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FSA guaranteed
loans provide lenders (e.g., banks, Farm Credit System institutions,
credit unions) with a guarantee of up to 95 percent of
the loss of principal and interest on a loan. Farmers
and ranchers apply to an agricultural lender, which then
arranges for the guarantee. The FSA guarantee permits lenders
to make agricultural credit available to farmers who do not
meet the lender's normal underwriting criteria.
FSA guaranteed loans
are for both Farm Ownership
and Operating purposes. Like the Direct
Loan Program, a percentage of Guaranteed Loan funds is
targeted to beginning farmers and ranchers and minority applicants.
Farm Ownership
Loans
Guaranteed Farm Ownership
(FO) Loans may be made to purchase farmland, construct or
repair buildings and other fixtures, develop farmland to promote
soil and water conservation, or to refinance debt.
Operating Loans
Guaranteed Operating Loans
(OL) may be used to livestock, farm equipment,
feed, seed, fuel, farm chemicals, insurance, and
other operating expenses. Operating Loans can also be used
to pay for minor improvements to buildings, costs associated
with land and water development, family living expenses, and
to refinance debts under certain conditions.
FSA can guarantee
OLs or FO loans up to $813,000 (amount adjusted annually based
on inflation).
To qualify for
an FSA Guarantee, a loan applicant must:
-
be a citizen
of the United States (or legal resident alien), which
includes Puerto Rico, the U.S. Virgin Islands, Guam, American
Samoa, and certain former Pacific Trust Territories.
-
have an acceptable
credit history as determined by the lender.
-
have the legal
capacity to incur the obligations of the loan.
-
be unable
to obtain a loan without a guarantee.
-
not have caused
FSA a loss by receiving debt forgiveness on more than
3 occasions.
-
be the owner
or tenant operator of a family farm after the loan is
closed. For an OL, the producer must be the operator
of a family farm after the loan is closed. For an FO Loan,
the producer needs to also own the farm.
-
not be delinquent
on any Federal debt.
Entities (corporations,
cooperatives, joint operations, partnerships, trusts, and
limited liability companies) and their
members/stockholders must meet
these same eligibility requirements. The entity must also
be authorized to operate a farm or ranch in the State where
the land is located.
What Other
Criteria Does FSA Consider?
In addition to
meeting the eligibility criteria, the loan applicant must
have a satisfactory credit history, demonstrate repayment
ability, and provide sufficient security for the loan.
If the Producer
Qualifies, What Next?
The following
actions are usually taken as part of the application process:
1. The producer
and lender complete the guaranteed application and submit it
to FSA (FSA will assist if needed.)
2. FSA reviews
the application for eligibility, repayment ability, security,
and compliance with other regulations.
3. FSA approves
and obligates the loan.
4. The lender
receives a conditional commitment indicating funds have
been set aside, and the loan may be closed.
5. The lender
closes the loan and advances funds to the producer.
6. FSA issues
the guarantee.
Repayment terms
vary according to the type of loan made, the collateral securing
the loan, and the producer's ability to repay. OLs are normally repaid within 7 years and
FO loans
cannot exceed 40 years.
The Guaranteed
loan interest rate and payment terms are negotiated between
the lender and the borrower. Interest rates on these loans
may not exceed the rate charged the lender's average farm
customer. In addition, under the Interest Assistance Program,
FSA will subsidize 4 percent of the interest rate on loans
to qualifying borrowers.
Each loan must
be adequately secured. Collateral for OLs consists
of a first lien on crops to be produced and on livestock and
equipment purchased or refinanced with loan funds. A lien
may be taken on certain other chattel and real estate property,
and an assignment usually will be taken on income such as
that from a dairy enterprise. Collateral for FO loans consists of real estate only or a combination of real
estate and chattels. FSA staff determine whether the
collateral proposed by the lender is adequate.
Is this the
Lender's Loan or an FSA Loan?
Guaranteed loans
are the property and responsibility of the lender. The lender
makes the loan and services it to conclusion. If successful,
the borrower is able to repay the loan and no taxpayer money
will be used except for administrative expenses. If a loan
fails, and the lender suffers a loss, FSA will reimburse the
lender with Federal funds according to the terms and conditions
specified in the guarantee.
What Happens
if the Loan Becomes Delinquent or the Borrower Defaults?
The lender must
notify FSA when a borrower is 30 days overdue on a payment
and is unlikely to bring the account current within 60 days,
or if a loan is otherwise a problem. Lenders are encouraged
to work with the borrower to resolve any problems.
For most loans,
the maximum guarantee is 90 percent. The guarantee percentage
will be determined by FSA based on the risk involved in the
loan. The lender may receive a 95 percent guarantee when:
1. The purpose
of the loan is to refinance direct FSA farm credit program
debt. If only a portion of the loan is for this purpose,
a weighted percentage of guarantee will be used.
2. The loan
is made to a beginning farmer to participate in the beginning
farmer down payment loan program or a qualifying State beginning
farmer program.
For most loans,
FSA charges a guarantee fee of 1 percent of the guaranteed
portion of the loan. This fee may be passed on to the borrower.
The guarantee fee is waived for:
-
Interest assistance
loans
-
Loans where
more than 50% of the loan funds are used to pay off direct
FSA loan debt
-
Loans in conjunction
with a Downpayment Farm Ownership Loan program for beginning
farmers or a qualifying state beginning farmer program.
This fee waiver does not extend to all beginning farmers.
The secondary
market for USDA guaranteed loans is a key feature of the guaranteed
lending program. The lender may resell the guaranteed portion
of the loan to an interested party. The interested party then
becomes the Holder of the loan, but the original
lender must retain the loan servicing responsibilities. Investors
who are looking for safe investments with a reasonable return
are attracted to these loans because of the Government's full
Faith and Credit guarantee against default. The existence
of the secondary market makes guaranteed loan notes more liquid.
By reselling the guaranteed portions, lenders reduce interest
rate exposure, increase their lending capabilities, and generate
fees.
Advantages of
Using the Secondary Market.
The existence
of the secondary market is a strong inducement for lenders
to become involved in guaranteed lending. Selling the guaranteed
portion of the loan to other investors offers a number of
advantages, including:
-
Reduced
Interest Rate Risk.
Lenders can transfer risk of interest
rate increases on the guaranteed portion of a fixed rate
loan.
-
Increased
Liquidity. Selling the loan on the secondary market
frees the funds for additional lending or investing activity.
-
Increased
Lending or Investing Capabilities.
Since the guaranteed
portion of the loan is generally not applied against a
bank's lending limit, it can be used to expand lending
capabilities.
-
Increased
Return on Investment.
The sale of the guaranteed portion
of the loan in the secondary market increases the lender's
overall return on investment. Each time a bank sells a
guaranteed portion, it generally retains a servicing fee.
-
Rates and
Terms. Lenders may be able to offer the producer more
flexible repayment terms, as well as fixed and/or reduced
interest rates to improve cash flow.
Where
To Go for More Information
Further information
and applications for FSA loan programs are available at the
Agency's local county offices. These are usually listed in
telephone directories in the section set aside for governmental/public
organizations under the U.S. Department of Agriculture, Farm
Service Agency. To
locate your local FSA Office, click here.
Comments
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Office of Civil Rights, Room 326-W, Whitten Building, 14th
and Independence Avenue, SW, Washington, D.C., 20250-9410,
or call (202) 720-5964 (voice or TDD).
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