Farm Loan Programs; Clarification and Improvement, 65523-65541 [2013-25836]

Agencies

• DEPARTMENT OF AGRICULTURE
• Farm Service Agency

[Federal Register Volume 78, Number 212 (Friday, November 1, 2013)]
[Rules and Regulations]
[Pages 65523-65541]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-25836]


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DEPARTMENT OF AGRICULTURE

Farm Service Agency

7 CFR Parts 761, 762, 765, 766, and 772

RIN 0560-AI14


Farm Loan Programs; Clarification and Improvement

AGENCY: Farm Service Agency, USDA.

ACTION: Final rule.

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SUMMARY: The Farm Service Agency (FSA) is amending the Farm Loan 
Programs (FLP) regulations for loan making and servicing, specifically 
those on real estate appraisals, leases, subordination and disposition 
of security, and Conservation Contract requirements. FSA is also 
streamlining the loan making and servicing process and giving the 
borrower greater flexibility while protecting the financial interests 
of the Government.

DATES: Effective December 16, 2013.

FOR FURTHER INFORMATION CONTACT: Michael C. Cumpton, telephone: (202) 
690-4014. Persons with disabilities or who require alternative means 
for communications should contact the USDA Target Center at (202) 720-
2600 (voice and TDD).

SUPPLEMENTARY INFORMATION:

Background

    This rule follows the FSA proposed rule that was published on April 
13, 2012, (77 FR 22444-22462). The rule streamlines the loan making and 
servicing process for direct and guaranteed FLP loans and gives the 
borrower greater flexibility while protecting the financial interests 
of the Government.
    FSA direct loans and loan guarantees are a means of providing 
credit to farmers whose financial risk exceeds a level acceptable to 
commercial lenders. Through direct and guaranteed Farm Ownership (FO), 
Operating Loans (OL), and Conservation Loans (CL), as well as direct 
Emergency Loans (EM), FSA assists tens of thousands of family farmers 
each year in starting and maintaining profitable farm businesses. FSA 
loan funds may be used to pay normal operating or family living 
expenses; make capital improvements; refinance certain debts; and 
purchase farmland, livestock, equipment, feed and other materials 
essential to farm and ranch operations. FSA services extend beyond the 
typical loan by offering customers ongoing consultation, advice, and 
creative ways to make their farm successful. These programs are a 
temporary source of credit. Direct borrowers generally are required to 
graduate to other credit when their financial condition will allow them 
to do so.
    FSA is amending the FSA regulations for several FLP loan making and 
servicing issues, including real estate appraisals, leases, 
disposition, and release of security, and Conservation Contracts.
    The overall changes are summarized below followed by a discussion 
of the individual comment issues and the responses.
    FSA is amending various issues related to appraisals. Section 
307(d) of the Consolidated Farm and Rural Development Act (CONACT, 7 
U.S.C. 1927(d)) requires that in order for FSA

[[Page 65524]]

to have the rights to oil, gas, or other minerals as Farm Ownership 
Loan (FO) loan collateral, the products' value must have been 
considered in the appraisal. The section only applies to FO loans made 
after the date of enactment (December 23, 1985), but FSA 
administratively extended this requirement to any type of FLP loan. FSA 
is revising the regulations in 7 CFR 761.7, 765.252 and 765.351 to 
mirror the CONACT by applying the requirement only to FO loans.
    FSA is clarifying its regulation in 7 CFR 761.7 on appraisal appeal 
rights by specifying that the appeal of real estate appraisals used by 
FSA, other than those used for primary loan servicing, is limited to 
whether the appraisal is compliant with the Uniform Standards of 
Professional Appraisal Practice (USPAP). The appellant may submit only 
a technical appraisal review of the appraisal that has been prepared by 
a State Certified General Appraiser.
    On guaranteed loans, FSA is going to increase the minimum 
guaranteed amount for which an appraisal is required from $50,000 to 
$250,000 as specified in 7 CFR 762.127. The lending industry's 
regulators, such as the Federal Deposit Insurance Corporation and the 
Farm Credit Administration, currently allow $250,000 as their threshold 
for business type (agricultural purpose) loans. There is no comparable 
proposal to raise the limit for direct FSA loans because direct loans 
typically display more serious financial stress, pose significantly 
more risk of loss to FSA, and warrant stricter safeguards. For loans of 
$250,000 or less, lenders may document value in the same manner as for 
their non-guaranteed loans using, for example, statement of value, tax 
assessment, and automated valuation model. The security for the loan 
must still meet the requirements specified in 7 CFR 762.126 to ensure 
that proper and adequate security is obtained to protect the interests 
of the lender and FSA. This change will allow lenders to follow 
industry standards of documenting collateral value.
    FSA also is revising 7 CFR 762.127 to allow the use of an appraisal 
that is more than 12 months old for guaranteed loans greater than 
$250,000 if market conditions have remained stable, the condition of 
the property in question is comparable to the time of the appraisal, 
and the value of the property has remained the same or increased.
    FSA is also clarifying 7 CFR 762.127 to state that while a formal 
appraisal is not necessary for chattel or real estate that will serve 
as additional security, an estimated value is still required.
    FSA is clarifying 7 CFR 762.127(c) to state that real estate 
appraisals must be completed in accordance with USPAP and that 
restricted reports as defined in USPAP are not acceptable. Restricted 
reports are permitted under USPAP, but are not appropriate for credit 
decisions. Both of these requirements are consistent with the 
Interagency Appraisal and Evaluation Guidelines (Guidelines) and the 
existing regulation in 7 CFR 762.127; however, they were not included 
in the proposed rule. As this clarification is consistent with the 
Guidelines and existing regulations, additional comments are not 
necessary.
    The terms ``complete'' and ``limited appraisal'' have been 
determined to be obsolete in the industry so FSA is removing the terms 
from the regulations in 7 CFR part 762.
    FSA is revising and clarifying 7 CFR 765.205(b), 765.252(a), and 
765.252(b) to allow consistent treatment of wireless communication 
leases, mineral leases, and alternative energy projects. The change 
provides that a lease must not adversely affect FSA's security interest 
or the successful operation of the farm, and requires FSA review of 
contracts and agreements related to the lease. The revision will also 
allow these nonfarm type leases be made for any term, instead of the 3 
to 5 year limit in the present regulations.
    FSA is expanding the definition of subordination in 7 CFR 761.2(b) 
to allow for subordinations to be included in leases as companies who 
want to use real estate security for alternative energy or 
communication towers often include subordination language in the lease. 
FSA is amending 7 CFR 765.205(b) to extend subordination authority to 
include leases when certain conditions are met.
    FSA is also amending 7 CFR 765.205(b)(1) to allow a subordination 
of real estate security to other creditors if the loan will be used to 
refinance a loan originally made for an authorized loan purpose by FSA 
or another creditor. This will allow FSA to help an existing borrower 
refinance a farm loan with an FSA loan. This often happens when a 
farmer wants to refinance the existing loan because interest rates have 
fallen.
    FSA is changing 7 CFR 765.302 to track only normal income security 
proceeds that are planned for release or applied to FSA FLP payments 
instead of attempting real time monitoring of all proceeds. This will 
be accomplished with the use of an agreement for each production cycle 
on which the borrower and FSA agree to the use of proceeds that will be 
used to make payments. To reflect this change to the regulation, FSA is 
revising the current definition of the agreement for the use of 
proceeds in 7 CFR 761.2(b). FSA is removing 7 CFR 765.302(b), which 
provides that an agreement for the use of proceeds is in effect until 
the proper disposition of all listed chattel security has been 
accomplished or a new agreement is executed. The duration of the 
agreement is specified in the agreement itself. FSA is also removing 7 
CFR 765.302(h), which requires the borrower to keep records of all 
dispositions of chattel proceeds, since it goes beyond the scope of the 
new agreement. However, as the recordkeeping requirement of all chattel 
proceeds, regardless of use, is still important for annual planning 
purposes, FSA is incorporating the recordkeeping requirement into 7 CFR 
765.301(a).
    FSA is amending 7 CFR 765.305 and 765.351(f) to allow the release 
of some security without compensation for borrowers who have not had 
primary loan servicing or Disaster Set-Aside within the last 3 years if 
the loan security margin would be 150 percent or more after the 
release, and the borrower is graduating, using security for other 
credit, or transferring small tracts to relatives.
    The Conservation Contract Program provides debt cancellation for 
FLP borrowers in exchange for them taking land out of production for 
conservation purposes. The changes noted below will reduce the costs to 
FSA and the burden of administering the Conservation Contract Program 
while still ensuring the conservation objective is met by clarifying 
and revising the Conservation Contract Program regulations in 7 CFR 
766.110.
    There are many instances where land proposed for a Conservation 
Contract is encumbered by another conservation program for which the 
borrower receives compensation. These revisions ensure that the land 
will not be eligible for a Conservation Contract if another 
conservation program pays the borrower for similar conservation, 
wildlife, or recreation benefits on the same land. Any portion of the 
land that is already encumbered by another conservation program would 
be ineligible for a Conservation Contract.
    FSA is clarifying 7 CFR 766.110(m) to specify that FSA will not 
grant subordinations of Conservation Contracts. This will ensure that 
the contract is not lost through foreclosure by a lender who obtains a 
superior lien through a subordination.
    FSA is requiring a legal right-of-way or other legal, permanent 
access to the Conservation Contract property for the life of the 
Conservation Contract in 7 CFR 766.110(c). A legal right-of-way

[[Page 65525]]

that is recorded, in addition to the Conservation Contract, will assure 
that FSA or the management authority will have access to inspect the 
property for the life of the Conservation Contract.
    FSA is revising 7 CFR 766.110 to require a minimum parcel size of 
10 contiguous acres to better manage Conservation Contracts. 
Establishing a minimum size as a general requirement has minimal 
adverse effect on the borrowers or FSA, and ensures an adequate size 
tract to meet conservation purposes.
    FSA is implementing new damages for a breach of contract in 7 CFR 
766.110. The purpose of the Conservation Contract Program is to place 
at-risk land under a conservation contract for a set period of time, 
protect the land, and enhance its conservation, wildlife or recreation 
value. The consequences of a breach of the Conservation Contract must 
discourage violations and abuse of the program. Therefore, FSA is 
requiring any violator to restore damaged or altered areas or, if the 
land is not restored within 90 days, pay FSA the amount of the debt 
previously cancelled, plus interest to the date of payment, plus any 
actual expenses incurred by FSA in enforcing the Conservation Contract, 
plus a penalty in the amount of 25 percent of the amount of the debt 
cancelled. In addition, FSA is clarifying that uplands that are 
eligible for Conservation Contracts include buffer areas necessary to 
protect the Conservation Contract area as well as the area subject to 
other conservation programs.
    Several technical amendments included in the final rule regarding 
assessments, payment of interest, and definitions will also be 
implemented as no comments were received. (See the proposed rule for a 
description of the technical amendments.)

Discussion of Comments and Responses

    In response to the proposed rule, 20 comments were submitted by 16 
commenters during the 60-day comment period. Comments were submitted by 
the Hmong National Development, Inc., the American Bankers Association, 
appraisers, the general public, and FSA employees. The comments 
addressed multiple provisions of the rule. Many of the comments 
received during the comment period were supportive, but several had 
concerns with certain aspects of the proposed rule. Some issues raised 
in the comments resulted in changes to the regulations.
    On some issues comments represented both sides of the issue and 
sometimes suggested specific changes. For example, half of the comments 
FSA received related to aspects of the proposal to increase the 
threshold for requiring an appraisal on guaranteed loans from $50,000 
to $250,000. One comment supported the change as proposed, some 
comments generally supported the increase, but recommended additional 
conditions or modifications, and several comments were against the 
increase. The suggested changes and reasons for not making the change 
are discussed below.
    The following provides a summary of the issues in the comments FSA 
received, the FSA response, and any changes made to the regulations 
based on the comments.

Increase Appraisal Threshold for Guaranteed Loans to $250,000

    Comment: Increasing the appraisal threshold to $250,000 results in 
eliminating the independent third party valuation an appraisal 
provides. That will result in inflated collateral values and increased 
risk of loss.
    Response: If a lender would require an appraisal on a non-
guaranteed loan even though the transaction was below $250,000, FSA 
expects the lender to require an appraisal for the guaranteed loan as 
well. Therefore, FSA is not eliminating a formal evaluation of 
collateral; it is bringing our requirements in line with normal banking 
practices. While evaluations may not contain the same supporting 
documentation and valuation methods as an appraisal, lenders' must use 
a formal process to estimate and document the property's market value.
    In December 2010, the federal banking regulators jointly issued 
Guidelines that provide federally regulated institutions and examiners 
clarification on the expectations for prudent appraisal and evaluation 
policies, procedures, and practices. These Guidelines include 
regulators' expectations for lenders to establish and follow policies 
relating to real estate appraisals and evaluations of collateral. 
Lenders are expected to establish and follow policies defining when an 
evaluation is appropriate instead of an appraisal and also the methods 
to be used in conducting and documenting an evaluation of collateral. 
FSA expects lenders to apply their appraisal and evaluation policies to 
guaranteed loans in the same manner as non-guaranteed loans.
    The Guidelines instruct lenders to define instances in which they 
would request an appraisal, and include factors such as the 
transaction's expected loan to value ratio, the borrower's credit risk 
factors, and the type of property proposed as security. In addition, 
they address the independence issue by stating that the collateral 
valuation process should be isolated from influence from the loan 
production staff. The Guidelines also provide considerable instructions 
on the content to be included in the evaluations and maintained in the 
credit file. Again, FSA expects lenders to follow the Guidelines for 
guaranteed loans.
    Regarding the risk of additional losses, FSA does not believe that 
this increase presents a significant exposure to increased losses. Only 
16 percent of FSA's Guaranteed Farm Ownership loan funds are for loans 
under $250,000. Some of these loans would also be in conjunction with a 
Direct Farm Ownership loan, which would require a USPAP appraisal. 
Furthermore, FSA will have an opportunity to examine and consider 
standard eligible lenders' evaluations before issuing the Guarantee. 
Given these factors along with the Guidelines lenders are already 
following, FSA's exposure to additional losses as a result of this 
change is insignificant.
    Because collateral valuations will continue to be adequately 
supported and reviewed and that there is no significant exposure to 
additional losses, there will be no change to 7 CFR 762.127(c) in 
response to this comment.
    Comment: In many parts of the country, appraisal fees and the 
timeframes for obtaining an appraisal are not significant issues.
    Response: State laws vary regarding who is authorized to appraise 
farm property. In some states, only Certified General Appraisers are 
permitted to issue appraisals on farmland. While the availability of 
qualified and authorized real estate appraisers may not be an issue in 
certain parts of the country, other regions are experiencing a lack of 
availability and therefore have problems with both timeliness and the 
cost of an appraisal. This puts FSA customers at a disadvantage when 
purchasing farmland for under $250,000. These customers are frequently 
small beginning farmers or Socially Disadvantaged farmers for whom FSA 
has targeted funds. Delays and additional costs have a greater impact 
on these operations than they would on larger, more established 
operations. With this rule change, we are trying to place our 
applicants on the same footing as the larger, more established farmers.
    As indicated above, this will be beneficial to a large number of 
our most disadvantaged customers, therefore, there will be no change to 
7 CFR 762.127(c) in response to this comment.
    Comment: Lenders are able to manage the additional risk associated 
with an evaluation rather than an appraisal

[[Page 65526]]

through their credit policies, such as lower loan to value ratio (60 to 
75 percent). Establish a maximum (75 percent) loan-to-value ratio under 
which FSA would accept an evaluation, with full collateral value only 
if an appraisal is obtained.
    Response: As mentioned above, FSA expects lenders to apply their 
credit standards on guaranteed loans in the same manner in which they 
do for their non-guaranteed loans.
    The Guidelines direct lenders to consider factors such as loan to 
value ratios, atypical properties, and borrower's risk characteristics 
when deciding whether to obtain an appraisal rather than an evaluation; 
therefore, no change is being made to 7 CFR 762.127(c)(1) in response 
to this comment. In addition, the sentence included in the proposed 
rule stating that if an appraisal is completed, it does not have to be 
USPAP compliant has been removed. That sentence is unnecessary since 
any collateral valuation completed for loans falling under 7 CFR 
762.127(c)(1) will be determined based on an evaluation completed in 
accordance with the Guidelines or an appraisal completed in accordance 
with USPAP.
    Comment: The same appraisal policy should be implemented for direct 
loans as they are no riskier than guaranteed loans.
    Response: FSA's history of loan losses and delinquency supports our 
concern that the direct loan program is indeed riskier than the 
guaranteed program. Further, with real estate loans, the direct loan 
regulations permit junior positions on real estate at 100 percent loan 
to value ratios. With these collateral positions, FSA strongly believes 
a USPAP appraisal is necessary to support our credit decision. In 
addition, our direct loan program does not charge the loan applicant 
for an appraisal and timeliness has not been a significant problem.
    Due to these differences in the direct loan program versus the 
guaranteed program, there will be no change to 7 CFR 764.107(a) in 
response to this comment.
    Comment: The proposed appraisal change should apply to unimproved 
tracts only as valuation of improvements can only be adequately done by 
a certified appraiser.
    Response: The Guidelines require lender's credit policies on 
collateral valuation to address the types of properties on which they 
would require an appraisal rather than an evaluation of value. These 
properties would typically include those with a substantial portion of 
the value coming from improvements, particularly specialized buildings. 
Since many properties only have a small amount of improvements with 
minimal contributory value, FSA does not want to prevent those from 
being valued under the lenders' normal procedures.
    Because the current language and lenders' policies adequately 
address this issue and protect FSA, there will be no change to 7 CFR 
762.172(c) in response to this comment.
    Comment: Since many purchases are jointly made with direct loans, 
the $250,000 real estate appraisal threshold should be for combined 
debt for the purchase of real estate or the refinance of debt.
    Response: When a loan is made in conjunction with a direct loan, 
FSA will complete an appraisal for its direct loan; therefore, it is 
unnecessary to establish a different standard for guaranteed loans made 
jointly with direct.
    As this concern is already addressed by current policies, there 
will be no change to 7 CFR 762.127(c) in response to this comment.
    Comment: The $250,000 appraisal threshold should be limited to the 
total outstanding guaranteed loan principal balance at the time of loan 
closing.
    Response: Industry standards base the appraisal exception on the 
particular loan transaction amount rather than total outstanding 
balances. As previously indicated, our goal is that FSA requirements 
for guaranteed lenders remain consistent with industry standards.
    To ensure FSA requirements retain consistency with industry 
standards, there will be no change to 7 CFR 762.127(c) in response to 
this comment.

Administrative and Technical Reviews of Real Estate Appraisals

    Comment: The administrative and technical review of appraisals is a 
significant and important function of the collateral calculation 
process that provides a sound level of trust in the process. Reviews 
protect against government loss and are a key part of sound lending 
practices. Removing this requirement in 7 CFR 761.7(d) would remove 
important protections of the program.
    Response: After a review of the concerns noted above, FSA agrees 
that important protections against government loss may be harmed by the 
proposed change.
    In response to this comment, 7 CFR 761.7(d) is not being removed.

Unlimited Term Leases for Non-Farm Property

    Comment: FSA should include unused agriculture property, such as 
milk barns, a vacant house or real farm property located a significant 
distance from the primary operation or not utilized in the primary 
operation to the list of property that can be leased for an unlimited 
term.
    Response: FSA does not agree with the addition of property that is 
part of the operation, but located remotely or is not part of the 
primary operation. Many modern farms are made up of several smaller 
operations located over a wide area. While these tracts or operations 
can be a significant distance from the primary operation, they are 
considered in the farm business plan developed by the borrower and FSA 
and contribute to the cash flow. FSA does agree with the addition of 
farm type property that is no longer used as part of the operation or 
an unused residence.
    In response to this comment, we revised Sec.  765.252(a)(2) to 
include farm property no longer in use, such as old barns. No change 
will be made in response to the comment suggestion to include real farm 
property based on distance.

Tracking of Disposition From Normal Income Proceeds

    Comments: Do not make the proposed changes for the disposition of 
chattel proceeds. The issues with the proposed changes for the 
disposition of chattel proceeds are:
    1. The practical implementation of the proposed change for the 
disposition of chattel proceeds would be extremely difficult under the 
statutory and regulatory requirements on notification of potential 
purchasers. In some Central Filing System (CFS) states, a creditor can 
file notice of a lien on specific crops or specific types of livestock 
or the creditor may file a notice covering all crops or all livestock. 
To change the CFS filing, a creditor must obtain the signature of the 
farmer on the CFS statement or amendment and pay a fee, so FSA policy 
is to list all crops and all livestock to decrease the cost and time 
associated with CFS actions. Farmers routinely rotate crops depending 
as various factors including expected price, weather conditions, pest 
and disease problems, etc. so the CFS filing would have to be amended 
every year resulting in costs and inconvenience for the farmer and FSA.
    2. If FSA attempts to limit notifications or CFS filings to only 
the crop and livestock codes to those commodities that a borrower 
intends to use to pay the FSA debt, FSA will lose the ability to 
protect its security interest when borrowers are under financial 
stress. This problem would be particularly acute when loan accounts

[[Page 65527]]

are accelerated (FSA regulations stop the release of security proceeds 
when an account is accelerated) as the borrower would probably not 
execute an amendment of the CFS filing to cover all crops.
    3. The proposed change for the disposition of chattel proceeds does 
not effectively address challenges for borrowers with breeding 
livestock. The determination of whether the sale of a cull cow will be 
considered basic or normal income security often is made through 
discussions with the borrower at the time of the sale based on the 
total number of cows sold and the number of replacements in the herd.
    4. Not requiring the farmer to report sales of normal income 
security that are not intended for payment to FSA provides the borrower 
with excessive latitude and opportunity to use proceeds in an 
unacceptable manner. Borrowers could sell crops that should be used to 
pay operating expenses or make payments to prior lienholders and 
instead use that money for investment in non-farm business or personal 
uses without any FSA oversight. This could also cause problems for 
beginning farmers who are still refining their budgeting and financial 
management skills and who benefit from additional oversight the current 
system provides.
    5. Reporting and tracking normal income security dispositions are 
an important aspect of supervised credit and an important tool to help 
develop sound financial management skills.
    Response: The concerns regarding the requirement in the law to 
notify potential purchasers are well founded, and FSA will continue to 
comply with CFS and potential purchaser notifications in 7 CFR 765.204. 
However, other tools such as account classification, year-end analysis, 
graduation reviews, and farm visits can be used to provide adequate 
credit oversight while still reducing reporting burdens to the greatest 
extent possible. Administrative guidance will be included in our Farm 
Loan Program Servicing Handbooks provided used by the field offices. 
Borrowers will be allowed to operate without submission of all proceeds 
to FSA to the greatest extent possible.
    The above concerns are noted, but we have found that to best 
achieve FSA's goal of reducing reporting burdens on our borrowers, FSA 
will not require submission of proceeds beyond what is required by law 
or needed for repayment of the loan. Other credit management tools can 
be used as necessary to ensure borrower success and protect FSA's 
security interests. There will be no change to 7 CFR 765.302 in 
response to this comment.
    Comment: The proposed change in Sec.  765.302 to track only normal 
income security proceeds that are planned to be applied to FLP payments 
should be tabled until Sec.  765.204, which requires notification of 
potential purchasers of FSA's lien on a borrower's chattel security, is 
amended to require notification only when the security is planned for 
FSA payments or basic security.
    Response: FSA will continue to comply with CFS and potential 
purchaser notifications in 7 CFR 765.204, however, this change will 
allow for greater flexibility in what security is included in the 
notifications.
    As the change will allow us added flexibility while still remaining 
in compliance there will be no change to 7 CFR 765.302 in response to 
this comment.
    Comment: Limit the reduced reporting to borrowers who have had 
loans outstanding for at least 3 years, have paid the loans timely, and 
have not had any security accounting transgressions. An option would be 
to limit the reporting when FSA determines that the value of the basic 
and normal income security that will continue to be tracked and 
reported is at least 150 percent of the FSA indebtedness.
    Response: FSA does not have the authority to curtail notifications 
to potential purchasers as this requirement is specified in the CONACT 
(7 U.S.C. 1631), and establishing criteria to implement the new policy 
on only certain borrowers based on creditworthiness or security would 
be complex, time consuming, and prone to error or inconsistency.
    In order to comply with existing requirements and policies, there 
will be no change to 7 CFR 765.302 in response to this comment.

Release of Security Without Compensation

    Comment: Add a requirement that the released property will not 
interfere with access to or operation of the remaining farm. Essential 
buildings and facilities should not be released as property might not 
be marketable without them. The requirement should be restricted to 
approval by the FSA State Executive Director (SED) only and indicate 
that the report to the SED should include easement issues, legal 
description, survey issues, environmental concerns, utilities, and if 
the release could adversely impact the remaining security.
    FSA should add Disaster Set-Aside to the requirement that no 
primary loan servicing has been required for 3 years.
    Response: After a review, FSA agreed with each of the above 
comments and determined that their inclusion in the rule would improve 
the changes.
    Based on the comments, these changes have been incorporated into 7 
CFR 765.351(f). Both chattel and real estate releases without 
compensation will require that no Disaster Set-Aside has been in place 
on the account within the past 3 years. Both chattel and real estate 
releases without compensation will require SED approval. Real estate 
releases without compensation will require that access or operation of 
the remaining farm operation will not be impacted and essential 
buildings and facilities will not be released if they reduce the 
utility or marketability of the remaining property.

Prior Lienholder Subordination to Conservation Contract

    Comment: The requirement for a prior lienholder to subordinate 
their debt in favor of a Conservation Contract will be difficult to 
accomplish and will make it much harder to participate in the 
Conservation Contract program. The requirement will cost the prior 
lienholder time and money, and the prior lienholder might not even want 
to allow the prior lien under any circumstances. The net result will be 
that the conservation goals of the program will be diminished.
    Response: FSA understands that sometimes this requirement could 
prevent the use of a Conservation Contract to reduce a borrower's debt; 
however, it is extremely important that the Conservation Contract be 
protected during the full term. When farm real estate is sold or 
changes hands by other means, such as foreclosure by a prior 
lienholder, and the contract can no longer be enforced, taxpayer funds 
have been wasted with the conservation goal unrealized. While FSA hopes 
that this does not serve as an impediment to future contracts, it is 
preferable for real estate in production to continue to comply with its 
existing conservation requirements instead of losing an easement that 
has been paid for by the Government.
    In order to best uphold the goals of the Conservation Contract 
program, we are not making a change to 7 CFR 766.110 in response to 
this comment.

Executive Order 12866 and 13563

    Executive Order 12866, ``Regulatory Planning and Review,'' and 
Executive Order 13563, ``Improving Regulation and Regulatory Review,'' 
direct agencies

[[Page 65528]]

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 emphasizes 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 was not 
required to review this final rule.

Regulatory Flexibility Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601), 
FSA is certifying that there would not be a significant economic impact 
on a substantial number of small entities. All FSA direct loan 
borrowers and all farm entities affected by this rule are small 
businesses according to the North American Industry Classification 
System and the U.S. Small Business Administration. There is no 
diversity in size of the entities affected by this rule, and the costs 
to comply with it are the same for all entities.
    In this rule, FSA is revising regulations that affect both loan 
making and loan servicing. FSA does not expect these changes to impose 
any additional cost to the borrowers, and in fact, FSA expects some 
Government, borrower, and lender costs could be saved because:
     Third party appraisals could be used in some cases in 
which FSA currently has to pay for new appraisals that include the 
mineral's value in real estate appraisals.
     A waiver for some guaranteed loan appraisals will save 
lenders and guaranteed borrowers the expense of ordering new appraisals 
when it is not necessary to protect Government interests.
     FSA will allow the release of security for other credit or 
generational transfers when FSA is very well secured.
     Elimination of double-dipping and strengthening the 
oversight of the real estate entered into the Conservation Contract 
program will allow the Government to fairly compensate the owners of 
the valuable natural resources without the risk of losing usage 
restrictions which have been paid for by the taxpayers.
    Therefore, FSA certifies that this rule will not have a significant 
economic impact on a substantial number of small entities.

Environmental Review

    The environmental impacts of this final rule have been considered 
in a manner consistent with the provisions of the National 
Environmental Policy Act (NEPA, 42 U.S.C. 4321-4347), the regulations 
of the Council on Environmental Quality (40 CFR parts 1500-1508), and 
the FSA regulations for compliance with NEPA (7 CFR part 799 and 7 CFR 
part 1940, subpart G). FSA concluded that the changes to streamline the 
servicing process and give the borrower greater flexibility explained 
in this final 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 Farm Loan Program actions (7 CFR 1940.309). Therefore, 
FSA will not prepare an environmental impact statement on this final 
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 final rule has been reviewed in accordance with Executive 
Order 12988, ``Civil Justice Reform.'' This rule preempts State and 
local laws and regulations that are in conflict with this rule. Before 
any judicial action may be brought concerning the provisions of this 
rule the administrative appeal provisions of 7 CFR parts 11 and 780 
must be exhausted.

Executive Order 13132

    This rule has been reviewed under Executive Order 13132, 
``Federalism.'' The policies contained in this rule do not have any 
substantial direct effect on States, the relationship between the 
Federal government and the States, or 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.

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 policies contained in this rule do not impose 
substantial unreimbursed direct compliance costs on Indian Tribal 
governments or have Tribal implications that preempt Tribal law. USDA 
will undertake, within 6 months after this rule becomes effective, a 
series of regulation Tribal consultation sessions to gain input by 
Tribal officials concerning the impact of this rule on Tribal 
governments, communities, and individuals. These sessions will 
establish a baseline of consultation for future actions, should any 
become necessary, regarding this rule. Reports from these sessions for 
consultation will be made part of the USDA annual reporting on Tribal 
Consultation and Collaboration. USDA will respond in a timely and 
meaningful manner to all Tribal government requests for consultation 
concerning this rule and will provide additional venues, such as 
Webinars and teleconferences, to periodically host collaborative 
conversations with Tribal leaders and their representatives concerning 
ways to improve this rule in Indian country.

Unfunded Mandates

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA, Pub. L. 
1044) requires Federal agencies to assess the effects of their 
regulatory actions on State, local, or Tribal governments or the 
private sector. Agencies generally must prepare a written statement, 
including a cost benefit analysis, for final rule with Federal mandates 
that may result in expenditures of $100 million or more in any 1 year 
for State, local, or Tribal governments, in the aggregate, or to the 
private sector. UMRA generally requires agencies to consider 
alternatives and adopt the more cost effective or least burdensome 
alternative that achieves the objectives of the rule. This rule 
contains no Federal mandates under the regulatory provisions of Title 
II of the Unfunded Mandates Reform Act of 1995 (UMRA, Pub. L. 104-4) 
for State, local, or Tribal governments, or private sector. Therefore, 
this rule is not subject to the requirements of sections 202 and 205 of 
UMRA.

[[Page 65529]]

Paperwork Reduction Act

    The amendments to the regulations are either revisions of internal 
operations or modifications to existing responses that will have no net 
effect on paperwork burden. For example, the new requirement for 
documentation to permit the use of guaranteed loan appraisals over 12 
months old in certain situations is offset by waiving the requirement 
for a new appraisal in every situation where the current appraisal is 
more than 12 months old. These changes are associated with the 
information collection approved under OMB control number 0560-0155, 
which is in the process of being renewed; the renewal request includes 
these changes.
    The borrower certification regarding double dipping in the 
Conservation Contract is a statement on an existing form that does not 
add burden.
    Therefore, the amendments for 7 CFR parts 761, 762, 765, 766, and 
772 require no new or changes to the information collections currently 
approved by OMB control numbers of 0560-0155, 0560-0233, 0560-0236, 
0560-0237, 0560-0238 and 0560-0230.

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 other purposes.

Federal Assistance Programs

    The title and number of the Federal assistance programs, as found 
in the Catalog of Federal Domestic Assistance, to which this final rule 
would apply are:
    10.099 Conservation Loans;
    10.404 Emergency Loans;
    10.406 Farm Operating Loans;
    10.407 Farm Ownership Loans.

List of Subjects

7 CFR Part 761

    Accounting, Loan programs--agriculture, Rural areas.

7 CFR Part 762

    Agriculture, Banks, Banking, Credit, Loan programs--agriculture.

7 CFR Part 765

    Agriculture, Agricultural commodities, Credit, Livestock, Loan 
programs--agriculture.

7 CFR Part 766

    Agriculture, Agricultural commodities, Credit, Livestock, Loan 
programs--agriculture.

7 CFR Part 772

    Agriculture, Credit, Loan programs--agriculture, Rural areas.

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

PART 761--FARM LOAN PROGRAM; GENERAL PROGRAM ADMINISTRATION

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

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

Subpart A--General Provisions

0
2. In Sec.  761.2(b), revise the definitions of ``Agreement for the use 
of proceeds'' and ``Subordination'' to read as follows:


Sec.  761.2  Abbreviations and definitions.

* * * * *
    (b) * * * .
    Agreement for the use of proceeds is an agreement between the 
borrower and the Agency for each production cycle that reflects the 
proceeds from the sale of normal income security that will be used to 
pay scheduled FLP loan installments, including any past due 
installments, during the production cycle covered by the agreement.
* * * * *
    Subordination is a creditor's temporary relinquishment of all or a 
portion of its lien priority to another party providing the other party 
with a priority lien on the collateral.
* * * * *

0
3. Amend Sec.  761.7 by revising paragraph (b)(1) and adding paragraphs 
(b)(3) and (e) to read as follows:


Sec.  761.7  Appraisals.

* * * * *
    (b) * * *
    (1) Real estate appraisals, technical appraisal reviews and their 
respective forms must comply with the standards contained in USPAP, as 
well as applicable Agency regulations and procedures for the specific 
FLP activity involved. Applicable appraisal procedures and regulations 
are available for review in each Agency State Office.
* * * * *
    (3) For direct FO loans secured by real estate after December 23, 
1985, the appraisal must consider the value of oil, gas, and other 
minerals even if the minerals have no known or nominal value.
* * * * *
    (e) Appraisal appeals. Challenges to an appraisal used by the 
Agency are limited as follows:
    (1) When an applicant or borrower challenges a real estate 
appraisal used by the Agency for any loan making or loan servicing 
decision, except primary loan servicing decisions as specified in Sec.  
766.115 of this chapter, the issue for review is limited to whether the 
appraisal used by the Agency complies with USPAP. The applicant or 
borrower must submit a technical appraisal review prepared by a State 
Certified General Appraiser that will be used to determine whether the 
Agency's appraisal complies with USPAP. The applicant or borrower is 
responsible for obtaining and paying for the technical appraisal 
review.
    (2) When an applicant or borrower challenges a chattel appraisal 
used by the Agency for any loan making or loan servicing decision, 
except for primary loan servicing decisions as specified in Sec.  
766.115 of this chapter, the issue for review is limited to whether the 
appraisal used by the Agency is consistent with present market values 
of similar items in the area. The applicant or borrower must submit an 
independent appraisal that will be used to determine whether the 
appraisal is consistent with present market values of similar items in 
the area. The applicant or borrower is responsible for obtaining and 
paying for the independent appraisal.

Subpart C--Supervised Credit


Sec.  761.103  Amended

0
4. Amend Sec.  761.103 by removing paragraph (b)(8) and redesignating 
paragraphs (b)(9), (10), and (11) as paragraphs (b)(8), (9), and (10), 
respectively.

PART 762--GUARANTEED FARM LOANS

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

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


Sec.  762.120  Amended

0
6. Amend Sec.  762.120 as follows:
0
a. In paragraph (a)(2) introductory text, remove the phrase ``and 
ranch'';
0
b. In paragraphs (k)(3) and (l)(2), remove the phrase ``or ranching''; 
and
0
c. In paragraph (m), remove the phrase ``or ranchers''.


Sec.  762.121  Amended

0
7. In Sec.  762.121(a)(1)(v), remove the words ``and ranch''.
0
8. Revise Sec.  762.127 to read as follows:


Sec.  762.127  Appraisal requirements.

    (a) General. The general requirements for an appraisal are:
    (1) Value of collateral. The lender is responsible for ensuring 
that the value

[[Page 65530]]

of chattel and real estate pledged as collateral is sufficient to fully 
secure the guaranteed loan.
    (2) Additional security. The lender is not required to complete an 
appraisal or evaluation of collateral that will serve as additional 
security, but the lender must provide an estimated value.
    (3) Appraisal cost. Except for authorized liquidation expenses, the 
lender is responsible for all appraisal costs, which may be passed on 
to the borrower or transferee in the case of a transfer and assumption.
    (b) Chattel security. The requirements for chattel appraisals are:
    (1) Need for chattel appraisal. A current appraisal (not more than 
12 months old) of primary chattel security is required on all loans 
except loans or lines of credit for annual production purposes secured 
by crops, which require an appraisal only when the guarantee is 
requested late in the current production year and actual yields can be 
reasonably estimated. An appraisal is not required for loans of $50,000 
or less if a strong equity position exists.
    (2) Basis of value. The appraised value of chattel property will be 
based on public sales of the same or similar property in the market 
area. In the absence of such public sales, reputable publications 
reflecting market values may be used.
    (3) Appraisal form. Appraisal reports may be on the Agency's 
appraisal of chattel property form or on any other appraisal form 
containing at least the same information.
    (4) Experience and training. Chattel appraisals will be performed 
by appraisers who possess sufficient experience or training to 
establish market (not retail) values as determined by the Agency.
    (c) Real estate security. The requirements for real estate 
appraisals are:
    (1) Loans of $250,000 or less. The lender must document the value 
of the real estate by applying the same policies and procedures as 
their non-guaranteed loans.
    (2) Loans greater than $250,000. The lender must document the value 
of real estate using a current appraisal (not more than 12 months old) 
completed by a State Certified General Appraiser. Real estate 
appraisals must be completed in accordance with USPAP. Restricted 
reports as defined in USPAP are not acceptable. The Agency may allow an 
appraisal more than 12 months old to be used only if documentation 
provided by the lender reflects each of the following:
    (i) Market conditions have remained stable or improved based on 
sales of similar properties,
    (ii) The property in question remains in the same or better 
condition, and
    (iii) The value of the property has remained the same or increased.
    (3) Agency determinations under paragraph (c)(2) of this section to 
permit appraisals more than 12 months old are not appealable.


Sec.  762.145  Amended

0
9. In 7 CFR part 762, remove the citation ``Sec.  762.102(b)'', and add 
``Sec.  761.2(b) of this chapter'' in its place.


Sec.  762.146  Amended

0
10. In Sec.  762.146(b)(1) remove the text ``or ranching'' and in 
paragraphs (b)(6) and (e)(1), remove the citation ``Sec.  762.102(b)'' 
and add citation ``Sec.  761.2(b) of this chapter'' in its place.


Sec.  762.149  Amended

0
11. In Sec.  762.149(b)(1)(iii) introductory text, remove the citation 
``Sec.  762.102'' and add the citation ``Sec.  761.2(b) of this 
chapter'' in its place.


Sec.  762.150  Amended

0
12. In Sec.  762.150(b)(5) and (d)(2) remove the text ``and ranchers'' 
and add the citation ``Sec.  761.2(b) of this chapter'' in its place.

PART 765--DIRECT LOAN SERVICING--REGULAR

0
13. The authority citation for part 765 continues to read as follows:

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

Subpart E--Protecting the Agency's Security Interest

0
14. In Sec.  765.205, revise paragraphs (b), (c) introductory text, and 
(c)(1) to read as follows:


Sec.  765.205  Subordination of liens.

* * * * *
    (b) Subordination of real estate security. For loans secured by 
real estate, the Agency will approve a request for subordination 
subject to the following conditions:
    (1) If a lender requires that the Agency subordinate its lien 
position on the borrower's existing property in order for the borrower 
to acquire new property and the request meets the requirements in 
paragraph (b)(3) of this section, the request may be approved. The 
Agency will obtain a valid mortgage and the required lien position on 
the new property. The Agency will require title clearance and loan 
closing for the property in accordance with Sec.  764.402 of this 
chapter.
    (2) If the borrower is an entity and the Agency has taken real 
estate as additional security on property owned by a member, a 
subordination for any authorized loan purpose may be approved when it 
meets the requirements in paragraph (b)(3) of this section and it is 
needed for the entity member to finance a separate farming operation. 
The subordination must not cause the unpaid principal and interest on 
the FLP loan to exceed the value of loan security or otherwise 
adversely affect the security.
    (3) The Agency will approve a request for subordination of real 
estate to a creditor if:
    (i) The loan will be used for an authorized loan purpose or is to 
refinance a loan made for an authorized loan purpose by the Agency or 
another creditor;
    (ii) The credit is essential to the farming operation, and the 
borrower cannot obtain the credit without a subordination;
    (iii) The FLP loan is still adequately secured after the 
subordination, or the value of the loan security will be increased by 
an amount at least equal to the advance to be made under the 
subordination;
    (iv) Except as authorized by paragraph (c)(2) of this section, 
there is no other subordination outstanding with another lender in 
connection with the same security;
    (v) The subordination is limited to a specific amount;
    (vi) The loan made in conjunction with the subordination will be 
closed within a reasonable time and has a definite maturity date;
    (vii) If the loan is made in conjunction with a guaranteed loan, 
the guaranteed loan meets the requirements of Sec.  762.142(c) of this 
chapter;
    (viii) The borrower is not in default or will not be in default on 
FLP loans by the time the subordination closing is complete;
    (ix) The borrower can demonstrate, through a current farm operating 
plan, the ability to repay all debt payments scheduled, and to be 
scheduled, during the production cycle;
    (x) Except for CL, the borrower is unable to partially or fully 
graduate;
    (xi) The borrower must not be ineligible as a result of a 
conviction for controlled substances according to part 718 of this 
chapter;
    (xii) The borrower must not be ineligible due to disqualification 
resulting from Federal crop insurance violation according to part 718 
of this chapter;
    (xiii) The borrower will not use loan funds in a way that will 
contribute to

[[Page 65531]]

erosion of highly erodible land or conversion of wetlands as described 
in part 1940, subpart G of this title;
    (xiv) Any planned development of real estate security will be 
performed as directed by the lessor or creditor, as approved by the 
Agency, and will comply with the terms and conditions of Sec.  761.10 
of this chapter;
    (xv) If a borrower with an SAA mortgage is refinancing a loan held 
by a lender, subordination of the SAA mortgage may only be approved 
when the refinanced loan does not increase the amount of debt; and
    (xvi) In the case of a subordination of non-program loan security, 
the non-program loan security also secures a program loan with the same 
borrower.
    (4) The Agency will approve a request for subordination of real 
estate to a lessee if the conditions in paragraphs (b)(3)(viii) through 
(xvi) of this section are met.
    (c) Chattel security. The requirements for chattel subordinations 
are as follows:
    (1) For loans secured by chattel, the subordination must meet the 
conditions contained in paragraphs (b)(3)(i) through (xiii) of this 
section.
* * * * *

Subpart F--Required Use and Operation of Agency Security

0
15. Amend Sec.  765.252 as follows:
0
a. Revise paragraphs (a) heading and introductory text, (a)(1), (a)(2), 
(a)(4), (b)(1), and (b)(2); and
0
b. Add paragraphs (a)(5) and (b)(4).
    The revisions and additions read as follows:


Sec.  765.252  Lease of security.

    (a) Real estate surface leases. The borrower must request prior 
approval to lease the surface of real estate security. The Agency will 
approve requests provided the following conditions are met:
    (1) The lease will not adversely affect the Agency's security 
interest;
    (2) The term of consecutive leases for agricultural purposes does 
not exceed 3 years, or 5 years if the borrower and the lessee are 
related by blood or marriage. The term of surface leases for farm 
property no longer in use, such as old barns, or for nonfarm purposes, 
such as wind turbines, communication towers, or similar installations 
can be for any term;
* * * * *
    (4) The lease does not hinder the future operation or success of 
the farm, or, if the borrower has ceased to operate the farm, the 
requirements specified in Sec.  765.253 are met; and
    (5) The lease and any contracts or agreements in connection with 
the lease must be reviewed and approved by the Government.
    (b) * * *
    (1) For FO loans secured by real estate on or after December 23, 
1985, and loans other than FO loans secured by real estate and made 
from December 23, 1985, to November 1, 2013, the value of the mineral 
rights must have been included in the original appraisal in order for 
the Agency to obtain a security interest in any oil, gas, and other 
mineral associated with the real estate security.
    (2) For all other loans not covered by paragraph (b)(1) of this 
section, the Agency will obtain a security interest in any oil, gas, 
and other mineral on or under the real estate pledged as collateral in 
accordance with the applicable security agreement, regardless of 
whether such minerals were included in the original appraisal.
* * * * *
    (4) The term of the mineral lease is not limited.
* * * * *


Sec.  765.253  Amended

0
16. Amend Sec.  765.253 by removing paragraph (d) and redesignating 
paragraph (e) as paragraph (d).

Subpart G--Disposal of Chattel Security

0
17. Revise Sec.  765.301(a) to read as follows:


Sec.  765.301  General.

    (a) The borrower must account for all chattel security, and 
maintain records of dispositions of chattel security and the actual use 
of proceeds. The borrower must make these records available to the 
Agency upon request.
* * * * *

0
18. Amend Sec.  765.302 as follows:
0
a. Revise paragraph (a);
0
b. Remove paragraphs (b) and (h);
0
c. Redesignate paragraphs (c), (d), (e), (f) and (g) as paragraphs (b), 
(c), (d), (e) and (f), respectively; and;
0
d. Revise newly redesignated paragraphs (b) through (e).
    The revisions read as follows:


Sec.  765.302  Use and maintenance of the agreement for the use of 
proceeds.

    (a) The borrower and the Agency will execute an agreement for the 
use of proceeds.
    (b) The borrower must report any disposition of basic or normal 
income security to the Agency as specified in the agreement for the use 
of proceeds.
    (c) If a borrower wants to dispose of normal income security in a 
way different than provided by the agreement for the use of proceeds, 
the borrower must obtain the Agency's consent before the disposition 
unless all FLP payments planned on the agreement have been paid.
    (d) If the borrower sells normal income security to a purchaser not 
listed in the agreement for the use of proceeds, the borrower must 
immediately notify the Agency of what property has been sold and of the 
name and business address of the purchaser.
    (e) The borrower must provide the Agency with the necessary 
information to update the agreement for the use of proceeds.
* * * * *

0
19. Amend Sec.  765.305 by adding paragraph (c) to read as follows:


Sec.  765.305  Release of security interest.

* * * * *
    (c) The Agency will release its lien on chattel security without 
compensation, upon borrower request provided:
    (1) The borrower has not received primary loan servicing or 
Disaster Set-Aside within the last 3 years;
    (2) The borrower will retain the security and use it as collateral 
for other credit, including partial graduation as specified in Sec.  
765.101;
    (3) The security margin on each FLP direct loan will be 150 percent 
or more after the release. The value of the retained and released 
security will normally be based on appraisals obtained as specified in 
Sec.  761.7 of this chapter; however, well documented recent sales of 
similar properties can be used if the Agency determines a supportable 
decision can be made without current appraisals;
    (4) The release is approved by the FSA State Executive Director; 
and
    (5) Except for CL, the borrower is unable to fully graduate as 
specified in Sec.  765.101.

Subpart H--Partial Release of Real Estate Security

0
20. Amend Sec.  765.351 as follows:
0
a. Revise paragraph (a)(3);
0
b. Remove paragraph (a)(4) and redesignate paragraphs (a)(5) through 
(a)(10) as (a)(4) through (a)(9), respectively;
0
c. Revise paragraph (b)(1)(ii);
0
d. Remove paragraph (b)(1)(iii); and
0
e. Add paragraph (f).
    The revisions and additions read as follows:


Sec.  765.351  Requirements to obtain Agency consent.

* * * * *
    (a) * * *
    (3) Except for releases in paragraph (f) of this section, the 
amount received by

[[Page 65532]]

the borrower for the security being disposed of, or the rights being 
granted, is not less than the market value and will be remitted to the 
lienholders in the order of lien priority;
* * * * *
    (b) * * *
    (1) * * *
    (ii) When the Agency has a security interest in oil, gas, or other 
minerals as provided by Sec.  765.252(b), the sale of such products 
will be considered a disposition of a portion of the security by the 
Agency.
* * * * *
    (f) Release without compensation. Real estate security may be 
released by FSA without compensation when the requirements of paragraph 
(a) of this section, except paragraph (a)(3) of this section, are met, 
and:
    (1) The borrower has not received primary loan servicing or 
Disaster Set-Aside within the last 3 years;
    (2) The security is:
    (i) To be retained by the borrower and used as collateral for other 
credit, including partial graduation as specified in Sec.  765.101; or
    (ii) No more than 10 acres, or the minimum size that meets all 
State and local requirements for a division into a separate legal lot, 
whichever is greater, and is transferred without compensation to a 
person who is related to the borrower by blood or marriage.
    (3) The property released will not interfere with access to or 
operation of the remaining farm;
    (4) Essential buildings and facilities will not be released if they 
reduce the utility or marketability of the remaining property;
    (5) Any issues arising due to legal descriptions, surveys, 
environmental concerns, utilities are the borrower's responsibility and 
no costs or fees will be paid by FSA;
    (6) The security margin on each FLP direct loan will be above 150 
percent after the release. The value of the retained and released 
security will normally be based on appraisals obtained as specified in 
Sec.  761.7 of this chapter; however, well documented recent sales of 
similar properties can be used if the Agency determines the criteria 
have been met and a sound decision can be made without current 
appraisals;
    (7) The release is approved by the FSA State Executive Director; 
and
    (8) Except for CL, the borrower is unable to fully graduate as 
specified in Sec.  765.101.

PART 766--DIRECT LOAN SERVICING--SPECIAL

0
21. The authority citation for part 766 continues to read as follows:

    Authority: 5 U.S.C. 301, 7 U.S.C. 1989, and 1981d(c).

Subpart C--Loan Servicing Programs

0
22. Amend Sec.  766.110 as follows:
0
a. Revise paragraphs (a)(6), (b)(2)(vi), (c) introductory text, and 
(c)(3);
0
b. Add paragraphs (c)(4) through (7);
0
c. Revise paragraph (e);
0
d. Amend paragraph (f), second sentence, by adding the word ``best'' 
immediately before the word ``interest''; and
0
c. Add paragraphs (m) and (n).
    The revisions and additions read as follows:


Sec.  766.110  Conservation Contract.

    (a) * * *
    (6) Only loans secured by the real estate that will be subject to 
the Conservation Contract may be considered for debt reduction under 
this section.
    (b) * * *
    (2) * * *
    (vi) Buffer areas necessary for the adequate protection of proposed 
Conservation Contract areas, or other areas enrolled in other 
conservation programs;
* * * * *
    (c) Unsuitable acreage. Notwithstanding paragraph (b) of this 
section, acreage is unsuitable for a Conservation Contract if:
* * * * *
    (3) The Conservation Contract review team determines that the land 
does not provide measurable conservation, wildlife, or recreational 
benefits;
    (4) There would be a duplication of benefits as determined by the 
Conservation Contract review team because the acreage is encumbered 
under another Federal, State, or local government program for which the 
borrower has been or is being compensated for conservation, wildlife, 
or recreation benefits;
    (5) The acreage subject to the proposed Conservation Contract is 
encumbered under a Federal, State, or local government cost share 
program that is inconsistent with the purposes of the proposed 
Conservation Contract, or the required practices of the cost share 
program are not identified in the conservation management plan;
    (6) The tract does not contain a legal right of way or other 
permanent access for the term of the contract that can be used by the 
Agency or its designee to carry out the contract; or
    (7) The tract, including any buffer areas, to be included in a 
Conservation Contract is less than 10 acres.
* * * * *
    (e) Conservation management plan. The Agency, with the 
recommendations of the Conservation Contract review team, is 
responsible for developing a conservation management plan. The 
conservation management plan will address the following:
    (1) The acres of eligible land and the approximate boundaries, and
    (2) A description of the conservation, wildlife, or recreation 
benefits to be realized.
* * * * *
    (m) Subordination. For real estate with a Conservation Contract:
    (1) Subordination will be required for all liens that are in a 
prior lien position to the Conservation Contract.
    (2) The Agency will not subordinate Conservation Contracts to liens 
of other lenders or other Governmental entities.
    (n) Breach of Conservation Contract. If the borrower or a 
subsequent owner of the land under the Conservation Contract fails to 
comply with any of its provisions, the Agency will declare the 
Conservation Contract breached. If the Conservation Contract is 
breached, the borrower or subsequent owner of the land must restore the 
land to be in compliance with the Conservation Contract and all terms 
of the conservation management plan within 90 days. If this cure is not 
completed, the Agency will take the following actions:
    (1) For borrowers who have or had a loan in which debt was 
exchanged for the Conservation Contract and breach the Conservation 
Contract, the Agency may reinstate the debt that was cancelled, plus 
interest to the date of payment at the rate of interest in the 
promissory note, and assess liquidated damages in the amount of 25 
percent of the debt cancelled, plus any actual expenses incurred by the 
Agency in enforcing the terms of the Conservation Contract. The 
borrower's account will be considered in non-monetary default; and
    (2) Subsequent landowners who breach the Conservation Contract must 
pay the Agency the amount of the debt cancelled when the contract was 
executed, plus interest at the non-program interest rate to the date of 
payment, plus liquidated damages in the amount of 25 percent of the 
cancelled debt, plus any actual expenses incurred by the Agency in 
enforcing the terms of the Conservation Contract.

0
23. Revise Sec.  766.115(a)(1) and (b) to read as follows:

[[Page 65533]]

Sec.  766.115  Challenging the agency appraisal.

    (a) * * *
    (1) Obtain a USPAP compliant technical appraisal review prepared by 
a State Certified General Appraiser of the Agency's appraisal and 
provide it to the Agency prior to reconsideration or the appeal 
hearing;
* * * * *
    (b) If the appraised value of the borrower's assets change as a 
result of the challenge, the Agency will reconsider its previous 
primary loan servicing decision using the new appraisal value.
* * * * *

0
24. Revise appendix A to subpart C to read as follows:

Appendix A to Subpart C of Part 766--FSA-2512, Notice of Availability 
of Loan Servicing to Borrowers Who Are Current, Financially Distressed, 
or Less Than 90 Days Past Due

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[[Page 65534]]


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[[Page 65536]]


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PART 772--SERVICING MINOR PROGRAM LOANS

0
25. The authority citation for part 772 continues to read as follows:

    Authority:  5 U.S.C. 301, 7 U.S.C. 1989, and 25 U.S.C. 490.


Sec.  772.5  [Amended]

0
26. Amend Sec.  772.5 as follows:
0
a. In paragraph (c)(1), remove the reference ``7 part 1962, subpart A'' 
and add the reference ``part 765 of this chapter'' in its place; and
0
b. In paragraph (c)(3), remove the reference ``7 CFR part 1965, subpart 
A'' and add the reference ``part 765 of this chapter'' in its place.
0
27. Revise Sec.  772.8(b) to read as follows:


Sec.  772.8  Sale or exchange of security property.

* * * * *
    (b) For IMP loans, a sale or exchange of real estate or chattel 
that is serving as security must be done as specified in part 765 of 
this chapter.

    Signed on August 27, 2013.
Juan M. Garcia,
Administrator, Farm Service Agency.
[FR Doc. 2013-25836 Filed 10-31-13; 8:45 am]
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