Federal Agricultural Lending Provisions in the 2002 Farm Bill[1]
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Title V of the new farm bill, formally called the Farm Security and
Rural Investment Act of 2002, addresses issues related to the implementation
of federal farm credit programs administered by the Farm Service Agency (FSA)
of the U. S. Department of Agriculture (USDA).
In general, the new agricultural credit provisions in the farm bill:
q authorize increased availability
of funds for direct and guaranteed agricultural lending;
q focus more resources on beginning
farmers and ranchers; and
q introduce eligibility rule changes
that will make more borrowers eligible for federal farm credit assistance.
Funding Levels
The farm bill authorizes levels of lending for FSA farm loan programs.
Based on these levels, appropriations bills are passed by the Congress
annually that set limits for actual expenditures under the federal farm lending
programs.
The new farm bill has increased authorization levels for both FSA
direct and guaranteed lending programs:
|
FSA Funding Levels Authorized by the 1996 and 2002 Farm Bills |
||
|
Program |
1996 Farm Bill |
2002 Farm Bill |
|
Direct
Loans |
$585 Million |
$770 Million |
|
Farm Ownership Loans |
$85 Million |
$205 Million |
|
Operating Loans |
$500 Million |
$565 Million |
|
Guaranteed
Loans |
$2.85 Billion |
$3.026 Billion |
|
Farm Ownership Loans |
$750 Million |
$1 Billion |
|
Operating Loans |
$2.1 Billion |
$2.026 Billion |
The new farm bill continues to emphasize guaranteed lending programs
that again received more authorized funds than direct lending programs.
This suggests that private credit sources could continue to account
for the bulk of farm loans as the new farm federal credit policy encourages
more the use of guarantees by farmers seeking credit from private sources.
Beginning Farmers and Ranchers
Beginning farmers and ranchers are now given more opportunities to
obtain credit under the new farm bill that introduces modifications in program
benefits and eligibility requirements affecting this class of farm borrowers. These farmers are now given more chances to
acquire farm properties held by FSA. Moreover,
two new guidelines provide for the additional guarantee schemes involving
owner-financed farm purchase loans on a pilot basis and State beginning farmer
loans, although the latter is contingent on a required change in the tax code.
These changes are discussed in detail in the following sections.
|
Amended Lending Guidelines for Beginning Farmers and Ranchers |
||
|
Lending Guideline |
1996 Farm Bill |
2002 Farm Bill |
|
I.
Eligibility
Rule Change under Farm Ownership (FO) Loan Program |
||
|
Þ Limit on the amount of acreage
owned (for eligibility) |
25% of the county median |
30% of county median |
|
II.
Farm purchase
down payment loans |
||
|
Þ Interest rate and maximum
term |
4%
fixed, up to10
years |
4%
fixed, up to 15 years |
|
Þ Loan Amount |
Equal
to the lesser of 30%
of the sale price or of the appraised value |
Equal
to the lesser of 40%
of the sale price or of the appraised value |
|
III.
Farm property
held by FSA |
||
|
Þ Holding period to offer for
sale to interested beginning farmers before offered for selling to
other buyers |
75
days |
135
days |
|
Þ Size of properties |
No
provision |
Inventory
properties are to be divided or combined to make them more suitable to the needs (more economically viable
to the operations) of beginning farmers. |
|
IV.
Guaranteed
Operating Loans (OL) |
||
|
Þ Interest rate reduction (IRR)
available annually |
4%
IRR on up to $490
million
of guaranteed OL loans through 2002 |
4%
IRR made
permanent,
with 15%
of the $750 million in annual authority set aside for beginning farmers
until March 1 of each fiscal year. |
There are also two provisions introduced for the first time in the
new farm bill:
1.
Beginning Farmer and Rancher Contract Land Sales Program: A pilot program to be implemented in at least five geographically
diverse states that will guarantee up to five (5) loans per state during the
period 2003-2007 made by a private seller to a beginning farmer on a contract
land sale basis provided underwriting criteria are met and a commercial bank
agrees to serve as escrow agent.
2.
State Beginning Farmer and Rancher Guarantee Program: FSA may guarantee loans made under State beginning farmer loan programs
that use small issue agricultural bonds (although a change in the tax code
is still required in this case).
Farm Ownership (FO) Loans
The new farm bill did not create
any new farm ownership loan programs. However,
certain eligibility guidelines were modified to expand the scope of the FO
program, in addition to special provisions on the implementation of the FO
program for beginning farmers and ranchers discussed in the preceding section.
Moreover, the bill includes a provision that now allows for the financing
of bridge loans under the direct FO program.
Details of these amendments are discussed in the following table:
|
Other Provisions on Direct and Guaranteed Farm Ownership Loans |
||
|
Lending Guideline |
1996 Farm Bill |
2002 Farm Bill |
|
Eligibility for direct farm ownership loan |
Borrower must have owned or operated a farm or ranch for at least 3 years |
Borrower must have participated in the operation of a farm or ranch for at least 3 years |
|
Bridge Financing |
Use of direct FO loans to refinance commercial debt was prohibited. |
Refinancing of commercial debt is allowed for direct FO loans if the debt was incurred for a farm purchase while waiting for funding
of an approved FO loan application. |
|
Other Eligible Borrowers |
|
USDA and State, county, or area committee employees become eligible
for FSA farm loans. |
Operating Loans (OL)
The 2002 farm bill likewise did not introduce new operating loan programs.
Instead, eligibility guidelines were expanded and existing provision on debt
forgiveness was amended, in addition to changes made to the interest rate
reduction for guaranteed operating loans discussed in the section for Beginning
Farmers and Ranchers. The following
summary outlines the provisions affecting said changes:
|
Other Provisions on Direct and Guaranteed Operating Loans |
||
|
Lending Guideline |
1996 Farm Bill |
2002 Farm Bill |
|
Qualifying
for new guaranteed and direct operating loans (OL) after receiving
either direct or guaranteed OL loans |
Waiver
through 2002 of provisions preventing existing borrowers from qualifying
for new guaranteed OL for period of 15 years and from qualifying for
new direct OL after 7 years. |
Eligibility
time limits on guaranteed OL were waived through 2006. Direct OL borrowers are eligible on a case-by-case basis for a one-time waiver good for 2
years under following conditions:
|
|
Special
consideration for Native Americans whose farms or ranches are within
the jurisdiction of an Indian Reservation |
No
similar provision |
May
be exempt
from direct OL eligibility limits and also become eligible for 95% guarantee on operating loans instead of a 90% guarantee |
|
Debt
forgiveness: For borrowers
who have received FSA debt forgiveness under certain procedures |
Eligible
for further direct or guaranteed loans, but only for annual operating expenses. |
If
forgiveness resulted from a declared major emergency or natural disaster, may be eligible for new direct or guaranteed operating
loans. |
Emergency Loans
Emergency
Resulting from Quarantines
Besides areas designated as natural disaster emergency areas, the
new farm bill also provides for low-interest emergency loans for Secretarial-declared areas under
plant or animal quarantines.
Horse
Breeders
While the new farm bill does not contain any provisions for assistance
to horse breeders, Section 759 of the Agricultural Appropriations Act of 2002
provides for a temporary low-interest loan program to assist horse breeders suffering from
mare reproductive loss syndrome. FSA will be publishing a
notice of funds availability in the Federal Register to announce this program.
Administrative Provisions
New
Eligible Borrowers
Trusts and limited liability companies are now eligible to avail of
farm ownership, farm operating and emergency loans.
Interest
Rate Options for Loans in Servicing
Originally there were two options to
choose from: the original loan rate
or the current rate. The bill introduces
a third alternative as an option for lowest rate:
the rate being charged by FSA for loans other than guaranteed loans, of the
same type at the time which the borrower applies for a deferral, consolidation,
rescheduling or re-amortization.
Simplified
Loan Guarantee Application Procedure
Previously
available for loans of $50,000 or less, the simplified procedure is now available
for loans of $125,000 and less.
Re-amortization
of Recapture Payments
This
applies to shared-appreciation agreements maturing after this Act or recapture
amount re-amortized, or recapture amount unpaid due to circumstances beyond
the control of the borrower, and borrower acted in good faith. The following conditions will apply in these
cases:
- The allowable term may not exceed 25 years from
the date of the original amortization agreement.
- May not provide
for reducing the outstanding principal or unpaid interest due.
Waiver
of FSA Borrower Training Requirement
The borrower-training requirement may be waived if borrower demonstrates
adequate knowledge. FSA shall establish criteria providing for the
application of waivers consistently in all counties nationwide.
Periodic
Review of Borrowers
In the past, local farm loan managers spent much of their time conducting
loan assessments twice a year on all farm borrowers. Since farmers
mainly produce annual crops, the Congress has reduced the requirement for
loan assessments to only once a year. Loan managers will now have
time to work with the farm borrowers who have the greatest need for individual
assistance.
Greater
Involvement of FSA Personnel
County committee involvement in farm loan decisions and procedures has been reduced in the new farm bill. A greater number of FSA employees shall be provided
with the authority to handle farm loan decisions, provided they receive appropriate
training.
Farm Credit System
The farm bill also contains provisions affecting the operations of
the Farm Credit System, a combination of cooperatively owned financial institutions
that specialize in providing rural housing loans, farmland loans and operating
credit, and loans to farmer-owned supply, marketing and processing cooperatives.
These provisions are:
- FCS associations and farm credit banks
no longer must get prior permission from another FCS lender when participating
in certain loans originated outside the lender's chartered territory.
- The Bank of Cooperatives is given greater
authority to finance the import and export of farm supplies, agricultural-related
equipment, agricultural processing equipment, and other capital goods used
in storing and handling agricultural commodities or products.
- The FCS Insurance Corporation may recognize
lower risks associated with assets that are guaranteed by government-sponsored
enterprises when assessing insurance premiums on FCS lenders.