Agricultural Lending

Farm Service Agency

Farm lending by the Farm Service Agency (FSA) is probably the most familiar of the government loan programs in rural areas. The FSA operates numerous offices and administers USDA’s commodity income and price support programs, farm credit programs, and federal crop insurance programs. FSA provides farm loans to producers unable to obtain credit elsewhere at reasonable rates and terms. FSA loans serve as the federal government’s primary credit safety net for agricultural producers. To qualify for loans, an applicant must demonstrate sufficient farm training or farm experience and be, or will become, an operator of a family-sized (or smaller) farm.

FSA provides credit assistance to farmers through two mechanisms: loan guarantees and direct loans. Direct loans are made and serviced directly by FSA staff, often at subsidized interest rates and concessionary terms and collateral requirements. FSA also guarantees certain types of loans made and serviced by qualified commercial or cooperative lenders.

Loan Guarantees. Under a guaranteed loan, FSA guarantees repayment of up to 90 percent of a loan made by a qualifying lender if the borrower defaults. A 95 percent guarantee is available for the refinancing of direct loan program indebtedness. FSA’s guarantee is transferable and many guaranteed loans are sold through formal and informal secondary markets. However, the FSA makes a relatively small number of guaranteed loans, as commercial banks are the major source of guaranteed loans. Interest rates are negotiated between the lender and the borrower, but are not to exceed the average rate the lender offers to its farm customers. This requirement and the government assumption of risk provide borrowers with more favorable rates than otherwise might be obtainable. FSA can provide interest rate subsidies of up to 4 percentage points on guaranteed loans.

Direct Loans. FSA offers three groups of loan programs: farm ownership (FO), operating loans (OL), and emergency disaster (EM) loans.

Farm Ownership (FO). FO direct and guaranteed loans are available for the purchase or improvement of farm real estate. Guaranteed loans also are available to help owner-operators restructure their debts using real estate equities. Loans are capped at $200M for a direct loan and $300M for a guaranteed loan.

Operating Loans (OL). OL loans are available for a variety of purposes, including the purchase of livestock and farm equipment, annual operating expenses, the refinancing of existing indebtedness and essential family living expenses. The loan limit is $200M for a direct loan and $400M for a guaranteed loan.

Emergency Loans (EM). EM loans are made directly by FSA. EM loans are available to producers in designated areas where property damage or severe production losses have occurred due to a natural disaster, such as a flood or drought. Loans are made for the actual losses arising from the natural disaster for amounts up to a maximum of $500M per applicant. EM loans may be made to repair, restore, or replace damaged farm property and to compensate for loss of income based on reduced production of crops or livestock resulting from the disaster. For EM loan requests over $100M, the applicant must provide the FSA with written confirmation from two commercial lenders that the requested credit could not be obtained.

Effects of 1996 Farm Bill on FSA. The Federal Agricultural Improvement and Reform Act of 1996 (Farm Bill) made extensive changes to FSA’s farm credit programs, especially to its direct credit programs. The Farm Bill encourages “graduation” from FSA credit programs (that is, shifting from FSA credit programs to commercial credit sources) by placing stricter limits on the eligibility to borrow through FSA programs.

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