[Federal Register Volume 78, Number 12 (Thursday, January 17, 2013)]
[Rules and Regulations]
[Pages 3828-3836]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-00672]


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DEPARTMENT OF AGRICULTURE

Farm Service Agency

7 CFR Parts 761 and 764

RIN 0560-AI17


Microloan Operating Loans

AGENCY: Farm Service Agency, USDA.

ACTION: Final rule.

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SUMMARY: The Farm Service Agency (FSA) is modifying Operating Loan (OL) 
application, eligibility, and security requirements for Microloans (ML) 
to better serve the unique operating needs of small family farm 
operations. The intended effect of this rule is to make the OL Program 
more widely available and attractive to small operators through reduced 
application requirements, more timely application processing, and added 
flexibility in meeting the managerial ability eligibility requirement. 
FSA is also removing provisions for the low documentation (Lo-Doc) 
application process for OLs from the existing direct loan regulations.

DATES: Effective January 17, 2013.

FOR FURTHER INFORMATION CONTACT: Connie Holman; telephone: (202) 690-
0756. Persons with disabilities or who require alternative means for 
communication (Braille, large print, audio tape, etc.) should contact 
the USDA Target Center at (202) 720-2600 (voice and TDD).

SUPPLEMENTARY INFORMATION: 

Background

    FSA has a long history of providing agricultural credit to the 
Nation's farmers and ranchers through its OL Program. The Consolidated 
Farm and Rural Development Act of 1972 (Pub. L. 92-419, CONACT), as 
amended, authorizes FSA's OL Program. FSA's OL Program is designed to 
finance the farm operating needs of family farms for operators who meet 
the program eligibility requirements. Among other things, eligible 
applicants must be unable to obtain sufficient credit from other 
sources; have sufficient applicable education, on-the-job training, or 
farming experience; have an acceptable credit history; and have 
adequate collateral for the proposed loan. (See 7 CFR 764.101 and 
764.252 for a full explanation of OL eligibility requirements.) OL 
funds may be used for such things as annual or term operating purposes 
to refinance certain debts; pay normal farm operating and family living 
expenses; purchase livestock, equipment, and other materials essential 
to a farm operation; and may also be used for some minor improvements 
to farm real estate, such as wells and essential repairs to buildings. 
(See 7 CFR 764.251 for a complete list of OL funds uses.) Throughout 
this rule, any reference to ``farm'' or ``farmer'' also includes 
``ranch'' or ``rancher,'' respectively; in this document, the word 
``operator'' refers to farmers who operate a farm.
    In on-going efforts to improve the OL Program, FSA evaluated the 
unique needs of small farm operations and identified unintended 
barriers to applying for OLs. As a result, FSA is simplifying the 
application process and adding flexibility for meeting both loan 
eligibility and security requirements to encourage their participation. 
FSA published the proposed rule on May 25, 2012 (77 FR 31220-31226). 
The proposed rule included provisions for streamlining and abbreviating 
the application process, modifying security provisions, and providing 
additional flexibility in meeting the experience eligibility 
requirement. Additionally, FSA proposed removing the Lo-Doc OL Program 
provisions from the CFR. As discussed below, this final rule makes a 
few changes from the proposed rule in response to comments.
    The ML application process, or the ML process, is within the 
existing OL Program framework, and uses existing OL appropriations to 
focus on the financing needs of small farm operations. These small 
farms, including non-traditional farm operations, currently have 
limited financing options available.
    ML has been designed to appeal to small family farm operations. The 
ML application process simplifies the information required to apply by 
reducing the level of documentation required to more appropriately 
align with the less complex structure and needs of small operations. 
Additionally, the eligibility requirement for managerial ability and 
the loan security requirements for the ML process have been modified 
from the OL

[[Page 3829]]

requirements to be more appropriate for small family farms.

Summary of Comment and Reponses

    In response to the proposed rule, FSA received 48 comments. 
Comments were from national and local organizations primarily with 
agricultural, financial, and socially disadvantaged group affiliations; 
the general public; and FSA employees. The issues in the comments and 
the FSA responses, including a discussion of any changes to the 
regulation are discussed below.
    The majority of the comments received were positive and supportive 
of the proposed ML process and commended FSA for considering the needs 
of small farms and niche-type operations while designing the new 
application process. Many of the comments welcomed the proposed changes 
without reservation. Some comments included suggestions for fine-tuning 
the proposed ML process. Some opposing comments stated concerns with 
inexperienced borrowers, a lessened standard of loan underwriting, and 
potential losses for the government.
    FSA is incorporating some changes to the regulation as discussed in 
this final rule. Some changes have been made to the farm assessment, 
security, eligibility, and farm operating plan requirements to 
accommodate the streamlined process for MLs. The changes in 7 CFR part 
764, ``Direct Loan Making,'' add the loan application requirements for 
ML; alternatives for meeting the managerial ability eligibility 
requirement for ML; operating loan uses for ML; security requirements 
for ML; and several other minor amendments.
    Comment: Include the work experience of migrant workers in the 
requirement for managerial experience.
    Response: For FSA loans generally and for microloans, as specified 
in 7 CFR 764.101(i)(3), an applicant with experience as a migrant 
worker may meet the managerial requirement through their farm 
experience depending on the type of management responsibilities the 
migrant worker performed. Internal guidance was added earlier this year 
to incorporate this type of experience into FSA's handbook at paragraph 
69(A) of 3-FLP. Additional handbook guidance will be added to further 
explain how this type of experience can be used to meet the 
requirements specified in the ML regulations. Therefore, FSA is not 
making any change beyond the proposed rule changes.
    Comment: FSA should broaden the agriculture-related organizations 
beyond youth programs, such as 4-H Club or Future Farmers of America 
(FFA), to include groups such as farm incubator programs and community 
based organizations.
    Response: FSA will not limit the experience with agriculture-
related organizations to youth programs. FSA agrees and will clarify 
that there are acceptable organizations with agricultural emphasis that 
can provide similar benefits to participants. The applicant that 
demonstrates day-to-day management experience in an agriculture related 
field. Therefore, FSA is revising Sec.  764.101(i)(4)(i) to include 
other acceptable agricultural organizations.
    Comment: The proposed change to the management experience should 
not be implemented. An applicant gaining experience on future intent is 
problematic. There should be at least 1 year of farm experience prior 
to participating in the proposed apprenticeship. In addition, there 
should be some type of quality control for the mentors participating in 
the apprenticeship program.
    Response: FSA agrees that an applicant should have some farm 
experience or small business experience to be determined eligible using 
proposed participation in the self-directed apprenticeship. FSA's 
intent was to create a farm management opportunity for applicants who 
are not able to meet the management ability eligibility requirement 
through traditional education, on the job training (as a farm laborer 
with farm management responsibilities), or managerial farm experience. 
FSA understands that there are applicants who want to farm, but who may 
not have had the traditional farm experience opportunities available to 
someone raised on a farm or in a farm or rural community where 
agriculture-affiliated organizations are within reach. Some applicants, 
due to a variety of circumstances, may have had only farm labor 
positions available to them. A self-directed apprenticeship was 
proposed for ML applicants to allow applicants an alternative means to 
gain farm management experience for one production cycle.
    FSA has considered the suggestions to improve the apprenticeship 
option. FSA still requires that there be some farm experience. FSA will 
also consider small business experience of an applicant along with the 
self-guided apprenticeship as a means to meet the management ability 
eligibility requirement, if the applicant is unable to meet this 
requirement through the other options. This will assist applicants who 
have only farm labor experience by providing them the opportunity to 
gain farm management experience while working with a mentor during the 
first production and marketing cycle. FSA will make the relevant 
changes to the apprenticeship program. FSA will monitor the results of 
the apprenticeship option in the coming years to determine if it 
adequately meets the needs of the applicants we expect to help. 
Therefore, FSA is revising Sec.  764.101(i)(4)(ii) to adjust the 
proposed alternatives to require sufficient prior experience working on 
a farm or small business management experience combined with 
participation in a self-directed apprenticeship.
    Comment: Require the mentor to sign the loan application to prevent 
fraud and abuse of program.
    Response: FSA will require that the mentor's full name and 
description of operation be provided on the application, but disagrees 
that the mentor should have to sign the application form. FSA believes 
requiring a signature on the application would make mentors wary of 
working with FSA applicants and borrowers. Therefore, FSA is not making 
any change beyond the proposed rule changes.
    Comment: There should be qualifying criteria for mentors so that 
their suitability can be evaluated. Mentors should demonstrate 
appropriate technical and other capabilities to provide guidance to 
applicants, acknowledge the existence of a proposed mentor 
relationship, and provide documentation of their farm profitability.
    Response: FSA has made adjustments to the regulatory text as 
proposed for 7 CFR 764.101(i)(4)(ii) to improve the self-directed 
apprenticeship option to assist applicants in meeting the management 
ability eligibility requirement. At this time, mentors will not be 
evaluated as part of the application process. An evaluation would cause 
the ML application to become cumbersome, and increase the process and 
burden on the applicant and mentor. As stated previously, FSA believes 
that this would cause mentors to be reluctant to work with FSA 
applicants and borrowers. Part of the intent of ML is to keep the 
process proportional to the loan amount, and to the small operations 
expected to frequently use ML funds. FSA will evaluate the 
effectiveness of the apprenticeship program in the coming years to 
determine if this tool is useful in helping applicants who cannot meet 
the management ability eligibility requirement in other ways. 
Therefore, FSA is not making any change beyond the proposed rule 
changes.

[[Page 3830]]

    Comment: Do not limit debt verification to the credit bureau 
reports; most of the farm creditors do not report to the credit 
bureaus.
    Response: FSA understands that many farm creditors and local 
suppliers do not report to the credit bureaus. FSA considers the self-
certification of debt on the application to be an acceptable risk that 
will contribute to streamlining efforts. Since applicants will still 
need to demonstrate credit-worthiness as specified in 7 CFR 764.101(d), 
among other OL eligibility criteria, any risks in this area are 
expected to be low. If deemed necessary by the loan official, 
additional information may be requested from the applicant; however, 
this should be in exceptional cases in order to keep ML a truly 
streamlined process. Therefore, FSA is not making any change beyond the 
proposed rule changes.
    Comment: The non-itemized cash flow will lower the level of 
business analysis and supportive documentation that would be required. 
FSA should require a minimum of 3 years of tax returns plus other 
information completed in greater detail. The non-itemized cash flow 
with less experienced operators is a set up for failure in any business 
venture.
    Response: FSA disagrees and will not be requiring an itemized cash 
flow or increased documentation for ML applicants, as the intent of ML 
is to keep the process proportional to the smaller loan amounts and to 
the small, simpler operations expected to seek this financing. For 
applicants new to FSA who may produce non-traditional crops or with 
production practices where yield per acre may be less important, other 
factors, such as the production capacity, the consistency of income and 
expenses, and the timely harvest and selling of produce, may be more 
appropriate measurements to use in establishing actual productivity and 
projected plans. In addition, FSA predicts that many ML borrowers will 
be existing OL borrowers that already borrow at the $35,000 threshold 
and below. In these cases, FSA will have information on file for many 
of these applicants through the normal course of business in past years 
(year end analysis (YEA), Farm Assessments, etc.). Therefore, FSA is 
not making any change beyond the proposed rule changes.
    Comment: New operations applying for ML should not be required to 
have yields or yield history.
    Response: The proposed rule already allowed for circumstances where 
yield history or reporting is impractical, not relevant to the proposal 
submitted, or is not available. Some applicants meeting the managerial 
eligibility requirements will not have operated a farm in the previous 
year, and therefore will not be required to have yield history. 
Therefore, FSA is not making any change beyond the proposed rule 
changes.
    Comment: Any applicant having caused FSA a loss should be 
considered ineligible for ML. The documentation needed for the 
application would be beyond the intent for the simplified ML process; 
they should have to provide all of the documentation for an OL. The 
applicant would have the option to apply for OL through the regular 
process as specified in 7 CFR 764.252(c).
    Response: MLs are direct program loans, and the general eligibility 
requirements for direct loans already state that an applicant who 
caused the Agency a loss by receiving debt forgiveness (defined in 7 
CFR 761.2) may be ineligible (7 CFR 764.101(d)(2)).
    Comment: MLs should not be secured by collateral worth only 100 
percent of the loan amount; it should still be able to be secured with 
up to 150 percent, when available. The proposed change differs from the 
current regulation in Sec.  764.104(c), which requires collateral worth 
up to 150 percent of the loan amount, if available, to secure the loan. 
Why decrease security requirements for MLs when these loans are riskier 
than regular OL loans or loans made to established producers? 
Additionally, the crops financed for direct sales involve added risk to 
loan security; it would be impractical for FSA to enforce a Uniform 
Commercial Code (UCC) filing on these commodities and, therefore, FSA 
would have no control over the produce sales income.
    Response: FSA's intent for ML is to provide flexibility for 
financing and to prevent possible barriers to meeting loan security 
requirements: Specifically, requiring additional security to finance 
unfamiliar crops and production. As a clarification, for FSA's existing 
OL Program, all agricultural commodities, whether salad greens or corn, 
are considered eligible production for a family farm and are regularly 
financed by FSA with UCC filings. So long as the agricultural 
commodities are determined to have a security value of 100 percent of 
the amount loaned for annual operating and family living expenses these 
commodities can be used to secure the loan. FSA agrees that for MLs 
security of 100 percent should always be required, but the requirement 
for additional security up to 150 percent, when available, should be 
limited to MLs for annual operating purposes. FSA also believes that 
additional security from 100 percent to 150 percent should be limited 
to farm assets, and is not to include the personal residence. 
Therefore, FSA is revising Sec.  764.255(c)(1), (2), (3), and (4) to 
limit collateral to farm property having a security value of at least 
100 percent for MLs and up to 150 percent, if available, for MLs made 
for annual operating purposes. This adjusts the security requirements 
for crops and equipment separately to meet a balance between adequate 
collateral margin, the type of security, and security requirements that 
take into consideration the assets and collateral of the non-
traditional, and new farm operations that FSA expects will be seeking 
ML funding.
    Comment: The costs to legally obtain the collateral in cases where 
loans fail would be onerous and exceed the value FSA would recover.
    Response: FSA agrees that in some cases, the costs to obtain the 
collateral could be onerous and exceed the value FSA would recover. FSA 
is required to service its loans, but can make the decision on how best 
to service delinquent loans on a case-by-case basis. This flexibility 
can limit the amount of loss to FSA. Treasury offsets are also applied 
to delinquent borrower accounts to recover amounts due. So, even when 
the loan balance exceeds the liquidated security FSA anticipates it 
will recover additional amounts through offsets. Therefore, FSA is not 
making any change beyond the proposed rule changes.
    Comment: Sound underwriting standards would require a second or 
junior mortgage placed on the property to cover the first mortgage.
    Response: FSA is making some adjustments to the security 
requirements for annual MLs, requiring chattel collateral up to 150 
percent when available, excluding personal residences. Therefore, FSA 
is revising Sec.  764.255(c)(1), (2), and (4) to limit collateral to 
farm property having security value of at least 100 percent, and up to 
150 percent, if available, for MLs made for annual operating purposes.
    Comment: Allow a cosigner on the security requirement.
    Response: FSA presently accepts a pledge of security from a third 
party or a cosigner under general security requirements. This option 
would also apply to MLs. Therefore, FSA is not making any change beyond 
the proposed rule changes.
    Comment: Do not remove the Lo-Doc OL application process; Lo-Docs 
still serve a purpose, particularly those that are above the ML maximum 
of $35,000.

[[Page 3831]]

    Response: To continue providing streamlined financing for annual OL 
needs up to $300,000, FSA is implementing internal processing changes, 
which do not require changes to the regulations, for an OL application 
process for returning customers with no changes in their operation 
since their original loan application. This new process for a 
subsequent OL, along with ML, is expected to improve the overall 
application process for all levels of OLs; the Lo-Doc would then become 
obsolete once these proposed changes are implemented. Therefore, FSA is 
not making any change beyond the proposed rule changes.
    Comment: The $35,000 maximum loan limit for ML should be a 
different amount. It should be $25,000 or lower to limit risk. FSA 
should assess any losses after a period of years, and then consider 
increasing the maximum. Alternately, the maximum amount should be 
greater than $35,000, with a limit up to $50,000.
    Response: ML will initially have a $35,000 maximum amount. FSA's 
preliminary analysis predicts this amount will be sufficient to provide 
financing needs to a substantial group of operators, but still low 
enough to be a manageable risk. FSA will review the success of the 
program and will reevaluate the loan amounts periodically, and if any 
change is needed, it will be made through rulemaking. Therefore, FSA is 
not making any change beyond the proposed rule changes.
    Comment: ML should be limited to individuals and husband and wife 
joint ventures only since this program is intended for more simplistic 
operations. The additional documentation required for entities does not 
lend itself to this type of simplified application.
    Response: FSA disagrees. This suggestion would cause some entities 
to be excluded from the ML process that might otherwise benefit from 
the changes intended for small operations. In addition, one of the 
requirements of the Regulatory Flexibility Act (5 U.S.C. 603) is to 
consider alternatives to minimize any significant economic impact of 
the rule on small entities. Arbitrarily limiting applicants to certain 
entity compositions could be considered disparate treatment. 
Furthermore, initial analysis and applicant estimates for the program 
show that only a small number of ML applicants would be entity 
applicants. The ML process is intended to tie the dollar amount of risk 
involved to the level of paperwork and documentation needed, rather 
than the type of organization. Therefore, FSA is not making any change 
beyond the proposed rule changes.
    Comment: ML should be limited to 4 of the 11 possible uses under 
the OL Program to avoid bringing more complex issues that would not fit 
a simplified loan application.
    Response: FSA disagrees. The ML process is intended to tie the 
dollar amount and risk involved to the level of paperwork and 
documentation needed, rather than the use of the loan money. It would 
be disparate treatment, and unsound business practice, to tie paperwork 
requirements to the uses of loan funds. Limiting uses of funds to only 
a few of the normal OL loan uses would punish those who request small 
loans, and it would be potentially confusing. MLs were designed to be 
less complicated. Therefore, FSA is not making any change beyond the 
proposed rule changes.
    Comment: There should be a limitation on use of balloon payments 
and terms to those that can be repaid within 7 years. The documentation 
needed to justify the longer terms requires additional paperwork by 
both the applicant and Farm Loan Programs (FLP) staff.
    Response: Loan terms for MLs will be the same as FSA's regular OL 
Program, which does limit term loans to a 7-year term. All MLs will be 
serviced the same as regular OLs. FSA also realizes that the 
profitability of an operation is not directly tied to the amount of 
operating funds it borrows and therefore believes that many smaller 
operations whose loan needs can be accommodated through the new ML 
process can be quite successful and business savvy enough to easily 
handle any balloon payment. Therefore, FSA is not making any change 
beyond the proposed rule changes.
    Comment: FSA should not require an ML applicant to submit 
additional information even if specifically needed to make a 
determination on the loan application. Asking for additional 
information may sound favorable to FSA; but it may make the process 
less palatable to the applicant after submitting what is believed to be 
a complete application.
    Response: FSA will not be making this change, as there are 
situations, such as requesting a divorce decree document in order to 
determine whose signature is needed to secure a loan, in which 
additional information will be necessary. FSA believes that there is a 
responsibility to undertake adequate due diligence to protect loan 
funds. The intent of the ML process is that requiring additional 
information will be the exception, in keeping with a truly streamlined 
process for applicants. Therefore, FSA is not making any change beyond 
the proposed rule changes.
    Comment: FSA should partner with agricultural groups to provide 
training and mentoring for ML applicants to include beginning farmers, 
sustainable agriculture, and specialty non-traditional operations.
    Response: FSA does partner with agricultural groups to provide 
training and mentoring, and will do so for ML applicants, and all 
borrower training requirements will apply as with all other FSA loans. 
FSA is committed to working through outreach and marketing efforts in 
local Service Centers and State offices to continue to seek additional 
opportunities for applicants and borrowers to receive appropriate, 
accessible training and continuing education as they start and build 
their farm operations. Therefore, FSA is not making any change beyond 
the proposed rule changes.
    Comment: Outreach for MLs is important to Socially Disadvantaged 
Applicants (SDA), applicants with limited English proficiency, and 
various ethnic minority communities. Will MLs target funds for 
Beginning Farmer (BF) and SDA applicants?
    Response: FSA has a strong commitment to Farm Loan Programs 
outreach and marketing at the Service Center and State Office levels, 
and anticipates strong demand for ML from SDAs. MLs are part of the OL 
Program and will be included in the outreach. Loan officials can locate 
interpreters on an as-needed basis if there is a language barrier with 
applicants. Loan applications and funding for SDA and BF customers are 
targeted, tracked, and monitored to ensure that these producers are 
reached within the communities FSA serves. ML will have the same BF and 
SDA loan funding goals as does the existing OL Program. Therefore, FSA 
is not making any change beyond the proposed rule changes.
    Comment: For ML to effectively assist the non-traditional farmers 
with this streamlined process, staff will need to be trained at the 
local and State levels.
    Response: Local offices will be provided training when the program 
is introduced, and further training will be provided on a periodic 
basis. Training on the new process, and the expected types of 
operations seeking MLs will be provided for a successful roll-out and 
implementation of this program. Therefore, FSA is not making any change 
beyond the proposed rule changes.

[[Page 3832]]

    Comment: Prioritize data and data collection to build information 
on nontraditional types of local markets.
    Response: FSA State offices compile the prices and yields of 
agricultural commodities, and make them available to the Service Center 
staff for loan underwriting and projecting purposes. For States and 
regions that currently have more exposure to more non-traditional and 
direct sales types of operations, additional data has been added on a 
year by year basis depending on the consistency and availability of 
market and yield data. Additional guidance on organic and less 
traditional crops is also being provided and will be in handbook 
amendments. Therefore, FSA is not making any change beyond the proposed 
rule changes.
    Comment: FSA should build in metrics to evaluate, monitor, track, 
and measure MLs separate from OLs.
    Response: FSA is implementing the necessary changes in our system, 
so that the MLs can be isolated and evaluated. Therefore, FSA is not 
making any change beyond the proposed rule changes.
    Comment: The ML application should be made available online with an 
improved application interface.
    Response: Applications and forms are available online for printing; 
some forms are fillable and can be submitted electronically. FSA agrees 
that an online application process would be an efficient alternative to 
the present OL application process, but a regulatory change is not 
necessary to accomplish this. Therefore, FSA is not making any change 
beyond the proposed rule changes.
    Comment: ML would be enhanced if payments could begin 3 years after 
establishing crops with longer production cycles versus requiring 
installments due prior to crop maturity.
    Response: The suggested change is not necessary. In some 
circumstances FSA already allows OL (which include MLs) principal and 
interest payments to be adjusted, and deferred until the crop 
establishes and produces, including, for example, woody plants, 
vineyard plantings, asparagus, and cranberries. Therefore, FSA is not 
making any change beyond the proposed rule changes.
    Comment: Will ML be subject to the direct OL term limits?
    Response: ML is a part of the direct OL Program and will be subject 
to the OL term limits set by law (see 7 U.S.C. 1941). Therefore, FSA is 
not making any change beyond the proposed rule changes.
    Comment: Will the Limited Resource (LR) rates be used for ML?
    Response: ML is a part of the direct OL Program, and LR rates can 
be used as appropriate as specified in 7 CFR 764.254. In this current 
low interest rate environment, the LR rate of 5 percent is above the 
regular OL rate. When the regular OL interest rate is above 5 percent, 
it will be appropriate to consider the impact of LR rates on the 
borrower's cash flow. Therefore, no change is necessary.
    Comment: Allow borrowers to make payments when they sell their 
products.
    Response: A change is not necessary because existing regulations 
already allow FSA borrowers to pay on their loans if receiving sales 
income throughout the year and prior to the annual due date. There are 
no prepayment penalties for any FSA direct loans. Therefore, FSA is not 
making any change beyond the proposed rule changes.
    Comment: What is the projected annual number of new borrowers, and 
existing borrowers expected to receive ML funds?
    Response: FSA's cost benefit analysis looked at the segment of 
existing direct OL customers borrowing $35,000 or less and estimates 
that with ML maximum rate of $35,000 there would be, at most, 3,340 
existing borrowers in this group. The analysis provides the best 
possible information for borrower projections. No regulatory change is 
necessary.
    Comment: FSA should wait for the next Farm Bill. What is FSA's 
authority for ML regulation?
    Response: ML is a subset of OL. Therefore, all the requirements and 
provisions in 7 U.S.C. 1941 for OL apply to MLs. FSA believes that many 
of these changes provided through ML, which were overwhelmingly 
supported by the commenters, will be welcomed by FSA customers. There 
has been much anticipation for an OL process that is more proportional 
to the loan amount, and the smaller operations have been seeking this 
financing. Therefore, FSA is not making any change beyond the proposed 
rule changes.
    Comment: This program, like other FLP loans, only applies to people 
with bad credit, what about people with good credit?
    Response: Applicants must show creditworthiness to be eligible for 
a direct loan. While it is true that an applicant must be unable to 
obtain credit elsewhere, circumstances surrounding an applicant's 
inability to obtain credit may not be related to bad credit issues. 
Some lenders will not lend for certain agricultural loan purposes, for 
loan amounts or equity amounts below a minimum threshold, or for any 
agricultural purpose. Weather-related or economic-related conditions 
beyond the applicant's control may also prove to be a temporary setback 
for some operations. Statistically, small operations are more 
susceptible to these situations. Therefore, FSA is not making any 
change beyond the proposed rule changes.
    Comment: Technical assistance or guidance from FSA to ML applicants 
should be required. What resources are available to provide this 
assistance?
    Response: FSA officials will provide technical assistance to direct 
loan applicants, if needed, to complete FSA forms and gather 
information necessary for a complete application. This assistance to 
applicants includes explaining the application process; identifying 
sources of information, informing applicants of other technical 
assistance providers who may be of assistance at minimal or no charge 
(such as Cooperative Extension Service, USDA outreach grants, Service 
Corp of Retired Executives), and advising applicants of alternatives to 
help overcome barriers to being determined eligible for FSA assistance. 
Other resources are available on a regional basis and FSA State Offices 
and local Service Centers often provide additional information not 
available on a national basis. Therefore, FSA is not making any change 
beyond the proposed rule changes.
    Comment: How will the definition of ``family farm'' relate to small 
agricultural production; for example, small family farms versus hobby 
farms? Will there be restrictions on farm size or gross income 
minimums?
    Response: FSA is not changing the ``family farm'' definition with 
this rule; any definition is unlikely to anticipate and address every 
possible production financing request. Requests to finance unusual farm 
production will continue to be handled on a case-by-case basis. FSA 
will develop additional handbook guidance, and provide initial and 
ongoing training as needed to field staff that will highlight and 
review ML financing of small farm operations. The current ``family 
farm'' definition in 7 CFR 764.101(k) does not specify minimum farm 
size restrictions, or minimum gross income, and FSA does not believe 
that it is necessary to be more specific for MLs. Therefore, FSA is not 
making any change beyond the proposed rule changes.
    Comment: When will ML be implemented?
    Response: This final rule implements the changes required to start 
ML.
    Other comments and recommended changes were out of scope or related 
to statutory requirements of the loan

[[Page 3833]]

programs other than MLs. Some of the comments falling under the 
category of statutory requirements or otherwise out of scope for the 
proposed ML concerned guaranteed ML lending, intermediary (or 
partnering) lending, elimination of OL term limits; and comments 
general to FLP and not specific to ML.

Effective Date

    According to 5 U.S.C. 553(d), a rule is to be published in the 
Federal Register 30 days prior to its effective date, unless, among 
other things, there is good cause found by the agency. (See 5 U.S.C. 
553(d)(3).) FSA finds that good cause exists to implement this final 
rule immediately. At this time of year, a 30-day delay between 
publication and effective date of the final rule will adversely impact 
the very applicants it is intended to benefit. For ML to have the 
greatest impact, it is essential for it to be implemented as early in 
2013 as possible. Growers need credit as soon as possible to pay land 
rent and crop expenses so they can plant their crops on time for 
optimum production and marketing. Many suppliers offer early season 
discounts for cash purchases of planting inputs; a 3-5 percent discount 
on seed, fertilizer, and chemicals will go straight to a grower's 
bottom line, a vital addition to profit margin. Early availability of 
MLs will allow FSA to provide credit to these small producers on a 
timely basis, enhancing their prospects for success. This final rule 
does not put any additional burdens on the FSA borrower. Instead, the 
rule makes the loan application less burdensome for applicants for MLs 
than for applicants for a standard OL. The proposed rule was 
straightforward and very well received by the public. The rule imposes 
no complex policies or program requirements that the public would need 
30 days to analyze and understand prior to implementation.

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 has not 
reviewed this final rule.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601-612), as amended by 
the Small Business Regulatory Enforcement Fairness Act of 1996 
(SBREFA), generally requires an agency to prepare a regulatory 
flexibility analysis of any rule subject to the notice and comment 
rulemaking requirements under the Administrative Procedure Act (5 
U.S.C. 553) or any other law, unless the agency certifies that the rule 
will not have a significant economic impact on a substantial number of 
small entities. FSA has determined that this rule will not have a 
significant impact on a substantial number of small entities for the 
reasons explained below. Consequently, FSA has not prepared a 
regulatory flexibility analysis.
    The term small entities include small businesses, small 
organizations, and small governmental jurisdictions. For the purposes 
of assessing the impacts of this rule on small entities, a small 
business is based on the categories in the Small Business 
Administration's Table of Small Business Size Standards by North 
American Industry Classification System (NAICS) Category (13 CFR 
121.201). All of the entities that would request a Microloan would be 
small businesses that produce crops and livestock in subsectors 111 and 
112 listed in 13 CFR 121.201. These categories cover all primary 
agricultural production. Under the SBA Small Business Size Standard for 
these two NAICS subsector categories, the majority of businesses are 
considered small when they receive less than $750,000 in annual 
receipts; the threshold is higher for two subcategories of animal 
production. (See 13 CFR 121.201, subsectors 112112 and 112310.) This 
standard does not exclude any of the potential farm loan borrowers who 
will make use of the modifications to the OL Program. Nevertheless, 
even though the applicants under ML are considered small entities, 
there would not be a substantial number affected by the rule.
    Overall, this rule creates a new application process and greater 
options for eligibility and security for small loans within the 
existing OL Program, so, theoretically, some of the loans could be made 
under the existing program. Therefore, small entities in two credit 
segments have to be considered for this analysis. One segment is the 
number of existing borrowers who might take advantage of the 
modifications in eligibility for future loans. The other segment is the 
number of new borrowers who might never have applied for an FSA 
operating loan without the modifications. The number of existing 
borrowers who might make use of the application, eligibility, and 
security modifications for future loans can be estimated using fiscal 
year 2011 direct operating loan data. Given that the maximum borrowing 
limit is $35,000 as set forth in the rule, it is estimated there would 
be at most 3,340 borrowers with $102.7 million in loans in this 
segment. However, since this estimate consists of existing borrowers 
with the same credit needs, this segment will have no additional 
economic impact. Only the demand by additional borrowers will have an 
incremental economic impact. This demand is more difficult to estimate. 
Preliminary estimates assume the new borrowers will be younger, below 
the age of 35, and have relatively low annual sales, less than $10,000 
annually. Using data from the 2007 Census of Agriculture, this segment 
of producers consists of about 14,434 primary operators. Historically, 
FSA direct operating loans have captured only 2 percent of the 
agricultural credit market; so fewer than 300 borrowers will probably 
be added. Therefore, about 4,000 entities could be affected by this 
rule with an economic impact of only about $10.5 million (300 new 
borrowers times $35,000 in loans per borrower).
    Furthermore, the minimal regulatory requirements will affect large 
and small businesses equally as part of the loan making process, since 
MLs are distinguished based on the size of the loan, not the size of 
the operation. ML applicants will have a lower paperwork burden that 
will be commensurate with the smaller loan amount, due to a reduction 
in documentation required for these loans. Therefore, in accordance 
with the Regulatory Flexibility Act, FSA is certifying that there would 
not be a significant economic impact on a substantial number of small 
entities. Due to the limited number of entities, the economic effects 
from any additional lending are unlikely to have a substantial impact 
on entities of any size.

Environmental Review

    The environmental impacts of this 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

[[Page 3834]]

concluded that simplifying the application process and adding 
flexibility for both meeting loan eligibility and security requirements 
to encourage small farm operation participation in its OL Program 
explained in this 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 FLP actions (7 CFR 1940.309). Therefore, FSA will not 
prepare an environmental impact statement on this 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 rule has been reviewed in accordance with Executive Order 
12988, ``Civil Justice Reform.'' The provisions of this rule will not 
have preemptive effect with respect to any State or local laws, 
regulations, or policies that conflict with such provision or which 
otherwise impede their full implementation. The rule will not have 
retroactive effect.

Executive Order 13132

    This rule has been reviewed under Executive Order 13132, 
``Federalism.'' The policies contained in this rule will not have any 
substantial direct effect on States, on the relationship between the 
Federal Government and the States, or on the distribution of power and 
responsibilities among the various levels of government. Nor would this 
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.'' Executive Order 13175 imposes requirements on the 
development of regulatory policies that have Tribal implications or 
preempt Tribal laws. The USDA Office of Tribal Relations has concluded 
that the policies contained in this rule do not, to USDA's knowledge, 
preempt Tribal law. FSA held a series of tribal consultation sessions 
early in the rule making process. Representatives from all federally 
recognized tribes were invited to participate.
    During the Tribal consultation, sessions were held to discuss ML, 
and FLP staff responded to the several comments and questions. The 
following summarizes the questions and responses discussed during 
Tribal consultation.
    Comment: Will ML be targeting a certain group?
    Response: MLs are designed to better serve small family farm 
operations. In addition, MLs may provide a bridge between Youth Loans 
and the traditional OL Program, and between the needs of smaller 
operations as they grow into larger farm operations.
    Comment: What is the purpose of ML?
    Response: ML will require less information to provide an 
application process more proportional to smaller loan amounts and 
operations in the growing segment of family farms engaged in organic 
farming and direct sales farming practices. Additionally, ML will 
provide financing at reasonable rates and terms, as some smaller 
operations often rely on credit cards, and dealer financing to finance 
their operations because they believe that paperwork requirements are 
often not worth the benefits.
    Comment: Will financing operations raising rice in lakes owned by 
the Tribes be eligible for ML and other FSA loans?
    Response: Operations using lakes managed by the Tribe can be 
eligible for FSA loans, including ML. FLP also welcomes the opportunity 
for future conversations to consider regulations that would permit 
financing operations that raise fish in bodies of water not fully 
controlled by the Tribe.
    Comment: When will ML be implemented?
    Response: FLP explained the steps of the rulemaking process, but 
could not provide an exact date for implementation. This final rule 
implements the changes required to start ML.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandate Reform Act of 1995 (UMRA, Pub. L. 
104-4) 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) for State, 
local, or Tribal governments, or the private sector. Therefore, this 
rule is not subject to the requirements of sections 202 and 205 of 
UMRA.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501-3520), FSA described the new information collection activities in 
the request for public comment in the proposed rule. Comments related 
to the Paperwork Reduction Act are discussed above and are in the 
supporting document that OMB reviewed. No change to the information 
collection was required based on the comments. After the final rule is 
published, the new information collection request will be merged with 
FSA existing information collection request approved under OMB control 
number 0560-0237.

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.

List of Subjects

7 CFR Part 761

    Accounting, Loan programs--agriculture, Rural areas.

7 CFR Part 764

    Agriculture, Disaster assistance, Loan programs--agriculture.

    For reasons discussed above, FSA amends 7 CFR chapter VII as 
follows:

PART 761--FARM LOAN PROGRAMS; GENERAL PROGRAM ADMINISTRATION

0
1. The authority citation for part 761 continues to read as follows:

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

0
2. Amend Sec.  761.2 as follows:

[[Page 3835]]

0
a. In paragraph (a), remove the abbreviation ``Lo-Doc'' and add an 
abbreviation, in alphabetical order, for ``ML Microloan'';
0
b. In paragraph (b), add definitions, in alphabetical order, for 
``Apprentice'' and ``Microloan''; and
0
c. In paragraph (b), remove the definition of ``Low-Documentation 
Operating loan.''
    The additions read as follows:


Sec.  761.2  Abbreviations and definitions.

* * * * *
    (a) * * *
    ML Microloan.
* * * * *
    (b) * * *
    Apprentice means an individual who receives applied guidance and 
input from an individual with the skills and knowledge pertinent to the 
successful operation of the farm enterprise being financed.
* * * * *
    Microloan is a type of OL of $35,000 or less made under reduced 
application, eligibility, and security requirements.
* * * * *

0
3. Amend Sec.  761.103 as follows:
0
a. Revise paragraph (b), introductory text;
0
b. Redesignate paragraphs (c) through (e) as paragraphs (d) through 
(f); and
0
c. Add paragraph (c).
    The revision and addition read as follows:


Sec.  761.103  Farm assessment.

* * * * *
    (b) Except for ML, the initial assessment must evaluate, at a 
minimum, the:
* * * * *
    (c) For ML, the Agency will complete a narrative that will 
evaluate, at a minimum, the:
    (1) Type of farming operation and adequacy of resources;
    (2) Amount of assistance necessary to cover expenses to carry out 
the proposed farm operating plan, including building an adequate equity 
base;
    (3) The goals of the operation;
    (4) The financial viability of the entire operation, including a 
marketing plan, and available production history, as applicable;
    (5) Supervisory plan; and
    (6) Training plan.
* * * * *

0
4. Amend Sec.  761.104 as follows:
0
a. Redesignate paragraphs (e) and (f) as (f) and (g),
0
b. Add paragraph (e), and
0
c. In newly redesignated paragraph (f), remove the cross reference 
``paragraph (f)'' and add in its place the cross reference ``paragraph 
(g)''.
    The addition reads as follows:


Sec.  761.104  Developing the farm operating plan.

* * * * *
    (e) For MLs, when projected yields and unit prices cannot be 
determined as specified in paragraphs (c) and (d) of this section 
because the data is not available or practicable, other documentation 
from other reliable sources may be used to assist in developing the 
applicant's farm operating plan.
* * * * *

PART 764--DIRECT LOAN MAKING

0
5. The authority citation for part 764 continues to read as follows:

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

Sec.  764.1  [Amended]

0
6. Amend Sec.  764.1(b)(2) by adding the words ``ML and'' immediately 
following the word ``including''.
0
7. Revise Sec.  764.51(c) to read as follows:


Sec.  764.51  Loan application.

* * * * *
    (c) For an ML request, all of the following criteria must be met:
    (1) The loan requested is:
    (i) To pay annual or term operating expenses, and
    (ii) $35,000 or less and the applicant's total outstanding Agency 
OL debt at the time of loan closing will be $35,000 or less,
    (2) The applicant must submit the following:
    (i) Items (1), (2), (3), (6), (7), (9), and (11) of paragraph (b) 
of this section;
    (ii) Financial and production records for the most recent 
production cycle, if available, and practicable to project the cash 
flow of the operating cycle, and
    (iv) Verification of all non-farm income relied upon for repayment; 
and
    (3) The Agency may require an ML applicant to submit any other 
information listed in paragraph (b) of this section upon request when 
specifically needed to make a determination on the loan application.
* * * * *

0
8. Amend Sec.  764.101 as follows:
0
a. In paragraph (i)(3) at the end of the first sentence add the text 
``or for MLs the applicant may have obtained and successfully repaid 
one FSA Youth-OL''; and
0
b. Add paragraph (i)(4).
    The addition reads as follows:


Sec.  764.101  General eligibility requirements.

* * * * *
    (i) * * *
    (4) Alternatives for ML. ML applicants also may demonstrate 
managerial ability by one of the following:
    (i) Certification of a past participation with an agriculture-
related organization, such as, but not limited to, 4-H Club, FFA, 
beginning farmer and rancher development programs, or Community Based 
Organizations, that demonstrates experience in a related agricultural 
enterprise; or
    (ii) A written description of a self-directed apprenticeship 
combined with either prior sufficient experience working on a farm or 
significant small business management experience. As a condition of 
receiving the loan, the self-directed apprenticeship requires that the 
applicant seek, receive, and apply guidance from a qualified person 
during the first cycle of production and marketing typical for the 
applicant's specific operation. The individual providing the guidance 
must be knowledgeable in production, management, and marketing 
practices that are pertinent to the applicant's operation, and agree to 
form a developmental partnership with the applicant to share knowledge, 
skills, information, and perspective of agriculture to foster the 
applicant's development of technical skills and management ability.


Sec.  764.103  [Amended]

0
9. Amend Sec.  764.103 as follows:
0
a. In paragraph (c) remove the words ``downpayment loans'' and add the 
words ``downpayment loans, MLs made for purposes other than annual 
operating,'' in their place.
0
b. In paragraph (e), last sentence, remove the words ``conservation 
loans'' and add the words ``CL, ML'' in their place.
0
10. Amend Sec.  764.251 as follows:
0
a. Revise paragraph (a), to add the words ``and ML'' immediately after 
``OL'' in the introductory text; and b. Remove paragraph (b).
0
11. Amend Sec.  764.255 as follows:
0
a. Revise paragraph (b), introductory text; and
0
b. Add paragraph (c).
    The revision and addition read as follows:


Sec.  764.255  Security Requirements.

* * * * *
    (b) Except for MLs, by a:
* * * * *
    (c) For MLs:
    (1) For annual operating purposes, loans must be secured by a first 
lien on farm property or products having a security value of at least 
100 percent of the loan amount, and up to 150 percent, when available.

[[Page 3836]]

    (2) For loans made for purposes other than annual operating 
purposes, loans must be secured by a first lien on farm property or 
products purchased with loan funds and having a security value of at 
least 100 percent of the loan amount.
    (3) A lien on real estate is not required unless the value of the 
farm products, farm property, and other assets available to secure the 
loan is not at least equal to 100 percent of the loan amount.
    (4) Notwithstanding the provisions of paragraphs (c)(1), (c)(2), 
and (c)(3) of this section, FSA will not require a lien on a personal 
residence.

    Signed on December 21, 2012.
Juan M. Garcia,
Administrator, Farm Service Agency.
[FR Doc. 2013-00672 Filed 1-15-13; 11:15 am]
BILLING CODE 3410-05-P