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10.337 Mortgagor's option to use loss proceeds for reconstruction. At the option of the mortgagor and subject to the provisions of these insurance regulations any sum received by a land bank in settlement of a loss covered by insurance required by $$ 10.331-10.347 may be used to pay for the reconstruction of the building involved; Provided, That the land bank may charge and collect from the mortgagor the reasonable cost of appraisal and of any investigation to determine the priority of the bank's mortgage over any lien by reason of such construction, and may withhold from such sum the amount of any such charge not otherwise paid.t (Sec. 6, 47 Stat. 14, secs. 12 “Ninth”, 17, 39 Stat. 371, 375; 12 U.S.C. 665, 771 “Ninth”, 831)

10.338 Subsequent owners. When(a) a subsequent owner of premises mortgaged to a Federal land bank has assumed the mortgage and stock interests of the original mortgagor in accordance with the provisions of section 12 "Sixth" of the Federal Farm Loan Act (39 Stat. 371, as amended; 12 U.S.C. 771 "Sixth”), and is primarily liable therefor, and not otherwise, and when (b) a subsequent owner of premises mortgaged to a joint stock land bank has assumed the obligations of the mortgage and is primarily liable therefor, and not otherwise, the term "mortgagor” shall be deemed for the purpose of $8 10.331-10,347 to refer to such subsequent owner.t (Sec. 6, 47 Stat. 14, sec. 12 “Ninth”, 39 Stat. 371; 12 U.S.C. 665, 771 “Ninth”)

10.339 Exercise of mortgagor's option to use loss proceeds. The land bank as promptly as possible after the receipt of the sum referred to in § 10.337 shall send to the mortgagor a notice in writing thereof. Within 30 days after such notice is sent, if the mortgagor desires to exercise his option, he shall so notify the bank in writing. With such notice to the bank or within 30 days thereafter, unless such time for good cause be extended by the bank, the mortgagor shall furnish the bank information in such form as shall be satisfactory to it covering the plans of the mortgagor for the reconstruction of the building involved in sound and serviceable form and condition, at least equal to that which existed immediately prior to the loss. Within said 30 days the mortgagor shall also furnish assurance satisfactory to the bank that such reconstruction will be completed within a reasonable time, and that there will be no unsatisfied liens for labor, material, and/or other expenses that will have priority over the bank's mortgage when such reconstruction shall have been completed or when the said sum received by the bank shall have been paid by the bank to or for the account of the mortgagor.t (Sec. 6, 47 Stat. 14, sec. 12 “Ninth”, 39 Stat. 371; 12 U.S.C. 665, 771 “Ninth”)

10.340 Reconstruction of improvements in different form. If the mortgagor desires to use the insurance money, in whole or in part, in order to replace the building involved with an insurable building of less expensive type, or to substitute any other insurable building, the said fund may be used for such purpose, provided the land bank is satisfied that the proposed building will be suitable and adequate to the agricultural needs of the farm.† (Sec. 6, 47 Stat. 14, sec. 12 “Ninth”, 39 Stat. 371; 12 U.S.C. 665, 771 “Ninth”)

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*For source citation, see note to 8 10.7.

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10.341 Evidence that mortgagor can supply additional funds; meaning of term "reconstruction". If the sum received by the bank (after making the deductions, if any, authorized by 8S 10.331– 10.347) be inadequate to enable the mortgagor to reconstruct as herein provided, and he desires nevertheless to do so, he shall furnish the bank assurance satisfactory to it that he will have the necessary additional funds. Where, under these regulations, a building may be repaired, replaced or substituted, the operations involved shall be deemed to be covered by the words "reconstruct" or "reconstruction," as the case may require.t (Sec. 6, 47 Stat. 14, sec. 12 “Ninth”, 39 Stat. 371; 12 U.S.C. 665, 771 “Ninth”)

10.342 Evidence required for disbursement of loss proceeds. No sum so received by the land bank shall be paid to or for the account of the mortgagor for the purpose of enabling him to reconstruct a building until it is satisfied that no lien by reason of reconstruction of the buildings covered by such insurance will have priority over its mortgage thereon. If, however, in any case the sum received by the bank be less than $100, the bank may pay over such sum to or for the account of the mortgagor upon assurance satisfactory to the bank that such sum will be used for the reconstruction of the building involved and that there will be no lien against such building which would have priority over the bank's mortgage. (Sec. 6, 47 Stat. 14, sec. 12 “Ninth", 39 Stat. 371; 12 U.S.C. 665, 771 “Ninth")

10.343 Application of loss proceeds to mortgage debt. If the mortgagor fails or refuses to exercise his option in accordance with 88 10.331-10.347, or to comply with all of the conditions of $$ 10.331– 10.347 with respect thereto, or if the mortgage be in process of foreclosure, or if the mortgagor be in default in such manner that the mortgage is subject to foreclosure, the sum received by the land bank may be retained by it for application upon the indebtedness secured by such mortgage or as collateral security therefor. If such sum be applied on the indebtedness, it should be applied first on the unmatured principal thereof. In exceptional cases, the land bank, if in its judgment advisable for the protection of its security, may apply such sum in whole or in part as a credit upon any delinquent indebtedness secured by the mortgage, including taxes, insurance premiums, and assessments, the payment of which is not otherwise provided for by the mortgagor to the satisfaction of the bank. If in such case the sum be insufficient for the whole of the delinquent indebtedness it should, if applied thereon, be credited first upon principal thereof. The provisions of this section shall also apply to any portion of the sum received by the land bank which is not used for reconstruction or withheld for cost of appraisal and investigation in accordance with $ 10.337.1 (Sec. 6, 47 Stat. 14, sec. 12 “Ninth", 39 Stat. 371; 12 U.S.C. 665, 771 "Ninth”)

10.344 Circumstances under which mortgagor's option to use loss proceeds does not obtain. The option of the mortgagor referred to in &$ 10.331-10.347 shall not apply in the case of any sum received by the land bank under a policy of insurance which was not provided or paid for by the mortgagor. Such option shall not

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*For source citation, see note to § 10.7.

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apply to any sum with respect to which liability to the mortgagor is denied by the insurer, unless and until such denial be rescinded or until final judgment of a court of competent jurisdiction that the insurer is liable to the mortgagor. In either event the mortgagor shall initiate the steps otherwise necessary under 88 10.331–10.347 for the exercise of his option within 30 days after the establishment of the liability of the insurer to him for such loss.† (Sec. 6, 47 Stat. 14, sec. 12 “Ninth”, 39 Stat. 371; 12 U.S.C. 665, 771 “Ninth”)

10.345 Endorsement of loss proceeds on mortgage or note. The land bank shall not endorse upon a mortgage or the note secured thereby, or request the farm loan registrar to endorse in case the mortgage is pledged with him, any sum received by the land bank on account of loss covered by insurance until it has been determined in accordance with $$ 10.331–10.347 that such sum should be applied as a credit upon the indebtedness of the mortgagor secured by the mortgage.t (Sec. 6, 47 Stat. 14, sec. 12 “Ninth", 39 Stat. 371; 12 U.S.C. 665, 771 “Ninth”)

10.346 Maintenance of additional collateral for loss proceeds held by land bank. Upon receipt of any sum in settlement of a loss on property covered by a mortgage pledged with the farm loan registrar, the land bank shall forth with notify the registrar thereof, and, pending disposition of such sum in accordance with $$ 10.33110.347 shall deposit and/or maintain with the farm loan registrar an amount of additional eligible collateral at least equal to the full amount of such payment. When disposition of such sum or any part thereof is finally made, the land bank shall forthwith report to the registrar the amount, if any, which should be endorsed as a credit upon the indebtedness of the mortgagor, and the bank may withdraw such portion of the additional collateral as shall not be required to cover the amount so to be endorsed and/or any amount withheld by the bank, if it shall have met all other existing requirements with respect to the collateral for its bonds.† (Sec. 6, 47 Stat. 14, secs. 12 “Ninth”, 19, 39 Stat. 371, 376; 12 U.S.C. 665, 771 "Ninth", 856)

10.347 Unconditional release of loss proceeds. No insurance proceeds may be released unconditionally to a borrower or a junior lienor except for the purpose and under the conditions set forth in 88 10.331–10.347, unless the remaining security for the loan meets the provisions of the Federal Farm Loan Act relating to new loans, that is, unless the unpaid balance of the loan does not exceed 50 percent of the value of the land and 20 percent of the value of the permanent, insured improvements remaining thereon. Exceptions to this requirement may be made only where it is clearly to the best interest of the bank to do so. Where insurance proceeds are released unconditionally to a borrower or junior lienor the procedure governing the release of funds received from the sale of part of the security shall be followed so far as applicable. (Sec. 6, 47 Stat. 14, sec. 12 “Ninth", 39 Stat. 371; 12 U.S.C. 665, 771 “Ninth”)

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*For source citation, see note to $ 10.7.

DIRECT LOAN REGULATIONS 10.361 Authorization to make direct loans. A Federal land bank may apply to the Land Bank Commissioner for authorization to make direct loans to borrowers secured by first mortgages on farm lands located in such bank's district within any locality or territory where farmers are unable to apply through a national farm loan association for either of the following reasons:

(a) That national farm loan associations have not been formed in such locality or territory; or

(b) That the bank is unable to accept applications from national farm loan association (s) within whose chartered territory such locality or territory or part thereof is situated.t (Sec. 6, 47 Stat. 14, sec. 7, 39 Stat. 365, as amended; 12 U.S.C. 665, 723 (a))

10.362 Territories in which direct loans may be made. A Federal land bank may make direct loans only upon the security of first mortgages on farm lands situated within localities or territories covered by authorization (s) granted by the Land Bank Commissioner. Such authorization (s) may be terminated or modified at any time by the Land Bank Commissioner. Such authorization (s) shall expire with respect to all or any part of a locality or territory whenever it shall appear to the Land Bank Commissioner that the farmers residing in such locality, territory or part thereof are able to apply to the bank for loans through a national farm loan association from which the bank is able to accept applications. The bank shall advise the Land Bank Commissioner whenever such locality, territory or part thereof becomes included within the chartered territory of an association from which the bank may accept applications for loans either due to the organization of a new association, or to the existence of circumstances enabling the bank to resume the acceptance of applications through an old association. (Sec. 6, 47 Stat. 14, sec. 7, 39 Stat. 365, as amended; 12 U.S.C. 665, 723 (a))

10.363 Applicability of association loan regulations. Except as otherwise specifically provided in $$ 10.361-10.368 and/or in section 7 of the Federal Farm Loan Act, as amended (39 Stat. 365, as amended; 12 U.S.C. 711-723, and Sup.), all provisions of said Act and of the rules and regulations adopted thereunder which are applicable with respect to loans made through national farm loan associations shall, insofar as practicable, apply with respect to direct loans.t (Sec. 6, 47 Stat. 14, sec. 7, 39 Stat. 365, as amended; 12 U.S.C. 665, 723 (a))

10.364 Interest. A Federal land bank shall charge interest on direct loans made at any time at a rate which exceeds by 1/2 of 1 per centum per annum the rate of interest then charged on loans through national farm loan associations: Provided, however, That if and when the borrower who has obtained such direct loan either shall have been elected to membership in an existing association whose endorsement at the time is acceptable to the land bank, or shall have united with other such borrowers to form a national farm loan association, which association shall have been chartered by the Land Bank Commissioner in accordance with the provisions of section 7 of the Federal Farm

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Loan Act, as amended (39 Stat. 365, as amended; 12 U.S.C. 711-723, and Sup.), and said association shall have complied with all of the requirements and conditions in such case made and provided by said section, then the bank shall, in the event such loan is in good standing by reason of the borrower's compliance with all covenants and conditions contained in his mortgage and in the promissory note secured thereby, reduce the interest rate thereon, beginning with the next regular installment date, to the rate of interest paid by borrowers on new loans made through national farm loan associations in the same farm credit district at the time such direct loan was made.t (Sec. 6, 47 Stat. 14, sec. 7, 39 Stat. 365, as amended; 12 U.S.C. 665, 723 (a), (b), (c), and Sup.)

10.365_ Subscription to stock. Each applicant for a direct loan from a Federal land bank shall, at the time of making application, subscribe for capital stock in the Federal land bank to which his application is addressed, in the sum of $5.00 for each $100.00 or fraction thereof borrowed. Each such subscription shall contain an undertaking on the part of the applicant to pay said subscription upon the granting of the loan by said bank. Any person who obtains a direct loan from a Federal land bank may, at his option, pay said subscription in cash, or authorize said bank to deduct the amount of said subscription from the amount borrowed before remitting the net proceeds of the loan and/or for the account of the borrower. When the amount subscribed by a borrower for stock in such bank is deducted from the net proceeds of the loan obtained by him, he shall be deemed to have complied with the requirement of section 7 of the Federal Farm Loan Act, as amended (39 Stat. 365, as amended; 12 U.S.C. 711-723, and Sup.), that he pay for such stock, and the amount so subscribed and deducted shall be included in and constitute part of the amortized mortgage loan in connection with which such stock subscription was made: Provided, however, that the total amount of such mortgage loan shall not exceed the limitation imposed in section 12 "Fifth" of the Federal Farm Loan Act (39 Stat. 371, as amended; 12 U.S.C. 711 “Fifth”, and Sup.). (Sec. 6, 47 Stat. 14, sec. 7, 39 Stat. 365, as amended; 12 U.S.C. 665, 723 (a), (c), and Sup.)

10.366 Stock held as collateral security. Shares of stock issued by a Federal land bank to a borrower who obtains a direct loan shall be held by said bank as collateral security for the loan of the borrower and shall participate in all dividends. Upon full payment of the loan or upon foreclosure of the mortgage securing the same, such stock shall, if still outstanding, be canceled at par, or, in the event that such stock shall have become impaired, at the estimated value thereof as approved by the Land Bank Commissioner, and the proceeds thereof shall be paid to the borrower: Provided, however, That all sums accruing and payable as dividends on such stock and/or proceeds of such stock upon cancelation (other than as provided in § 10.367), shall be subject to the right of said bank to retain and apply the same upon any obligation(s) due and unpaid under the terms of the mortgage securing the loan in connection with which such stock was subscribed; and Provided further, That the capital stock of said bank shall not be reduced to an amount less than 5 per

† For source citation, see note to § 10.7.

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