If a borrower sells basic security for an FSA loan without any replacement, how should the proceeds be applied?

The correct choice indicates that the proceeds from the sale of basic security for an FSA loan should be applied as an extra payment on the loan. This approach is aligned with the intent of safeguarding the loan's collateral and ensuring that the borrower is held accountable for any changes to the security originally provided when the loan was issued.

When a borrower sells the collateral without replacing it, applying proceeds as an extra payment helps to reduce the debt, reflecting the loss of security backing the loan. This not only mitigates risk for the lender but also demonstrates the borrower's commitment to fulfilling their obligations. Making these extra payments can lead to decreased interest costs over time, as it reduces the principal balance more quickly than regular payments would.

In contrast, applying the proceeds as a refund, regular payment, or offset payment would not adequately address the fact that the collateral securing the loan has changed, thereby not adequately protecting the lender's interests or fully accounting for the decrease in security. Hence, maintaining a proactive approach by treating the proceeds as an extra payment is essential in managing the loan responsibly.