[Federal Register Volume 72, Number 216 (Thursday, November 8, 2007)]
[Rules and Regulations]
[Pages 63242-63361]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-5374]



[[Page 63241]]

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Part II





Department of Agriculture





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Farm Service Agency



Commodity Credit Corporation



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7 CFR Parts 718, 761, 762 et al.



Regulatory Streamlining of the Farm Service Agency's Direct Farm Loan 
Programs; Final Rule

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

[[Page 63242]]


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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.

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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: <a href="/cdn-cgi/l/email-protection#482a212424662b272a2a083f2c2b663d3b2c29662f273e"><span class="__cf_email__" data-cfemail="33515a5f5f1d505c5151734457501d464057521d545c45">[email protected]</span></a>.

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 Sec.  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 large-scale 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

[[Page 63243]]

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 large-scale 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 Sec.  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 
Sec.  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

[[Page 63245]]

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 inter-generational transfers and 
therefore, the comments are not adopted.
    Similar concerns regarding the impact of entity eligibility 
requirements were received in response to regulations at Sec.  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 (Sec.  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

[[Page 63246]]

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 Sec.  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, Sec.  766.105(b)(1) 
provides the agency will attempt to achieve a 110 percent of debt 
service margin; however, under Sec.  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 re-notify 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

[[Page 63247]]

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 
Sec.  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 one-time 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.

[[Page 63248]]

    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 non-revolving 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 non-
essential 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 ``non-eligible 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 
non-eligible 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 ``non-eligible 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 ``non-eligible 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 non-farm animals 
are not eligible for loans, however, the terms ``exotic'' and ``non-
farm 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

[[Page 63249]]

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 Sec.  
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 Sec.  764.2, provides the 
priority for the types of records the agency will use. The proposed 
definition made no substantive changes from current Sec.  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 Sec.  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 ``owner-operator'' 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 ``tenant-operator'' 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 Sec.  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 Sec. Sec.  
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 Sec.  
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

[[Page 63250]]

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 Sec.  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 Sec.  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 Sec.  761.6 as well as Sec.  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 Sec.  761.6 and 
revised Sec.  762.104 to remove the joint appeal requirement. One 
comment stated that while Sec.  761.6 provides appeals will be handled 
according to 7 CFR parts 11 and 780, Sec.  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 Sec.  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 Sec.  
761.10(e)(4), the

[[Page 63251]]

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 non-supervised 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 Sec.  
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 
Sec.  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 Sec.  1924.56 that address the

[[Page 63252]]

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 (Sec.  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 Sec.  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 Sec.  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 Sec.  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

[[Page 63253]]

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 Sec.  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 (Sec.  
764.51(a)(4) and (5), renumbered to Sec.  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, Sec.  
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 Sec.  
764.355(c)(3) should be revised to match the requirements under Sec.  
764.51(b) (renumbered from Sec.  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 Sec.  764.51(b) 
(renumbered from Sec.  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 (Sec.  764.51(b)(11), renumbered from Sec.  
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 (Sec.  764.51(b)(12), renumbered from Sec.  
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 (Sec.  764.51(b)(13), renumbered 
from Sec.  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 (Lo-Doc) requirements Sec.  764.51(c), renumbered from Sec.  
764.51(b)). All comments stated that certain information under Sec.  
764.51(a) (Sec.  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

[[Page 63254]]

property owned or to be acquired, when applicable. Section 764.51(b)(4) 
(Sec.  764.51(c)(4) in final rule) states the agency may require a Lo-
Doc applicant to provide any other information listed in Sec.  
764.51(a) (Sec.  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 (Sec.  764.51(d) renumbered from Sec.  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 Sec.  764.51(a)(13) 
(Sec.  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 Sec.  
764.51(c)(3) (Sec.  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 Sec.  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, Sec.  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 Sec. Sec.  
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 Sec.  764.352(c) (Sec.  
764.352(a)(4) in the proposed rule) accordingly.
    Two comments were received on the no prior drug convictions 
provisions under Sec.  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

[[Page 63255]]

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 (Sec.  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 Sec.  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 (Sec.  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 Sec.  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 Sec.  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 Sec.  764.101(h) (Sec.  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 (Sec.  764.101(k), renamed 
and

[[Page 63256]]

renumbered to Sec.  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 Sec.  764.101(j) (Sec.  764.101(k) in final 
rule) in response to comments received on proposed Sec.  764.101(j) and 
(k) (Sec.  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 Sec.  764.101(j) (renamed and renumbered to Sec.  764.101(k) 
in final rule) do not match the eligibility requirements for EM loans 
at Sec.  764.352. Both comments stated the agency should make Sec.  
764.101(j) and Sec.  764.352 consistent. As stated above, the agency 
revised Sec.  764.101(j) and (k) extensively. In the final rule, Sec.  
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 Sec.  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 (Sec.  
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 Sec.  
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 
(Sec.  764.102(b)(2) renumbered to Sec.  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 (Sec.  764.102(b)(3) renumbered to Sec.  
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 Sec.  765.205(b)(10) 
accordingly. Further, a definition of ``highly erodible land'' has been 
added to Sec.  761.2.
    Eleven comments were received on the noncontiguous tracts provision 
(Sec.  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

[[Page 63257]]

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 non-essential 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 non-
essential 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 non-
essential 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

[[Page 63258]]

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 Sec.  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 Sec.  764.8(j) incorporates BIA 
title status reports and approval requirements from Sec.  
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 Sec.  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 Sec.  
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 Sec.  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 Sec.  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 Sec.  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

[[Page 63259]]

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 
Sec.  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 Sec.  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 (Sec. Sec.  764.152(b) and 764.252(b)). One comment stated 
the agency should revise Sec.  764.152(b) to include all the debt 
forgiveness conditions found under Sec.  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 Presidentially-designated emergency are still 
eligible for operating loans. The comment stated that the determination 
if the debt forgiveness was due to a Presidentially-designated 
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 Sec.  764.152(d). The agency received nine comments requesting 
the definition be moved to Sec.  761.2(b) and Sec.  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 (Sec.  
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

[[Page 63260]]

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 Sec.  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 Sec.  764.152(c).
    Lastly, the agency revised Sec.  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 Sec.  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

[[Page 63261]]

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 Sec.  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 
Sec.  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 Sec.  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 Sec.  764.252(d) (Sec.  
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 Sec.  764.252(f)(1) (Sec.  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 Sec.  764.252(g) (renumbered to Sec.  764.252(e)(2)) needs to 
reflect the statutory requirement. The agency agrees with the comment 
and has revised Sec.  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 Sec.  
764.252(e)(4) to provide that ``On a case-by-casis basis, [the 
applicant] may be granted a one-time 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 Sec.  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

[[Page 63262]]

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 Sec.  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 Sec.  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, income-producing 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 
Sec.  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 Sec.  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.

[[Page 63263]]

    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 Sec.  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 Sec.  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 Sec.  764.302(b) and 
redesignating proposed Sec.  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, 
agriculture-related 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 Sec.  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 Sec.  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 Sec.  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 
Sec.  764.3(b)(1). Therefore, the agency revised Sec.  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 Sec.  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 Sec.  
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

[[Page 63264]]

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 Sec.  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 Sec.  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 Sec.  
764.4(b)(2)(iii) was inadvertently omitted and has included the 
provision in Sec.  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 Sec.  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 Sec.  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 Sec.  764.3 
and has revised the paragraph accordingly.
    Lastly, the agency added in Sec.  764.353(c)(4) and (d)(6) the 
words ``or insurance indemnities received or to be received'' from 
current Sec.  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 Sec.  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 Sec.  
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 Sec.  764.355(c)(3) should be revised to match the requirements 
under Sec.  764.51(a). For the reasons stated above as well as in 
addressing comments for Sec.  764.51(a), the agency believes that the 
requirements are reasonable. Therefore, the comments are not adopted.
    Lastly, in Sec.  764.355(c)(4) the agency added the provision from 
current Sec.  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 Sec.  761.8, 
accordingly. In addition, the agency revised the guaranteed loan 
regulation at Sec.  762.122 to incorporate the maximum loan limit of 
Sec.  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 
Sec.  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

[[Page 63265]]

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 Sec.  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

[[Page 63266]]

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 Sec.  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 Sec.  764.452(f) and Sec.  
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 Sec.  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 Sec.  
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 Sec.  
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 
Sec.  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 Sec.  764.454(a)(4) 
to strengthen the lack of good faith denial when delinquent borrowers 
request

[[Page 63267]]

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

[[Page 63268]]

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 Sec.  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 Sec.  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 Sec.  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 non-monetary 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 Sec.  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 Sec.  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 Sec.  765.154. The 
agency cannot assign a percentage to each of the items listed in Sec.  
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

[[Page 63269]]

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 Sec.  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 Sec.  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 Sec.  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 Sec.  765.205(a)(11) 
(Sec.  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 Sec.  765.205(b)(2) (renumbered 
to Sec.  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

[[Page 63270]]

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 Sec.  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 Sec.  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 Sec.  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.

[[Page 63271]]

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 post-approval. 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 
post-approval. 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 (Sec.  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 post-
approval. 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 Sec.  
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, Sec.  
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 Sec.  765.152(c) 
and Sec.  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, Sec. Sec.  
765.152 and 765.153 only address the order in which payments are 
applied against agency loans, whereas Sec.  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 
Sec.  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

[[Page 63272]]

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 (Sec.  
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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Non-program 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, Sec.  
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 Sec.  765.401 through Sec.  
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 non-monetary 
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

[[Page 63273]]

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 Sec.  766.1(b) to clearly reflect this existing 
policy.
Section 766.51 General (Disaster Set-Aside)
    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 Non-program 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 Sec.  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 
Sec.  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 Sec.  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 (Sec.  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 Sec.  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 Sec.  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

[[Page 63274]]

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 Sec.  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 Sec.  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 Sec.  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

[[Page 63275]]

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 (Sec.  
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 Sec.  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 (Sec.  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 
Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 
Sec.  764.452. As provided in Sec.  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 State-Certified 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

[[Page 63276]]

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 Non-program 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 Sec.  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 Sec.  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

[[Page 63277]]

a conservation contract used for current or financially distressed and 
delinquent borrowers (Sec.  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 Sec.  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 ``re-
acquire.'' The agency agrees with the first part of the comments, 
however, it believes they are more applicable under

[[Page 63278]]

the liquidation provisions. The agency, therefore, has added Sec.  
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 Sec.  766.152(a)(4) to reference the 
voluntary conveyance requirements in Sec.  766.353. Further, Sec.  
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 Sec.  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 
Sec.  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 Sec.  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 Sec.  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 Sec.  
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

[[Page 63279]]

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 Sec.  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 (Sec.  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 (Sec.  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 
Non-program 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 Non-program loan, using rates and terms identical to those proposed 
for accelerated repayment agreements. In addition, the agency revised 
Sec.  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 Sec.  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;

[[Page 63280]]

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 Sec.  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 (Sec.  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 State-specific 
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 Sec.  766.356 as Sec.  766.357 in the final rule and added a 
new Sec.  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 Sec.  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 Sec.  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

[[Page 63281]]

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 non-appealability 
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 Sec.  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 Sec.  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

[[Page 63282]]

only through foreclosure or voluntary conveyance, the agency believes 
it is more appropriate to revise Sec.  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 non-beginning 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 non-targeted 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 Sec.  767.151(b) (renumbered from Sec.  
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 Sec.  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 Sec.  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

[[Page 63283]]

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

[[Page 63284]]

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.


0
Accordingly, 7 CFR chapters VII and XIV are amended as follows:

7 CFR Chapter VII

PART 718--PROVISIONS APPLICABLE TO MULTIPLE PROGRAMS

0
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.

0
2. Revise Sec.  718.1 to read as follows:


Sec.  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 Sec. Sec.  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.

0
3. Revise Sec.  718.6 to read as follows:


Sec.  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.

0
4. Revise Sec.  718.11 to read as follows:


Sec.  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.).

[[Page 63285]]

    (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.

0
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


Sec.  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.


Sec.  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

[[Page 63286]]

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 low-risk 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 day-to-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

[[Page 63287]]

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

[[Page 63288]]

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 Sec.  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

[[Page 63289]]

    (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.

[[Page 63290]]

    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 owner-operator 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-to-day 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

[[Page 63291]]

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.

[[Page 63292]]

    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 income-producing agricultural 
project.


Sec.  761.3  Civil rights.

    Part 15d of this title contains applicable regulations pertaining 
to civil rights and filing of discrimination complaints by program 
participants.


Sec.  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.


Sec.  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.


Sec.  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.


Sec.  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 Non-program 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.


Sec.  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);

[[Page 63293]]

    (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.


Sec.  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.


Sec.  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;

[[Page 63294]]

    (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.


Sec. Sec.  761.11-761.50  [Reserved]

Subpart B--Supervised Bank Accounts


Sec.  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.


Sec.  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.


Sec.  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.


Sec.  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.


Sec.  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

[[Page 63295]]

    (4) Continue to pay expenses from the supervised bank account in 
conjunction with the borrower's estate.


Sec. Sec.  761.56-761.100  [Reserved]

Subpart C--Supervised Credit


Sec.  761.101  Applicability.

    This subpart applies to all direct applicants and borrowers, except 
borrowers with only Non-program loans.


Sec.  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 loan-related 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.


Sec.  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.


Sec.  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.


Sec.  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 year-end 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.


Sec. Sec.  761.106-761.200  [Reserved]

Subpart D--Allocation of Farm Loan Programs Funds to State Offices


Sec.  761.201  Purpose.

    (a) This subpart addresses:

[[Page 63296]]

    (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.


Sec.  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.


Sec.  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.


Sec.  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 Sec.  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-by-case 
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.


Sec.  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) x State Factor

    (b) To calculate the State Factor, the Agency:
    (1) Uses the following criteria, data sources, and weights:

----------------------------------------------------------------------------------------------------------------
                                                                                         Weight for   Weight for
              Criteria                 Loan type criterion is        Data source          FO loans     OL loans
                                              used for                                   (percent)    (percent)
----------------------------------------------------------------------------------------------------------------
Farm operators with sales of $2,500-  FO and OL loans........  U.S. Census of                    15           15
 $39,999 and less than 200 days work                            Agriculture.
 off the farm.
Farm operators with sales of $40,000  FO and OL loans........  U.S. Census of                    35           35
 or more and less than 200 days work                            Agriculture.
 off farm.
Tenant farm operators...............  FO and OL loans........  U.S. Census of                    25           20
                                                                Agriculture.
3-year average net farm income......  FO and OL loans........  USDA Economic Research            15           15
                                                                Service.
Value of farm real estate assets....  FO loans...............  USDA Economic Research            10          N/A
                                                                Service.
Value of farm non-real estate assets  OL loans...............  USDA Economic Research           N/A           15
                                                                Service.
----------------------------------------------------------------------------------------------------------------

    (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.


Sec.  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.


Sec.  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.


Sec.  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.

[[Page 63297]]

    (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.


Sec.  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.


Sec.  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

0
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]

0
7. Amend part 762 to read as follows:
0
a. Remove the phrase ``farm or ranch'' each time it appears and add in 
its place the term ``farm''.
0
b. Remove the phrase ``farmer or rancher'' each time it appears and add 
in its place the term ``farmer''.
0
c. Remove the phrase ``farmers or ranchers'' each time it appears and 
add in its place the term ``farmers''.
0
d. Remove the phrase ``Loan Applicant'' each time it appears and add in 
its place the term ``Applicant''.
0
e. Remove the phrase ``loan applicant'' each time it ppears and add in 
its place the term ``applicant''
0
f. Remove the phrase ``loan applicant's'' each time it appears and add 
in its place the term ``applicant's''.
0
g. Remove the phrase ``loan applicants'' each time it appears and add 
in its place the term ``applicants''.
0
h. Remove the phrase ``Non-farm enterprises'' each time it appears and 
add in its place the term ``Non-eligible enterprises''.

0
8. Amend Sec.  762.101 by revising paragraphs (b) and (c) to read as 
follows:


Sec.  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 Sec.  762.105;
    (2) Certified Lender, or
    (3) Preferred Lender under Sec.  762.106.
* * * * *

0
9. Revise Sec.  762.102 to read as follows:


Sec.  762.102  Abbreviations and definitions.

    Abbreviations and definitions for terms used in this part are 
provided in Sec.  761.2 of this chapter.


Sec.  762.104  [Amended]

0
10. Amend Sec.  762.104 by removing paragraph (a) and redesignating 
paragraphs (b) through (d) as (a) through (c).

0
11. Amend Sec.  762.110 by adding a new paragraph (g) to to read as 
follows:


Sec.  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.

0
12. Amend Sec.  762.120 as follows:
0
a. In paragraph (a), remove the word ``CONACT'' everywhere it appears 
and add the word ``Act'' in its place.
0
b. Revise paragraph (l) to read as follows:


Sec.  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.


Sec.  762.121  [Amended]

0
13. Amend Sec.  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.

0
14. Amend Sec.  762.122 by redesignating paragraphs (a) through (d) as 
(b) through (e) and adding a new paragraph (a) to read as follows.


Sec.  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 Sec.  761.8 of this chapter.
* * * * *


Sec.  762.123  [Amended]

0
15. Amend Sec.  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.


Sec.  762.124  [Amended]

0
16. Amend Sec.  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.


Sec.  762.128  [Amended]

0
17. Amend Sec.  762.128 as follows:
0
a. In paragraph (c)(3), remove the words, ``and part 1901, subpart F, 
of this title.''
0
b. In paragraph (c)(4), remove the word ``CONACT'' and add the word 
``Act'' in its place.


Sec.  762.129  [Amended]

0
18. Amend Sec.  762.129(b)(1) by removing the words ``farm credit 
program'' in the second sentence.


Sec.  762.130  [Amended]

0
19. Amend Sec.  762.130(d)(4)(iii)(C) by removing the words ``beginning 
farmers or ranchers,'' and adding the words ``beginning farmers'' in 
their place.

0
20. Revise Sec.  762.130(e) by removing the words ``in Louisiana and 
Puerto Rico.''


Sec.  762.143  [Amended]

0
21. Revise Sec.  762.143(b)(3)(ii) by removing the words ``credit 
officer,'' wherever they appear and adding the word, ``official'' in 
their place.

[[Page 63298]]

PART 763--[RESERVED]

0
22. Add and reserve part 763.
0
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


Sec.  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.


Sec.  764.2  Abbreviations and definitions.

    Abbreviations and definitions for terms used in this part are 
provided in Sec.  761.2 of this chapter.


Sec. Sec.  764.3-764.50  [Reserved]

Subpart B--Loan Application Process


Sec.  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:

[[Page 63299]]

    (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.


Sec.  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.


Sec.  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 
Sec.  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.


Sec.  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.


Sec. Sec.  764.55-764.100  [Reserved]

Subpart C--Requirements for All Direct Program Loans


Sec.  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

[[Page 63300]]

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.


Sec.  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 Sec.  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 Sec.  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.


Sec.  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.


Sec.  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;

[[Page 63301]]

    (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.


Sec.  764.105  General chattel security requirements.

    The same chattel may be pledged as security for more than one 
direct or guaranteed loan.


Sec.  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.


Sec.  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 Sec.  
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 Sec.  
761.7 of this chapter.


Sec.  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.


Sec. Sec.  764.109-764.150  [Reserved]

Subpart D--Farm Ownership Loan Program


Sec.  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;

[[Page 63302]]

    (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.


Sec.  764.152  Eligibility requirements.

    The applicant:
    (a) Must comply with the general eligibility requirements 
established at Sec.  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.


Sec.  764.153  Limitations.

    The applicant must:
    (a) Comply with the general limitations established at Sec.  
764.102;
    (b) Have dwellings and other buildings necessary for the planned 
operation of the farm available for use after the loan is made.


Sec.  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.


Sec.  764.155  Security requirements.

    An FO loan must be secured:
    (a) In accordance with Sec. Sec.  764.103 through 764.106;
    (b) At a minimum, by the real estate being purchased or improved.


Sec. Sec.  764.156-764.200  [Reserved]

Subpart E--Beginning Farmer Downpayment Loan Program


Sec.  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.


Sec.  764.202  Eligibility requirements.

    The applicant must:
    (a) Comply with the general eligibility requirements established at 
Sec.  764.101 and the FO eligibility requirements of Sec.  764.152; and
    (b) Be a beginning farmer.


Sec.  764.203  Limitations.

    (a) The applicant must:
    (1) Comply with the general limitations established at Sec.  
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.


Sec.  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.


Sec.  764.205  Security requirements.

    A Beginning Farmer Downpayment loan must:
    (a) Be secured in accordance with Sec. Sec.  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.


Sec. Sec.  764.206-764.250  [Reserved]

Subpart F--Operating Loan Program


Sec.  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

[[Page 63303]]

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).


Sec.  764.252  Eligibility requirements.

    The applicant:
    (a) Must comply with the general eligibility requirements 
established at Sec.  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 Presidentially-designated 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.


Sec.  764.253  Limitations.

    The applicant must comply with the general limitations established 
at Sec.  764.102.


Sec.  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.


Sec.  764.255  Security requirements.

    An OL loan must be secured:
    (a) In accordance with Sec. Sec.  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.


Sec. Sec.  764.256-764.300  [Reserved]

Subpart G--Youth Loan Program


Sec.  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.


Sec.  764.302  Eligibility requirements.

    The applicant:
    (a) Must comply with the general eligibility requirements 
established at Sec.  764.101(a) through (g);
    (b) And anyone who will sign the promissory note, must not have 
received

[[Page 63304]]

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.


Sec.  764.303  Limitations.

    (a) The applicant must comply with the general limitations 
established at Sec.  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.


Sec.  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 Sec.  764.254(b).


Sec.  764.305  Security requirements.

    A first lien will be obtained on property or products acquired or 
produced with loan funds.


Sec. Sec.  764.306-764.350  [Reserved]

Subpart H--Emergency Loan Program


Sec.  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 Sec.  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.


Sec.  764.352  Eligibility requirements.

    The applicant:
    (a) Must comply with the general eligibility requirements 
established at Sec.  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 Sec.  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 Sec.  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

[[Page 63305]]

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.


Sec.  764.353  Limitations.

    (a) EM loans must comply with the general limitations established 
at Sec.  764.102.
    (b) EM loans may not exceed the lesser of:
    (1) The amount of credit necessary to restore the farming operation 
to its pre-disaster 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.


Sec.  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

[[Page 63306]]

based on the applicant's repayment ability and the useful life of the 
security, but in no case will the term exceed 40 years.


Sec.  764.355  Security requirements.

    (a) EM loans made under Sec.  764.351(a)(1) must comply with the 
general security requirements established at Sec. Sec.  764.103, 
764.104 and 764.155(b).
    (b) EM loans made under Sec.  764.351(a)(2) and (b) must comply 
with the general security requirements established at Sec. Sec.  
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 Sec.  
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.


Sec.  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.


Sec. Sec.  764.357-764.400  [Reserved]

Subpart I--Loan Decision and Closing


Sec.  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 Sec.  
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 
Sec.  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.


Sec.  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

[[Page 63307]]

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 Sec.  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 non-essential 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.


Sec. Sec.  764.403-764.450  [Reserved]

Subpart J--Borrower Training and Training Vendor Requirements


Sec.  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.


Sec.  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 Sec.  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 Sec.  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.


Sec.  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 Sec.  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.


Sec.  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

[[Page 63308]]

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.


Sec.  764.455  Potential training vendors.

    The Agency will contract for training services with State or 
private providers of production and financial management training 
services.


Sec.  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.


Sec.  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.


Sec.  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 
Sec.  764.457.


Sec.  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:

------------------------------------------------------------------------
                         Criteria used to
       Score             determine score          Agency consideration
------------------------------------------------------------------------
1.................  If the borrower:
                      <bullet> Attended        Training requirement
                       sessions as agreed,.     associated with course
                    <bullet> Satisfactorily     is complete.
                     completed all
                     assignments, and.
                    <bullet> Demonstrated an
                     understanding of the
                     course material..
2.................  If the borrower:

[[Page 63309]]

 
                      <bullet> Attended        Training requirement
                       sessions as agreed,      associated with couse is
                       and.                     complete. Additional
                    <bullet> Attempted to       Agency supervision may
                     complete all               be necessary.
                     assignments, but.
                    <bullet> Does not
                     demonstrate an
                     understanding of the
                     course material..
3.................  If the borrower did not:
                      <bullet> Attend          Training requirement
                       sessions as agreed, or.  associated with course
                    <bullet> Attempt to         is not complete. The
                     complete assignments, or.  borrower is ineligible
                    <bullet> Otherwise make a   for future direct loans
                     good faith effort to       until the training is
                     complete the training..    completed.
------------------------------------------------------------------------


0
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


Sec.  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.


Sec.  765.2  Abbreviations and definitions.

    Abbreviations and definitions for terms used in this part are 
provided in Sec.  761.2 of this chapter.


Sec. Sec.  765.3-765.50  [Reserved]

Subpart B--Borrowers With Limited Resource Interest Rate Loans


Sec.  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 Sec.  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 Sec.  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.

[[Page 63310]]

Sec.  765.52-765.100  [Reserved]

Subpart C--Borrower Graduation


Sec.  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 non-Agency 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 Sec.  762.110(g) of this chapter.
    (f) The borrower will be responsible for any application fees or 
purchase of stock in conjunction with graduation.


Sec.  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.


Sec.  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.


Sec. Sec.  765.104-765.150  [Reserved]

Subpart D--Borrower Payments


Sec.  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.


Sec.  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.


Sec.  765.153  Application of payments.

    (a) Regular payments. A regular payment is credited to a scheduled 
installment on program and non-program 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.


Sec.  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.


Sec.  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

[[Page 63311]]

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.


Sec. Sec.  765.156-765.200  [Reserved]

Subpart E--Protecting the Agency's Security Interest


Sec.  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.


Sec.  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.


Sec.  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.


Sec.  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.


Sec.  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 Sec.  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 Sec.  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 Non-program loan, the Agency does not 
permit subordination. The Agency may subordinate Non-program security 
when it is also security for a program loan

[[Page 63312]]

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 
Sec.  761.7 of this chapter.


Sec.  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.


Sec.  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.


Sec. Sec.  765.208-765.250  [Reserved]

Subpart F--Required Use and Operation of Agency Security


Sec.  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 Sec. Sec.  765.252 and 765.253.


Sec.  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 Sec.  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 Sec.  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.


Sec.  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 Sec.  
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.

[[Page 63313]]

Sec. Sec.  765.254-765.300  [Reserved]

Subpart G--Disposal of Chattel Security


Sec.  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 Sec.  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.


Sec.  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 Sec.  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.


Sec.  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.


Sec.  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 non-monetary 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.


Sec.  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

[[Page 63314]]

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.


Sec. Sec.  765.306-765.350  [Reserved]

Subpart H--Partial Release of Real Estate Security


Sec.  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-of-way 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 Sec.  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 Sec.  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 Sec.  765.252.


Sec.  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.

[[Page 63315]]

    (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 Sec.  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.


Sec.  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 Sec.  761.7 of this chapter.


Sec. Sec.  765.354-765.400  [Reserved]

Subpart I--Transfer of Security and Assumption of Debt


Sec.  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.


Sec.  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.


Sec.  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 
Sec.  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.


Sec.  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

[[Page 63316]]

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.


Sec.  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.


Sec.  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.


Sec. Sec.  765.407-765.450  [Reserved]

Subpart J--Deceased Borrowers


Sec.  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.


Sec.  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.


Sec. Sec.  765.453-765.500  [Reserved]

Subpart K--Exception Authority


Sec.  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.

0
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 Set-Aside.
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.

[[Page 63317]]

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


Sec.  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 Sec.  
766.107 and deferral according to Sec.  766.109.
    (2) The Agency does not service Non-program 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.


Sec.  766.2  Abbreviations and definitions.

    Abbreviations and definitions for terms used in this part are 
provided in Sec.  761.2 of this chapter.


Sec. Sec.  766.3-766.50  [Reserved]

Subpart B--Disaster Set-Aside


Sec.  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.


Sec.  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 non-monetary 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

[[Page 63318]]

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.


Sec.  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.


Sec.  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.


Sec.  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.


Sec.  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 Sec.  766.112(b).


Sec.  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.


Sec.  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.


Sec.  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.


Sec.  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 Sec.  766.113; or
    (c) The borrower pays the set-aside installment.


Sec.  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.


Sec. Sec.  766.62-766.100  [Reserved]

Subpart C--Loan Servicing Programs


Sec.  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 non-monetary or both monetary and non-
monetary 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.


Sec.  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:

[[Page 63319]]

    (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.


Sec.  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 Sec.  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.


Sec.  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 non-essential 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.


Sec.  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 Sec.  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.


Sec.  766.106  Agency notification of decision regarding a complete 
application.

    The Agency will send the borrower notification of the Agency's 
decision

[[Page 63320]]

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 
Sec.  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 Sec.  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 Sec.  766.115.
    (iii) If the net recovery value of non-essential 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 Sec.  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 Sec.  766.151.


Sec.  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 Sec.  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 Sec.  
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 Sec.  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 Sec.  
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 Sec.  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.

[[Page 63321]]

    (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.


Sec.  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 Sec.  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 Sec.  
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 Sec.  
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.


Sec.  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 Sec.  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 
Sec. Sec.  766.107, 766.108 and 766.111, as appropriate.

[[Page 63322]]

Sec.  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 Sec.  
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.
[GRAPHIC] [TIFF OMITTED] TR08NO07.000

    (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.
[GRAPHIC] [TIFF OMITTED] TR08NO07.001

    (3) Multiply the borrower's total unpaid FLP loan balance 
(principal, interest, and recoverable costs already paid by the Agency) 
by 33 percent.
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    (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.

[[Page 63323]]

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    (6) The borrower will receive 20 percent of the amount calculated 
in paragraph (h)(4) of this section for a 10-year contract.
[GRAPHIC] [TIFF OMITTED] TH06NO07.004

    (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.
[GRAPHIC] [TIFF OMITTED] TR08NO07.005

    (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.
[GRAPHIC] [TIFF OMITTED] TR08NO07.006

    (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.
[GRAPHIC] [TIFF OMITTED] TR08NO07.007

    (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.
[GRAPHIC] [TIFF OMITTED] TR08NO07.008

    (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.
[GRAPHIC] [TIFF OMITTED] TR08NO07.009

    (8) The borrower will receive 20 percent of the amount calculated 
in paragraph (i)(6) of this section for a 10-year contract term.

[[Page 63324]]

[GRAPHIC] [TIFF OMITTED] TR08NO07.010

    (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.


Sec.  766.111  Writedown.

    (a) Eligibility. The Agency will only consider a writedown if the 
borrower:
    (1) Meets the eligibility criteria in Sec.  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 Sec.  766.201.
    (c) Associated loan servicing. Loans written down will also be 
serviced in accordance with Sec. Sec.  766.107 and 766.108, as 
appropriate.


Sec.  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.


Sec.  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 non-essential 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.


Sec.  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.


Sec.  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 
Sec.  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.

[[Page 63325]]

    (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.


Sec. Sec.  766.116-766.150  [Reserved]

[[Page 63326]]

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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[[Page 63327]]


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[[Page 63328]]


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[[Page 63334]]


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BILLING CODE 3410-05-P

[[Page 63335]]

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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[[Page 63336]]


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[[Page 63337]]


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[[Page 63338]]


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[[Page 63339]]


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[[Page 63340]]


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[[Page 63341]]


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[[Page 63342]]


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[[Page 63343]]


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[[Page 63344]]



Appendix C to Subpart C of Part 766--Notice of Availability of Loan 
Servicing to Borrowers Who Are in Non-Monetary Default
[GRAPHIC] [TIFF OMITTED] TR08NO07.029


[[Page 63345]]


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[[Page 63346]]


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[[Page 63347]]


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[[Page 63348]]


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[[Page 63349]]


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[[Page 63350]]


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[[Page 63351]]


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[[Page 63352]]


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[[Page 63353]]


[GRAPHIC] [TIFF OMITTED] TR08NO07.038

BILLING CODE 3410-05-C

Subpart D--Homestead Protection Program


Sec.  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 Sec.  766.102;
    (ii) Information required under Sec.  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 Sec.  766.102; and
    (ii) Identification of land and buildings to be considered.


Sec.  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 Sec.  
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.


Sec.  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.


Sec.  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;

[[Page 63354]]

    (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.


Sec.  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.


Sec. Sec.  766.156-766.200  [Reserved]

Subpart E--Servicing Shared Appreciation Agreements and Net 
Recovery Buyout Agreements


Sec.  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 Sec.  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.


Sec.  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 Sec.  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.


Sec.  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.


Sec.  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 Sec.  
764.51(b), by the recapture due date or within 60 days of

[[Page 63355]]

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 Sec.  
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.


Sec.  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.


Sec.  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.


Sec. Sec.  766.207-766.250  [Reserved]

Subpart F--Unauthorized Assistance


Sec.  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.


Sec.  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.


Sec.  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 Non-program 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.


Sec. Sec.  766.254-766.300  [Reserved]

Subpart G--Loan Servicing For Borrowers in Bankruptcy


Sec.  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.


Sec.  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.


Sec.  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

[[Page 63356]]

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.


Sec. Sec.  766.304-766.350  [Reserved]

Subpart H--Loan Liquidation


Sec.  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 Sec.  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 Sec. Sec.  766.355 and 
766.356, as appropriate.
    (2) Borrowers may voluntarily liquidate their security in 
accordance with Sec. Sec.  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 Non-program 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.


Sec.  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.


Sec.  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.

[[Page 63357]]

    (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 Sec.  766.154 or required by 
State law.


Sec.  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.


Sec.  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 Sec.  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 Sec.  766.352; or
    (4) Voluntarily convey the security to the Agency in accordance 
with Sec. Sec.  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 Sec.  766.357 if the borrower 
does not pay the account in full within the time period specified in 
the acceleration notice.


Sec.  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 Sec.  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;

[[Page 63358]]

    (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 Sec.  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.


Sec.  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 
Sec. Sec.  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.


Sec. Sec.  766.358--766.400  [Reserved]

Subpart I--Exception Authority


Sec.  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.

0
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-of-way, 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


Sec.  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.

[[Page 63359]]

Sec.  767.2  Abbreviations and definitions.

    Abbreviations and definitions for terms used in this part are 
provided in Sec.  761.2 of this chapter.


Sec. Sec.  767.3-767.50  [Reserved]

Subpart B--Property Abandonment and Personal Property Removal


Sec.  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.


Sec.  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.


Sec. Sec.  767.53-767.100  [Reserved]

Subpart C--Lease of Real Estate Inventory Property


Sec.  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.


Sec.  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.


Sec.  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.


Sec. Sec.  767.104-767.150  [Reserved]

Subpart D--Disposal of Inventory Property


Sec.  767.151  General requirements.

    Subject to Sec.  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.


Sec.  767.152  Exceptions.

    The Agency's disposition procedure under Sec.  767.151 is subject 
to the following:
    (a) If the Agency leases real estate inventory property to a 
beginning farmer in accordance with Sec.  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:

[[Page 63360]]

    (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.


Sec.  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 Sec.  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.


Sec.  767.154  Conveying easements, rights-of-way, 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 Sec.  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.


Sec.  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.


Sec. Sec.  767.156-767.200  [Reserved]

Subpart E--Real Estate Property With Important Resources or Located 
in Special Hazard Areas


Sec.  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 
Federally-designated 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;

[[Page 63361]]

    (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 non-profit 
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.


Sec.  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.


Sec. Sec.  767.203-767.250  [Reserved]

Subpart F--Exception Authority


Sec.  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]

0
27. Add and reserve parts 768 and 769.

7 CFR Chapter XIV

PART 1405--LOANS, PURCHASES, AND OTHER OPERATIONS

0
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.


0
29. Amend Sec.  1405.8 as follows:
0
a. Revise the section heading to read as set forth below;
0
b. Revise paragraph (a)(1) to read as set forth below; and
0
c. Redesignate paragraph (a)(7) as (a)(8) and add a new paragraph 
(a)(7) to read as set forth below.


Sec.  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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