Title: FINAL RULE--Loan Policies and Operations--12 CFR Part 614
Issue Date: 11/29/1993
Agency: FCA
Federal Register Cite: 58 FR 62513
___________________________________________________________________________
FARM CREDIT ADMINISTRATION

12 CFR Part 614

RIN 3052-AB46

Loan Policies and Operations


ACTION: Final rule.

[*62513]

SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit Administration Board (Board), adopts a final rule amending the regulation regarding the content of borrower rights notices for distressed loans. The FCA has learned that the foreclosure language requirement may unnecessarily offend borrowers. Therefore, the regulation will no longer require that Farm Credit System (System) institutions include a reference to foreclosure when notifying borrowers that their distressed loans may be suitable for restructuring.

EFFECTIVE DATE: The regulation shall become effective upon expiration of 30 days after publication in the Federal Register during which either or both Houses of Congress are in session. Notice of the effective date will be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT:

Eric Howard, Policy Analyst, Office of Examination, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4498,

or

James M. Morris, Senior Attorney, Office of General Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION:

Background

The Agricultural Credit Act of 1987 (Pub. L. 100-233) enacted on January 6, 1988, amended the Farm Credit Act of 1971 (Act) to establish additional borrower rights. Final regulations on borrower rights (12 CFR parts 614, 615, and 618) were published on September 14, 1988 (54 FR 35427), and became effective on October 14, 1988. Section 614.4516 required that the lender notify a borrower that its loan is or has become a "distressed loan" as defined in the Act, and may be suitable for restructuring. On the determination that a loan is or has become distressed, the regulation also required that the lender notify the borrower that the alternative to restructuring may be foreclosure.

The FCA learned that the foreclosure language requirement could unnecessarily offend borrowers. The FCA now believes that the reference to "foreclosure" should be optional and is amending 614.4516 to allow qualified lenders latitude in the timing of the foreclosure notification. Borrowers with distressed loans will still receive adequate warning of the possibility of foreclosure, since 614.4519(a) requires that a qualified lender notify the borrower, not later than 45 days before commencing foreclosure proceedings, that the alternative to restructuring may be foreclosure.

Comment Received

On July 15, 1993, a proposed regulation incorporating this change was published in the Federal Register (58 FR 38091). One comment was received on the proposed regulation [*62514] from a State department of agriculture. The commentor requested that the FCA continue to require that institutions inform a borrower, in the initial notice that a loan is distressed, that the alternative to restructuring may be foreclosure. The commentor was concerned that some borrowers might disregard the importance of the distressed loan notice if the foreclosure language were not included. It is true that the regulations will no longer mandate that every distressed loan notice under 614.4516 contain a reference to the possibility of foreclosure. However, the amendment will not shorten the time that must elapse after a borrower has been notified of the foreclosure option before foreclosure proceedings can be initiated. Section 614.4519(a) still requires that a qualified lender notify the borrower that the alternative to restructuring may be foreclosure at least 45 days before commencing foreclosure proceedings. Therefore, the FCA believes that existing regulations will continue to ensure that borrowers receive adequate warning of the possibility of foreclosure.

The commentor also suggested that the FCA require System institutions to include the distressed loan policy and an application for restructuring with the notice. Section 614.4516(a)(1) and (2) presently requires that a qualified lender include with the notification the lender's distressed loan policy and all materials needed in order to submit a restructuring application. The commentor also suggested that, in order to "reduce the potential for offending borrowers," the notice should detail what a borrower can do to avoid foreclosure, e.g., pay the account current within a specified period of time. Because 614.4516 will no longer require mention of foreclosure, it is not necessary to mitigate the offensiveness of the reference to foreclosure. More importantly, although a borrower may generally have the ability to stop foreclosure by paying the account current, the options available to a borrower with a distressed loan vary from state to state and depend largely on the individual circumstances of the borrower. The borrower may, in fact, have options that are more favorable than paying the account current. Special legal expertise is needed in order to properly advise such borrowers. FCA does not believe that 614.4516 should be amended to put the lending institution in the position of rendering legal advice to borrowers with distressed loans. Nor would such borrowers be well served by regulations that, by requiring lenders to provide certain minimal advice, give the borrowers a false sense that they have been informed of the best available options. Borrowers with distressed loans should obtain their own legal advice rather than relying on the lending institution for such advice. Therefore, the commentor's suggestions were not incorporated in the final regulation.

List of Subjects in 12 CFR Part 614

Agriculture, Banks, banking, Foreign trade, Reporting and recordkeeping requirements, Rural areas.

For the reasons stated in the preamble, part 614 of chapter VI, title 12 of the Code of Federal Regulations is amended to read as follows:

PART 614-LOAN POLICIES AND OPERATIONS

1. The authority citation for part 614 continues to read as follows:

Authority: Secs. 1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12, 2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A, 4.13, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.19, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.7, 7.8, 7.12, 7.13, 8.0, 8.5 of the Farm Credit Act; 12 U.S.C. 2011, 2013, 2014, 2015, 2017, 2018, 2071, 2073, 2074, 2075, 2091, 2093, 2094, 2096, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183, 2184, 2199, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2207, 2219a, 2219b, 2243, 2244, 2252, 2279a, 2279a-2, 2279b, 2279b-1, 2279b-2, 2279f, 2279f-1, 2279aa, 2279aa-5; sec. 413 of Pub. L. 100-233, 101 Stat. 1568, 1639.

Subpart N-Loan Servicing Requirements; State Agricultural Loan Mediation Programs; Right of First Refusal

2. Section 614.4516 is amended by revising the introductory text of paragraph (a) to read as follows:

614.4516 -- Restructuring procedures.

(a) Notice. When a qualified lender determines that a loan is or has become a distressed loan, the lender shall provide written notice to the borrower that the loan may be suitable for restructuring. The qualified lender shall include with such notice:

* * * * *

Dated: November 18, 1993.

Curtis M. Anderson,

Secretary, Farm Credit Administration Board.

[FR Doc. 93-29139 Filed 11-26-93; 8:45 am]

BILLING CODE 6705-01-P