Court Opinion

ID: 6759314
Source: CourtListenerOpinion
Date Created: 2022-07-21 00:29:59.594776+00
Date Added: 2024-06-11T16:02:32.957264
License: Public Domain

Douglas, J.,
dissenting. Before the trial court below was appellants’ motion for leave to file an amended answer, pursuant to Civ. R. 15(A), to raise as a defense appellees’ failure to comply with provisions of the Farm Credit Act of 1971. The Farm Credit Act of 1971, specifically Section 2019, Title 12, U.S. Code, states in part:
“The Federal land banks may provide technical assistance to borrowers, members, and applicants and may make available to them at their option such financial related services appropriate to their on-farm and *77aquatic operations as determined to be feasible by the board of directors of each district bank, under regulations of the Farm Credit Administration.”
The objectives of the policies and procedures for federal land banks are enumerated in 12 C.F.R., Section 614.4510 which includes the following provisions:
“The bank and associations that are originating lenders shall be responsible for the servicing of the loans which they make. * * * The bank board of directors shall direct the bank and associations to adopt loan servicing policies and procedures to assure that loans will be serviced fairly and equitably for the borrower while minimizing the risk for the bank and associations. Procedures shall include specific plans which help preserve the quality of sound loans and which help credit deficiencies as they develop.” (Emphasis added.)
More specifically, 12 C.F.R., Section 614.4510(d)(1) provides:
“(d) In the development of the bank and association loan servicing policies and procedures, the following criteria shall be included:
“(1) * * * The objective shall be to provide borrowers with prompt and efficient service * * *. The policy shall provide a means of forbearance for cases when the borrower is cooperative, making an honest effort to meet the conditions of the loan contract, and is capable of working out of the debt burden. * * *”
The record in this case indicates that the appellees, Farmers Production Credit Association of Ashland and the Federal Land Bank of Louisville, either had no forbearance policy in effect at the time of foreclosure or such policy was never shown or made known to the appellants. Conversely, appellants alleged that they were cooperative, were making an honest effort to meet the conditions of the loan, and were capable of working out of the debt burden. Nevertheless, relying upon the holding of the Eleventh Circuit Court of Appeals in Smith v. Russellville Production Credit Assn. (C.A. 11, 1985), 777 F. 2d 1544, the majority has held that appellees’ failure to comply with the requirements of 12 C.F.R., Section 614.4510(d)(1) “does not provide [the appellants with] a valid defense to a foreclosure action.” Most significantly, the Smith court held at 1548:
“Like the provision in [United States v.] Harvey [(C.A. 5, 1981), 659 F. 2d 62], the ‘means of forbearance’ regulation in the present case is not a substantive rule but, rather, is a general statement of agency policy. The regulation states that, when banks and associations develop their loan servicing policies and procedures, ‘the policy shall provide a means of forbearance’ for borrowers meeting certain criteria. * * * Although the term ‘shall’ indicates the mandatory nature of this policy, the regulation is nevertheless directed at agency policy, and is not a substantive rule. Accordingly, we hold that 12 C.F.R. § 614.4510(d)(1) does not have the force and effect of law, and does not provide the basis for an implied right of action * *
*78In so holding, the Smith court rejected the reasoning and holding of the Southern District Court of Georgia in the case of DeLaigle v. Federal Land Bank of Columbia (D. Ga. 1983), 568 F. Supp. 1432, 1437, that the regulation herein, has “the ‘force and effect’ of law.” It is my opinion, however, that DeLaigle was properly decided and that for the following reasons the Smith court erred. In the first place, the Smith court improvidently relied for its analysis upon the Fifth Circuit Court’s rationale in Harvey. In Harvey, the court considered whether a provision2 in a Veterans Administration (“VA”) loan servicing manual imposed an affirmative foreclosure avoidance duty on the VA, and thereby created a right in the mortgagor to this performance. The VA manual stated at paragraph 2.20(e):
“ ‘After the reasons for default have been determined, indulgence may be extended for a reasonable time to a worthy borrower who is unable immediately to begin the liquidation of his arrearage.’ ” (Emphasis added.) Id. at 63.
The Harvey court found this provision to be merely a general statement of the agency’s own policy, stating at 64 that:
“* * * ‘[I]n order for a regulation to have the “force and effect of law,” it must have certain substantive characteristics and be the product of certain procedural requisites.’ * * * More specifically, the regulation must be a substantive or legislative-type rule—i.e. one ‘affecting individual obligations,’ * * * which has been issued by the agency pursuant to statutory authority and promulgated in accordance with the procedural requirements of the Administrative Procedure Act.” (Citations omitted.)
Conversely, as noted by the DeLaigle court at 1437:
“* * * [T]he Federal Farm Credit Board issued the regulations in question in this case, pursuant to the authority specified in the statutory section labelled ‘Powers of the Federal Farm Credit Board,’ 12 U.S.C. § 2243 (1976). Section 2243 states in part that ‘[t]he Federal Farm Credit Board shall establish the general policy for the guidance of the Farm Credit Administration.’ The loan servicing techniques that Federal land banks may provide—according to 12 U.S.C. § 2019 (1976)—are subject to the regulations of the Farm Credit Administration. * * *
“* * * [Additionally, there is no] evidence suggesting that section 614.4510 does not comply with the Administrative Procedure Act, 5 U.S.C. §§ 551 et seq. (1976). The Court notes that this regulation appeared at 37 F.R.. 11424 on June 7, 1972. Without any indication otherwise, the Court concludes that the regulation in question here was issued in accordance with the procedural requirements of the Administrative Procedure Act.”
*79Consequently, I agree with the court’s conclusion in DeLaigle that “these regulations * * * were issued by the appropriate agency pursuant to statutory authority” and therefore should have the “ ‘force and effect of law.’ ” Id. Unlike the VA manual in Harvey, Section 614.4510 is a formal agency regulation, promulgated pursuant to statutory authority.
Secondly, Section 614.4510(d)(1) states that there “shall” be a means of forbearance provided. The use of the word “shall” mandates agency policy. The provisions of this regulation are rules which must be followed by federal land banks when they service farm loans. On the other hand, the appellant-borrowers in Harvey conceded that the VA manual’s provisions were not formal agency requirements. Id. at 64. Additionally, the Harvey court noted that the language of the manual was “clearly permissive rather than mandatory” and “[o]n its face * * * does not purport to create a binding obligation.” Id. The court also observed that the manual itself characterized the provisions for servicing defaulted loans as merely “preferable,” and in paragraph 2.18(c) of the manual, it is stated that “strict compliance with these procedures may be impracticable or even impossible under certain conditions.” Id. As such, where it is alleged that the bank has failed to comply with Section 614.4510(d)(1), as in the case sub judice, a valid defense to the bank’s foreclosure action may exist.
While I intend to make no attempt to frustrate banks in the conduct of their business, including foreclosure where required, the cases at bar should be remanded and given a hearing on the merits under the facts presented. If it can be shown that the criteria outlined in Section 614.4510(d)(1) were not met by the appellants, foreclosure is warranted and should be upheld. However, compliance on the appellants’ part may well require the opposite result.
For the foregoing reasons, I must respectfully dissent.

 See paragraph 2.20(e) of the Veterans Administration Loan Guaranty Operation for Regional Offices—Loan Management and Servicing Policies, Procedures and Methods, M-26-3.