FSA Guaranteed Loans

Transcription

1 FSA Guaranteed Loans CAUTION: This is an outline for educational purposes only. To learn the details about any certain point, read the current statutes, regulations, and policy notices, which can change frequently. These materials cannot substitute for an experienced lawyer who is up to date on the latest changes in federal laws and regulations. Farmers Legal Action Group, Inc. 46 4th Street East, Suite 1301 St. Paul, MN Phone: Fax: Copyright 2003, Farmers Legal Action Group, Inc. This outline may be reprinted for educational purposes only so long as Farmers Legal Action Group is credited when reprinting.

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3 FSA Guaranteed Loans Page 1 FSA Guaranteed Loans CAUTION: This is an outline for educational purposes only. To learn the details about any certain point, read the current statutes, regulations, and policy notices, which can change frequently. These materials cannot substitute for an experienced lawyer who is up to date on the latest changes in federal laws and regulations. I. Introduction FSA offers guaranteed farm ownership (FO) and operating (OL) loans and operating lines of credit to family farmers who are unable to obtain credit elsewhere. Increasingly, the focus of FSA s credit programs has been shifting from direct loan making to loan guarantees, and that trend seems likely to continue. In the 2002 Agriculture Appropriations Bill, Congress provided only $150 million for direct FO loans but $1 billion for guaranteed FO loans and provided only just over $600 million for direct OL loans but more than $2 billion for guaranteed OL loans. 1 Congress continued this trend in the 2003 Consolidated Appropriation Resolution designating $1 billion for guaranteed FO loans, $1.7 billion for unsubsidized guaranteed OL loans, and $400 million for subsidized guaranteed OL loans versus $130 million for direct FO loans and $605 million for direct OL loans. 2 A. Revised Guaranteed Loan Rule Issued in 1999 On February 12, 1999, FSA issued a final rule that made significant changes to the guaranteed loan program. 3 The primary aim of the changes was to make the guaranteed loan program more appealing to lenders, though important changes for borrowers were also included. The new rule makes changes in several areas not discussed in these materials, including the substitution of lenders, the sale and repurchase of guaranteed loans on the secondary loan market, and the liquidation process. Anyone interested in the guaranteed loan program should review the regulations themselves, now found in Part 762 of Title 7 of the Code of Federal Regulations. One important change from the old regulations is that the loan forms and many of the detailed FSA procedures were removed from the regulations. 4 FSA procedures are instead published in an agency handbook, 2-FLP Guaranteed Loan Making and Servicing. 5 1 Making Appropriations for Agriculture, Rural Development, Food and Drug Administration, and Related Agencies for Fiscal Year 2002, H.R. Conf. Rep. No. 275, 107th Cong., 1st Sess., p. 13 (2001). 2 Consolidated Appropriations Resolution, Division A, Title I, Agricultural Credit Insurance Fund Program Account, H.J. Res (2003) 3 64 Fed. Reg (1999). For the proposed rule, see 63 Fed. Reg. 51,458 (1998). 4 See 64 Fed. Reg. 7357, 7359 (1999) (prefatory comments).

4 FSA Guaranteed Loans See cautionary note on page 1. Page 2 B. Borrower Can Appeal Adverse Guaranteed Loan Decisions Without Lender Adverse decisions made by FSA related to the guaranteed loan program may be appealed to USDA s National Appeals Division (NAD). Until June 1999, borrowers could only bring an appeal if the lender joined the appeal request. New NAD regulations, issued June 23, 1999, allow guaranteed loan borrowers to appeal adverse FSA decisions without the lender s participation. 6 Note that neither the guaranteed loan regulations nor the handbook have been changed to reflect this new NAD rule, therefore they continue to state the old rule (now untrue) that the lender and borrower must jointly execute an appeal. 7 C. Changes for 2001 Loan Limits Increased, Cash Flow Cushion Eliminated In January 2001 FSA issued a final rule that further changed the guaranteed loan program. 8 The rule incorporated the maximum loan levels applicable to 2001 loans, added a provision for annual inflationary adjustments, and moved the loan limit provisions to a new regulatory section. 9 The rule also changed cash flow requirements for loan eligibility. Guaranteed loan cash flow plans no longer must provide for the expense of replacing capital items. 10 This requirement had been incorporated into regulations through the requirement that guaranteed loan cash flow plans include a 10 percent margin for capital replacements. 11 The new rule implements the 1999 statutory change by removing this 10 percent margin and requiring only that guaranteed loan applicants demonstrate a feasible plan. 12 D. Time Limits on OL Loan Eligibility Suspended until 2006 As discussed in more detail later in these materials, there are complicated limits on how long a borrower may receive guaranteed OL loans from FSA. These limits are generally 15 years of either direct or guaranteed OL loans or five years of guaranteed OL loans after October 28, This handbook can be retrieved and downloaded, in whole or in part, from FSA s website at C.F.R. 11.1, Participant (2003). 7 7 C.F.R (a) (2001); 2-FLP Guaranteed Loan Making and Servicing, p. 3-3, para. 33A (Feb. 12, 1999) Fed. Reg (2001) (codified at 7 C.F.R. pts. 761, 762). 9 7 U.S.C. 1925, 1943 (2003); 7 C.F.R (2003) U.S.C. 1989(b). 11 See 7 C.F.R (b), Positive cash flow (2003) Fed. Reg (2001) (codified at scattered sections of 7 C.F.R. pt. 762). This change is discussed in the prefatory comments to the rule at 66 Fed. Reg (2001).

5 See cautionary note on page 1. FSA Guaranteed Loans Page 3 In May 2002, Congress enacted a statutory provision suspending enforcement of the time limits on guaranteed OL loan eligibility through December 31, E. Other Changes for 2002 Simplified Application Process, Loan Assistance, Beginning Farmers In addition to suspending enforcement of time limits on guaranteed loan OL loan eligibility in the 2002 Farm Bill, Congress increased the maximum principal amount of loans eligible for the Guaranteed Loan program s simplified application process from $50,000 to $125, The 2002 Farm Bill also permanently authorizes the Guaranteed Loan Interest Assistance Program, which had been scheduled to sunset at the end of September In addition, 15 percent of Interest Assistance funds must be reserved for beginning farmers and ranchers until March 1 of each year. 16 II. FSA Guaranteed Loan Making As mentioned earlier, the focus of FSA lending efforts has shifted toward making guaranteed loans. In some cases, guaranteed loan eligibility requirements are much less restrictive than those for direct FSA loans. 17 And certain loan purposes that have been eliminated for direct loans may still be available for guaranteed loans. A. Types of Guaranteed Loans Each type of guaranteed loan has somewhat different eligibility requirements and allows for different uses to be made of the loan money. 1. Guaranteed Operating (OL) Loans Guaranteed operating loans known as OL loans can be used for operating expenses. 18 This includes purchasing machinery, equipment, livestock, seed, and other inputs. Guaranteed OL loans can also be used to pay rent and family living expenses and, in some cases, refinance other operating debt or develop land and water resources. 2. Guaranteed Operating (OL) Lines of Credit Guaranteed FSA operating (OL) loans can also take the form of a line of credit. 19 A line of credit is a fund from which a borrower can draw money without applying for 13 Farm Security and Rural Investment Act of 2002, Pub. L. No , 5102 (May 13, 2002). The provision suspends the force and effect of 7 U.S.C. 1941(c) and 1949 and 7 C.F.R from the date of enactment through December 31, Farm Security and Rural Investment Act of 2002, Pub. L. No , 5307 (May 13, 2002). 15 Farm Security and Rural Investment Act of 2002, Pub. L. No , 5313 (May 13, 2002). 16 Farm Security and Rural Investment Act of 2002, Pub. L. No , 5313 (May 13, 2002). 17 See 7 C.F.R (a)(8)-(9), (a)(8)-(9) (2003) C.F.R (a)(1) (2003) C.F.R (d), (a)(2) (2003).

6 FSA Guaranteed Loans See cautionary note on page 1. Page 4 a new loan each time a withdrawal is made. In general, a line of credit may be used for many of the same uses as an OL loan. This includes paying annual operating and family living expenses, paying current annual operating debts, and purchasing feeder animals. 20 As of February 1999, line of credit funds can also be advanced to make scheduled, non-delinquent payments for debt authorized for OL or FO loan purposes Guaranteed Farm Ownership (FO) Loans Guaranteed farm ownership loans known as FO loans can be used to purchase or enlarge a farm, to make capital improvements to farm real estate and to promote soil and water conservation. 22 In addition, FO loans may sometimes be used to refinance debt. B. Eligibility for Guaranteed Loans Several general eligibility rules apply for all types of guaranteed loans. Statutory changes over the past decade significantly altered the eligibility requirements for FSA guaranteed loans. 1. General Eligibility Requirements In order to be eligible for any type of guaranteed loan, a number of requirements must be met. 23 a. Legal Capacity and Citizen or Legal Resident Guaranteed loan borrowers must have the legal capacity to take on loan obligations. 24 In addition, they must be either citizens or permanent residents of the United States. 25 b. Family Farmer For an FO loan, the individual borrower must be the owner-operator of a family farm after the loan is closed. 26 For an OL loan, an individual borrower must operate, as owner or tenant, a family farm. 27 FSA has a specific definition of a family farm, which includes the following elements: 28 (1) Produces enough to be recognized as a farm; 20 7 C.F.R (a)(2) (2003) C.F.R (a)(2)(iv) (2003) C.F.R (b) (2003) C.F.R (2003) C.F.R (e) (2003) C.F.R (d) (2003) C.F.R (j) (2003) C.F.R (i) (2003) C.F.R , Family farm (2003).

7 See cautionary note on page 1. FSA Guaranteed Loans Page 5 (2) Generates enough income from farm to pay expenses; (3) Farm managed by borrower; and (4) Substantial labor contributed by borrower. c. Unable to Get Credit Elsewhere Borrowers must be unable to obtain sufficient credit without a loan guarantee. 29 This means that the borrower cannot finance his or her actual needs at reasonable rates and terms. d. Only Limited Debt Forgiveness from USDA In general, to be eligible for a guaranteed loan, the borrower may not have been granted debt forgiveness by USDA on more than three occasions on or before April 4, 1996, and may not have been granted debt forgiveness by USDA on any occasion after April 4, (1) Definition of Debt Forgiveness FSA defines debt forgiveness as (1) a debt write-down, write-off, compromise, adjustment, reduction, charge-off, or discharge in bankruptcy of a direct loan; or (2) a payment of a guaranteed loan loss claim by FSA under the same circumstances. 31 (2) Exception to Debt Forgiveness Restriction for OL loans For guaranteed OL loans, there is an exception to the debt forgiveness restriction. If a borrower meets both parts of the exception, he or she may still be eligible for a guaranteed OL loan despite having disqualifying prior debt forgiveness. 32 First, the form of debt forgiveness must have been a restructuring with a primary loan servicing write-down or bankruptcy. Second, the borrower must be applying for a guaranteed OL loan that is intended to pay annual farm and ranch operating expenses. e. Not Delinquent on Federal Debt To be eligible for a loan or line of credit guaranteed by FSA, the borrower, and anyone who will execute the promissory note, cannot be delinquent on any federal nontax debt C.F.R (h) (2003) C.F.R (a) (2003) C.F.R (a) (2003) C.F.R (a) (2003) C.F.R (b) (2003).

8 FSA Guaranteed Loans See cautionary note on page 1. Page 6 f. Acceptable Credit History The borrower must have an acceptable credit history demonstrated by debt repayment. 34 A history of failure to repay past debts will be considered unacceptable credit history if payment was within the borrower s control. Lack of credit history and certain isolated incidents of late payment will not be considered unacceptable. g. No False or Misleading Information Given to FSA The borrower cannot have provided false or misleading documents or statements in past dealings with FSA. 35 h. No Outstanding Judgments Owing to United States The borrower, and anyone who will execute the promissory note, may not have any outstanding unpaid nontax judgment obtained by the United States in any court. 36 i. Crop Insurance Coverage or Waiver of Eligibility for Disaster Relief The borrower must either: (i) obtain catastrophic risk crop insurance (CAT), if it is available, for each crop of economic significance; or (ii) waive future eligibility for emergency crop loss assistance in connection with uninsured crops. 37 j. No Controlled Substance Violation The borrower cannot have been convicted of planting, cultivating, growing, producing, harvesting, or storing a controlled substance under Federal or state law within the last five crop years Feasible Plan In order to qualify for a guaranteed loan, the borrower must show a feasible plan. 39 For guaranteed loans, feasible plan is defined to mean that there is sufficient cash flow to cover all scheduled debt payments and other expenses for the year. 40 As noted earlier, guaranteed loan borrowers no longer need to show a 10 percent margin over 34 7 C.F.R (g) (2003) C.F.R (f) (2003) C.F.R (c) (2003) C.F.R (a)(2) (2003) C.F.R (l) (2003) C.F.R (a)(2) (2003) C.F.R (b), Feasible plan, (a)(2) (2003).

9 See cautionary note on page 1. FSA Guaranteed Loans Page 7 scheduled expenses and payments to cover capital replacement costs. 41 No margin is currently required. If the loan is for one production cycle, the cash flow plan must be feasible over one cycle. If the loan is for more than one production cycle and the cash flow budget is unusual because the borrower has cash or inventory on hand, new enterprises, carryover debt, unusual planned purchases, important operating changes, or other reasons, the cash flow budget must show a feasible plan for a typical cycle Time Limits on Eligibility for Guaranteed OL Loans Congress has adopted some complicated time limits on guaranteed OL loan eligibility for FSA borrowers. 43 These requirements mean that after a certain number of years borrowers who have had either direct or guaranteed OL loans from FSA or the old FmHA must find non-fsa credit. Two versions of the time limitation can affect a borrower s eligibility for guaranteed OL loans. One requirement applies to borrowers who only fairly recently borrowed through FSA for the first time. The other requirement is more likely to apply to those who have been long-term FSA borrowers. a. More Recent Borrowers The General Rule of 15 Years Under the time limit rules, a borrower who has received FmHA or FSA OL loans either direct or guaranteed for 15 years or more is not eligible for a new guaranteed OL loan. 44 For farmers who first borrowed through FSA recently, this is the limit that will apply. b. Transition Rule for Long-term FSA Borrowers Some longer-term FSA borrowers who would have been immediately cut off from guaranteed operating credit by the 15-year rule qualified for continued guaranteed OL borrowing through a transition rule. In order for the transition rule to apply, the borrower must have had FSA operating loans for at least ten years before October 28, A borrower who meets this requirement is eligible for an FSA guaranteed OL loan for five additional years after October 28, In the case of a line of credit, each year in which an advance is made after October 28, 1992, counts toward the five additional years C.F.R (b), (2003) C.F.R (b), Feasible plan (2003) U.S.C. 1949(b) C.F.R (a)(1) (2003) C.F.R (a)(2) (2003).

10 FSA Guaranteed Loans See cautionary note on page 1. Page 8 NOTE: In May 2003, Congress enacted a statutory provision suspending enforcement of the time limits on guaranteed OL loan eligibility until January 1, C. Guaranteed Loan Dollar Limits In 1998, Congress increased the maximum loan amounts for guaranteed loans and provided for the limits to be adjusted annually for inflation. 47 The specific loan limits set for 1999 were incorporated into the guaranteed loan rule. 48 As mentioned earlier, a rule change published in January 2001 incorporated the loan limits for 2001, provides for annual adjustments, and moves the loan limitation provisions to a new section of the Code of Federal Regulations. 49 An FSA policy notice issued on October 19, 2001, announced the loan limits effective until September 30, FSA has not issued a similar policy notice announcing loan limits effective through September 30, Limits on Total Outstanding Loan Principal The total outstanding principal balance on the borrower s FSA guaranteed OL and FO loans in any combination can currently be no more than $762,000 at loan closing. 51 There is also currently a $762,000 total principal balance limitation on outstanding direct and guaranteed OL loans or direct and guaranteed FO loans held by a borrower. 52 There is currently a $962,000 maximum for outstanding principal balance on all of a borrower s direct and guaranteed OL and FO loans Limit on Guaranteed Lines of Credit The amount of debt outstanding on a guaranteed line of credit should not exceed total estimated expenses less interest, as indicated in the borrower s cash flow budget, 46 Farm Security and Rural Investment Act of 2002, Pub. L. No , 5102 (May 13, 2002). The provision suspends the force and effect of 7 U.S.C. 1941(c) and 1949 from the date of enactment through December 31, Omnibus Bill, Div. A, Agriculture, Title VIII, 806 (amending 7 U.S.C. 1925, 1943). 48 See 7 C.F.R (a) (2001) C.F.R (2003)(generally); 7 C.F.R (2003)(for FO loans); 7 C.F.R (2003)(for OL loans). 50 FSA Notice FLP-226, Guaranteed Loan Limits for Fiscal Year (FY) 2002 (Oct. 19, 2001) C.F.R (b) (2003) stating that current the maximum guaranteed loan size adjusted annually for inflation is available at $762,000 total outstanding principal balance figure located at (visited April 3, 2003). 52 Extrapolated from the total outstanding balance figure of $762,000 and following the structure provided in FSA Notice FLP-226 for fiscal year Extrapolated from the total outstanding balance figure of $762,000 and following the structure provided in FSA Notice FLP-226 for fiscal year 2002.

11 See cautionary note on page 1. FSA Guaranteed Loans Page 9 unless the budget is revised and continues to reflect a feasible plan. 54 A lender may make an emergency advance under a guaranteed line of credit, however, even when the line of credit has reached its ceiling. 55 The emergency advance must meet the following conditions (1) the funds are for authorized operating loan purposes; (2) the financial benefit to the lender and the federal government exceeds the amount of the advance; (3) the loss of crops or livestock is imminent; and (4) the loan documentation allows for the advance. The advance will count against the line of credit and be secured by the same security. It will not constitute a new loan but will be a part of the original loan. D. Terms of Guaranteed Loans Many of the terms of a guaranteed loan are negotiated by the borrower and the lender. Other terms are set by FSA guaranteed loan regulations. 1. Length of Repayment FSA regulations set limits on the possible repayment terms of guaranteed loans. a. Guaranteed Operating (OL) Loans Annual Operating Loans Usually, loan funds used to pay annual operating expenses are repaid when the income from the year s operation is received, except when the borrower is establishing a new enterprise, developing a farm, purchasing feed while feed crops are being established, or recovering from disaster or economic reverses. 56 b. Guaranteed Operating (OL) Loans Not for Annual Operating Purposes Advances for purposes other than annual operating expenses are scheduled for payment over the minimum period necessary considering the borrower s ability to pay and the useful life of the security. 57 The final repayment date for an operating loan or line of credit cannot be more than seven years from the loan closing date. c. Guaranteed OL Lines of Credit All advances on a line of credit must be made within five years from the date of the loan. 58 d. Guaranteed Farm Ownership (FO) Loans In general, a guaranteed FO loan must be scheduled for repayment over a period of not more than 40 years from the date of the note C.F.R (c) (2003) C.F.R (a)(3) (2003) C.F.R (b)(1) (2003) C.F.R (b)(2) (2003) C.F.R (b)(3) (2003).

12 FSA Guaranteed Loans See cautionary note on page 1. Page Interest Rates In general, interest rates are negotiated by the lender and the borrower. FSA regulations do, however, set certain limits on the interest that may be charged on a guaranteed loan. 60 a. Fixed or Variable Rates The interest rate may be a fixed or variable rate as agreed upon by the borrower and lender. 61 FSA regulations spell out some characteristics required for variable interest rates charged on guaranteed loans. b. No Higher Than Average Customer Rates The interest rate that the lender may charge on a loan both the guaranteed and non-guaranteed parts of the loan may not be greater than the rate the lender charges its average farm customer. 62 c. Interest Assistance FSA s Interest Assistance Program can reduce a borrower s interest rate by four percentage points. 63 For example, if the borrower and the banker negotiated an interest rate of 11 percent and the borrower is eligible for interest assistance, the borrower would pay an interest rate of 7 percent, and FSA would pay the bank the remaining 4 percent. Eligibility for interest assistance is based on the borrower s cash flow calculation. 64 In general, borrowers are eligible for interest assistance if they cannot show a feasible plan with a normal interest rate but can show a feasible plan if they have the 4 percent interest assistance. CAUTION: Since the revision of the guaranteed loan rules in 1999, FSA s policy has become that each FSA guaranteed loan borrower is allowed one 10-year Interest Assistance period in a lifetime. This means that a borrower can receive Interest Assistance on one or more guaranteed loans in a 10-year period, but will not be eligible for Interest Assistance ever again once that period is over. This will be the case even if the borrower does not receive Interest Assistance in each of the 10 years during the period C.F.R (c) (2003) C.F.R (a) (2003) C.F.R (a)(1), (2) (2003) C.F.R (a)(3) (2003) C.F.R (a)(5), (2003) C.F.R (2003).

13 See cautionary note on page 1. FSA Guaranteed Loans Page Uneven Payment Schedules Permitted Balloon payments and other uneven payments are permissible for certain guaranteed FO and OL loans. 65 There must be sufficient collateral available at the time of the balloon payment, and it must be projected that the borrower would be able to refinance the debt when the balloon payment comes due. E. Charges and Fees Several charges and fees may be required of the borrower. These may include an initial guarantee fee, routine charges and fees established by the lender if charged to other borrowers for similar types of transactions, and late payment charges. 66 F. Security Requirements FSA regulations set several requirements for the collateral that must be offered as security for a guaranteed loan. 67 Changes made in 1999 include granting lenders greater authority to grant a partial release of security and subordinate their interest in normal income security to allow the farmer to obtain a new operating loan Security Necessary to Assure Repayment In general, the security for a guaranteed loan must be enough to fully secure the loan, protect the interests of both the lender and FSA, and assure repayment Type of Security Required A guaranteed loan may generally be secured by any property. 70 The lender must consider the term of the loan and expected life of the property when determining the adequacy of security. Loans lasting seven years or more must be secured by real estate Best Lien Available In general, a guaranteed loan must be secured by the best lien obtainable on security property Exception Authority FSA can make exceptions to security requirements for guaranteed loans if collection will not be impaired and the change is in the government s best interest C.F.R (d) (2003) C.F.R (e), (d)(4)(ii) (2003) C.F.R (2003) C.F.R (b), (c)(3) (2003) C.F.R (a) (2003) C.F.R (d) (2003) C.F.R (d)(2) (2003) C.F.R (e) (2003).

14 FSA Guaranteed Loans See cautionary note on page 1. Page 12 G. Property and Liability Insurance Requirements Based on the strengths and weaknesses of the loan, borrowers will be required to have adequate property, liability, and crop insurance coverage to protect the interests of the lender and FSA. 74 H. Finding a Lender for a Guaranteed Loan 1. Current List Available at County Office FSA regulations require the county office to maintain a current list of possible guaranteed lenders in the area. 75 These lists are to be made available to borrowers upon request. 2. Most Farm Lenders Eligible to Participate in Guaranteed Loan Program Borrowers do not need to limit themselves to this list, however. Most financial institutions banks, Farm Credit Services institutions, savings and loan offices, and credit unions can receive authority to make guaranteed loans if they have experience with agricultural loans. Farmers can start the process of getting a guaranteed loan by going to a lender and asking if it is interested in making an FSA guaranteed loan. 3. Preferred and Certified Lenders FSA has a Certified Lender Program (CLP) and new Preferred Lender Program (PLP). 76 Preferred lenders and Certified lenders are allowed to operate with less direct FSA supervision of their guaranteed loans, and their paperwork responsibility to FSA is reduced. 77 Not all rural banks, however, are preferred or certified lenders. (a) The Certified Lender Program allows a lender meeting certain standards to certify that certain loan making requirements are met, without needing to submit documents to FSA. 78 This is part of the effort to streamline the guarantee process and make the program more appealing to lenders. (b) The Preferred Lender Program allows lenders meeting still higher lending standards to have an even more streamlined process of loan approval. 79 For example, there is automatic approval of a complete application for a guarantee (subject to funding), unless it is denied within 14 days of receipt. 80 Less loan documentation is required of PLP lenders, and they are 73 7 C.F.R (h) (2003) C.F.R (2003) C.F.R (c) (2003) C.F.R (2003). 77 See 7 C.F.R (2003) C.F.R (b), (d) (2003) C.F.R (c), (c) (2003) C.F.R (a)(2) (2003).

15 See cautionary note on page 1. FSA Guaranteed Loans Page 13 allowed to make many decisions and take certain actions without specific FSA approval. 4. Substitution of Lenders When a borrower who already has a guaranteed loan needs to move the loan to another bank, FSA regulations allow what is called a substitution of lenders. 81 This means that the guaranteed loan is transferred to a new lender. I. The Guaranteed Loan Application Process In general, borrowers supply information to the lender, and the lender completes the guaranteed loan application. 82 The loan information requirements may be somewhat different from bank to bank. 1. Paperwork Requirements for Lenders The biggest complaint that lenders have had about guaranteed loans is paperwork. This concern can be justified especially for smaller banks with few employees and little time to learn about the details of the guaranteed loan program. There are some significant advantages to lenders who participate in the program, however. First, as long as the lender follows the program rules including keeping track of security property up to 90 or 95 percent of the loan value is guaranteed. 83 This means that the financial risk for the lender is quite small. Second, the more guaranteed loans the lender does, the more routine the paperwork will seem. Third, if the loan is for $125,000 or less, the paperwork requirements are much less demanding. 84 FSA responded to lenders concerns when it rewrote the guaranteed loan rules in The new rule reduces the requirements for all lenders for submitting a complete loan application. The burden on CLP and PLP lenders is reduced further, with the least documentation required from PLP lenders. PLP lenders are also allowed to make many decisions and take certain actions without specific FSA approval. 2. Deadlines for FSA Response In response to complaints about FSA delays in loan processing, Congress and FSA have set deadlines for loan eligibility considerations. a. If the guaranteed loan application is incomplete, FSA must notify the lender within 20 days after it is received. 85 b. If FSA needs additional information for a guaranteed OL loan application, it must ask the borrower for it within 10 calendar days C.F.R (c) (2003) C.F.R (2003) C.F.R (2003) C.F.R (a) (2003) U.S.C. 1983a(a)(2)(A).

16 FSA Guaranteed Loans See cautionary note on page 1. Page 14 c. Guaranteed loan applications submitted by standard lenders must be approved or disapproved, and the lender notified in writing, not later than 30 days after FSA receives a completed application. 87 d. Guaranteed loan applications submitted by CLP or PLP lenders must be approved or disapproved, and the lender notified in writing, not later than 14 days after FSA receives a completed application. 88 For PLP lenders, FSA s failure to meet this deadline results in automatic approval, subject to funding. 89 J. Funding Problems for Guaranteed Loans and Interest Assistance Like many other government agencies, FSA faces budget limits. Guaranteed loans and Interest Assistance are therefore approved subject to the availability of funds. 90 It is possible, therefore, that a guaranteed OL loan application could be approved but that FSA would not have enough money to provide the guaranteed loan in that year. 1. Generally, First Come, First Served In general, funding of approved borrower applications is based on the date the application was received first come, first served Some Preferences When Funding Limited When available guaranteed loan funds are not enough to meet the needs of all applicants, applications on hand from veterans, current FSA direct loan borrowers, and borrowers who (a) have a dependent family, (b) own livestock and implements necessary to successfully carry on a farming operation; or (c) can make down payments, receive preference over other applications received on the same date. 92 III. FSA Guaranteed Loan Servicing As mentioned earlier, the focus of FSA lending efforts is increasingly turning toward guaranteed loans. In times of financial stress, therefore, the loan servicing possibilities for guaranteed loans become more and more important. A. Loan Servicing Possibilities FSA guaranteed loan regulations allow for a range of loan restructuring options that change the terms of the debt agreement. 93 Many of these options may be familiar to 86 7 U.S.C. 1983a(a)(2)(B) C.F.R (a)(1) (2003) C.F.R (a)(2)(i) (2003) C.F.R (a)(2)(ii) (2003) C.F.R (b) (2003) C.F.R (b) (2002) C.F.R (b) (2003) C.F.R (2003).

17 See cautionary note on page 1. FSA Guaranteed Loans Page 15 borrowers and their attorneys from experience with direct FSA loans, but there are some important differences in the guaranteed loan context. 1. Consolidation The outstanding principal and interest of two or more guaranteed OL loans can be combined in a loan consolidation Rescheduling The payment term of a guaranteed loan can be extended through rescheduling, which means to rewrite the rates and terms of the loan or line of credit agreement Deferral Deferral allows a guaranteed loan borrower to make no principal payments and only partial interest payments for up to five years, however the loan may not be extended beyond the note s final due date Write-Down Guaranteed loan debt may be reduced through debt write-down. 97 Lenders may write down guaranteed loans to the level sufficient to allow the borrower to develop a feasible plan, after loan restructuring and deferral have been considered. As with direct loan write-downs, the goal is to have the borrower paying the most that he or she can afford, and in no case can the debt be written down below the net recovery value of the loan collateral. 98 The borrower will be required to enter a Shared Appreciation Agreement (SAA) for the write-down amount Interest Assistance Interest Assistance is a loan servicing program for guaranteed loans which reduces the interest rate paid by the borrower. 100 In this program, FSA makes annual payments to the lender equal to the amount of the interest reduction on the loan. At present the level of interest assistance is 4 percent. 101 FSA requires detailed cash flows to determine interest assistance eligibility. 102 In general, interest assistance is only available when the farmer cannot create a feasible 94 7 C.F.R (b), Consolidation, (e) (2003) C.F.R (b), Rescheduling, (c) (2003) C.F.R (b), Deferral, (d) (2003) C.F.R (b), Debt write-down, (e) (2003) CFR (e) (2003). See 7 CFR (b) for a definition of "net recovery value 99 7 C.F.R (e)(11) (2003) C.F.R (2003) C.F.R (e)(2) (2003) C.F.R (2003).

18 FSA Guaranteed Loans See cautionary note on page 1. Page 16 plan with regular interest payments but can do so with the subsidized interest payments. As discussed above, FSA currently allows a borrower only one 10-year Interest Assistance period in a lifetime. As previously discussed, the 2002 Farm Bill permanently authorized the Guaranteed Loan Interest Assistance Program for FSA guaranteed loans by removing statutory language that terminated the program at the end of In addition, 15 percent of Interest Assistance funds must be reserved for beginning farmers and ranchers until March 1 of each year. 6. Transfer and Assumption In a transfer and assumption the borrower transfers the assets, collateral, and liabilities of the guaranteed loan to another person. 104 The other party assumes the outstanding debt and promises to pay it to the lender. 7. Subordination Subordination is a tool that FSA can use to help a borrower who has an FSA direct loan and either would like to have or already has an FSA guaranteed loan. 105 Essentially, through subordination FSA allows the guaranteed lender to step in front of FSA in lien position for the borrower's collateral. B. Guaranteed Lender Obligations and Borrower Rights Guaranteed lenders are bound by two types of obligations that may affect the rights of borrowers. 1. Obligations Under Loan Documents and Applicable Laws As with any other lender, guaranteed lenders are obligated by the loan documents signed by lender and borrower and the general legal obligations of lenders. 2. Obligations Under FSA Guaranteed Loan Regulations FSA guaranteed lenders are also obligated to follow certain requirements unique to FSA guaranteed loans. Regulations covering FSA guaranteed loans provide for several lender obligations regarding loan servicing. Other agreements between FSA and the lender may provide still more servicing duties. 103 Farm Security and Rural Investment Act of 2002, Pub. L. No , 5313 (May 13, 2002). The 2002 Farm Bill also increased the funding authorization for the Interest Assitance program from a maximum of $490 million to a maximum of $750 million C.F.R (b), Transfer and Assumption, (d) (2003) C.F.R (b), Subordination, (c)(1), (2) (2003).

19 See cautionary note on page 1. FSA Guaranteed Loans Page 17 a. Obligations of All Guaranteed Lenders Obligations related to loan servicing that FSA regulations impose on all guaranteed lenders include the duty to service the guaranteed loan in a reasonable and prudent manner and the duty to not be negligent in servicing a guaranteed loan. 106 Negligent loan servicing includes the failure to act, the failure to act in a timely manner, and acting in a manner contrary to the manner in which a reasonable prudent lender would act. 107 b. Additional Obligations of Standard Eligible Lenders and Certified Lenders FSA regulations impose additional specific loan servicing regulations on lenders who are not part of the Preferred Lender Program. These regulations require standard and CLP lenders to (1) meet with defaulting borrowers, 108 and (2) if liquidation is imminent, consider and request Interest Assistance and delay foreclosure for 60 days while that request is reviewed FSA Enforcement of Lender Servicing Obligations Lenders may forfeit their loss guarantee payments from FSA if they are negligent in servicing a guaranteed loan. 110 Lenders who disregard their obligations under program regulations and agreements may also jeopardize their ability to obtain loan guarantees in the future. It is FSA, therefore, that has the most power over the lender and can most easily insist that the lender meet its loan servicing obligations. If lenders choose to ignore these penalties, however, FSA may have limited leverage over the lender. 4. Borrower Enforcement of Lender Servicing Obligations Because the agreements that set out a guaranteed lender s loan servicing obligations are made between FSA and the lender, the borrower is not a party to those agreements. If a borrower were considered a third-party beneficiary of a guaranteed loan lending agreement, the borrower could enforce the agreement. Federal courts are divided on whether borrowers are third-party beneficiaries of guaranteed loan agreements between FSA and lenders, and what that might mean C.F.R (a)(1), (2) (2003) C.F.R (b), Negligent servicing (2003) C.F.R (b)(3) (2003). The regulations set specific time frames in which the meeting should be arranged C.F.R (b)(3)(v) (2003) C.F.R (a)(2) (2003). 111 Little v. United States, 48 Fed. Cl. 843 (2001) (third party beneficiary found); Parker v. United States Dep t of Agric., 879 F.2d 1362 (6th Cir. 1989) (no third party beneficiary); Schuerman v. United States, 30 Fed. Cl. 420 (1994) (third party beneficiary found); Maniere v. United States, 31 Fed. Cl. 410, (1994) (endorsing Schuerman approach); State of Montana v. United States, 124 F.3d 1269, (Fed. Cir. 1997) (endorsing Schuerman approach); National Sur. Corp. v.

20 FSA Guaranteed Loans See cautionary note on page 1. Page 18 In a recent case originating in Oklahoma, a court held that although the borrowers were third-party beneficiaries of the agreements between FSA and the lender, FSA was not required to ensure that the guaranteed lender satisfied its contractual obligations to meet with the borrower and consider interest assistance before submitting a liquidation plan. 112 Therefore, the court held, the borrowers did not have a claim against FSA for its failure to enforce those obligations before approving the plan. United States, 31 Fed. Cl. 565, (1994) (endorsing Schuerman approach); Nematollahi v. United States, 38 Fed. Cl. 224, 236 (1997); Norman v. United States, 38 Fed. Cl. 417, 430, n.5 (1997); Norwest Bank Arizona v. United States, 37 Fed. Cl. 605, (1997); Vines v. United States, 30 Fed. Cl. 711, (1994). 112 Little v. United States, 48 Fed. Cl. 843 (2001).