Type: FCA Regulation
PART 617 - BORROWER RIGHTS
Subpart E - Distressed Loan Restructuring; State Agricultural Loan Mediation Programs
§ 617.7415 How does a qualified lender decide to restructure a loan?
(a) What criteria does a qualified lender use to evaluate an application for restructuring? The qualified lender should consider the following:
(1) Whether the cost to the lender of restructuring the loan is equal to or less than the cost of foreclosure, considering all relevant criteria. These criteria include:
(i) The present value of interest and principal foregone by the lender in carrying out the application for restructuring;
(ii) Reasonable and necessary administrative expenses involved in working with the borrower to finalize and implement the application for restructuring;
(iii) Whether the borrower’s application for restructuring included a preliminary restructuring plan and cash flow analysis, taking into account income from all sources to be applied to the debt and all assets to be pledged, that show a reasonable probability that orderly debt retirement will occur as a result of the proposed restructuring; and
(iv) Whether the borrower has furnished, or is willing to furnish, complete and current financial statements in a form acceptable to the qualified lender.
(2) Whether the borrower is applying all income over and above necessary and reasonable living and operating expenses to the payment of primary obligations;
(3) Whether the borrower has the financial capacity and the management skills to protect the collateral from diversion, dissipation, or deterioration;
(4) Whether the borrower is capable of working out existing financial difficulties, taking into consideration any prior restructuring of the loan, reestablishing a viable operation, and repaying the loan on a rescheduled basis; and
(5) In the case of a distressed loan that is not delinquent, whether restructuring consistent with sound lending practices may be taken to reasonably ensure that the loan will not have to be placed into non-interest-earning status in the future.
(b) What should be included in determining the cost of foreclosure?
(1) The difference between the outstanding balance due, as provided by the loan documents, and the liquidation value of the loan, taking into consideration the borrower’s repayment capacity and the liquidation value of the collateral used to secure the loan;
(2) The estimated cost of maintaining a loan classified as a high-risk asset;
(3) The estimated cost of administrative and legal actions necessary to foreclose a loan and dispose of property acquired as the result of the foreclosure, including attorneys’ fees and court costs;
(4) The estimated cost of value changes in collateral used to secure a loan during the period beginning on the date of the initiation of an action to foreclose or liquidate the loan and ending on the date of the disposition of the collateral; and
(5) All other costs incurred as the result of the foreclosure or liquidation of a loan.
(c) What should the qualified lender do if the borrower and the qualified lender cannot agree on the financial projections used in the application for restructuring? If the borrower and lender are not able to agree on supportable or realistic financial projections, the lender may use benchmarks to determine the operational input costs and chattel security values. These benchmarks may include, but are not limited to, the borrower’s 5-year production average; averages in the county where the farming operation is located, based on data from United States Department of Agriculture, local colleges or universities, or other recognized authority; and other such reasonable sources.
(d) How does the qualified lender decide whether to restructure or foreclose? If a qualified lender determines the potential cost to the lender of restructuring the loan as proposed in the application for restructuring is less than or equal to the potential cost of foreclosure, the qualified lender must restructure the loan. If two or more restructuring alternatives are available, the qualified lender must restructure the loan using the alternative that results in the least cost to the lender.
(e) What documentation should the qualified lender retain? In the event that an application for restructuring is denied, a qualified lender must maintain sufficient documentation to demonstrate compliance with paragraphs (a), (b), and (c) of this section, as applicable.
[69 FR 10910, Mar. 9, 2004]
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