Revision of the Interest Assistance Program, 17353-17359 [07-1748]

Agencies

• DEPARTMENT OF AGRICULTURE
• Farm Service Agency

[Federal Register Volume 72, Number 67 (Monday, April 9, 2007)]
[Rules and Regulations]
[Pages 17353-17359]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 07-1748]



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Federal Register / Vol. 72, No. 67 / Monday, April 9, 2007 / Rules 
and Regulations

[[Page 17353]]



DEPARTMENT OF AGRICULTURE

Farm Service Agency

7 CFR Part 762

RIN 0560-AG46


Revision of the Interest Assistance Program

AGENCY: Farm Service Agency, USDA.

ACTION: Final rule.

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SUMMARY: The Farm Service Agency (FSA) is amending its regulations 
governing how FSA guaranteed farm loan borrowers may obtain a 
subsidized interest rate on their guaranteed farm loan. This program is 
known as the interest assistance (IA) program. Changes include deletion 
of annual review requirements, limitations on maximum subsidy payments 
and period of assistance, and streamlining of claim submission. The 
changes are intended to reduce paperwork burden on program participants 
and agency employees, make IA available to more farmers, reduce the 
costs of the program, and enhance the fiscal integrity of the program.

EFFECTIVE DATE: June 8, 2007.

FOR FURTHER INFORMATION CONTACT: Tracy L. Jones, Senior Loan Officer, 
Farm Service Agency; telephone: (202) 720-3889; Facsimile: (202) 720-
6797; e-mail: Tracy.Jones@wdc.usda.gov. Persons with disabilities 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:

Summary of Public Comments

    FSA published a proposed rule on June 22, 2005, (69 FR 36055-36060) 
to amend its regulations governing loans made under the guaranteed farm 
loan program, IA program. The initial comment period deadline of August 
22, 2005, was extended to September 6, 2005, due to a change in the e-
mail address of the information contact. Comments were received from 
144 respondents from 18 states and the District of Columbia. Many of 
the respondents provided multiple comments.
    Six respondents supported the proposed rule in its entirety, 
stating that the entire proposed rule was well written and easy to 
understand, or commenting that the proposed rule looks good and will 
save a lot of time.
    Three respondents did not approve of the IA program at all; 
however, they did not give specific reasons as to why they opposed the 
IA program.
    Two respondents asked that the Agency keep the program the same 
because they really needed to keep receiving the money. Another 
indicated that the assistance received makes the difference between 
making a profit or not. While the Agency understands the importance of 
the assistance, there were no specific recommendations provided to 
support their general comments.
    One respondent generally asked how the changes would affect those 
serving in Iraq. No specific changes were made to address this issue. 
Borrowers called to active duty will continue to be handled in 
accordance with existing procedures.
    One respondent indicated under the discussion of the proposed rule, 
the Agency gave a negative connotation of borrowers receiving IA by 
stating those recipients were ``underdeveloped''. The Agency in no way 
intended to portray farmers in a negative connotation, so this 
terminology has not been used in the final rule.
    While these comments received in opposition to the proposed changes 
were reviewed, they did not provide specific recommendations, so no 
changes were made in the final rule to address them.
    Following is a review of specific comments and the changes made in 
the final rule in response to the comments.

Loans Eligible for Interest Assistance

    The Agency proposed to delete references to providing IA on Farm 
Ownership (FO) loans and existing guaranteed Operating Loans (OL) in 
conjunction with a rescheduling action because Congress has not 
appropriated IA funds for these purposes since 1992. Seven comments 
supported this change. One respondent indicated that FO's would be too 
costly for the program. However, 35 comments received were opposed to 
the change citing that it would be a mistake to eliminate regulations 
governing the use of IA for FO's and/or existing OL's. In the event 
that funds were appropriated to fund IA for these other types of loans, 
implementation would be delayed while FSA implemented regulations again 
to govern these aspects of the program. The respondents stated that 
they recognize the desire to streamline the Code of Federal 
Regulations, but believe it does no harm to leave regulations in place 
for currently unfunded applications of IA. The Agency carefully 
considered the comments and determined that because funding has not 
been provided since fiscal year 1992 and such funding would be 
prohibitively expensive, the proposed change is warranted. Therefore, 
the final rule implements the proposal to limit IA to new guaranteed 
OL's only.
    One respondent stated the Agency should eliminate the requirement 
to consider IA after loan default. The Agency agrees with this comment, 
however, this requirement is required by 7 U.S.C. 1999 and can only be 
changed by Congress.
    One respondent recommended that the Agency prohibit the use of a 
loan with IA to refinance debt owed by the applicant to another lender. 
The Agency agrees that this change would prevent lenders from using IA 
to unfairly market their loans to their competitor's customers and 
would extend limited program funds. However, this is a localized 
problem and would be a significant program change that would make a 
large number of applicants ineligible. Thus, the agency decided not to 
include this change in the final rule.
    One respondent requested additional guidance on the definition of 
nonessential assets. The Agency feels that the definition and 
discussion in the rule are sufficiently clear. No changes are made in 
the final rule; however, additional guidance will be provided in the 
FSA field office handbook for the Guaranteed Loan Program. Also, as was 
suggested by one respondent, direction will be added to this handbook 
for FSA employees on when it is appropriate to encourage lenders to use 
the FO

[[Page 17354]]

program rather than IA to fund an applicant's needs.

Debt-to-Asset Ratio

    As stated in the proposed rule, current regulations provide for IA 
based simply on cash flow. Agency reviews have revealed that some 
borrowers who receive IA have a significant net worth, with adequate 
financial strength that would allow them to restructure their 
liabilities to meet their credit needs without receiving IA. To address 
this concern the Agency proposed to limit IA to applicants who possess 
a debt-to-asset ratio in excess of 50 percent prior to receiving the 
new loan. There were 18 comments that supported this change. These 
comments pointed out that this would limit subsidy to the more highly 
stressed borrowers and reduce the number of large loans that have used 
a large portion of the funding allocation.
    Conversely, 73 comments received did not support this change. Seven 
respondents disagreed with this proposal in general but did not give 
specific reasons for their concern. Another had strong objection to the 
change, although the respondent went on to comment that most of the 
loans on IA have a 50 percent or higher debt-to-asset ratio. Nine 
respondents were concerned that the ratio would limit eligibility and 
may screen out needy operations. Three respondents suggested that a 50 
percent debt-to-asset ratio was too liberal, and suggested that a ratio 
between 35 to 40 percent would be more appropriate. Three other 
respondents indicated that 50 percent was too low and suggested the 
agency adopt a 65 percent ratio. Six respondents were concerned that 
this proposed change would only cause problems, would not simplify the 
program, and could lead to burdensome documentation and applicants' 
manipulation of balance sheets.
    The Agency's proposed limit for new IA applicants to possess a debt 
to asset ratio in excess of 50 percent prior to the new loan is 
reasonable. The 50 percent level was proposed after the Agency 
performed an analysis of the financial characteristics of borrowers in 
the guaranteed loan program to determine the correlation between debt 
to asset ratio, loan performance, and the need for interest subsidy. 
The Agency found that one-third of the borrowers in the current 
guaranteed portfolio have a debt to asset ratio of 50 percent or 
greater while approximately one-fourth of the guaranteed operating 
loans receive IA. Additionally, a 50 percent debt to asset ratio is the 
most common capital standard used by those lenders who have achieved 
the Agency's preferred lender status. The Agency acknowledges that some 
applicants will become ineligible, but believes that applicants below 
the 50 percent threshold have the financial strength to restructure 
their debt and cash flow without an interest subsidy. Guidance will be 
provided in the Agency's handbook on how to address fraud or 
misrepresentation of asset values.
    Forty-six respondents recommended that the Agency use a measure of 
repayment ability rather than one of solvency. Thirteen respondents 
indicated that it would be difficult to impossible to lend money solely 
based on this change; a true depiction of the need for IA should be 
based instead on a producer's cash flow. Three respondents indicated 
that this proposal was unfair, because it does not take into account 
each individual operation, unfairly penalized those who have owned real 
estate for some time, or unfairly impacted agricultural operators in 
their areas who need IA initially to have adequate repayment capacity.
    The Agency acknowledges that an applicant with a strong net worth 
does not necessarily have strong cash flow and vice versa. This rule 
maintains the current IA capacity provision which requires that an 
applicant be unable to repay the debt at the note rate of interest 
without a subsidy. However, this control by itself has been inadequate. 
The Agency's long standing policy is that IA is intended for farmers 
with inadequate financial resources. Producers with a strong net worth 
have assets with which to restructure their debt and improve their cash 
flow. Therefore, this rule provides that applicants with such resources 
cannot receive an interest subsidy.
    One respondent suggested the Agency calculate the applicant's debt 
to asset ratio as it would be after the loan is closed. The Agency 
seriously considered this recommendation. However, it was determined 
that this limitation would be subject to manipulation in that an 
applicant could possibly purchase assets or acquire debt in order to 
achieve a debt/asset ratio that would qualify them for the subsidy. The 
Agency, therefore, is not adopting this suggestion.
    One respondent suggested using an applicant's current ratio, not 
debt to asset ratio. The Agency chose to not adopt this recommendation 
because of the volatility of this ratio throughout the operating year.
    Of the comments opposed to the change, five indicated that the 
proposal would unjustly impact beginning farmers and ranchers because 
they typically have smaller operations with less debt. For example, a 
beginning farmer or rancher may have a pickup truck with very few other 
assets and almost no debt, and could very easily have greater than 50 
percent equity and, therefore, be ineligible for IA subsidy. This was 
not the Agency's intent. Beginning farmers are specifically targeted by 
FSA for increased assistance because of their inability to access 
private credit programs. In addition, this program could provide such 
applicants with the assistance needed to get them through the difficult 
early years as they accumulate farm assets and become financially 
viable. By specifically targeting funds to beginning farmers in the 
statute, Congress has clearly signaled its intent that the Agency 
should endeavor to address the specific needs of this group. Therefore, 
the rule has been modified to exclude beginning farmers and ranchers 
from this debt to asset restriction. The 50 percent equity limitation 
will be applied to applicants not defined as beginning farmers. This 
will target the limited amount of IA funds to those most in need of the 
assistance.

Maximum Assistance Period

    Existing regulations limit IA for each borrower to a maximum of 10 
years from the date of the first IA agreement signed by the loan 
applicant, including entity members, or the outstanding term of the 
loan, whichever is less. The proposed rule would limit each borrower to 
a total of 5 consecutive years of IA eligibility. Seventy-nine comments 
received were opposed to this change. These comments stated that this 
change would be detrimental to some borrowers and suggested that the 
current 10-year limitation is the minimum time needed to give farmers 
and ranchers adequate opportunity to establish their operations 
considering the realities of weather. One respondent indicated that he 
believed the Agency had ``sold out'', and the Agency should extend and 
not shorten the program. Three respondents suggested a 7-year maximum 
assistance period. There were 25 comments that supported the change and 
stated that 5 years was an adequate period of time for a farm to 
achieve, or return to, profitability.
    Two respondents stated that the maximum assistance period should be 
for the life of the borrower, not consecutive years. To adopt this 
suggestion, the need for subsidy would need to be determined each year 
and the Agency could not eliminate the annual needs test. Of the 
changes in this rule, elimination of the annual needs test will result 
in the most significant reduction

[[Page 17355]]

in burden on the public. The advantage to a borrower receiving 5 years 
of subsidy in intermittent 1-year periods, rather than in one 5-year 
block, would be minimal when compared to the increased administrative 
burden to all parties involved with adopting such a proposal. Some 
producers will receive less total subsidy due to the reduced term. 
Nonetheless, budget constraints force the Agency to make difficult 
decisions regarding the best use of Government resources. The IA 
program is intended to provide temporary relief, and the Agency has 
determined that 5 years is an adequate maximum subsidy period within 
which an applicant's operation should become sufficiently profitable to 
eliminate the need for an interest subsidy.
    One respondent supported the reduction to 5 years only if the 
annual renewal process is eliminated as proposed. The Agency agrees.
    The Agency is making an additional change in the final rule with 
regard to the maximum IA period for beginning farmers and ranchers. It 
was determined that 5 years may be too short a period of time for 
beginning farmers and ranchers to accumulate assets and reduce debt 
load to a level necessary for the operation to be viable without IA. 
The final rule permits beginning farmers to receive a second 5-year 
period of IA eligibility if their cash flow requires the subsidy, and 
they are still beginning farmers at the end of the first 5-year period. 
Non-beginning farmers are still limited to one 5-year period of 
eligibility as provided in the proposed rule.
    Some respondents expressed concern that this rule would reduce the 
term on existing IA agreements. That is incorrect. Existing agreements 
will remain in effect as written. In addition, the rule provides 
existing borrowers time to prepare for the reduced period of 
eligibility to ease the transition to this new maximum period.

Maximum Interest Assistance Payment

    The proposed rule did not restrict the maximum guaranteed loan that 
could be received, but did limit the maximum amount of debt on which an 
applicant may receive IA to $400,000. With the percentage rate of IA 
subsidy established at 4 percent, this change would limit the amount of 
subsidy that may be paid to a maximum of $16,000 annually ($400,000 x 
.04). Twenty-four comments supported this change, stating that this 
would permit FSA to assist a larger number of young, beginning, and 
small producers and reduce abuse in the program. There were 76 comments 
opposed to the change. The opposing comments stated that this change 
was too restrictive, arbitrary, limits legitimate borrowers from 
accessing the program, and was inappropriate considering that the costs 
required for farming have increased.
    Another four respondents suggested the subsidized debt limit be 
indexed to inflation and adjusted annually accordingly. The Agency 
concedes that indexing the maximum amount of debt on which an applicant 
may receive IA would be minimally advantageous to farmers. However, 
changing the maximum amount annually would increase the cost of the 
program each year, would be administratively complex, and would make 
planning difficult because the amount would be changing each year. 
Therefore, the final rule does not link the maximum subsidy amount to 
inflation.
    Thirty-two respondents stated that this change would limit a 
benefit that Congress intended to be available across the board. 
However, the Agency feels that Congress intended that IA be provided to 
those who need it most. If Congress had intended that borrowers of all 
sizes receive the maximum benefit it seems the level of IA funds 
appropriated annually would have kept pace with demand. However, this 
is not the case. In recent fiscal years, IA funds have been depleted 
early in the fiscal year. The numbers of large loans receiving IA are a 
main cause for this rapid depletion of funds and the result is a 
decrease in the number of borrowers assisted with IA. Appropriations to 
the program have not increased while the sizes of guaranteed loans, 
including those with IA, have increased. Therefore, the Agency believes 
the respondent's rationale is misplaced, and reducing the maximum 
amount of subsidy payable to each producer does not violate 
Congressional intent for the program.
    A number of respondents implied that the Agency was proposing to 
decrease the maximum guaranteed loan to $400,000. This is not correct; 
a borrower with IA may still incur the maximum allowable guaranteed 
loan debt; however, subsidy payments will be limited to $16,000 per 
year. As clarified in the final rule, this maximum guaranteed loan 
level with interest assistance is a lifetime limit.
    In summary, the Agency, as proposed, will limit subsidy payments to 
$16,000 per year, for a term of 5 years. The IA program is the most 
expensive of the Agency's guaranteed farm loan programs. These limits 
will help control costs, allow limited funds to reach more borrowers, 
and target those funds to applicants with the most need. These changes 
will not prevent borrowers from accessing the program; the Agency still 
expects all available funds to be utilized each year.

Guarantee Fees

    The proposed rule proposed to eliminate the waiver of a guarantee 
fee for IA loans. Seventy-five comments were opposed to this change. 
These respondents stated that a fee is counter-productive and adds 
stress to farmers already in financial trouble. Four respondents 
expressed an additional concern about how the fee would affect 
beginning farmers and ranchers.
    Since the IA proposed rule was published on June 22, 2005, the 
Agency published another rule proposing to increase the fees charged 
for guaranteed loans (71 FR 27978, May 15, 2006). To comply with 
anticipated budget requirements and maintain new loan activity at the 
proposed level, the Agency must increase fees.
    The Agency has decided to leave this issue open and will finalize 
it with the proposed rule (71 FR 27978) regarding fees. All comments on 
this issue will be carefully considered at that time. No change of the 
guarantee fee for IA loans is being made in this rule.

Reduced Application Requirements

    The existing regulation requires lenders to submit a repayment 
schedule for the guaranteed loan and a projected monthly cash flow 
budget on lines of credit. The Agency proposed to delete these 
requirements as the forms are not necessary to make the evaluation, and 
impose significant burdens on program participants. Sixty-seven 
comments supported this change to make the program more attractive to 
lenders due to the reduced paperwork burden. Twelve respondents opposed 
the change, indicating that the monthly budgets are important financial 
analysis documents and the requirement for lines of credit should not 
be removed. The Agency acknowledges that monthly cash flow budgets can 
be useful tools and certainly may be used when needed, at the lender's 
discretion. However, they are not always necessary and should not be 
required by the Agency. The final rule adopts the proposed rule as 
written with regard to the application requirements.

Removal of Annual Review Requirements

    Current regulations require a lender to submit to FSA--once a year, 
each year, for each IA borrower, for the term of the IA agreement--a 
form requesting the previous year's interest subsidy payment and a 
``needs test''. This needs test must document that the borrower

[[Page 17356]]

needs IA in the next production cycle, usually a year, in order to 
achieve a feasible business plan. The proposed rule proposed to reduce 
the submission requirements for annual claims for IA payment. In the 
proposal, IA would simply be authorized for 5 years for the borrower 
from the date of the first IA agreement. The lender would only be 
required to submit an Agency IA payment form and the average daily 
principal balance for the claim period, with supporting documentation.
    Comments were received from 58 respondents supporting this change. 
These comments stated that this streamlined claim process should make 
the program much more attractive to all participants. There were 11 
comments opposed to the change stating that although the existing 
submission requirements may be burdensome, they were necessary to 
determine if IA was actually needed. One respondent stated that this 
would remove a ``supervision tool''.
    As discussed in the preamble to the proposed rule, the annual 
review requirements have not been a meaningful control for the program. 
Approximately 93 percent of the borrowers operating under an IA 
agreement receive a subsidy payment each year, regardless of the amount 
and scope of documentation that has been required. Clearly, the 
significant administrative burden has not been cost effective and is 
not warranted. In addition, this burden has resulted in an unbalanced 
program as it discourages many lenders from participating at all, 
effectively making the program unavailable to producers in certain 
parts of the country. The Agency feels that the few producers who may 
receive a subsidy payment at a time when they may not need it is far 
outweighed by the improved delivery and more equitable distribution of 
the program throughout the country that will result from these reduced 
annual review requirements. The Agency will continue to honor existing 
Interest Assistance agreements that require an annual needs test.
    Two respondents suggested that the producer be required to keep 
loan agreements, such as accounting for collateral and supplying 
requested financial information, to receive annual subsidy payments. 
The Agency believes that it is the lender's responsibility to enforce 
its loan agreements. FSA will make subsidy payments upon the lender's 
request in accordance with the Interest Assistance Agreement and FSA 
regulations. No changes have been made in relation to these comments.

Fees Charged by Lenders for IA Claims Submissions

    Agency reviews of guaranteed lenders indicate that some lenders 
charge fees to the borrower for the preparation of documentation and 
claims for payment of IA that are submitted to FSA. The Agency proposed 
to prohibit these fees. There were 36 comments opposed to this change, 
stating that the Agency should not be in the business of regulating 
fees charged by lenders, and that banks should be allowed to recover 
their preparation costs. Respondents opposed to the change also stated 
that it was contradictory to prohibit a fee when the Agency will be 
increasing its guarantee fee. Twenty-three respondents supported this 
change, stating that borrowers are in financially stressed 
circumstances, additional fees are counter-productive, and lenders did 
not charge a fee anyway. The Agency has carefully considered the 
comments and has adopted as final the prohibition on fees as proposed. 
Most of the requirements for IA claims are eliminated in this rule, 
greatly reducing lender administrative costs. Since IA claims are now 
very easy to submit charging fees for IA claims is not appropriate.

First and Final Claims

    Existing regulations require final IA claims to be submitted 
concurrently with the submission of any estimated loss claims. The 
Agency proposed that, upon liquidation of a loan, the lender complete 
the Request for Interest Assistance and submit it to the Agency 
concurrently with any estimated or final loss claims. Approximately 15 
comments supported this change; however, some comments indicated that 
it should be more clearly stated. Based on these comments, the Agency 
has clarified this section regarding final IA claims being submitted 
with the estimated loss claim or final loss claim if an estimated loss 
claim was not previously provided, and added that the IA accrual date 
cannot exceed the last date of interest accrual for a loss claim.

Servicing

    The proposed rule proposed to clarify numerous servicing actions 
concerning IA including: transfers, assumptions, writedown, interest 
reduction due to court order in bankruptcy reorganization, and loan 
restructuring. There were 15 comments received supporting these 
changes.
    One respondent objected to allowing the rescheduling of loans 
subject to IA, but not allowing the IA agreement term to be extended 
beyond 5 years from the date of the first IA agreement. This comment 
stated that such IA loans are in need of maximum assistance and these 
interest assistance agreements should be extended to 10 years. 
Extending the term due to restructuring would be difficult to control, 
as even performing loans might be restructured in an effort to assure 
that every borrower has IA available for an additional time period. 
This would defeat the purpose of limiting the term to 5 years per 
borrower. For consistency purposes, all borrowers will be treated the 
same, and the Agency did not adopt this comment.
    Another respondent requested that entities be allowed to assume a 
loan with IA. The Agency agrees and will allow this to occur if the 
entity is eligible and one of the entity members was liable for the 
debt when the original agreement was signed. Since the entity is 
eligible for a loan with IA, this is a reasonable way to accommodate 
the situation, and save loan funds. Otherwise, the entity would have to 
make an application for a new loan, requiring expenditure of more loan 
funds and more subsidized funding, all to achieve the same result, a 
loan with IA.
    Two respondents suggested that the Agency was not clear on how it 
would handle restructuring of a guaranteed loan above the authorized IA 
amount. One of the respondents thought that the amount restructured 
above the IA portion of the loan would not be guaranteed. In response, 
the Agency has clarified and expanded on Sec.  762.150(k) to more 
specifically state that lenders are able to capitalize interest when 
restructuring up to the original loan amount under the remaining terms 
and still have interest assistance available for the full amount of the 
original loan. This clarification mirrors the existing practice and has 
no impact on funding because IA funds have already been set aside at 
loan origination. When restructuring, if terms are increased or 
interest is capitalized to the extent that additional funds are needed, 
Agency approval is subject to funding availability. Interest assistance 
is not available on that portion of the loan as interest assistance is 
limited to the original loan amount.
    A final technical correction is being made to remove the 
requirement for an IA claim to be submitted through the effective date 
of rescheduling. Claims are required to be submitted annually on the 
date identified on the interest assistance agreement and in the event 
of rescheduling; only an annual claim is needed. The claim submission 
is already addressed in this rule and more details on administrative 
processing

[[Page 17357]]

will be elaborated on in the Agency Handbook.

Miscellaneous Changes

    The proposed rule proposed to update, clarify, and remove 
references to forms and internal administrative processes to be 
completed for IA loans. There were 5 comments that supported these 
changes. The Agency adopts the proposed rule on these miscellaneous 
changes as written. In addition, the Agency is removing the definitions 
for ``Interest Assistance Review'' and ``Interest Assistance 
Anniversary Date'' as unnecessary. It is also revising the definition 
of ``Average Farm Customer'' to ``Average Agricultural Loan Customer.''

Average Customer Rate

    The proposed rule provided in Sec.  762.150(b)(6) that the lender 
may charge a fixed or variable interest rate, but not in excess of what 
the lender charges its average farm customer. One respondent stated 
that FSA should not dictate rates and a guaranteed customer should not 
be compared with a non-guaranteed customer because of increased risk. 
Another indicated that they had not used the program; however, higher 
risk borrowers should pay a higher rate like the rest of the borrowing 
community. The Agency does not agree. This limitation has been in place 
many years under Sec.  762.124 and the proposed rule did not propose a 
change in this area. The guarantee from FSA compensates the lender for 
most of its risk of loss. Lenders ordinarily charge higher risk 
customers a higher interest rate to compensate for the higher 
probability of loss associated with such loans. The guarantee 
eliminates most of that risk, so the lender cannot justify charging a 
``risk premium'' as a part of the interest rate on guaranteed loans. 
The lender, when it comes to alleviating the higher risk from a loan to 
a borrower that they may not normally extend credit, may charge that 
customer a higher rate of interest, or obtain an FSA guarantee, not 
both.
    Thirty-one respondents objected to FSA using the term ``average 
farm customers'' to describe the maximum interest rate that could be 
charged. These respondents stated that there is no single, clear 
definition of this term. Respondents also recommended that the Agency 
clarify the limitation on the maximum interest rate that can be charged 
under Sec.  762.124(a)(3). They pointed out that this provision 
discusses ``average agricultural loan customer'' while the term 
``average farm customers'' is defined in Sec.  762.102(a). FSA and 
guaranteed lenders historically have considered these terms synonymous; 
however for clarity, the Agency is amending the definition in Sec.  
762.102(a) and reference in Sec.  762.124(a)(2) to ``average 
agricultural loan customer'', instead of ``average farm customers.'' 
The definition also is being clarified to refer to the conventional 
farm borrower who is required to pledge their crops, livestock, other 
chattel, ``and/or'' real estate security for the loan. As has always 
been the case, depending on the type of loan, available security and 
market conditions, different types of security may be required from 
conventional farm borrowers and not all types of security listed will 
be required of all borrowers. No substantive policy changes are made at 
this time.

Exception Authority

    The proposed rule failed to provide exception authority as provided 
in the current Sec.  762.150(k). The Agency is reinserting the 
exception authority rule. Based upon past experience and the need in 
the final for flexibility in implementing the new requirements in this 
rule, exception authority is needed to address unusual situations that 
may arise. If a case is not adverse to the Government or contrary to 
statute, and is in the Government's best financial interest, the Agency 
may use this exception authority to waive a regulatory provision 
involving interest assistance.

Executive Order 12866

    This rule has been determined by the Office of Management and 
Budget to be not significant for the purposes of Executive Order 12866, 
and was therefore not reviewed by the Office of Management and Budget.

Regulatory Flexibility Act

    The Agency certifies that this rule will not have significant 
economic effect on a substantial number of small entities, because it 
does not require any specific actions on the part of the borrower or 
the lenders. The Agency made this certification in the proposed rule, 
and no comments were received in this area. The Agency, therefore, 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 final rule have been considered 
consistent 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 
regulations for compliance with NEPA, 7 CFR part 1940 subpart G. FSA 
concluded that the rule does not require preparation of an 
environmental assessment or environmental impact statement.

Executive Order 12988

    This rule has been reviewed in accordance with Executive Order 
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; it will not affect IA agreements entered into prior to the 
effective date of the rule to the extent that it is inconsistent with 
the terms of those agreements; 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 
the 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 are currently 
approved by OMB under control number 0560-0155. A proposed rule 
containing an estimate of the information collection burden of this 
rule was published on June 22, 2005 (70 FR 36055-36060). No comments

[[Page 17358]]

regarding the burden estimates were received.

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; Loan programs; Banks, banking; Credit.

0
For the reasons stated in the preamble, the Farm Service Agency is 
amending 7 CFR Chapter VII as set forth below:

PART 762--GUARANTEED FARM LOANS

0
1. The authority citation for part 762 continues to read as follows:

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

0
2. Amend Sec.  762.102(b) by removing the definitions of the terms 
``average farm customers'', ``interest assistance anniversary date'' 
and ``interest assistance review'' and adding the following definition 
in alphabetical order:


Sec.  762.102  Abbreviations and definitions.

* * * * *
    (b) * * *
    Average agricultural loan customer. The conventional farm borrower 
who is required to pledge crops, livestock, other chattels and/or real 
estate security for the loan. This does not include the high-risk 
farmer with limited security and management ability that is generally 
charged a higher interest rate by conventional agricultural lenders. 
Also, this does not include the low-risk farm customer who obtains 
financing on a secured or unsecured basis, who has as collateral items 
such as savings accounts, time deposits, certificates of deposit, 
stocks and bonds, and life insurance to pledge for the loan.
* * * * *


Sec.  762.124  [Amended]

0
3. Amend Sec.  762.124(a)(2) to replace the phrase ``average farm 
customers'' with ``average agricultural loan customer'' in the second 
sentence.

0
4. Amend Sec.  762.145 by revising paragraph (b)(2)(i) and the first 
sentence of paragraph (b)(8) to read as follows:


Sec.  762.145  Restructuring guaranteed loans.

* * * * *
    (b) * * *
    (2) * * *
    (i) A feasible plan as defined in Sec.  762.102(b).
* * * * *
    (8) Any holder agrees to any changes in the original loan terms. * 
* *
* * * * *

0
5. Revise Sec.  762.150 to read as follows:


Sec.  762.150  Interest assistance program.

    (a) Requests for interest assistance. In addition to the loan 
application items required by Sec.  762.110, to apply for interest 
assistance the lender's cash flow budget for the guaranteed loan 
applicant must reflect the need for interest assistance and the ability 
to cash flow with the subsidy. Interest assistance is available only on 
new guaranteed Operating Loans (OL).
    (b) Eligibility requirements. The lender must document that the 
following conditions have been met for the loan applicant to be 
eligible for interest assistance:
    (1) A feasible plan cannot be achieved without interest assistance, 
but can be achieved with interest assistance.
    (2) If significant changes in the borrower's cash flow budget are 
anticipated after the initial 12 months, then the typical cash flow 
budget must demonstrate that the borrower will still have a feasible 
plan following the anticipated changes, with or without interest 
assistance.
    (3) The typical cash flow budget must demonstrate that the borrower 
will have a feasible plan throughout the term of the loan.
    (4) The borrower, including members of an entity borrower, does not 
own any significant assets that do not contribute directly to essential 
family living or farm operations. The lender must determine the market 
value of any such non-essential assets and prepare a cash flow budget 
and interest assistance calculations based on the assumption that these 
assets will be sold and the market value proceeds used for debt 
reduction. If a feasible plan can then be achieved, the borrower is not 
eligible for interest assistance.
    (5) A borrower may only receive interest assistance if their total 
debts (including personal debts) prior to the new loan exceed 50 
percent of their total assets (including personal assets). An entity's 
debt to asset ratio will be based upon a financial statement that 
consolidates business and personal debts and assets of the entity and 
its members. Beginning farmers and ranchers, as defined in Sec.  
762.102, are excluded from this requirement.
    (c) Maximum assistance. The maximum total guaranteed OL debt on 
which a borrower can receive interest assistance is $400,000, 
regardless of the number of guaranteed loans outstanding. This is a 
lifetime limit.
    (d) Maximum time for which interest assistance is available. (1) A 
borrower may only receive interest assistance for one 5-year period. 
The term of the interest assistance agreement executed under this 
section shall not exceed 5 consecutive years from the date of the 
initial agreement signed by the loan applicant, including any entity 
members, or the outstanding term of the loan, whichever is less. This 
is a lifetime limit.
    (2) Beginning farmers and ranchers, as defined in Sec.  762.102, 
however, may be considered for two 5-year periods. The applicant must 
meet the definition of a beginning farmer or rancher and meet the other 
eligibility requirements outlined in paragraph (b) of this section at 
the onset of each 5-year period. A needs test will be completed in the 
fifth year of IA eligibility for beginning farmers, to determine 
continued eligibility for a second 5-year period.
    (3) Notwithstanding the limitation of paragraph (d)(1) of this 
section, a new interest assistance agreement may be approved for 
eligible borrowers to provide interest assistance through June 8, 2009, 
provided the total period does not exceed 10 years from the effective 
date of the original interest assistance agreement.
    (e) Multiple loans. In the case of a borrower with multiple 
guaranteed loans with one lender, interest assistance can be applied to 
each loan, only to one loan or any distribution the lender selects, as 
necessary to achieve a feasible plan, subject to paragraph (c) of this 
section.
    (f) Terms. The typical term of scheduled loan repayment will not be 
reduced solely for the purpose of maximizing eligibility for interest 
assistance. A loan must be scheduled over the maximum term typically 
used by lenders for similar type loans within the limits in Sec.  
762.124. An OL for the purpose of providing annual operating and family 
living expenses will be scheduled for repayment when the income is 
scheduled to be received from the sale of the crops, livestock, and/or 
livestock products which will serve as security for the loan. An OL for 
purposes other than annual operating and family living expenses (i.e. 
purchase of equipment or livestock, or refinancing existing debt) will 
be scheduled over 7 years from the effective date of the proposed 
interest assistance agreement, or the life of the security, whichever 
is less.
    (g) Rate of interest. The lender may charge a fixed or variable 
interest rate, but not in excess of what the lender charges its average 
agricultural loan customer.

[[Page 17359]]

    (h) Agreement. The lender and borrower must execute an interest 
assistance agreement as prescribed by the Agency.
    (i) Interest assistance claims and payments. To receive an interest 
assistance payment, the lender must prepare and submit a claim on the 
appropriate Agency form. The following conditions apply:
    (1) Interest assistance payments will be four (4) percent of the 
average daily principal loan balance prorated over the number of days 
the loan has been outstanding during the payment period. For loans with 
a note rate less than four (4) percent, interest assistance payments 
will be the weighted average interest rate multiplied by the average 
daily principal balance.
    (2) The lender may select at the time of loan closing the date that 
they wish to receive an interest assistance payment. That date will be 
included in the interest assistance agreement.
    (i) The initial and final claims submitted under an agreement may 
be for a period less than 12 months. All other claims will be submitted 
for a 12-month period, unless there is a lender substitution during the 
12-month period in accordance with this section.
    (ii) In the event of liquidation, the final interest assistance 
claim will be submitted with the estimated loss claim or the final loss 
claim if an estimated loss claim was not submitted. Interest will not 
be paid beyond the interest accrual cutoff dates established in the 
loss claims according to Sec.  762.149(d)(2).
    (3) A claim should be filed within 60 days of its due date. Claims 
not filed within 1 year from the due date will not be paid, and the 
amount due the lender will be permanently forfeited.
    (4) All claims will be supported by detailed calculations of 
average daily principal balance during the claim period.
    (5) Requests for continuation of interest assistance for agreements 
dated prior to June 8, 2007 will be supported by the lender's analysis 
of the applicant's farming operation and need for continued interest 
assistance as set out in their Interest Assistance Agreements. The 
following information will be submitted to the Agency:
    (i) A summary of the operation's actual financial performance in 
the previous year, including a detailed income and expense statement.
    (ii) A narrative description of the causes of any major differences 
between the previous year's projections and actual performance, 
including a detailed income and expense statement.
    (iii) A current balance sheet.
    (iv) A cash-flow budget for the period being planned. A monthly 
cash-flow budget is required for all lines of credit and operating 
loans made for annual operating purposes. All other loans may include 
either an annual or monthly cash-flow budget.
    (v) A copy of the interest assistance needs analysis portion of the 
application form which has been completed based on the planned period's 
cash-flow budget.
    (6) Interest Assistance Agreements dated June 8, 2007 or later do 
not require a request for continuation of interest assistance. The 
lender will only be required to submit an Agency IA payment form and 
the average daily principal balance for the claim period, with 
supporting documentation.
    (7) Lenders may not charge or cause a borrower with an interest 
assistance agreement to be charged a fee for preparation and submission 
of the items required for an annual interest assistance claim.
    (j) Transfer, consolidation, and writedown. Loans covered by 
interest assistance agreements cannot be consolidated. Such loans can 
be transferred only when the transferee was liable for the debt on the 
effective date of the interest assistance agreement. Loans covered by 
interest assistance can be transferred to an entity if the entity is 
eligible in accordance with Sec.  762.120 and Sec.  762.150(b) and at 
least one entity member was liable for the debt on the effective date 
of the interest assistance agreement. Interest assistance will be 
discontinued as of the date of any writedown on a loan covered by an 
interest assistance agreement.
    (k) Rescheduling and deferral. When a borrower defaults on a loan 
with interest assistance or the loan otherwise requires rescheduling or 
deferral, the interest assistance agreement will remain in effect for 
that loan at its existing terms. The lender may reschedule the loan in 
accordance with Sec.  762.145. For Interest Assistance Agreements dated 
June 8, 2007 or later increases in the restructured loan amount above 
the amount originally obligated do not require additional funding; 
however, interest assistance is not available on that portion of the 
loan as interest assistance is limited to the original loan amount.
    (l) Bankruptcy. In cases where the interest on a loan covered by an 
interest assistance agreement is reduced by court order in a 
reorganization plan under the bankruptcy code, interest assistance will 
be terminated effective on the date of the court order. Guaranteed 
loans which have had their interest reduced by bankruptcy court order 
are not eligible for interest assistance.
    (m) Termination of interest assistance payments. Interest 
assistance payments will cease upon termination of the loan guarantee, 
upon reaching the expiration date contained in the agreement, or upon 
cancellation by the Agency under the terms of the interest assistance 
agreement. In addition, for loan guarantees sold into the secondary 
market, Agency purchase of the guaranteed portion of a loan will 
terminate the interest assistance.
    (n) Excessive interest assistance. Upon written notice to the 
lender, borrower, and any holder, the Agency may amend or cancel the 
interest assistance agreement and collect from the lender any amount of 
interest assistance granted which resulted from incomplete or 
inaccurate information, an error in computation, or any other reason 
which resulted in payment that the lender was not entitled to receive.
    (o) Condition for Cancellation. The Interest Assistance Agreement 
is incontestable except for fraud or misrepresentation, of which the 
lender or borrower have actual knowledge at the time the interest 
assistance agreement is executed, or which the lender or borrower 
participates in or condones.
    (p) Substitution. If there is a substitution of lender, the 
original lender will prepare and submit to the Agency a claim for its 
final interest assistance payment calculated through the effective date 
of the substitution. This final claim will be submitted for processing 
at the time of the substitution.
    (1) Interest assistance will continue automatically with the new 
lender.
    (2) The new lender must follow paragraph (i) of this section to 
receive their initial and subsequent interest assistance payments.
    (q) Exception Authority. The Deputy Administrator for Farm Loan 
Programs has the authority to grant an exception to any requirement 
involving interest assistance if it is in the best interest of the 
Government and is not inconsistent with other applicable law.

    Signed in Washington, DC, on March 15, 2007.
Teresa C. Lasseter,
Administrator, Farm Service Agency.
[FR Doc. 07-1748 Filed 4-4-07; 3:38 pm]
BILLING CODE 3410-05-P