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FSA guarantees loans made by
conventional agricultural lenders for up to 95 percent of the loan
amount. All loans must meet certain qualifying criteria. Farmers
interested in Guaranteed loans must apply to a conventional lender,
which then arranges for the guarantee. FSA will guarantee loans for
both Farm Ownership and Operating Expenses. A percentage of
Guaranteed loan funds are targeted to beginning farmers, ranchers
and minority applicants.
Loan Purposes
Maximum Loan Size
Borrower
Eligibility
Other Criteria FSA
Considers
Producer Qualifies,
What Next?
Loan
Term and Interest Rates
Security
Lenders Loan
or FSA Loan
What Happens if Loan is Delinquent
Percent of
Guarantee
Guarantee Fees
Secondary Market
Program
Farm Ownership Loans
Farm Ownership (FO) Loans may be made to:
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Operating Loans
Operating loans (OL) may be
used to:
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Purchase items needed for a successful farm
operation. These items include livestock, farm equipment, feed,
seed, fuel, farm chemicals, repairs, insurance,, and other
operating expenses.
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Pay for minor improvements to buildings
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Cost associated with land and water
development
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Family living expenses
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Refinance debts under certain conditions.
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FSA can guarantee OLs or FO
loans up to $762,000 (amount adjusted annually based on inflation)
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To qualify for and FSA
Guarantee, a loan applicant must:
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Be a citizen of the United Stated ( or legal
resident alien), which includes Puerto Rico, the Virgin Islands,
Guam, American Samoa, and certain former Pacific Trust
Territories.
-
Have the legal capacity to incur the
obligations of the loan.
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Be unable to obtain credit without a
guarantee.
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Have an acceptable credit history as
determined by the lender.
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Not have caused FSA a loss by receiving debt
forgiveness on more than 3 occasions.
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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.
Corporations, cooperatives,
joint operations, and partnerships and their members/stockholders
must meet these same eligibility requirements, and the entity must
also be authorized to operate a farm or ranch in the State where the
land is located.
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In addition to meeting the
eligibility criteria, the loan applicant must:
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Have a satisfactory credit History.
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Demonstrate repayment ability.
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Provide sufficient security for the loan.
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The following actions
are usually taken as part of the application process:
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The producer and lender complete the
guaranteed application and submit it to the FSA (FSA will assist
if needed)
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FSA reviews the application for eligibility,
repayment ability, security, and compliance with other
regulations.
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FSA approves and obligates the loan.
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The lender receives a conditional commitment
indicating funds have been set aside, and the loan may be
closed.
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The lender closes the loan and advances funds
to the producer.
-
FSA issues the guarantee.
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Repayment terms vary
according to the type of loan made, the collateral securing the
loan, and the producers’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
Interest Assistance Program, FSA will subsidize 4 percent of the
interest rate on loans to qualifying borrowers.
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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.
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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.
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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.
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For most loans, the maximum
guarantee is 90 percent. The guarantee percentage will be determined
by FSA on the risk involved in the loan. The lender may receive a 95
percent guarantee when:
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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.
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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.
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Guarantee Fees
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:
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Interest assistance
loans.
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Loans where more that
50% of the loan funds are used to pay off direct FSA loan debt
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Loans in conjunction
with a Downpayment Farm Ownership Loan program for beginning
farmers or a qualifying state beginning farmer program. The fee
waiver does not extend to all beginning farmers.
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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 selling the guaranteed
portions, lenders reduce interest rate exposure, increase their
lending capabilities, and generate fee income.
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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:
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Reduced Interest Rate Risk. Lenders
can transfer risk of interest rate increases on the guaranteed
portion of a fixed rate loan.
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Increased Liquidity. Selling the loan
on the secondary market frees the funds for additional lending
or investing activity.
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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 capabilities.
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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.
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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.
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