While authorized by regulation, Congress has not appropriated IA funds for guaranteed FO's and existing guaranteed OL's since the implementation of the Federal Credit Reform Act of 1990 (2 U.S.C. 661 et. seq.) that became effective beginning in fiscal year 1992. As a result, IA funding has only been available for new OL's or the continuation of IA during the authorized period on loans when IA was granted at the time of initial loan approval. Therefore, in an effort to align the regulations with current practices under appropriations law, the proposed rule will revise its regulations to limit IA to new guaranteed OL's only.

Debt to Asset Ratio

Existing regulation, 7 CFR 762.150, provides for IA based simply on cash flow. However, program reviews by the Agency have found that some borrowers who receive IA have a significant net worth, with adequate financial strength that would allow them to restructure their balance sheet to meet their credit
[[Page 36057]]
needs without receiving IA. This rule proposes that IA be limited to applicants who possess a debt to asset ratio in excess of 50 percent prior to the new loan. We propose to set this limit at 50 percent because onethird of the existing guaranteed portfolio has a debt to asset ratio of 50 percent or greater and approximately onethird of the guaranteed operating loans receive IA. Additionally, a 50 percent debt to asset ratio is the most common capital standard used by the Agency's preferred lenders.

Maximum Assistance Period

Existing regulations limit IA for each borrower to a maximum of 10 years from the date of the first IA agreement signed by the loan applicant, including entity members, or the outstanding term of the loan, whichever is less. The proposed rule would limit each borrower to a total of 5 consecutive years of IA eligibility, regardless of the number of loans received. New agreements may not extend beyond 5 consecutive years from the date of the initial agreement signed by the loan applicant or the term of the loan, whichever is less. The term of subsequent agreements would be reduced by the period of time any existing or previous IA agreement has been in effect. The intent of the program is to provide temporary relief. By reducing the number of years an individual borrower may receive IA, the Agency would significantly reduce its cost per borrower. The Agency feels that a term of 5 years is adequate for a farm operation to achieve or return to a level of profitability that is sufficient to sustain the operation without an interest subsidy. Therefore, reducing the current maximum assistance period from 10 years to 5 years realigns the program to meet its original intent.

The Agency realizes that some existing borrowers need some time to prepare for the reduced period of eligibility. Therefore, we propose to provide for a transition rule which will give any borrower at least two more years of eligibility after publication of the final rule as long as the total period does not exceed ten years from the effective date of the original IA agreement.

Maximum Interest Assistance Payment

This rule proposes that the maximum amount of debt on which an applicant may receive IA be limited to $400,000. This will effectively limit the amount of loan principal that may be subsidized, regardless of whether it is in one loan or multiple loans, to a maximum of $400,000. Currently, the maximum guaranteed loan that can be approved is $782,000, and IA is available on that entire amount. In recent fiscal years, IA funds have been depleted early in the year, and the number of larger loans receiving the subsidy contributed to this rapid depletion. Since the IA program is the most expensive of the Agency's guaranteed farm loan programs, limits are proposed to control costs and target funds to a larger number of eligible borrowers. Also, by capping the amount of debt on which an applicant is eligible to receive IA, the subsidy would be targeted to borrowers with the most need, and appropriated subsidized loan funds will be available for more farmers and ranchers. Had this change been in effect in fiscal year 2002, only 8 percent of the borrowers who received IA would have been affected; however, they received over 23 percent of the IA obligated. With the other changes in this proposed rule, it is still expected that all available funds will be utilized; however, this change will allow these limited funds to help more farmers and ranchers.

Guarantee Fees

This rule proposes that loans with IA be charged a guarantee fee. The current regulation, 7 CFR 762.130(d), waives the fee for loans with IA; this rule proposes to delete that language. The Agency is concerned that not charging a fee on loans with IA creates an unanticipated incentive for lenders to request IA. Reinstating the guarantee fee is expected to reduce potential abuse, and result in requests being submitted mainly by those with a legitimate need for the subsidy. This would also reduce the cost of the IA program to the Agency. The Agency will continue to waive the guarantee fee under that regulation for those loans used mainly to refinance an Agency direct loan and loans to beginning farmers or ranchers involved in the direct beginning farmer downpayment program.

Reduced Application Requirements

The existing regulation, 7 CFR 762.150, requires lenders to submit a completed IA needs analysis in addition to those items required for a loan without IA. In addition, requests for IA on lines of credit or loans made for annual operating purposes must also be accompanied by a projected monthly cash flow budget. Further, requests for IA for loans with unequal payments require that the lender submit a debt repayment schedule which shows scheduled payments for the subject loan in each of the remaining years of the loan. We have determined that these additional documents are not necessary to make the evaluation, and are a significant burden on program participants and need not be required. Therefore, the proposed rule will require all lenders to submit the appropriate items required for a loan application, plus an IA needs analysis. The proposed rule will not require the submission of a monthly cash flow budget or a debt repayment schedule.

Removal of Annual Review Requirements

This rule proposes to reduce the submission requirements for annual claims for IA payment. In order to receive an IA subsidy payment, and to continue the Agency's obligation to pay the subsidy in the following year, current regulations require lenders to submit a long list of items each year, including:

This list of requirements is excessively burdensome and has resulted in delays and confusion in the handling of subsidized loans. In addition, these requirements are the subject of the majority of complaints received from lenders, loan applicants, and FSA field staff about the program. Agency records indicate that 93 percent of the borrowers operating under an IA agreement receive the subsidy payment every year, regardless of the long list of qualifying requirements imposed on them every year. Clearly, the significant administrative burden imposed on the public and Agency to determine whether the borrower requires a subsidy payment each year is not cost effective. In addition, while all of the funding has been utilized nationally each year, this excessive burden creates an unbalanced program as it discourages many lenders from participating in the program at all. Twelve states have less than five IA
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loans on their books. This indicates the program is basically unavailable to farmers that may need assistance in these areas.

In this rule it is proposed that IA will simply be authorized for 5 years for the borrower from the date of the first IA agreement. If the loan is for less than 5 years, however, IA will be approved for the term of the loan. The term of an IA agreement on subsequent loans will be limited to 5 years from the date of the first IA agreement. IA will be approved at the initial loan closing and will be renewed each year on a designated date, expected to generally be the payment due date or loan anniversary date. The lender only will be required to submit:

This will greatly reduce the paperwork associated with IA loans. The amount of subsidy will change each year consistent with, and only to the extent that, the principal balance of the loan changes. Fees Charged by Lenders for IA Claims Submission

Agency reviews of lenders indicate that some lenders charge fees to the borrower for the preparation of documentation and claims for payment of IA that are submitted to FSA. The range of fees charged by lenders varies substantially from modest document preparation fees to significant charges for loan analysis and preparation of cash flows, balance sheets, and needs tests. Since the analysis activities and requirements for cash flows, balance sheets, and recurring annual needs tests in connection with IA are being eliminated, fees for such activities involved with IA loans will no longer be appropriate. Further, in keeping with the intention of providing assistance to economically impacted borrowers and to ensure consistent treatment of all borrowers, the charging of fees for the annual submission of IA claims by lenders is prohibited under the proposed rule.

First and Final Claims

Existing regulations require final IA claims to be submitted concurrently with the submission of any estimated loss claims. The proposed rule will require, upon liquidation of a loan, that the lender complete the Request for Interest Assistance and submit it to the Agency concurrently with any estimated or final loss claims. IA will be calculated through the date that interest accrual ceases in the case of an estimated loss claim, or a final loss claim when it is not preceded by an estimated loss claim.

IA claim periods for most installments are required to be exactly 12 months. This rule maintains current requirements providing that IA claims for final payments be calculated based on the average daily principal loan balance, prorated over the number of days the loan has actually been outstanding during the payment period. The period for all other claims must be for a period not exceeding 12 months.

Servicing

The new 7 CFR 762.150(d) clarifies procedures for when a loan subject to IA may be transferred, discontinuation of IA in the event of a loan writedown, and when interest on a loan covered by an IA Agreement is reduced by court order in a bankruptcy reorganization.

This rule proposes to consolidate the provisions governing the handling of loans with IA regarding transfers and assumptions, consolidations, and writedowns to one paragraph for clarification purposes.

The rescheduling and deferral provisions in the existing regulations also are proposed to be revised regarding the obligation of additional years of IA and increases in the restructured loan amount. The proposed rule will allow the rescheduling of loans subject to IA; however, the IA will not be extended beyond 5 years from the date of the first IA agreement, nor will the amount of principal subject to IA be increased above that approved on the existing agreement. Thus, the restructured loan amount, including any interest capitalized, may not exceed the original loan amount. Interest on the loan to be restructured that cannot be paid or capitalized under this amount will have to be dealt with in another manner. This change is in keeping with the Agency's objective for IA to be reasonably limited in duration and amount to place the borrower on sound enough financial footing to meet their obligations without the need for continued subsidy.

Miscellaneous Changes

Existing regulations contain outdated references to forms and internal administrative processes to be completed for IA loans. This rule proposes the use of FSA forms, and clarifies what process is necessary for the borrower to receive IA on multiple loans. Internal processes are removed, and the organizational structure of the section is revised for clarity and readability.

List of Subjects in 7 CFR Part 762

Agriculture, Banks, Banking, Credit, Loan programs.

For the reasons stated in the preamble, the Farm Service Agency proposes to amend Chapter VII, as set forth below:

PART 762GUARANTEED FARM LOANS

1. The authority citation continues to read as follows:

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

Sec. 762.130 [Amended]

2. Amend Sec. 762.130 by removing paragraph (d)(4)(iii)(A) and redesignating paragraphs (d)(4)(iii)(B) and (C) as (d)(4)(iii)(A) and (B).

3. Revise Sec. 762.145(b)(2)(i) and the first sentence of (b)(8). Sec. 762.145 Restructuring guaranteed loans.
* * * * *
(b) * * *
(2) * * *
(i) A feasible plan as defined in Sec. 762.102(b).
* * * * *
(8) Any holder agrees to any changes in the original loan terms. * * *
* * * * *

4. Revise Sec. 762.150 to read as follows:
Sec. 762.150 Interest Assistance program.
(a) Requests for interest assistance. In addition to the loan application items required by Sec. 762.110, to apply for Interest Assistance the lender's cash flow budget for the guaranteed loan applicant must reflect the need for Interest Assistance and the ability to cash flow with the subsidy. Interest Assistance is available only on new guaranteed OL's.
(b) Requirements. (1) Eligibility. The lender must document that the following conditions have been met for the loan applicant to be eligible for Interest Assistance:
(i) A feasible plan cannot be achieved without Interest Assistance, but can be achieved with Interest Assistance.
(ii) If significant changes in the borrower's cash flow budget are anticipated after the initial 12 months, then the typical cash flow budget must demonstrate that the borrower will still have a feasible plan following the anticipated changes, with or without Interest Assistance.
(iii) The typical cash flow budget must demonstrate that the borrower will have a feasible plan throughout the term of the loan. (iv) The borrower, including members of an entity borrower, does not own any significant assets that do not contribute
[[Page 36059]]
directly to essential family living or farm operations. The lender must determine the market value of any such nonessential assets and prepare a cash flow budget and Interest Assistance calculations based on the assumption that these assets will be sold and the market value proceeds used for debt reduction. If a feasible plan can then be achieved, the borrower is not eligible for Interest Assistance.
(v) Debt to Asset Ratio. A borrower may only receive Interest Assistance if their total debts (including personal debts) prior to the new loan exceed 50 percent of their total assets (including personal assets). An entity's debt to asset ratio will be based upon a financial statement that consolidates business and personal debts and assets of the entity and its members.
(2) Maximum Assistance. The maximum total guaranteed farm debt on which a borrower can receive Interest Assistance in any year of borrower eligibility is $400,000, regardless of the number of guaranteed loans outstanding.
(3) Maximum time for which Interest Assistance is available. (i) General rule. A borrower may only receive Interest Assistance for one 5year period. The term of any Interest Assistance agreement executed under this section shall not exceed 5 consecutive years from the date of the initial agreement signed by the loan applicant, including entity members, or the outstanding term of the loan, whichever is less. This is a lifetime limit.
(ii) Transition rule. Notwithstanding the general 5year limitation of paragraph (b)(3)(i) of this section, a new Interest Assistance agreement may be approved for eligible borrowers to provide interest assistance through (2 YEARS FROM THE DATE OF PUBLICATION OF THE FINAL RULE IN THE Federal Register), provided the total period does not exceed 10 years from the effective date of the original Interest Assistance agreement.
(4) Multiple loans. Interest Assistance can be applied to each loan, only to one loan or any distribution the lender selects; however, Interest Assistance is only available on as many loans as necessary, up to a maximum of $400,000 guaranteed OL debt, to achieve a feasible plan.
(5) Terms. The typical term of scheduled loan repayment will not be reduced solely for the purpose of maximizing eligibility for Interest Assistance. A loan must be scheduled over the maximum term typically used by lenders for similar type loans within the limits in Sec. 762.124. An OL for the purpose of providing annual operating and family living expenses will be scheduled for repayment when the income is scheduled to be received from the sale of the crops, livestock, and/or livestock products which will serve as security for the loan. OL for purposes other than annual operating and family living expenses (i.e. purchase of equipment or livestock, or refinancing existing debt) will be scheduled over 7 years from the effective date of the proposed Interest Assistance agreement, or the life of the security, whichever is less.
(6) Rate of interest. The lender may charge a fixed or variable interest rate, but not in excess of what the lender charges its average farm customer.
(7) Agreement. The lender and borrower must execute an Interest Assistance agreement as prescribed by the Agency.
(c) Interest Assistance claims and payments. To receive an Interest Assistance payment, the lender must prepare and submit a claim on the appropriate Agency form. The following conditions apply:
(1) Rate. Interest Assistance payments will be four (4) percent of the average daily principal loan balance prorated over the number of days the loan has been outstanding during the payment period. However, for loans with a note rate less than four (4) percent, Interest Assistance payments will be the weighted average interest rate multiplied by the average daily principal balance.
(2) Date of claim. The lender may select at the time of loan closing, the date that they wish to receive an Interest Assistance payment and that date will be included in the Interest Assistance agreement. The initial and final claims submitted under an agreement may be for a period less than 12 months. All other claims will be submitted for a 12 month period, unless there is a loan rescheduling or lender substitution during the 12 month period in accordance with this section.
(3) Claims. A claim should be filed within 60 days of its due date. Claims not filed within 1 year from the due date will not be paid, and the amount due the lender will be permanently forfeited.
(4) Calculations. All claims will be supported by detailed calculations of average daily principal balances during the claim period.
(5) Prohibition of claim preparation fees. Lenders may not charge or cause a borrower with an Interest Assistance agreement to be charged a fee for preparation and submission of the items required for an annual Interest Assistance claim.
(d) Transfer, consolidation and writedown. Loans covered by Interest Assistance agreements cannot be consolidated. Such loans can be transferred only when the transferee was liable for the debt on the effective date of the Interest Assistance agreement. Interest Assistance will be discontinued as of the date of any writedown on a loan covered by an Interest Assistance agreement.
(e) Rescheduling and deferral. When a borrower defaults on a loan with Interest Assistance, or the loan otherwise requires rescheduling or deferral, the Interest Assistance agreement will remain in effect for that loan at its existing terms. The lender may reschedule the loan in accordance with Sec. 762.145, if the capitalized interest does not cause the principal amount of the loan to be above the principal amount on the original Interest Assistance agreement. A claim for Interest Assistance through the effective date of the rescheduling will be submitted by the lender to be processed at the time of the rescheduling action.
(f) Bankruptcy. In cases where the interest on a loan covered by an Interest Assistance agreement is reduced by court order in a reorganization plan under the bankruptcy code, Interest Assistance will be terminated effective on the date of the court order. Guaranteed loans which have had their interest reduced by bankruptcy court order are not eligible to receive Interest Assistance.
(g) Termination of Interest Assistance payments. Interest Assistance payments will cease upon termination of the loan guarantee, upon reaching the expiration date contained in the agreement, or upon cancellation by the Agency under the terms of the Interest Assistance agreement. In addition, for loan guarantees sold into the secondary market, Agency purchase of the guaranteed portion of a loan will terminate the Interest Assistance.
(h) Excessive Interest Assistance. Upon written notice to the lender, borrower and any holder, the Agency may amend or cancel the Interest Assistance agreement and collect from the lender any amount of Interest Assistance granted which resulted from incomplete or inaccurate information, an error in computation, or any other reason which resulted in payment that the lender was not entitled to receive. (i) Substitution. If there is a substitution of lender, the original lender will prepare and submit to the Agency a claim for its final Interest Assistance payment calculated through the effective date of the substitution. This final claim will be submitted for [[Page 36060]]
processing at the time of the substitution.
(1) Interest Assistance will continue automatically with the new lender.
(2) The new lender must follow paragraph (c) of this section to receive their initial and subsequent IA payments.

Signed in Washington, DC, on June 16, 2005.
James R. Little,
Administrator.
[FR Doc. 0512316 Filed 62105; 8:45 am]
BILLING CODE 341005P

FOR FURTHER INFORMATION CONTACT

Tracy L. Jones, Senior Loan Officer, Farm Service Agency; telephone: (202) 7203889; facsimile: (202) 720 6797; Email: Tracy.Jones@wdc.usda.gov Persons with disabilities who require alternative means for communication (Braille, large print, audio tape, etc.) should contact the USDA Target Center at (202) 720 2600 (voice and TDD). All comments and supporting documents on this rule may be viewed by contacting the information contact. All comments received, including names and addresses, will become a matter of public record. Comments on the information collection requirements of this rule must be sent to the addresses listed in the Paperwork Reduction Act section of this rule.