Agricultural Lending

Agricultural Loan Underwriting

Although agricultural lending involves some unique requirements, it requires many of the same fundamental underwriting practices as other forms of lending. The process begins with current, accurate, and complete credit data. Current credit information generally is considered to be no more than 12 months old, but this practice may vary depending on the farmer’s financial condition and type of operation. Specific requirements should be detailed in the lending bank’s policy. Whatever form the information takes, it should provide the account officer with sufficient insight into the farmer’s operations to develop accurate financial statements, cash flow projections, and budgets. Credit files should be documented with this information during underwriting, as well as information obtained and used during ongoing loan administration.

The underwriting process, and subsequent loan administration, should be governed by an effective set of lending guidelines. The guidelines may be formal or informal, but should be rigorously applied in either case.

At a minimum, the underwriting guidelines should require:

• In-depth financial analysis.

• Structuring loans in accordance with the type of borrowing and the expected income stream.

• Reliable collateral evaluations and margins, and/or other steps to minimize credit risk.

• Effective ongoing monitoring practices, including segregation of any prior period crop carryover debt.

• Thorough evaluation of the borrower’s character and history of managing debt repayment.

Subsequent sections of this booklet expand upon these minimum guidelines.

Some larger banks use credit scoring as a basis for making agricultural credit decisions. In those cases, the scoring model should be consistent with the guidance contained in OCC Bulletin 97-24, dated May 20, 1997.

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