DIRECT AND GUARANTEED FARM LOANS
FROM FEDERAL AND STATE SOURCES IN GEORGIA

Cooperative Extension Service

Department of Agricultural and Applied Economics

University of Georgia

February 2002

Prepared by Cesar L. Escalante, Assistant Professor

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Agricultural lending has been generally associated with the more popular lending institutions such as commercial banks and the Farm Credit System (FCS). Unknown to many farm borrowers are a number of federal and state programs that either lend directly to farmers or could offer loan guarantees that will increase the likelihood of the approval of farm loan proposals made to most of the traditional loan-servicing institutions such as the banks and the FCS branches.

This primer is designed to provide prospective farm borrowers with a snapshot of available agricultural credit facilities from various public fund sources that engage in both direct and guaranteed lending programs to supplement the farm loan supply available from the FCS and the commercial banking sector. The important general features of the programs of these public institutions are summarized in this primer for easy reference for farmers contemplating on utilizing the services of these lenders to finance the requirements of their farm businesses.

I. Overview

The Farm Lending Scenario

Over the last decade, the Farm Credit System (FCS) and the commercial banking system have provided the greater bulk of agricultural loans extended to farm borrowers in the State (Figure 1). These two lenders alone already account for about 70% to 75% of total farm loans granted since 1990 (USDA-ERS).

Other institutional sources of farm credit in the state include the Farm Service Agency (FSA) and life insurance companies. In recent years the collective share of agricultural loans extended by private individuals, input suppliers and other sources is increasing and surpassing the combined proportions of loans originating from the FSA and life insurance companies. Historically, these private sources of farm credit, extending both farm real and non-real estate credit, have accounted for about 15% to 18% of total farm loans during the last decade.

The Farm Loan Guarantee Scheme

In absolute levels, farm debt in the state has generally increased steadily in the nineties (Figure 2). Notably, these sustained increases in loan levels were realized under volatile farm conditions, especially during the latter half of the decade.

Greater income risk in the farm sector usually translates to deteriorating credit risk ratings for the farm borrowers. In spite of such disadvantages, total farm loan levels continued to grow, thus, suggesting that farm credit supply remains accessible to most farmers. The farmers' continued access to most farm credit sources could have been enhanced by the availability of credit risk guarantees from federal and state government agencies.

The farm loan guarantee scheme introduces a third party in the usual lender-borrower relationship. The third party is usually a government agency that assures the (commercial) lender that a high percentage (around 90%) of the borrower's credit obligations will be repaid in the event the borrower defaults in his loan obligation. This assurance given by the third party entails a minimal fee (usually a small percentage based on the loan amount) to be paid by the farm borrower to the guarantor. It can be argued that this fee actually raises the borrower's effective (overall) loan cost. However, commercial lenders' decisions to grant loans to riskier farm borrowers usually hinge on the availability of such guarantees. Thus, a farm loan guarantee scheme enables farmers to avail of farm loans that otherwise (without the guarantee) would have been highly improbable to obtain.

II. The Lending and Guarantee Institutions

There are at least four (4) government-affiliated agencies that serve the dual role as direct lenders and guarantors of farm loans. Their branch offices located around the state handle their direct lending operations.

The loan guarantee programs are implemented under conduit arrangements with intermediary institutions, usually from the commercial banking sector. Under most of these guarantee programs, the commercial lenders seek accreditation as a “conduit” lending institution under the program. Once accredited, this “conduit” commercial lender could then choose to include a guarantee arrangement in a loan facility being packaged for a particular farm borrower. This proposal for a guaranteed farm loan transaction is then presented to the guarantee institution for consideration.

The office addresses of these agencies and some of their “conduit” commercial lenders are provided as an appendix to this primer.

A. The Farm Service Agency

The Farm Service Agency (FSA), an agency of the Department of Agriculture, administers farm commodity and conservation programs for farmers and makes farm loans. FSA programs are primarily directed at agricultural producers or, in the case of loans, at those with farming experience. The agency’s missions include stabilizing farm income, helping farmers conserve land and water resources, providing credit to new or disadvantaged farmers and ranchers, and helping farm operations recover from the effects of disaster.

FSA was set up in 1994 during the reorganization of the Department. The new agency consolidates the programs from several agencies, including the Agricultural Stabilization and Conservation Service, the Federal Crop Insurance Corporation (now a separate Risk Management Agency), and the Farmers Home Administration. Though its name has changed over the years, the Agency's relationship with farmers goes back to the 1930s.

At that time, Congress set up a unique system under which Federal farm programs are administered locally. Farmers who are eligible to participate in these programs elect a three- to five-person county committee, which reviews county office operations and makes decisions on how to apply the programs. This grassroots approach gives farmers a much-needed say in how Federal actions affect their communities and their individual operations. After more than 60 years, it remains a cornerstone of FSA's efforts to preserve and promote American agriculture.

The FSA farm-lending program involves direct and guaranteed loans to family farmers and ranchers to purchase farmland and finance agricultural production. FSA maintains its state headquarters in Athens as well as in most agriculturally productive counties. Farmers may apply for direct loans at FSA local offices or USDA Service Centers. Guaranteed loans are available from local commercial lenders who apply for loan guarantees from FSA. Although general information may be obtained from state offices, all programs are administered through local offices.

B. The Georgia Development Authority

The Georgia Development Authority (GDA) was created as a public corporation and an instrumentality of the State to assist Georgia agriculture and industry interests by insuring loans to farmers and businessmen. Its purposes include rural rehabilitation; development of agriculture and industry by providing, securing or guaranteeing loans for such purposes; and possession of an operation of any franchise, license or permits granted to the Authority for business purposes by the United States or the state of Georgia.

The assets, which provide the reserves to insure such loans, were transferred in 1954 from the Federal Government to the Georgia Rural Rehabilitation Corporation, a predecessor of the present Authority. One of the original conditions of the transfer, which is still binding on the Authority, is that returned assets and income will be used only for the rural rehabilitation purposes agreed upon by the U.S. Secretary of Agriculture and the administering agencies. Because all of its assets originated with transfer funds, the Authority’s loan programs are limited to insuring agricultural and agribusiness loans. Additional State funds would be required to implement new loan programs to be guaranteed by the Authority.

A loan transaction can actually be either sold or assigned to a Local Bank. There are currently about 73 participating banks throughout the state under the GDA program. After the loan is sold and assigned to a participating bank, the local bank receives the prime rate with the Authority retaining 0.5 percent for servicing and insuring the loan. The incentives for the participating banks are as follows:

§ They can receive interest rates in excess of other government guarantees or discount rates by dealing with the Authority.

§ The banks have never suffered a loss on any loan insured by the Authority.

§ Loans are 100% guaranteed and are not counted against the loan to asset ratio of the banks insured by the FDIC.

In the event of bankruptcy or default by the customer, the Authority repurchases the loan from the local bank and handles all phases of the collection work, including foreclosure, if necessary.

C. The Small Business Administration

The Small Business Administration (SBA), created in 1953, is committed to "aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns." Over the past 10 years, (FY 1991-2000), the SBA has helped almost 435,000 small businesses get more than $94.6 billion in loans, a record level for the agency since its creation. Last year alone, the SBA backed more than $12.3 billion in loans to small businesses. More than $1 billion was made available for disaster loans and more than $40 billion in federal contracts were secured by small businesses with SBA's help.

The majority of SBA’s financial assistance is in the form of loan guarantees. The SBA itself does not provide direct loans or grants to small businesses. However, the SBA supports other organizations that provide loans, management training and services for small businesses.

The most active and expert lenders (commercial banks) qualify for the SBA's streamlined lending programs. Under these programs, lenders are delegated partial or full authority to approve loans, which results in faster service from SBA.

Certified lenders are those who have been heavily involved in regular SBA loan-guaranty processing and have met certain other criteria. They receive a partial delegation of authority and are given a three-day turnaround by the SBA on their applications (they may also use regular SBA loan processing). Certified lenders account for nearly a third of all SBA business loan guaranties. Preferred lenders are chosen from among the SBA's best lenders and enjoy full delegation of lending authority in exchange for a lower rate of guaranty. This lending authority must be renewed at least every two years, and the SBA examines the lender’s portfolio periodically. Preferred loans account for more than 10 percent of SBA loans.

D. USDA’s Rural Development Program

The Rural Development Program of the USDA has legislative authority under Section 310B of the (amended) Consolidated Farm and Rural Development Act of 1972 to implement its Business and Industry (B & I) Direct and Guaranteed Loan Programs.

The B & I Direct Loan Program is designed to expand the availability of credit for businesses that do not qualify for conventional bank financing in certain rural areas suffering from fundamental and economic stress. It provides loans to private parties, who cannot obtain credit elsewhere, and to public bodies. This type of assistance is available in areas outside any city with a population of 50,000 or more and its immediately adjacent urbanized or urbanizing area. The program’s primary purpose is to improve, develop or finance businesses, industry and employment and improve the economic and environmental climate in rural communities, including pollution abatement and control.

The B & I Guaranteed Loan Program also helps in expanding the availability of credit to borrowers based in rural areas by providing guarantees to loans made by commercial lenders up to a maximum of 90% of loss resulting from borrower default. The purpose of the guarantee authority is to improve the economic climate in rural communities in “partnership” with existing private credit sources by increasing the local lender’s legal lending limit and allowing increased benefits to return to the lender via sale of both the guaranteed and non-guaranteed portions of the loan.

For easy reference and comparison, the important features of the direct and guaranteed lending programs of these four institutions are summarized in Tables 1 and 2, respectively.

Table 1: General Features of Direct Lending Programs
Program Features	FSA	GDA	SBA	USDA-B&I
Eligible Borrowers	U.S. citizens unable to obtain credit elsewhere at reasonable rates and terms to finance needs; have an acceptable credit history	Loans made to full or part0time farmers; borrower does not have to live in the farm to qualify. Loans made on timber or cropland.	SBA’s direct loans are for other organizations that provide loans, management training and services for small businesses.	Any legally organized entity, including cooperatives, corporations, partnerships, trusts or other entity organized and operating on a profit or nonprofit basis, Indian tribes or federally-recognized Tribal groups, municipalities, counties, any other political subdivisions or an individual.
Loan Purposes	Farm Ownership Loans for purchase of land, construction or repair buildings and other fixtures, and promotion of soil and water conservation Operating Loans Emergency Loans to help cover production and physical losses in disaster areas	Land purchases, irrigation equipment and wells, farm building construction and repairs, machinery and equipment purchases, farm pond construction, education of children, establishment of permanent pastures, specialized building for dairy poultry, swine or beef enterprises, establishment of beef, dairy or swine herds, debt refinancing.		Business and industrial acquisitions, construction, conversion, expansion, repair, modernization, or development costs; purchase of equipment, machinery or supplies; startup costs and working capital; processing and marketing facilities; pollution control and abatement; and refinancing for viable projects under certain conditions. Ineligible loan purposes include lines of credit, tourist or recreation facilities of any project likely to transfer employment from one area to another. Aquaculture, commercial nurseries, forestry, mushrooms and hydroponics are excluded from list of eligible agricultural enterprises.
Loan Amount	Maximum loan size of $200,000 under both Farm Ownership and Operating Loan facilities	Minimum of $25,000 and maximum of $1,000,000.		Maximum aggregate amount to any one borrower is $10 million.
Loan Maturity	Operating loans are normally repaid within 7 years and Farm Ownership loan terms cannot exceed 40 years.	Up to 20-year amortization, variable interest rate based on prime rate, adjusted annually.		Maximum maturities of 7 years for working capital, 15 years for machinery and equipment and 30 years for real estate loans.

Table 2: General Features of Guaranteed Lending Programs
Program Features	FSA	GDA	SBA (Basic 7a)	USDA-B&I
Who makes the Loan?	Commercial and other recognized farm lenders in the state	Local commercial lenders in the state	Certified and preferred lenders in the commercial banking industry	Commercial and other recognized lenders including Federal or State chartered banks, credit unions, insurance companies, savings and loans associations, Farm Credit Banks or a mortgage company that is part of a bank-holding company
Eligible Borrowers	US citizen with legal capacity to incur obligations of loan, be unable to obtain sufficient credit elsewhere, with acceptable credit history, has not caused FSA a loss by receiving debt forgiveness on more than 3 occasions, not delinquent on any federal debt and must be owner or tenant of family farm after loan is closed	Citizen of the state of Georgia and property to secure loan must be real property located within the boundaries of the state of Georgia	Small businesses defined as one that is independently owned and operated and not dominant in its field of operation. Size standard for agriculture is $0.5 - $3.5 million receipts.	Virtually any legally organized entity including a cooperative, corporation, partnership, trust or other entity organized and operating on a profit or nonprofit basis, Indian Tribe or federally-recognized tribal group, municipality, county or other political subdivision of a state or an individual.
Maximum Loan Guarantee	90% but lender may receive 95% guarantee is loan is to refinance direct FSA farm credit program debt or loan made under beginning farmer down payment loan program	100%	75% up to $$750,000; For loans of $100,000 or less, the guarantee rate is 80%	90%
Loan Purposes	Farm Ownership (FO) Loans for purchase of land, construction or repair buildings and other fixtures, and promotion of soil and water conservation; Operating Loans (OL) to working capital	Same as loan purposes for direct loans	Real estate, expansion, equipment, working capital or inventory	Working capital, machinery and equipment, buildings and real estate and certain types of debt refinancing
Loan Amount	Maximum guarantee of $731,000 for both OL and FO loans	Minimum of $25,000 and maximum of $1,000,000.	Subject to cap on maximum guarantee of $750,000.	Maximum aggregate amount to any one borrower is $25 million.
Loan Maturity	Operating loans are normally repaid within 7 years and Farm Ownership loan terms cannot exceed 40 years.	5-20 years	Up to 10 years for working capital and up to 25 years for fixed assets	Maximum maturities of 7 years for working capital, 15 years for machinery and equipment and 30 years for real estate loans.

References

Berton, V. and J. Butler. “Building Better Rural Places.” United States Department of Agriculture, January 2001.
Farm Credit System, http://www.agfirst.com
Farm Service Agency, USDA, http://www.fsa.usda.gov
Georgia Department of Community Affairs. “Economic Development Financing Packet.” Publication No. 0095, Atlanta, GA.
Georgia Development Authority, http://www.gda.org
United States Department of Agriculture (USDA). “Agricultural Income and Finance: Situation and Outlook Report.” Economic Research Service, AIS-76, February 2001.

APPENDIX

Lenders’ Contact Information

A. FARM SERVICE AGENCY

State Office: 355 E. Hancock Avenue
Room 102
Athens, GA 30601
Tel. No. 706-546-2266
FAX No. 706-546-2151

B. GEORGIA DEVELOPMENT AUTHORITY

District Offices

P.O. Box 1267	2082 East Exchange Place	P.O. Box 1267
15 5^th Street, SE	Suite 102	1109 Washington St.
Moultrie, GA 31776-1267	Tucker, GA 30084	Perry, GA 31069-1267
Tel. No. 912-891-7118	Tel. No. 1-800-376-FARM 770-414-3400	Tel. No. 912-987-7487

C. SMALL BUSINESS ADMINISTRATION

District Office:
233 PEACHTREE ST. N.E. Harris Tower-1900
Atlanta, GA 30303
Tel No. (404)331-0100
FAX (404)331-0101

Regional Office:
233 PEACHTREE ST. N.E.
Harris Tower-1800
Atlanta, GA 30303
Tel. No. (404)331-4999
FAX (404)331-2354

Preferred SBA Lenders
(Asterisk denotes preferred lender status)

*Allied Capital Lending
2970 Peachtree Road, Ste 825
Atlanta, GA 30305
Voice # : 404-760-0566
Fax : 404-760-0526

AmeriBank
7 East Congress Street
Savannah, GA 31402
Voice # : 912-239-1637
Fax: 912-232-1322

*Amresco Independence Funding Co
2 Concourse Parkway, Suite 275
Atlanta, GA 30328
Voice #: 404-654-2785
Fax: 404-654-2789

Atlantic States Bank
1725 Indian Trial Road
Norcross, GA 30090
Voice # : 770-982-3109
Fax: 770-982-3107

*Bank of America
Riverwood 100, 11th Floor
3350 Riverwood Parkway
Atlanta, Georgia 30339-3340
Voice #: 770/850-5513
Fax: 770/850-5543 Fax

*Bank of North Georgia
8025 Westside Pkwy
Alpharetta, GA 30004
Voice #: 770-569-9660
Fax: 770-754-9956

*BDC of Georgia, Inc
2255 Cumberland Pkwy, Ste 1200
Atlanta, GA 30339
Voice #: 770-434-0273
Fax: 770-801-9273

*Branch Banking & Trust Co.
205 Market Place, Suite 102
Roswell, GA 30075
Voice #: 770-518-6100
Fax: 770-518-6300

*Business Loan Center
415 Beckrich Rd., Ste 250
Panama City Peach, FL 32407
Voice #: 850-234-5056
Fax: 850-234-6150

*Citizens Trust Bank
75 Piedmont Ave.
Atlanta, GA 30303
Voice # : 404-653-2871
Fax: 404-659-6424

*CIT Small Business Lending
PMB 342
12460 Crabapple Road, Suite 202
Alpharetta, GA 30004-6386
Voice #: 678-461-0461
Fax: 678-461-0462

The Coastal Bank
P.O. Box 9750
Savannah, GA 31412-9747
Voice # : 912-235-4444
Fax: 912-233-8423

*Colonial Bank
390 W. Crogan Street
Lawrenceville, GA