Microloan Operating Loans, 31220-31226 [2012-12685]

Agencies

• DEPARTMENT OF AGRICULTURE
• Farm Service Agency

[Federal Register Volume 77, Number 102 (Friday, May 25, 2012)]
[Proposed Rules]
[Pages 31220-31226]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-12685]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 77, No. 102 / Friday, May 25, 2012 / Proposed 
Rules

[[Page 31220]]



DEPARTMENT OF AGRICULTURE

Farm Service Agency

7 CFR Parts 761 and 764

RIN 0560-AI17


Microloan Operating Loans

AGENCY: Farm Service Agency, USDA.

ACTION: Proposed rule.

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

DATES: We will consider comments that we receive by July 24, 2012.

ADDRESSES: We invite you to submit comments on this rule and the new 
information collection request. In your comments, include the 
Regulation Identifier Number (RIN), and volume, date, and page number 
of this issue of the Federal Register. You may submit comments by any 
of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the online instructions for submitting comments.
     Mail: Director, Loan Making Division (LMD), FSA, USDA, 
1400 Independence Avenue SW., Stop 0522, Washington, DC 20250-0522.
    Comments will be available for inspection online at 
www.regulations.gov and at the mail address listed above between 8 a.m. 
and 4:30 p.m., except holidays. A copy of this proposed rule is also 
available through the FSA home page at https://www.fsa.usda.gov/.

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

SUPPLEMENTARY INFORMATION: 

Background

    FSA has a long history of providing agricultural credit to the 
Nation's farmers and ranchers through its OL Program. Throughout this 
rule, any reference to ``farm'' or ``farmer'' also includes ``ranch'' 
or ``rancher,'' respectively; in this document, the word ``operator'' 
refers to farmers who operate a farm. FSA's OL Program is designed to 
finance the farm operating needs of family farms for operators who meet 
the program eligibility requirements. Among other things, eligible 
applicants must be unable to obtain sufficient credit from other 
sources; have sufficient applicable education, on-the-job training, or 
farming experience; have an acceptable credit history; and have 
adequate collateral for the proposed loan. (See 7 CFR 764.101 and 
764.252 for a full explanation of OL eligibility requirements.) OL 
funds may be used for such things as annual or term operating purposes 
to refinance certain debts; pay normal farm operating and family living 
expenses; purchase livestock, equipment, and other materials essential 
to a farm operation, and may also be used for some minor improvements 
to farm real estate, such as wells and essential repairs to buildings. 
(See 7 CFR 764.251 for a complete list of OL funds uses.) OL funds 
cannot be used to finance the purchase of real estate. The maximum loan 
amount for OLs is $300,000, and repayment can be amortized up to 7 
years depending on the specific loan purpose and expected useful life 
of the collateral. (See 7 CFR 761.8(a)(2) and 764.254(b)(1)(ii).) For 
example, an annual OL used to finance crop input costs such as seed, 
fertilizer, and chemicals, will generally be due in 1 year, while a 
term OL to finance equipment, livestock, or grape vines may be extended 
up to 7 years. As specified in 7 CFR 764.254(a)(3), the interest rate 
charged is the OL rate in effect at the time of loan approval or at the 
time of loan closing, whichever is lower. FSA's direct loan interest 
rates are adjusted as often as monthly and are available on the FSA Web 
site at: https://www.fsa.usda.gov/daflp.rates.htm and from any FSA 
office.
    In on-going efforts to improve the OL Program, FSA evaluated the 
unique needs of small farm operations and identified unintended 
barriers to their applying for OLs, and is proposing to simplify the 
application process and add flexibility for meeting loan eligibility 
and security requirements to encourage their participation. FSA is 
proposing an ML process within the existing OL Program and using 
existing OL appropriations that would focus on the financing needs of 
small farm operations. These small farms, including non-traditional 
farm operations, currently have limited financing options, as explained 
below.
    With increased awareness among consumers regarding the sources, 
affordability, and quality of their food, and the wider occurrence of 
community supported agriculture (CSA) the small specialty producer has 
increasing opportunities to raise and sell locally. Additionally, low-
income neighborhoods with high concentrations of people who are far 
from a grocery store and have limited access to healthy food choices. 
These areas (sometimes called ``food deserts'') have gained attention 
and support from the USDA, the United States Department of the 
Treasury, the United States Department of Health and Human Services 
(HHS), and the Obama Administration's Lets Move initiative, offering 
opportunities for niche-type urban farms to market directly to the city 
neighborhoods.
    Operators of these types of small farms are not typically served by 
agricultural lenders, and may have difficulty obtaining financing from 
conventional commercial lenders. Consequently, these farmers often rely 
on credit cards or personal loans, which carry high interest rates and 
less flexible payment schedules, to finance their operations. Though 
their specialty produce may not be well known to ag-lending community 
at-large, there can be a viable market within cultural or ethnic 
communities.
    The 2007 Census of Agriculture shows that 71 percent of all farm

[[Page 31221]]

operations gross less than $25,000 per year. Therefore, these 
operations require smaller financial investments for initial start-up 
expenses such as hoop houses to extend the growing season, essential 
tools, irrigation, delivery vehicles, and annual expenses such as seed, 
fertilizer, utilities, land rents, marketing, and distribution 
expenses. These expenses are examples of some of the operational needs 
that may be financed using the ML funds. Minor improvements to farm 
real estate such as well drilling costs, modest shed and storage 
structures, and underground irrigation may also be financed using ML 
funds.
    An ML is a type of OL with abbreviated streamlined application 
process and modified security and eligibility requirements. The major 
components of the proposed ML process are the application process and 
flexibility in meeting some of the eligibility and security 
requirements. These components have been specially designed to make the 
ML process appeal to small farm operations. The proposed ML application 
process simplifies the information required to apply by reducing the 
level of documentation required to more appropriately align with the 
less complex structure and needs of smaller operations. Additionally, 
the eligibility requirement for managerial ability, and the loan 
security requirements for an ML have been modified to be more 
appropriate for smaller family farms.
    With the proposed ML application process, FSA can provide credit to 
these farmers with reasonable rates and terms. Applicants that 
otherwise may have chosen credit card financing in lieu of an FSA OL 
due to the application process or certain eligibility requirements may 
choose to seek assistance from FSA to start and continue their 
operations as a result of the simplified application process and 
eligibility and security requirements. Additionally, the flexibility 
FSA gives farmers to make loan payments when they sell their products 
allows them to more efficiently manage their income and resources. 
Participation in FSA's loan programs provides eligible farms advantages 
over credit card financing and this is significant because financing 
costs have a greater impact on smaller start-up operations, which 
typically have tighter cashflows. These benefits will help small 
operations progress through the start-up years, build capacity, 
increase equity, expand their use of FSA's loan programs, and 
eventually graduate to commercial credit.
    The ML application process would significantly streamline 
requirements compared to FSA's existing OL process. As a result, it 
would provide an option for farmers who may be intimidated by the 
documentation requirements that are often perceived as a deterrent to 
participation in FSA's loan programs. Additionally, FSA believes that 
the proposed ML application process would provide a financial bridge 
for many of its successful Youth Loan Program borrowers as they move 
toward more complex operations. Youth Loans are made to borrowers 
between the ages of 10 to 20 to finance income producing agriculture-
related projects. The maximum amount of a youth loan is $5,000. (See 7 
CFR part 764, subpart H for a further description and explanation of 
the requirements for youth loans.) FSA also views the ML application 
process as a catalyst for other small farmers to move forward in their 
farming ventures.
    FSA has the responsibility of providing credit counseling and 
supervision to its direct loan borrowers. While the ML requirements 
will reduce the burden on loan applicants, it will not reduce the level 
of counseling and supervision provided by FSA. In fact, the reduced 
documentation will allow FSA personnel to devote more time to loan 
analysis and to provide technical assistance to borrowers.
    Though MLs are not limited to beginning farmers, they will benefit 
from the modified alternatives for meeting the managerial experience 
eligibility requirement by allowing applicants to gain experience while 
managing their own farm or through a past association with an 
agricultural-related organization. In the application, the applicant 
will provide a written description of their apprenticeship relationship 
(planned or current), or will provide a written description of their 
past affiliations with an agriculture-related organization explaining 
how the experience will contribute to the success of managing their own 
farm operation.
    Since the majority of small farms gross $25,000 or less in farm 
sales, as discussed below, a maximum of $35,000 for an ML should be 
ample for many beginning farmers starting out. As their financing needs 
expand, applicants can apply for an OL up to direct maximum loan amount 
of $300,000 or obtain financing from a commercial lender under the 
Guaranteed Loan Program.
    FSA performed a preliminary analysis of the proposed ML process and 
evaluated its potential to impact loan losses and program costs. Actual 
losses will ultimately depend on the demand by, and the risk profile 
of, the ML borrowers. These variables are currently unknown; however, 
historical borrower data on OL originations was used to approximate 
participation. Past demand for smaller OLs provides a baseline 
indication of potential ML demand. ML baseline demand and associated 
costs were forecast by varying the maximum ML amount from $15,000 to 
$35,000 and applying these criteria to historical OL data. In fiscal 
year 2011, FSA made 14,628 direct operating loans to 10,927 applicants. 
Slightly less than 31 percent of all these applicants received loans 
totaling less than $35,000. This indicates the number of MLs made might 
be quite high, although the potential for increased losses could be 
minimized as these same applicants received just under 10 percent of 
the total dollar amount loaned under the direct OL Program, or $103 
million out of the $1.037 billion loan portfolio. Because of expected 
similarities between the operations managed by ML applicants and Youth 
Loan applicants, such as new operations and operators, loan rates, 
small amounts of operating expenses, and small loan volume compared to 
the regular OL Program, an assumption was made that ML borrowers will 
have the same risk profile as Youth Loan Program participants. 
Furthermore, exposure to losses would also be partially offset by 
administrative savings achieved as a result of reductions in workload 
during the application process.
    To implement ML, FSA is proposing changes to the regulations and to 
the information collection requirements as discussed below. The changes 
to the regulations are discussed in the same order in which the 
regulations appear in the Code of Federal Regulations.

Abbreviations and Definitions

    Abbreviations and definitions used throughout FSA Farm Loan 
Programs (FLP) are in 7 CFR 761.2. This rule proposes to add 
abbreviations and definitions to that section that will be used for 
loans made through the ML application process. FSA is proposing to add 
an abbreviation for ``microloan'' and definitions for ``microloan'' and 
``apprentice.''

Farm Assessment Requirements

    Proposed farm assessment requirements for ML applicants will be 
significantly reduced. A farm assessment for FSA's direct loan programs 
is a collaborative effort between FSA and the applicant and currently, 
it addresses the farm organization and key personnel qualifications, 
type of farming operation, goals for the operation, adequacy of real 
estate and chattel

[[Page 31222]]

property to conduct the farming operation, historical performance, farm 
operating plan, loan evaluation, supervisory plan, and training plan. 
The initial assessment under 7 CFR 761.103 is completed during the 
application process and is then updated annually with the borrower. As 
the ML application will require less information to be submitted by the 
applicant, the farm assessment will also be pared down to a level more 
proportional to the smaller operations being financed by ML funds. This 
is expected to benefit both the applicant and the loan staff in terms 
of time savings and speed of processing the application. The initial 
assessment for an ML applicant will be in the form of a narrative that 
will address the type of operation, assistance needed, goals of the 
operation, marketing plan, supervisory plan, financial viability of the 
plan, and training plan. These elements reflect the less complicated 
organizational structure and smaller farm asset base that we would 
expect to encounter with ML applicants. FSA will still conduct an 
annual review, but believes that these elements will better evaluate 
the probability of success for the small farm operations expected to be 
typical of ML applicants.

ML Application Requirements and Application Processing

    A complete ML application would consist of the following:
     An application form;
     A description of the applicant's farm training and 
experience;
     A balance sheet;
     An annual cash flow budget;
     Applicable environmental information;
     Verification of non-farm income relied upon for loan 
repayment;
     Past income, expenses, and yields for the most recent 
production cycle, to the extent practicable; and
     Credit report fee.
    A new application form will be available for ML applicants. This 
form is intended to capture most of the information needed to process 
an ML, including sections for the applicant to describe their farm 
training and experience. It will also reduce and simplify the financial 
statement. For example, no itemization will be required for the ML cash 
flow budget, which differs from the more detailed farm operating plan 
and similar income and expense projections as required by the existing 
OL programs.
    Environmental information will still be handled through the county 
office process, involving FSA staff and NRCS staff as applicable. This 
will not change from the current process followed for regular OLs.
    Verification of non-farm income will only be required if that 
income is necessary for a feasible plan and sufficient cash flow for 
debt repayment. This is a change over the existing OL application 
process, as income is always verified as specified in 7 CFR 
764.51(b)(8). If it is necessary to verify debt, debts will be verified 
through the credit bureau reporting system.
    There also are proposed changes to the requirement for reporting of 
past yields as currently specified in 7 CFR 761.104. Applicants can 
provide other forms of documentation such as operator's sales receipts, 
financial statements, contracts, and tax returns. This change will be 
helpful for operations where past yields have little bearing on the 
projected plan, such as vegetable operators who plan short term and 
grow different crops to meet current demand, operators who produce 
crops using measures such as rows or partial rows versus acres, or 
operators who grow crops that sell in volumes such as bunches. In some 
of these cases it will be impracticable, burdensome, and often 
irrelevant for the farmer to demonstrate accurate yields, especially if 
a variety of produce is harvested and then sold to the public only 
hours later. In such cases, past reliable history of income and 
expenses or cash receipts may be more useful in projecting the future 
production revenue of a field, greenhouse, or operation. Also, if an 
operator is changing crop from year to year to meet changing market 
demands, then production for the past 2 or 3 years may not be 
applicable to their production model. This modification allows FSA to 
assist operations that otherwise may have difficulty meeting or 
documenting production and yield history and will provide sufficient 
information for a loan official to determine eligibility and 
feasibility. FSA believes the lower loan limit will mitigate much of 
the risk of losses.
    For incomplete applications, FSA proposes to follow existing direct 
loan processing procedures. Following current procedures, FSA will 
inform the applicant, through written correspondence, of any missing 
items needed to complete the application prior to established 
regulatory deadlines.

Eligibility

    Since MLs are OLs, applicants will be subject to existing OL 
eligibility requirements. However, FSA proposes to add flexibility in 
meeting the managerial ability requirement. Current regulations in 7 
CFR 764.101(i) require that an OL applicant show managerial ability 
through the following:
     Has obtained a 4-year college degree in agricultural 
business, horticulture, animal science, agronomy, or other 
agricultural-related field;
     Has on-the-job training, such as currently working on a 
farm as part of an apprenticeship program;
     Has farming experience, such as be an owner, manager, or 
operator of a farm business for at least one entire production cycle; 
or
     Have obtained and successfully repaid one FSA Youth-OL.
    For ML applicants FSA proposes to add flexibility that will allow 
applicants to meet the eligibility requirement through either (1) a 
past association with an agriculture-related organization, such as 4-H 
Club or Future Farmers of America (FFA), that demonstrates experience 
in a related enterprise; or (2) by seeking, receiving, and applying 
guidance on how to manage their own start-up farm operation under an 
apprenticeship relationship. Only a written description of the current 
or future apprenticeship will be required in order to determine 
eligibility.
    Meeting the managerial requirement through the agriculture-related 
organization experience will require the applicant to self certify on 
the application their involvement, detailing how that experience 
provides them with the ability to succeed with the operation they seek 
to finance with ML funds.
    The apprenticeship relationship will allow an ML applicant to 
receive applied guidance and direction from an individual with the 
skills and knowledge pertinent to the successful operation of the farm 
enterprise being operated by the applicant. FSA expects that the 
applicant will consult with the mentor over the course of the 
production cycle (including issues of crop planning, purchasing from 
vendors, crop culture or animal husbandry, pest and disease management, 
networking groups and associations, harvest, marketing, etc.) while 
operating their own farm and take the initiative to seek and apply 
advice as appropriate to their needs. Successful completion of the 
apprenticeship through the first operating cycle will be required as a 
condition of the loan. FSA loan officials will monitor the borrower's 
progress and work with the borrower to ensure successful completion of 
the apprenticeship program during the first operating cycle. If 
unforeseen circumstances prevent successful completion, FSA loan 
officials will provide additional guidance to assist the borrower in

[[Page 31223]]

successfully completing the requirement.
    This expansion of management ability offers the opportunity for ML 
borrowers to gain the minimum of 3 years farm and management experience 
needed as part of eligibility for FSA's Farm Ownership (FO) Program, a 
loan program for the purchase of farm real estate. For those applicants 
who were not raised in a farming background, or do not have the 
educational experience necessary to meet the farm managerial ability 
requirements, or do not have the opportunity to gain management 
experience while working for someone else's farm operation, the ML 
process can provide a path to eventual ownership of a family farm.

Limitations

    FSA is proposing that the ML application process can be used for an 
annual or term OL up to a maximum of $35,000. ML applicants would be 
required to have an outstanding OL principal balance to FSA of no more 
than $35,000 after the loan is closed. Since the gross value of farm 
production is usually less than $25,000 for the majority of small 
income producing farming operations, financing needs for annual 
production cost are expected to be below the $35,000 maximum loan 
amount. FSA believes that this loan limit would provide sufficient 
levels of capital to small operations, which can include beginning 
farmers, truck farms, niche operations, CSA operations, and operations 
owned by immigrants who may need assistance establishing themselves in 
the farming community. Through this proposed rule, FSA is requesting 
comments on all aspects of the proposed ML process and is specifically 
interested in comments regarding the limitation of the loan amount.

Security Requirements

    FSA is proposing that MLs must be secured by collateral worth at 
least 100 percent of the loan amount. This differs from the current 
requirement in 7 CFR 764.104(c) that requires collateral worth at least 
150 percent of the loan amount if available. Loans for improvements to 
farm real estate, such as well drilling, small barn or shed 
construction, or underground irrigation, may be secured by equipment, 
foundation livestock, or similar chattel security, if available, as an 
alternative to a lien on real estate, provided the 100 percent security 
requirement is met. A lien on real estate will only be required when 
other security is not available to meet the 100 percent security 
requirement. For an ML applicant, FSA can take a lien on equipment, or 
other available security, instead of taking a lien on real estate. 
Crops and livestock products will be taken as security for annual 
operating MLs only when other security available does not provide the 
minimum 100 percent security requirement. For example, when an ML is 
used to finance cash crops such as vegetables that are marketed at a 
farmers market, or when produce is grown in measures such as rows, the 
applicant may choose to offer a tractor as security instead of a lien 
on the crop. Some start-up or small family farms may not have 
sufficient equity in equipment or may be renting equipment and, 
therefore, a cash crop is all that is available to secure an annual ML. 
In this case, a lien on the crop produced with loan funds may provide 
security for the loan. FSA believes that flexibility in security 
requirements is another tool in meeting the needs of small family farms 
by providing affordable credit alternatives to credit card and high 
interest financing.

Applicability of Other Regulatory Requirements

    Other existing and applicable regulatory requirements pertaining to 
development of operating plans, loan processing and closing, use of 
loan funds, loan servicing, and environmental requirements not 
specifically amended by this proposed rule will apply to MLs, like 
other OLs.

Lo-Doc OLs

    The Lo-Doc OL application process is not widely used, for example 
only 3 percent of OLs obligated in FY 2010 were Lo-Doc loans. As a 
result of the Lo-Doc application process not being used, FSA has 
determined that a new program that changes not only the application 
process but also some eligibility and security requirements would be 
more appropriate rather than attempting to revise the Lo-Doc process. A 
large percentage of applicants that could have applied for a Lo-Doc OL 
will be able to apply for an ML. Therefore, FSA proposes to remove the 
Lo-Doc provisions from the Code of Federal Regulations. Removal of the 
Lo-Doc Program is not expected to have a significant impact on the 
public.

Executive Orders 12866 and 13563

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

Clarity of the Regulation

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

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601-612), as amended by 
the Small Business Regulatory Enforcement Fairness Act of 1996 
(SBREFA), generally requires an agency to prepare a regulatory 
flexibility analysis of any rule subject to the notice and comment 
rulemaking requirements under the Administrative Procedure Act (5 
U.S.C. 553) or any other statute, unless the agency certifies that the 
rule will not have a significant economic impact on a substantial 
number of small entities. FSA has determined that this rule will not 
have a significant impact on a substantial number of small entities for 
the reasons explained below. Consequently, FSA has not prepared a 
regulatory flexibility analysis.
    The term small entities include small businesses, small 
organizations, and small governmental jurisdictions. For the purposes 
of assessing the impacts of this rule on small entities, a small 
business will be as described in the Small Business Administration's 
Table of Small Business Size Standards by North American Industry 
Classification System (NAICS) Category (13 CFR

[[Page 31224]]

121.201). This includes the following categories and the relative size 
standards that will apply to the entities requesting microloans. All of 
the entities that would request a microloan would be small businesses 
that produce crops and livestock in subsectors 111 and 112 listed under 
13 CFR 121.201. These categories cover all primary agricultural 
production. Under the SBA Small Business Size Standard for these two 
NAICS subsector categories, the majority of businesses are considered 
small when they receive less than $750 thousand in annual receipts, the 
threshold is higher for two subcategories of animal production. (See 13 
CFR 121.201, subsectors 112112 and 112310.) This standard does not 
exclude any of the potential farm loan borrowers who will make use of 
the proposed modifications to the OL Program. Nevertheless, even if the 
applicants under the proposed ML Program were considered small 
entities, there would not be a substantial number affected by the rule.
    Overall, this is a new application process and greater options for 
eligibility and security for small loans within the existing OL 
Program, so theoretically some of the loans could be made under the 
existing program. Therefore, small entities in two credit segments have 
to be considered for this analysis. One segment is the number of 
existing borrowers who might take advantage of the modifications in 
eligibility for future loans. The other segment is the number of new 
borrowers who might never have applied for an FSA operating loan 
without the modifications. The number of existing borrowers who might 
make use of the application, eligibility, and security modifications 
for future loans can be precisely estimated using fiscal year 2011 
direct operating loan data. Given that the maximum borrowing limit is 
$35,000 as proposed in the rule, it is estimated there would be at most 
3,340 borrowers with $102.7 million in loans in this segment. However 
since these are existing borrowers with the same credit needs, this 
segment will have no additional economic impact. Only the demand by 
additional borrowers will have an incremental economic impact. This 
additional demand is more difficult to estimate. Preliminary estimates 
assume the new borrowers will be younger, below the age of 35, and have 
relatively low annual sales, less than $10,000 annually. Using data 
from the 2007 Census of Agriculture, this segment of producers consists 
of about 14,434 primary operators. Historically FSA direct operating 
loans have captured only 2 percent of the agricultural credit market, 
so fewer than 300 borrowers will probably be added. Therefore, about 
4,000 entities could be affected by this rule with an economic impact 
of only about $10.5 million (300 new borrowers times $35,000 in loans 
per borrower).
    Furthermore, the minimal regulatory requirements will impact large 
and small businesses equally as part of the loan making process since 
MLs are distinguished based on the size of the loan. ML applicants will 
have a lower paperwork burden that will be commensurate with the 
smaller loan amount due to a reduction in documentation required for 
these loans. Therefore, in accordance with the Regulatory Flexibility 
Act, FSA is certifying that there would not be a significant economic 
impact on a substantial number of small entities. Due to the limited 
number of entities, the economic effects from any additional lending 
are unlikely to have a substantial impact on entities of any size.

Environmental Review

    The environmental impacts of this proposed rule have been 
considered in a manner consistent with the provisions of the National 
Environmental Policy Act (NEPA, 42 U.S.C. 4321-4347), the regulations 
of the Council on Environmental Quality (40 CFR parts 1500-1508), and 
the FSA regulations for compliance with NEPA (7 CFR 799 and 7 CFR part 
1940, subpart G). FSA concluded that simplifying the application 
process and adding flexibility for meeting loan eligibility and 
security requirements to encourage small farm operation participation 
in its OL program explained in this proposed rule are administrative in 
nature and will not have a significant impact on the quality of the 
human environment either individually or cumulatively. The 
environmental responsibilities for each prospective applicant will not 
change from the current process followed for all FLP actions (7 CFR 
1940.309). Therefore, FSA will not prepare an environmental impact 
statement on this proposed rule.

Executive Order 12372

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

Executive Order 12988

    This proposed rule has been reviewed in accordance with Executive 
Order 12988, ``Civil Justice Reform.'' The provisions of this proposed 
rule will not have preemptive effect with respect to any State or local 
laws, regulations, or policies that conflict with such provision or 
which otherwise impede their full implementation. The rule will not 
have retroactive effect.

Executive Order 13132

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

Executive Order 13175

    This rule has been reviewed for compliance with Executive Order 
13175, ``Consultation and Coordination with Indian Tribal 
Governments.'' The Executive Order imposes requirements on the 
development of regulatory policies that have tribal implications or 
preempt tribal laws. The USDA Office of Tribal Relations has concluded 
that the policies contained in this rule do not, to our knowledge, 
preempt Tribal law.
    As part of an ongoing collaboration, FSA provided government-to-
government consultation with Tribal governments to discuss this 
proposed rule. In February, 2012, the Farm Service Agency (FSA) held 
three teleconference sessions for all federally recognized Tribal 
governments. The teleconference session was also offered to intertribal 
organizations, and individual Native Americans and Alaska Natives. The 
purpose of these teleconferences was to present information about 
important program changes and the new Microloan Program. FSA also 
provided an overview of the subjects to be discussed with the 
invitation letter prior to the teleconferences. These Tribal 
Consultation conversations and presentations were held to help guide

[[Page 31225]]

USDA in understanding any challenges that may be associated with the 
implementation of the new Microloan program among Tribal communities 
and within Tribal governments. A question and answer period was held 
immediately following each topic presentation by the FSA Administrator 
and staff from FSA's Farm Loan Programs. This proposed rule 
incorporates the information FSA received during these Tribal 
Consultations. In addition, comments from the general public are being 
requested on this proposed rule for 60 days following its publication 
in the Federal Register and FSA encourages individual Native Americans 
and Alaska Natives, Tribal governments, and intertribal organizations 
to provide additional comments during this comment period.
    FSA will continue to respond in a timely and meaningful manner to 
all Tribal government requests for Tribal consultation about this rule 
and its implementation and will provide additional avenues, such as 
webinars and teleconferences, to periodically host collaborative 
conversations with Tribal leaders and their representatives about ways 
to improve this program and rule in Indian Country.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995, the 
following new information collection request that supports the new ML 
program is being submitted to OMB. FSA is requesting comments from 
interested individuals and organizations on the information collection 
activities related to the ML application process as described in this 
proposed rule. FSA is currently modifying the loan application process 
in order to provide loans to eligible borrowers through the ML process.
    This information collection request will be incorporated into FSA's 
approved information collection of the same title and OMB control 
number 0560-0237.
    Title: Direct Loan Making.
    OMB Control Number: 0560-New.
    Type of Request: New Collection.
    Abstract: This information collection is required to support the 
regulation changes in 7 CFR 764, ``Direct Loan Making,'' which 
establishes the requirements for most of FSA's direct loan programs 
including the new ML application process. The information collection 
established in this proposed rule is necessary for FSA to evaluate the 
applicant's request and determine if eligibility, loan repayment, and 
security requirements can be met.
    Estimate of Burden: Public reporting for this collection of 
information is estimated to average 4.27 hours.
    Type of Respondents: Individuals or households, businesses or other 
for profit, and farms.
    Estimated Number of Respondents: 5,142.
    Estimated Average Number of Responses per Respondent: 5.71.
    Estimated Total Annual Number of Responses: 29,372.
    Estimated Total Annual Burden on Respondents: 21,938 hours.
    We are requesting comments on all aspects of this information 
collection and to help us:
    (1) Evaluate whether the collection of information is necessary for 
the proper performance of the functions of FSA, including whether the 
information will have practical utility;
    (2) Evaluate the accuracy of FSA's estimate of burden including the 
validity of the methodology and assumptions used;
    (3) Enhance the quality, utility, and clarity of the information to 
be collected; and
    (4) Minimize the burden of the collection of information on those 
who are to respond, including through the use of appropriate automated, 
electronic, mechanical, or other technological collection techniques or 
other forms of information technology.
    All comments received in response to this notice, including names 
and addresses when provided, will be a matter of public record. 
Comments will be summarized and included in the submission for OMB 
approval.

E-Government Act Compliance

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

List of Subjects

7 CFR Part 761

    Accounting, Loan programs-agriculture, Rural areas.

7 CFR Part 764

    Agriculture, Disaster assistance, Loan programs-agriculture.
    For reasons discussed above, FSA proposes to amend 7 CFR chapter 
VII as follows:

PART 761--FARM LOAN PROGRAMS; GENERAL PROGRAM ADMINISTRATION

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

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

    2. Amend Sec.  761.2 as follows:
    a. In paragraph (a), remove the abbreviation ``Lo-Doc'' and add an 
abbreviation, in alphabetical order, for ``ML Microloan'';
    b. In paragraph (b), add definitions, in alphabetical order, for 
``Apprentice'' and ``Microloan''; and
    c. In paragraph (b), remove the definition of ``Low-Documentation 
Operating loan.''
    The additions read as follows:


Sec.  761.2  Abbreviations and definitions.

* * * * *
    (a) * * *
    ML Microloan.
* * * * *
    (b) * * *
    Apprentice means an individual who receives applied guidance and 
input from an individual with the skills and knowledge pertinent to the 
successful operation of the farm enterprise being financed.
* * * * *
    Microloan is a type of OL of $35,000 or less made under reduced 
application, eligibility and security requirements.
* * * * *
    3. Amend Sec.  761.103 as follows:
    a. Revise paragraph (b), introductory text;
    b. Redesignate paragraphs (c) through (e) as paragraphs (d) through 
(f); and
    c. Add paragraph (c).
    The revision and addition read as follows:


Sec.  761.103  Farm assessment.

* * * * *
    (b) Except for ML, the initial assessment must evaluate, at a 
minimum, the:
* * * * *
    (c) For ML, the Agency will complete a narrative that will 
evaluate, at a minimum, the:
    (1) Type of farming operation and adequacy of resources;
    (2) Amount of assistance necessary to cover expenses to carry out 
the proposed farming plan, including building an adequate equity base;
    (3) The goals of the operation;
    (4) The financial viability of the plan, including a marketing plan 
and available production history, as applicable;
    (5) Supervisory plan; and
    (6) Training plan.
* * * * *
    4. Amend Sec.  761.104 by redesignating paragraphs (e) and (f) as 
(f) and (g), and adding paragraph (e) to read as follows:


Sec.  761.104  Developing the farm operating plan.

* * * * *

[[Page 31226]]

    (e) For MLs, when projected yields and unit prices cannot be 
determined as set forth in paragraphs (c) and (d) of this section 
because the data is not available or practicable, documentation from 
other reliable sources may be used.
* * * * *

PART 764--DIRECT LOAN MAKING

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

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


Sec.  764.1  [Amended]

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


Sec.  764.51  Loan application.

* * * * *
    (c) For an ML request, all of the following criteria must be met:
    (1) The loan requested is:
    (i) To pay annual or term operating expenses, and
    (ii) $35,000 or less and the applicant's total outstanding Agency 
OL debt at the time of loan closing will be $35,000 or less;
    (2) The applicant must submit the following:
    (i) Items (1), (2), (3), (6), (7), (9), and (11) of paragraph (b) 
of this section;
    (ii) Financial and production records for the most recent 
production cycle, if available, and practicable to project the cash 
flow of the operating cycle, and
    (iv) Verification of all non-farm income relied upon for repayment; 
and
    (3) The Agency may require an ML applicant to submit any other 
information listed in paragraph (b) of this section upon request when 
specifically needed to make a determination on the loan application.
* * * * *
    7. Amend Sec.  764.101 as follows:
    a. In paragraph (i)(3) at the end of the first sentence add the 
text ``or the applicant may have obtained and successfully repaid one 
FSA Youth-OL''; and
    b. Add paragraph (i)(4).
    The addition reads as follows:


Sec.  764.101  General eligibility requirements.

* * * * *
    (i) * * *
    (4) Alternatives for ML. ML applicants also may demonstrate 
managerial ability by one of the following:
    (i) Certification of a past association with an agriculture-related 
organization, such as 4-H Club or FFA, that demonstrates experience in 
a related enterprise; or
    (ii) A written description of a self directed apprenticeship for 
the first operating cycle. The applicant will agree as a condition of 
the loan to seek, receive, and apply guidance, during the first 
production cycle of production and marketing typical to the applicant's 
specific operation, with an individual who is knowledgeable of 
production and marketing practices that are pertinent to the 
applicant's operation and will provide a developmental partnership to 
share knowledge, skills, information, and perspective of agriculture to 
foster professional growth. The intent of this apprenticeship is to 
provide the applicant with the skills and knowledge necessary to manage 
their operation on their own. They may continue the apprenticeship 
beyond the first operating cycle, but they are not required to do so.


Sec.  764.103  [Amended]

    8. Amend Sec.  764.103 as follows:
    a. Amend paragraph (c), by adding ``ML'' after the words 
``downpayment loans''; and
    b. Amend the last sentence of paragraph (e) by removing the words 
``conservation loans'' and adding, in their place, the words ``CL, 
ML''.
    9. Amend Sec.  764.251 as follows:
    a. Revise paragraph (a), introductory text; and
    b. Revise paragraph (b).
    The revisions read as follows:


Sec.  764.251  Operating loan uses.

    (a) OL funds may only be used for:
* * * * *
    (b) ML funds may be used for any OL purpose.
    10. Amend Sec.  764.255 as follows:
    a. Revise paragraph (b), introductory text; and
    b. Add paragraph (c).
    The revision and addition read as follows:


Sec.  764.255  Security requirements.

* * * * *
    (b) Except for MLs, by a:
    * * *
    (c) For MLs:
    (1) All loans must be secured by assets having a security value of 
at least 100 percent of the loan amount.
    (2) A lien is required on foundation livestock or equipment 
purchased with term ML funds.
    (3) Improvements to farm real estate (such as, well drilling, small 
barns, storage sheds, or underground irrigation) may be secured by 
equipment, foundation livestock, or similar chattel security if 
available and adequate to meet the 100 percent security requirement. A 
lien on real estate will only be taken if other security is not 
available to adequately meet 100 percent security requirement.
    (4) Crops and livestock products may be taken as security for 
annual operating MLs only when other available security does not meet 
the 100 percent security requirement.

    Signed on April 27, 2012.
Bruce Nelson,
Administrator, Farm Service Agency.
[FR Doc. 2012-12685 Filed 5-23-12; 8:45 am]
BILLING CODE P