.2 Abbreviations and definitions. 

764.3–764.50 [Reserved] 

Subpart B—Loan Application Process 

764.51 Loan application. 

764.52 Processing an incomplete 

application. 

764.53 Processing the complete application. 

764.54 Preferences when there is limited 

funding. 

764.55–764.100 [Reserved] 

Subpart C—Requirements for All Direct 

Program Loans 

764.101 General eligibility requirements. 

764.102 General limitations. 

764.103 General security requirements. 

764.104 General real estate security 

requirements. 

764.105 General chattel security 

requirements. 

764.106 Exceptions to security 

requirements. 

764.107 General appraisal requirements. 

764.108 General insurance requirements. 

764.109–764.150 [Reserved] 

Subpart D—Farm Ownership Loan Program 

764.151 Farm Ownership loan uses. 

764.152 Eligibility requirements. 

764.153 Limitations. 

764.154 Rates and terms. 

764.155 Security requirements. 

764.156–764.200 [Reserved] 

Subpart E—Beginning Farmer 

Downpayment Loan Program 

764.201 Beginning Farmer Downpayment 

loan uses. 

764.202 Eligibility requirements. 

764.203 Limitations. 

764.204 Rates and terms. 

764.205 Security requirements. 

764.206–764.250 [Reserved] 

Subpart F—Operating Loan Program 

764.251 Operating loan uses. 

764.252 Eligibility requirements. 

764.253 Limitations. 

764.254 Rates and terms. 

764.255 Security requirements. 

764.256–764.300 [Reserved] 

Subpart G—Youth Loan Program 

764.301 Youth loan uses. 

764.302 Eligibility requirements. 

764.303 Limitations. 

764.304 Rates and terms. 

764.305 Security requirements. 

764.306–764.350 [Reserved] 

Subpart H—Emergency Loan Program 

764.351 Emergency loan uses. 

764.352 Eligibility requirements. 

764.353 Limitations. 

764.354 Rates and terms. 

764.355 Security requirements. 

764.356 Appraisal and valuation 

requirements. 

764.357–764.400 [Reserved] 

Subpart I—Loan Decision and Closing 

764.401 Loan decision. 

764.402 Loan closing. 

764.403–764.450 [Reserved] 

Subpart J—Borrower Training and Training 

Vendor Requirements 

764.451 Purpose. 

764.452 Borrower training requirements. 

764.453 Agency waiver of training 

requirements. 

764.454 Actions that an applicant must take 

when training is required. 

764.455 Potential training vendors. 

764.456 Applying to be a vendor. 

764.457 Vendor requirements. 

764.458 Vendor approval. 

764.459 Evaluation of borrower progress. 

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

Subpart A—Overview 

§ 764.1 Introduction. 

(a) Purpose. This part describes the 

Agency’s policies for making direct FLP 

loans. 

(b) Types of loans. The Agency makes 

the following types of loans: 

(1) FO, including Beginning Farmer 

Downpayment loans; 

(2) OL, including Youth loans; and 

(3) EM. 

§ 764.2 Abbreviations and definitions. 

Abbreviations and definitions for 

terms used in this part are provided in 

§ 761.2 of this chapter. 

§§ 764.3–764.50 [Reserved] 

Subpart B—Loan Application Process 

§ 764.51 Loan application. 

(a) A loan application must be 

submitted in the name of the actual 

operator of the farm. Two or more 

applicants applying jointly will be 

considered an entity applicant. The 

Agency will consider tax filing status 

and other business dealings as 

indicators of the operator of the farm. 

(b) A complete loan application, 

except as provided in paragraphs (c) 

through (e) of this section, will include: 

(1) The completed Agency application 

form; 

(2) If the applicant is an entity: 

(i) A complete list of entity members 

showing the address, citizenship, 

principal occupation, and the number of 

shares and percentage of ownership or 

stock held in the entity by each member, 

or the percentage of interest in the entity 

held by each member; 

(ii) A current personal financial 

statement from each member of the 

entity; 

(iii) A current financial statement 

from the entity itself; 

(iv) A copy of the entity’s charter or 

any entity agreement, any articles of 

incorporation and bylaws, any 

certificate or evidence of current 

registration (good standing), and a 

resolution adopted by the Board of 

Directors or entity members authorizing 

specified officers of the entity to apply 

for and obtain the desired loan and 

execute required debt, security and 

other loan instruments and agreements; 

(v) In the form of married couples 

applying as a joint operation, items (i) 

and (iv) will not be required. The 

Agency may request copies of the 

marriage license, prenuptial agreement 

or similar documents as needed to 

verify loan eligibility and security. Items 

(ii) and (iii) are only required to the 

extent needed to show the individual 

and joint finances of the husband and 

wife without duplication. 

(3) A written description of the 

applicant’s farm training and 

experience, including each entity 

member who will be involved in 

managing or operating the farm; 

(4) The last 3 years of farm financial 

records, including tax returns, unless 

the applicant has been farming less than 

three years; 

(5) The last 3 years of farm production 

records, unless the applicant has been 

farming less than 3 years; 

(6) Documentation that the applicant 

and each member of an entity applicant 

cannot obtain sufficient credit 

elsewhere on reasonable rates and 

terms, including a loan guaranteed by 

the Agency; 

(7) Documentation of compliance 

with the Agency’s environmental 

regulations contained in subpart G of 7 

CFR part 1940; 

(8) Verification of all non-farm 

income; 

(9) A current financial statement and 

the operation’s farm operating plan, 

including the projected cash flow 

budget reflecting production, income, 

expenses, and loan repayment plan; 

(10) A legal description of the farm 

property owned or to be acquired and, 

if applicable, any leases, contracts, 

options, and other agreements with 

regard to the property; 

(11) Payment to the Agency for 

ordering a credit report on the 

applicant; 

(12) Verification of all debts; 

(13) Any additional information 

deemed necessary by the Agency to 

effectively evaluate the applicant’s 

eligibility and farm operating plan; and 

(14) For EM loans, a statement of loss 

or damage on the appropriate Agency 

form. 

(c) For a Lo-Doc OL request, the 

applicant must: 


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(1) Be current on all payments to all 

creditors including the Agency (if an 

Agency borrower); 

(2) Have not received primary loan 

servicing on any FLP debt within the 

past 5 years; and 

(3) Meet one of the following sets of 

criteria: 

(i) The loan requested is $50,000 or 

less and the total outstanding Agency 

OL loan debt at the time of loan closing 

will be less than $100,000; or 

(ii) The loan requested is to pay 

annual operating expenses and the 

applicant is an existing Agency 

borrower who has received and timely 

repaid at least two previous annual OL 

loans from the Agency. 

(4) Submit items (1), (2), (7), (9), and 

(11) of paragraph (b) of this section. The 

Agency may require a Lo-Doc applicant 

to submit any other information listed 

in paragraph (b) of this section as 

needed to make a determination on the 

loan application. 

(d) For a youth loan request: 

(1) The applicant must submit items 

(1), (7), and (9) of paragraph (b) of this 

section. 

(2) Applicants 18 years or older, must 

also provide items (11) and (12) of 

paragraph (b) of this section. 

(3) The Agency may require a youth 

loan applicant to submit any other 

information listed in paragraph (b) of 

this section as needed to make a 

determination on the loan application. 

(e) The applicant need not submit any 

information under this section that 

already exists in the applicant’s Agency 

file and is still current. 

§ 764.52 Processing an incomplete 

application. 

(a) Within 10 days of receipt of an 

incomplete application, the Agency will 

provide the applicant written notice of 

any additional information which must 

be provided. The applicant must 

provide the additional information 

within 20 calendar days of the date of 

this notice. 

(b) If the additional information is not 

received, the Agency will provide 

written notice that the application will 

be withdrawn if the information is not 

received within 10 calendar days of the 

date of this second notice. 

§ 764.53 Processing the complete 

application. 

Upon receiving a complete loan 

application, the Agency will: 

(a) Consider the loan application in 

the order received, based on the date the 

application was determined to be 

complete. 

(b) Provide written notice to the 

applicant that the application is 

complete. 

(c) Within 60 calendar days after 

receiving a complete loan application, 

the Agency will complete the processing 

of the loan request and notify the 

applicant of the decision reached, and 

the reason for any disapproval. 

(d) If, based on the Agency’s review 

of the application, it appears the 

applicant’s credit needs could be met 

through the guaranteed loan program, 

the Agency will assist the applicant in 

securing guaranteed loan assistance 

under the market placement program in 

accordance with § 762.110(g) of this 

chapter. 

(e) In the absence of funds for a direct 

loan, the Agency will keep an approved 

loan application on file until funding is 

available. At least annually, the Agency 

will contact the applicant to determine 

if the Agency should retain the 

application or if the applicant wants the 

application withdrawn. 

(f) If funding becomes available, the 

Agency will resume processing of 

approved loans in accordance with this 

part. 

§ 764.54 Preferences when there is limited 

funding. 

(a) First priority. When there is a 

shortage of loan funds, approved 

applications will be funded in the order 

of the date the application was received, 

whether or not complete. 

(b) Secondary priorities. If two or 

more applications were received on the 

same date, the Agency will give 

preference to: 

(1) First, an applicant who is a veteran 

of any war; 

(2) Second, an applicant who is not a 

veteran, but: 

(i) Has a dependent family; 

(ii) Is able to make a downpayment; 

or 

(iii) Owns livestock and farm 

implements necessary to farm 

successfully. 

(3) Third, to other eligible applicants. 

§§ 764.55–764.100 [Reserved] 

Subpart C—Requirements for All 

Direct Program Loans 

§ 764.101 General eligibility requirements. 

The following requirements must be 

met unless otherwise provided in the 

eligibility requirements for the 

particular type of loan. 

(a) Controlled substances. The 

applicant, and anyone who will sign the 

promissory note, must not be ineligible 

for loans as a result of a conviction for 

controlled substances according to 7 

CFR part 718 of this chapter. 

(b) Legal capacity. The applicant, and 

anyone who will sign the promissory 

note, must possess the legal capacity to 

incur the obligation of the loan. A Youth 

loan applicant will incur full personal 

liability upon execution of the 

promissory note without regard to the 

applicant’s minority status. 

(c) Citizenship. The applicant, and 

anyone who will sign the promissory 

note, must be a citizen of the United 

States, United States non-citizen 

national, or a qualified alien under 

applicable Federal immigration laws. 

(d) Credit history. The applicant must 

have acceptable credit history 

demonstrated by debt repayment. 

(1) As part of the credit history, the 

Agency will determine whether the 

applicant will carry out the terms and 

conditions of the loan and deal with the 

Agency in good faith. In making this 

determination, the Agency may examine 

whether the applicant has properly 

fulfilled its obligations to other parties, 

including other agencies of the Federal 

Government. 

(2) When the applicant caused the 

Agency a loss by receiving debt 

forgiveness, the applicant may be 

ineligible for assistance in accordance 

with eligibility requirements for the 

specific loan type. If the debt 

forgiveness is cured by repayment of the 

Agency’s loss, the Agency may still 

consider the debt forgiveness in 

determining the applicant’s credit 

worthiness. 

(3) A history of failures to repay past 

debts as they came due when the ability 

to repay was within the applicant’s 

control will demonstrate unacceptable 

credit history. The following 

circumstances, for example, do not 

automatically indicate an unacceptable 

credit history: 

(i) Foreclosures, judgments, 

delinquent payments of the applicant 

which occurred more than 36 months 

before the application, if no recent 

similar situations have occurred, or 

Agency delinquencies that have been 

resolved through loan servicing 

programs available under 7 CFR part 

766. 

(ii) Isolated incidents of delinquent 

payments which do not represent a 

general pattern of unsatisfactory or slow 

payment. 

(iii) ‘‘No history’’ of credit 

transactions by the applicant. 

(iv) Recent foreclosure, judgment, 

bankruptcy, or delinquent payment 

when the applicant can satisfactorily 

demonstrate that the adverse action or 

delinquency was caused by 

circumstances that were of a temporary 

nature and beyond the applicant’s 

control; or the result of a refusal to make 

full payment because of defective goods 

or services or other justifiable dispute 


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relating to the purchase or contract for 

goods or services. 

(e) Availability of credit elsewhere. 

The applicant, and all entity members 

in the case of an entity, must be unable 

to obtain sufficient credit elsewhere to 

finance actual needs at reasonable rates 

and terms. The Agency will evaluate the 

ability to obtain credit based on factors 

including, but not limited to: 

(1) Loan amounts, rates, and terms 

available in the marketplace; and 

(2) Property interests, income, and 

significant non-essential assets. 

(f) Not in delinquent status on Federal 

debt. As provided in 31 CFR part 285, 

except for EM loan applicants, the 

applicant, and anyone who will sign the 

promissory note, must not be in 

delinquent status on any Federal debt, 

other than a debt under the Internal 

Revenue Code of 1986 at the time of 

loan closing. All delinquent debts, 

however, will be considered in 

determining credit history and ability to 

repay under this part. 

(g) Outstanding judgments. The 

applicant, and anyone who will sign the 

promissory note, must have no 

outstanding unpaid judgments obtained 

by the United States in any court. Such 

judgments do not include those filed as 

a result of action in the United States 

Tax Courts. 

(h) Federal crop insurance violation. 

The applicant, and all entity members 

in the case of an entity, must not be 

ineligible due to disqualification 

resulting from Federal crop insurance 

violation according to 7 CFR part 718. 

(i) Managerial ability. The applicant 

must have sufficient managerial ability 

to assure reasonable prospects of loan 

repayment, as determined by the 

Agency. The applicant must 

demonstrate this managerial ability by: 

(1) Education. For example, the 

applicant obtained a 4-year college 

degree in agricultural business, 

horticulture, animal science, agronomy, 

or other agricultural-related field. 

(2) On-the-job training. For example, 

the applicant is currently working on a 

farm as part of an apprenticeship 

program. 

(3) Farming experience. For example, 

the applicant has been an owner, 

manager, or operator of a farm business 

for at least one entire production cycle. 

The farming experience must have been 

obtained within the last 5 years. 

(j) Borrower training. The applicant 

must agree to meet the training 

requirements in subpart J of this part. 

(k) Operator of a family farm. (1) The 

applicant must be the operator of a 

family farm after the loan is closed. 

(2) For an entity applicant, if the 

entity members holding a majority 

interest are: 

(i) Related by blood or marriage, at 

least one member must be the operator 

of a family farm; 

(ii) Not related by blood or marriage, 

the entity members holding a majority 

interest must be operators of a family 

farm. 

(3) Except for EM loans, the collective 

interests of the members may be larger 

than a family farm only if: 

(i) Each member’s ownership interest 

is not larger than a family farm; 

(ii) All of the members of the entity 

are related by blood or marriage; and 

(iii) All of the members are or will 

become operators of the family farm; 

and 

(4) If the entity applicant has an 

operator and ownership interest for farm 

ownership loans and emergency loans 

for farm ownership loan purposes, in 

any other farming operation, that 

farming operation must not exceed the 

requirements of a family farm. 

(l) Entity composition. If the applicant 

is an entity, the entity members are not 

themselves entities. 

§ 764.102 General limitations. 

(a) Limitations specific to each loan 

program are contained in subparts D 

through H of this part. 

(b) The total principal balance owed 

to the Agency at any one time by the 

applicant, or any one who will sign the 

promissory note, cannot exceed the 

limits established in § 761.8 of this 

chapter. 

(c) The funds from the FLP loan must 

be used for farming operations located 

in the United States. 

(d) The Agency will not make a loan 

if the proceeds will be used: 

(1) For any purpose that contributes to 

excessive erosion of highly erodible 

land, or to the conversion of wetlands; 

(2) To drain, dredge, fill, level, or 

otherwise manipulate a wetland; or 

(3) To engage in any activity that 

results in impairing or reducing the 

flow, circulation, or reach of water, 

except in the case of activity related to 

the maintenance of previously 

converted wetlands as defined in the 

Food Security Act of 1985. 

(e) Any construction financed by the 

Agency must comply with the standards 

established in § 761.10 of this chapter. 

(f) Loan funds will not be used to 

establish or support a non-eligible 

enterprise, even if the non-eligible 

enterprise contributes to the farm. 

§ 764.103 General security requirements. 

(a) Security requirements specific to 

each loan program are outlined in 

subparts D through H of this part. 

(b) All loans must be secured by 

assets having a security value of at least 

100 percent of the loan amount, except 

for EM loans as provided in subpart H 

of this part. If the applicant’s assets do 

not provide adequate security, the 

Agency may accept: 

(1) A pledge of security from a third 

party; or 

(2) Interests in property not owned by 

the applicant (such as leases that 

provide a mortgageable value, water 

rights, easements, mineral rights, and 

royalties). 

(c) An additional amount of security 

up to 150 percent of the loan amount 

will be taken when available, except for 

beginning farmer downpayment loans 

and youth loans. 

(d) The Agency will choose the best 

security available when there are several 

alternatives that meet the Agency’s 

security requirements. 

(e) The Agency will take a lien on all 

assets that are not essential to the 

farming operation and are not being 

converted to cash to reduce the loan 

amount when each such asset, or 

aggregate value of like assets (such as 

stocks), has a value in excess of $5,000. 

The value of this security is not 

included in the Agency’s additional 

security requirement stated in paragraph 

(c) of this section. This requirement 

does not apply to beginning farmer 

downpayment loans and youth loans. 

§ 764.104 General real estate security 

requirements. 

(a) Agency lien position requirements. 

If real estate is pledged as security for 

a loan, the Agency must obtain a first 

lien, if available. When a first lien is not 

available, the Agency may take a junior 

lien under the following conditions: 

(1) The prior lien does not contain 

any provisions that may jeopardize the 

Agency’s interest or the applicant’s 

ability to repay the FLP loan; 

(2) Prior lienholders agree to notify 

the Agency prior to foreclosure; 

(3) The applicant must agree not to 

increase an existing prior lien without 

the written consent of the Agency; and 

(4) Equity in the collateral exists. 

(b) Real estate held under a purchase 

contract. If the real estate offered as 

security is held under a recorded 

purchase contract: 

(1) The applicant must provide a 

security interest in the real estate; 

(2) The applicant and the purchase 

contract holder must agree in writing 

that any insurance proceeds received for 

real estate losses will be used only for 

one or more of the following purposes: 

(i) To replace or repair the damaged 

real estate improvements which are 

essential to the farming operation; 


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(ii) To make other essential real estate 

improvements; or 

(iii) To pay any prior real estate lien, 

including the purchase contract. 

(3) The purchase contract must 

provide the applicant with possession, 

control and beneficial use of the 

property, and entitle the applicant to 

marketable title upon fulfillment of the 

contract terms. 

(4) The purchase contract must not: 

(i) Be subject to summary cancellation 

upon default; 

(ii) Contain provisions which 

jeopardize the Agency’s security 

position or the applicant’s ability to 

repay the loan. 

(5) The purchase contract holder must 

agree in writing to: 

(i) Not sell or voluntarily transfer their 

interest without prior written consent of 

the Agency; 

(ii) Not encumber or cause any liens 

to be levied against the property; 

(iii) Not take any action to accelerate, 

forfeit, or foreclose the applicant’s 

interest in the security property until a 

specified period of time after notifying 

the Agency of the intent to do so; 

(iv) Consent to the Agency making the 

loan and taking a security interest in the 

applicant’s interest under the purchase 

contract as security for the FLP loan; 

(v) Not take any action to foreclose or 

forfeit the interest of the applicant 

under the purchase contract because the 

Agency has acquired the applicant’s 

interest by foreclosure or voluntary 

conveyance, or because the Agency has 

subsequently sold or assigned the 

applicant’s interest to a third party who 

will assume the applicant’s obligations 

under the purchase contract; 

(vi) Notify the Agency in writing of 

any breach by the applicant; and 

(vii) Give the Agency the option to 

rectify the conditions that amount to a 

breach within 30 days after the date the 

Agency receives written notice of the 

breach. 

(6) If the Agency acquires the 

applicant’s interest under the purchase 

contract by foreclosure or voluntary 

conveyance, the Agency will not be 

deemed to have assumed any of the 

applicant’s obligations under the 

contract, provided that if the Agency 

fails to perform the applicant’s 

obligations while it holds the 

applicant’s interest is grounds for 

terminating the purchase contract. 

(c) Tribal lands held in trust or 

restricted. The Agency may take a lien 

on Indian Trust lands as security 

provided the applicant requests the 

Bureau of Indian Affairs to furnish Title 

Status Reports to the agency and the 

Bureau of Indian Affairs provides the 

reports and approves the lien. 

(d) Security for more than one loan. 

The same real estate may be pledged as 

security for more than one direct or 

guaranteed loan. 

(e) Loans secured by leaseholds. A 

loan may be secured by a mortgage on 

a leasehold, if the leasehold has 

negotiable value and can be mortgaged. 

§ 764.105 General chattel security 

requirements. 

The same chattel may be pledged as 

security for more than one direct or 

guaranteed loan. 

§ 764.106 Exceptions to security 

requirements. 

Notwithstanding any other provision 

of this part, the Agency will not take a 

security interest: 

(a) When adequate security is 

otherwise available and the lien will 

prevent the applicant from obtaining 

credit from other sources; 

(b) When the property could have 

significant environmental problems or 

costs as described in subpart G of 7 CFR 

part 1940; 

(c) When the Agency cannot obtain a 

valid lien; 

(d) When the property is the 

applicant’s personal residence and 

appurtenances and: 

(1) They are located on a separate 

parcel; and 

(2) The real estate that serves as 

security for the FLP loan plus crops and 

chattels are greater than or equal to 150 

percent of the unpaid balance due on 

the loan; 

(e) When the property is subsistence 

livestock, cash, working capital 

accounts the applicant uses for the 

farming operation, retirement accounts, 

personal vehicles necessary for family 

living, household contents, or small 

equipment such as hand tools and lawn 

mowers; or 

(f) On marginal land and timber that 

secures an outstanding ST loan. 

§ 764.107 General appraisal requirements. 

(a) Establishing value for real estate. 

The value of real estate will be 

established by an appraisal completed 

in accordance with § 761.7 of this 

chapter. 

(b) Establishing value for chattels. The 

value of chattels will be established as 

follows: 

(1) Annual production. The security 

value of annual livestock and crop 

production is presumed to be 100 

percent of the amount loaned for annual 

operating and family living expenses, as 

outlined in the approved farm operating 

plan. 

(2) Livestock and equipment. The 

value of livestock and equipment will 

be established by an appraisal 

completed in accordance with § 761.7 of 

this chapter. 

§ 764.108 General insurance requirements. 

The applicant must obtain and 

maintain insurance, equal to the lesser 

of the value of the security at the time 

of loan closing or the principal of all 

FLP and non-FLP loans secured by the 

property, subject to the following: 

(a) All security, except growing crops, 

must be covered by hazard insurance if 

it is readily available (sold by insurance 

agents in the applicant’s normal trade 

area) and insurance premiums do not 

exceed the benefit. The Agency must be 

listed as loss payee for the insurance 

indemnity payment or as a beneficiary 

in the mortgagee loss payable clause. 

(b) Real estate security located in 

flood or mudslide prone areas must be 

covered by flood or mudslide insurance. 

The Agency must be listed as a 

beneficiary in the mortgagee loss 

payable clause. 

(c) Growing crops used to provide 

adequate security must be covered by 

crop insurance if such insurance is 

available. The Agency must be listed as 

loss payee for the insurance indemnity 

payment. 

(d) Prior to closing the loan, the 

applicant must have obtained at least 

the catastrophic risk protection level of 

crop insurance coverage for each crop 

which is a basic part of the applicant’s 

total operation, if such insurance is 

available, unless the applicant executes 

a written waiver of any emergency crop 

loss assistance with respect to such 

crop. The applicant must execute an 

assignment of indemnity in favor of the 

Agency for this coverage. 

§§ 764.109–764.150 [Reserved] 

Subpart D—Farm Ownership Loan 

Program 

§ 764.151 Farm Ownership loan uses. 

FO loan funds may only be used to: 

(a) Acquire or enlarge a farm or make 

a down payment on a farm; 

(b) Make capital improvements to a 

farm owned by the applicant, for 

construction, purchase or improvement 

of farm dwellings, service buildings or 

other facilities and improvements 

essential to the farming operation. In the 

case of leased property, the applicant 

must have a lease to ensure use of the 

improvement over its useful life or to 

ensure that the applicant receives 

compensation for any remaining 

economic life upon termination of the 

lease; 

(c) Promote soil and water 

conservation and protection; 

(d) Pay loan closing costs; 


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(e) Refinance a bridge loan if the 

following conditions are met: 

(1) The applicant obtained the loan to 

be refinanced to purchase a farm after a 

direct FO was approved; 

(2) Direct FO funds were not available 

to fund the loan at the time of approval; 

(3) The loan to be refinanced is 

temporary financing; and 

(4) The loan was made by a 

commercial or cooperative lender. 

§ 764.152 Eligibility requirements. 

The applicant: 

(a) Must comply with the general 

eligibility requirements established at 

§ 764.101; 

(b) And anyone who will sign the 

promissory note, must not have received 

debt forgiveness from the Agency on 

any direct or guaranteed loan; 

(c) Must be the owner-operator of the 

farm financed with Agency funds after 

the loan is closed. In the case of an 

entity: 

(1) The entity is controlled by farmers 

engaged primarily and directly in 

farming in the United States, after the 

loan is made; 

(2) The entity must be authorized to 

own and operate the farm in the State 

in which the farm is located; 

(3) If the entity members holding a 

majority interest are: 

(i) Related by blood or marriage, at 

least one member of the entity must 

operate the farm; 

(ii) Not related by blood or marriage, 

the entity members holding a majority 

interest must own and operate the farm. 

(d) And in the case of an entity, one 

or more members constituting a majority 

interest, must have participated in the 

business operations of a farm for at least 

3 years out of the 10 years prior to the 

date the application is submitted. 

(e) And anyone who will sign the 

promissory note, must satisfy at least 

one of the following conditions: 

(1) Meet the definition of a beginning 

farmer; 

(2) Have not had a direct FO loan 

outstanding for more than a total of 10 

years prior to the date the new FO loan 

is closed; 

(3) Have never received a direct FO 

loan. 

§ 764.153 Limitations. 

The applicant must: 

(a) Comply with the general 

limitations established at § 764.102; 

(b) Have dwellings and other 

buildings necessary for the planned 

operation of the farm available for use 

after the loan is made. 

§ 764.154 Rates and terms. 

(a) Rates. (1) The interest rate is the 

Agency’s Direct Farm Ownership rate, 

available in each Agency office. 

(2) The limited resource Farm 

Ownership interest rate is available to 

applicants who are unable to develop a 

feasible plan at regular interest rates. 

(3) If the FO loan is part of a joint 

financing arrangement and the amount 

of the Agency’s loan does not exceed 50 

percent of the total amount financed, 

the Agency will use the Farm 

Ownership participation rate, available 

in each Agency office. 

(4) The interest rate charged will be 

the lower of the rate in effect at the time 

of loan approval or loan closing. 

(b) Terms. The Agency schedules 

repayment of an FO loan based on the 

applicant’s ability to repay and the 

useful life of the security. In no event 

will the term be more than 40 years 

from the date of the note. 

§ 764.155 Security requirements. 

An FO loan must be secured: 

(a) In accordance with §§ 764.103 

through 764.106; 

(b) At a minimum, by the real estate 

being purchased or improved. 

§§ 764.156–764.200 [Reserved] 

Subpart E—Beginning Farmer 

Downpayment Loan Program 

§ 764.201 Beginning Farmer Downpayment 

loan uses. 

Beginning Farmer Downpayment loan 

funds may be used to partially finance 

the purchase of a family farm by an 

eligible beginning farmer. 

§ 764.202 Eligibility requirements. 

The applicant must: 

(a) Comply with the general eligibility 

requirements established at § 764.101 

and the FO eligibility requirements of 

§ 764.152; and 

(b) Be a beginning farmer. 

§ 764.203 Limitations. 

(a) The applicant must: 

(1) Comply with the general 

limitations established at § 764.102; and 

(2) Provide a minimum downpayment 

of 10 percent of the purchase price of 

the farm. 

(b) The purchase price or appraised 

value of the farm, whichever is lower, 

must not exceed $250,000. 

(c) Beginning Farmer Downpayment 

loans will not exceed 40 percent of the 

lesser of the purchase price or appraised 

value of the farm to be acquired. 

(d) Financing provided by the Agency 

and all other creditors must not exceed 

90 percent of the lesser of the purchase 

price or appraised value of the farm and 

may be guaranteed by the Agency under 

part 762 of this chapter. 

§ 764.204 Rates and terms. 

(a) Rates. The interest rate for 

Beginning Farmer Downpayment loans 

shall be 4 percent. 

(b) Terms. (1) The Agency schedules 

repayment of Beginning Farmer 

Downpayment loans in equal, annual 

installments over a term not to exceed 

15 years. 

(2) The non-Agency financing must 

have an amortization period of at least 

30 years and cannot have a balloon 

payment due within the first 15 years of 

the loan. 

§ 764.205 Security requirements. 

A Beginning Farmer Downpayment 

loan must: 

(a) Be secured in accordance with 

§§ 764.103 through 764.106; 

(b) Be secured by a lien on the 

property being acquired with the loan 

funds and junior only to the party 

financing the balance of the purchase 

price. 

§§ 764.206–764.250 [Reserved] 

Subpart F—Operating Loan Program 

§ 764.251 Operating loan uses. 

(a) Except as provided in paragraph 

(b), OL loan funds may only be used for: 

(1) Costs associated with reorganizing 

a farm to improve its profitability; 

(2) Purchase of livestock, including 

poultry, farm equipment, quotas and 

bases, and cooperative stock for credit, 

production, processing or marketing 

purposes; 

(3) Farm operating expenses, 

including, but not limited to, feed, seed, 

fertilizer, pesticides, farm supplies, 

repairs and improvements which are to 

be expensed, cash rent and family living 

expenses; 

(4) Scheduled principal and interest 

payments on term debt provided the 

debt is for authorized FO or OL 

purposes; 

(5) Other farm needs; 

(6) Costs associated with land and 

water development, use, or 

conservation; 

(7) Loan closing costs; 

(8) Costs associated with Federal or 

State-approved standards under the 

Occupational Safety and Health Act of 

1970 (29 U.S.C. 655 and 667) if the 

applicant can show that compliance or 

non-compliance with the standards will 

cause substantial economic injury; 

(9) Borrower training costs required or 

recommended by the Agency; 

(10) Refinancing farm-related debts 

other than real estate to improve the 

farm’s profitability provided the 

applicant has refinanced direct or 

guaranteed OL loans four times or fewer 


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and one of the following conditions is 

met: 

(i) A designated or declared disaster 

caused the need for refinancing; or 

(ii) The debts to be refinanced are 

owed to a creditor other than the USDA; 

(11) Costs for minor real estate repairs 

or improvements, provided the loan can 

be repaid within 7 years. 

(b) Lo-Doc funds approved under: 

(1) Section 764.51(c)(3)(i) may be used 

for any OL purpose except for 

refinancing debt under paragraph 

(a)(10); 

(2) Section 764.51(c)(3)(ii) may only 

be used for expenses under paragraph 

(a)(3). 

§ 764.252 Eligibility requirements. 

The applicant: 

(a) Must comply with the general 

eligibility requirements established at 

§ 764.101. 

(b) And anyone who will sign the 

promissory note, except as provided in 

paragraph (c) of this section, must not 

have received debt forgiveness from the 

Agency on any direct or guaranteed 

loan. 

(c) And anyone who will sign the 

promissory note, may receive direct OL 

loans to pay annual farm operating and 

family living expenses, provided that 

the applicant meets all other applicable 

requirements under this part, if the 

applicant: 

(1) Received a write-down under 

section 353 of the Act; 

(2) Is current on payments under a 

confirmed reorganization plan under 

Chapter 11, 12, or 13 of Title 11 of the 

United States Code; or 

(3) Received debt forgiveness on not 

more than one occasion after April 4, 

1996, resulting directly and primarily 

from a Presidentially-designated 

emergency for the county or contiguous 

county in which the applicant operates. 

Only applicants who were current on all 

existing direct and guaranteed FLP 

loans prior to the beginning date of the 

incidence period of a Presidentiallydesignated emergency and received debt 

forgiveness on that debt within 3 years 

after the designation of such emergency 

meet this exception. 

(d) And in the case of an entity, the 

entity must be: 

(1) Controlled by farmers engaged 

primarily and directly in farming in the 

United States; and 

(2) Authorized to operate the farm in 

the State in which the farm is located. 

(e) And anyone who will sign the 

promissory note, may close an OL loan 

in no more than 7 calendar years, either 

as an individual or as a member of an 

entity, except as provided in paragraphs 

(e)(1) through (4) of this section. The 

years may be consecutive or 

nonconsecutive, and there is no limit on 

the number of loans closed in a year. 

Youth loans are not counted toward this 

limitation. The following exceptions are 

applicable. 

(1) This limitation does not apply if 

the applicant and anyone who will sign 

the promissory note is a beginning 

farmer. 

(2) This limitation does not apply if 

the applicant’s land is subject to the 

jurisdiction of an Indian tribe, the loan 

is secured by one or more security 

instruments subject to the jurisdiction of 

an Indian tribe, and commercial credit 

is generally not available to such farm 

operations. 

(3) If the applicant, and anyone who 

will sign the promissory note, has 

closed direct OL loans in four or more 

previous calendar years as of April 4, 

1996, the applicant is eligible to close 

OL loans in any three additional years 

after that date. 

(4) On a case-by-case basis, may be 

granted a one-time waiver of OL term 

limits for a period of 2 years, not subject 

to administrative appeal, if the 

applicant: 

(i) Has a financially viable operation; 

(ii) And in the case of an entity, the 

members holding the majority interest, 

applied for commercial credit from at 

least two lenders and were unable to 

obtain a commercial loan, including an 

Agency-guaranteed loan; and 

(iii) Has successfully completed, or 

will complete within one year, borrower 

training. Previous waivers to the 

borrower training requirements are not 

applicable under this paragraph. 

§ 764.253 Limitations. 

The applicant must comply with the 

general limitations established at 

§ 764.102. 

§ 764.254 Rates and terms. 

(a) Rates. (1) The interest rate is the 

Agency’s Direct Operating Loan rate, 

available in each Agency office. 

(2) The limited resource Operating 

Loan interest rate is available to 

applicants who are unable to develop a 

feasible plan at regular interest rates. 

(3) The interest rate charged will be 

the lower rate in effect at the time of 

loan approval or loan closing. 

(b) Terms. (1) The Agency schedules 

repayment of annual OL loans made for 

family living and farm operating 

expenses when planned income is 

projected to be available. 

(i) The term of the loan may not 

exceed 18 months from the date of the 

note. 

(ii) The term of the loan may exceed 

18 months in unusual situations such as 

establishing a new enterprise, 

developing a farm, purchasing feed 

while crops are being established, 

marketing plans, or recovery from a 

disaster or economic reverse. In no 

event will the term of the loan exceed 

7 years from the date of the note. Crops 

and livestock produced for sale will not 

be considered adequate security for 

such loans. 

(2) The Agency schedules the 

repayment of all other OL loans based 

on the applicant’s ability to repay and 

the useful life of the security. In no 

event will the term of the loan exceed 

7 years from the date of the note. 

Repayment schedules may include 

equal, unequal, or balloon installments 

if needed to establish a new enterprise, 

develop a farm, or recover from a 

disaster or economic reversal. Loans 

with balloon installments: 

(i) Must have adequate security at the 

time the balloon installment comes due. 

Crops, livestock other than breeding 

stock, or livestock products produced 

are not adequate collateral for such 

loans; 

(ii) Are only authorized when the 

applicant can project the ability to 

refinance the remaining debt at the time 

the balloon payment comes due based 

on the expected financial condition of 

the operation, the depreciated value of 

the collateral, and the principal balance 

on the loan; 

(iii) Are not authorized when loan 

funds are used for real estate repairs or 

improvements. 

§ 764.255 Security requirements. 

An OL loan must be secured: 

(a) In accordance with §§ 764.103 

through 764.106. 

(b) By a: 

(1) First lien on all property or 

products acquired or produced with 

loan funds; 

(2) Lien of equal or higher position of 

that held by the creditor being 

refinanced with loan funds. 

§§ 764.256–764.300 [Reserved] 

Subpart G—Youth Loan Program 

§ 764.301 Youth loan uses. 

Youth loan funds may only be used to 

finance a modest, income-producing, 

agriculture-related, educational project 

while participating in 4–H, FFA, or a 

similar organization. 

§ 764.302 Eligibility requirements. 

The applicant: 

(a) Must comply with the general 

eligibility requirements established at 

§ 764.101(a) through (g); 

(b) And anyone who will sign the 

promissory note, must not have received 


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debt forgiveness from the Agency on 

any direct or guaranteed loan; 

(c) Must be at least 10 but not yet 21 

years of age at the time the loan is 

closed; 

(d) Must reside in a rural area, city or 

town with a population of 50,000 or 

fewer people; 

(e) Must be recommended and 

continuously supervised by a project 

advisor, such as a 4–H Club advisor, a 

vocational teacher, a county extension 

agent, or other agriculture-related 

organizational sponsor; and 

(f) Must obtain a written 

recommendation and consent from a 

parent or guardian if the applicant has 

not reached the age of majority under 

state law. 

§ 764.303 Limitations. 

(a) The applicant must comply with 

the general limitations established at 

§ 764.102. 

(b) The total principal balance owed 

by the applicant to the Agency on all 

Youth loans at any one time cannot 

exceed $5,000. 

§ 764.304 Rates and terms. 

(a) Rates. (1) The interest rate is the 

Agency’s Direct Operating Loan rate, 

available in each Agency office. 

(2) The limited resource Operating 

Loan interest rate is not available for 

Youth loans. 

(3) The interest rate charged will be 

the lower rate in effect at the time of 

loan approval or loan closing. 

(b) Terms. Youth loan terms are the 

same as for an OL established at 

§ 764.254(b). 

§ 764.305 Security requirements. 

A first lien will be obtained on 

property or products acquired or 

produced with loan funds. 

§§ 764.306–764.350 [Reserved] 

Subpart H—Emergency Loan Program 

§ 764.351 Emergency loan uses. 

(a) Physical losses—(1) Real estate 

losses. EM loan funds for real estate 

physical losses may only be used to 

repair or replace essential property 

damaged or destroyed as a result of a 

disaster as follows: 

(i) For any FO purpose, as specified 

in § 764.151, except subparagraph (e) of 

that section; 

(ii) To establish a new site for farm 

dwelling and service buildings outside 

of a flood or mudslide area; and 

(iii) To replace land from the farm 

that was sold or conveyed, if such land 

is necessary for the farming operation to 

be effective. 

(2) Chattel losses. EM loan funds for 

chattel physical losses may only be used 

to repair or replace essential property 

damaged or destroyed as a result of a 

disaster as follows: 

(i) Purchase livestock, farm 

equipment, quotas and bases, and 

cooperative stock for credit, production, 

processing, or marketing purposes; 

(ii) Pay customary costs associated 

with obtaining and closing a loan that 

an applicant cannot pay from other 

sources (e.g., fees for legal, architectural, 

and other technical services, but not 

fees for agricultural management 

consultation, or preparation of Agency 

forms); 

(iii) Repair or replace household 

contents damaged in the disaster; 

(iv) Pay the costs to restore 

perennials, which produce an 

agricultural commodity, to the stage of 

development the damaged perennials 

had obtained prior to the disaster; 

(v) Pay essential family living and 

farm operating expenses, in the case of 

an operation that has suffered livestock 

losses not from breeding stock, or losses 

to stored crops held for sale; and 

(vi) Refinance farm-related debts other 

than real estate to improve farm 

profitability, if the applicant has 

refinanced direct or guaranteed loans 

four times or fewer and one of the 

following conditions is met: 

(A) A designated or declared disaster 

caused the need for refinancing; or 

(B) The debts to be refinanced are 

owed to a creditor other than the USDA. 

(b) Production losses. EM loan funds 

for production losses to agricultural 

commodities (except the losses 

associated with the loss of livestock) 

may be used to: 

(1) Pay costs associated with 

reorganizing the farm to improve its 

profitability except that such costs must 

not include the payment of bankruptcy 

expenses; 

(2) Pay annual operating expenses, 

which include, but are not limited to, 

feed, seed, fertilizer, pesticides, farm 

supplies, and cash rent; 

(3) Pay costs associated with Federal 

or State-approved standards under the 

Occupational Safety and Health Act of 

1970 (29 U.S.C. 655 and 667) if the 

applicant can show that compliance or 

non-compliance with the standards will 

cause substantial economic injury; 

(4) Pay borrower training costs 

required or recommended by the 

Agency; 

(5) Pay essential family living 

expenses; 

(6) Refinance farm-related debts other 

than real estate to improve farm 

profitability, if the applicant has 

refinanced direct or guaranteed loans 

four times or fewer and one of the 

following conditions is met: 

(i) A designated or declared disaster 

caused the need for refinancing; or 

(ii) The debts to be refinanced are 

owed to a creditor other than the USDA; 

and 

(7) Replace lost working capital. 

§ 764.352 Eligibility requirements. 

The applicant: 

(a) Must comply with the general 

eligibility requirements established at 

§ 764.101; 

(b) Must be an established farmer; 

(c) Must be the owner-operator or 

tenant-operator as follows: 

(1) For a loan made under 

§ 764.351(a)(1), must have been: 

(i) The owner-operator of the farm at 

the time of the disaster; or 

(ii) The tenant-operator of the farm at 

the time of the disaster whose lease on 

the affected real estate exceeds the term 

of the loan. The operator will provide 

prior notification to the Agency if the 

lease is proposed to terminate during 

the term of the loan. The lessor will 

provide the Agency a mortgage on the 

real estate as security for the loan; 

(2) For a loan made under § 764.351(a) 

(2) or (b), must have been the operator 

of the farm at the time of the disaster; 

and 

(3) In the case of an entity, the entity 

must be: 

(i) Engaged primarily and directly in 

farming in the United States; 

(ii) Authorized to operate and own the 

farm, if the funds are used for farm 

ownership loan purposes, in the State in 

which the farm is located; 

(d) Must demonstrate the intent to 

continue the farming operation after the 

designated or declared disaster; 

(e) And all entity members must be 

unable to obtain sufficient credit 

elsewhere at reasonable rates and terms. 

To establish this, the applicant must 

obtain written declinations of credit, 

specifying the reasons for declination, 

from legally organized commercial 

lending institutions within reasonable 

proximity of the applicant as follows: 

(1) In the case of a loan in excess of 

$300,000, two written declinations of 

credit are required; 

(2) In the case of a loan of $300,000 

or less, one written declination of credit 

is required; and 

(3) In the case of a loan of $100,000 

or less, the Agency may waive the 

requirement for obtaining a written 

declination of credit, if the Agency 

determines that it would pose an undue 

burden on the applicant, the applicant 

certifies that they cannot get credit 

elsewhere, and based on the applicant’s 

circumstances credit is not likely to be 

available; 

(4) Notwithstanding the applicant’s 

submission of the required written 


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declinations of credit, the Agency may 

contact other commercial lending 

institutions within reasonable proximity 

of the applicant and make an 

independent determination of the 

applicant’s ability to obtain credit 

elsewhere; 

(f) And all entity members in the case 

of an entity, must not have received 

debt forgiveness from the Agency on 

more than one occasion on or before 

April 4, 1996, or any time after April 4, 

1996. 

(g) Must submit an application to be 

received by the Agency no later than 8 

months after the date the disaster is 

declared or designated in the county of 

the applicant’s operation. 

(h) For production loss loans, must 

have a disaster yield that is at least 30 

percent below the normal production 

yield of the crop, as determined by the 

Agency, which comprises a basic part of 

an applicant’s total farming operation. 

(i) For physical loss loans, must have 

suffered disaster-related damage to 

chattel or real estate essential to the 

farming operation, or to household 

contents that must be repaired or 

replaced, to harvested or stored crops, 

or to perennial crops. 

(j) Must meet all of the following 

requirements if the ownership structure 

of the family farm changes between the 

time of a qualifying loss and the time an 

EM loan is closed: 

(1) The applicant, including all 

owners must meet all of the eligibility 

requirements; 

(2) The individual applicant, or all 

owners of a entity applicant, must have 

had an ownership interest in the 

farming operation at the time of the 

disaster; and 

(3) The amount of the loan will be 

based on the percentage of the former 

farming operation transferred to the 

applicant and in no event will the 

individual portions aggregated equal 

more than would have been authorized 

for the former farming operation. 

(k) Must agree to repay any 

duplicative Federal assistance to the 

agency providing such assistance. An 

applicant receiving Federal assistance 

for a major disaster or emergency is 

liable to the United States to the extent 

that the assistance duplicates benefits 

available to the applicant for the same 

purpose from another source. 

§ 764.353 Limitations. 

(a) EM loans must comply with the 

general limitations established at 

§ 764.102. 

(b) EM loans may not exceed the 

lesser of: 

(1) The amount of credit necessary to 

restore the farming operation to its predisaster condition; 

(2) In the case of a physical loss loan, 

the total eligible physical losses caused 

by the disaster; or 

(3) In the case of a production loss 

loan, 100 percent of the total actual 

production loss sustained by the 

applicant as calculated in paragraph (c) 

of this section. 

(c) For production loss loans, the 

applicant’s actual crop production loss 

will be calculated as follows: 

(1) Subtract the disaster yield from the 

normal yield to determine the per acre 

production loss; 

(2) Multiply the per acre production 

loss by the number of acres of the 

farming operation devoted to the crop to 

determine the volume of the production 

loss; 

(3) Multiply the volume of the 

production loss by the market price for 

such crop as determined by the Agency 

to determine the dollar value for the 

production loss; and 

(4) Subtract any other disaster related 

compensation or insurance indemnities 

received or to be received by the 

applicant for the production loss. 

(d) For a physical loss loan, the 

applicant’s total eligible physical losses 

will be calculated as follows: 

(1) Add the allowable costs associated 

with replacing or repairing chattel 

covered by hazard insurance (excluding 

labor, machinery, equipment, or 

materials contributed by the applicant 

to repair or replace chattel); 

(2) Add the allowable costs associated 

with repairing or replacing real estate, 

covered by hazard insurance; 

(3) Add the value of replacement 

livestock and livestock products for 

which the applicant provided: 

(i) Written documentation of 

inventory on hand immediately 

preceding the loss; 

(ii) Records of livestock product sales 

sufficient to allow the Agency to 

establish a value; 

(4) Add the allowable costs to restore 

perennials to the stage of development 

the damaged perennials had obtained 

prior to the disaster; 

(5) Add, in the case of an individual 

applicant, the allowable costs associated 

with repairing or replacing household 

contents, not to exceed $20,000; and 

(6) Subtract any other disaster related 

compensation or insurance indemnities 

received or to be received by the 

applicant for the loss or damage to the 

chattel or real estate. 

(e) EM loan funds may not be used for 

physical loss purposes unless: 

(1) The physical property was covered 

by general hazard insurance at the time 

that the damage caused by the natural 

disaster occurred. The level of the 

coverage in effect at the time of the 

disaster must have been the tax or cost 

depreciated value, whichever is less. 

Chattel property must have been 

covered at the tax or cost depreciated 

value, whichever is less, when such 

insurance was readily available and the 

benefit of the coverage was greater than 

the cost of the insurance; or 

(2) The loan is to a poultry farmer to 

cover the loss of a chicken house for 

which the applicant did not have hazard 

insurance at the time of the loss and the 

applicant: 

(i) Applied for, but was unable to 

obtain hazard insurance for the chicken 

house; 

(ii) Uses the loan to rebuild the 

chicken house in accordance with 

industry standards in effect on the date 

the applicant submits an application for 

the loan; 

(iii) Obtains, for the term of the loan, 

hazard insurance for the full market 

value of the chicken house; and 

(iv) Meets all other requirements for 

the loan. 

(f) EM loan funds may not be used to 

refinance consumer debt, such as 

automobile loans, or credit card debt 

unless such credit card debt is directly 

attributable to the farming operation. 

§ 764.354 Rates and terms. 

(a) Rates. (1) The interest rate is the 

Agency’s Emergency Loan Actual Loss 

rate, available in each Agency office. 

(2) The interest rate charged will be 

the lower rate in effect at the time of 

loan approval or loan closing. 

(b) Terms. (1) The Agency schedules 

repayment of EM loans based on the 

useful life of the security, the 

applicant’s repayment ability, and the 

type of loss. 

(2) The repayment schedule must 

include at least one payment every year. 

(3) EM loans for annual operating 

expenses, except expenses associated 

with establishing a perennial crop that 

are subject to paragraph (b)(4), must be 

repaid within 12 months. The Agency 

may extend this term to not more than 

18 months to accommodate the 

production cycle of the agricultural 

commodities. 

(4) EM loans for production losses or 

physical losses to chattel (including, but 

not limited to, assets with an expected 

life between one and 7 years) may not 

exceed 7 years. The Agency may extend 

this term up to a total length not to 

exceed 20 years, if necessary to improve 

the applicant’s repayment ability and 

real estate security is available. 

(5) The repayment schedule for EM 

loans for physical losses to real estate is 


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based on the applicant’s repayment 

ability and the useful life of the security, 

but in no case will the term exceed 40 

years. 

§ 764.355 Security requirements. 

(a) EM loans made under 

§ 764.351(a)(1) must comply with the 

general security requirements 

established at §§ 764.103, 764.104 and 

764.155(b). 

(b) EM loans made under 

§ 764.351(a)(2) and (b) must comply 

with the general security requirements 

established at §§ 764.103, 764.104 and 

764.255(b). 

(c) Notwithstanding the requirements 

of paragraphs (a) and (b) of this section, 

when adequate security is not available 

because of the disaster, the loan may be 

approved if the Agency determines, 

based on an otherwise feasible plan, 

there is a reasonable assurance that the 

applicant has the ability to repay the 

loan provided: 

(1) The applicant has pledged as 

security for the loan all available 

personal and business security, except 

as provided in § 764.106; 

(2) The farm operating plan, approved 

by the Agency, indicates the loan will 

be repaid based upon the applicant’s 

production and income history; 

addresses applicable pricing risks 

through the use of marketing contracts, 

hedging, options, or other revenue 

protection mechanisms, and includes a 

marketing plan or similar risk 

management practice; 

(3) The applicant has had positive net 

cash farm income in at least 3 of the past 

5 years; and 

(4) The applicant has provided the 

Agency an assignment on any USDA 

program payments to be received. 

(d) For loans over $25,000, title 

clearance is required when real estate is 

taken as security. 

(e) For loans of $25,000 or less, when 

real estate is taken as security, a 

certification of ownership in real estate 

is required. Certification of ownership 

may be in the form of an affidavit which 

is signed by the applicant, names the 

record owner of the real estate in 

question and lists the balances due on 

all known debts against the real estate. 

Whenever the Agency is uncertain of 

the record owner or debts against the 

real estate security, a title search is 

required. 

§ 764.356 Appraisal and valuation 

requirements. 

(a) In the case of physical losses 

associated with livestock, the applicant 

must have written documentation of the 

inventory of livestock and records of 

livestock product sales sufficient to 

allow the Agency to value such 

livestock or livestock products just prior 

to the loss. 

(b) In the case of farm assets damaged 

by the disaster, the value of such 

security shall be established as of the 

day before the disaster occurred. 

§§ 764.357–764.400 [Reserved] 

Subpart I—Loan Decision and Closing 

§ 764.401 Loan decision. 

(a) Loan approval. (1) The Agency 

will approve a loan only if it determines 

that: 

(i) The applicant’s farm operating 

plan reflects a feasible plan, which 

includes repayment of the proposed 

loan and demonstrates that all other 

credit needs can be met; 

(ii) The proposed use of loan funds is 

authorized for the type of loan 

requested; 

(iii) The applicant has been 

determined eligible for the type of loan 

requested; 

(iv) All security requirements for the 

type of loan requested have been, or will 

be met before the loan is closed; 

(v) The applicant’s total indebtedness 

to the Agency, including the proposed 

loan, will not exceed the maximum 

limits established in § 761.8 of this 

chapter; 

(vi) There have been no significant 

changes in the farm operating plan or 

the applicant’s financial condition since 

the time the Agency received a complete 

application; and 

(vii) All other pertinent requirements 

have been, or will be met before the loan 

is closed. 

(2) The Agency will place conditions 

upon loan approval it determines 

necessary to protect its interest and 

maximize the applicant’s potential for 

success. 

(b) Loan denial. The Agency will not 

approve a loan if it determines that: 

(1) The applicant’s farm operating 

plan does not reflect a feasible plan; 

(2) The proposed use of loan funds is 

not authorized for the type of loan 

requested; 

(3) The applicant does not meet the 

eligibility requirements for the type of 

loan requested; 

(4) There is inadequate security for 

the type of loan requested; 

(5) Approval of the loan would cause 

the applicant’s total indebtedness to the 

Agency to exceed the maximum limits 

established in § 761.8 of this chapter; 

(6) The applicant’s circumstances may 

not permit continuous operation and 

management of the farm; or 

(7) The applicant, the farming 

operation, or other circumstances 

surrounding the loan are inconsistent 

with the authorizing statutes, other 

Federal laws, or Federal credit policies. 

(c) Overturn of an Agency decision by 

appeal. If an FLP loan denial is 

overturned on administrative appeal, 

the Agency will not automatically 

approve the loan. Unless prohibited by 

the final appeal determination or 

otherwise advised by the Office of 

General Counsel, the Agency will: 

(1) Request current financial 

information from the applicant as 

necessary to determine whether any 

changes in the applicant’s financial 

condition or agricultural conditions 

which occurred after the Agency’s 

adverse decision was made will 

adversely affect the applicant’s farming 

operation; 

(2) Approve a loan for crop 

production: 

(i) Only if the Agency can determine 

that the applicant will be able to 

produce a crop in the production cycle 

for which the loan is requested; or 

(ii) For the next production cycle, 

upon review of current financial data 

and a farm operating plan for the next 

production cycle, if the Agency 

determines the loan can be repaid. The 

new farm operating plan must reflect 

any financial issues resolved in the 

appeal. 

(3) Determine whether the applicant’s 

farm operating plan, as modified based 

on the appeal decision, reflects a 

feasible plan, which includes repayment 

of the proposed loan and demonstrates 

that all other credit needs can be met. 

§ 764.402 Loan closing. 

(a) Signature requirements. Signatures 

on loan documents are required as 

follows: 

(1) For individual applicants, only the 

applicant is required to sign the 

promissory note. 

(2) For entity applicants, the 

promissory note will be executed to 

evidence the liability of the entity and 

the individual liability of all members of 

the entity. 

(3) Despite minority status, a youth 

executing a promissory note for a Youth 

loan will incur full personal liability for 

the debt. 

(4) A cosigner will be required to sign 

the promissory note if they assist the 

applicant in meeting the repayment 

requirements for the loan requested. 

(5) All signatures needed for the 

Agency to acquire the required security 

interests will be obtained according to 

State law. 

(b) Payment of fees. The applicant, or 

in the case of a real estate purchase, the 

applicant and seller, must pay all filing, 

recording, notary, lien search, and any 


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other fees necessary to process and close 

a loan. 

(c) Chattel-secured loans. The 

following requirements apply to loans 

secured by chattel: 

(1) The Agency will close a chattel 

loan only when it determines the 

Agency requirements for the loan have 

been satisfied; 

(2) A financing statement is required 

for every loan except when a filed 

financing statement covering the 

applicant’s property is still effective, 

covers all types of chattel property that 

will serve as security for the loan, 

describes the land on which crops and 

fixtures are or will be located, and 

complies with the law of the 

jurisdiction where filed; 

(3) A new security agreement is 

required for new loans, as necessary to 

secure the loan under State law, prior to 

the disbursement of loan funds. 

(d) Real estate-secured loans. (1) The 

Agency will close a real estate loan only 

when it determines that the Agency 

requirements for the loan have been 

satisfied and the closing agent can issue 

a policy of title insurance or final title 

opinion as of the date of closing. The 

title insurance or final title opinion 

requirement may be waived: 

(i) For loans of $10,000 or less; 

(ii) As provided in § 764.355 for EM 

loans; 

(iii) When the real estate is considered 

additional security by the Agency; or 

(iv) When the real estate is a nonessential asset. 

(2) The title insurance or final title 

opinion must show title vested as 

required by the Agency, the lien of the 

Agency’s security instrument in the 

priority required by the Agency, and 

title to the security property, subject 

only to those exceptions approved in 

writing by the Agency. 

(3) The Agency must approve agents 

who will close FLP loans. Closing 

agents must meet all of the following 

requirements to the Agency’s 

satisfaction: 

(i) Be licensed in the state where the 

loan will be closed; 

(ii) Not be debarred or suspended 

from participating in any Federal 

programs; 

(iii) Maintain liability insurance; 

(iv) Have a fidelity bond that covers 

all employees with access to loan funds; 

(v) Have current knowledge of the 

requirements of State law in connection 

with the loan closing and title clearance; 

(vi) Not represent both the buyer and 

seller in the transaction; 

(vii) Not be related as a family 

member or business associate with the 

applicant; and 

(viii) Act promptly to provide 

required services. 

(e) Disbursement of funds. (1) Loan 

funds will be made available to the 

applicant within 15 days of loan 

approval, subject to the availability of 

funding. 

(2) If the loan is not closed within 90 

days of loan approval or if the 

applicant’s financial condition changes 

significantly, the Agency must 

reconfirm the requirements for loan 

approval prior to loan closing. The 

applicant may be required to provide 

updated information for the Agency to 

reconfirm approval and proceed with 

loan closing. 

(3) The Agency or closing agent will 

be responsible for disbursing loan 

funds. The electronic funds transfer 

process, followed by Treasury checks, 

are the Agency’s preferred methods of 

loan funds disbursement. The Agency 

will use these processes on behalf of 

borrowers to disburse loan proceeds 

directly to creditors being refinanced 

with loan funds or to sellers of chattel 

property that is being acquired with 

loan funds. A supervised bank account 

will be used according to subpart B of 

part 761 of this chapter when these 

processes are not practicable. 

§§ 764.403–764.450 [Reserved] 

Subpart J—Borrower Training and 

Training Vendor Requirements 

§ 764.451 Purpose. 

The purpose of production and 

financial management training is to help 

an applicant develop and improve skills 

necessary to: 

(a) Successfully operate a farm; 

(b) Build equity in the operation; and 

(c) Become financially successful and 

prepared to graduate from Agency 

financing to commercial sources of 

credit. 

§ 764.452 Borrower training requirements. 

(a) The applicant must agree to 

complete production and financial 

management training, unless the Agency 

provides a waiver in accordance with 

§ 764.453, or the applicant has 

previously satisfied the training 

requirements. In the case of an entity: 

(1) Any individual member holding a 

majority interest in the entity or who is 

operating the farm must complete 

training on behalf of the entity, except 

as provided in paragraph (a)(2) of this 

section; 

(2) If one entity member is solely 

responsible for production or financial 

management, then only that member 

will be required to complete training. 

(b) When the Agency determines that 

production training is required, the 

applicant must agree to complete course 

work covering production management 

in each crop or livestock enterprise the 

Agency determines necessary. 

(c) When the Agency determines that 

financial management training is 

required, the applicant must agree to 

complete course work covering all 

aspects of farm accounting and 

integrating accounting elements into a 

financial management system. 

(d) An applicant who applies for a 

loan to finance a new enterprise, such 

as a new crop or a new type of livestock, 

must agree to complete production 

training with regard to that enterprise, 

even if production training 

requirements were waived or satisfied 

under a previous loan request, unless 

the Agency provides a waiver in 

accordance with § 764.453. 

(e) Even if a waiver is granted, the 

borrower must complete borrower 

training as a condition for future loans 

if and when Agency supervision 

provided in 7 CFR part 761 subpart C 

reflects that such training is needed. 

(f) The Agency cannot reject a request 

for a direct loan based solely on an 

applicant’s need for training. 

(g) The Agency will provide written 

notification of required training or 

waiver of training. 

§ 764.453 Agency waiver of training 

requirements. 

(a) The applicant must request the 

waiver in writing. 

(b) The Agency will grant a waiver for 

training in production, financial 

management, or both, under the 

following conditions: 

(1) The applicant submits evidence of 

successful completion of a course 

similar to a course approved under 

section § 764.457 and the Agency 

determines that additional training is 

not needed; or 

(2) The applicant submits evidence 

which demonstrates to the Agency’s 

satisfaction the applicant’s experience 

and training necessary for a successful 

and efficient operation. 

(c) If the production and financial 

functions of the operation are shared 

among individual entity members, the 

Agency will consider the collective 

knowledge and skills of those 

individuals when determining whether 

to waive training requirements. 

§ 764.454 Actions that an applicant must 

take when training is required. 

(a) Deadline for completion of 

training. (1) If the Agency requires an 

applicant to complete training, at loan 

closing the applicant must agree in 

writing to complete all required training 

within 2 years. 

(2) The Agency will grant a one-year 

extension to complete training if the 


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applicant is unable to complete training 

within the 2-year period due to 

circumstances beyond the applicant’s 

control. 

(3) The Agency will grant an 

extension longer than one year for 

extraordinary circumstances as 

determined by the Agency. 

(4) An applicant who does not 

complete the required training within 

the specified time-period will be 

ineligible for additional direct FLP loans 

until the training is completed. 

(b) Arranging training with a vendor. 

The applicant must select and contact 

an Agency approved vendor and make 

all arrangements to begin training. 

(c) Payment of training fees. (1) The 

applicant is responsible for the cost of 

training and must include training fees 

in the farm operating plan as a farm 

operating expense. 

(2) The payment of training fees is an 

authorized use of OL funds. 

(3) The Agency is not a party to fee 

or other agreements between the 

applicant and the vendor. 

(d) Evaluation of a vendor. Upon 

completion of the required training, the 

applicant will complete an evaluation of 

the course and submit it to the vendor. 

The vendor will forward the completed 

evaluation forms to the Agency. 

§ 764.455 Potential training vendors. 

The Agency will contract for training 

services with State or private providers 

of production and financial 

management training services. 

§ 764.456 Applying to be a vendor. 

(a) A vendor for borrower training 

services must apply to the Agency for 

approval. 

(b) The vendor application must 

include: 

(1) A sample of the course materials 

and a description of the vendor’s 

training methods; 

(2) Specific training objectives for 

each section of the course; 

(3) A detailed course agenda 

specifying the topics to be covered, the 

time devoted to each topic, and the 

number of sessions to be attended; 

(4) A list of instructors and their 

qualifications; 

(5) The criteria by which additional 

instructors will be selected; 

(6) The proposed locations where 

training will take place; 

(7) The cost per participant, including 

cost for additional members of a farming 

operation; 

(8) The minimum and maximum class 

size; 

(9) The vendor’s experience in 

developing and administering training 

to farmers; 

(10) The monitoring and quality 

control methods the vendor will use; 

(11) The policy on allowing Agency 

employees to attend the course for 

monitoring purposes; 

(12) A plan of how the needs of 

applicants with physical, mental, or 

learning disabilities will be met; and 

(13) A plan of how the needs of 

applicants who do not speak English as 

their primary language will be met. 

§ 764.457 Vendor requirements. 

(a) Minimum experience. The vendor 

must demonstrate a minimum of 3 years 

of experience in conducting training 

courses or teaching the subject matter. 

(b) Training objectives. The courses 

provided by a vendor must enable the 

applicant to accomplish one or more of 

the following objectives: 

(1) Describe the specific goals of the 

farming operation, any changes required 

to attain the goals, and outline how 

these changes will occur using present 

and projected cash flow budgets; 

(2) Maintain and use a financial 

management information system to 

make financial decisions; 

(3) Understand and use an income 

statement; 

(4) Understand and use a balance 

sheet; 

(5) Understand and use a cash flow 

budget; and 

(6) Use production records and other 

production information to identify 

problems, evaluate alternatives, and 

correct current production practices to 

improve efficiency and profitability. 

(c) Curriculum. At least one of the 

following subjects must be covered: 

(1) Business planning courses, 

covering general goal setting, risk 

management, and planning. 

(2) Financial management courses, 

covering all aspects of farm accounting 

and focusing on integrating accounting 

elements into a financial management 

system. 

(3) Crop and livestock production 

courses focusing on improving the 

profitability of the farm. 

(d) Instructor qualifications. All 

instructors must have: 

(1) Sufficient knowledge of the 

material and experience in adult 

education; 

(2) A bachelor’s degree or comparable 

experience in the subject area to be 

taught; and 

(3) A minimum of 3 years experience 

in conducting training courses or 

teaching. 

§ 764.458 Vendor approval. 

(a) Agreement to conduct training. (1) 

Upon approval, the vendor must sign an 

agreement to conduct training for the 

Agency’s borrowers. 

(2) The agreement to conduct training 

is valid for 3 years. 

(3) Any changes in curriculum, 

instructor, or cost require prior approval 

by the Agency. 

(4) The vendor may revoke the 

agreement by giving the Agency a 

written 30-day notice. 

(5) The Agency may revoke the 

agreement if the vendor does not 

comply with the responsibilities listed 

in the agreement by giving the vendor 

a written 30-day notice. 

(b) Renewal of agreement to conduct 

training. (1) To renew the agreement to 

conduct training, the vendor must 

submit in writing to the Agency: 

(i) A request to renew the agreement; 

(ii) Any changes in curricula, 

instructor, or cost; and 

(iii) Documentation that the vendor is 

providing effective training. 

(2) The Agency will review renewal 

requests in accordance with § 764.457. 

§ 764.459 Evaluation of borrower 

progress. 

(a) The vendor must provide the 

Agency with a periodic progress report 

for each borrower enrolled in training in 

accordance with the agreement to 

complete training. The reports will 

indicate whether the borrower is 

attending sessions, completing the 

training program, and demonstrating an 

understanding of the course material. 

(b) Upon borrower completion of the 

training, the vendor must provide the 

Agency with an evaluation of the 

borrower’s knowledge of the course 

material and assign a score. The 

following table lists the possible scores, 

the criteria used to assign each score, 

and Agency consideration of each score: 

Score Criteria used to determine score Agency consideration 

1 ................ If the borrower: 

• Attended sessions as agreed, ...............................................

• Satisfactorily completed all assignments, and 

• Demonstrated an understanding of the course material. 

Training requirement associated with course is complete. 

2 ................ If the borrower: 


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Score Criteria used to determine score Agency consideration 

• Attended sessions as agreed, and ........................................

• Attempted to complete all assignments, but 

• Does not demonstrate an understanding of the course material. 

Training requirement associated with couse is complete. Additional Agency supervision may be necessary. 

3 ................ If the borrower did not: 

• Attend sessions as agreed, or ..............................................

• Attempt to complete assignments, or 

• Otherwise make a good faith effort to complete the training. 

Training requirement associated with course is not complete. 

The borrower is ineligible for future direct loans until the training is completed. 

■ 24. Add part 765 to read as follows: 

PART 765—DIRECT LOAN 

SERVICING—REGULAR 

Sec. 

Subpart A—Overview 

765.1 Introduction. 

765.2 Abbreviations and definitions. 

765.3–765.50 [Reserved] 

Subpart B—Borrowers with Limited 

Resource Interest Rate Loans 

765.51 Annual review. 

765.52–765.100 [Reserved] 

Subpart C—Borrower Graduation 

765.101 Borrower graduation requirements. 

765.102 Borrower noncompliance with 

graduation requirements. 

765.103 Transfer and assignment of Agency 

liens. 

765.104—765.150 [Reserved] 

Subpart D—Borrower Payments 

765.151 Handling payments. 

765.152 Types of payments. 

765.153 Application of payments. 

765.154 Distribution of payments. 

765.155 Final loan payments. 

765.156–765.200 [Reserved] 

Subpart E—Protecting the Agency’s 

Security Interest 

765.201 General policy. 

765.202 Borrower responsibilities. 

765.203 Protective advances. 

765.204 Notifying potential purchasers. 

765.205 Subordination of liens. 

765.206 Junior liens. 

765.207 Conditions for severance 

agreements. 

765.208–765.250 [Reserved] 

Subpart F—Required Use and Operation of 

Agency Security 

765.251 General. 

765.252 Lease of security. 

765.253 Ceasing to operate security. 

765.254–765.300 [Reserved] 

Subpart G—Disposal of Chattel Security 

765.301 General. 

765.302 Use and maintenance of the 

agreement for the use of proceeds. 

765.303 Use of proceeds from chattel 

security. 

765.304 Unapproved disposition. 

765.305 Release of security interest. 

765.306–765.350 [Reserved] 

Subpart H—Partial Release of Real Estate 

Security 

765.351 Requirements to obtain Agency 

consent. 

765.352 Use of proceeds. 

765.353 Determining market value. 

765.354–765.400 [Reserved] 

Subpart I—Transfer of Security and 

Assumption of Debt 

765.401 Conditions for transfer of real 

estate and chattel security. 

765.402 Transfer of security and loan 

assumption on same rates and terms. 

765.403 Transfer of security to and 

assumption of debt by eligible 

applicants. 

765.404 Transfer of security to and 

assumption of debt by ineligible 

applicants. 

765.405 Payment of costs associated with 

transfers. 

765.406 Release of transferor from liability. 

765.407–765.450 [Reserved] 

Subpart J—Deceased Borrowers 

765.451 Continuation of FLP debt and 

transfer of security. 

765.452 Borrowers with Non-program 

loans. 

765.453–765.500 [Reserved] 

Subpart K—Exception Authority 

765.501 Agency exception authority. 

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

Subpart A—Overview 

§ 765.1 Introduction. 

(a) Purpose. This part describes the 

policies for servicing direct FLP loans, 

except for borrowers who are 

delinquent, financially distressed, or 

otherwise in default on their loan. 

(b) Servicing actions. Servicing 

actions described in this part include: 

(1) Limited resource reviews; 

(2) Graduation to commercial credit; 

(3) Application of payments; 

(4) Maintaining and disposing of 

security; 

(5) Transfer of security and 

assumption of debt; and 

(6) Servicing accounts of deceased 

borrowers. 

(c) Loans covered. The Agency 

services direct FLP loans under the 

policies contained in this part. This part 

is not applicable to Non-program loans, 

except where noted. 

§ 765.2 Abbreviations and definitions. 

Abbreviations and definitions for 

terms used in this part are provided in 

§ 761.2 of this chapter. 

§§ 765.3–765.50 [Reserved] 

Subpart B—Borrowers With Limited 

Resource Interest Rate Loans 

§ 765.51 Annual review. 

(a) A borrower with limited resource 

interest rate loans is required to provide 

the Agency annually the operation’s 

financial information to determine if the 

borrower can afford to pay a higher 

interest rate on the loan. The Agency 

will review the information provided in 

accordance with § 761.105 of this 

chapter. 

(b) If the borrower’s farm operating 

plan shows that the debt service margin 

exceeds 110 percent, the Agency will 

increase the interest rate on the loans 

with a limited resource interest rate 

until: 

(1) A further increase in the interest 

rate results in a debt service margin of 

less than 110 percent; or 

(2) The interest rate is equal to the 

interest rate currently in effect for the 

type of loan. 

(c) Except as provided in paragraph 

(d) of this section, the Agency will 

increase the limited resource interest 

rate to the current interest rate for the 

type of loan, if the borrower: 

(1) Purchases items not planned 

during the term of the loan; 

(2) Refuses to submit information the 

Agency requests for use in reviewing the 

borrower’s financial condition; 

(3) Ceases farming, as described in 

§ 765.253; or 

(4) Is ineligible due to disqualification 

resulting from Federal crop insurance 

violation according to 7 CFR part 718. 

(d) If the borrower has limited 

resource interest rate loans that are 

deferred, the Agency will not change the 

interest rate during the deferral period. 


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§ 765.52–765.100 [Reserved] 

Subpart C—Borrower Graduation 

§ 765.101 Borrower graduation 

requirements. 

(a) In accordance with the promissory 

note and security instruments, the 

borrower must graduate to another 

source of credit if the Agency 

determines that: 

(1) The borrower has the ability to 

obtain credit from other sources; and 

(2) Adequate credit is available from 

other sources at reasonable rates and 

terms. 

(b) The Agency may require partial or 

full graduation. 

(1) In a partial graduation, all FLP 

loans of one type (i.e. all chattel loans 

or all real estate loans) must be paid in 

full by refinancing with other credit 

with or without an Agency guarantee. 

(2) In a full graduation, all FLP loans 

are paid in full by refinancing with 

other credit with or without an Agency 

guarantee. 

(3) A loan made for chattel and real 

estate purposes will be categorized 

according to how the majority of the 

loan’s funds are expended. 

(c) The borrower must submit all 

information that the Agency requests in 

conjunction with the review of the 

borrower’s financial condition. 

(d) The Agency may provide a 

borrower’s prospectus to lenders in an 

attempt to identify sources of nonAgency credit and assess the lenders’

interest in refinancing the borrower’s 

loan. The Agency will notify the 

borrower when the borrower’s 

prospectus is provided to one or more 

lenders. 

(e) If a lender expresses an interest in 

refinancing the borrower’s FLP loan, the 

borrower must: 

(1) Apply for a loan from the 

interested lender within 30 days of 

notice; or 

(2) Seek guaranteed loan assistance 

under the market placement program in 

accordance with § 762.110(g) of this 

chapter. 

(f) The borrower will be responsible 

for any application fees or purchase of 

stock in conjunction with graduation. 

§ 765.102 Borrower noncompliance with 

graduation requirements. 

Borrower failure to fulfill all 

graduation requirements within the 

time-period specified by the Agency 

constitutes default on the loan. The 

Agency will accelerate the borrower’s 

loan without offering servicing options 

provided in 7 CFR part 766. 

§ 765.103 Transfer and assignment of 

Agency liens. 

The Agency may assign its lien to the 

new lender when the borrower is 

graduating and all FLP debt will be paid 

in full. 

§§ 765.104–765.150 [Reserved] 

Subpart D—Borrower Payments 

§ 765.151 Handling payments. 

(a) Borrower payments. Borrowers 

must submit their loan payments in a 

form acceptable to the Agency, such as 

checks, cash, and money orders. Forms 

of payment not acceptable to the Agency 

include, but are not limited to, foreign 

currency, foreign checks, and sight 

drafts. 

(b) Crediting account. The Agency 

credits the borrower’s account as of the 

date the Agency receives payment. 

§ 765.152 Types of payments. 

(a) Regular payments. Regular 

payments are derived from, but are not 

limited to: 

(1) The sale of normal income 

security; 

(2) The sale of farm products; 

(3) Lease income, including mineral 

lease signing bonus; 

(4) Program or disaster-related 

disbursements from USDA or crop 

insurance entities; and 

(5) Non-farm income. 

(b) Extra payments. Extra payments 

are derived from any of the following: 

(1) Sale of chattel security other than 

normal income security; 

(2) Sale of real estate security; 

(3) Refinancing of FLP debt; 

(4) Cash proceeds of insurance claims 

received on Agency security, if not 

being used to repair or replace the 

security; 

(5) Any transaction that results in a 

loss in the value of any Agency basic 

security; 

(6) Refunds of duplicate disaster 

program benefits to be applied on an EM 

loan; or 

(7) Refunds of unused loan funds. 

(c) Payments from sale of real estate. 

Notwithstanding any other provision of 

this section, payments derived from the 

sale of real estate security will be treated 

as regular payments at the Agency’s 

discretion, if the FLP loans will be 

adequately secured after the transaction. 

§ 765.153 Application of payments. 

(a) Regular payments. A regular 

payment is credited to a scheduled 

installment on program and nonprogram loans. Regular payments are 

applied to loans in the following order: 

(1) Annual operating loan; 

(2) Delinquent FLP installments, 

paying least secured loans first; 

(3) Non-delinquent FLP installments 

due in the current production cycle in 

order of security priority, paying least 

secured loans first; 

(4) Any future installments due. 

(b) Extra payments. An extra payment 

is not credited to a scheduled 

installment and does not relieve the 

borrower’s responsibility to make 

scheduled loan installments, but will 

reduce the borrower’s FLP 

indebtedness. Extra payments are 

applied to FLP loans in order of lien 

priority except for refunds of unused 

loan funds, which shall be applied to 

the loan for which the funds were 

advanced. 

§ 765.154 Distribution of payments. 

The Agency applies both regular and 

extra payments to each loan in the 

following order, as applicable: 

(a) Recoverable costs and protective 

advances plus interest; 

(b) Deferred non-capitalized interest; 

(c) Accrued deferred interest; 

(d) Interest accrued to date of 

payment; and 

(e) Loan principal. 

§ 765.155 Final loan payments. 

(a) General. (1) Unless the Agency has 

reservations regarding the validity of the 

payment, the Agency may release the 

borrower’s security instruments at the 

time payment is made, if the borrower 

makes a final payment by one of the 

following methods: 

(i) Cash; 

(ii) U.S. Treasury check; 

(iii) Cashier’s check; or 

(iv) Certified check. 

(2) Security instruments will only be 

released when all loans secured by the 

instruments have been paid in full or 

otherwise satisfied. 

(3) The Agency will return the paid 

note and satisfied security instruments 

to the borrower after the Agency 

processes the final payment and 

determines that the total indebtedness is 

paid in full. 

(b) Borrower refunds. If the borrower 

refunds the entire loan after the loan is 

closed, the borrower must pay interest 

from the date of the note to the date the 

Agency received the funds. 

(c) Overpayments. If an Agency 

miscalculation of a final payment 

results in an overpayment by the 

borrower of less than $10, the borrower 

must request a refund from the Agency 

in writing. Overpayments of $10 or 

more automatically will be refunded by 

the Agency. 

(d) Underpayments. If an Agency 

miscalculation of a final payment 

amount results in an underpayment, the 

Agency may collect all account balances 


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resulting from its error. If the Agency 

cannot collect an underpayment from 

the borrower, the Agency will attempt to 

settle the debt in accordance with 

subpart B of 7 CFR part 1956. 

§§ 765.156–765.200 [Reserved] 

Subpart E—Protecting the Agency’s 

Security Interest 

§ 765.201 General policy. 

All Agency servicing actions 

regarding preservation and protection of 

Agency security will be consistent with 

the covenants and agreements contained 

in all loan agreements and security 

instruments. 

§ 765.202 Borrower responsibilities. 

The borrower must: 

(a) Comply with all provisions of the 

loan agreements; 

(1) Non-compliance with the 

provisions of loan agreements and 

documents, other than failure to meet 

scheduled loan repayment installments 

contained in the promissory note, 

constitutes non-monetary default on 

FLP loans by the borrower; 

(2) Borrower non-compliance will be 

considered by the Agency when making 

eligibility determinations for future 

requests for assistance and may 

adversely impact such requests; 

(b) Maintain, protect, and account for 

all security; 

(c) Pay the following, unless State law 

requires the Agency to pay: 

(1) Fees for executing, filing or 

recording financing statements, 

continuation statements or other 

security instruments; and 

(2) The cost of lien search reports; 

(d) Pay taxes on property securing 

FLP loans when they become due; 

(e) Maintain insurance coverage in an 

amount specified by the Agency; 

(f) Protect the interests of the Agency 

when a third party brings suit or takes 

other action that could affect Agency 

security. 

§ 765.203 Protective advances. 

When necessary to protect the 

Agency’s security interest, costs 

incurred for the following actions will 

be charged to the borrower’s account: 

(a) Maintain abandoned security 

property; 

(b) Preserve inadequately maintained 

security; 

(c) Pay real estate taxes and 

assessments; 

(d) Pay property, hazard, or flood 

insurance; 

(e) Pay harvesting costs; 

(f) Maintain Agency security 

instruments; 

(g) Pay ground rents; 

(h) Pay expenses for emergency 

measures to protect the Agency’s 

collateral; and 

(i) Protect the Agency from actions by 

third parties. 

§ 765.204 Notifying potential purchasers. 

(a) States with Central Filing System 

(CFS). The Agency participates and 

complies with central filing systems in 

States where CFS has been organized. In 

a State with a CFS, the Agency is not 

required to additionally notify potential 

purchasers that the Agency has a lien on 

a borrower’s chattel security, unless 

specifically required by State law. 

(b) States without CFS. In a State 

without CFS, the Agency follows the 

filing requirements specified for 

perfecting a lien on a borrower’s chattel 

security under State law. The Agency 

will distribute the list of chattel and 

crop borrowers to sale barns, 

warehouses, and other businesses that 

buy or sell chattels or crops. In addition, 

the Agency may provide the list of 

borrowers to potential purchasers upon 

request. 

§ 765.205 Subordination of liens. 

(a) Borrower application 

requirements. The borrower must 

submit the following, unless it already 

exists in the Agency’s file and is still 

current as determined by the Agency: 

(1) Completed Agency application for 

subordination form; 

(2) A current financial statement, 

including, in the case of an entity, 

financial statements from all entity 

members; 

(3) Documentation of compliance 

with the Agency’s environmental 

regulations contained in subpart G of 7 

CFR part 1940; 

(4) Verification of all non-farm 

income; 

(5) The farm’s operating plan, 

including a projected cash flow budget 

reflecting production, income, expenses, 

and debt repayment plan; and 

(6) Verification of all debts. 

(b) Real estate security. For loans 

secured by real estate, the Agency will 

approve a request for subordination if 

all of the following conditions are met: 

(1) The borrower is not in default or 

will not be in default on FLP loans by 

the time the subordination closing is 

complete; 

(2) The loan will be used for an 

authorized loan purpose or is made in 

conjunction with a guaranteed loan; 

(3) The credit is essential to the 

farming operation, and the borrower 

cannot obtain the credit without a 

subordination; 

(4) 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; 

(5) 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; 

(6) The borrower is not able to 

graduate; 

(7) 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 is needed for the 

entity member to finance a separate 

farming operation, provided the 

subordination does not cause the 

unpaid principal and interest on the 

FLP loans to exceed the value of loan 

security or otherwise adversely affect 

the security; 

(8) The borrower must not be 

ineligible as a result of a conviction for 

controlled substances according to 7 

CFR part 718 of this chapter; 

(9) The borrower must not be 

ineligible due to disqualification 

resulting from Federal crop insurance 

violation according to 7 CFR part 718 of 

this chapter; 

(10) 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; 

(11) There is no other subordination 

outstanding with another lender in 

connection with the same security; 

(12) The subordination is limited to a 

specific amount; the loan made in 

conjunction with the subordination will 

be closed within a reasonable time and 

has a definite maturity date; 

(13) In the case of real property 

purchase or exchange, the Agency will 

obtain a valid mortgage and the required 

lien position on the real property. The 

Agency will require title clearance and 

loan closing for the property in 

accordance with § 764.402 of this 

chapter; 

(14) Any planned development of real 

estate security will be performed as 

directed by the creditor, approved by 

the Agency, and will comply with the 

terms and conditions of § 761.10 of this 

chapter; 

(15) Subordinations of SAA mortgages 

may only be approved when there is no 

increase in the debt which is prior to the 

SAA debt; and 

(16) If a borrower has only a Nonprogram loan, the Agency does not 

permit subordination. The Agency may 

subordinate Non-program security when 

it is also security for a program loan 


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with the same borrower in accordance 

with this section. 

(c) Chattel security. (1) For loans 

secured by chattel, the subordination 

must meet the conditions contained in 

paragraphs (b)(1) through (12) of this 

section. 

(2) The Agency will approve a request 

for a second subordination to enable a 

borrower to obtain crop insurance, if the 

following conditions are met: 

(i) The creditor to whom the first 

subordination was given did not 

provide for payment of the current 

year’s crop insurance premium, and 

consents in writing to the provisions of 

the second subordination to pay 

insurance premiums from the crop or 

insurance proceeds; 

(ii) The borrower assigns the 

insurance proceeds to the Agency or 

names the Agency in the loss payable 

clause of the policy; and 

(iii) The subordination meets the 

conditions under paragraphs (b)(1) 

through (12) of this section. 

(d) Appraisals. An appraisal of the 

property that secures the FLP loan will 

be required when the Agency 

determines it necessary to protect its 

interest. Appraisals will be obtained in 

accordance with § 761.7 of this chapter. 

§ 765.206 Junior liens. 

(a) General policy. The borrower will 

not give a lien on Agency security 

without the consent of the Agency. 

Failure to obtain Agency consent will be 

considered by the Agency when making 

eligibility determinations for future 

requests for assistance and may 

adversely impact such requests. 

(b) Conditions for consent. The 

Agency will consent to the terms of a 

junior lien if all of the following 

conditions are met: 

(1) The borrower’s ability to make 

scheduled loan payments is not 

jeopardized; 

(2) The borrower provides the Agency 

a copy of the farm operating plan 

submitted to the junior lienholder, and 

the plan is consistent with the Agency 

operating plan; 

(3) The total debt against the security 

does not exceed the security’s market 

value; 

(4) The junior lienholder agrees in 

writing not to foreclose the security 

instrument unless written notice is 

provided to the Agency; 

(5) The borrower is unable to 

graduate; and 

(6) The junior lien will not otherwise 

adversely impact the Agency’s financial 

interests. 

§ 765.207 Conditions for severance 

agreements. 

For loans secured by real estate, a 

borrower may request Agency consent 

to a severance agreement or similar 

instrument so that future chattel 

acquired by the borrower will not 

become part of the real estate securing 

the FLP debt. The Agency will consent 

to severance agreements if all of the 

following conditions are met: 

(a) The financing arrangements are in 

the financial interest of the Agency and 

the borrower; 

(b) The transaction will not adversely 

affect the Agency’s security position; 

(c) The borrower is unable to 

graduate; 

(d) The transaction will not jeopardize 

the borrower’s ability to pay all 

outstanding debts to the Agency and 

other creditors; and 

(e) The property acquired is 

consistent with authorized loan 

purposes. 

§§ 765.208–765.250 [Reserved] 

Subpart F—Required Use and 

Operation of Agency Security 

§ 765.251 General. 

(a) A borrower is required to be the 

operator of Agency security in 

accordance with loan purposes, loan 

agreements, and security instruments. 

(b) A borrower who fails to operate 

the security without Agency consent is 

in violation of loan agreements and 

security instruments. 

(c) The Agency will consider a 

borrower’s request to lease or cease to 

operate the security as provided in 

§§ 765.252 and 765.253. 

§ 765.252 Lease of security. 

(a) Real estate leases. The borrower 

may lease real estate security provided 

the following conditions are met: 

(1) The Agency approves the 

borrower’s request; 

(2) The term of consecutive leases 

does not exceed 3 years, or 5 years if the 

borrower and the lessee are related by 

blood or marriage; 

(3) The lease does not contain an 

option to purchase; and 

(4) The requirements of § 765.253 

have been met. 

(b) Mineral leases. The borrower must 

request Agency consent to lease any 

mineral rights used as security for FLP 

loans. 

(1) For loans secured by real estate 

before December 23, 1985, the Agency 

has a security interest in any mineral 

rights the borrower has on the real estate 

pledged as collateral. 

(2) For loans secured by real estate on 

or after December 23, 1985, the Agency 

has a security interest in any mineral 

rights if the mineral rights were 

included in an appraisal. 

(3) The Agency may consent to a 

mineral lease if the proposed use of the 

leased rights will not adversely affect 

either: 

(i) The Agency’s security interest; or 

(ii) Compliance with any applicable 

environmental requirements of subpart 

G of 7 CFR part 1940. 

(c) Lease of chattel security. Lease of 

chattel security is not authorized. 

(d) Lease proceeds. Lease proceeds are 

considered normal income security and 

may be used in accordance with 

§ 765.303. 

(e) Lease of allotments. (1) The 

Agency will not approve any crop 

allotment lease that will adversely affect 

its security interest in the allotment. 

(2) The borrower must assign all 

rental proceeds from an allotment lease 

to the Agency. 

§ 765.253 Ceasing to operate security. 

If the borrower requests Agency 

consent to cease operating the security 

or if the Agency discovers that the 

borrower is failing to operate the 

security, the Agency will give consent 

if: 

(a) Such action is in the Agency’s best 

interests; 

(b) The borrower is unable to 

graduate; 

(c) The borrower is not ineligible as a 

result of disqualification for Federal 

crop insurance violation according to 7 

CFR part 718; 

(d) The borrower has leased the 

security according to § 765.252(a)(2); 

and 

(e) Any one of the following 

conditions is met: 

(1) The borrower is involved in the 

day-to-day operational activities, 

management decisions, costs and 

returns of the farming operation, and 

will continue to reside in the immediate 

farming community for reasonable 

management and operation 

involvement; 

(2) The borrower’s failure to operate 

the security is due to age or poor health, 

and the borrower continues to reside in 

the immediate farming community for 

reasonable management and operation 

involvement; or 

(3) The borrower’s failure to operate 

the security is beyond the borrower’s 

control, and the borrower will resume 

the farming operation within 3 years. 


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§§ 765.254–765.300 [Reserved] 

Subpart G—Disposal of Chattel 

Security 

§ 765.301 General. 

(a) The borrower must account for all 

security. 

(b) The borrower may not dispose of 

chattel security for an amount less than 

its market value. All proceeds, 

including any amount in excess of the 

market value, must be distributed to 

lienholders for application to the 

borrower’s account in the order of lien 

priority. 

(1) The Agency considers the market 

value of normal income security to be 

the prevailing market price of the 

commodity in the area in which the 

farm is located. 

(2) The market value for basic security 

is determined by an appraisal obtained 

in accordance with § 761.7 of this 

chapter. 

(c) When the borrower sells chattel 

security, the property and proceeds 

remain subject to the Agency lien until 

the lien is released by the Agency. 

(d) The Agency and all other 

lienholders must provide written 

consent before a borrower may use 

proceeds for a purpose other than 

payment of lienholders in the order of 

lien priority. 

(e) The transaction must not interfere 

with the borrower’s farming operation 

or jeopardize the borrower’s ability to 

repay the FLP loan. 

(f) The disposition must enhance the 

program objectives of the FLP loan. 

(g) When the borrower exchanges 

security property for other property or 

purchases new property with sale 

proceeds, the acquisition must be 

essential to the farming operation as 

well as meet the program objectives, 

purposes, and limitations for the type of 

loan. 

(h) All checks, drafts, or money orders 

which the borrower receives from the 

sale of Agency security must be payable 

to the borrower and the Agency. If all 

FLP loan installments and any past due 

installments, for the period of the 

agreement for the use of proceeds have 

been paid, however, these payments 

from the sale of normal income security 

may be payable solely to the borrower. 

§ 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 for each production cycle, 

including proceeds from the sale of 

milk, crops on hand or in storage, 

planned proceeds from Government 

payments, crop insurance and insurance 

proceeds derived from the loss of 

security. 

(b) The agreement for the use of 

proceeds will remain in effect until the 

proper disposition of all listed chattel 

security has been accomplished, or the 

remaining chattel security has been 

transferred to a new agreement for the 

use of proceeds. 

(c) The borrower must report any 

disposition of basic or normal income 

security immediately to the Agency. 

(d) If a borrower wants to dispose of 

chattel security not listed or in a way 

different than provided on the 

agreement for the use of proceeds, the 

borrower must obtain the Agency’s 

consent before the disposition. 

(e) If the borrower sells 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. 

(f) The borrower must provide the 

Agency with the necessary information 

to update the farm operating plan and 

the agreement for the use of proceeds in 

accordance with § 761.102 of this 

chapter. 

(g) Changes to the agreement on the 

use of proceeds will be recorded, dated 

and initialed by the borrower and the 

Agency. 

(h) The borrower must maintain 

records of dispositions of chattel 

security and the actual use of proceeds. 

The borrower must make these records 

available to the Agency at the end of the 

period covered by the agreement for the 

use of proceeds. 

§ 765.303 Use of proceeds from chattel 

security. 

(a) General. (1) Proceeds from the sale 

of basic security and normal income 

security must be remitted to lienholders 

in order of lien priority. 

(2) Proceeds remitted to the Agency 

may be used as follows: 

(i) Applied to the FLP loan; 

(ii) Pay customary costs appropriate to 

the transaction. 

(3) With the concurrence of all 

lienholders, proceeds may be used to 

preserve the security because of a 

natural disaster or other severe 

catastrophe, when funds cannot be 

obtained by other means in time to 

prevent the borrower and the Agency 

from suffering a substantial loss. 

(4) Security may be consumed as 

follows: 

(i) Livestock may be used by the 

borrower’s family for subsistence; 

(ii) If crops serve as security and 

usually would be marketed, the Agency 

may allow such crops to be fed to the 

borrower’s livestock, if this is preferable 

to marketing, provided the Agency 

obtains a lien or assignment on the 

livestock, and livestock products, at 

least equal to the lien on the crops. 

(b) Proceeds from the sale of normal 

income security. In addition to the uses 

specified in paragraph (a) of this 

section, the agreement for the use of 

proceeds will allow for release of 

proceeds from the sale of normal 

income security to be used to pay 

essential family living and farm 

operating expenses. Such releases will 

be terminated when an account is 

accelerated. 

(c) Proceeds from the sale of basic 

security. In addition to the uses 

specified in paragraph (a) of this 

section: 

(1) Proceeds from the sale of basic 

security may not be used for any family 

living and farm operating expenses. 

(2) Security may be exchanged for 

chattel property better suited to the 

borrower’s needs if the Agency will 

acquire a lien on the new property at 

least equal in value to the lien held on 

the property exchanged. 

(3) Proceeds may be used to purchase 

chattel property better suited to the 

borrower’s needs if the Agency will 

acquire a lien on the purchased 

property. The value of the purchased 

property, together with any proceeds 

applied to the FLP loan, must at least 

equal the value of the Agency lien on 

the old security. 

§ 765.304 Unapproved disposition. 

(a) If a borrower disposes of chattel 

security without Agency approval, or 

misuses proceeds, the borrower must: 

(1) Make restitution to the Agency 

within 30 days of Agency notification; 

or 

(2) Provide disposition or use 

information to enable the Agency to 

consider post-approval within 30 days 

of Agency notification. 

(b) Failure to cure the first 

unauthorized disposition in accordance 

with paragraph (a) of this section, or a 

second unauthorized disposition, 

whether or not cured, constitutes a nonmonetary default, will be considered by 

the Agency when making eligibility 

determinations for future requests for 

assistance, may adversely impact such 

requests, and may result in civil or 

criminal action. 

§ 765.305 Release of security interest. 

(a) When Agency security is sold, 

exchanged, or consumed in accordance 

with the agreement for the use of 

proceeds, the Agency will release its 

security interest to the extent of the 

value of the security disposed. 

(b) Security interests on wool and 

mohair may be released when the 


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security is marketed by consignment, 

provided all of the following conditions 

are met: 

(1) The borrower assigns to the 

Agency the proceeds of any advances 

made, or to be made, on the wool or 

mohair by the broker, less shipping, 

handling, processing, and marketing 

costs; 

(2) The borrower assigns to the 

Agency the proceeds of the sale of the 

wool or mohair, less any remaining 

costs in shipping, handling, processing, 

and marketing, and less the amount of 

any advance (including any interest 

which may have accrued on the 

advance) made by the broker against the 

wool or mohair; and 

(3) The borrower and broker agree that 

the net proceeds of any advances on, or 

sale of, the wool or mohair will be paid 

by checks made payable jointly to the 

borrower and the Agency. 

§§ 765.306–765.350 [Reserved] 

Subpart H—Partial Release of Real 

Estate Security 

§ 765.351 Requirements to obtain Agency 

consent. 

The borrower must obtain prior 

consent from the Agency for any 

transactions affecting the real estate 

security, including, but not limited to, 

sale or exchange of security, a right-ofway across security, and a partial 

release. The Agency may consent to 

such transactions provided the 

conditions in this section are met. 

(a) General. The following conditions 

apply to all transactions affecting real 

estate: 

(1) The transaction will enhance the 

objectives for which the FLP loan or 

loans were made; 

(2) The transaction will not jeopardize 

the borrower’s ability to repay the FLP 

loan, or is necessary to place the 

borrower’s farming operation on a 

sound basis; 

(3) The amount received for the 

security being disposed of or the rights 

being granted is not less than the market 

value; 

(4) Any proceeds in excess of the 

market value are remitted to lienholders 

in the order of lien priority; 

(5) The transaction must not interfere 

with the borrower’s farming operation; 

(6) The market value of the remaining 

security is adequate to secure the FLP 

loans, or if the market value of the 

security before the transaction was 

inadequate to fully secure the FLP 

loans, the Agency’s equity in the 

security is not diminished; 

(7) The environmental requirements 

of subpart G of 7 CFR part 1940 must 

be met; 

(8) The borrower cannot graduate to 

other credit; 

(9) The borrower must not be 

ineligible due to disqualification 

resulting from Federal crop insurance 

violation according to 7 CFR part 718; 

and 

(10) The disposition of real estate 

security for an outstanding ST loan will 

only be authorized if the transaction 

will result in full repayment of the loan. 

(b) Sale of timber, gravel, oil, gas, 

coal, or other minerals. (1) Agency 

security instruments require that the 

borrower request and receive written 

consent from the Agency prior to certain 

transactions, including, but not limited 

to, cutting, removal, or lease of timber, 

gravel, oil, gas, coal, or other minerals, 

except small amounts used by the 

borrower for ordinary household 

purposes. 

(i) The sale of timber from real estate 

that secures an FLP loan will be 

considered a disposition of a portion of 

the security. 

(ii) For loans secured by real estate 

before December 23, 1985, the Agency 

has a security interest in mineral 

products, gravel, oil, gas, coal, or other 

resources and the sale by unit or lump 

sum payment will be considered a 

disposition of security. 

(iii) For loans secured by real estate 

on or after December 23, 1985, the 

Agency has a security interest in 

mineral products, gravel, oil, gas, coal, 

or other resources if the value of such 

products was included in an appraisal. 

When the Agency has a security 

interest, the sale of such products will 

be considered a disposition of a portion 

of the security. 

(2) Any compensation the borrower 

may receive for damages to the surface 

of the real estate security resulting from 

exploration for, or recovery of, minerals 

must be assigned to the Agency. Such 

proceeds will be used to repair the 

damage, and any remaining funds must 

be remitted to lienholders in the order 

of lien priority or, with all lienholders’

consent, used for an authorized loan 

purpose. 

(c) Exchange of security property. (1) 

When an exchange of security results in 

a balance owing to the borrower, the 

proceeds must be used in accordance 

with § 765.352. 

(2) Property acquired by the borrower 

must meet program objectives, purposes 

and limitations relating to the type of 

loan involved as well as applicable 

requirements for appraisal, title 

clearance and security. 

(d) Sale under contract for deed. A 

borrower may sell a portion of the 

security for not less than its market 

value under a contract for deed subject 

to the following: 

(1) Not less than 10 percent of the 

purchase price will be paid as a down 

payment and remitted to lienholders in 

the order of lien priority; 

(2) Payments will not exceed 10 

annual installments of principal plus 

interest or the remaining term of the 

FLP loan, whichever is less. The interest 

rate will be the current rate being 

charged on a regular FO loan plus 1 

percent or the rate on the borrower’s 

notes, whichever is greater. Payments 

may be in equal or unequal installments 

with a balloon final installment; 

(3) The Agency’s security rights, 

including the right to foreclose on either 

the portion being sold or retained, will 

not be impaired; 

(4) Any subsequent payments must be 

assigned to the lienholders and remitted 

in order of lien priority, or with 

lienholder’s approval, used in 

accordance with § 765.352; 

(5) The mortgage on the property sold 

will not be released prior to either full 

payment of the borrower’s account or 

receipt of the full amount of sale 

proceeds; 

(6) The sale proceeds applied to the 

borrower’s loan accounts will not 

relieve the borrower from obligations 

under the terms of the note or other 

agreements approved by the Agency; 

(7) All other requirements of this 

section are met. 

(e) Transfer of allotments. (1) The 

Agency will not approve any crop 

allotment lease that will adversely affect 

its security interest. 

(2) The sale of an allotment must 

comply with all conditions of this 

subpart. 

(3) The borrower may transfer crop 

allotments to another farm owned or 

controlled by the borrower. Such 

transfer will be treated as a lease under 

§ 765.252. 

§ 765.352 Use of proceeds. 

(a) Proceeds from transactions 

affecting the real estate security may 

only be used as follows: 

(1) Applied on liens in order of 

priority; 

(2) To pay customary costs 

appropriate to the transaction, which 

meet the following conditions: 

(i) Are reasonable in amount; 

(ii) Cannot be paid by the borrower; 

(iii) Will not be paid by the purchaser; 

(iv) Must be paid to consummate the 

transaction; and 

(v) May include postage and 

insurance when it is necessary for the 

Agency to present the promissory note 

to the recorder to obtain a release of a 

portion of the real estate from the 

mortgage. 


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(3) For development or enlargement of 

real estate owned by the borrower as 

follows: 

(i) Development or enlargement must 

be necessary to improve the borrower’s 

debt repayment ability, place the 

borrower’s farming operation on a 

sound basis, or otherwise enhance the 

objectives of the loan; 

(ii) Such use will not conflict with the 

loan purposes, restrictions or 

requirements of the type of loan 

involved; 

(iii) Funds will be deposited in a 

supervised bank account in accordance 

with subpart B of part 761 of this 

chapter; 

(iv) The Agency has, or will obtain, a 

lien on the real estate developed or 

enlarged; 

(v) Construction and development 

will be completed in accordance with 

§ 761.10 of this chapter. 

(b) After acceleration, the Agency may 

approve transactions only when all the 

proceeds will be applied to the liens 

against the security in the order of their 

priority, after deducting customary costs 

appropriate to the transaction. Such 

approval will not cancel or delay 

liquidation, unless all loan defaults are 

otherwise cured. 

§ 765.353 Determining market value. 

(a) Security proposed for disposition. 

(1) The Agency will obtain an appraisal 

of the security proposed for disposition. 

(2) The Agency may waive the 

appraisal requirement when the 

estimated value is less than $25,000. 

(b) Security remaining after 

disposition. The Agency will obtain an 

appraisal of the remaining security if it 

determines that the transaction will 

reduce the value of the remaining 

security. 

(c) Appraisal requirements. 

Appraisals, when required, will be 

conducted in accordance with § 761.7 of 

this chapter. 

§§ 765.354–765.400 [Reserved] 

Subpart I—Transfer of Security and 

Assumption of Debt 

§ 765.401 Conditions for transfer of real 

estate and chattel security. 

(a) General conditions. (1) Approval 

of a security transfer and corresponding 

loan assumption obligates a new 

borrower to repay an existing FLP debt. 

(2) All transferees will become 

personally liable for the debt and 

assume the full responsibilities and 

obligations of the debt transferred when 

the transfer and assumption is complete. 

If the transferee is an entity, the entity 

and each member must assume personal 

liability for the loan. 

(3) A transfer and assumption will 

only be approved if the Agency 

determines it is in the Agency’s 

financial interest. 

(b) Agency consent. A borrower must 

request and obtain written Agency 

consent prior to selling or transferring 

security to another party. 

§ 765.402 Transfer of security and loan 

assumption on same rates and terms. 

An eligible applicant may assume an 

FLP loan on the same rates and terms as 

the original note if: 

(a) The original borrower has died and 

the spouse, other relative, or joint tenant 

who is not obligated on the note inherits 

the security property; 

(b) A family member of the borrower 

or an entity comprised solely of family 

members of the borrower assumes the 

debt along with the original borrower; 

(c) An individual with an ownership 

interest in the borrower entity buys the 

entire ownership interest of the other 

members and continues to operate the 

farm in accordance with loan 

requirements. The new owner must 

assume personal liability for the loan; 

(d) A new entity buys the borrower 

entity and continues to operate the farm 

in accordance with loan requirements; 

or 

(e) The original loan is an EM loan for 

physical or production losses and 

persons who were directly involved in 

the farm’s operation at the time of the 

loss will assume the loan. If the original 

loan was made to: 

(1) An individual borrower, the 

transferee must be a family member of 

the original borrower or an entity that is 

comprised solely of family members of 

the original borrower. 

(2) A trust, partnership or joint 

operation, the transferee must have been 

a member, partner or joint operator 

when the Agency made the original loan 

or remain an entity comprised solely of 

people who were original members, 

partners or joint operators when the 

entity received the original loan. 

(3) A corporation, including limited 

liability company, or cooperative, the 

transferee must: 

(i) Have been a corporate stockholder 

or a cooperative member when the 

Agency made the original loan or will 

be an entity comprised solely of people 

who were corporate stockholders or 

cooperative members when the entity 

received the loan; and 

(ii) Assume only the portion of the 

physical or production loss loan equal 

to the transferee’s percentage of 

ownership. In the case of entity 

transferees, the transferee must assume 

that portion of the loan equal to the 

combined percentages of ownership of 

the individual stockholders or members 

in the transferee. 

§ 765.403 Transfer of security to and 

assumption of debt by eligible applicants. 

(a) Transfer of real estate and chattel 

security. The Agency may approve 

transfers of security with assumption of 

FLP debt, other than EM loans for 

physical or production losses, by 

transferees eligible for the type of loan 

being assumed if: 

(1) The transferee meets all loan and 

security requirements in part 764 of this 

chapter for the type of loan being 

assumed; and 

(2) The outstanding loan balance 

(principal and interest) does not exceed 

the maximum loan limit for the type of 

loan as contained in § 761.8 of this 

chapter. 

(b) Assumption of Non-program 

loans. Applicants eligible for FO loans 

under part 764 of this chapter may 

assume Non-program loans made for 

real estate purposes if the Agency 

determines the property meets program 

requirements. In such case, the Agency 

will reclassify the Non-program loan as 

an FO loan. 

(c) Loan types that the Agency no 

longer makes. Real estate loan types the 

Agency no longer makes (i.e. EE, RL, 

RHF) may be assumed and reclassified 

as FO loans if the transferee is eligible 

for an FO loan under part 764 of this 

chapter and the property proposed for 

transfer meets program requirements. 

(d) Amount of assumption. The 

transferee must assume the lesser of: 

(1) The outstanding balance of the 

transferor’s loan; or 

(2) The market value of the security, 

less prior liens and authorized costs, if 

the outstanding loan balance exceeds 

the market value of the property. 

(e) Rates and terms. The interest rate 

and loan term will be determined 

according to rates and terms established 

in part 764 of this chapter for the type 

of loan being assumed. 

§ 765.404 Transfer of security to and 

assumption of debt by ineligible applicants. 

(a) General. (1) The Agency will allow 

the transfer of real estate and chattel 

security property to applicants who are 

ineligible for the type of loan being 

assumed only on Non-program loan 

rates and terms. 

(2) The Agency will reclassify the 

assumed loan as a Non-program loan. 

(b) Eligibility. Transferees must: 

(1) Provide written documentation 

verifying their credit worthiness and 

debt repayment ability; 

(2) Not have received debt forgiveness 

from the Agency; 

(3) Not be ineligible for loans as a 

result of a conviction for controlled 


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substances according to 7 CFR part 718; 

and 

(4) Not be ineligible due to 

disqualification resulting from Federal 

crop insurance violation according to 7 

CFR part 718. 

(c) Assumption amount. The 

transferee must assume the total 

outstanding FLP debt or if the value of 

the property is less than the entire 

amount of debt, an amount equal to the 

market value of the security less any 

prior liens. The total outstanding FLP 

debt will include any unpaid deferred 

interest that accrued on the loan to the 

extent that the debt does not exceed the 

security’s market value. 

(d) Downpayment. Non-program 

transferees must make a downpayment 

to the Agency of not less than 10 

percent of the lesser of the market value 

or unpaid debt. 

(e) Interest rate. The interest rate will 

be the Non-program interest rate in 

effect at the time of loan approval. 

(f) Loan terms. (1) For a Non-program 

loan secured by real estate, the Agency 

schedules repayment in 25 years or less, 

based on the applicant’s repayment 

ability. 

(2) For a Non-program loan secured 

by chattel property only, the Agency 

schedules repayment in 5 years or less, 

based on the applicant’s repayment 

ability. 

§ 765.405 Payment of costs associated 

with transfers. 

The transferor and transferee are 

responsible for paying transfer costs 

such as real estate taxes, title 

examination, attorney’s fees, surveys, 

and title insurance. When the transferor 

is unable to pay its portion of the 

transfer costs, the transferee, with 

Agency approval, may pay these costs 

provided: 

(a) Any cash equity due the transferor 

is applied first to payment of costs and 

the transferor does not receive any cash 

payment above these costs; 

(b) The transferee’s payoff of any 

junior liens does not exceed $5,000; 

(c) Fees are customary and reasonable; 

(d) The transferee can verify that 

personal funds are available to pay 

transferor and transferee fees; and 

(e) Any equity due the transferor is 

held in escrow by an Agency designated 

closing agent and is disbursed at 

closing. 

§ 765.406 Release of transferor from 

liability. 

(a) General. Agency approval of an 

assumption does not automatically 

release the transferor from liability. 

(b) Requirements for release. (1) The 

Agency may release the transferor from 

liability when all of the security is 

transferred and the total outstanding 

debt is assumed. 

(2) If an outstanding debt balance will 

remain and only part of the transferor’s 

Agency security is transferred, the 

written request for release of liability 

will not be approved, unless the 

deficiency is otherwise resolved to the 

Agency’s satisfaction. 

(3) If an outstanding balance will 

remain and all of the transferor’s 

security has been transferred, the 

transferor may pay the remaining 

balance or request debt settlement in 

accordance with subpart B of 7 CFR part 

1956. 

(4) Except for loans in default being 

serviced under 7 CFR part 766, if an 

individual who is jointly liable for 

repayment of an FLP loan withdraws 

from the farming operation and conveys 

all of their interest in the security to the 

remaining borrower, the withdrawing 

party may be released from liability 

under the following conditions: 

(i) A divorce decree or property 

settlement states that the withdrawing 

party is no longer responsible for 

repaying the loan; 

(ii) All of the withdrawing party’s 

interests in the security are conveyed to 

the persons with whom the loan will be 

continued; and 

(iii) The persons with whom the loan 

will be continued can demonstrate the 

ability to repay all of the existing and 

proposed debt obligations. 

§§ 765.407–765.450 [Reserved] 

Subpart J—Deceased Borrowers 

§ 765.451 Continuation of FLP debt and 

transfer of security. 

(a) Individuals who are liable. 

Following the death of a borrower, the 

Agency will continue the loan with any 

individual who is liable for the 

indebtedness provided that the 

individual complies with the 

obligations of the loan and security 

instruments. 

(b) Individuals who are not liable. The 

Agency will continue the loan with a 

person who is not liable for the 

indebtedness in accordance with 

subpart I of this part. 

§ 765.452 Borrowers with Non-program 

loans. 

(a) Loan continuation. (1) The Agency 

will continue the loan with a jointly 

liable borrower if the remaining 

borrower continues to pay the deceased 

borrower’s loan in accordance with the 

loan and security instruments. 

(2) The Agency may continue the loan 

with an individual who inherits title to 

the property and is not liable for the 

indebtedness provided the individual 

makes payments as scheduled and 

fulfills all other responsibilities of the 

borrower according to the loan and 

security instruments. 

(b) Loan assumption. A deceased 

borrower’s loan may be assumed by an 

individual not liable for the 

indebtedness in accordance with 

subpart I of this part. 

(c) Loan discontinuation. (1) The 

Agency will not continue a loan for any 

subsequent transfer of title by the heirs, 

or sale of interests between heirs to 

consolidate title; and 

(2) The Agency treats any subsequent 

transfer of title as a sale subject to 

requirements listed in subpart I of this 

part. 

§§ 765.453–765.500 [Reserved] 

Subpart K—Exception Authority 

§ 765.501 Agency exception authority. 

On an individual case basis, the 

Agency may consider granting an 

exception to any regulatory requirement 

or policy of this part if: 

(a) The exception is not inconsistent 

with the authorizing statute or other 

applicable law; and 

(b) The Agency’s financial interest 

would be adversely affected by acting in 

accordance with published regulations 

or policies and granting the exception 

would resolve or eliminate the adverse 

effect upon the Agency’s financial 

interest. 

■ 25. Add part 766 to read as follows: 

PART 766—DIRECT LOAN 

SERVICING—SPECIAL 

Sec. 

Subpart A—Overview 

766.1 Introduction. 

766.2 Abbreviations and definitions. 

766.3–766.50 [Reserved] 

Subpart B—Disaster Set-Aside 

766.51 General. 

766.52 Eligibility. 

766.53 Disaster Set-Aside amount 

limitations. 

766.54 Borrower application requirements. 

766.55 Eligibility determination. 

766.56 Security requirements. 

766.57 Borrower acceptance of Disaster SetAside. 

766.58 Installment to be set aside. 

766.59 Payments toward set-aside 

installments. 

766.60 Canceling a Disaster Set-Aside. 

766.61 Reversal of a Disaster Set-Aside. 

766.62–766.100 [Reserved] 

Subpart C—Loan Servicing Programs 

766.101 Initial Agency notification to 

borrower of loan servicing programs. 

766.102 Borrower application requirements. 

766.103 Borrower does not respond or does 

not submit a complete application. 


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766.104 Borrower eligibility requirements. 

766.105 Agency consideration of servicing 

requests. 

766.106 Agency notification of decision 

regarding a complete application. 

766.107 Consolidation and rescheduling. 

766.108 Reamortization. 

766.109 Deferral. 

766.110 Conservation Contract. 

766.111 Writedown. 

766.112 Additional security for restructured 

loans. 

766.113 Buyout of loan at current market 

value. 

766.114 State-certified mediation and 

voluntary meeting of creditors. 

766.115 Challenging the Agency appraisal. 

766.116–766.150 [Reserved] 

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 

Appendix B to Subpart C of Part 766—FSA–

2510, Notice of Availability of Loan 

Servicing to Borrowers Who Are 90 Days 

Past Due 

Appendix C to Subpart C of Part 766—FSA–

2514, Notice of Availability of Loan 

Servicing to Borrowers in Non-Monetary 

Default 

Subpart D—Homestead Protection Program 

766.151 Applying for Homestead 

Protection. 

766.152 Eligibility. 

766.153 Homestead Protection 

transferability. 

766.154 Homestead Protection leases. 

766.155 Conflict with State law. 

766.156–766.200 [Reserved] 

Subpart E—Servicing Shared Appreciation 

Agreements and Net Recovery Buyout 

Agreements 

766.201 Shared Appreciation Agreement. 

766.202 Determining the shared 

appreciation due. 

766.203 Payment of recapture. 

766.204 Amortization of recapture. 

766.205 Shared Appreciation Payment 

Agreement rates and terms. 

766.206 Net Recovery Buyout Recapture 

Agreement. 

766.207–766.250 [Reserved] 

Subpart F—Unauthorized Assistance 

766.251 Repayment of unauthorized 

assistance. 

766.252 Unauthorized assistance resulting 

from submission of false information. 

766.253 Unauthorized assistance resulting 

from submission of inaccurate 

information by borrower or Agency error. 

766.254–766.300 [Reserved] 

Subpart G—Loan Servicing For Borrowers 

in Bankruptcy 

766.301 Notifying borrower in bankruptcy 

of loan servicing. 

766.302 Loan servicing application 

requirements for borrowers in 

bankruptcy. 

766.303 Processing loan servicing requests 

from borrowers in bankruptcy. 

766.304–766.350 [Reserved] 

Subpart H—Loan Liquidation 

766.351 Liquidation. 

766.352 Voluntary sale of real property and 

chattel. 

766.353 Voluntary conveyance of real 

property. 

766.354 Voluntary conveyance of chattel. 

766.355 Acceleration of loans. 

766.336 Acceleration of loans to American 

Indian borrowers. 

766.357 Involuntary liquidation of real 

property and chattel. 

766.358–766.400 [Reserved] 

Subpart I—Exception Authority 

766.401 Agency exception authority. 

Authority: 5 U.S.C. 301 and 7 U.S.C. 1981d 

and 1989. 

Subpart A—Overview 

§ 766.1 Introduction. 

(a) This part describes the Agency’s 

servicing policies for direct loan 

borrowers who: 

(1) Are financially distressed; 

(2) Are delinquent in paying direct 

loans or otherwise in default; 

(3) Have received unauthorized 

assistance; 

(4) Have filed bankruptcy or are 

involved in other civil or criminal cases 

affecting the Agency; or 

(5) Have loan security being 

liquidated voluntarily or involuntarily. 

(b) The Agency services direct FLP 

loans under the policies contained in 

this part. 

(1) Youth loans: 

(i) May not receive Disaster Set-Aside 

under subpart B of this part; 

(ii) Will only be considered for 

rescheduling according to § 766.107 and 

deferral according to § 766.109. 

(2) The Agency does not service Nonprogram loans under this part except 

where noted. 

(c) The Agency requires the borrower 

to make every reasonable attempt to 

make payments and comply with loan 

agreements before the Agency considers 

special servicing. 

§ 766.2 Abbreviations and definitions. 

Abbreviations and definitions for 

terms used in this part are provided in 

§ 761.2 of this chapter. 

§§ 766.3–766.50 [Reserved] 

Subpart B—Disaster Set-Aside 

§ 766.51 General. 

(a) DSA is available to borrowers with 

program loans who suffered losses as a 

result of a natural disaster. 

(b) DSA is not intended to circumvent 

other servicing available under this part. 

(c) Non-program loans may be 

serviced under this subpart for 

borrowers who also have program loans. 

§ 766.52 Eligibility. 

(a) Borrower eligibility. The borrower 

must meet all of the following 

requirements to be eligible for a DSA: 

(1) The borrower must have operated 

the farm in a county designated or 

declared a disaster area or a contiguous 

county at the time of the disaster. 

Farmers who have rented out their land 

base for cash are not operating the farm. 

(2) The borrower must have acted in 

good faith, and the borrower’s inability 

to make the upcoming scheduled loan 

payments must be for reasons not 

within the borrower’s control. 

(3) The borrower cannot have more 

than one installment set aside on each 

loan. 

(4) As a direct result of the natural 

disaster, the borrower does not have 

sufficient income available to pay all 

family living and farm operating 

expenses, other creditors, and debts to 

the Agency. This determination will be 

based on: 

(i) The borrower’s actual production, 

income and expense records for the year 

the natural disaster occurred; 

(ii) Any other records required by the 

Agency; 

(iii) Compensation received for losses; 

and 

(iv) Increased expenses incurred 

because of the natural disaster. 

(5) For the next production cycle, the 

borrower must develop a feasible plan 

showing that the borrower will at least 

be able to pay all operating expenses 

and taxes due during the year, essential 

family living expenses, and meet 

scheduled payments on all debts, 

including FLP debts. The borrower must 

provide any documentation required to 

support the farm operating plan. 

(6) The borrower must not be in nonmonetary default. 

(7) The borrower must not be 

ineligible due to disqualification 

resulting from Federal crop insurance 

violation according to 7 CFR part 718. 

(8) The borrower must not become 

165 days past due before the appropriate 

Agency DSA documents are executed. 

(b) Loan eligibility. (1) Any FLP loan 

to be considered for DSA must have 

been outstanding at the time the natural 

disaster occurred. 

(2) All of the borrower’s program and 

non-program loans must be current after 

the Agency completes a DSA of the 

scheduled installment. 

(3) All FLP loans must be current or 

less than 90 days past due at the time 

the application for DSA is complete. 

(4) The Agency has not accelerated or 

applied any special servicing action 

under this part to the loan since the 

natural disaster occurred. 

(5) For any loan that will receive a 

DSA, the remaining term of the loan 


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must equal or exceed 2 years from the 

due date of the installment set-aside. 

(6) The loan must not have a DSA in 

place. 

§ 766.53 Disaster Set-Aside amount 

limitations. 

(a) The DSA amount is limited to the 

lesser of: 

(1) The first or second scheduled 

annual installment on the FLP loans due 

after the disaster occurred; or 

(2) The amount the borrower is unable 

to pay the Agency due to the disaster. 

Borrowers are required to pay any 

portion of an installment they are able 

to pay. 

(b) The amount set aside will be the 

unpaid balance remaining on the 

installment at the time the DSA is 

complete. This amount will include the 

unpaid interest and any principal that 

would be credited to the account as if 

the installment were paid on the due 

date, taking into consideration any 

payments applied to principal and 

interest since the due date. 

(c) Recoverable cost items may not be 

set aside. 

§ 766.54 Borrower application 

requirements. 

(a) Requests for DSA. (1) A borrower 

must submit a request for DSA in 

writing within eight months from the 

date the natural disaster was designated. 

(2) All borrowers must sign the DSA 

request. 

(b) Required financial information. (1) 

The borrower must submit actual 

production, income, and expense 

records for the production cycle in 

which the disaster occurred unless the 

Agency already has this information. 

(2) The Agency may request other 

information needed to make an 

eligibility determination. 

§ 766.55 Eligibility determination. 

Within 30 days of a complete DSA 

application, the Agency will determine 

if the borrower meets the eligibility 

requirements for DSA. 

§ 766.56 Security requirements. 

If, prior to executing the appropriate 

DSA Agency documents, the borrower is 

not current on all FLP loans, the 

borrower must execute and provide to 

the Agency a best lien obtainable on all 

of their assets except those listed under 

§ 766.112(b). 

§ 766.57 Borrower acceptance of Disaster 

Set-Aside. 

The borrower must execute the 

appropriate Agency documents within 

45 days after the borrower receives 

notification of Agency approval of DSA. 

§ 766.58 Installment to be set aside. 

(a) The Agency will set-aside the first 

installment due immediately after the 

disaster occurred. 

(b) If the borrower has already paid 

the installment due immediately after 

the disaster occurred, the Agency will 

set-aside the next annual installment. 

§ 766.59 Payments toward set-aside 

installments. 

(a) Interest accrual. (1) Interest will 

accrue on any principal portion of the 

set-aside installment at the same rate 

charged on the balance of the loan. 

(2) If the borrower’s set-aside 

installment is for a loan with a limited 

resource rate and the Agency modifies 

that limited resource rate, the interest 

rate on the set-aside portion will be 

modified concurrently. 

(b) Due date. The amount set-aside, 

including interest accrued on the 

principal portion of the set-aside, is due 

on or before the final due date of the 

loan. 

(c) Applying payments. The Agency 

will apply borrower payments toward 

set-aside installments first to interest 

and then to principal. 

§ 766.60 Canceling a Disaster Set-Aside. 

The Agency will cancel a DSA if: 

(a) The Agency takes any primary 

loan servicing action on the loan; 

(b) The borrower pays the current 

market value buyout in accordance with 

§ 766.113; or 

(c) The borrower pays the set-aside 

installment. 

§ 766.61 Reversal of a Disaster Set-Aside. 

If the Agency determines that the 

borrower received an unauthorized 

DSA, the Agency will reverse the DSA 

after all appeals are concluded. 

§§ 766.62–766.100 [Reserved] 

Subpart C—Loan Servicing Programs 

§ 766.101 Initial Agency notification to 

borrower of loan servicing programs. 

(a) Borrowers notified. The Agency 

will provide servicing information 

under this section to borrowers who: 

(1) Have a current farm operating plan 

that demonstrates the borrower is 

financially distressed; 

(2) Are 90 days or more past due on 

loan payments, even if the borrower has 

submitted an application for loan 

servicing as a financially distressed 

borrower; 

(3) Are in non-monetary default on 

any loan agreements; 

(4) Have filed bankruptcy; 

(5) Request this information; 

(6) Request voluntary conveyance of 

security; 

(7) Have only delinquent SA; or 

(8) Are subject to any other collection 

action, except when such action is a 

result of failure to graduate. Borrowers 

who fail to graduate when required and 

are able to do so, will be accelerated 

without providing notification of loan 

servicing options. 

(b) Form of notification. The Agency 

will notify borrowers of the availability 

of primary loan servicing programs, 

conservation contract, current market 

value buyout, debt settlement programs, 

and homestead protection as follows: 

(1) A borrower who is financially 

distressed, or current and requesting 

servicing will be provided FSA–2512 

(Appendix A to this subpart); 

(2) A borrower who is 90 days past 

due will be sent FSA–2510 (Appendix 

B to this subpart); 

(3) A borrower who is in nonmonetary or both monetary and nonmonetary default will receive FSA–2514 

(Appendix C to this subpart); 

(4) A borrower who has only 

delinquent SA will be notified of 

available loan servicing; 

(5) Notification to a borrower who 

files bankruptcy will be provided in 

accordance with subpart G of this part. 

(c) Mailing. Notices to delinquent 

borrowers or borrowers in non-monetary 

default will be sent by certified mail to 

the last known address of the borrower. 

If the certified mail is not accepted, the 

notice will be sent immediately by first 

class mail to the last known address. 

The appropriate response time will 

begin three days following the date of 

the first class mailing. For all other 

borrowers requesting the notices, the 

notices will be sent by regular mail or 

hand-delivered. 

(d) Borrower response timeframes. To 

be considered for loan servicing, a 

borrower who is: 

(1) Current or financially distressed 

may submit a complete application any 

time prior to becoming 90 days past 

due; 

(2) Ninety (90) days past due must 

submit a complete application within 60 

days from receipt of FSA–2510; 

(3) In non-monetary default with or 

without monetary default must submit a 

complete application within 60 days 

from receipt of FSA–2514. 

§ 766.102 Borrower application 

requirements. 

(a) Except as provided in paragraph 

(e) of this section, an application for 

primary loan servicing, conservation 

contract, current market value buyout, 

homestead protection, or some 

combination of these options, must 

include the following to be considered 

complete: 


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(1) Completed acknowledgment form 

provided with the Agency notification 

and signed by all borrowers; 

(2) Completed Agency application 

form; 

(3) Financial records for the 3 most 

recent years, including income tax 

returns; 

(4) The farming operation’s 

production records for the 3 most recent 

years or the years the borrower has been 

farming, whichever is less; 

(5) Documentation of compliance 

with the Agency’s environmental 

regulations contained in subpart G of 7 

CFR part 1940; 

(6) Verification of all non-farm 

income; 

(7) A current financial statement and 

the operation’s farm operating plan, 

including the projected cash flow 

budget reflecting production, income, 

expenses, and debt repayment plan. In 

the case of an entity, the entity and all 

entity members must provide current 

financial statements; and 

(8) Verification of all debts and 

collateral. 

(b) In addition to the requirements 

contained in paragraph (a) of this 

section, the borrower must submit an 

aerial photo delineating any land to be 

considered for a conservation contract. 

(c) To be considered for debt 

settlement, the borrower must provide 

the appropriate Agency form, and any 

additional information required under 

subpart B of 7 CFR part 1956. 

(d) If a borrower who submitted a 

complete application while current or 

financially distressed is renotified as a 

result of becoming 90 days past due, the 

borrower must only submit a request for 

servicing in accordance with paragraph 

(a)(1) of this section, provided all other 

information is less than 90 days old and 

is based on the current production 

cycle. Any information 90 or more days 

old or not based on the current 

production cycle must be updated. 

(e) The borrower need not submit any 

information under this section that 

already exists in the Agency’s file and 

is still current as determined by the 

Agency. 

(f) When jointly liable borrowers have 

been divorced and one has withdrawn 

from the farming operation, the Agency 

may release the withdrawing individual 

from liability, provided: 

(1) The remaining individual submits 

a complete application in accordance 

with this section; 

(2) Both parties have agreed in a 

divorce decree or property settlement 

that only the remaining individual will 

be responsible for all FLP loan 

payments; 

(3) The withdrawing individual has 

conveyed all ownership interest in the 

security to the remaining individual; 

and 

(4) The withdrawing individual does 

not have repayment ability and does not 

own any non-essential assets. 

§ 766.103 Borrower does not respond or 

does not submit a complete application. 

(a) If a borrower, who is financially 

distressed or current, requested loan 

servicing and received FSA–2512, but 

fails to respond timely and subsequently 

becomes 90 days past due, the Agency 

will notify the borrower in accordance 

with § 766.101(a)(2). 

(b) If a borrower who is 90 days past 

due and received FSA–2510, or is in 

non-monetary, or both monetary and 

non-monetary default and received 

FSA–2514, and fails to timely respond 

or does not submit a complete 

application within the 60-day 

timeframe, the Agency will notify the 

borrower by certified mail of the 

following: 

(1) The Agency’s intent to accelerate 

the loan; and 

(2) The borrower’s right to request 

reconsideration, mediation and appeal 

in accordance with 7 CFR parts 11 and 

780. 

§ 766.104 Borrower eligibility 

requirements. 

(a) A borrower must meet the 

following eligibility requirements to be 

considered for primary loan servicing: 

(1) The delinquency or financial 

distress is the result of reduced 

repayment ability due to one of the 

following circumstances beyond the 

borrower’s control: 

(i) Illness, injury, or death of a 

borrower or other individual who 

operates the farm; 

(ii) Natural disaster, adverse weather, 

disease, or insect damage which caused 

severe loss of agricultural production; 

(iii) Widespread economic conditions 

such as low commodity prices; 

(iv) Damage or destruction of property 

essential to the farming operation; or 

(v) Loss of, or reduction in, the 

borrower or spouse’s essential non-farm 

income. 

(2) The borrower does not have nonessential assets for which the net 

recovery value is sufficient to resolve 

the financial distress or pay the 

delinquent portion of the loan. 

(3) If the borrower is in non-monetary 

default, the borrower will resolve the 

non-monetary default prior to closing 

the servicing action. 

(4) The borrower has acted in good 

faith. 

(5) Financially distressed or current 

borrowers requesting servicing must pay 

a portion of the interest due on the 

loans. 

(6) The borrower must not be 

ineligible due to disqualification 

resulting from Federal crop insurance 

violation according to 7 CFR part 718. 

(b) Debtors with SA only must: 

(1) Be delinquent due to 

circumstances beyond their control; 

(2) Have acted in good faith. 

§ 766.105 Agency consideration of 

servicing requests. 

(a) Order in which Agency considers 

servicing options. The Agency will 

consider loan servicing options and 

combinations of options to maximize 

loan repayment and minimize losses to 

the Agency. The Agency will consider 

loan servicing options in the following 

order for each eligible borrower who 

requests servicing: 

(1) Conservation Contract, if 

requested; 

(2) Consolidation and rescheduling or 

reamortization; 

(3) Deferral; 

(4) Writedown; and 

(5) Current market value buyout. 

(b) Debt service margin. (1) The 

Agency will attempt to achieve a 110 

percent debt service margin for the 

servicing options listed in paragraphs 

(a)(2) through (4) of this section. 

(2) If the borrower cannot develop a 

feasible plan with the 110 percent debt 

service margin, the Agency will reduce 

the debt service margin by one percent 

and reconsider all available servicing 

authorities. This process will be 

repeated until a feasible plan has been 

developed or it has been determined 

that a feasible plan is not possible with 

a 100 percent margin. 

(3) The borrower must be able to 

develop a feasible plan with at least a 

100 percent debt service margin to be 

considered for the servicing options 

listed in paragraphs (a)(1) through (4) of 

this section. 

(c) Appraisal of borrower’s assets. The 

Agency will obtain an appraisal on: 

(1) All Agency security, non-essential 

assets, and real property unencumbered 

by the Agency that does not meet the 

criteria established in § 766.112(b), 

when: 

(i) A writedown is required to develop 

a feasible plan; 

(ii) The borrower will be offered 

current market value buyout. 

(2) The borrower’s non-essential 

assets when their net recovery value 

may be adequate to bring the delinquent 

loans current. 

§ 766.106 Agency notification of decision 

regarding a complete application. 

The Agency will send the borrower 

notification of the Agency’s decision 


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within 60 calendar days after receiving 

a complete application for loan 

servicing. 

(a) Notification to financially 

distressed or current borrowers. (1) If the 

borrower can develop a feasible plan 

and is eligible for primary loan 

servicing, the Agency will offer to 

service the account. 

(i) The borrower will have 45 days to 

accept the offer of servicing. After 

accepting the Agency’s offer, the 

borrower must execute loan agreements 

and security instruments, as 

appropriate. 

(ii) If the borrower does not accept the 

offer, the Agency will send the borrower 

another notification of the availability of 

loan servicing if the borrower becomes 

90 days past due in accordance with 

§ 766.101(a)(2). 

(2) If the borrower cannot develop a 

feasible plan, or is not eligible for loan 

servicing, the Agency will send the 

borrower the calculations used and the 

reasons for the adverse decision. 

(i) The borrower may request 

reconsideration, mediation and appeal 

in accordance with 7 CFR parts 11 and 

780 of this title. 

(ii) The Agency will send the 

borrower another notification of the 

availability of loan servicing if the 

borrower becomes 90 days past due in 

accordance with § 766.101(a)(2). 

(b) Notification to borrowers 90 days 

past due or in non-monetary default. (1) 

If the borrower can develop a feasible 

plan and is eligible for primary loan 

servicing, the Agency will offer to 

service the account. 

(i) The borrower will have 45 days to 

accept the offer of servicing. After 

accepting the Agency’s offer, the 

borrower must execute loan agreements 

and security instruments, as 

appropriate. 

(ii) If the borrower does not timely 

accept the offer, or fails to respond, the 

Agency will notify the borrower of its 

intent to accelerate the account. 

(2) If the borrower cannot develop a 

feasible plan, or is not eligible for loan 

servicing, the Agency will send the 

borrower notification within 15 days, 

including the calculations used and 

reasons for the adverse decision, of its 

intent to accelerate the account in 

accordance with subpart H of this part, 

unless the account is resolved through 

any of the following options: 

(i) The borrower may request 

reconsideration, mediation or voluntary 

meeting of creditors, or appeal in 

accordance with 7 CFR parts 11 and 

780. 

(ii) The borrower may request 

negotiation of appraisal within 30 days 

in accordance with § 766.115. 

(iii) If the net recovery value of nonessential assets is sufficient to pay the 

account current, the borrower has 90 

days to pay the account current. 

(iv) The borrower, if eligible in 

accordance with § 766.113, may buy out 

the loans at the current market value 

within 90 days. 

(v) The borrower may request 

homestead protection if the borrower’s 

primary residence was pledged as 

security by providing the information 

required under § 766.151. 

§ 766.107 Consolidation and rescheduling. 

(a) Loans eligible for consolidation. 

The Agency may consolidate OL loans 

if: 

(1) The borrower meets the loan 

servicing eligibility requirements in 

§ 766.104; 

(2) The Agency determines that 

consolidation will assist the borrower to 

repay the loans; 

(3) Consolidating the loans will bring 

the borrower’s account current or 

prevent the borrower from becoming 

delinquent; 

(4) The Agency has not referred the 

borrower’s account to OGC or the U.S. 

Attorney, and the Agency does not plan 

to refer the account to either of these 

two offices in the near future; 

(5) The borrower is in compliance 

with the Highly Erodible Land and 

Wetland Conservation requirements of 7 

CFR part 12, if applicable; 

(6) The loans are not secured by real 

estate; 

(7) The Agency holds the same lien 

position on each loan; 

(8) The Agency has not serviced the 

loans for unauthorized assistance under 

subpart F of this part; and 

(9) The loan is not currently deferred, 

as described in § 766.109, or set-aside, 

as described in subpart B of this part. 

The Agency may consolidate loans upon 

cancellation of the deferral or DSA. 

(b) Loans eligible for rescheduling. 

The Agency may reschedule loans made 

for chattel purposes, including OL, SW, 

RL, EE, or EM if: 

(1) The borrower meets the loan 

servicing eligibility requirements in 

§ 766.104; 

(2) Rescheduling the loans will bring 

the borrower’s account current or 

prevent the borrower from becoming 

delinquent; 

(3) The Agency determines that 

rescheduling will assist the borrower to 

repay the loans; 

(4) The Agency has not referred the 

borrower’s account to OGC or the U.S. 

Attorney, and the Agency does not plan 

to refer the account to either of these 

two offices in the near future; 

(5) The borrower is in compliance 

with the Highly Erodible Land and 

Wetland Conservation requirements of 7 

CFR part 12, if applicable; and 

(6) The loan is not currently deferred, 

as described in § 766.109, or set-aside, 

as described in subpart B of this part. 

The Agency may reschedule loans upon 

cancellation of the deferral or DSA. 

(c) Consolidated and rescheduled 

loan terms. (1) The Agency determines 

the repayment schedule for 

consolidated and rescheduled loans 

according to the borrower’s repayment 

ability. 

(2) The repayment period cannot 

exceed 15 years from the date of the 

consolidation and rescheduling, except 

that the repayment schedule for RL 

loans may not exceed 7 years from the 

date of rescheduling. 

(d) Consolidated and rescheduled 

loan interest rate. The interest rate of 

consolidated and rescheduled loans will 

be as follows: 

(1) The interest rate for loans made at 

the regular interest rate will be the 

lesser of: 

(i) The interest rate for that type of 

loan on the date a complete servicing 

application was received; 

(ii) The interest rate for that type of 

loan on the date of restructure; or 

(iii) The lowest original loan note rate 

on any of the original notes being 

consolidated and rescheduled. 

(2) The interest rate for loans made at 

the limited resource interest rate will be 

the lesser of: 

(i) The limited resource interest rate 

for that type of loan on the date a 

complete servicing application was 

received; 

(ii) The limited resource interest rate 

for that type of loan on the date of 

restructure; or 

(iii) The lowest original loan note rate 

on any of the original notes being 

consolidated and rescheduled. 

(3) At the time of consolidation and 

rescheduling, the Agency may reduce 

the interest rate to a limited resource 

rate, if available, if: 

(i) The borrower meets the 

requirements for the limited resource 

interest rate; and 

(ii) A feasible plan cannot be 

developed at the regular interest rate 

and maximum terms permitted in this 

section. 

(4) Loans consolidated and 

rescheduled at the limited resource 

interest rate will be subject to annual 

limited resource review in accordance 

with § 765.51 of this chapter. 

(e) Capitalizing accrued interest and 

adding protective advances to the loan 

principal. (1) The Agency capitalizes the 

amount of outstanding accrued interest 

on the loan at the time of consolidation 

and rescheduling. 


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(2) The Agency adds protective 

advances for the payment of real estate 

taxes to the principal balance at the time 

of consolidation and rescheduling. 

(3) The borrower must resolve all 

other protective advances not 

capitalized prior to closing the servicing 

actions. 

(f) Installments. If there are no 

deferred installments, the first 

installment payment under the 

consolidation and rescheduling will be 

at least equal to the interest amount 

which will accrue on the new principal 

between the date the promissory note is 

executed and the next installment due 

date. 

§ 766.108 Reamortization. 

(a) Loans eligible for reamortization. 

The Agency may reamortize loans made 

for real estate purposes, including FO, 

SW, RL, SA, EE, RHF, and EM if: 

(1) The borrower meets the loan 

servicing eligibility requirements in 

§ 766.104; 

(2) Reamortization will bring the 

borrower’s account current or prevent 

the borrower from becoming delinquent; 

(3) The Agency determines that 

reamortization will assist the borrower 

to repay the loan; 

(4) The Agency has not referred the 

borrower’s account to OGC or the U.S. 

Attorney, and the Agency does not plan 

to refer the account to either of these 

two offices in the near future; 

(5) The borrower is in compliance 

with the Highly Erodible Land and 

Wetland Conservation requirements of 7 

CFR part 12, if applicable; and 

(6) The loan is not currently deferred, 

as described in § 766.109, or set-aside, 

as described in subpart B of this part. 

The Agency may reamortize loans upon 

cancellation of the deferral or DSA. 

(b) Reamortized loan terms. (1) Except 

as provided in paragraph (b)(2), the 

Agency will reamortize loans within the 

remaining term of the original loan or 

assumption agreement unless a feasible 

plan cannot be developed or debt 

forgiveness will be required to develop 

a feasible plan. 

(2) If the Agency extends the loan 

term, the repayment period from the 

original loan date may not exceed the 

maximum number of years for the type 

of loan being reamortized in paragraphs 

(2)(i) through (iv), or the useful life of 

the security, whichever is less. 

(i) FO, SW, RL, EE real estate-type, 

and EM loans made for real estate 

purposes may not exceed 40 years from 

the date of the original note or 

assumption agreement. 

(ii) EE real estate-type loans secured 

by chattels only may not exceed 20 

years from the date of the original note 

or assumption agreement. 

(iii) RHF loans may not exceed 33 

years from the date of the original note 

or assumption agreement. 

(iv) SA loans may not exceed 25 years 

from the date of the original Shared 

Appreciation note. 

(c) Reamortized loan interest rate. The 

interest rate will be as follows: 

(1) The interest rate for loans made at 

the regular interest rate will be the 

lesser of: 

(i) The interest rate for that type of 

loan on the date a complete servicing 

application was received; 

(ii) The interest rate for that type of 

loan on the date of restructure; or 

(iii) The original loan note rate of the 

note being reamortized. 

(2) The interest rate for loans made at 

the limited resource interest rate will be 

the lesser of: 

(i) The limited resource interest rate 

for that type of loan on the date a 

complete servicing application was 

received; 

(ii) The limited resource interest rate 

for that type of loan on the date of 

restructure; or 

(iii) The original loan note rate of the 

note being reamortized. 

(3) At the time of reamortization, the 

Agency may reduce the interest rate to 

a limited resource rate, if available, if: 

(i) The borrower meets the 

requirements for the limited resource 

interest rate; and 

(ii) A feasible plan cannot be 

developed at the regular interest rate 

and maximum terms permitted in this 

section. 

(4) Loans reamortized at the limited 

resource interest rate will be subject to 

annual limited resource review in 

accordance with § 765.51 of this 

chapter. 

(5) SA payment agreements will be 

reamortized at the current SA 

amortization rate in effect on the date of 

approval or the rate on the original 

payment agreement, whichever is less. 

(d) Capitalizing accrued interest and 

adding protective advances to the loan 

principal. (1) The Agency capitalizes the 

amount of outstanding accrued interest 

on the loan at the time of 

reamortization. 

(2) The Agency adds protective 

advances for the payment of real estate 

taxes to the principal balance at the time 

of reamortization. 

(3) The borrower must resolve all 

other protective advances not 

capitalized prior to closing the 

reamortization. 

(e) Installments. If there are no 

deferred installments, the first 

installment payment under the 

reamortization will be at least equal to 

the interest amount which will accrue 

on the new principal between the date 

the promissory note is executed and the 

next installment due date. 

§ 766.109 Deferral. 

(a) Conditions for approving deferrals. 

The Agency will only consider deferral 

of loan payments if: 

(1) The borrower meets the loan 

servicing eligibility requirements in 

§ 766.104; 

(2) Rescheduling, consolidation, and 

reamortization of all the borrower’s 

loans, will not result in a feasible plan 

with 110 percent debt service margin; 

(3) The need for deferral is temporary; 

and 

(4) The borrower develops feasible 

first-year deferral and post-deferral farm 

operating plans subject to the following: 

(i) The deferral will not create 

excessive net cash reserves beyond that 

necessary to develop a feasible plan. 

(ii) The Agency will consider a partial 

deferral if deferral of the total Agency 

payment would result in the borrower 

developing more cash availability than 

necessary to meet debt repayment 

obligations. 

(b) Deferral period. (1) The deferral 

term will not exceed 5 years and will be 

determined based on the post-deferral 

plan that results in the: 

(i) Greatest improvement over the first 

year cash available to service FLP debt; 

(ii) The shortest possible deferral 

period. 

(2) The Agency will distribute interest 

accrued on the deferred principal 

portion of the loan equally to payments 

over the remaining loan term after the 

deferral period ends. 

(c) Agency actions when borrower’s 

repayment ability improves. (1) If during 

the deferral period the borrower’s 

repayment ability has increased to allow 

the borrower to make payments on the 

deferred loans, the borrower must make 

supplemental payments, as determined 

by the Agency. If the borrower agrees to 

make supplemental payments, but does 

not do so, the borrower will be 

considered to be in non-monetary 

default. 

(2) If the Agency determines that the 

borrower’s improved repayment ability 

will allow graduation, the Agency will 

require the borrower to graduate in 

accordance with part 765, subpart C of 

this chapter. 

(d) Associated loan servicing. (1) The 

Agency must cancel an existing deferral 

if the Agency approves any new primary 

loan servicing action. 

(2) Loans deferred will also be 

serviced in accordance with §§ 766.107, 

766.108 and 766.111, as appropriate. 


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63322 Federal Register / Vol. 72, No. 216 / Thursday, November 8, 2007 / Rules and Regulations 

§ 766.110 Conservation Contract. 

(a) General. (1) A debtor with only SA 

or Non-program loans is not eligible for 

a Conservation Contract. However, an 

SA or Non-program loan may be 

considered for a Conservation Contract 

if the borrower also has program loans. 

(2) A current or financially distressed 

borrower may request a Conservation 

Contract at any time prior to becoming 

90 days past due. 

(3) A delinquent borrower may 

request a Conservation Contract during 

the same 60-day time period in which 

the borrower may apply for primary 

loan servicing. The borrower eligibility 

requirements in § 766.104 will apply. 

(4) A Conservation Contract may be 

established for conservation, recreation, 

and wildlife purposes. 

(5) The land under a Conservation 

Contract cannot be used for the 

production of agricultural commodities 

during the term of the contract. 

(6) Only loans secured by the real 

estate that will be subject to the 

easement, may be considered for a 

Conservation Contract. 

(b) Eligible lands. The following types 

of lands are eligible to be considered for 

a Conservation Contract by the 

Conservation Contract review team: 

(1) Wetlands or highly erodible lands; 

and 

(2) Uplands that meet any one of the 

following criteria: 

(i) Land containing aquatic life, 

endangered species, or wildlife habitat 

of local, State, tribal, or national 

importance; 

(ii) Land in 100-year floodplains; 

(iii) Areas of high water quality or 

scenic value; 

(iv) Historic or cultural properties 

listed in or eligible for the National 

Register of Historic Places; 

(v) Aquifer recharge areas of local, 

regional, State, or tribal importance; 

(vi) Buffer areas necessary for the 

adequate protection of proposed 

Conservation Contract areas; 

(vii) Areas that contain soils generally 

not suited for cultivation; or 

(viii) Areas within or adjacent to 

Federal, State, tribal, or locally 

administered conservation areas. 

(c) Unsuitable acreage. Acreage is 

unsuitable for Conservation Contract if: 

(1) It is not suited or eligible for the 

program due to legal restrictions; 

(2) It has on-site or off-site conditions 

that prohibit the use of the land for 

conservation, wildlife, or recreational 

purposes; or 

(3) The Conservation Contract review 

team determines that the land is not 

suitable for conservation, wildlife, or 

recreational purposes. 

(d) Conservation Contract terms. The 

borrower selects the term of the 

contract, which may be 10, 30, or 50 

years. 

(e) Conservation management plan. 

The Agency, through the 

recommendations of the Conservation 

Contract review team, is responsible for 

approving the conservation management 

plan. 

(f) Management authority. The 

Agency has enforcement authority over 

the Conservation Contract. The Agency, 

however, may delegate contract 

management to another entity if doing 

so is in the Agency’s interest. 

(g) Limitations. The Conservation 

Contract must meet the following 

conditions: 

(1) Result in a feasible plan for current 

borrowers; or 

(2) Result in a feasible plan with or 

without primary loan servicing for 

financially distressed or delinquent 

borrowers; and 

(3) Improve the borrower’s ability to 

repay the remaining balance of the loan. 

(h) Maximum debt reduction for a 

financially distressed or current 

borrower. The amount of debt reduction 

by a Conservation Contract is calculated 

as follows: 

(1) Divide the contract acres by the 

total acres that secure the borrower’s 

FLP loans to determine the contract 

acres percentage. 

Contract

divided

 acres Percent by Total acres of contract ac = res to total acres

(2) Multiply the borrower’s total 

unpaid FLP loan balance (principal, 

interest, and recoverable costs already 

paid by the Agency) by the percentage 

calculated under paragraph (h)(1) of this 

section to determine the amount of FLP 

debt that is secured by the contract 

acreage. 

Total Percent FLP FLP debt calculated under (h)(1) debt se

× =

cured by contract acres

(3) Multiply the borrower’s total 

unpaid FLP loan balance (principal, 

interest, and recoverable costs already 

paid by the Agency) by 33 percent. 

Total FLP debt

× = 33%

(4) The lesser of the amounts 

calculated in paragraphs (h)(2) and 

(h)(3) of this section is the maximum 

amount of debt reduction for a 50-year 

contract. 

(5) The borrower will receive 60 

percent of the amount calculated in 

paragraph (h)(4) of this section for a 30- 

year contract. 


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Result from (h)(4) debt reduction for a 30-yea

× = 60%

Maximum r contract

(6) The borrower will receive 20 

percent of the amount calculated in 

paragraph (h)(4) of this section for a 10- 

year contract. 

(i) Maximum debt reduction for a 

delinquent borrower. The amount of 

debt reduction by a Conservation 

Contract is calculated as follows: 

(1) Divide the contract acres by the 

total acres that secure the borrower’s 

FLP loans to determine the contract 

acres percentage. 

Contract acres by Total acres 

divided

Percent of contract ac = res to total acres 

(2) Multiply the borrower’s total 

unpaid FLP loan balance (principal, 

interest, and recoverable costs already 

paid by the Agency) by the percentage 

calculated in paragraph (i)(1) of this 

section to determine the amount of FLP 

debt that is secured by the contract 

acreage. 

Total FLP debt calculated in (i)(1) debt secur

× =

Percent FLP ed by contract acres

(3) Multiply the market value of the 

total acres, less contributory value of 

any structural improvements, that 

secure the borrower’s FLP loans by the 

percent calculated in paragraph (i)(1) of 

this section to determine the current 

value of the acres in the contract. 

Market value of total acres

less contributory value of

structural improvements

 calculated in (i)(1)

× =

Percent Market value of

acres in the contract

(4) Subtract the market value of the 

contract acres calculated in paragraph 

(i)(3) of this section from the FLP debt 

secured by the contract acres as 

calculated in paragraph (i)(2) of this 

section. 

Result from (i)(2) Result from (i)(3) − = Difference

(5) Select the greater of the amounts 

calculated in either paragraphs (i)(3) 

and (i)(4) of this section. 

(6) The lesser of the amounts 

calculated in paragraphs (i)(2) and (i)(5) 

of this section will be the maximum 

amount of debt reduction for a 50-year 

contract term. 

(7) The borrower will receive 60 

percent of the amount calculated in 

paragraph (i)(6) of this section for a 30- 

year contract term. 

Result from (i)(6) debt cancellation for a 30-

× = 60%

Maximum year term

(8) The borrower will receive 20 

percent of the amount calculated in 

paragraph (i)(6) of this section for a 10- 

year contract term. 


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Result from (i)(6) debt cancellation for a 10-

× = 20%

Maximum year term

(j) Conservation Contract Agreement. 

The borrower must sign the 

Conservation Contract Agreement 

establishing the contract’s terms and 

conditions. 

(k) Transferring title to land under 

Conservation Contract. If the borrower 

or any subsequent landowner transfers 

title to the property, the Conservation 

Contract will remain in effect for the 

duration of the contract term. 

(l) Borrower appeals of technical 

decisions. Borrower appeals of the 

Natural Resources Conservation 

Service’s (NRCS) technical decisions 

made in connection with a Conservation 

Contract, will be handled in accordance 

with applicable NRCS regulations. 

Other aspects of the denial of a 

conservation contract may be appealed 

in accordance with 7 CFR parts 11 and 

780. 

§ 766.111 Writedown. 

(a) Eligibility. The Agency will only 

consider a writedown if the borrower: 

(1) Meets the eligibility criteria in 

§ 766.104; 

(2) Is delinquent; 

(3) Has not previously received debt 

forgiveness on any FLP direct loan; and 

(4) Complies with the Highly Erodible 

Land and Wetland Conservation 

requirements of 7 CFR part 12. 

(b) Conditions. (1) Rescheduling, 

consolidation, reamortization, deferral 

or some combination of these options on 

all of the borrower’s loans would not 

result in a feasible plan with a 110 

percent debt service margin. If a feasible 

plan, including writedown is achieved 

with a debt service margin of 101 

percent or more, the Agency will 

determine if a feasible plan can be 

achieved without a writedown. If a 

feasible plan is achieved with and 

without a writedown and the borrower 

meets all the eligibility requirements, 

both options will be offered and the 

borrower may choose one option. 

(2) The present value of the 

restructured loan must be greater than 

or equal to the net recovery value of 

Agency security and any non-essential 

assets. 

(3) The writedown amount, excluding 

debt reduction received through 

Conservation Contract, does not exceed 

$300,000. 

(4) A borrower who owns real estate 

must execute an SAA in accordance 

with § 766.201. 

(c) Associated loan servicing. Loans 

written down will also be serviced in 

accordance with §§ 766.107 and 

766.108, as appropriate. 

§ 766.112 Additional security for 

restructured loans. 

(a) If the borrower is delinquent prior 

to restructuring, the borrower, and all 

entity members in the case of an entity, 

must execute and provide to the Agency 

a lien on all of their assets, except as 

provided in paragraph (b) of this 

section, when the Agency is servicing a 

loan. 

(b) The Agency will take the best lien 

obtainable on all assets the borrower 

owns, except: 

(1) When taking a lien on such 

property will prevent the borrower from 

obtaining credit from other sources; 

(2) When the property could have 

significant environmental problems or 

costs as described in subpart G of 7 CFR 

part 1940; 

(3) When the Agency cannot obtain a 

valid lien; 

(4) When the property is subsistence 

livestock, cash, special collateral 

accounts the borrower uses for the 

farming operation, retirement accounts, 

personal vehicles necessary for family 

living, household contents, or small 

equipment such as hand tools and lawn 

mowers; or 

(5) When a contractor holds title to a 

livestock or crop enterprise, or the 

borrower manages the enterprise under 

a share lease or share agreement. 

§ 766.113 Buyout of loan at current market 

value. 

(a) Borrower eligibility. A delinquent 

borrower may buy out the borrower’s 

FLP loans at the current market value of 

the loan security, including security not 

in the borrower’s possession, and all 

non-essential assets if: 

(1) The borrower has not previously 

received debt forgiveness on any other 

FLP direct loan; 

(2) The borrower has acted in good 

faith; 

(3) The borrower does not have nonessential assets for which the net 

recovery value is sufficient to pay the 

account current; 

(4) The borrower is unable to develop 

a feasible plan through primary loan 

servicing programs or a Conservation 

Contract, if requested; 

(5) The present value of the 

restructured loans is less than the net 

recovery value of Agency security; 

(6) The borrower pays the amount 

required in a lump sum without 

guaranteed or direct credit from the 

Agency; and 

(7) The amount of debt forgiveness 

does not exceed $300,000. 

(b) Buyout time frame. After the 

Agency offers current market value 

buyout of the loan, the borrower has 90 

days from the date of Agency 

notification to pay that amount. 

§ 766.114 State-certified mediation or 

voluntary meeting of creditors. 

(a) A borrower who is unable to 

develop a feasible plan but is otherwise 

eligible for primary loan servicing may 

request: 

(1) State-certified mediation; or 

(2) Voluntary meeting of creditors 

when a State does not have a certified 

mediation program. 

(b) Any negotiation of the Agency’s 

appraisal must be completed before 

State-certified mediation or voluntary 

meeting of creditors. 

§ 766.115 Challenging the Agency 

appraisal. 

(a) A borrower considered for primary 

loan servicing who does not agree with 

the Agency’s appraisal of the borrower’s 

assets may: 

(1) Obtain a technical appraisal 

review of the Agency’s appraisal and 

provide it at the reconsideration or 

appeal hearing; 

(2) Obtain an independent appraisal 

completed in accordance with § 761.7 as 

part of the appeals process. The 

borrower must: 

(i) Pay for this appraisal; 

(ii) Choose which appraisal will be 

used in Agency calculations, if the 

difference between the two appraisals is 

five percent or less. 

(3) Negotiate the Agency’s appraisal 

by obtaining a second appraisal. 

(i) If the difference between the two 

appraisals is five percent or less, the 

borrower will choose the appraisal to be 

used in Agency calculations. 

(ii) If the difference between the two 

appraisals is greater than five percent, 

the borrower may request a third 

appraisal. The Agency and the borrower 

will share the cost of the third appraisal 

equally. The average of the two 

appraisals closest in value will serve as 

the final value. 

(iii) A borrower may request a 

negotiated appraisal only once in 

connection with an application for 

primary loan servicing. 

(iv) The borrower may not appeal a 

negotiated appraisal. 


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(b) If the appraised value of the 

borrower’s assets changes as a result of 

the appealed appraisal or the negotiated 

appraisal, the Agency will reconsider its 

previous loan servicing decision using 

the new appraisal value. 

(c) If the appeal process results in a 

determination that the borrower is 

eligible for primary loan servicing, the 

Agency will use the information utilized 

to make the appeal decision, unless 

stated otherwise in the appeal decision 

letter. 

§§ 766.116–766.150 [Reserved] 


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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 


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BILLING CODE 3410–05–P 


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Appendix B to Subpart C of Part 766—

Notice of Availability of Loan Servicing 

to Borrowers Who Are 90 Days Past 

Due 


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Appendix C to Subpart C of Part 766—

Notice of Availability of Loan Servicing 

to Borrowers Who Are in NonMonetary Default 


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BILLING CODE 3410–05–C 

Subpart D—Homestead Protection 

Program 

§ 766.151 Applying for Homestead 

Protection. 

(a) Pre-acquisition—(1) Notification. If 

the borrower requested primary loan 

servicing but cannot develop a feasible 

plan, the Agency will notify the 

borrower of any additional information 

needed to process the homestead 

protection request. The borrower must 

provide this information within 30 days 

of Agency notification. 

(2) Borrower does not respond. If the 

borrower does not timely provide the 

information requested, the Agency will 

deny the homestead protection request 

and provide appeal rights. 

(3) Application requirements. A 

complete application for homestead 

protection will include: 

(i) Updates to items required under 

§ 766.102; 

(ii) Information required under 

§ 766.353; and 

(iii) Identification of land and 

buildings to be considered. 

(b) Post-acquisition—(1) Notification. 

After the Agency acquires title to the 

real estate property, the Agency will 

notify the borrower of the availability of 

homestead protection. The borrower 

must submit a complete application 

within 30 days of Agency notification. 

(2) Borrower does not respond. If the 

borrower does not respond to the 

Agency notice, the Agency will dispose 

of the property in accordance with 7 

CFR part 767. 

(3) Application requirements. A 

complete application for homestead 

protection will include: 

(i) Updates to items required under 

§ 766.102; and 

(ii) Identification of land and 

buildings to be considered. 

§ 766.152 Eligibility. 

(a) Property. (1) The principal 

residence and the adjoining land of up 

to 10 acres, must have served as real 

estate security for the FLP loan and may 

include existing farm service buildings. 

Homestead protection does not apply if 

the FLP loans were secured only by 

chattels. 

(2) The applicant may propose a 

homestead protection site. Any 

proposed site is subject to Agency 

approval. 

(3) The proposed homestead 

protection site must meet all State and 

local requirements for division into a 

separate legal lot. 

(4) Where voluntary conveyance of 

the property to the Agency is required 

to process the homestead protection 

request, the Agency will process any 

request for voluntary conveyance 

according to § 766.353. 

(b) Applicant. To be eligible for 

homestead protection, the applicant: 

(1) Must be the owner, or former 

owner from whom the Agency acquired 

title of the property pledged as security 

for an FLP loan. For homestead 

protection purposes, an owner or former 

owner includes: 

(i) A member of an entity who is or 

was personally liable for the FLP loan 

secured by the homestead protection 

property when the applicant or entity 

held fee title to the property; or 

(ii) A member of an entity who is or 

was personally liable for the FLP loan 

that possessed and occupied a separate 

dwelling on the security property; 

(2) Must have earned gross farm 

income commensurate with: 

(i) The size and location of the farm; 

and 

(ii) The local agricultural conditions 

in at least 2 calendar years during the 

6-year period immediately preceding 

the calendar year in which the applicant 

applied for homestead protection; 

(3) Must have received 60 percent of 

gross income from farming in at least 

two of the 6 years immediately 

preceding the year in which the 

applicant applied for homestead 

protection; 

(4) Must have lived in the home 

during the 6-year period immediately 

preceding the year in which the 

applicant applied for homestead 

protection. The applicant may have left 

the home for not more than 12 months 

if it was due to circumstances beyond 

their control; 

(5) Must demonstrate sufficient 

income to make rental payments on the 

homestead property for the term of the 

lease, and maintain the property in good 

condition. The lessee will be 

responsible for any normal 

maintenance; and 

(6) Must not be ineligible due to 

disqualification resulting from Federal 

crop insurance violation according to 7 

CFR part 718. 

§ 766.153 Homestead Protection 

transferability. 

Homestead protection rights are not 

transferable or assignable, unless the 

eligible party dies or becomes legally 

incompetent, in which case the 

homestead protection rights may be 

transferred to the spouse only, upon the 

spouse’s agreement to comply with the 

terms and conditions of the lease. 

§ 766.154 Homestead Protection leases. 

(a) General. (1) The Agency may 

approve a lease-purchase agreement on 

the appropriate Agency form subject to 

obtaining title to the property. 

(2) If a third party obtains title to the 

property: 

(i) The applicant and the property are 

no longer eligible for homestead 

protection; 


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(ii) The Agency will not implement 

any outstanding lease-purchase 

agreement. 

(3) The borrower may request 

homestead protection for property 

subject to third party redemption rights. 

In such case, homestead protection will 

not begin until the Agency obtains title 

to the property. 

(b) Lease terms and conditions. (1) 

The amount of rent will be based on 

equivalent rents charged for similar 

residential properties in the area in 

which the dwelling is located. 

(2) All leases will include an option 

to purchase the homestead protection 

property as described in paragraph (c) of 

this section. 

(3) The lease term will not be less 

than 3 years and will not exceed 5 years. 

(4) The lessee must agree to make 

lease payments on time and maintain 

the property. 

(5) The lessee must cooperate with 

Agency efforts to sell the remaining 

portion of the farm. 

(c) Lease-purchase options. (1) The 

lessee may exercise in writing the 

purchase option and complete the 

homestead protection purchase at any 

time prior to the expiration of the lease 

provided all lease payments are current. 

(2) The purchase price is the market 

value of the property when the option 

is exercised as determined by a current 

appraisal obtained by the Agency. 

(3) The lessee may purchase 

homestead protection property with 

cash or other credit source. 

(4) The lessee may receive Agency 

Non-program financing provided: 

(i) The lessee has not received 

previous debt forgiveness; 

(ii) The Agency has funds available to 

finance the purchase of homestead 

protection property; and 

(iii) The lessee demonstrates an 

ability to repay such an FLP loan. 

(d) Lease terminations. The Agency 

may terminate the lease if the lessee 

does not cure any lease defaults within 

30 days of Agency notification. 

(e) Appraisal of homestead protection 

property. The Agency will use an 

appraisal obtained within six months 

from the date of the application for 

considering homestead protection. If a 

current appraisal does not exist, the 

applicant will select an independent 

real estate appraiser from a list of 

appraisers approved by the Agency. 

§ 766.155 Conflict with State law. 

If there is a conflict between a 

borrower’s homestead protection rights 

and any provisions of State law relating 

to redemption rights, the State law 

prevails. 

§§ 766.156–766.200 [Reserved] 

Subpart E—Servicing Shared 

Appreciation Agreements and Net 

Recovery Buyout Agreements 

§ 766.201 Shared Appreciation Agreement. 

(a) When a SAA is required. The 

Agency requires a borrower to enter into 

a SAA with the Agency covering all real 

estate security when the borrower: 

(1) Owns any real estate that serves or 

will serve as loan security; and 

(2) Accepts a writedown in 

accordance with § 766.111. 

(b) When SAA is due. The borrower 

must repay the calculated amount of 

shared appreciation after a term of 5 

years from the date of the writedown, or 

earlier if: 

(1) The borrower sells or conveys all 

or a portion of the Agency’s real estate 

security, unless real estate is conveyed 

upon the death of a borrower to a 

spouse who will continue farming; 

(2) The borrower repays or satisfies all 

FLP loans; 

(3) The borrower ceases farming; or 

(4) The Agency accelerates the 

borrower’s loans. 

§ 766.202 Determining the shared 

appreciation due. 

(a) The value of the real estate 

security at the time of maturity of the 

SAA (market value) will be the 

appraised value of the security at the 

highest and best use, less the increase in 

the value of the security resulting from 

capital improvements added during the 

term of the SAA (contributory value). 

The market value of the real estate 

security property will be determined 

based on a current appraisal completed 

within the previous 12 months in 

accordance with § 761.7 of this chapter, 

and subject to the following: 

(1) Prior to completion of the 

appraisal, the borrower will identify any 

capital improvements that have been 

added to the real estate security since 

the execution of the SAA. 

(2) The appraisal must specifically 

identify the contributory value of capital 

improvements made to the real estate 

security during the term of the SAA to 

make deductions for that value. 

(3) For calculation of shared 

appreciation recapture, the contributory 

value of capital improvements added 

during the term of the SAA will be 

deducted from the market value of the 

property. Such capital improvements 

must also meet at least one of the 

following criteria: 

(i) It is the borrower’s primary 

residence. If the new residence is 

affixed to the real estate security as a 

replacement for a residence which 

existed on the security property when 

the SAA was originally executed, or, the 

living area square footage of the original 

residence was expanded, only the value 

added to the real property by the new 

or expanded portion of the original 

residence (if it added value) will be 

deducted from the market value. 

(ii) It is an improvement to the real 

estate with a useful life of over one year 

and is affixed to the property, the 

following conditions must be met: 

(A) The item must have been 

capitalized and not taken as an annual 

operating expense on the borrower’s 

Federal income tax returns. The 

borrower must provide copies of 

appropriate tax returns to verify that 

capital improvements claimed for 

shared appreciation recapture reduction 

are capitalized. 

(B) If the new item is affixed to the 

real estate as a replacement for an item 

that existed on the real estate at the time 

the SAA was originally executed, only 

the value added by the new item will be 

deducted from the market value. 

(b) In the event of a partial sale, an 

appraisal of the property being sold may 

be required to determine the market 

value at the time the SAA was signed if 

such value cannot be obtained through 

another method. 

§ 766.203 Payment of recapture. 

(a) The borrower must pay on the due 

date or 30 days from Agency 

notification, whichever is later: 

(1) Seventy-five percent of the 

appreciation in the real estate security if 

the agreement is triggered within 4 years 

or less from the date of the writedown; 

or 

(2) Fifty percent of such appreciation 

if the agreement is triggered more than 

4 years from the date of the writedown 

or when the agreement matures. 

(b) If the borrower sells a portion of 

the security, the borrower must pay 

shared appreciation only on the portion 

sold. Shared appreciation on the 

remaining portion will be due in 

accordance with paragraph (a) of this 

section. 

(c) The amount of recapture cannot 

exceed the amount of the debt written 

off through debt writedown. 

§ 766.204 Amortization of recapture. 

(a) The Agency will amortize the 

recapture into a Shared Appreciation 

Payment Agreement provided the 

borrower: 

(1) Has not ceased farming and the 

borrower’s account has not been 

accelerated; 

(2) Provides a complete application in 

accordance with § 764.51(b), by the 

recapture due date or within 60 days of 


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Agency notification of the amount of 

recapture due, whichever is later; 

(3) Is unable to pay the recapture and 

cannot obtain funds from any other 

source; 

(4) Develops a feasible plan that 

includes repayment of the shared 

appreciation amount; 

(5) Provides a lien on all assets, 

except those listed in § 766.112(b); and 

(6) Signs loan agreements and security 

instruments as required. 

(b) If the borrower later becomes 

delinquent or financially distressed, 

reamortization of the Shared 

Appreciation Payment Agreement can 

be considered under subpart C of this 

part. 

§ 766.205 Shared Appreciation Payment 

Agreement rates and terms. 

(a) The interest rate for Shared 

Appreciation Payment Agreements is 

the Agency’s SA amortization rate. 

(b) The term of the Shared 

Appreciation Payment Agreement is 

based on the borrower’s repayment 

ability and the useful life of the security. 

The term will not exceed 25 years. 

§ 766.206 Net Recovery Buyout Recapture 

Agreement. 

(a) Servicing existing Net Recovery 

Buyout Recapture Agreements. Prior to 

July 3, 1996, the Agency was authorized 

to offer borrowers buy out their loans at 

the net recovery value. A Net Recovery 

Buyout Agreement was required for 

borrowers who bought out their loans at 

the net recovery value. The Agency 

services existing Net Recovery Buyout 

Recapture Agreements as described in 

this section. 

(b) Requirements and terms. (1) The 

term of a Net Recovery Buyout 

Recapture Agreement is 10 years. Net 

Recovery Buyout Recapture Agreements 

are secured by a lien on the former 

borrower’s real estate. 

(2) If the former borrower sells or 

conveys real estate within the 10-year 

term, the former borrower must repay 

the Agency the lesser of: 

(i) The market value of the real estate 

parcel at the time of sale or conveyance, 

as determined by an Agency appraisal, 

minus the portion of the recovery value 

of the real estate paid to the Agency in 

the buyout; 

(ii) The market value of the real estate 

parcel at the time of the sale or 

conveyance, as determined by an 

Agency appraisal, minus: 

(A) The unpaid balance of prior liens 

at the time of the sale or conveyance; 

and 

(B) The net recovery value of the real 

estate the borrower paid to the Agency 

in the buyout if this amount has not 

been accounted for as a prior lien; 

(iii) The total amount of the FLP debt 

the Agency wrote off for loans secured 

by real estate. 

(3) If the former borrower does not 

pay the amount due, the Agency will 

liquidate the Net Recovery Buyout 

account in accordance with subpart H of 

this part. 

(4) If the former borrower does not 

sell or convey the real estate within the 

10-year term, no recapture is due. 

§§ 766.207–766.250 [Reserved] 

Subpart F—Unauthorized Assistance 

§ 766.251 Repayment of unauthorized 

assistance. 

(a) Except where otherwise specified, 

the borrower is responsible for repaying 

any unauthorized assistance in full 

within 90 days of Agency notice. The 

Agency may reverse any unauthorized 

loan servicing actions, when possible. 

(b) The borrower has the opportunity 

to meet with the Agency to discuss or 

refute the Agency’s findings. 

§ 766.252 Unauthorized assistance 

resulting from submission of false 

information. 

A borrower is ineligible for continued 

Agency assistance if the borrower, or a 

third party on the borrower’s behalf, 

submits information to the Agency that 

the borrower knows to be false. 

§ 766.253 Unauthorized assistance 

resulting from submission of inaccurate 

information by borrower or Agency error. 

(a) Borrower options. (1) The borrower 

may repay the amount of the 

unauthorized assistance in a lump sum 

within 90 days of Agency notice. 

(2) If the borrower is unable to repay 

the entire amount in a lump sum, the 

Agency will accept partial repayment of 

the unauthorized assistance within 90 

days of Agency notice to the extent of 

the borrower’s ability to repay. 

(3) If the borrower is unable to repay 

all or part of the unauthorized amount, 

the loan will be converted to a Nonprogram loan under the following 

conditions: 

(i) The borrower did not provide false 

information; 

(ii) It is in the interest of the Agency; 

(iii) The debt will be subject to the 

interest rate for Non-program loans; 

(iv) The debt will be serviced as a 

Non-program loan; 

(v) The term of the Non-program loan 

will be as short as feasible, but in no 

case will exceed: 

(A) The remaining term of the FLP 

loan; 

(B) Twenty-five (25) years for real 

estate loans; or 

(C) The life of the security for chattel 

loans. 

(b) Borrower refusal to pay. If the 

borrower is able to pay the unauthorized 

assistance amount but refuses to do so, 

the Agency will notify the borrower of 

the availability of loan servicing in 

accordance with subpart C of this part. 

§§ 766.254–766.300 [Reserved] 

Subpart G—Loan Servicing For 

Borrowers in Bankruptcy 

§ 766.301 Notifying borrower in 

bankruptcy of loan servicing. 

If a borrower files for bankruptcy, the 

Agency will provide written notification 

to the borrower’s attorney with a copy 

to the borrower as follows: 

(a) Borrower not previously notified. 

The Agency will provide notice of all 

loan servicing options available under 

subpart C of this part, if the borrower 

has not been previously notified of these 

options. 

(b) Borrower with prior notification. If 

the borrower received notice of all loan 

servicing options available under 

subpart C of this part prior to the time 

of bankruptcy filing but all loan 

servicing was not completed, the 

Agency will provide notice of any 

remaining loan servicing options 

available. 

§ 766.302 Loan servicing application 

requirements for borrowers in bankruptcy. 

(a) Borrower not previously notified. 

To be considered for loan servicing, the 

borrower or borrower’s attorney must 

sign and return the appropriate response 

form and any forms or information 

requested by the Agency within 60 days 

of the date of receipt of Agency notice 

on loan servicing options. 

(b) Borrower previously notified. To 

be considered for continued loan 

servicing, the borrower or borrower’s 

attorney must sign and return the 

appropriate response form and any 

forms or information requested by the 

Agency within the greater of: 

(1) Sixty days after the borrower’s 

attorney received the notification of any 

remaining loan servicing options; or 

(2) The remaining time from the 

Agency’s previous notification of all 

servicing options that the Agency 

suspended when the borrower filed 

bankruptcy. 

(c) Court approval. The borrower is 

responsible for obtaining court approval 

prior to exercising any available 

servicing rights. 

§ 766.303 Processing loan servicing 

requests from borrowers in bankruptcy. 

(a) Considering borrower requests for 

servicing. Any request for servicing is 

the borrower’s acknowledgment that the 

Agency will not interfere with any 


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rights or protections under the 

Bankruptcy Code and its automatic stay 

provisions. 

(b) Borrowers with confirmed 

bankruptcy plans. If a plan is confirmed 

before servicing and any appeal is 

completed under 7 CFR part 11, the 

Agency will complete the servicing or 

appeals process and may consent to a 

post-confirmation modification of the 

plan if it is consistent with the 

Bankruptcy Code and subpart C of this 

part, as appropriate. 

(c) Chapter 7 borrowers. A borrower 

filing for bankruptcy under chapter 7 of 

the Bankruptcy Code may not receive 

primary loan servicing unless the 

borrower reaffirms the entire FLP debt. 

A borrower who filed chapter 7 does not 

have to reaffirm the debt in order to be 

considered for homestead protection. 

§§ 766.304–766.350 [Reserved] 

Subpart H—Loan Liquidation 

§ 766.351 Liquidation. 

(a) General. (1) When a borrower 

cannot or will not meet a loan 

obligation, the Agency will consider 

liquidating the borrower’s account in 

accordance with this subpart. 

(2) The Agency will charge protective 

advances against the borrower’s account 

as necessary to protect the Agency’s 

interests during liquidation in 

accordance with § 765.203 of this 

chapter. 

(3) When no surviving family member 

or third party assumes or repays a 

deceased borrower’s loan in accordance 

with part 765, subpart J, of this chapter, 

or when the estate does not otherwise 

fully repay or sell loan security to repay 

a deceased borrower’s FLP loans, the 

Agency will liquidate the security as 

quickly as possible in accordance with 

State and local requirements. 

(b) Liquidation for Program borrowers. 

(1) If the borrower does not apply, does 

not accept, or is not eligible for primary 

loan servicing, conservation contract, 

market value buyout or homestead 

protection, and all administrative 

appeals are concluded, the Agency will 

accelerate the borrower’s account in 

accordance with §§ 766.355 and 

766.356, as appropriate. 

(2) Borrowers may voluntarily 

liquidate their security in accordance 

with §§ 766.352, 766.353 and 766.354. 

In such case, the Agency will: 

(i) Not delay involuntary liquidation 

action. 

(ii) Notify the borrower in accordance 

with subpart C of this part, prior to 

acting on the request for voluntary 

liquidation, if the conditions of 

paragraph (b)(1) of this section have not 

been met. 

(c) Liquidation for Non-program 

borrowers. If a borrower has both 

program and Non-program loans, the 

borrower’s account will be handled in 

accordance with paragraph (b) of this 

section. If a borrower with only Nonprogram loans is in default, the 

borrower may liquidate voluntarily, 

subject to the following: 

(1) The Agency may delay involuntary 

liquidation actions when in the 

Agency’s financial interest for a period 

not to exceed 60 days. 

(2) The borrower must obtain the 

Agency’s consent prior to the sale of the 

property. 

(3) If the borrower will not pay the 

Agency in full, the minimum sales price 

must be the market value of the property 

as determined by the Agency. 

(4) The Agency will accept a 

conveyance offer only when it is in the 

Agency’s financial interest. 

(5) If a Non-program borrower does 

not cure the default, or cannot or will 

not voluntarily liquidate, the Agency 

will accelerate the loan. 

§ 766.352 Voluntary sale of real property 

and chattel. 

(a) General. A borrower may 

voluntarily sell real property or chattel 

security to repay FLP debt in lieu of 

involuntary liquidation if all applicable 

requirements of this section are met. 

Partial dispositions are handled in 

accordance with part 765, subparts G 

and H, of this chapter. 

(1) The borrower must sell all real 

property and chattel that secure FLP 

debt until the debt is paid in full or until 

all security has been liquidated. 

(2) The Agency must approve the sale 

and approve the use of proceeds. 

(3) The sale proceeds are applied in 

order of lien priority, except that 

proceeds may be used to pay customary 

costs appropriate to the transaction 

provided: 

(i) The costs are reasonable in 

amount; 

(ii) The borrower is unable to pay the 

costs from personal funds or have the 

purchaser pay; 

(iii) The costs must be paid to 

complete the sale; 

(iv) Costs are not for postage and 

insurance of the note while in transit 

when required for the Agency to present 

the promissory note to the recorder to 

obtain a release of a portion of the real 

property from the mortgage. 

(4) The Agency will approve the sale 

of property when the proceeds do not 

cover the borrower’s full debt only if: 

(i) The sales price must be equal to or 

greater than the market value of the 

property; and 

(ii) The sale is in the Agency’s 

financial interest. 

(5) If an unpaid loan balance remains 

after the sale, the Agency will continue 

to service the loan in accordance with 

subpart B of 7 CFR part 1956. 

(b) Voluntary sale of chattel. If the 

borrower complies with paragraph (a) of 

this section, the borrower may sell 

chattel security by: 

(1) Public sale if the borrower obtains 

the agreement of lienholders as 

necessary to complete the public sale; or 

(2) Private sale if the borrower: 

(i) Sells all of the security for not less 

than the market value; 

(ii) Obtains the agreement of 

lienholders as necessary to complete the 

sale; 

(iii) Has a buyer who is ready and able 

to purchase the property; and 

(iv) Obtains the Agency’s agreement 

for the sale. 

§ 766.353 Voluntary conveyance of real 

property. 

(a) Requirements for conveying real 

property. The borrower must supply the 

Agency with the following: 

(1) An Agency application form; 

(2) A current financial statement. If 

the borrower is an entity, all entity 

members must provide current financial 

statements; 

(3) Information on present and future 

income and potential earning ability; 

(4) A warranty deed or other deed 

acceptable to the Agency; 

(5) A resolution approved by the 

governing body that authorizes the 

conveyance in the case of an entity; 

(6) Assignment of all leases to the 

Agency. The borrower must put all oral 

leases in writing; 

(7) Title insurance or title record for 

the security, if available; 

(8) Complete debt settlement 

application in accordance with subpart 

B of 7 CFR part 1956 before or in 

conjunction with the voluntary 

conveyance offer if the value of the 

property to be conveyed is less than the 

FLP debt; and 

(9) Any other documentation required 

by the Agency to evaluate the request. 

(b) Conditions for conveying real 

property. The Agency will accept 

voluntary conveyance of real property 

by a borrower if: 

(1) Conveyance is in the Agency’s 

financial interest; 

(2) The borrower conveys all real 

property securing the FLP loan; and 

(3) The borrower has received prior 

notification of the availability of loan 

servicing in accordance with subpart C 

of this part. 

(c) Prior and junior liens. (1) The 

Agency will pay prior liens to the extent 

consistent with the Agency’s financial 

interest. 


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(2) Before conveyance, the borrower 

must pay or obtain releases of all junior 

liens, real estate taxes, judgments, and 

other assessments. If the borrower is 

unable to pay or obtain a release of the 

liens, the Agency may attempt to 

negotiate a settlement with the 

lienholder if it is in the Agency’s 

financial interest. 

(d) Charging and crediting the 

borrower’s account. (1) The Agency will 

charge the borrower’s account for all 

recoverable costs incurred in connection 

with a conveyance. 

(2) The Agency will credit the 

borrower’s account for the amount of 

the market value of the property less 

any prior liens, or the debt, whichever 

is less. In the case of an American 

Indian borrower whose loans are 

secured by real estate located within the 

boundaries of a Federally recognized 

Indian reservation, however, the Agency 

will credit the borrower’s account with 

the greater of the market value of the 

security or the borrower’s FLP debt. 

(e) Right of possession. After 

voluntary conveyance, the borrower or 

former owner retains no statutory, 

implied, or inherent right of possession 

to the property beyond those rights 

under an approved lease-purchase 

agreement executed according to 

§ 766.154 or required by State law. 

§ 766.354 Voluntary conveyance of chattel. 

(a) Requirements for conveying 

chattel. The borrower must supply the 

Agency with the following: 

(1) An Agency application form; 

(2) A current financial statement. If 

the borrower is an entity, all entity 

members must provide current financial 

statements; 

(3) Information on present and future 

income and potential earning ability; 

(4) A bill of sale including each item 

and titles to all vehicles and equipment, 

as applicable; 

(5) A resolution approved by the 

governing body that authorizes the 

conveyance in the case of an entity 

borrower; 

(6) Complete debt settlement 

application in accordance with subpart 

B of 7 CFR part 1956 before or in 

conjunction with the voluntary 

conveyance offer if the value of the 

property to be conveyed is less than the 

debt. 

(b) Conditions for conveying chattel. 

The Agency will accept conveyance of 

chattel only if: 

(1) The borrower has made every 

possible effort to sell the property 

voluntarily; 

(2) The borrower can convey the 

chattel free of other liens; 

(3) The conveyance is in the Agency’s 

financial interest; 

(4) The borrower conveys all chattel 

securing the FLP loan; and 

(5) The borrower has received prior 

notification of the availability of loan 

servicing in accordance with subpart C 

of this part. 

(c) Charging and crediting the 

borrower’s account. (1) The Agency will 

charge the borrower’s account for all 

recoverable costs incurred in connection 

with the conveyance. 

(2) The Agency will credit the 

borrower’s account in the amount of the 

market value of the chattel. 

§ 766.355 Acceleration of loans. 

(a) General. (1) The Agency 

accelerates loans in accordance with 

this section, unless: 

(i) State law imposes separate 

restrictions on accelerations; 

(ii) The borrower is American Indian, 

whose real estate is located on an Indian 

reservation. 

(2) The Agency accelerates all of the 

borrower’s loans at the same time, 

regardless of whether each individual 

loan is delinquent or not. 

(3) All borrowers must receive prior 

notification in accordance with subpart 

C of this part, except for borrowers who 

fail to graduate in accordance with 

§ 766.101(a)(8). 

(b) Time limitations. The borrower 

has 30 days from the date of the Agency 

acceleration notice to pay the Agency in 

full. 

(c) Borrower options. The borrower 

may: 

(1) Pay cash; 

(2) Transfer the security to a third 

party in accordance with part 765, 

subpart I of this chapter; 

(3) Sell the security property in 

accordance with § 766.352; or 

(4) Voluntarily convey the security to 

the Agency in accordance with 

§§ 766.353 and 766.354, as appropriate. 

(d) Partial payments. The Agency may 

accept a payment that does not cover 

the unpaid balance of the accelerated 

loan if the borrower is in the process of 

selling security, unless acceptance of 

the payment would reverse the 

acceleration. 

(e) Failure to satisfy the debt. The 

Agency will liquidate the borrower’s 

account in accordance with § 766.357 if 

the borrower does not pay the account 

in full within the time period specified 

in the acceleration notice. 

§ 766.356 Acceleration of loans to 

American Indian borrowers. 

(a) General. (1) The Agency 

accelerates loans to American Indian 

borrowers whose real estate is located 

on an Indian reservation in accordance 

with this section, unless State law 

imposes separate restrictions on 

accelerations. 

(2) The Agency accelerates all of the 

borrower’s loans at the same time, 

regardless of whether each individual 

loan is delinquent or not. 

(3) All borrowers must receive prior 

notification in accordance with subpart 

C of this part, except for borrowers who 

fail to graduate in accordance with 

§ 766.101(a)(8). 

(4) At the time of acceleration, the 

Agency will notify the borrower and the 

Tribe that has jurisdiction over the 

Indian reservation of: 

(i) The possible outcomes of a 

foreclosure sale and the potential 

impacts of those outcomes on rights 

established under paragraphs (a)(4)(ii) 

and (iii) of this section; 

(ii) The priority for purchase of the 

property acquired by the Agency 

through voluntary conveyance or 

foreclosure; 

(iii) Transfer of acquired property to 

the Secretary of the Interior if the 

priority of purchase of the property 

established under paragraph (a)(4)(ii) of 

this section is not exercised. 

(b) Borrower options. The Agency will 

notify an American Indian borrower of 

the right to: 

(1) Request the Tribe, having 

jurisdiction over the Indian reservation 

in which the real property is located, be 

assigned the loan; 

(i) The Tribe will have 30 calendar 

days after the Agency notification of 

such request to accept the assignment of 

the loan. 

(ii) The Tribe must pay the Agency 

the lesser of the outstanding Agency 

indebtedness secured by the real estate 

or the market value of the property. 

(iii) The Tribe may pay the amount in 

a lump sum or according to the rates, 

terms and requirements established in 

part 770 of this chapter, subject to the 

following: 

(A) The Tribe must execute the 

promissory note and loan documents 

within 90 calendar days of receipt from 

the Agency; 

(B) Such loan may not be considered 

for debt writedown under 7 CFR part 

770. 

(iv) The Tribe’s failure to respond to 

the request for assignment of the loan or 

to finalize the assignment transaction 

within the time provided, shall be 

treated as the Tribe’s denial of the 

request. 

(2) Request the loan be assigned to the 

Secretary of the Interior. The Secretary 

of the Interior’s failure to respond to the 

request for assignment of the loan or to 

finalize the assignment transaction, 

shall be treated as denial of the request; 

(3) Voluntarily convey the real estate 

property to the Agency; 


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(i) The Agency will conduct a 

environmental review before accepting 

voluntary conveyance. 

(ii) The Agency will credit the 

account with the greater of the market 

value of the real estate or the amount of 

the debt. 

(4) Sell the real estate; 

(i) The buyer must have the financial 

ability to buy the property. 

(ii) The sale of the property must be 

completed within 90 calendar days of 

the Agency’s notification. 

(iii) The loan can be transferred and 

assumed by an eligible buyer. 

(5) Pay the FLP debt in full. 

(6) Consult with the Tribe that has 

jurisdiction over the Indian reservation 

to determine if State or Tribal law 

provides rights and protections that are 

more beneficial than those provided 

under this section. 

(c) Tribe notification. At the time of 

acceleration, the Agency will notify the 

Tribe that has jurisdiction over the 

Indian reservation in which the 

property is located, of the: 

(1) Sale of the American Indian 

borrower’s property; 

(2) Market value of the property; 

(3) Amount the Tribe would be 

required to pay the Agency for 

assignment of the loan. 

(d) Partial payments. The Agency may 

accept a payment that does not cover 

the unpaid balance of the accelerated 

loan if the borrower is in the process of 

selling security, unless acceptance of 

the payment would reverse the 

acceleration. 

(e) Failure to satisfy the debt. The 

Agency will liquidate the borrower’s 

account in accordance with § 766.357 if: 

(1) The borrower does not pay the 

account in full within the time period 

specified in the acceleration notice; 

(2) The borrower does not voluntarily 

convey the property to the Agency; 

(3) Neither the Tribe nor the Secretary 

of the Interior accepts assignment of the 

borrower’s loan. 

§ 766.357 Involuntary liquidation of real 

property and chattel. 

(a) General. The Agency will liquidate 

the borrower’s security if: 

(1) The borrower does not satisfy the 

account in accordance with §§ 766.355 

and 766.356, as appropriate; 

(2) The involuntary liquidation is in 

the Agency’s financial interest. 

(b) Foreclosure on loans secured by 

real property. (1) The Agency will 

charge the borrower’s account for all 

recoverable costs incurred in connection 

with the foreclosure and sale of the 

property. 

(2) If the Agency acquires the 

foreclosed property, the Agency will 

credit the borrower’s account in the 

amount of the Agency’s bid except 

when incremental bidding was used, in 

which case the amount of credit will be 

the maximum bid that was authorized. 

If the Agency does not acquire the 

foreclosed property, the Agency will 

credit the borrower’s account in 

accordance with State law and guidance 

from the Regional OGC. 

(3) Notwithstanding paragraph (b)(2), 

for an American Indian borrower whose 

real property secures an FLP loan and 

is located within the confines of a 

Federally-recognized Indian reservation, 

the Agency will credit the borrower’s 

account in the amount that is the greater 

of: 

(i) The market value of the security; 

or 

(ii) The amount of the FLP debt 

against the property. 

(4) After the date of foreclosure, the 

borrower or former owner retains no 

statutory, implied, or inherent right of 

possession to the property beyond those 

rights granted by State law. 

(5) If an unpaid balance on the FLP 

loan remains after the foreclosure sale of 

the property, the Agency may debt settle 

the account in accordance with subpart 

B of 7 CFR part 1956. 

(c) Foreclosure of loans secured by 

chattel. (1) The Agency will charge the 

borrower’s account for all recoverable 

costs incurred by the Agency as a result 

of the repossession and sale of the 

property. 

(2) The Agency will apply the 

proceeds from the repossession sale to 

the borrower’s account less prior liens 

and all authorized liquidation costs. 

(3) If an unpaid balance on the FLP 

loan remains after the sale of the 

repossessed property, the Agency may 

debt settle the account in accordance 

with subpart B of 7 CFR part 1956. 

§§ 766.358—766.400 [Reserved] 

Subpart I—Exception Authority 

§ 766.401 Agency exception authority. 

On an individual case basis, the 

Agency may consider granting an 

exception to any regulatory requirement 

or policy of this part if: 

(a) The exception is not inconsistent 

with the authorizing statute or other 

applicable law; and 

(b) The Agency’s financial interest 

would be adversely affected by acting in 

accordance with published regulations 

or policies and granting the exception 

would resolve or eliminate the adverse 

effect upon its financial interest. 

■ 26. Add part 767 to read as follows: 

PART 767—INVENTORY PROPERTY 

MANAGEMENT 

Subpart A—Overview 

Sec. 

767.1 Introduction. 

767.2 Abbreviations and definitions. 

767.3–767.50 [Reserved] 

Subpart B—Property Abandonment and 

Personal Property Removal 

767.51 Property abandonment. 

767.52 Disposition of personal property 

from real estate inventory property. 

767.53–767.100 [Reserved] 

Subpart C—Lease of Real Estate Inventory 

Property 

767.101 Leasing real estate inventory 

property. 

767.102 Leasing non-real estate inventory 

property. 

767.103 Managing leased real estate 

inventory property. 

767.104–767.150 [Reserved] 

Subpart D—Disposal of Inventory Property 

767.151 General requirements. 

767.152 Exceptions. 

767.153 Sale of real estate inventory 

property. 

767.154 Conveying easements, rights-ofway, and other interests in inventory 

property. 

767.155 Selling chattel property. 

767.156–767.200 [Reserved] 

Subpart E—Real Estate Property with 

Important Resources or Located in Special 

Hazard Areas 

767.201 Real estate inventory property with 

important resources. 

767.202 Real estate inventory property 

located in special hazard areas. 

767.203–767.250 [Reserved] 

Subpart F—Exception Authority 

767.251 Agency exception authority. 

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

Subpart A—Overview 

§ 767.1 Introduction. 

(a) Purpose. This part describes the 

Agency’s policies for: 

(1) Managing inventory property; 

(2) Selling inventory property; 

(3) Leasing inventory property; 

(4) Managing real and chattel property 

the Agency takes into custody after 

abandonment by the borrower; 

(5) Selling or leasing inventory 

property with important resources, or 

located in special hazard areas; and 

(6) Conveying interest in real property 

for conservation purposes. 

(b) Basic policy. The Agency 

maintains, manages and sells inventory 

property as necessary to protect the 

Agency’s financial interest. 


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§ 767.2 Abbreviations and definitions. 

Abbreviations and definitions for 

terms used in this part are provided in 

§ 761.2 of this chapter. 

§§ 767.3–767.50 [Reserved] 

Subpart B—Property Abandonment 

and Personal Property Removal 

§ 767.51 Property abandonment. 

The Agency will take actions 

necessary to secure, maintain, preserve, 

manage, and operate the abandoned 

security property, including marketing 

perishable security property on behalf of 

the borrower when such action is in the 

Agency’s financial interest. If the 

security is in jeopardy, the Agency will 

take the above actions prior to 

completing servicing actions contained 

in 7 CFR part 766. 

§ 767.52 Disposition of personal property 

from real estate inventory property. 

(a) Preparing to dispose of personal 

property. If, at the time of acquisition, 

personal property has been left on the 

real estate inventory property, the 

Agency will notify the former real estate 

owner and any known lienholders that 

the Agency will dispose of the personal 

property. Property of value may be sold 

at a public sale. 

(b) Reclaiming personal property. The 

owner or lienholder may reclaim 

personal property at any time prior to 

the property’s sale or disposal by paying 

all expenses incurred by the Agency in 

connection with the personal property. 

(c) Use of proceeds from sale of 

personal property. Proceeds from the 

public sale of personal property will be 

distributed as follows: 

(1) To lienholders in order of lien 

priority less a pro rata share of the sale 

expenses; 

(2) To the inventory account up to the 

amount of expenses incurred by the 

Agency in connection with the sale of 

personal property; 

(3) To the outstanding balance on the 

FLP loan; and 

(4) To the borrower, if the borrower’s 

whereabouts are known. 

§§ 767.53–767.100 [Reserved] 

Subpart C—Lease of Real Estate 

Inventory Property 

§ 767.101 Leasing real estate inventory 

property. 

(a) The Agency may lease real estate 

inventory property: 

(1) To the former owner under the 

Homestead Protection Program; 

(2) To a beginning farmer selected to 

purchase the property but who was 

unable to purchase it because of a lack 

of Agency direct or guaranteed loan 

funds; 

(3) When the Agency is unable to sell 

the property because of lengthy 

litigation or appeal processes. 

(b) The Agency will lease real estate 

inventory property in an ‘‘as is’’

condition. 

(c) The Agency will lease property for: 

(1) Homestead protection in 

accordance with part 766, subpart D, of 

this chapter. 

(2) A maximum of 18 months to a 

beginning farmer the Agency selected as 

purchaser when no Agency loan funds 

are available; or 

(3) The shortest possible duration for 

all other cases subject to the following: 

(i) The maximum lease term for such 

a lease is 12 months. 

(ii) The lease is not subject to renewal 

or extension. 

(d) The lessee may pay: 

(1) A lump sum; 

(2) On an annual installment basis; or 

(3) On a crop-share basis, if the lessee 

is a beginning farmer under paragraph 

(a) of this section. 

(e) The Agency leases real estate 

inventory property for a market rent 

amount charged for similar properties in 

the area. 

(f) The Agency may require the lessee 

to provide a security deposit. 

(g) Only leases to a beginning farmer 

or Homestead Protection Program 

participant will contain an option to 

purchase the property. 

§ 767.102 Leasing non-real estate 

inventory property. 

The Agency does not lease non-real 

estate property unless it is attached as 

a fixture to real estate inventory 

property that is being leased and it is 

essential to the farming operation. 

§ 767.103 Managing leased real estate 

inventory property. 

(a) The Agency will pay for repairs to 

leased real estate inventory property 

only when necessary to protect the 

Agency’s interest. 

(b) If the lessee purchases the real 

estate inventory property, the Agency 

will not credit lease payments to the 

purchase price of the property. 

§§ 767.104–767.150 [Reserved] 

Subpart D—Disposal of Inventory 

Property 

§ 767.151 General requirements. 

Subject to § 767.152, the Agency will 

attempt to sell its inventory property as 

follows: 

(a) The Agency will combine or 

divide inventory property, as 

appropriate, to maximize the 

opportunity for beginning farmers to 

purchase real property. 

(b) The Agency will advertise all real 

estate inventory property that can be 

used for any authorized FO loan 

purpose for sale to beginning farmers no 

later than 15 days after the Agency 

obtains title to the property. 

(c) If more than one eligible beginning 

farmer applies, the Agency will select a 

purchaser by a random selection process 

open to the public. 

(1) All applicants will be advised of 

the time and place of the selection. 

(2) All drawn offers will be numbered. 

(3) Offers drawn after the first will be 

held in suspense pending sale to the 

successful applicant. 

(4) Random selection is final and not 

subject to administrative appeal. 

(d) If there are no offers from 

beginning farmers, the Agency will sell 

inventory property by auction or sealed 

bid to the general public no later than 

165 days after the Agency obtains title 

to the property. All bidders will be 

required to submit a 10 percent deposit 

with their bid. 

(e) If the Agency receives no 

acceptable bid through an auction or 

sealed bid, the Agency will attempt to 

sell the property through a negotiated 

sale at the best obtainable price. 

(f) If the Agency is not able to sell the 

property through negotiated sale, the 

Agency may list the property with a real 

estate broker. The broker must be 

properly licensed in the State in which 

the property is located. 

§ 767.152 Exceptions. 

The Agency’s disposition procedure 

under § 767.151 is subject to the 

following: 

(a) If the Agency leases real estate 

inventory property to a beginning 

farmer in accordance with 

§ 767.101(a)(2), and the lease expires, 

the Agency will not advertise the 

property if the Agency has direct or 

guaranteed loan funds available to 

finance the transaction. 

(b) The Agency will not advertise a 

property for sale until the homestead 

protection rights have terminated in 

accordance with part 766, subpart D of 

this chapter. 

(c) The Agency may allow an 

additional 60 days if needed for 

conservation easements or 

environmental reviews. 

(d) If the property was owned by an 

American Indian borrower and is 

located on an Indian reservation, the 

Agency will: 

(1) No later than 90 days after 

acquiring the property, offer the 

opportunity to purchase or lease the 

property in accordance with: 


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(i) The priorities established by the 

Indian Tribe having jurisdiction over 

the Indian reservation; 

(ii) In cases where priorities have not 

been established, the following order: 

(A) A member of the Indian Tribe that 

has jurisdiction over the Indian 

reservation; 

(B) An Indian entity; 

(C) The Indian Tribe. 

(2) Transfer the property to the 

Secretary of the Interior if the property 

is not purchased or leased under 

paragraph (1) of this section. 

(e) If Agency analysis of farm real 

estate market conditions indicates the 

sale of the Agency’s inventory property 

will have a negative effect on the value 

of farms in the area, the Agency may 

withhold inventory farm properties in 

the affected area from the market until 

further analysis indicates otherwise. 

§ 767.153 Sale of real estate inventory 

property. 

(a) Pricing. (1) The Agency will 

advertise property for sale at its market 

value, as established by an appraisal 

obtained in accordance with § 761.7. 

(2) Property sold by auction or sealed 

bid will be sold for the best obtainable 

price. The Agency reserves the right to 

reject any and all bids. 

(b) Agency-financed sales. The 

Agency may finance sales to purchasers 

if: 

(1) The Agency has direct or 

guaranteed FO loan funds available; 

(2) All applicable loan making 

requirements are met; and 

(3) All non-beginning farmer 

purchasers make a 10 percent down 

payment. 

(c) Taxes and assessments. (1) 

Property taxes and assessments will be 

prorated between the Agency and the 

purchaser based on the date the Agency 

conveys title to the purchaser. 

(2) The purchaser is responsible for 

paying all taxes and assessments after 

the Agency conveys title to the 

purchaser. 

(d) Loss or damage to property. If, 

through no fault of either party, the 

property is lost or damaged as a result 

of fire, vandalism, or act of God before 

the Agency conveys the property, the 

Agency may reappraise the property and 

set the sale price accordingly. 

(e) Termination of contract. Either 

party may terminate the sales contract. 

If the contract is terminated by the 

Agency, the Agency returns any deposit 

to the bidder. If the contract is 

terminated by the purchaser, any 

deposit will be retained by the Agency 

as full liquidated damages, except 

where failure to close is due to Agency 

non-approval of credit. 

(f) Warranty on title. The Agency will 

not provide any warranty on the title or 

on the condition of the property. 

§ 767.154 Conveying easements, rights-ofway, and other interests in inventory 

property. 

(a) Appraisal of real property and real 

property interests. The Agency will 

determine the value of real property and 

real property interests being transferred 

in accordance with § 761.7 of this 

chapter. 

(b) Easements and rights-of-way on 

inventory property. (1) The Agency may 

grant or sell an easement or right-of-way 

for roads, utilities, and other 

appurtenances if the conveyance is in 

the public interest and does not 

adversely affect the value of the real 

property. 

(2) The Agency may sell an easement 

or right-of-way by negotiation for market 

value to any purchaser for cash without 

giving public notice if: 

(i) The sale would not prevent the 

Agency from selling the property; and 

(ii) The sale would not decrease the 

value of the property by an amount 

greater than the price received. 

(3) In the case of condemnation 

proceedings by a State or political 

subdivision, the transfer of title will not 

be completed until adequate 

compensation and damages have been 

determined and paid. 

(c) Disposal of other interests in 

inventory property. (1) If applicable, the 

Agency will sell mineral and water 

rights, mineral lease interests, mineral 

royalty interests, air rights, and 

agricultural and other lease interests 

with the surface land except as provided 

in paragraph (b) of this section. 

(2) If the Agency sells the land in 

separate parcels, any rights or interests 

that apply to each parcel are included 

with the sale. 

(3) The Agency will assign lease or 

royalty interests not passing by deed to 

the purchaser at the time of sale. 

(4) Appraisals of property will reflect 

the value of such rights, interests, or 

leases. 

§ 767.155 Selling chattel property. 

(a) Method of sale. (1) The Agency 

will use sealed bid or established public 

auctions for selling chattel. The Agency 

does not require public notice of sale in 

addition to the notice commonly used 

by the auction facility. 

(2) The Agency may sell chattel 

inventory property, including fixtures, 

concurrently with real estate inventory 

property if, by doing so, the Agency can 

obtain a higher aggregate price. The 

Agency may accept an offer for chattel 

based upon the combined final sales 

price of both the chattel and real estate. 

(b) Agency-financed sales. The 

Agency may finance the purchase of 

chattel inventory property if the Agency 

has direct or guaranteed OL loan funds 

available and all applicable loan making 

requirements are met. 

§§ 767.156–767.200 [Reserved] 

Subpart E—Real Estate Property With 

Important Resources or Located in 

Special Hazard Areas 

§ 767.201 Real estate inventory property 

with important resources. 

In addition to the requirements 

established in subpart G of 7 CFR part 

1940, the following apply to inventory 

property with important resources: 

(a) Wetland conservation easements. 

The Agency will establish permanent 

wetland conservation easements to 

protect and restore certain wetlands that 

exist on inventory property prior to the 

sale of such property, regardless of 

whether the sale is cash or credit. 

(1) The Agency establishes 

conservation easements on all wetlands 

or converted wetlands located on real 

estate inventory property that: 

(i) Were not considered cropland on 

the date the property was acquired by 

the Agency; and 

(ii) Were not used for farming at any 

time during the 5 years prior to the date 

of acquisition by the Agency. 

(A) The Agency will consider 

property to have been used for farming 

if it was used for agricultural purposes 

including, but not limited to, cropland, 

pastures, hayland, orchards, vineyards, 

and tree farming. 

(B) In the case of cropland, hayland, 

orchards, vineyards, or tree farms, the 

Agency must be able to demonstrate that 

the property was harvested for crops. 

(C) In the case of pastures, the Agency 

must be able to demonstrate that the 

property was actively managed for 

grazing by documenting practices such 

as fencing, fertilization, and weed 

control. 

(2) The wetland conservation 

easement will provide for access to 

other portions of the property as 

necessary for farming or other uses. 

(b) Mandatory conservation 

easements. The Agency will establish 

conservation easements to protect 100- 

year floodplains and other Federallydesignated important resources. 

Federally-designated important 

resources include, but are not limited to: 

(1) Listed or proposed endangered or 

threatened species; 

(2) Listed or proposed critical habitats 

for endangered or threatened species; 

(3) Designated or proposed wilderness 

areas; 


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(4) Designated or proposed wild or 

scenic rivers; 

(5) Historic or archeological sites 

listed or eligible for listing on the 

National Register of Historic Places; 

(6) Coastal barriers included in 

Coastal Barrier Resource Systems; 

(7) Natural landmarks listed on 

National Registry of Natural Landmarks; 

and 

(8) Sole source aquifer recharge areas 

as designated by EPA. 

(c) Discretionary easements. The 

Agency may grant or sell an easement, 

restriction, development right, or 

similar legal right to real property for 

conservation purposes to a State 

government, a political subdivision of a 

State government, or a private nonprofit organization. 

(1) The Agency may grant or sell 

discretionary easements separate from 

the underlying fee or property rights. 

(2) The Agency may convey property 

interests under this paragraph by 

negotiation to any eligible recipient 

without giving public notice if the 

conveyance does not change the 

intended use of the property. 

(d) Conservation transfers. The 

Agency may transfer real estate 

inventory property to a Federal or State 

agency provided the following 

conditions are met: 

(1) The transfer of title must serve a 

conservation purpose; 

(2) A predominance of the property 

must: 

(i) Have marginal value for 

agricultural production; 

(ii) Be environmentally sensitive; or 

(iii) Have special management 

importance; 

(3) The homestead protection rights of 

the previous owner have been 

exhausted; 

(4) The Agency will notify the public 

of the proposed transfer; and 

(5) The transfer is in the Agency’s 

financial interest. 

(e) Use restrictions on real estate 

inventory property with important 

resources. (1) Lessees and purchasers 

receiving Agency credit must follow a 

conservation plan developed with 

assistance from NRCS. 

(2) Lessees and purchasers of property 

with important resources or real 

property interests must allow the 

Agency or its representative to 

periodically inspect the property to 

determine if it is being used for 

conservation purposes. 

§ 767.202 Real estate inventory property 

located in special hazard areas. 

(a) The Agency considers the 

following to be special hazard areas: 

(1) Mudslide hazard areas; 

(2) Special flood areas; and 

(3) Earthquake areas. 

(b) The Agency will use deed 

restrictions to prohibit residential use of 

properties determined to be unsafe in 

special hazard areas. 

(c) The Agency will incorporate use 

restrictions in its leases of property in 

special hazard areas. 

§§ 767.203–767.250 [Reserved] 

Subpart F—Exception Authority 

§ 767.251 Agency exception authority. 

On an individual case basis, the 

Agency may consider granting an 

exception to any regulatory requirement 

or policy of this part if: 

(a) The exception is not inconsistent 

with the authorizing statute or other 

applicable law; and 

(b) The Agency’s financial interest 

would be adversely affected by acting in 

accordance with published regulations 

or policies and granting the exception 

would reduce or eliminate the adverse 

effect upon the its financial interest. 

PART 768–769—[RESERVED] 

■ 27. Add and reserve parts 768 and 

769. 

7 CFR Chapter XIV 

PART 1405—LOANS, PURCHASES, 

AND OTHER OPERATIONS 

■ 28. Revise the authority citation to 

read as follows: 

Authority: 7 U.S.C. 1515; 7 U.S.C. 7416a; 

7 U.S.C. 7991(e); 15 U.S.C. 714b and 714c. 

■ 29. Amend § 1405.8 as follows: 

■ a. Revise the section heading to read 

as set forth below; 

■ b. Revise paragraph (a)(1) to read as 

set forth below; and 

■ c. Redesignate paragraph (a)(7) as 

(a)(8) and add a new paragraph (a)(7) to 

read as set forth below. 

§ 1405.8 Disqualification due to crop 

insurance violation. 

(a) * * * 

(1) The FCIA. 

* * * * * 

(7) The Consolidated Farm and Rural 

Development Act (7 U.S.C. 1921 et seq.). 

* * * * * 

Signed in Washington, DC, on October 23, 

2007. 

Teresa C. Lasseter, 

Executive Vice President, Commodity Credit 

Corporation and Administrator, Farm Service 

Agency. 

[FR Doc. 07–5374 Filed 11–7–07; 8:45 am] 

BILLING CODE 3410–05–P 


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