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Guaranteed Loans--Retaining PLP Status and Payment of Interest Accrued During Bankruptcy and Redemption Rights Periods
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[Federal Register: August 15, 2005 (Volume 70, Number 156)]
[Proposed Rules]
[Page 47730-47733]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15au05-13]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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DEPARTMENT OF AGRICULTURE
Farm Service Agency
7 CFR Part 762
RIN 0560-AH07
Guaranteed Loans--Retaining PLP Status and Payment of Interest
Accrued During Bankruptcy and Redemption Rights Periods
AGENCY: Farm Service Agency, USDA.
ACTION: Proposed rule.
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SUMMARY: This action proposes several amendments to the regulations
governing the Farm Service Agency (FSA) guaranteed farm loan program.
First, this rule proposes to allow Preferred Lender Program (PLP)
lenders, under certain conditions, to retain their PLP status for a
period not to exceed one year after their loss ratio exceeds the
standard established by the Agency, currently set at three percent.
Secondly, FSA proposes to pay lenders additional interest on a final
loss claim if a bankruptcy prevents the lender from taking liquidation
action or a state's mandatory redemption law prevents the lender from
disposing of property acquired through foreclosure. The changes
proposed are intended to improve the services the Agency provides to
its customers.
DATES: Comments concerning this proposed rule must be submitted by
October 14, 2005 to be assured of consideration.
ADDRESSES: Interested persons are invited to submit written comments
concerning this rule. Comments should reference the volume, date and
page number of this issue of the Federal Register. Comments may be
submitted by any of the following methods:
E-Mail: Send comments to Joseph.Pruss@usda.gov.
Fax: Submit comments by facsimile transmission to (202) 690-1196.
Mail: Submit comments to Branch Chief, Guaranteed Loan Servicing
and Inventory Property Branch, Loan Servicing and Property Management
Division, FSA, USDA, 1400 Independence Avenue, STOP 0523, Washington,
DC 20250-0523.
Hand Delivery or Courier: USDA FSA DAFLP LSPMD, Suite 500, 1250
Maryland Avenue, SW., Washington, DC 20024.
Federal eRulemaking Portal: Go to http://www.regulations.gov.
Follow the online instructions for submitting comments.
FOR FURTHER INFORMATION CONTACT: Joseph Pruss, Senior Loan Officer,
Farm Service Agency; telephone: (202) 690-2854; Facsimile: (202) 690-
1196; E-mail: Joseph_Pruss@wdc.usda.gov.
SUPPLEMENTARY INFORMATION:
Discussion of the Proposed Rule
This rule proposes changes to the FSA guaranteed farm loan program.
FSA guaranteed loans provide conventional agricultural lenders with up
to a 95 percent guarantee of the principal loan amount, and accrued
interest. The lender is responsible for servicing a borrower's account
for the life of the loan. All loans must meet certain qualifying
criteria to be eligible for guarantees, and FSA has the right and
responsibility to monitor the lender's servicing activities. Farmers
interested in these loans must apply to a conventional lender, which
then arranges for the FSA guarantee. When a farmer does not fully repay
the loan from the lender that FSA guaranteed, the lender will submit a
formal request to the Agency for payment of the guaranteed percentage
of the unpaid debt. This rule proposes changes to provisions that
govern such loss claims and related loan servicing issues.
Retaining PLP status
The first change proposed is to amend 7 CFR 762.106(g)(2)(ii)
regarding the revocation of PLP status for failure to maintain
eligibility, specifically with regard to the maximum loss percentage.
The status of ``preferred lender'' is awarded by FSA to lenders with
demonstrated expertise in agricultural lending and experience with the
FSA Guaranteed Loan Program. This section, in part, requires that PLP
lenders maintain eligibility established in 7 CFR 762.106(c)(4)
governing the losses that a PLP lender may have incurred, currently
three percent for loans made in the previous 7 years. The amendment
will allow a PLP lender to maintain its status as a PLP lender for up
to one year after its loss ratio exceeds, for reasons explained below
which are beyond its control, the maximum allowable PLP loss rate.
Lenders would be required to explain the reason their loss rate exceeds
the allowable limit, and develop and implement a plan to reduce the
loss rate below the allowable limit within the one year period. A
lender that does not submit such a request to retain their PLP status
for the one-year period, will not retain their status as a PLP lender.
The proposed waiver will not apply to Certified Lenders, because their
loss criteria is already generous compared to the requirements for PLP
lenders.
This amendment also would broaden the conditions under which FSA
may grant a waiver to existing PLP lenders for exceeding the maximum
loss ratio. Present regulations at 7 CFR 762.106(c)(4) provide that the
Agency may waive the maximum PLP loss ratio if the applicable lender's
loss rate was substantially affected by a disaster (such as storms,
earthquakes, drought, flooding, and freezes) as defined in 7 CFR part
1945, subpart A. This provision only covers natural disasters that are
widespread enough to be declared a disaster. Conditions, such as a
freeze with only local impact, may not be declared a disaster but may
cause excessive losses for one or two lenders in a community. Further,
lender loss ratios may be affected by an unforeseeable economic
downturn, drops in land value, industry moving into or out of an area,
a loss of access to a market, biological or chemical damage, or other
circumstances beyond the lender's control. Such one-occasion losses may
have an inordinate affect on a lender in that local area, or a lender
with a concentration of loans to producers of a commodity suffering
localized reduction in production and market prices. The proposal would
allow the Agency more flexibility in granting a waiver to an existing
PLP lender for exceeding the maximum loss ratio for reasons beyond
their control. A lender requesting a 1-year waiver of the maximum loss
ratio must provide a satisfactory explanation of why it's losses
suddenly increased, and a realistic plan detailing the actions they
plan to take to reduce their loss ratio to the requisite level. Whether
losses could
[[Page 47731]]
have been controlled by the lender and whether a plan for loss
reduction is acceptable will be determined in each case by FSA. If the
Agency grants a 1-year waiver, and the lender's loss ratio does not
meet the maximum PLP loss ratio at the end of the 1-year period, the
lender's PLP status will be revoked.
Interest Accrual on Loan Liquidations
FSA also proposes to amend the amount of interest accrual that the
Agency will pay lenders on loss claims. Specifically, this rule
proposes changes to the way loss claims are handled when liquidation is
delayed by a Chapter 7 bankruptcy filing, a Chapter 7 bankruptcy
results in a lower estimated loss claim due to an over-estimation of
security value, or where a mandatory state right of redemption prevents
a lender from disposing of property acquired through foreclosure.
Loss claims in case of a Chapter 7 bankruptcy. This rule proposes
to amend 7 CFR 762.148(d)(1) to clarify that, in Chapter 7 bankruptcy
cases, the date of the decision to liquidate, for the purposes of
calculating total interest due on a final loss claim under Sec.
762.149, is the date the borrower files for Chapter 7 bankruptcy. This
will preclude any misunderstanding as to the date beyond which the
Agency will not pay accruing interest. Currently, 7 CFR 762.148(d)(1)
requires the lender with such a borrower who to proceed under section
762.149 and submit a liquidation plan and estimated loss claim within
30 days of the decision to liquidate, if liquidation is expected to
exceed 90 days. That policy exists because collateral or property
mortgaged for a debt discharged under Chapter 7 of the Bankruptcy Code
is subject to repossession or sale by the secured creditor. Thus, a
Chapter 7 discharge of an FSA guaranteed farm loan typically results in
sale of the security for the guaranteed loan. Although the decision to
liquidate is not actually made by the lender, as is commonly the case
where defaults cannot be cured and the borrower does not file for
bankruptcy, the bankruptcy petition of the borrower is, in effect, a
``decision to liquidate.''
The Agency also is proposing to amend Sec. 762.149 so that in the
case of a Chapter 7 bankruptcy, a lender will not be penalized for
submitting an estimated loss claim that later proves to be
underestimated, based on the final loss claim. The estimated loss claim
submitted with the liquidation plan is calculated based on the
remaining principal and interest of the loan, less the estimated value
of the remaining security for the loan. In a bankruptcy case, lenders
often lack reliable information regarding the value of the remaining
collateral, their appraisals are outdated, and the bankruptcy schedules
may not yet be available for the lenders to use for a liquidation plan
and estimated loss claim. Also, when the borrower files bankruptcy the
borrower and lender are often in an adverse relationship and the lender
cannot inspect or accurately evaluate the security property. Other
problems may cause the estimated claim in a Chapter 7 case to vary from
the final claim, such as depreciation, missing security property, or an
inaccurate estimate of the time required to complete liquidation. Thus,
at the time of the bankruptcy filing and submission of the estimated
loss claim, the lender's valuation of its remaining loan security may
be far from what the liquidation sale actually brings. Regardless, for
purposes of calculating final loss claims, present Agency regulations
allow no further interest on the loan after payment of the estimated
loss claim. Therefore, this rule proposes that 7 CFR 762.149(d)(2) be
amended to provide that a lender receive the guaranteed percentage of
the interest that accrued on the amount that had been estimated to be
secure, but upon final disposition of collateral was found to be
unsecured. Interest will not be paid on the amount estimated to be
unsecured, and will not be paid if the lender did not submit an
estimated loss claim within the established timeframe. The Agency
proposes to pay the additional interest up to a maximum of 45 days
after the earlier of the relief from stay, or discharge of the Chapter
7 Bankruptcy. This is a reasonable period of time for a lender to
accomplish liquidation after the relief from stay or discharge.
Redemption rights. This rule proposes that lenders will be paid the
guaranteed portion of interest that accrues during a redemption period
on the additional unsecured debt if the lender submitted an estimated
loss claim as required. State right of redemption statutes provide the
former owner of the property, and, in some states, parties with any
interest in the property such as subordinate lien holders, with a time
period, typically six months to one year, during which they may redeem
the property by paying the obligations secured by it. Numerous states
provide that redemption rights continue after foreclosure proceedings.
Therefore, these rights may frustrate creditors, including FSA
guaranteed lenders, when they are attempting to enforce their liens on
mortgaged property. A creditor who submits successful bids at
foreclosure sales cannot get a clear deed to the property until the
debtor's redemption period has passed. Such lenders cannot convey clear
title to a buyer, and if they do sell it, the final sales price could
be depressed because of the uncertainty of the finality of the
transaction. Further, any successful bidder at a foreclosure sale in a
state with a redemption period cannot take title to the property until
the end of the redemption period. A winning bidder who improves the
property, such as erecting buildings or fences, risks losing his or her
investment if the former owner ``redeems'' it and retains title by
paying the redemption amount. This discourages bidding on property and
may reduce the amount potential purchasers are willing to bid. For this
reason, lenders rarely sell properties prior to the expiration of the
redemption period. Many factors beyond the lender's control, such as
actions of the former owner, economic conditions, and even the weather
may affect the real estate value during the redemption period.
Currently, FSA loss claim regulation, 7 CFR 762.149, prohibits paying
the lender interest that accrues beyond 90 days from the date of the
decision to liquidate. However, borrower redemption rights are
circumstances beyond the lender's control, and the Agency has
determined that the lender is entitled to the guaranteed portion of the
interest that accrues during the redemption period on the additional
portion of the loan that is unsecured. The Agency is proposing to pay
the additional interest during the time of the redemption period, plus
up to an additional 45 days, which is considered sufficient time for
the lender to dispose of the property.
There will be some additional cost to the Agency for the above
proposed changes, but based on an analysis of losses paid during fiscal
years 2002 through 2004, the total costs to the Agency should be
minimal. The analysis indicated that the proposals will result in an
increase of only one-sixth of one percent of the amount currently paid
in loss claims.
Executive Order 12866
This rule has been determined not significant and was not reviewed
by the Office of Management and Budget under Executive Order 12866.
Regulatory Flexibility Act
The Agency certifies that this rule will not have a significant
economic effect on a substantial number of small entities. This rule
does not require any specific actions on the part of the subject
program's borrowers or lenders, except for a PLP lender that is
[[Page 47732]]
requesting the Agency to grant an exception to the loss rate criteria,
to allow them to retain their PLP status for a year while they attempt
to reduce their loss ratio to an acceptable level. In the six year
period since the Agency has been granting PLP status, an average of
less than one lender a year has had their status removed due to their
loss ratio exceeding the established standard. When a PLP lender
decides to request that their PLP status be maintained for an
additional year, the Agency anticipates that request will require
minimal submission of information, no more than a page or two of
narrative explaining why their loss rate is high, and their plans to
bring it down, further justifying the conclusion that a Regulatory
Flexibility Analysis is not required. The Agency, therefore, concludes
that it is not required to perform a Regulatory Flexibility Analysis as
required by the Regulatory Flexibility Act, Public Law 96-534, as
amended (5 U.S.C. 601).
Environmental Evaluation
The environmental impacts of this proposed rule have been
considered in accordance with the provisions of the National
Environmental Policy Act of 1969 (NEPA), 42 U.S.C. 4321 et seq., the
regulations of the Council on Environmental Quality (40 CFR Parts 1500-
1508), and the FSA regulation for compliance with NEPA, 7 CFR part
1940, subpart G. FSA completed an environmental evaluation and
concluded that the rule requires no further environmental review. No
extraordinary circumstances or other unforeseeable factors exist which
would require preparation of an environmental assessment or
environmental impact statement.
Executive Order 12988
This rule has been reviewed in accordance with E.O. 12988, Civil
Justice Reform. In accordance with that Executive Order: (1) All State
and local laws and regulations that are in conflict with this rule will
be preempted; (2) no retroactive effect will be given to this rule
except that lender servicing under this rule will apply to loans
guaranteed prior to the effective date of the rule to the extent
permitted by existing contracts; and (3) administrative proceedings in
accordance with 7 CFR part 11 must be exhausted before requesting
judicial review.
Executive Order 12372
For reasons contained in the Notice related 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,
which requires intergovernmental consultation with state and local
officials.
Unfunded Mandates
This rule contains no Federal mandates, as defined by title II of
Unfunded Mandates Reform Act of 1995 (UMRA), Public Law 104-4, for
State, local, and tribal governments or the private sector. Therefore,
this rule is not subject to the requirements of sections 202 and 205 of
UMRA.
Executive Order 13132
The policies contained in this rule do not have any substantial
direct effect on states, on the relationship between the national
government and the states, or on the distribution of power and
responsibilities among the various levels of government. Nor does this
rule impose substantial direct compliance costs on state and local
governments. Therefore, consultation with the states is not required.
Paperwork Reduction Act
The amendments to 7 CFR part 762 contained in this rule require no
revisions to the information collection requirements that were
previously approved by OMB under control number 0560-0155.
Federal Assistance Programs
These changes affect the following FSA programs as listed in the
Catalog of Federal Domestic Assistance:
10.406--Farm Operating Loans.
10.407--Farm Ownership Loans.
List of Subjects in 7 CFR Part 762
Agriculture, Banks, Credit, Loan programs--agriculture.
Accordingly, 7 CFR part 762 is proposed to be amended as follows:
PART 762--GUARANTEED FARM LOANS
1. The authority citation for part 762 continues to read as follows:
Authority: 5 U.S.C. 301; 7 U.S.C. 1989.
2. Amend Sec. 762.106 by revising paragraph (g)(2)(ii) to read as
follows:
Sec. 762.106 Preferred and certified lender programs.
* * * * *
(g) * * *
(2) * * *
(ii) Failure to maintain PLP or CLP eligibility criteria. The
Agency, however, may allow a PLP lender with a loss rate which exceeds
the maximum PLP loss rate, as provided by the Agency periodically in a
Federal Register notice, to retain its PLP status if:
(A) The Agency determines that exceeding the maximum PLP loss rate
standard was beyond the control of the lender (Examples include, but
are not limited to, a freeze with only local impact, economic downturn
in a local area, drop in local land values, industries moving into or
out of an area, loss of access to a market, and biological or chemical
damage);
(B) The lender documents in writing why the excessive loss rate is
beyond their control; and
(C) The lender provides a written plan that will reduce the loss
rate to the PLP maximum rate within one year from the date of the plan.
PLP status will be revoked if the maximum PLP loss rate is not met at
the end of the one year grace period.
* * * * *
3. Amend Sec. 762.148(d)(1) by adding a sentence to the end of the
paragraph to read as follows:
Sec. 762.148 Bankruptcy.
* * * * *
(d) * * *
(1) * * * For purposes of calculating the time frames required
under Sec. 762.149 of this part, the date the borrower files for
bankruptcy protection under Chapter 7 shall be the date of the decision
to liquidate.
* * * * *
4. Amend Sec. 762.149 by revising paragraph (d)(2) to read as
follows:
Sec. 762.149 Liquidation.
* * * * *
(d) * * *
(2) The lender generally will discontinue interest accrual on the
defaulted loan at the time the estimated loss claim is paid by the
Agency. If the lender estimates that there will be no loss after
considering the costs of liquidation, interest accrual will cease 90
days after the decision to liquidate. However, in the case of a Chapter
7 bankruptcy, the Agency will pay the lender interest which accrues
during and up to 45 days after the date of discharge on the portion of
the debt that was estimated to be secured but was found to be unsecured
upon final disposition, in cases where the lender filed an estimated
loss claim. The Agency also will pay the lender interest which accrues
during and up to 45 days after the time period the lender is unable to
dispose of acquired property due to state imposed redemption rights on
any unsecured portion of the loan during the redemption period, if an
estimated loss claim was timely filed during the liquidation action.
* * * * *
[[Page 47733]]
Signed at Washington, DC, on July 22, 2005.
James R. Little,
Administrator, Farm Service Agency.
[FR Doc. 05-16107 Filed 8-12-05; 8:45 am]
BILLING CODE 3410-05-P