Associations that participate in the Farm Service Agency’s Guaranteed Loan Program understand how beneficial it can be. But, you might not recognize that through a few simple steps, you can improve your loan performance under the Program.
Here are several ways[1] to shape up your guaranteed loan portfolio:
1) Clean up the loan application.
The guaranteed loan begins (and sometimes ends) with the application. If the borrower’s loan application is well prepared and maintained, Lenders will have less problems in the future. FSA regulations require Lenders to maintain “a complete application for each guaranteed loan.” Also, the Handbook states “lenders must perform at least the same level of evaluation and documentation for guaranteed loans as for nonguaranteed loans of a similar type and amount.” Handbook 2-FLP at 65-A, page 5-1. FSA also requires Lenders to keep in this file “all correspondence with the borrower about servicing actions and other loan-related documentation generated after loan approval.” Id. 65-B, page 5-1. In addition to providing the necessary background for the loan, maintaining a complete loan application file ensures the Lender will be able to respond to any questions by FSA as to the current status of the loan servicing.
2) Exercise proper loan purposes.
FSA guarantees only certain types of loans for a reason. The permitted purposes tend to provide a source of funds to repay the loan. That is why Lenders may issue loans to—among other purposes—improve profitability, purchase livestock or equipment, pay annual operating expenses, purchase feeder animals, acquire or enlarge a farm, make capital improvements, and promote water and soil conservation. See, generally, 7 DFR §762.121(a)-(c). As long as the borrower seeks funds for proper purposes,
3) Tighten the appraisal line.
Appraisals are only as good as the market on which they are based. Therefore, Lenders should obtain the most reliable, conservative appraisal available. While not required on all loans, “appraisals are an integral part of the loan evaluation process.” See 7 CFR 762.127. FSA’s Handbook reminds lenders they “are responsible for using a [qualified appraiser].” Handbook 181B at 8-141. Furthermore, real estate appraisals “must be completed according to USPAP….” Id.
4) Shape up the collateral.
The collateral is your friend. The best practices begins with the Regulations requirement that “[t]he lender is responsible for ensuring that proper and adequate security is obtained and maintained to fully secure the loan ….” 7 CFR §762.126(a)(1). While the regulations permit broad classes of collateral as security, FSA’s interpretation provide two additional suggestions. First, the “type of security must be appropriate to the type of loan, and the loan terms must be consistent with the useful life of the security.” Handbook at 168-A, page 8-118. Second, FSA suggests typical categories based on the term of the loan: “annual operating loans will be secured by crops and livestock, loans to be repaid within 2 to 7 years by breeding livestock and equipment.” Handbook at 168-B, page 8-118. Of course, if the loan will be repaid in more than 7 years, “a lien must be taken on real estate.” Id. at §762.126(d)(2).
After the loan is closed, FSA regulations require the lender take reasonable steps to ensure the collateral remains available to satisfy the loan. These requirements include ensuring the borrower adequately protects the lender’s security interest by paying rent, taxes, insuring the collateral, and similar steps. Also, the Lender must regularly inspect the collateral “as often as deemed necessary to properly service the loan.” 7 CFR §762.142(a)(3). If the collateral is sold or otherwise disposed of by the borrower, the Lender should account for those proceeds, and apply the proceeds in accordance with the lien priorities. Id. at §762.142(a)(5). While the Regulations “spell out the standard” servicing requirements, the Handbook reminds Lenders to also refer to the specific loan documents, such as the Conditional Commitment, for any additional servicing requirements for your specific loan. Handbook at 264-A, page 11-6.
5) Eliminate the stress of distressed loans.
When a borrower defaults under the loan documents, and that default is not cured within 30 days, the Lender must notify FSA and proceed with steps designed to address the default. 7 CFR §762.143(b). Of particular importance is the meeting required by the Regulations, which allows lender and borrower to “identify the nature of the delinquency and develop a course of action that will eliminate the delinquency and correct underlying problems.” Id. at §762.143(b)(3) (emphasis added). This process allows the lender to “work with the borrower so that the loan can be brought current and the borrower can continue the farming operation.” Handbook at 300-A, page 12-1. To accomplish this goal, FSA reminds Lenders there is “an assortment of restructuring tools that may be used to bring the loan current.” Id.
6) Carefully consider a liquidation diet.
Liquidation is the final step for a loan that cannot be repaid or restructured. As FSA has stated, after a lender determines “that a borrower’s financial difficulties cannot be solved with any 1 or combination of the loan restructuring options, the lender must liquidate the loan.” Handbook at 355-A, page 14-1. “If default cannot be cured after considering servicing options and mediation, the lender will proceed with liquidation of the collateral….” 7 CFR §762.149(b). The Regulations and Handbook detail the steps the lender should follow, and the lender should strictly observe both the time limits on each step, as well as the concurrence, approval, or permission to be obtained from FSA for each step. These steps include: (1) notice to the borrower that the loan will be liquidated; (2) acceleration of the loan; (3) preparation of a liquidation plan; (4) submission of an estimated loss claim; (5) liquidation of the security;(6) submission of the final loss claim; and (7) remission of any future recoveries to FSA by the lender. The Handbook reminds lenders that Form FSA-2248 should be filed after the lender/borrower meeting under 7 CFR §762.143, and every 60 days thereafter. Also, the loan cannot be accelerated (and therefore liquidation plan cannot proceed) unless and until FSA considers the borrowers eligibility for interest assistance programs. See, 7 CFR §762.143(b)(3)(v); Handbook at 357-C, page 14-7.
[1] The Farm Service Regulations detail all aspects of the Guaranteed Loan program, and the author has chosen to highlight a few requirements. Please refer to the Regulations promulgated under Title 7, Part 762, and the applicable FSA Handbook(s), including 2-FLP, for additional requirements.
