[Federal Register: November 8, 2007 (Volume 72, Number 216)] [Rules and Regulations] [Page 63241-63361] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr08no07-15] [[Page 63241]] ----------------------------------------------------------------------- Part II Department of Agriculture ----------------------------------------------------------------------- Farm Service Agency Commodity Credit Corporation ----------------------------------------------------------------------- 7 CFR Parts 718, 761, 762 et al. Regulatory Streamlining of the Farm Service Agency's Direct Farm Loan Programs; Final Rule [[Page 63242]] ----------------------------------------------------------------------- DEPARTMENT OF AGRICULTURE Farm Service Agency 7 CFR Parts 718, 761, 762, 763, 764, 765, 766, 767, 768 and 769 Commodity Credit Corporation 7 CFR Part 1405 RIN 0560-AF60 Regulatory Streamlining of the Farm Service Agency's Direct Farm Loan Programs AGENCY: Farm Service Agency, USDA. ACTION: Final rule. ----------------------------------------------------------------------- SUMMARY: This rule streamlines the Farm Service Agency's (FSA) regulations governing its direct Farm Loan Programs. The final rule simplifies and clarifies FSA's direct loan regulations; implements the recommendations of the USDA Civil Rights Action Team; meets the objectives of the Paperwork Reduction Act of 1995; and separates FSA's direct Farm Loan Programs regulations from the Rural Development mission area's loan program regulations. DATES: Effective Date: December 31, 2007. FOR FURTHER INFORMATION CONTACT: William D. Cobb; USDA/FSA/DAFLP/STOP 0520, 1400 Independence Avenue, SW., Washington, DC 20250-0520; telephone (202) 720-1059; electronic mail: bill.cobb@wdc.usda.gov. SUPPLEMENTARY INFORMATION: Discussion of the Final Rule On February 9, 2004, the agency published a proposed rule (69 FR 6056-6121) to streamline regulations governing its direct Farm Loan Programs (FLP). The comment period closed on April 9, 2004. The agency received several comments requesting the comment period to be reopened. The agency reopened the comment period until May 4, 2004 (69 FR 20834). In response to the proposed rule the agency received 1,583 comments from 593 individuals and organizations, including 181 banks or banking organizations, 168 individuals, 81 FSA employees, 71 Farm Credit Administration offices or employees, 42 agricultural organizations, 18 state agencies or officials, 13 Farm Bureaus, five State representatives, three Federal agencies, two FSA County Committee members, one tribal association, one university and one loan packager. In addition, six comment letters signed by multiple Members of the United States Congress were received. Seven comments addressed the agency's decision to move the administrative provisions of program delivery from the Code of Federal Regulations (CFR) to a series of agency handbooks. Three comments opposed the agency's decision while four comments supported it. In accordance with the Administrative Procedures Act, both the proposed and the final rules provide the substantive requirements applicable to the public requesting assistance or benefits from FSA, not internal agency procedures and processes. The agency will issue its internal guidance in handbooks simultaneously with the final rule, since internal guidance only describes the operating procedures of the agency and does not impact services provided to applicants and borrowers. Further, the agency is working on making all its handbooks available on the internet so that any interested party may view, download, and print agency handbooks as appropriate. Therefore, these comments were not adopted. Four comments were received requesting the agency reopen the comment period. As noted above, the agency reopened and extended the comment period from April 9, 2004, to May 4, 2004, and published a Federal Register notice to that effect on April 19, 2004. Eleven comments provided general comments not related to any specific part, section, or policy of the proposed rule. Therefore, the agency did not take any action regarding these comments. The following provides a summary of the comments received and the agency's response by CFR part. Part 761--General Program Administration The following discussion addresses the comments received on Part 761. Section 761.2 Abbreviations and Definitions Three comments were received on the ``active borrower'' and ``borrower'' definitions. Two comments stated the definitions as written are very similar, and therefore, the definition of ``active borrower'' should be removed from the CFR. The other comment stated the term ``active borrower'' is not used in the proposed rule. The agency agrees with the comments and has removed the definition. One comment was received on the ``agreement for the use of proceeds'' definition. The comment stated the agreement for the use of proceeds has not benefited borrowers or the agency since its inception. Further, the comment stated if the comment is not adopted, the agency should initiate a study on how the agreement for the use of proceeds has benefited the agency's borrowers. Section 335(f) of the Consolidated Farm and Rural Development Act (Act) (7 U.S.C. 1985(f)) requires the agency to release normal income security proceeds to borrowers for essential family living and farm operating expenses until the loan is accelerated. Further, Section 335(f)(6) of the Act provides if a borrower is required to plan or report how proceeds from the sale of security will be used, the agency must notify the borrower of (a) the reporting requirement; (b) the right to release proceeds; and (c) how to request such funds. The agency implemented the Act's requirement with the agreement for the use of proceeds that provides a means for reaching a consensus with a borrower regarding the use of proceeds from the sale of security property when the farm operating plan is developed. In addition, the agency delegates the authority to release proceeds to borrowers according to an established agreement for the use of proceeds to agency officials who do not have loan approval authority. Further, the agency utilizes the agreement for the use of proceeds to account for the agency's security. Moreover, the agency continuously evaluates forms utilized in administering its programs for effectiveness. Therefore, based on this comment as well as the comments received on Sec. 765.302, the agency may conduct further analysis to determine if changes are warranted. Lastly, the agency did not propose to make changes to the agreement for the use of proceeds; therefore, the agency will not take any action on this comment at this time. One comment stated the term ``agribusiness'' is not defined in the proposed rule. The agency does not use the term in the CFR; therefore, it does not need to include a definition for ``agribusiness.'' Two comments were received on the ``agricultural commodity'' definition. One comment stated the agency must define ``agriculture'' in general to clarify and distinguish that agriculture does not solely consist of commodities and large-scale operations. The definition as written, the comment stated, will make many Indian farm operators ineligible for loans. The other comment stated that the narrow definition of ``agricultural commodity'' adversely impacts the definition of ``basic part of the applicant's total farming operation'' and urged that the definition of ``agricultural commodity'' be broadened to include a [[Page 63243]] specific list of agricultural products. The agency believes the definition is reasonably broad and provides the agency discretion in determining what constitutes an agricultural commodity. The agency does not use this term in the regulations to suggest that agriculture consists only of commodities and large-scale operations. Furthermore, the definitions of both ``agricultural commodity'' and ``basic part of an applicant's total farming operation'' included in the proposed rule are identical to existing definitions established in the agency's emergency loan regulations by a final rule (67 FR 791-801) published on January 8, 2002, after considering public comments. Based on reviews of assistance provided since the implementation of that final rule, the agency believes both definitions have resulted in the achievement of the program's mission and the agency is not aware of any adverse impact on the public. Therefore, neither comment is adopted. Two comments were received on the ``applicant'' definition. One comment stated the definition is not clear if husband and wife applicants are considered as a joint operation. Further, the comment objected to husband and wife applicants being considered joint operations. The agency has not revised the definition based on this comment, but, the agency has revised the applicant eligibility requirements under Sec. 764.51, as discussed under that section heading. The other comment stated the agency should eliminate the definition and use ``lender applicant'' in the guaranteed loan program. The agency clarified the definition of ``applicant'' to be applicable to both direct and guaranteed loan programs. The agency believes using the terms ``lender applicant'' and ``lender'' in the guaranteed loan program, however, would be confusing, therefore, the comment is not adopted. Further, to avoid confusion, the agency removed the definition ``loan applicant'' in the final rule. Therefore, the comment is not adopted. One comment was received on the ``approval official'' definition. The comment stated the definition as written is confusing, because it contains the term ``field official'' which is not defined. The agency agrees with the comment, and removed the definition and replaced the term in the text with the word ``Agency.'' One comment was received on the ``aquaculture'' definition. The comment stated the agency should work with Tribes in the Northwestern, Northeastern and Midwestern United States to ensure the definition covers aquaculture on Tribal reservations. The agency believes the definition as written is broad enough to cover aquaculture operations in every part of the country. Further, the agency evaluates each operation on its merits. Therefore, the comment is not adopted. Three comments were received on the ``average farm customer'' definition. Two comments supported the definition as written. One comment stated the definition as proposed eliminates Indian producers with niche markets who farm traditionally and practice sustainable agriculture. The agency does not foresee that Indian producers will be impacted by the definition since producers eligible to receive guaranteed loans will remain eligible. Therefore, the comment is not adopted. One comment was received on the ``basic part of an applicant's total farming operation'' definition. The comment stated the definition as written is narrowly based on the definition of ``agricultural commodity'' without a definition of agriculture. Section 329 of the Act (7 U.S.C. 1970), in part, provides the agency may make emergency loans to applicants based on production losses if the applicant shows that a single enterprise that is a ``basic part of the applicant's farming, ranching, or aquaculture operation'' has suffered at least a 30 percent loss of normal per acre or per animal production. The definition clarifies the agency's implementation of the Act's provisions and as discussed in the agency's response to comments on the definition of ``agricultural commodity,'' the agency does not believe either definition as written, has an adverse impact on an applicant's eligibility. Therefore, the comment is not adopted. Five comments were received on the ``beginning farmer'' definition. Three comments stated that the definition precludes applicants with less than 3 years of experience from meeting the conditions of the beginning farmer definition. Further, the comments stated an applicant with less than 3 years of experience is eligible for a direct farm ownership loan, but is not eligible for a beginning farmer downpayment farm ownership loan. The agency agrees with the comments and has revised the definition accordingly. One comment stated the agency should revise the definition to remove the word ``direct'' in describing ``OL applicant'' from subparagraph (5). The subparagraph is not applicable to direct or guaranteed operating loans (OL) under the statutory definition, therefore, the agency agrees and has revised the definition accordingly. Further, the comment stated the agency should use the median acreage, as provided in Section 343(a)(11)(F) (7 U.S.C. 1991(a)(11)(F)) of the Act, to determine if an applicant is a beginning farmer. Section 343(a)(11)(F) of the Act was enacted under the provisions of the Agricultural Credit Improvement Act of 1992. As addressed in the preamble of the agency's 1993 final rule (58 FR 48275) published on September 15, 1993, implementing the regulatory definition of ``beginning farmer,'' while the statute referred to ``the median acreage of farm * * * as reported in the most recent census of agriculture,'' the agency utilized the term ``average acreage'' in its regulations as the census of agriculture did not capture ``median acreage'' at that time. The National Agricultural Statistics Service now publishes both the median and average farm size by county. Analysis of the data reveals that the median acreage is typically lower than the average acreage. Adoption of the comment may result in some applicants, who meet the existing requirements of the definition, not being considered a ``beginning farmer.'' However, the comment is correct in that both the existing and proposed regulations do not match the statute. Therefore, the comment is adopted and the definition has been revised accordingly. One comment stated the agency should remove the requirement that all members of an entity must materially and substantially participate in the operation. Section 343(a)(11) (7 U.S.C. 1991(a(11)) of the Act defines the term ``qualified beginning farmer or rancher'' and provides that for loans made to entities, the entity members must materially and substantially participate in the operation of the farm. The definition was based on the Act's provision, therefore, the comment cannot be adopted. Three comments were received on the ``borrower'' definition. One comment stated the definition does not seem to be applicable to the guaranteed loan program. The agency agrees with the comment and has revised the definition accordingly. Another comment stated the agency should revise the definition to exclude cosigners since cosigners merely sign the promissory note to assure repayment of the loan and are not program borrowers as defined in the agency's regulations. The agency does not agree with the comment because a cosigner has the same liability for the debt as any other borrower who signed the promissory note. Therefore, the comment is not adopted. The last comment stated the agency should clarify the definition to provide if the borrower's name should match the [[Page 63244]] operator's name utilized by Farm Programs in their internal agency systems. The agency believes the definition as written is clear; signature requirements are a separate issue. Further, as stated in Sec. 761.2, the definitions included in this part are applicable to FLP only. Therefore, the comment is not adopted. One comment was received on the ``cash flow budget'' definition. The comment stated that commercial lenders have adopted the practice of not including advances or principal repayments on lines of credit in the cash flow, since they are considered cash flow neutral. The comment stated the agency should revise the definition to match commercial lenders' standards. The agency agrees with the comment and has revised the definition accordingly. One comment was received on the ``chattel security'' definition. The comment stated the agency should clarify the definition to state that chattel is non-real estate property. The agency obtains a security interest using mortgages, deeds of trust, financing statements and security agreements. The agency believes the comment is proposing to delineate between chattels and real estate which cannot be done uniformly in all cases, especially for loans for which security is growing crops and fixtures. Further, the agency believes the definition as written is reasonably clear. Therefore, the comment is not adopted. One comment stated the term ``commercial classified account'' is not used in the rule, while the terms ``immediate family'' and ``immediate family member'' even though they are used, are not defined. The agency agrees and, in the final rule, the agency has removed the term ``commercial classified account'' and replaced the terms ``immediate family'' and ``immediate family member'' with the defined ``family member'' term. Two comments were received on the ``conservation contract review team'' definition. Both comments stated the agency should remove the adjacent public landowners from the definition. The comments did not provide any reason for removing public landowners from the conservation contract review team. The agency has utilized the definition, as published in the proposed rule, since September 14, 1988, and has not encountered any difficulties or concerns. Further, the agency believes public landowners may have concerns or relevant information regarding the potential easement that may affect the agency's decision. Therefore, the comments are not adopted. One comment was received on the ``cosigner'' definition. The comment stated the agency should revise the definition to state that cosigners are not eligible to receive loan servicing. The agency agrees that cosigners do not have independent rights to receive loan servicing, but may submit a joint application for servicing with all other liable parties. Therefore, the definition is revised accordingly. One comment was received on the ``current market value buyout'' definition. The comment stated the agency should revise the definition to remove liquidation costs as the definition conflicts with the explanation of current market value buyout included in Appendix B of 7 CFR part 766. The agency agrees with the comment and has revised the definition as the provisions of Appendix B are identical to existing regulations published in subpart S of 7 CFR part 1951. Furthermore, the Agency did not address a revision to the existing regulations in the preamble of the proposed rule. One comment was received on the ``debt forgiveness'' definition. The comment stated the agency should include in the definition the Act's provision, found in Section 343(a)(12)(B)(ii), which provides that ``any write-down provided as part of a resolution of a discrimination complaint against the Secretary'' is not considered debt forgiveness. The agency agrees with the comment and has revised the definition. The agency also has clarified the definition to state that the term does not include prior debt forgiveness that is repaid in full and debt reduction in exchange for a conservation contract. One comment was received on the ``debt service margin'' definition. The comment stated the proposed calculation would take a borrower off of limited resource rates if the borrower has atypical or one-time high inventories or cash. Therefore, the comment stated the agency should use the term debt and capital lease coverage ratio, which is the industry standard to calculate the debt service margin. The agency uses a typical plan to calculate the debt service margin and does not consider atypical high inventories or cash when running the Debt and Loan Restructuring System (DALR$) for primary loan servicing. Further, the definition of ``feasible plan'' provides that the farm operating plan will not be based on atypical or one-time high inventories, or cash on hand. Therefore, the comment is not adopted. Six comments were received on the ``delinquent borrower'' definition. All comments stated the definition contained in the proposed rule did not match the definition in the agency's final rule published on February 4, 2004 (69 FR 5264-5267). The agency agrees with the comments, and has revised the definition accordingly. Three comments were received on the ``entity'' definition. One comment stated that the term ``trust,'' as used in the definition, must be more clearly defined ``so that it includes trusts established in treaties'' making tribal farms eligible for assistance. Two comments stated that it was not clear in the proposed rule how less than traditional entity structures would be handled. Act section 302(a) (7 U.S.C. 1922(a)) for farm ownership loans, section 311(a) (7 U.S.C. 1941(a)) for operating loans, and section 321(a) (7 U.S.C. 1961(a)) for emergency loans specifically provide the types of entities eligible to receive loans; entity applicants must fit within at least one of the types listed. The agency does not believe the definition, as written, limits the type of trust, or other organization listed, that are considered an entity under the Act's provisions. However, entity applicants must meet the statutory eligibility requirement of being the owner-operator or tenant-operator of a family farm, as well as all other applicable eligibility and loan making requirements. The agency believes the definition, as written, will not result in the adverse impacts suggested in the comments; therefore, the comments are not adopted. Two comments were received on the ``essential family household expenses'' definition. One comment stated that the definition, along with the definition of ``essential family living and farm operating expenses,'' makes the rule unclear. The agency believes the ``essential family household expenses'' and the ``essential family living and farm operating expenses'' definitions are similar, and has therefore, removed the definition of ``essential family household expenses'' in the final rule as unnecessary and replaced the term throughout the CFR. The other comment stated the agency should revise the text ``the borrower and the immediate family of the borrower'' to read ``the borrower, spouse, and immediate family members'' since the agency defined the term ``family member.'' Since the agency removed the definition of ``essential family household expenses,'' the agency revised the definition of ``family living expenses'' to include expenses for the borrower's spouse and immediate family members. Two comments were received on the ``essential family living and farm operating expenses'' definition. One comment stated that the agency should [[Page 63245]] revise the definition to provide that the agency will consider the expenses typical for the local community, instead of expenses typical for that type of operation in the area. Further, the comment stated the agency should remove the provision that the agency will consider what constitutes an efficient method of production for the borrower's resources because it is ambiguous. The agency believes using the term ``local community'' will make the definition unclear when applied to a rural area. Further, the agency believes the provision, as written, furthers the agency's mission of providing supervised credit and allowing the agency and the applicant to adjust to the needs of the operation. Therefore, this part of the comment is not adopted. The comment also stated the agency should include in the definition nursing care of immediate family members not living in the same household. The agency has revised the definition of ``family living expenses'' to include the costs of providing for the needs of family members and those for whom the borrower has a financial obligation, such as alimony, child support, or nursing care of an elderly parent. The agency agrees that nursing care of immediate family members is a family living expense, but the agency believes it is not always an essential family living expense. Therefore, this part of the comment is not adopted. Lastly, the comment stated the agency should remove the reference to church expenses from the definition and replace it with religious expenses. The other comment stated the agency should revise the definition to remove the reference to ``church.'' The agency agrees with the comments and has revised the definition accordingly. Eight comments were received on the ``established farmer'' definition. Two comments stated the agency should remove the subparagraph describing entity eligibility from the definition because it limits the use of different legal structures for families attempting to transfer the farm to a new generation. The term ``established farmer'' is used only in subpart H of 7 CFR part 764 which addresses requirements specific to emergency loans in accordance with section 321 of the Act (7 U.S.C. 1961). The authorized uses for emergency loan funds include the repair or replacement of essential property damaged or destroyed as a result of a disaster; however, emergency loan funds would not be used to finance the transfer of a farm to a new generation. The agency does not agree that the provision of the definition adversely impacts inter-generational transfers and therefore, the comments are not adopted. Similar concerns regarding the impact of entity eligibility requirements were received in response to regulations at Sec. 764.101. As described in the agency's response to those comments, the agency revised the entity eligibility requirements contained in that section, and as a result made conforming changes to the definition of ``established farmer'' by revising the provision that an established farmer is not ``an entity with an ownership interest of 50 percent or more held by one or more entities'' to require that an entity cannot be ``an entity whose members are themselves entities.'' One comment stated that the ``established farmer'' definition should be revised to recognize that Tribal farms have sovereign rights that allow for complex land issues, which often require the use of a full time farm manager. As discussed in the response to comments for the definition of entity, the agency does not believe the regulations, as written, impose any additional limitations on a particular type of entity. However, agency assistance is only available to entity operations that are family farms and, therefore, must have a majority of the day-to-day operational and strategic management decisions made by the members operating the farm, as well as meet all other requirements established within the definition of family farm. Therefore, this portion of the comment is not adopted. Further, the comment stated that the ``established farmer'' definition requirement that 50 percent or more of the ownership in the entity cannot be held by another entity will exclude Tribal farms. As discussed in the response to comments received on the general eligibility requirements for loan making (Sec. 764.101), the agency has revised the eligibility requirements regarding entities to provide that an entity applicant cannot be composed of members that are themselves entities. Therefore, appropriate conforming changes have been made in the CFR, and this portion of the comment is not adopted. Two comments stated the requirement in the ``established farmer'' definition that the entity is primarily engaged in farming and has over 50 percent of its gross income from all sources from farming, is detrimental to small or beginning farmers who rely on non-farm income to meet operating and family living expenses. This requirement is supported by the ``family farm'' requirement that the farm produce ``agricultural commodities for sale in sufficient quantities to be recognized as a farm rather than a rural residence.'' Furthermore, the 50 percent gross income requirement is included in existing regulations published in 7 CFR 764.2 and the agency is not aware of any adverse impacts on the public; therefore, the comments are not adopted. One comment stated it is not clear what the term ``such loans'' refers to in subparagraph (5)(ii) of the definition. The agency agrees with the comment and has revised the definition to refer to ``Agency loans.'' Two comments suggested that the word ``employees'' in the last sentence of the definition be replaced with the word ``employs.'' The agency agrees with the comments and has revised the definition accordingly. Two comments were received on the ``false information'' definition. One comment stated the agency should revise the definition to include information the applicant or borrower should have known to be false, because it is difficult for the agency to prove the information the applicant or borrower submitted to the agency was false. While the agency agrees with the comment, the agency believes it is even more difficult to prove the applicant or borrower should have known information submitted to the agency was false. Therefore, the comment is not adopted. The other comment stated the agency should revise the definition to include information the applicant or borrower chose to withhold from the agency. The term is used only in subpart F of 7 CFR part 766 for the submission of false information. Since the proposal concerns information not submitted to the agency, and therefore not relied on, the comment is not adopted. Practically, however, in such cases the information submitted to the agency may be false in light of conflicting information not submitted and would, therefore, be covered by the definition. Five hundred sixty-four comments were received on the ``family farm'' definition. Of the comments received, 12 supported the definition as proposed while 552 comments opposed it. The proposed definition would establish that the typical year gross income of the operation could not exceed the greater of $750,000 in annual sales, or the 95th percentile of the statistical distribution of the income of farms in the state with gross sales in excess of $10,000, based on the farm data and survey of farm economic factors published by the National Agricultural Statistics Service. The opposing comments stated the proposed definition would make a large number of family farms ineligible for direct and guaranteed agency loans. One hundred seventy comments [[Page 63246]] recommended the gross income limit be increased from $750,000 to $1,000,000, $1,500,000, or $2,500,000. Seventy-four comments opposed the use of any gross income limit. Fifty-two comments stated that the use of annual sales to determine eligibility was arbitrary. Thirty-one comments stated the proposed definition would exclude high value crop producing farms. Seventy comments stated the agency provided little justification in the proposed rule for using a gross farm income cap. Fourteen comments stated the agency does not have a statutory basis for changing the family farm definition. Thirteen comments opposed using a gross income limit that was not indexed to inflation. Therefore, because of the overwhelming opposition to the proposed requirement, the agency will not include a gross annual income in its family farm definition. However, as noted in the discussion of the proposed rule published on February 9, 2004, the broad guidelines contained within the existing definition have resulted in inconsistencies in applying the definition on a nationwide basis. The agency believes that the ``family farm'' definition in this final rule will minimize inconsistencies regarding management and labor requirements. Based upon comments received, the Office of Management and Budget recommends the agency seek public input as part of a further analysis regarding the inclusion of an appropriate nation-wide income limitation, which may necessitate future action. It is important to note that the definition of a ``family farm'' as stated in this final rule only applies to farm loan program eligibility requirements. Further, the proposed ``family farm'' definition included the provision that the majority of the day-to-day operational and management decisions are made by the applicant and persons related to the applicant by blood or marriage. One hundred sixteen comments were received on the ``related by blood or marriage'' definition. All comments stated the definition as written excludes certain relationships, including, but not limited to, cousins, uncles, aunts, and grandparents and that as a result, partnerships or entities comprised of these individuals would not be considered a family farm. The agency agrees with the comments and revised the definition to include the relationships except cousins. In addition, in response to the concerns expressed, the agency revised the definition of ``relative'' to include cousin in the covered relationships. Furthermore, the agency revised the ``family farm'' definition to provide that the day-to-day operational and management decisions be made by the applicant and persons related to the applicant by blood or marriage or a relative of the applicant. One comment expressed concern regarding the provision in the ``family farm'' definition that the farm ``in a typical year generates net cash income that improves the family's standard of living'' as the term ``typical year'' is not defined in the rule. The agency agrees that the provision is subject to different interpretations and could adversely impact applicants that have been subject to recent disasters. Therefore, the agency removed the provision from the definition. One comment was received on the ``family living expenses'' definition. The comment stated the agency should remove the definition because the CFR already includes the ``essential family living and farm operating expenses'' definition. The agency believes the terms are not synonymous as all family living expenses are not considered essential. Further, the terms are utilized under different circumstances in the loan making and servicing process when the distinction is necessary. Therefore, the comment is not adopted. One comment was received on the ``family member'' definition. The comment stated the agency should revise the definition to provide family members include the immediate members of the family for whom the borrower has a financial obligation, e.g., child support payments, alimony, nursing care for an elderly parent. The agency revised the definition of ``family living expenses'' to include the expenses provided in the comment, for family members who are the borrower's responsibility, as revising that definition is more appropriate. One comment was received on the ``farmer'' definition. The comment stated the agency should revise the definition to provide that farmer is an individual or entity who is a family farmer. The agency believes the definition as written is adequate as not every farmer in the United States is a family farmer. Therefore, the comment is not adopted. Two comments were received on the ``feasible plan'' definition. One comment stated the agency should revise the definition to state ``feasible plan is when the cash flow budget shows total income equals or exceeds total cash outflow.'' The agency does not agree with the comment to limit the evaluation of feasibility to include only ``total income'' as there may be other non-income sources of cash inflows, such as cash on hand, that impact the borrower's repayment ability. Therefore, the comment is not adopted. The other comment stated the agency should clarify the definition to provide that the margin after debt service and ending cash, depending on the loan requested, determine if the operation projects a feasible plan. The agency agrees that the feasibility for an annual operating loan should be evaluated differently than for a term loan. However, ``margin after debt service'' and ``ending cash'' are terms that apply to the Farm Business Plan, a software application utilized by the agency to determine feasibility for direct loan making and servicing requests. ``Feasible plan'' is a term applicable to regulations for both the direct and guaranteed loan programs. While the term ``ending cash'' refers to the applicant or borrower having ``sufficient cash inflow to pay all cash outflow'' and the term ``margin after debt service'' applies to consideration of a typical plan when the ``loan approval or servicing action exceeds one production cycle,'' the agency believes the definition, as written, adequately describes the requirements for both the direct and guaranteed loan programs. Therefore, the comment is not adopted. One comment was received on the ``financially distressed borrower'' definition. The comment stated the definition should include borrowers who do not have a 110 percent debt service margin to match the DALR$ software program. The agency disagrees. The agency notifies financially distressed borrowers of the availability of loan servicing programs as provided under Sec. 766.101. The agency does not consider a borrower who can develop a feasible plan, which does not require a margin, with less than 10 percent margin to be financially distressed. However, a borrower who is not delinquent, but cannot develop a feasible plan for the current or next production cycle, is considered financially distressed and in need of loan servicing. Further, Sec. 766.105(b)(1) provides the agency will attempt to achieve a 110 percent of debt service margin; however, under Sec. 766.105(b)(3) the agency only requires the borrower ``be able to develop a feasible plan with at least 100 percent of debt service margin'' to be considered for loan servicing programs. If the agency revises the definition as provided in the comment, the agency would have to re-notify all borrowers restructured with a debt service margin of less than 110 percent immediately after the restructuring is complete. Therefore, the comment is not adopted. However, the [[Page 63247]] agency did revise the definition by removing the text, ``unable to make payments as planned for the current or next business accounting period or to project a feasible plan of operation for the next business accounting period'' as the term ``business accounting period'' is not defined. The removed text was replaced by the text, ``unable to develop a feasible plan for the current or next production cycle'' as the term ``production cycle'' is defined in the rule, and is more easily understood. Six comments were received on the ``financially viable operation'' definition. One comment recommended the words ``basic family living expenses'' in the definition be revised to read ``essential family living expenses.'' One comment stated the agency should revise the definition to provide the operation must generate sufficient income to meet essential family living expenses to the extent they are not met by dependable non-farm income. The agency agrees with the comments and has revised the definition accordingly. In addition, the agency clarified the definition further to provide that it is applicable only under Sec. 764.252, which provides the conditions applicants have to meet to request a waiver of the operating loan term limit. Four comments stated the definition requires the operation to generate sufficient income to provide for replacement of capital items and long-term financial growth, and that such an operation should qualify for commercial credit, with no agency assistance. Therefore, the comments stated the agency should either remove the definition or make it identical to the ``feasible plan'' definition. In addition, one of the comments stated the definition seems to provide that non-farm income can only be used to meet family living expenses, but that non-farm income is used to make debt payments, replace capital items and supplement working capital. Section 311(c)(4)(B) of the Act (7 U.S.C. 1941(c)(4)(B)) requires the applicant to have a financially viable operation for the agency to consider granting a one-time 2-year waiver of operating loan limits. The agency believes the definition as revised to refer to essential family living expenses should allow flexibility to small operations while meeting the statutory requirements; therefore, the comments are not adopted. One comment was received on the ``foreclosed'' definition. The comment stated the agency should revise the definition to provide ``foreclosed'' is the completed act of selling real estate security under the power of sale in the security instrument or through judicial proceedings. The agency agrees with the comment and has revised the definition to refer to judicial proceedings. One similar comment was received on the ``foreclosure sale'' definition. The comment stated the agency should revise the definition to provide ``foreclosure sale'' is the act of selling real estate security. The agency believes the definition as written is adequate since the agency can also foreclose on loans secured by chattels. Therefore, the comment is not adopted. Two comments were received on the ``good faith'' definition. One comment supported the definition as written. Further, it stated it is not necessary for the agency to consult the Office of General Counsel to determine findings of fraud, waste or conversion. The other comment stated the agency should retain the requirement for a written Office of General Counsel opinion that has been a regulatory requirement since September of 1988, as such determinations have ``grave consequences for the rights and interest of FLP borrowers * * *'' The agency recognizes the seriousness of allegations of fraud, waste, and conversion and therefore has revised the definition to include the requirement that an opinion be obtained form the Office of the General Counsel. Further, the comment stated the ``good faith'' definition should allow for inadvertent departures from the agreements with the agency because good faith deals with the borrower's state of mind at the time the violation of the agreement occurs. The agency does not believe its staff can make determinations regarding a borrower's state of mind. The text, ``The Agency considers a borrower to act in good faith, however, when the borrower is unable to adhere to all agreements due to circumstances beyond the borrower's control'' adequately addresses this concern; therefore, the comment is not adopted. In addition, the comment stated the statutory requirement that a borrower who disposed of security and used proceeds for essential household and operating expenses prior to October 14, 1988, is not considered to lack good faith is not included in the definition. While the agency agrees with the comment, the agency does not believe a borrower will be determined to lack good faith based on events that occurred more than 15 years prior to a current loan or servicing application. However, as an added precaution, the agency handbook will provide guidance on dealing with applicants and borrowers who disposed of security and used proceeds for essential family living and farm operating expenses prior to October 14, 1988. Therefore, the comment is not adopted. Lastly, the agency made an administrative revision to the ``good faith'' definition by clarifying that good faith requires an applicant or borrower to provide ``current, complete, and truthful information when applying for assistance and in all past dealings with the Agency.'' This text supports the acknowledgment currently included on each loan or servicing application. One comment was received on the ``graduation'' definition. The comment stated the agency should revise the definition as the payment in full of one or more direct FLP loans. The agency believes the payment in full of one or more loans of the same type, when the borrower has several outstanding loans, cannot be considered as graduation because the borrower is still depending on the agency to obtain necessary credit for the operation. As agency loans are a temporary source of credit for borrowers, for the agency to measure its borrowers' success, borrowers have to obtain their credit needs from another source with or without an agency guarantee. Therefore, the comment is not adopted. One comment was received on the ``homestead protection'' definition. The comment stated the agency should clarify that homestead protection applies to direct loan borrowers only. The agency agrees with the comment and has revised the definition accordingly. One comment was received on the ``homestead protection property'' definition. The comment stated the agency should revise the definition to clarify that homestead protection property secured direct loans only. The agency agrees with the comment and has revised the definition accordingly. One comment was received on the ``household contents'' definition. The comment stated the agency should remove the second sentence of the proposed definition with exclusions for luxury items. The agency believes the definition as written is reasonable. The term is used in Parts 764 and 766 in relation to disaster-related damages and taking additional security refers to needed, not luxury household items. Therefore, the comment is not adopted. One comment was received on the ``inaccurate information'' definition. The comment stated the agency should revise the definition to include information provided by an applicant without the intent of fraudulently obtaining benefits. The agency agrees with the comment and has revised the definition to refer to applicants, borrowers, lenders, and other sources. [[Page 63248]] Two comments were received on the ``inventory property'' definition. One comment stated the definition as written includes all Federal property, such as Federal buildings and public land. Further, the comment stated the agency should clarify the definition to include real estate property held by guaranteed lenders after liquidation of guaranteed loans. The other comment stated the agency should revise the definition as real estate and chattel property to which the United States has acquired ownership rights. In response to the comments, the agency has clarified that the term covers such property that formerly secured an FLP loan and to which the Government has acquired title. The definition would not cover former security property held by the guaranteed lender. One comment was received on the ``joint operation'' definition. The comment stated the agency should remove the definition. Section 343(a)(7) of the Act (7 U.S.C. 1991(a)(7)) defines the term ``joint operation'' and this type of entity is specifically listed as an eligible entity for farm loans. The proposed rule was based on the Act's provision; therefore, the comment cannot be adopted. One comment was received on the ``lien'' definition. The comment stated the agency should revise the definition as a legally enforceable claim against real or chattel property. The agency agrees with the comment and has revised the definition to refer to real or chattel property. One comment was received on the ``line of credit agreement'' definition. The comment stated the agency should revise the definition as a contract between the lender and the borrower that contains certain lender and borrower conditions, limitations, and responsibilities for revolving or non-revolving credit. The agency's current guaranteed regulations and handbook have contained the definition as published in the proposed rule since February 12, 1999, without causing adverse impacts on the program. The agency believes the less technical definition is reasonable and easily understood. Therefore, the comment is not adopted. One comment was received on the ``loss rate'' definition. The comment stated the agency should revise the definition as the net amount of loan loss claims paid on loans made in the previous 7 years divided by the total loan amount guaranteed during the same period. The agency's current guaranteed regulations and handbook have contained the definition as published in the proposed rule since February 12, 1999, without causing adverse impacts on the program. Therefore, the comment is not adopted. The agency did however make an administrative revision to the definition to replace the text ``guaranteed OL, Farm Ownership (FO), and Soil and Water (SW) loans'' with the text ``FSA guaranteed loans'' as the agency has not made guaranteed SW loans in the last 7 years. One comment was received on the ``mortgage'' definition. The comment stated the agency should revise the definition as a security instrument. The agency defines the term ``mortgage'' to clarify that it is synonymous with the term ``deed of trust'' in those States that use a deed of trust to obtain a lien on real estate. Further, the agency has added the definition for the term ``security instrument'' to describe any document that provides the agency with a security interest in real or personal property. Therefore, the comment is not adopted. One comment was received on the ``net recovery value of security property'' definition. The comment stated the agency should include a separate definition for the term ``net recovery value of non-essential assets'' instead of including it in the definition of ``net recovery value of security property.'' The agency agrees with the comment. Therefore, the agency defined the term ``net recovery value of non- essential assets'' and revised the ``net recovery value of security property'' definition accordingly. Seventeen comments were received on the ``non-eligible enterprise'' definition. Four comments supported the agency's proposed definition as written. One comment stated the agency should remove the definition and provide the eligible enterprises under the applicable loan purpose sections. The agency believes enumerating all the eligible enterprises will make the applicable loan purpose sections voluminous. Further, by not enumerating the eligible enterprises in the rule the agency eliminates the possibility of inadvertently omitting an eligible enterprise. Therefore, the comment is not adopted. Another comment stated the ``non-eligible enterprise'' definition as written could be confusing to the public. The agency believes that by defining the term and providing in the CFR text that loan funds may not be used to finance a non-eligible enterprise, it eliminates confusion. Therefore, the comment is not adopted. One comment, while it supported the definition, stated the agency should provide that an economically viable transportation situation does not exist for the non-eligible enterprise's products. The agency believes that it is not the expenses associated with the enterprise that makes the enterprise ineligible for agency loans, it is the products the enterprise produces. Further, when considering any enterprise, the agency includes transportation expenses when it determines the operation's feasibility, since transportation costs can vary greatly from locality to locality. It is not the agency's intent to allow financing of non-eligible enterprises in one area and not in other areas based on transportation costs. Therefore, the comment is not adopted. Five comments opposed the ``non-eligible enterprise'' definition as proposed because it eliminates tropical fish farming, the equine industry, llamas, alpacas, and ratites from being eligible for agency loans. The agency has a long-standing policy not to finance the production of animals kept solely for pleasure or companionship. This policy will continue. Therefore, the comments are not adopted. Two comments stated it is not clear if the definition includes products bought and further grown, and then resold, or otherwise having value added to the products. ``Non-eligible enterprise'' would not include common farming operations that buy chickens, piglets, seedling, etc., and resell them when fully grown; it would include operations that purchase ripened fruit and resell it as jam, for example. No change is being made in relation to the comments. Further, the comments stated it is not clear if the requirement that the ``majority of the commodities processed or marketed'' by the enterprise is based on dollar sales or the number of items. The agency believes the requirement as written is applicable only to the number of items processed or sold. Therefore, the comments are not adopted. Another comment stated the ``non-eligible enterprise'' definition adds another tier of inquiry in determining if a particular enterprise is eligible for agency loans. Further, the comment stated the definition provides enterprises that produce exotic or non-farm animals are not eligible for loans, however, the terms ``exotic'' and ``non- farm animals'' are not defined. In response to the comment, the agency revised the definition to clarify what the agency considers exotic or non-farm animal; however, the term is still needed. The Federal Agriculture Improvement and Reform Act of 1996 (Public Law 104-127), removed financing of non-farm enterprises as an authorized use of loan funds. The agency needs to specify the type of [[Page 63249]] enterprises that will not be financed to avoid confusion and inconsistent application of this restriction. Further, financing enterprises producing animals or products for which there is not an established market is inconsistent with prudent lending objectives. Another comment stated the agency must allow Tribal input to determine what tribal agricultural enterprises consist of, and set guidelines to recognize traditional tribal markets. Further, the comment stated the production of leeches, vermiculture and aquaculture must not be included in the non-eligible enterprise definition. The agency believes the definition as revised, along with the definitions of agricultural commodity and aquaculture, adequately identify the enterprises eligible for receiving loans. Further, the agency evaluates each individual operation requesting assistance on its own merits. Therefore, the comment is not adopted. One comment was received on the ``non-essential assets'' definition. The comment stated the agency should revise the definition to include assets that may contribute a small amount of income to the farming operation but are clearly non-essential for the operation to function. The agency believes the definition as written is adequate, especially when read in the context of the CFR text. Therefore, the comment is not adopted. One comment was received on the ``non-program loan'' definition. The comment stated the definition as written is too narrow and the agency should continue to use the definition found in current Sec. 1951.451. The agency agrees with the comment and has revised CFR accordingly. One comment was received on the ``normal production yield'' definition. The comment stated the definition as written is confusing and that the current definition, found in Sec. 764.2, provides the priority for the types of records the agency will use. The proposed definition made no substantive changes from current Sec. 764.2. Some clarifying language has been added in response to the comment. One comment was received on the ``note'' definition. The comment stated the agency should remove the definition, as the term ``note'' is included in the ``debt instrument'' definition. The agency believes the term ``debt instrument'' does not adequately describe the instruments the agency uses to evidence debt and therefore, the agency removed it in the final rule. However, the agency added the term ``promissory note'' which is used in several sections of the CFR to replace the term ``note,'' and further added the term ``assumption agreement'' for clarity since it is distinguished from the term ``promissory note'' in the text. The agency revised the definition of ``Operating loan'' to include a youth loan as provided in Sec. 764.1(b). One comment was received on the ``owner-operator'' definition. The comment stated the definition should be revised to read ``* * *is the individual or entity that owns the farm and provides the labor, management, and capital to operate the farm. An entity must have one or more members operating the farm.'' The terms ``owner-operator'' and ``tenant-operator'' are used in the general eligibility requirements established in 7 CFR 764.101, as well as the additional eligibility requirements established for specific loan types in the applicable subparts. While the proposed rule included a definition of the term ``owner-operator,'' the terms ``tenant-operator'' and ``operator'' were not defined. The agency believes the key term that should be defined is ``operator,'' and has, therefore, removed the definition of ``owner- operator'' in the final rule and has added ``operator.'' The agency defined the term ``operator'' to include both an ``owner-operator'' or ``tenant-operator'' as applicable under each loan program. The agency does not believe that a definition of either of these terms is necessary as they are self explanatory. Further, the agency believes that the new definition of ``operator'' uses the abbreviated text suggested by the comment; therefore, this portion of the comment is adopted. However, the agency did not adopt the portion of the comment suggesting the inclusion of the text ``An entity must have one or more members operating the farm'' as this requirement is adequately addressed in the revisions made to the eligibility requirement established in 7 CFR 764.101(k) requiring the applicant be the operator of a family farm. One comment was received on the ``partnership'' definition. The comment stated the agency's requirement that partnerships must be formally organized is out of date and unnecessary. The agency believes the definition as written does not require a formal partnership agreement, but instead it provides the agency will comply with State requirements pertaining to partnerships. Therefore, the agency does not believe a change to the definition is necessary. One comment was received on the ``protective advance'' definition. The comment stated since the definition will be applicable to the guaranteed loan program also, the agency should continue to use the definition found in current Sec. 762.102(b). The agency believes the definition as written in the proposed rule is adequate to cover both the direct and guaranteed loan programs. Further, under Sec. Sec. 765.203 and 762.149, respectively, the agency specifies the conditions for making protective advances for the direct and guaranteed loan programs. Therefore, the comment is not adopted. One hundred sixteen comments were received on the ``related by blood or marriage'' definition. As noted in the agency's response to comments received on the definition of ``family farm,'' all comments stated the definition as written excludes certain relationships, including, but not limited to, cousins, uncles, aunts, and grandparents. The agency agreed and revised the definition accordingly. One comment was received on the ``relative'' definition. The comment recommended the word ``of'' be inserted between the words ``one'' and ``the.'' The agency agrees and has revised the definition accordingly. In addition, as discussed in the agency's response to comments received on the definition of ``family farm,'' the definition of ``relative'' was revised to include the term ``cousin.'' Two comments were received on the ``restructuring'' definition. Both comments stated the definition as written does not cover the guaranteed loan programs. The agency agrees with the comments and has revised the CFR accordingly to adopt the definition from current Sec. 762.102. Three comments were received on the ``rural youth'' definition. Two comments supported the definition as written and opposed lowering the age limit for youth loans from the proposed 10 years to 8 years of age. One comment, while it supported the definition, stated the population limit should not exceed 20,000 inhabitants. The agency disagrees. The agency believes rural youth residing in areas of up to 50,000 inhabitants can benefit from the youth loan program and that the age minimum should remain at 10 years of age. Seven comments were received on the ``socially disadvantaged applicant'' definition. Six comments stated that applicants who are spouses are penalized under the definition when the wife is the operator and owns 50 percent of the farming operation, because they do not meet the majority ownership interest test. The agency agrees there are circumstances where a spouse's ability to own the majority interest in property is prohibited by State laws governing spousal rights. Therefore, the agency revised the [[Page 63250]] definition to allow married couples to be considered socially disadvantaged when the socially disadvantaged spouse owns 50 percent of the farming operation and makes most of the management decisions, contributes a significant amount of labor and is generally recognized as the operator of the farm. Such construction of the term as used in section 355 of the Act is reasonable under these circumstances. Another comment stated the requirement for entities that the socially disadvantaged member must have a majority ownership interest in the operation to receive targeted funds reduces access to targeted funds by eligible socially disadvantaged applicants. The Act's section 302(a) for farm ownership loans, section 311(a) for operating loans, and 321(a) for emergency loans provide the eligibility requirements for loans to entities. The statutory eligibility requirements apply to members holding a majority interest in the entity. The proposed rule is consistent with the Act's provisions in focusing on the majority interest holder. The agency is taking a more lenient approach only in the case of spouses as discussed above. Therefore, the comment is not adopted. One comment was received on the ``socially disadvantaged group'' definition. The comment stated the socially disadvantaged groups are not specified in the proposed rule. The agency agrees with the comment and has revised the definition to include the groups currently listed in Sec. 1943.4. One comment was received on the ``trust'' definition. The comment stated the agency should revise the definition to reflect that Tribes, as sovereign nations, have the ability to create and enforce laws to regulate businesses conducted within their boundaries. The requirement that a trust is recognized by the state in which it conducts business is the same as the requirement applicable to all other entities. Agency regulations cannot address every Tribe's unique situation; therefore, state offices may develop guidance according to applicable state and tribal laws in consultation with the Regional Office of General Counsel. The agency believes the definition as written is adequate; therefore, the comment is not adopted. One comment was received on the ``United States'' definition. The comment stated the definition as written excludes the Republic of Palau, the Federated States of Micronesia, and the Republic of the Marshall Islands. Further, the comment stated the Free Association Treaty provides that the agency may enter into loan agreements with citizens of the countries mentioned above. The agency agrees with the comment and has revised the definition accordingly. One comment was received on the ``working capital'' definition. The comment stated the agency should revise the definition for clarity to provide ``* * * including, but not limited to, paying for feed, seed * * *'' The agency agrees and has revised the definition accordingly. Four comments were received on the ``youth loan'' definition. Three comments stated youth loans should not be restricted to agricultural projects only. One comment stated that changing the youth loan purposes to include financing agriculturally-related projects only will have a devastating effect on Tribal youth. As stated in the discussion of comments received under Sec. 764.301, the agency believes that youth loan funds should be used for modest, income producing, agriculture- related projects. Therefore, the comments are not adopted. Section 761.6 Appeals Five comments were received on the appeals provisions. Three comments stated the agency should clarify the provision that an adverse decision involving a guaranteed loan may be appealed by either the lender or the applicant or borrower. One comment stated the agency should revise Sec. 761.6 as well as Sec. 762.104 to provide a guaranteed applicant or borrower may appeal an adverse a