USDA Farm, Ranch, and Housing Loan Foreclosures
This chapter addresses U.S. Department of Agriculture (USDA) program loans made to borrowers that are serviced by USDA Field Service employees under USDA guidelines and regulations. See 7 C.F.R. pt. 1980, subpt. D, and 7 C.F.R. pt. 762 for Rural Housing Service (RHS) loans and 7 C.F.R. pts. 765 and 766 for farm and ranch loans originated through the Farm Service Agency (FSA). If one of these loans goes into default, it is referred to the USDA Office of General Counsel (OGC) to be foreclosed under normal state law foreclosure procedures.
Private lenders also make loans that are guaranteed through the RHS and FSA (the successor for the Farmers Home Administration), but these loans are serviced by the mortgagee in-house or by its authorized mortgage servicers. The lender is responsible for all servicing activities, whether done in-house or by its servicer, that would be necessary if the lender were servicing the loan for its own account. However, because of the USDA guarantee, the lender must comply with various loan reporting and counseling mandates related to the performance status of the loan as required by the relevant USDA agency. Foreclosures of farm, ranch, and housing loans with USDA guarantees are rare and viewed as a last resort.
Because federal agencies do not want to foreclose program loans, a borrower with a direct USDA program loan that is serviced by the USDA Centralized Servicing Center (CSC) in St. Louis, Missouri, is afforded various loss mitigation and forbearance opportunities not found in the conventional residential or commercial marketplace. Both local USDA Field Service staff and CSC employees may be involved in providing loss mitigation alternatives, but final authority rests with the CSC. If loan liquidation is the only reasonable alternative to cure a loan default, a CSC-serviced program loan is referred to the OGC in Temple, Texas, for foreclosure. Once one of these loans goes into default, the loan is foreclosed in the same manner as a conventional loan. There is little or no difference in the foreclosure process between a conventional and USDA-serviced loan. The OGC forecloses CSC-serviced loans, and lender-serviced loans are foreclosed by local counsel chosen by the servicer. According to the OGC, less than ten USDA loans are posted for foreclosure each month.
Most farm and ranch loans are originated as “production” loans, and when a production loan goes into default, foreclosure is conducted under article 9 of the Texas Business and Commerce Code because these loans are generally secured by personal property, not real property. Foreclosure of personal property is outside the scope of this manual; however, for additional information on this and other related issues, see David L. LeBas, Contractual and Involuntary Agriculture Liens, in Agricultural Law Course, State Bar of Texas, Austin (2003).
Because the foreclosure of a USDA program loan is the same as that of a conventional loan, this chapter will highlight some of the federal loan servicing regulations and federal administrative remedies that affect the foreclosure process before a loan is referred for foreclosure under Texas law.
§ 32.2USDA Foreclosure Background
Current agriculture policy is a direct result of Congress’ attempts to cure the abuses that were the focus of Curry v. Block, 541 F. Supp. 506 (S.D. Ga. 1982), aff’d, 738 F.2d. 1556 (11th Cir. 1984) and Coleman v. Block, 562 F. Supp. 1353 (D.N.D. 1983). Curry and Coleman were class action lawsuits that enjoined the USDA from initiating farm and ranch foreclosures during the mid-1980s. The judgment in Coleman was vacated in Coleman v. Lyng, 864 F.2d 604, 612 (8th Cir. (N.D.) 1989), cert. denied sub nom. Coleman v. Yeutter, 493 U.S. 953 (1989), and was ultimately dismissed as being moot because Congress passed the Agricultural Credit Act of 1987, Pub. L. No. 100-233, 101 Stat. 1568 (1998). In the dismissal, the court held the Agricultural Credit Act cured the egregious abuses that were presented in Coleman. See Lyng, 864 F.2d at 608–09. A review of Curry and Coleman provides a legislative history of the current agricultural loan liquidation policy. If a borrower has a valid claim for discrimination against the USDA, 7 U.S.C. § 1981a imposes an injunction on foreclosure if the borrower can show that the default in paying principal and interest was due to circumstances beyond the borrower’s control and the borrower’s temporary inability to pay principal and interest will impair the borrower’s standard of living. See 7 U.S.C. § 1981a.
Federal farm and ranch foreclosure policy can change dramatically, depending on the administration in power and how the executive branch carries out its agricultural policies through the president’s choice for secretary of the USDA. For example, see James T. Massey, Farmers Home Administration and Farm Credit System Update, 73 Neb. L. Rev.187 (1994), for a description of the political tug of war between the Reagan administration and Congress that dramatically affected farm policy during the 1980s and still affects agricultural policy.
The attorney dealing with a USDA program loan in default will find that determining which Code of Federal Regulations provision or U.S. Code statute applies to a particular loan program can be very confusing. For example, the Debt Settlement Policies and Procedures section, 7 C.F.R. pt. 792, sets forth the manner in which USDA agencies will collect and settle debts. Loans designated as Farm Loan Programs (FLP) fall under 7 U.S.C. ch. 50, subch. IV, and are originated and serviced under 7 C.F.R. pts. 765 and 766; rural housing loans are originated and serviced under 7 C.F.R. pts. 1980 and 3550, subpt. D; and the principal debt restructuring and servicing provision is 7 U.S.C. § 2001. In addition, the borrower’s rights provisions found in 12 U.S.C. ch. 23, subch. IV, pt. C, must be considered on all agricultural loans serviced under federal guidelines.
Because many of the regulations in the Code of Federal Regulations that deal with USDA loans use acronyms for the various loan programs, the practitioner should review 7 C.F.R. § 761.2 to decipher the various abbreviations and loan program descriptions.
Several core principles apply to USDA loan programs for farm, ranch, and housing loans, as set out below.
The USDA’s goal in making a program loan is to help transition the borrower to a private source of credit in the shortest period of time practicable. 7 U.S.C. § 1993(a).
If a USDA loan has to be terminated, it has to be (1) written down or written off under 7 U.S.C. § 2001; (2) compromised, adjusted, reduced, or charged off under 7 U.S.C. § 1981(b)(4); or (3) discharged in bankruptcy. Debt forgiveness will not include the consolidation, rescheduling, reamortization, or deferral of the loan. 7 U.S.C. § 1991(a)(12)(B)(i).
§ 32.3:3No Waiver of Mediation Rights
The USDA cannot make, insure, or guarantee any program loan that requires the borrower to waive any of the borrower’s mediation rights. 7 U.S.C. § 2006.
USDA loan programs require the borrower to participate in farm management and credit counseling programs that are contracted by the USDA with community colleges, the state extension service, or the state department of agriculture. See 7 U.S.C. § 2006(a). In addition, the USDA is required to train its employees in credit analysis and financial farm and ranch management to ensure proper supervision of farm program loans. 7 U.S.C. § 2006(c)(2).
Typically, the gentleman farmer or rancher who buys farm or ranch land for pleasure or recreational use does not qualify for a USDA program loan and does not enjoy the borrower’s rights and safeguards found in a USDA program loan. See 7 U.S.C. § 1922.
§ 32.3:6Lender Service Default
The default servicing provisions that apply to RHS loans that are serviced by lenders or their mortgage servicers and not USDA employees are found in 7 C.F.R. §§ 1980.370–.399. The lender can liquidate a loan, but it must comply with the requirements of sections 1980.370 through 1980.399 in concert with the RHS. Both the lender and the borrower can appeal any adverse determination made by the RHS with respect to a RHS loan, but they must jointly execute the appeal. 7 C.F.R. § 1980.399(a)(1). However the borrower does not have to join in an appeal if the lender appeals the amount the RHS paid to the lender under the USDA guarantee because of the borrower’s default. 7 C.F.R. § 1980.399(a)(2).
To be eligible for any USDA loan made under 7 U.S.C. ch. 50, a borrower must certify in writing that he was “unable to obtain sufficient credit elsewhere to finance his actual needs at reasonable rates and terms, taking into consideration prevailing private and cooperative rates and terms in the community” and provide a written financial statement. 7 U.S.C. § 1983(1).
§ 32.4Debt Restructuring and Servicing
Whenever a borrower with a farm program loan becomes delinquent in the payment of principal and interest for ninety days, the USDA must send the borrower a notice by certified mail that describes the eligibility criteria and a summary of all the loan preservation services and debt settlement programs that are available to an eligible borrower. See 7 U.S.C. § 1981d(a), (b). If the borrower requests assistance in writing within sixty days of receiving the notice, the “Secretary shall place the highest priority on the preservation of the borrower’s farming operations.” 7 U.S.C. § 1981d(e).
Once an eligible borrower seeks assistance, the extensive modification and restructuring alternatives offered by the USDA and found in 7 U.S.C. § 2001 come into play. The primary purpose for a loan modification is to mitigate any loss to the USDA and enable the borrower to continue the borrower’s farm and ranching operations. See 7 U.S.C. § 2001(a).
To be eligible for assistance, the following requirements must be met: (1) the delinquency must be due to circumstances beyond the control of the borrower; (2) the borrower must have acted in good faith; (3) the borrower must present a plan based on a reasonable assumption that demonstrates the borrower will be able to meet necessary family living and operating expenses and service all the borrower’s loan; and (4) the loan, if restructured, must result in a net recovery to the government when paid off as restructured that exceeds the liquidation or foreclosure value of the property. 7 U.S.C. § 2001(b).
The elements that go into determining how to create a restructure plan are found in 7 U.S.C. § 2001(c), which goes into detail as to what is required.
The loss mitigation options available to a delinquent borrower are (1) a principal and interest write-down, pursuant to 7 U.S.C. § 2001(d); (2) a shared appreciation arrangement, pursuant to 7 U.S.C. § 2001(e); (3) a partial liquidation, pursuant to 7 U.S.C. § 2001(k); and (4) liquidation, pursuant to 7 U.S.C. § 2001(n).
§ 32.5Military Reservists Relief
If a mobilized military reservist, as defined by 7 U.S.C. § 1982(a), is called to active duty, all interest payments must be forgiven and cannot be accrued. See 7 U.S.C. § 1982(b), (d). This provision expressly rescinds a requirement that a direct loan borrower must pay interest if called to active duty. 7 U.S.C. § 1982(b). The due date of any payment of principal on a direct loan is deferred for the same length of time the borrower was a mobilized military reservist. 7 U.S.C. § 1982(c).
For farm program loans that are serviced under 7 C.F.R. pt. 766, which deals with direct loan servicing, a borrower in financial trouble can request that the USDA take over servicing the loan and request protection of the homestead under 7 C.F.R. § 766.151(a) by simply completing an application. Homestead protection is available to the borrower even after the property is foreclosed if the borrower qualifies under 7 C.F.R. § 766.151(b).
§ 32.7Borrowers’ Rights in Liquidation Process
The “borrowers’ rights” section of the United States Code relating to distressed loans is 12 U.S.C. §§ 2202a–2202d. A distressed loan is a loan that the borrower does not have the financial capacity to pay according to its terms because the loan is past due or there is a high probability of loss to the lender because of inadequate collateralization. 12 U.S.C. § 2202a(a)(3). Appendices A, B, and C to 7 C.F.R. pt. 766, subpt. C, are reproductions of FSA Form-2510, FSA Form-2512, and FSA Form-2514, which are the notice forms that are sent to the borrower depending on the borrower’s financial circumstances. These forms are written in plain English and describe in detail the rights of the borrower and how the borrower can exercise those rights.
If a direct FSA loan serviced under 7 C.F.R. § 766.101 is in default more than ninety days, the borrower must be given written notice that the loan may be eligible for restructuring before the lender can (1) initiate any liquidation action, (2) accept a deed in lieu of foreclosure, (3) accelerate the maturity of the debt, (4) foreclose, or (5) take any other collection action. See 7 U.S.C. § 2001; 7 C.F.R. § 766.351(b).
If an application to restructure a loan is received from a borrower, the loan servicing official uses the Electronic Debt and Loan Restructuring System computer program to find the combination of loan servicing programs that will result in a feasible restructure plan. For FSA-guaranteed loans that are serviced in-house or by a mortgage servicer, the lender or servicer may offer a restructure plan to the borrower. See 7 C.F.R. § 762.145.
§ 32.7:1Restructuring Feasibility
Some of the factors that may be considered by an agriculture lender to determine whether a loan should be restructured are (1) whether the cost to restructure is equal to or less than the cost of foreclosure; (2) whether the borrower is applying all income over and above necessary living and operating expenses to the payment of the loan; (3) whether the borrower has the financial acumen as well as the management expertise to protect the collateral; (4) whether, over time, the borrower is capable of working out the current financial difficulty and reestablishing a viable business operation to repay the loan on a reschedule basis; and (5) whether a restructure plan is consistent with sound lending practices.
To determine whether the potential cost of restructuring a distressed loan is less than or equal to the costs of foreclosure, the lender or servicer must consider (1) the present value of interest income and principal that will be forgiven in the restructuring plan; (2) the administrative expenses involved in negotiating, structuring, documenting, and implementing the restructure plan; (3) whether the borrower’s cash flow includes income from other sources that will be applied to the debt; and (4) whether the borrower is willing to furnish a complete and current financial statement in a form acceptable to the institution, as well as all other documents and information that might be required.
The options available to all agriculture lenders for restructuring agricultural loans are generally one or a combination of the following alternatives: (1) loan consolidation, (2) changes in the interest rate and maturity date, (3) write-down of the amount due, and (4) interest rate assistance. If two or more restructuring alternatives are viable, the servicer must recommend the plan that results in the least cost to the lender.
The Certified State Mediation Program, which provides mediation services mandated by USDA policy, is handled by the USDA with matching grants and funds for administration to mediators who provide mediation services that comply with USDA regulations and guidelines. Funding also may come from the state or other local sources. See 7 U.S.C. § 5102. Trained and impartial neutral mediators are selected under the program to assist the parties in finding a solution to the borrower’s financial difficulties.
The Farm Credit Administration is responsible for establishing the mediation regulations for the Farm Credit System. When a state program has been certified, USDA agricultural lenders are obligated to participate in the state mediation program.
Even in those states where no mediation system has been certified, the FSA has facilitated mediation through contracts with private mediators. Once a state’s mediation program is certified, the FSA state executive director must confer with the state governor’s mediation officials and other USDA agencies and prepare procedural guidelines for mediation under the state program.
The logistics of mediation are usually arranged through the agency that services the agriculture loan in question. State mediation officials contact the requesting party for a list of potential participants and advise the borrower on how to prepare for mediation. The mediation service then assigns one or more mediators to the case, which can be selected or rejected by the participants. Once a mediator is selected, however, mediation is deemed underway. All mediation sessions are confidential and mediation documents cannot be used in any other legal action. The current address for the Texas Certified Mediation Program, which is always subject to change, is:
Texas Rural Mediation Services
904 Broadway
P.O. Box 10536
Lubbock, TX 79408
Phone: (806) 755-1000
In handling a foreclosure that is serviced under USDA guidelines, the exhaustion principle must be considered. Before a person can bring any action in federal court, the borrower must exhaust all administrative remedies—restructure, mediation, and appeal.
There are two distinct kinds of exhaustion: that mandated by federal statutes and that imposed by judicial fiat in case law. See Information Resources, Inc. v. U.S., 950 F.2d 1122 (5th Cir. 1992), and Power Plant Division, Brown & Root, Inc. v. Occupational Safety and Health Review Commission, 673 F.2d 111 (5th Cir. 1982), which explain the two exhaustion doctrines.
When the requirement to exhaust all administrative remedies is mandated by statute, exhaustion is a condition precedent to maintaining a suit in federal court. The only exception to this rule is when the claim asserted is a constitutional challenge that is collateral to the dispute or there is a claim that the administrative process system, itself, is unlawful or unconstitutional. Greater Slidell Auto Auction, Inc. v. American Bank & Trust Co., 32 F.3d 939 (5th Cir. 1994). The judicially created doctrine of exhaustion only applies if Congress did not mandate exhaustion by statute as to the matter in controversy. McCarthy v. Madigan, 503 U.S. 140 (1992).
In the agriculture law context, there have been numerous challenges to whether the Administrative Procedure Act (APA), codified at 5 U.S.C. §§ 500–706, invokes the statutory exhaustion doctrine for all agriculture loan liquidations and foreclosure proceedings. Though borrowers have tried, it is clear that the exhaustion principle for agricultural loan cases is statutory. Darby v. Cisneros, 509 U.S. 137 (1993). In Gleichman v. U.S. Department of Agriculture, 896 F. Supp. 42, 44 (D. Me. 1995), the court said, “It is hard to imagine more direct and explicit language requiring that a plaintiff suing the Department of Agriculture, its agents, or employees, must first turn to administrative avenues before beginning a lawsuit.” Though creative, borrowers have also argued that the exhaustion doctrine cannot apply if the legal issue concerns statutory interpretation. See Xiao v. Barr, 979 F.2d 151 (9th Cir. 1992).
A separate bankruptcy chapter is available to farmers and ranchers for the purpose of giving the family farmer “a fighting chance to reorganize their debts and keep their land.” In re Beard, 134 B.R. 239, 247 (Bankr. S.D. Ohio 1991), aff’d, 177 B.R. 74 (S.D. Ohio 1993). While the provisions of 11 U.S.C. §§ 1201–1231 (chapter 12) are generally modeled after the provisions of chapter 13, they are not identical. A debtor filing under chapter 12 is not afforded all of the same benefits as that of a debtor under chapter 13. For a discussion of agricultural bankruptcy issues, see Susan A. Schneider, The Family Farmer in Bankruptcy: Recent Developments in Chapter 12, 3 Drake J. Agric. L. 161 (1998) and Neal D. Hamilton, A Changing Agriculture Law for a Changing Agriculture, 4 Drake J. Agric. L. 41 (1999).
The loan appeals process for agriculture loans was substantially modified in the Agriculture Credit Act of 1987, Pub. L. No. 100-203, 101 Stat. 1568, and modified again in the Federal Crop Insurance Reform and Department of Agricultural Reorganization Act of 1994, Pub. L. No. 103-354, 108 Stat. 3178. All appeals are conducted under the auspices of the National Appeals Division (NAD), an independent body created by Congress within the USDA to handle administrative appeals of several USDA agencies, including the FSA.
A borrower is entitled to notice of any adverse action by any USDA agency and must be given appeal rights, which include an opportunity for an informal face-to-face meeting with the decision maker or initiating an appeal before an NAD hearing officer.
§ 32.12Hearing Officer of National Appeals Division
A person may appeal an adverse action by petitioning the USDA county committee, the state committee, and then the NAD, or go directly to the NAD for a hearing before a hearing officer, with appeal rights to the director. Mediation is also available. See 7 C.F.R. pt. 780.
For appeals through the state-level appeal process, after the state executive director issues a decision, the borrower can request a review by the director of the NAD. There is the possibility of supplementing the appeals record at this stage, and the appeal is on the record for purposes of the Equal Access to Justice Act (EAJA). NAD appeals are conducted informally. The informality of the hearing allows for a substantial amount of latitude and flexibility in how issues are approached and provides a less expensive forum than a bankruptcy proceeding or lawsuit. An appeal also gives the borrower an opportunity to argue that changed circumstances have affected the initial agency’s determination.
In response to perceived abuses in the appeals process (because the agency always seemed to win), 7 C.F.R. § 780.1 and § 780.2 were amended. In Lane v. USDA, 120 F.3d. 106 (8th Cir. 1997), the court ruled that the Administrative Procedures Act (APA) and the EAJA provide that anyone who successfully challenges or defends against a government action can recover fees and expenses incurred if the government’s position was not substantially justified. See 5 U.S.C. § 504(a)(1). The EAJA also provides that claims for costs and fees may be made for any adjudication brought under the APA. If the borrower plans to file suit in federal district court for judicial review of the agency’s final decision or conduct, the borrower must exhaust all opportunities for hearing and appeal within the agency. Otherwise, the court must dismiss the suit.
Because of the delays in initiating a foreclosure under the federal guidelines, statute of limitation questions frequently arise. Under federal law, the general statutes of limitation are found in 28 U.S.C. § 2415 and § 2416, which provide that any action for money damages brought by the United States or agency that is founded upon a contract, express or implied in law or in fact, is barred unless a complaint is filed within six years after the cause of action accrues or within one year after final decisions have been rendered in an administrative proceeding. However, in 1991, the statute of limitation for enforcing Farmers Home Administration (now Federal Service Agency), Rural Housing Service, farm ownership, emergency, operating, rural housing, farm labor housing, rural rental housing, and soil and water loans was removed from the Code of Federal Regulations. See 56 F.R. 943-01, 1991 WL 308097 (F.R.).
This decision was prompted by the holding in Cracco v. Cox, 414 N.Y.S.2d 404 (N.Y. App. Div. 1979). The only issue was whether the federal government’s right to foreclose a real estate mortgage was barred by 28 U.S.C. § 2415. The court held—
28 U.S.C. § 2415(a) does not govern the right to bring a foreclosure action. It is a long-standing rule that the right to foreclose a mortgage securing a debt is distinct from the right to bring an action for money damages on the note or bond representing the debt. Congress recognized and preserved this distinction and intended that section 2415 apply only for actions for money damages.
Cracco, 414 N.Y.S.2d at 405.
The court went on to say—
Federal and New York case law establishes that the right to foreclose a mortgage lien on property given to secure debt which has not been discharged exists independently of the right to bring an action for money damages on the note . . . . Indeed, the right to foreclose survives when an action on the debt is barred by the statute of limitations.
Cracco, 414 N.Y.S.2d at 405–06.
In addition, state statutes of limitation do not apply to actions brought by the United States. United States v. John Hancock Mutual Life Insurance Co., 364 U.S. 301 (1960); United States v. Summerlin, 310 U.S. 414 (1940) (federal government can enforce a foreclosure claim in its capacity as sovereign without regard to statute of limitation); see also United States v. Johnson, 946 F. Supp. 915 (D. Utah 1996).
Since liquidating a USDA loan is such a laborious process, a borrower may be in default for years under one USDA program, while receiving farm subsidy payments from another USDA farm program. Based on the principle that it is fiscally irresponsible for a federal agency to make payments to someone who is delinquent on other government debts, the USDA amended 7 C.F.R. §§ 1951.101–.150 to bring the USDA’s procedures in compliance with the offset provisions of the Federal Claims Collection Act at 31 U.S.C. § 3716. This Act requires all federal agencies to attempt to collect delinquent debts with administrative offsets as soon as a debt becomes delinquent. Consequently, any money that is or may be payable by the United States to an individual or entity indebted to another USDA agency is subject to the offset under 7 C.F.R. § 1951.101.
An offset may be initiated when the agency determines that it has a legally enforceable right to collect a debt under state law or federal law. Offsets are determined on a case-by-case basis, and the practicality of the offset is the overriding principle. Borrowers generally must be given thirty days’ notice prior to an offset. The borrower then has twenty days to request a meeting with the appropriate loan-servicing official after receiving the offset notice. The borrower also has the right to review the agency’s records and may reach a payment agreement in lieu of the offset. Additionally, the borrower has the usual appeal rights with the NAD.
LeBas, David L. “Contractual and Involuntary Agriculture Liens.” In Agricultural Law Course, 2003. Austin: State Bar of Texas, 2003.
Melamed, Richard. “Foreclosure of Farm and Ranch Real Property.” In Agricultural Law Course, 2012. Austin: State Bar of Texas, 2012.