[Federal Register Volume 77, Number 72 (Friday, April 13, 2012)]
[Proposed Rules]
[Pages 22443-22462]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-8827]



[[Page 22443]]

Vol. 77

Friday,

No. 72

April 13, 2012

Part III





Department of Agriculture





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Farm Service Agency





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7 CFR Parts 761, 762, 765, et al.





Farm Loan Programs; Clarification and Improvement; Proposed Rule

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

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DEPARTMENT OF AGRICULTURE

Farm Service Agency

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

RIN 0560-AI14


Farm Loan Programs; Clarification and Improvement

AGENCY: Farm Service Agency, USDA.

ACTION: Proposed rule.

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SUMMARY: The Farm Service Agency (FSA) is proposing to amend the Farm 
Loan Programs (FLP) regulations for loan making and servicing, 
specifically those on real estate appraisals, lease, subordination and 
disposition of security, and Conservation Contract requirements. FSA is 
proposing the changes to streamline the loan making and servicing 
process and give the borrower greater flexibility while protecting the 
financial interests of the Government.

DATES: We will consider comments that we receive by June 12, 2012.

ADDRESSES: We invite you to submit written comments on this proposed 
rule. In your comment, include the Regulation Identifier Number (RIN) 
and volume, date, and page number of this issue of the Federal 
Register. You may submit comments by any of the following methods:
     Federal eRulemaking Portal: Go to http://www.regulations.gov. Follow the online instructions for submitting 
comments.
     Mail: Director, Loan Servicing and Property Management 
Division, FLP, FSA, U.S. Department of Agriculture, 1400 Independence 
Avenue SW., Stop 0523, Washington, DC 20250-0523.
    Comments will be available for inspection online at 
www.regulations.gov and at the mail address listed above between 8 a.m. 
and 4:30 p.m., Monday through Friday, except holidays. A copy of this 
proposed rule is also available through the FSA home page at http://www.fsa.usda.gov/.

FOR FURTHER INFORMATION CONTACT: Michael C. Cumpton, telephone: (202) 
690-4014. Persons with disabilities or who require alternative means 
for communications should contact the USDA Target Center at (202) 720-
2600 (voice and TDD).

SUPPLEMENTARY INFORMATION:

Background

    This rule proposes changes concerning certain loan making and 
servicing provisions of FSA's direct and guaranteed loan programs. FSA 
direct loans and loan guarantees are a means of providing credit to 
farmers whose financial risk exceeds a level acceptable to commercial 
lenders. Through direct and guaranteed Farm Ownership (FO), Operating 
Loans (OL), and Conservation Loans (CL), as well as direct Emergency 
Loans (EM), FSA assists tens of thousands of family farmers each year 
in starting and maintaining profitable farm businesses. FSA loan funds 
may be used to pay normal operating or family living expenses; make 
capital improvements; refinance certain debts; and purchase farmland, 
livestock, equipment, feed and other materials essential to farm and 
ranch operations. FSA services extend beyond the typical loan by 
offering customers ongoing consultation, advice, and creative ways to 
make their farm successful. These programs are a temporary source of 
credit. Direct borrowers generally are required to graduate to other 
credit when their financial condition will allow them to do so.
    FSA proposes to amend the FSA regulations for several FLP loan 
making and servicing issues, including real estate appraisals, leases, 
disposition, and release of security, and Conservation Contracts. FSA 
is proposing the changes to streamline the loan making and servicing 
process and give the borrower greater flexibility while protecting the 
financial interests of the Government.
    First, FSA proposes changes for various issues related to 
appraisals. Section 307(d) of the Consolidated Farm and Rural 
Development Act (CONACT, 7 U.S.C. 1927(d)) requires that in order for 
FSA to have the rights to oil, gas, or other minerals as FO loan 
collateral, the products' value must have been considered in the 
appraised value of collateral securing the loan. The section only 
applies to FO loans made after the date of enactment (December 23, 
1985), but FSA administratively extended this requirement to any type 
of FLP loan. FSA now proposes to modify its regulations to mirror the 
CONACT by applying the requirement only to FO loans.
    FSA also proposes to clarify its regulation on appraisal appeal 
rights by specifying that the appeal of real estate appraisals used by 
FSA in non-primary loan servicing contexts is limited to the question 
of whether the appraisal is compliant with the Uniform Standards of 
Professional Appraisal Practice (USPAP), and that the appellant must 
submit a technical appraisal review of the appraisal that has been 
prepared by a State Certified General Appraiser. Appeals of real estate 
appraisals in the primary loan servicing context can include either a 
technical appraisal review prepared by a State Certified General 
Appraiser or an independent appraisal. For chattel appeal appraisals, 
FSA proposes to amend the regulation to reflect current policy that the 
borrower may obtain an independent appraisal to help determine the 
question of whether the appraisal in question is consistent with 
present market values of similar items in the area.
    Furthermore, FSA proposes to not require a new appraisal for 
guaranteed loans if updates can be made to an existing appraisal, or if 
the guaranteed loan amount is less than $250,000.
    Second, FSA proposes changes related to leases of borrowers' 
property for mineral production, communication towers, and wind and 
solar energy installations. The revisions and clarifications proposed 
by this rule would provide flexibility for these leases while also 
implementing standards for consistent treatment by FSA.
    Third, for borrowers with chattel security, FSA proposes limiting 
the tracking of chattel proceeds to those that will be applied to FSA 
loans, instead of having detailed agreements on the use of all chattel 
proceeds. FSA also proposes giving the State Executive Director (SED) 
the authority to release security in certain situations if stringent 
security and graduation requirements are met.
    Fourth, on Conservation Contracts, in which a borrower's debt is 
reduced for taking certain conservation actions, FSA proposes changes 
that will reduce the costs to FSA and the time needed to administer the 
program while still ensuring the conservation intent is met.
    These changes are discussed in more detail below.

Appraisals

    Section 307(d) of the CONACT (7 U.S.C. 1927(d)), requires that for 
farm ownership loans made after December 23, 1985 (the date of 
enactment), the value of oil, gas, or other minerals must be included 
in the appraised value of the security collateral in order for FSA to 
have a valid security interest in those products. FSA administratively 
extended this requirement in the regulations to require that real 
estate appraisals used by FSA for any type of FLP loan include the 
value of any oil, gas, or other minerals. This has resulted in the 
following issues:
     In loan making, FSA's general policy is to obtain and pay 
for an appraisal. This may occur even when a third party appraisal, 
completed by a qualified appraiser, may already be available. Not only 
does this

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substantially increase the cost to FSA, but it can also delay 
application processing and increase the applicant's wait for loan 
funds.
     In loan servicing, this mineral appraisal requirement puts 
FSA security at risk on non-FO loans because not stating the value of 
minerals in an appraisal, usually because they have no known value at 
the time of the appraisal, could prevent FSA from getting the mineral 
security interest in special loan servicing, where the best lien 
obtainable is taken on the borrower's security, or in a voluntary 
conveyance or foreclosure. This could increase FSA program losses.
    This rule therefore proposes to remove this mineral appraisal 
requirement in 7 CFR 761.7, 765.252, and 765.351 for all future FLP 
loans except direct FO loans, where it is required by law. This change 
would not be retroactive. For all non-FO loans made after the effective 
date of this rule, FSA will have a security interest in oil, gas, or 
other minerals on or under the property regardless of whether the value 
of those products were included in the appraisal value of the property. 
This security interest is reflected in the FSA mortgage forms.

Appeals of Appraisals

    In making direct loans, FSA obtains real estate appraisals to 
ensure adequate security for the loan. If FSA makes an adverse decision 
that involves the appraisal, applicants generally have the right to 
appeal the decision and the appraisal under 7 CFR part 11. When an 
applicant appeals the decision regarding the appraised value, it has 
been FSA's policy to limit the appeal to the question of whether the 
appraisal complied with USPAP, and the borrower or applicant who filed 
the appeal may obtain a technical appraisal review prepared by a State 
Certified General Appraiser to help determine USPAP compliance. FSA 
proposes to amend 7 CFR 761.7 to reflect this policy. The change is 
proposed because submission of an independent appraisal by an applicant 
or borrower is not useful as two appraisals that both comply with USPAP 
can still differ, but there is no basis for the appeal hearing officer 
to choose one over the other, or some other value. The proposed change 
will allow the borrower or applicant to submit a technical appraisal 
review prepared by a State Certified General Appraiser to determine if 
FSA's appraisal complies with USPAP. The proposed change would also 
require that the technical appraisal review be prepared in accordance 
with USPAP, and paid for by the borrower or applicant.
    For appeals of real estate appraisals in primary loan servicing 
cases, FSA proposes to amend 7 CFR 766.115 to clarify that the 
technical appraisal reviews must be prepared by a State Certified 
General Appraiser. The borrower in a primary loan servicing case may 
still obtain an independent appraisal as provided for by 7 CFR 
766.115(a)(2) and CONACT section 353(j) (7 U.S.C. 2001).
    For appeals of chattel appraisals, FSA's current policy is to limit 
the question to whether FSA's appraisal is consistent with present 
market value of similar items in the area, and to allow the applicant 
or borrower to submit an independent appraisal review to help determine 
that question. FSA proposes amending 7 CFR 761.7 to reflect this 
policy.
    FSA proposes to remove 7 CFR 761.7(d) regarding FSA's internal 
administrative appraisal and technical reviews since the provisions are 
for internal procedures and therefore not required to be in the Code of 
Federal Regulations.

Appraisal Requirements for Guaranteed Loans

    FSA currently requires an appraisal of the security for all 
guaranteed loans in excess of $50,000 in accordance with 7 CFR 762.127. 
The $50,000 threshold has not changed since the start of the program in 
the early 1980's. FSA proposes to increase the minimum guaranteed loan 
amount for which a real estate appraisal will be required.
    OMB Circular A-129 states, ``Agencies should ensure that a State 
licensed or certified appraiser prepares an appraisal for all credit 
transactions over $100,000 ($250,000 for business loans).'' The lending 
industry's regulators, such as the Federal Deposit Insurance 
Corporation and the Farm Credit Administration, currently allow 
$250,000 as their threshold for business type (agricultural purpose) 
loans. Therefore, FSA proposes to increase the minimum guaranteed loan 
amount required for a real estate appraisal from $50,000 to the minimum 
level of $250,000. There is no comparable proposal to raise the limit 
for direct FSA loans because direct loans typically display more 
serious financial stress, pose significantly more risk of loss to FSA, 
and warrant stricter safeguards.
    For loans of $250,000 or less, lenders may document value in the 
same manner as for their unguaranteed loans, for example statement of 
value, tax assessment, automated valuation model, and so on. If an 
appraisal is completed voluntarily for loans of $250,000 or less, it is 
not required to be USPAP compliant. The security for the loan must 
still meet the requirements specified in 7 CFR 762.126 to ensure that 
proper and adequate security is obtained to protect the interests of 
the lender and FSA. This change will merely allow lenders to follow 
industry standards to document collateral value.
    Amending the appraisal regulations to increase the minimum loan 
amount to $250,000 will benefit lenders, guaranteed loan applicants, 
and FSA. Some of the applicants are small or family farms for whom 
appraisal fees can be a significant burden. Due to the relatively small 
size of these loans, FSA can expeditiously provide financial assistance 
to these borrowers. Appraisal fees will be reduced, if not eliminated, 
as there will be no cost for an appraisal on loans under $250,000.
    Application processing times also are expected to be reduced 
because of the proposed change, due to the fact that the appraisal will 
not need to be conducted under the new threshold, and this will also 
help make FSA's guaranteed loan program more attractive to lenders and 
their applicants. Faster access to capital is expected to promote 
operation viability and a higher probability of loan repayment.
    Guaranteed loans greater than $250,000 still require a current 
appraisal completed by a State Certified General Appraiser in 
accordance with USPAP in the previous 12 months. As an alternative, FSA 
also proposes to revise 7 CFR 762.127 to allow FSA to waive the 
requirement for loans greater than $250,000 if there is an existing 
appraisal that is more than 12 months old and:
     Overall market conditions have remained stable or 
improved;
     The condition of the property in question is comparable to 
the time of the appraisal; and
     The value of the property has remained the same or 
increased.
    This change would relieve the applicant of the cost of a new 
appraisal. Further, with stable or improving market conditions, there 
would be no additional risk to FSA when collateralizing a loan with 
security that has not had an updated appraisal. No appeal will be 
available on FSA's decision to waive this regulatory requirement.
    The proposed increase from $50,000 to $250,000 would apply to real 
estate appraisals, not chattel appraisals. FSA's policy to not require 
chattel appraisals for loans of $50,000 or less where a strong equity 
position exists would remain.

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    FSA also proposes clarifying in 7 CFR 762.127 that while a formal 
appraisal is not necessary for chattel or real estate that will serve 
as additional security, an estimated value is still required.
    Lastly, the terms ``complete'' and ``limited appraisal'' have been 
determined to be obsolete in the industry. Therefore, FSA proposes to 
remove the references of ``complete'' and ``limited appraisal'' from 
the regulations in 7 CFR part 762.

Leases

    With the increased emphasis on wireless communication, finding 
traditional energy sources, and developing alternative energy sources, 
FSA is receiving more requests to allow borrowers to lease portions of 
their farm for communication towers, wind energy installations, and 
mineral exploration. While usually beneficial to landowners and their 
lenders, these leases may create a financial burden to the borrower as 
a result of unanticipated costs, such as removal of the equipment or 
mitigation of damages. The installations can also make the land 
difficult or impossible to farm, and FSA farm loan borrowers are 
required by law to operate, not lease, the farmland they own and use as 
security.
    Such leases, however, can provide flexibility for farm loan 
borrowers in the form of increased cash flows, reduced debt load, and 
quicker debt reduction that can lead to graduation from FSA credit to 
commercial credit. Each of these situations is unique, and legal 
counsel is often required. Therefore, instructions to cover every 
circumstance cannot be issued in this rule; however, FSA proposes 
certain revisions and clarifications to 7 CFR 765.205(b), 765.252(a), 
and 765.252(b) to allow consistent treatment of such lease requests. 
For example, the proposed change provides that a lease must not 
adversely affect FSA's security interest or the successful operation of 
the farm, and requires FSA review of contracts or agreements related to 
the lease.
    FSA also proposes changes in 7 CFR 765.252 to allow these nonfarm 
type leases be made for any term, instead of the 3- to 5-year limit in 
the present regulations. FSA proposes removing the time limit in order 
to allow qualified nonfarm leases to continue for longer periods since 
these leases provide flexibility and cash flow to the borrower, but do 
not interfere with the successful operation of the farm or adversely 
affect the Government's interest. These standards are central to FSA's 
mission as FSA is required to supply agricultural financing to farm 
operators who cannot obtain funds elsewhere until they are in a 
position to move to commercial credit.

Subordinations

    In a subordination, a lender will give another entity, often 
another lender, its superior lien position. FSA often executes 
subordinations for its direct loans so another lender can provide 
financing to an FSA borrower. This subordination of the lien on FSA 
security allows the borrower to produce a crop, build a house on the 
farm, or do other things that are beneficial to the family farm. These 
FSA subordinations are almost always to another lender that is making a 
loan to the borrower, and the present FSA regulations address this 
circumstance. However, FSA proposes expanding the definition in 7 CFR 
761.2(b) to allow for leases to companies who want to use the land for 
purposes such as alternative energy. Subordinations of real estate to a 
lessee must meet the following conditions (all of which also apply to 
subordinations of real estate to creditors):
     The borrower is not in default or will not be in default 
on FLP loans by the time the subordination closing is complete;
     The borrower can demonstrate, through a current farm 
operating plan, the ability to repay all debt payments scheduled, and 
to be scheduled, during the production cycle;
     Except for CL, the borrower is unable to partially or 
fully graduate;
     The borrower must not be ineligible as a result of a 
conviction for controlled substances according to 7 CFR part 718;
     The borrower must not be ineligible due to 
disqualification resulting from Federal crop insurance violation 
according to 7 CFR part 718;
     The borrower will not use loan funds in a way that will 
contribute to erosion of highly erodible land or conversion of wetlands 
as described in subpart G of 7 CFR part 1940;
     Any planned development of real estate security will be 
performed as directed by the lessor or creditor, as approved by FSA, 
and will comply with the terms and conditions of 7 CFR 761.10;
     Subordinations of shared appreciation agreement (SAA) 
mortgages may only be approved when there is no increase in the debt 
that is prior to the SAA debt; and
     FSA may subordinate non-program security only when it is 
also security for a program loan with the same borrower.
    FSA proposes amending 7 CFR 765.205(b) to extend subordination 
authority to include leases, as the contracts presented to borrowers by 
companies who want to use the land for alternative energy or 
communication towers often contain subordination language in addition 
to the terms of the lease.
    FSA also proposes amending 7 CFR 765.205(b)(1) to allow a 
subordination of real estate security to creditors if the loan will be 
used to refinance a loan originally made for an authorized loan purpose 
by FSA or another creditor. This will allow FSA to help an existing 
borrower refinance a farm loan with another loan more beneficial to the 
operation. This type of financing is often used when a lower interest 
rate becomes available.

Disposition of Chattel Proceeds

    Section 335(f)(6) of the CONACT (7 U.S.C. 1985(f)(6)) allows FSA to 
require borrowers to plan for, or report on, how proceeds from the sale 
of collateral property will be used. Currently, FSA requires borrowers 
with chattel security to sign detailed annual agreements on the use of 
all chattel proceeds, even beyond those required for payment of FLP 
loans, and to immediately report to FSA all proceeds from the sale of 
chattel security. FSA proposes to limit these agreements to proceeds 
from the disposition of normal income security and will be applied to 
the FSA indebtedness in order to save time for both the borrower and 
FSA. This change would mean that for proceeds that will not be applied 
to FSA loans, borrowers who live some distance from the nearest FSA 
office could save time and expense required for ``in person'' reporting 
and submission of chattel proceeds. FSA personnel will also be free to 
perform other duties instead of tracking proceeds used to pay other 
creditors. The borrower will still be informed of their rights and 
responsibilities regarding the security. FSA will continue to comply 
with the statutory release requirements in Section 335(f) of the 
CONACT, including release of normal income security prior to 
acceleration in an amount sufficient to pay for essential household and 
farm operating expenses, while not reducing the oversight of chattel 
security. FSA proposes to change 7 CFR 765.302 to track only normal 
income security proceeds that are planned for release or applied to FSA 
FLP payments instead of attempting real time monitoring of all 
proceeds. This will be accomplished with the use of an agreement for 
each production cycle (with revisions as necessary) on which the 
borrower and FSA agree to the use of proceeds that will be used to make 
payments. With the proposed change, FSA will use an internal form that 
records the proceeds of both normal income and basic security as they 
are

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submitted. To reflect this change to the regulation, FSA proposes to 
conform the current definition of the agreement for the use of proceeds 
in 7 CFR 761.2(b).
    FSA further proposes removing 7 CFR 765.302(b), which provides that 
an agreement for the use of proceeds is in effect until the proper 
disposition of all listed chattel security has been accomplished or a 
new agreement is executed. The duration of the agreement is specified 
in the agreement itself and 7 CFR 765.302(b) is unnecessary.
    FSA also proposes to remove 7 CFR 765.302(h), which requires the 
borrower to maintain documentation of all dispositions of chattel 
proceeds, because it goes beyond the scope of the new proposed 
definition of the agreement, which is limited to proceeds that will be 
applied to loan payments. The recordkeeping requirement of all chattel 
proceeds, regardless of whether applied to loan payments, is still 
important for annual planning purposes, however, so FSA proposes to 
incorporate the recordkeeping requirement into 7 CFR 765.301(a).

Release

    Due the changing needs of many in the rural community, FSA is 
proposing to amend 7 CFR 765.305 and 765.351(f) to expand releases of 
its liens. The proposed change would allow FSA to release some security 
without compensation for borrowers who have not had primary loan 
servicing within the last 3 years if the loan security margin would be 
150 percent or more after the release, and the borrower is:
     Graduating on all chattel or all real estate debt (that 
is, partial graduation);
     Using the security to obtain other credit; or
     Transferring a small tract of real estate to a person 
related by blood or marriage.
    Loans of borrowers in these circumstances have a low risk of loss 
to the Government, and the partial release of security without 
compensation would be acceptable when weighed against the benefits that 
would accrue to the borrower. In addition, supporting this change is 
the fact that at the end of fiscal year 2010, the dollar delinquency on 
the FLP direct loan program as a whole was 5.9 percent and the loss 
rate was 1.2 percent. These are remarkably positive statistics in light 
of FSA's mission to serve those who cannot get credit elsewhere. This 
success is, of course, partially due to the nature and resilience of 
farmers, but beyond that, there have been several policies that have 
brought the delinquencies and losses down:
     The extensive servicing options originally made available 
through the Agricultural Credit Act of 1987;
     The Treasury Offset Program (TOP) brought about by the 
Debt Collection and Improvement Act of 1996 and the continuation of 
administrative offsets;
     Continued financial support by the various FSA farm 
programs (commodity and price support);
     Stable FLP credit policies; and
     Continued emphasis on looking at cash flow and not just 
collateral when making credit decisions.
    As the average age for farmers increases and their numbers 
diminish, FSA is encountering instances where farmers with loans that 
have security margins of 150 percent or more are requesting releases of 
security for partial graduations (when a borrower obtains commercial 
credit on all real estate or all chattel loans), to obtain financing 
for non-farm businesses, to facilitate gradual generational transfers 
of farm property to family members, or to manage future taxes by 
transferring assets to family members. These proposed changes may allow 
successful farmers to expand into businesses such as selling seed and 
feed retail, trucking or welding, that while not eligible for FSA 
financing, still contribute to their income and provide services to the 
local community. Further, the proposed changes allow borrowers to 
transfer small tracts to family members related by blood or marriage to 
start a business, or build a house, or any number of things that could 
spur economic activity in the area. Although these borrowers have 
successful operations and their loans are better secured than most 
direct borrowers, graduation requirements will still ensure that they 
are unable to move entirely to commercial credit before FSA releases 
security. This policy will help support the rural population while 
still protecting the Government.

Conservation Contracts

    The Conservation Contract Program provides debt cancellation for 
FLP borrowers in exchange for them taking land out of production for 
conservation purposes. The proposed changes noted below will reduce the 
costs to FSA and the burden of administering the Conservation Contract 
Program while still ensuring the conservation objective is met by 
clarifying and revising the Conservation Contract Program regulations 
in 7 CFR 766.110.
    There are many instances where land proposed for a Conservation 
Contract is encumbered under another conservation program for which the 
borrower receives compensation. If the conservation program, whether 
administered by Federal, State, or local government, compensates the 
borrower for similar conservation, wildlife or recreation benefits on 
the same land, FSA proposes that the land generally will not be 
eligible for a Conservation Contract. The borrower, who has already 
received payment for the conservation benefit, should not receive 
additional payments on land in the form of a debt cancellation with a 
Conservation Contract. This change would, thus, eliminate inadvertent 
duplicative payments, sometimes referred to as ``double-dipping.'' 
However, cost-share payments from other sources for practices that 
improve the property as opposed to solely conserving the property, such 
as pesticide application, diking, or noxious weed removal, are not 
considered a duplication of benefits as long as such practices are 
consistent with with the Conservation Contract management plan. 
Borrowers would be required to certify on the Conservation Contract as 
to any participation in other conservation programs for the 
Conservation Contract land. Any portion of the land that was already 
encumbered by another conservation program would be ineligible for a 
Conservation Contract.
    FSA also proposes to clarify in 7 CFR 766.110(m) that FSA would not 
grant subordinations of the Conservation Contract. This will ensure 
that the contract is not lost through foreclosure of a lien by a holder 
who obtains a superior lien through a subordination.
    FSA proposes to require in 7 CFR 766.110(c) a legal right-of-way or 
other legal, permanent access to the Conservation Contract property for 
the life of the Conservation Contract. The current regulation is silent 
on this issue. On Conservation Contract properties that are land-locked 
with no legal right of access, FSA officials or the management 
authority cannot verify compliance with the Conservation Contract. The 
Conservation Contract form FSA-2535 includes the following statement in 
paragraph 11.B: ``Grantee has a right of reasonable ingress and egress 
to the contract area over the Grantor's property, whether or not the 
property is adjacent to the contract area, for the exercise of any of 
the rights of Grantee under this contract,'' but this does not give FSA 
or the management authority the legal right to access the property 
through a third party's property. In addition, if the land is 
transferred to a subsequent landowner, it is possible that access may 
be refused by the subsequent landowner despite the contract's language. 
A legal right-of-way that is recorded, in addition to the

[[Page 22448]]

Conservation Contract, will assure that FSA or the management authority 
will have access to inspect the property for the life of the 
Conservation Contract.
    FSA is proposing to change 7 CFR 766.110 to require a minimum 
parcel size of 10 contiguous acres to better manage Conservation 
Contracts. Presently, there are numerous small parcels with 
Conservation Contracts that are not suitable for the purposes of the 
program as they are too small for conservation, recreation, or wildlife 
purposes. In addition, they are difficult to identify, access, and 
manage. Establishing a minimum size as a general requirement has 
minimal adverse effect on the borrowers or FSA, and FSA or the 
management authority will be better able to inspect the property for 
contract compliance, to ensure protection of the natural resource and 
recreational areas.
    Further, FSA proposes to require subordinations from prior 
lienholders before approval of the Conservation Contract. Under the 
existing regulations, if a borrower with a Conservation Contract 
defaults on a debt with another lender that is secured by the same land 
as that subject to the Conservation Contract, that creditor could 
foreclose on the property and effectively remove the Conservation 
Contract. The intent of the program is to establish long-term 
conservation, wildlife, or recreation benefits. Requiring a 
subordination from a prior lienholder would ensure that the 
Conservation Contract will stay with the land for the duration of the 
contract.
    FSA is proposing new damages for a breach of contract in this rule. 
Currently a grantor who breaches the Conservation Contract by using the 
land in a manner not permitted under the contract, such as building an 
unauthorized structure or cutting down timber, must either restore 
damaged or altered land, or repay the amount of the debt cancellation. 
FSA has determined that this does not provide sufficient incentive to 
ensure the grantor's compliance with the terms of the Conservation 
Contract as the original debt is reinstated, but the public still loses 
the benefit of the conservation of the land. The purpose of the 
Conservation Contract Program is to place at-risk land under a 
conservation contract for a set period of time, protect the land, and 
enhance its conservation, wildlife or recreation value. The 
consequences of a breach of the Conservation Contract must discourage 
violations and abuse of the program. Therefore, FSA proposes to require 
any violator to restore damaged or altered areas or, if the land is not 
restored within 90 days, pay FSA the amount of the debt previously 
cancelled, plus interest to the date of payment, plus any actual 
expenses incurred by FSA in enforcing the Conservation Contract, plus a 
penalty in the amount of 25 percent of the amount of the debt 
cancelled. Such interest will accrue either at the note rate for a 
grantor indebted to FSA or at the non-program interest rate for a 
grantor who is no longer indebted to FSA or a successor-in-interest. 
Also, grantors who still have an FSA loan and breach a Conservation 
Contract will be considered to be in non-monetary default on their loan 
if the violation is not timely cured, and FSA will take collection 
actions accordingly. These changes are expected to reduce the number of 
Conservation Contract breaches and help to ensure that the Conservation 
Contract Program accomplishes its important purpose of protecting the 
land and enhancing its conservation, wildlife, or recreation value. 
Conservation Contracts executed prior to the implementation of this 
rule will be enforced according to the terms and regulations in force 
at the time of their execution.
    Lastly, FSA proposes to clarify that uplands eligible for 
Conservation Contracts include buffer areas necessary not only for the 
protection of proposed Conservation Contract areas, but also for 
protection of the area enrolled in other conservation programs.

Technical Amendments

    FSA proposes to remove Sec.  761.103(b)(8) requiring loan 
evaluation as part of the farm assessment. The farm assessment helps 
determine the appropriate level of FSA oversight, credit counseling, 
and training needs of the applicant. A loan evaluation is also 
completed by FSA when a loan request is processed and is intended to be 
a narrative to address eligibility, collateral, capacity, capital, and 
loan conditions of the specific loan. Therefore, it is duplicative to 
include a loan evaluation as part of the farm assessment. A loan 
evaluation also should not be a burden on the applicant. Therefore, FSA 
proposes to remove the requirement for a loan evaluation to be part of 
the initial farm assessment.
    Appendix A to Subpart C of part 766, Notice of Availability of Loan 
Servicing to Borrowers who are Current, Financially Distressed, or Less 
Than 90 Days Past Due, does not match the requirement established in 
Sec.  766.104(a)(5). The paragraph requires borrowers who are 
financially distressed or current to pay a portion of the interest due 
on their loans to qualify for primary loan servicing. Appendix A 
section (a)(4), paragraph entitled ``payment of interest,'' however, 
implies that the borrower will always have to pay a portion of the 
interest that has accrued on FLP loans when a restructuring is closed. 
FSA proposes to revise Appendix A to remove this inconsistency and 
reflect that the requirement to pay some interest on the account only 
applies to borrowers who are not delinquent at closing.
    Previously, definitions applicable to 7 CFR parts 761 through 767 
were moved to 7 CFR 761.2(b); however, several conforming changes to 7 
CFR part 762 were not made at that time. FSA proposes conforming 
changes to 7 CFR part 762 to properly cite the location of the 
definitions and remove ``or ranching'' from 7 CFR 762.146(b)(1). 
Lastly, this rule proposes to remove obsolete CFR references for FLP 
and to replace them with current references that were missed when FSA 
published the Regulatory Streamlining regulation on November 8, 2007 
(72 FR 63242-63361).

Executive Orders 12866 and 13563

    Executive Order 12866, ``Regulatory Planning and Review,'' and 
Executive Order 13563, ``Improving Regulation and Regulatory Review,'' 
direct agencies to assess all costs and benefits of available 
regulatory alternatives and, if regulation is necessary, to select 
regulatory approaches that maximize net benefits (including potential 
economic, environmental, public health and safety effects, distributive 
impacts, and equity). Executive Order 13563 emphasized the importance 
of quantifying both costs and benefits, of reducing costs, of 
harmonizing rules, and of promoting flexibility.
    The Office of Management and Budget (OMB) designated this rule as 
not significant under Executive Order 12866 and, therefore, OMB was not 
required to review this proposed rule.

Clarity of the Regulation

    Executive Order 12866, as supplemented by Executive Order 13563, 
requires each agency to write all rules in plain language. In addition 
to your substantive comments on these proposed rules, we invite your 
comments on how to make them easier to understand. For example:
     Are the requirements in the rule clearly stated? Are the 
scope and intent of the rule clear?
     Does the rule contain technical language or jargon that is 
not clear?
     Is the material logically organized?
     Would changing the grouping or order of sections or adding 
headings make the rule easier to understand?
     Could we improve clarity by adding tables, lists, or 
diagrams?

[[Page 22449]]

     Would more, but shorter, sections be better? Are there 
specific sections that are too long or confusing?
     What else could we do to make the rule easier to 
understand?

Regulatory Flexibility Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601), 
FSA is certifying that there would not be a significant economic impact 
on a substantial number of small entities. All FSA direct loan 
borrowers and all farm entities affected by this rule are small 
businesses according to the North American Industry Classification 
System and the U.S. Small Business Administration. There is no 
diversity in size of the entities affected by this rule, and the costs 
to comply with it are the same for all entities.
    In this rule, FSA is proposing to revise regulations that affect 
both loan making and loan servicing. FSA does not expect these changes 
to impose any additional cost to the borrowers, and in fact, FSA 
expects some Government, borrower, and lender costs could be saved 
because:
     Third party appraisals could be used in some cases in 
which FSA currently has to pay for new appraisals that include the 
mineral's value in real estate appraisals.
     A waiver for some guaranteed loan appraisals will save 
lenders and guaranteed borrowers the expense of ordering new appraisals 
when it is not necessary to protect Government interests.
     FSA will allow the release of security for other credit or 
generational transfers when FSA is very well secured.
     Planning for the disposition of chattel proceeds will be 
simplified, while FSA still tracks all proceeds to be applied on FLP 
loans.
     Elimination of double-dipping and strengthening the 
oversight of the real estate entered into the Conservation Contract 
program will allow the Government to fairly compensate the owners of 
the valuable natural resources without the risk of losing usage 
restrictions which have been paid for by the taxpayers.
    Therefore, FSA certifies that this rule will not have a significant 
economic impact on a substantial number of small entities.

Environmental Review

    The environmental impacts of this proposed rule have been 
considered in a manner consistent with the provisions of the National 
Environmental Policy Act (NEPA, 42 U.S.C. 4321-4347), the regulations 
of the Council on Environmental Quality (40 CFR parts 1500-1508), and 
the FSA regulations for compliance with NEPA (7 CFR part 799 and 7 CFR 
part 1940, subpart G). FSA concluded that the changes to streamline the 
servicing process and give the borrower greater flexibility explained 
in this proposed rule are administrative in nature and will not have a 
significant impact on the quality of the human environment either 
individually or cumulatively. The environmental responsibilities for 
each prospective applicant will not change from the current process 
followed for all Farm Loan Program actions (7 CFR 1940.309). Therefore 
FSA will not prepare an environmental impact statement on this proposed 
rule.

Executive Order 12372

    Executive Order 12372, ``Intergovernmental Review of Federal 
Programs,'' requires consultation with State and local officials. The 
objectives of the Executive Order are to foster an intergovernmental 
partnership and a strengthened Federalism, by relying on State and 
local processes for State and local government coordination and review 
of proposed Federal Financial assistance and direct Federal 
development. For reasons set forth in the Notice to 7 CFR part 3015, 
subpart V (48 FR 29115, June 24, 1983), the programs and activities 
within this rule are excluded from the scope of Executive Order 12372.

Executive Order 12988

    This proposed rule has been reviewed in accordance with Executive 
Order 12988, ``Civil Justice Reform.'' As proposed, this rule preempts 
State and local laws and regulations that are in conflict with this 
rule. Before any judicial action may be brought concerning the 
provisions of this rule the administrative appeal provisions of 7 CFR 
parts 11 and 780 must be exhausted.

Executive Order 13132

    This rule has been reviewed under Executive Order 13132, 
``Federalism.'' The policies contained in this rule do not have any 
substantial direct effect on States, the relationship between the 
Federal government and the States, or the distribution of power and 
responsibilities among the various levels of government. Nor does this 
proposed rule impose substantial direct compliance costs on State and 
local governments. Therefore, consultation with the States is not 
required.

Executive Order 13175

    This rule has been reviewed for compliance with Executive Order 
13175, ``Consultation and Coordination with Indian Tribal 
Governments.'' The Executive Order imposes requirements on the 
development of regulatory policies that have Tribal implications or 
preempt Tribal laws. The policies contained in this rule do not impose 
substantial unreimbursed direct compliance costs on Indian Tribal 
governments or have Tribal implications that preempt Tribal law. USDA 
will undertake, within 6 months after this rule becomes effective, a 
series of regulation Tribal consultation sessions to gain input by 
Tribal officials concerning the impact of this rule on Tribal 
governments, communities, and individuals. These sessions will 
establish a baseline of consultation for future actions, should any 
become necessary, regarding this rule. Reports from these sessions for 
consultation will be made part of the USDA annual reporting on Tribal 
Consultation and Collaboration. USDA will respond in a timely and 
meaningful manner to all Tribal government requests for consultation 
concerning this rule and will provide additional venues, such as 
Webinars and teleconferences, to periodically host collaborative 
conversations with Tribal leaders and their representatives concerning 
ways to improve this rule in Indian country.

Unfunded Mandates

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA, Pub. L. 
1044) requires Federal agencies to assess the effects of their 
regulatory actions on State, local, or Tribal governments or the 
private sector. Agencies generally must prepare a written statement, 
including a cost benefit analysis, for proposed and final rules with 
Federal mandates that may result in expenditures of $100 million or 
more in any 1 year for State, local, or Tribal governments, in the 
aggregate, or to the private sector. UMRA generally requires agencies 
to consider alternatives and adopt the more cost effective or least 
burdensome alternative that achieves the objectives of the rule. This 
rule contains no Federal mandates under the regulatory provisions of 
Title II of the Unfunded Mandates Reform Act of 1995 (UMRA, Pub. L. 
104-4) for State, local, or Tribal governments, or private sector. 
Therefore, this rule is not subject to the requirements of sections 202 
and 205 of UMRA.

[[Page 22450]]

Paperwork Reduction Act

    The proposed amendments are either revisions of internal operations 
or modifications to existing responses that will have no net effect on 
paperwork burden. For example, the proposed new requirement for 
documentation to permit the use of guaranteed loan appraisals over 12 
months old in certain situations is offset by waiving the requirement 
for a new appraisal in every situation where the current appraisal is 
more than 12 months old.
    The borrower certification regarding double dipping in the 
Conservation Contract is a statement on an existing form that does not 
add burden.
    Therefore, the amendments proposed for 7 CFR parts 761, 762, 765, 
766, and 772 require no changes or new collection to the currently 
approved information collections by OMB under the control numbers of 
0560-0155, 0560-0233, 0560-0236, 0560-0237, 0560-0238 and 0560-0230.

E-Government Act Compliance

    FSA is committed to complying with the E-Government Act, to promote 
the use of the Internet and other information technologies to provide 
increased opportunities for citizen access to Government information 
and services and other purposes.

Federal Assistance Programs

    The title and number of the Federal assistance programs, as found 
in the Catalog of Federal Domestic Assistance, to which this proposed 
rule would apply are:

10.099 Conservation Loans
10.404 Emergency Loans
10.406 Farm Operating Loans
10.407 Farm Ownership Loans

List of Subjects

7 CFR Part 761

    Accounting, Loan programs--agriculture, Rural areas.

7 CFR Part 762

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

7 CFR Part 765

    Agriculture, Agricultural commodities, Credit, Livestock, Loan 
programs--agriculture.

7 CFR Part 766

    Agriculture, Agricultural commodities, Credit, Livestock, Loan 
programs--agriculture.

7 CFR Part 772

    Agriculture, Credit, Loan programs--agriculture, Rural areas.

    For the reasons discussed above, FSA proposes to amend 7 CFR 
chapter VII as follows:

PART 761--FARM LOAN PROGRAM; GENERAL PROGRAM ADMINISTRATION

    1. The authority citation for part 761 continues to read as 
follows:

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

Subpart A--General Provisions

    2. In Sec.  761.2(b) revise the definitions of ``Agreement for the 
use of proceeds'' and ``Subordination'' to read as follows:


Sec.  761.2  Abbreviations and definitions.

* * * * *
    (b) * * *
    Agreement for the use of proceeds is an agreement between the 
borrower and the Agency for each production cycle that reflects the 
proceeds from the sale of normal income security that will be used to 
pay scheduled FLP loan installments, including any past due 
installments, during the production cycle covered by the agreement.
* * * * *
    Subordination is a creditor's temporary relinquishment of all or a 
portion of its lien priority to another party providing the other party 
with a priority lien on the collateral.
* * * * *
    3. Amend Sec.  761.7 as follows:
    a. Revise paragraph (b)(1);
    b. Add paragraph (b)(3); and
    c. Revise paragraph (d).
    The revisions and addition read as follows:


Sec.  761.7  Appraisals.

* * * * *
    (b) * * *
    (1) Real estate appraisals, technical appraisal reviews and their 
respective forms must comply with the standards contained in USPAP, as 
well as applicable Agency regulations and procedures for the specific 
FLP activity involved. Applicable appraisal procedures and regulations 
are available for review in each Agency State Office.
* * * * *
    (3) For direct FO loans secured by real estate after December 23, 
1985, the appraisal must include the value of oil, gas, and other 
minerals even if the minerals have no known or nominal value.
* * * * *
    (d) Appraisal appeals. Challenges to an appraisal used by the 
Agency are limited as follows:
    (1) When an applicant or borrower challenges a real estate 
appraisal used by the Agency for any loan making or loan servicing 
decision, except primary loan servicing decisions as specified in Sec.  
766.115 of this chapter, the issue for review is limited to whether the 
appraisal used by the Agency complies with USPAP. The applicant or 
borrower must submit a technical appraisal review prepared by a State 
Certified General Appraiser that will be used to determine whether the 
Agency's appraisal complies with USPAP. The applicant or borrower is 
responsible for obtaining and paying for the technical appraisal 
review.
    (2) When an applicant or borrower challenges a chattel appraisal 
used by the Agency for any loan making or loan servicing decision, 
except for primary loan servicing decisions as specified in Sec.  
766.115 of this chapter, the issue for review is limited to whether the 
appraisal used by the Agency is consistent with present market values 
of similar items in the area. The applicant or borrower must submit an 
independent appraisal that will be used to determine whether the 
appraisal is consistent with present market values of similar items in 
the area. The applicant or borrower is responsible for obtaining and 
paying for the independent appraisal.

Subpart C--Supervised Credit


Sec.  761.103  [Amended]

    4. Amend Sec.  761.103 by removing paragraph (b)(8) and 
redesignating paragraphs (b)(9), (10), and (11) as paragraphs (b)(8), 
(9), and (10), respectively.

PART 762--GUARANTEED FARM LOANS

    5. The authority citation for part 762 continues to read as 
follows:

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


Sec.  762.120  [Amended]

    6. Amend Sec.  762.120 as follows:
    a. In paragraph (a)(2) introductory text, remove the phrase ``and 
ranch'';
    b. In paragraphs (k)(3) and (l)(2), remove the phrase ``or 
ranching''; and
    c. In paragraph (m), remove the phrase ``or ranchers''.


Sec.  762.121  [Amended]

    7. In Sec.  762.121(a)(1)(v), remove the words ``and ranch''.
    8. Revise Sec.  762.127 to read as follows:


Sec.  762.127  Appraisal requirements.

    (a) General. The general requirements for an appraisal are:
    (1) Value of collateral. The lender is responsible for ensuring 
that the value of chattel and real estate pledged as

[[Page 22451]]

collateral is sufficient to fully secure the guaranteed loan.
    (2) Additional security. The lender is not required to complete an 
appraisal of chattel or real estate that will serve as additional 
security, but the lender must provide an estimated value.
    (3) Appraisal cost. Except for authorized liquidation expenses, the 
lender is responsible for all appraisal costs, which may be passed on 
to the borrower, or transferee in the case of a transfer and 
assumption.
    (b) Chattel security. The requirements for chattel appraisals are:
    (1) Need for chattel appraisal. A current appraisal (not more than 
12 months old) of primary chattel security is required on all loans 
except loans or lines of credit for annual production purposes secured 
by crops, which require an appraisal only when the guarantee is 
requested late in the current production year and actual yields can be 
reasonably estimated. An appraisal is not required for loans of $50,000 
or less if a strong equity position exists.
    (2) Basis of value. The appraised value of chattel property will be 
based on public sales of the same or similar property in the market 
area. In the absence of such public sales, reputable publications 
reflecting market values may be used.
    (3) Appraisal form. Appraisal reports may be on the Agency's 
appraisal of chattel property form or on any other appraisal form 
containing at least the same information.
    (4) Experience and training. Chattel appraisals will be performed 
by appraisers who possess sufficient experience or training to 
establish market (not retail) values as determined by the Agency.
    (c) Real estate security. The requirements for real estate 
appraisals are:
    (1) Loans of $250,000 or less. The lender must document the value 
of the real estate in the same manner as their non-guaranteed loans. If 
an appraisal is used, it does not have to be USPAP compliant.
    (2) Loans greater than $250,000. The lender must document the value 
of real estate using a current appraisal (not more than 12 months old) 
completed by a State Certified General Appraiser. The Agency may allow 
an appraisal more than 12 months old to be used only if documentation 
provided by the lender reflects each of the following:
    (i) Market conditions have remained stable or improved based on 
sales of similar properties,
    (ii) The property in question remains in the same or better 
condition, and
    (iii) The value of the property has remained the same or increased.
    (3) Agency determinations under paragraph (c)(2) of this section to 
permit appraisals more than 12 months old are not appealable.


Sec.  762.145  [Amended]

    9. In Sec.  762.145(b)(4) and (e)(1), remove the citation ``Sec.  
762.102(b)'' and add in its place the citation ``Sec.  761.2(b) of this 
chapter''.


Sec.  762.146  [Amended]

    10. In Sec.  762.146(b)(6) and (e)(1), remove the citation ``Sec.  
762.102(b)'' and add in its place the citation ``Sec.  761.2(b) of this 
chapter'' and in paragraph (b)(1) by removing the text ``or ranching''.


Sec.  762.149  [Amended]

    11. In Sec.  762.149(b)(1)(iii) introductory text, remove the 
citation ``Sec.  762.102'' and add in its place the citation ``Sec.  
761.2(b) of this chapter''.


Sec.  762.150  [Amended]

    12. In Sec.  762.150(b)(5) and (d)(2), remove the text ``and 
ranchers'' and remove the citation ``Sec.  762.102'' and add in its 
place the citation ``Sec.  761.2(b) of this chapter''.

PART 765--DIRECT LOAN SERVICING--REGULAR

    13. The authority citation for part 765 continues to read as 
follows:

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

Subpart E--Protecting the Agency's Security Interest


Sec.  765.205  Subordination of liens.

    14. Revise Sec.  765.205(b), (c) introductory text, and (c)(1) to 
read as follows:
* * * * *
    (b) Subordination of real estate security. (1) If a lender requires 
that the Agency subordinate its lien position on the borrower's 
existing property in order for the borrower to acquire new property, 
the Agency will obtain a valid mortgage and the required lien position 
on the new property. The Agency will require title clearance and loan 
closing for the property in accordance with Sec.  764.402 of this 
chapter.
    (2) If the borrower is an entity and the Agency has taken real 
estate as additional security on property owned by a member, a 
subordination for any authorized loan purpose may be approved when it 
meets the requirements in paragraph (b)(3) of this section and it is 
needed for the entity member to finance a separate farming operation. 
The subordination must not cause the unpaid principal and interest on 
the FLP loans to exceed the value of loan security or otherwise 
adversely affect the security.
    (3) The Agency will approve a request for subordination of real 
estate to a creditor if:
    (i) The loan will be used for an authorized loan purpose or is to 
refinance a loan made for an authorized loan purpose by the Agency or 
another creditor;
    (ii) The credit is essential to the farming operation, and the 
borrower cannot obtain the credit without a subordination;
    (iii) The FLP loan is still adequately secured after the 
subordination, or the value of the loan security will be increased by 
an amount at least equal to the advance to be made under the 
subordination;
    (iv) Except as authorized by paragraph (c)(2) of this section, 
there is no other subordination outstanding with another lender in 
connection with the same security;
    (v) The subordination is limited to a specific amount;
    (vi) The loan made in conjunction with the subordination will be 
closed within a reasonable time and has a definite maturity date;
    (vii) If the loan is made in conjunction with a guaranteed loan, 
the guaranteed loan meets the requirements of Sec.  762.142(c) of this 
chapter;
    (viii) The borrower is not in default or will not be in default on 
FLP loans by the time the subordination closing is complete;
    (ix) The borrower can demonstrate, through a current farm operating 
plan, the ability to repay all debt payments scheduled, and to be 
scheduled, during the production cycle;
    (x) Except for CL, the borrower is unable to partially or fully 
graduate;
    (xi) The borrower must not be ineligible as a result of a 
conviction for controlled substances according to part 718 of this 
chapter;
    (xii) The borrower must not be ineligible due to disqualification 
resulting from Federal crop insurance violation according to part 718 
of this chapter;
    (xiii) The borrower will not use loan funds in a way that will 
contribute to erosion of highly erodible land or conversion of wetlands 
as described in part 1940, subpart G of this title;
    (xiv) Any planned development of real estate security will be 
performed as directed by the lessor or creditor, as approved by the 
Agency, and will comply with the terms and conditions of Sec.  761.10 
of this chapter;
    (xv) If a borrower with an SAA mortgage is refinancing a loan held 
by

[[Page 22452]]

a lender, subordination of the SAA mortgage may only be approved when 
the refinanced loan does not increase the amount of debt; and
    (xvi) In the case of a subordination of non-program loan security, 
the non-program loan security also secures a program loan with the same 
borrower.
    (4) The Agency will approve a request for subordination of real 
estate to a lessee if the conditions in paragraphs (b)(3)(viii) through 
(b)(3)(xvi) of this section are met.
    (c) Chattel security. The requirements for chattel subordinations 
are as follows:
    (1) For loans secured by chattel, the subordination must meet the 
conditions contained in paragraphs (b)(3)(i) through (xiii) of this 
section.
* * * * *

Subpart F--Required Use and Operation of Agency Security

    15. Amend Sec.  765.252 as follows:
    a. Revise paragraphs (a) heading and introductory text, (a)(1), 
(a)(2), (a)(4), (b)(1), and (b)(2); and
    b. Add paragraphs (a)(5) and (b)(4).
    The revisions and additions read as follows:


Sec.  765.252  Lease of security.

    (a) Real estate surface leases. The borrower must request prior 
approval to lease the surface of real estate security. The Agency will 
approve requests provided the following conditions are met:
    (1) The lease will not adversely affect the Agency's security 
interest;
    (2) The term of consecutive leases for agricultural purposes does 
not exceed 3 years, or 5 years if the borrower and the lessee are 
related by blood or marriage. The term of surface leases for nonfarm 
purposes, such as wind turbines, communication towers, or similar 
installations can be for any term;
* * * * *
    (4) The lease does not hinder the future operation or success of 
the farm, or, if the borrower has ceased to operate the farm, the 
requirements specified in Sec.  765.253 are met; and
    (5) The lease and any contracts or agreements in connection with 
the lease must be reviewed and approved by the Government.
    (b) * * *
    (1) For FO loans secured by real estate on or after December 23, 
1985, and loans other than FO loans secured by real estate and made 
from December 23, 1985, to (effective date of the final rule), the 
value of the mineral rights must have been included in the original 
appraisal in order for the Agency to obtain a security interest in any 
oil, gas, and other mineral associated with the real estate security.
    (2) For all other loans not covered by paragraph (b)(1) of this 
section, the Agency will obtain a security interest in any oil, gas, 
and other mineral on or under the real estate pledged as collateral in 
accordance with the applicable security agreement, regardless of 
whether such minerals were included in the original appraisal.
* * * * *
    (4) The term of the mineral lease is not limited.
* * * * *


Sec.  765.253  [Amended]

    16. Amend Sec.  765.253 by removing paragraph (d) and redesignating 
paragraph (e) as paragraph (d).

Subpart G--Disposal of Chattel Security

    17. Revise Sec.  765.301(a) to read as follows:


Sec.  765.301  General.

    (a) The borrower must account for all chattel security, and 
maintain records of dispositions of chattel security and the actual use 
of proceeds. The borrower must make these records available to the 
Agency upon request.
* * * * *
    18. Amend Sec.  765.302 as follows:
    a. Revise paragraph (a);
    b. Remove paragraphs (b) and (h);
    c. Redesignate paragraphs (c), (d), (e), (f), and (g) as paragraphs 
(b), (c), (d), (e), and (f) respectively; and
    d. Revise newly redesignated paragraphs (b) through (e).
    The revisions read as follows:


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.
    (b) The borrower must report any disposition of basic or normal 
income security to the Agency as specified in the agreement for the use 
of proceeds.
    (c) If a borrower wants to dispose of normal income security in a 
way different than provided by the agreement for the use of proceeds, 
the borrower must obtain the Agency's consent before the disposition 
unless all FLP payments planned on the agreement have been paid.
    (d) If the borrower sells normal income security to a purchaser not 
listed in the agreement for the use of proceeds, the borrower must 
immediately notify the Agency of what property has been sold and of the 
name and business address of the purchaser.
    (e) The borrower must provide the Agency with the necessary 
information to update the agreement for the use of proceeds.
* * * * *
    19. Amend Sec.  765.305 by adding paragraph (c) to read as follows:


Sec.  765.305  Release of security interest.

* * * * *
    (c) The Agency will release its lien on chattel security without 
compensation, upon borrower request provided:
    (1) The borrower has not received primary loan servicing within the 
last 3 years;
    (2) The borrower will retain the security and use it as collateral 
for other credit, including partial graduation as specified in Sec.  
765.101;
    (3) The security margin on each FLP direct loan will be 150 percent 
or more after the release. The value of the retained and released 
security will normally be based on appraisals obtained as specified in 
Sec.  761.7 of this chapter; however, well documented recent sales of 
similar properties can be used if the Agency determines a supportable 
decision can be made without current appraisals; and
    (4) Except for CL, the borrower is unable to fully graduate as 
specified Sec.  765.101.

Subpart H--Partial Release of Real Estate Security

    20. Amend Sec.  765.351 as follows:
    a. Revise paragraph (a)(3);
    b. Remove paragraph (a)(4) and redesignate paragraphs (a)(5) 
through (10) as (a)(4) through (a)(9), respectively;
    c. Revise paragraph (b)(1)(ii);
    d. Remove paragraph (b)(1)(iii); and
    e. Add paragraph (f).
    The revisions and addition read as follows:


Sec.  765.351  Requirements to obtain Agency consent.

* * * * *
    (a) * * *
    (3) Except for releases in paragraph (f) of this section, the 
amount received by the borrower for the security being disposed of, or 
the rights being granted, is not less than the market value and will be 
remitted to the lienholders in the order of lien priority;
* * * * *
    (b) * * *
    (1) * * *
    (ii) When the Agency has a security interest in oil, gas, or other 
minerals as provided by Sec.  765.252(b), the sale of such products 
will be considered a disposition of a portion of the security by the 
Agency.
* * * * *

[[Page 22453]]

    (f) Release without compensation. Real estate security may be 
released by FSA without compensation when the requirements of paragraph 
(a) of this section, except paragraph (a)(3) of this section, are met, 
and:
    (1) The borrower has not received primary loan servicing within the 
last 3 years;
    (2) The security is:
    (i) To be retained by the borrower and used as collateral for other 
credit, including partial graduation as specified in Sec.  765.101; or
    (ii) No more than 10 acres, or the minimum size that meets all 
State and local requirements for a division into a separate legal lot, 
whichever is greater, and is transferred without compensation to a 
person who is related to the borrower by blood or marriage;
    (3) The security margin on each FLP direct loan will be above 150 
percent after the release. The value of the retained and released 
security will normally be based on appraisals obtained as specified in 
Sec.  761.7 of this chapter; however, well documented recent sales of 
similar properties can be used if the Agency determines the criteria 
have been met and a sound decision can be made without current 
appraisals; and
    (4) Except for CL, the borrower is unable to fully graduate as 
specified in Sec.  765.101.

PART 766--DIRECT LOAN SERVICING--SPECIAL

    21. The authority citation for part 766 continues to read as 
follows:

    Authority:  5 U.S.C. 301, 7 U.S.C. 1989, and 1981d(c).

Subpart C--Loan Servicing Programs

    22. Amend Sec.  766.110 as follows:
    a. Revise paragraphs (a)(6), (b)(2)(vi), (c) introductory text, and 
(c)(3);
    b. Add paragraphs (c)(4) through (7);
    c. Revise paragraph (e);
    d. Amend paragraph (f), second sentence, by adding the word 
``best'' before the word ``interest''; and
    e. Add paragraphs (m) and (n).
    The revisions and additions read as follows:


Sec.  766.110  Conservation Contract.

    (a) * * *
    (6) Only loans secured by the real estate that will be subject to 
the Conservation Contract may be considered for debt reduction under 
this section.
    (b) * * *
    (2) * * *
    (vi) Buffer areas necessary for the adequate protection of proposed 
Conservation Contract areas, or other areas enrolled in other 
conservation programs;
* * * * *
    (c) Unsuitable acreage. Notwithstanding paragraph (b) of this 
section, acreage is unsuitable for a Conservation Contract if:
* * * * *
    (3) The Conservation Contract review team determines that the land 
does not provide measurable conservation, wildlife, or recreational 
benefits;
    (4) There would be a duplication of benefits as determined by the 
Conservation Contract review team because the acreage is encumbered 
under another Federal, State, or local government program for which the 
borrower has been or is being compensated for conservation, wildlife, 
or recreation benefits;
    (5) The acreage subject to the proposed Conservation Contract is 
encumbered under a Federal, State, or local government cost share 
program that is inconsistent with the purposes of the proposed 
Conservation Contract, or the required practices of the cost share 
program are not identified in the conservation management plan;
    (6) The tract does not contain a legal right of way or other 
permanent access for the term of the contract that can be used by the 
Agency or its designee to carry out the contract; or
    (7) The tract, including any buffer areas, to be included in a 
Conservation Contract is less than 10 acres.
* * * * *
    (e) Conservation management plan. The Agency, with the 
recommendations of the Conservation Contract review team, is 
responsible for developing a conservation management plan. The 
conservation management plan will address the following:
    (1) The acres of eligible land and the approximate boundaries, and
    (2) A description of the conservation, wildlife, or recreation 
benefits to be realized.
* * * * *
    (m) Subordination. For real estate with a Conservation Contract:
    (1) Subordination will be required for all liens that are in a 
prior lien position to the Conservation Contract.
    (2) The Agency will not subordinate Conservation Contracts to liens 
of other lenders or other Governmental entities.
    (n) Breach of Conservation Contract. If the borrower or a 
subsequent owner of the land under the Conservation Contract fails to 
comply with any of its provisions, the Agency will declare the 
Conservation Contract breached. If the Conservation Contract is 
breached, the borrower or subsequent owner of the land must restore the 
land to be in compliance with the Conservation Contract and all terms 
of the conservation management plan within 90 days. If this cure is not 
completed, the Agency will take the following actions:
    (1) For borrowers who have or had a loan in which debt was 
exchanged for the Conservation Contract and breach the Conservation 
Contract, the Agency may reinstate the debt that was cancelled, plus 
interest to the date of payment at the rate of interest in the 
promissory note, and assess liquidated damages in the amount of 25 
percent of the debt cancelled, plus any actual expenses incurred by the 
Agency in enforcing the terms of the Conservation Contract. The 
borrower's account will be considered in non-monetary default; and
    (2) Subsequent landowners who breach the Conservation Contract must 
pay the Agency the amount of the debt cancelled when the contract was 
executed, plus interest at the non-program interest rate to the date of 
payment, plus liquidated damages in the amount of 25 percent of the 
cancelled debt, plus any actual expenses incurred by the Agency in 
enforcing the terms of the Conservation Contract.
    23. Revise Sec.  766.115(a)(1) and (b) to read as follows:


Sec.  766.115  Challenging the Agency appraisal.

    (a) * * *
    (1) Obtain a USPAP compliant technical appraisal review prepared by 
a State Certified General Appraiser of the Agency's appraisal and 
provide it to the Agency prior to reconsideration or the appeal 
hearing;
* * * * *
    (b) If the appraised value of the borrower's assets change as a 
result of the challenge, the Agency will reconsider its previous 
primary loan servicing decision using the new appraisal value.
* * * * *
    24. Revise Appendix A to read as follows:

Appendix A to Subpart C of Part 766--FSA-2512, Notice of Availability 
of Loan Servicing to Borrowers Who Are Current, Financially Distressed, 
or Less Than 90 Days Past Due

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PART 772--SERVICING MINOR PROGRAM LOANS

    25. Revise the authority citation for part 772 continues to read as 
follows:

    Authority:  5 U.S.C. 301, 7 U.S.C. 1989, and 25 U.S.C. 490.


Sec.  772.5  [Amended]

    26. Amend Sec.  772.5 as follows:
    a. In paragraph (c)(1), remove the reference ``7 part 1962, subpart 
A'' and add in its place the reference ``part 765 of this chapter''; 
and
    b. In paragraph (c)(3), remove the reference ``7 CFR part 1965, 
subpart A'' and add in its place the reference ``part 765 of this 
chapter''.
    27. Revise Sec.  772.8(b) to read as follows:


Sec.  772.8  Sale or exchange of security property.

* * * * *
    (b) For IMP loans, a sale or exchange of real estate or chattel 
that is serving as security is governed by part 765 of this chapter.

    Signed on April 5, 2012.
Bruce Nelson,
Administrator, Farm Service Agency.
[FR Doc. 2012-8827 Filed 4-12-12; 8:45 am]
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