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Letters to Regulators
FSA's Guaranteed Farm Ownership and Operating Loan Program Requirements
July 2, 2004
Director, Loan Making Division
RE: FSA's Guaranteed Farm Ownership and Operating Loan Program Requirements; Proposed Rule - RIN 0560-AG65
We are sending this letter on behalf of the Independent Community Bankers of America (ICBA) and its nearly 5,000 community bank members. ICBA is the largest national banking trade association and exclusively represents the interests of the nation's community banks. Our comments pertain to the Farm Service Agency's (FSA) request for comments regarding the proposed rule for FSA's guaranteed farm ownership and operating loan programs.
Background and General ICBA Views
The FSA has asked for responses to a proposed rule published May 4, 2004 in the Federal Register that would revise and remove certain regulations for the Guaranteed Loan Programs. The agency is to be commended for its efforts to remove unnecessary documentation and security requirements and to allow lenders to pledge guaranteed loans to the Federal Home Loan Banks (FHLB) as collateral for funding. However, the provision that would prevent lenders from charging any processing, servicing, and packaging fees for guaranteed loans is troublesome and could reduce the participation of lenders in the guaranteed loan program. In addition, the provision that would negate the FSA loan guarantee, if a loan pledged for collateral were acquired, is problematic.
ICBA Comments and Concerns
Commercial banks are consistently the largest users of FSA's guaranteed loan program and continue to use the program to provide financing to borrowers who might not otherwise be able to obtain commercial credit without a loan guarantee. As such, we are supportive of efforts that would streamline the program and remove any unnecessary and burdensome requirements. We would like to address several particular areas of interest and concern to our members.
CLP and PLP Provisions
Specifically, we support the removal of the requirement in section 762.106(b)(8) that lenders applying for Certified Lender Program (CLP) status must submit copies of the forms that will be used for loan processing and servicing to the FSA. In addition, we agree that Preferred Lender Program (PLP) lenders should not be required to obtain FSA approval to designate persons to process PLP loans, but rather PLP lenders can simply designate the person by name, title, or position without involvement from the FSA. We support the removal of this requirement from section 762.106(c)(8).
Fees on Guaranteed Loans
ICBA is strongly opposed to the provision in section 762.124(e)(1) that would prevent lenders from charging or causing to be charged any processing, servicing, or packaging fees for guaranteed loans unless such charges are also assessed on non-guarantee customers for similar transactions. As you know, a number of lenders that utilize the FSA guaranteed loan program do not have the "in house" resources to prepare and assemble the necessary loan package for the guaranteed program, and therefore, rely on other lenders or individuals with the expertise to perform this function. Clearly, the provision of such services is a benefit to the FSA, the lender, and most importantly, the borrower.
If such a provision is implemented, a number of lenders could exit the guaranteed loan program if they are unable to recoup the costs of packaging and processing the loans for their customers by charging these fees. The FSA guaranteed loan program was created to provide a source of credit for farmers and ranchers that are unable to obtain adequate commercial credit without a guarantee. Since this provision will reduce the number of lenders in the program, it would lead to fewer options for producers seeking guaranteed loan funding. FSA should be doing whatever possible to encourage lenders to participate in the guaranteed loan program, since the only other alternative for producers seeking these loans would be direct loans from the FSA. This is especially important in this era of large budget deficits and declining discretionary appropriations available to USDA agencies for farm programs. Signs of declining use in FSA programs would most likely result in a reduced budget for FSA in the future.
Given the additional forms, paperwork, and specific FSA format required for guaranteed loan applications, it is reasonable to allow lenders to charge a fee for such functions. In addition, the required documentation and annual reviews and reporting to FSA constitute greater administrative costs for community banks making guaranteed loans. Furthermore, the prohibition of fees would impact small banks the most, since a number of them have small staffs, irregular guaranteed loan demand, and do not have the resources to dedicate to this specialized program. Therefore, community banks may often have third parties to prepare and package these particular loan documents. In addition, banks are taking a risk when submitting guaranteed loan applications to FSA since a number of these applications may not be approved for a guarantee while a bank will have incurred time and expenses.
FSA's guaranteed loan program should operate in a manner that will encourage maximum lender participation as a means to reduce the demand for direct loans from FSA and provide ample opportunity for farmers and ranchers to obtain guaranteed loans when they are unable to receive adequate non-guaranteed commercial credit.
ICBA supports the removal of the requirement in section 762.126(e) stipulating that when refinancing a loan, the guaranteed loan must have a security position no lower than that of the refinanced loan. For example, this would eliminate the requirement that lenders maintain a lien on chattel property when refinancing loans secured by chattel with loans secured by real estate. The elimination of this provision will increase lender flexibility when restructuring loans and could improve the lenders' competitive position regarding rates and terms.
However, we are concerned with the proposed change in this section regarding junior lien positions. Currently, such liens are limited to situations where the equity position is "strong". This proposal would define a "strong" equity position for junior liens by requiring a 25% or greater equity position in the security. We recommend maintaining the current "strong" equity position requirement, rather than requiring a specific percentage.
Guaranteed Loans as Security
We also support the inclusion of section 762.159, which explicitly allows lenders to pledge guaranteed loans to FHLB and Federal Reserve Banks (FRB) as collateral for funding. This clarifies the ability of lenders to use these guaranteed loans as security for funding and liquidity purposes.
However, we are concerned about the impact of the provision regarding the loan guarantee if a FHLB or FRB acquires a loan by enforcing a pledge. It is our understanding that the guarantee is unenforceable until a new, eligible lender takes over the servicing responsibilities of the loan. This provision would severely impair the ability of banks to pledge guaranteed loans to FHLB or FRB because the guarantee would not be enforceable if the loan is acquired by the FHLB or FRB. This is completely contrary to the proposed benefit of allowing banks to pledge guaranteed loans and receive full collateral value in return. Guaranteed loans, by their nature, should allow banks to receive the full value of the loan collateral and should not result in an unnecessary discounting of the loan.
This provision has the potential to significantly reduce the effectiveness of bank's ability to pledge FSA guaranteed loans to FHLB or FRB for liquidity. It will lead to lower funding ratios because the collateral will not be as attractive to the FHLB or FRB without an enforceable guarantee. The guarantee should remain in force no matter who holds the loan. FSA should rethink this provision and revise the proposal to ensure banks will receive the full benefit of the ability to pledge guaranteed loans for funding and liquidity needs.
Participations in Guaranteed Loans
In addition, ICBA agrees with the revision of section 762.160, which deals with the sale, assignment, and participation of guaranteed loans. We agree that since the purchase of a participation interest in a guaranteed loan does not change the risk to the FSA, there is no need for FSA to approve such transactions by a guaranteed lender. This is also an important issue because certain FHLB districts either have announced, or could announce in the future, that they will accept participation loans as collateral. The FHLB of Des Moines recently made such an announcement.
Again, we commend the agency for proposing to streamline the FSA guaranteed loan program and making changes that could help reduce the regulatory burden on community banks participating in the program. However, we remain opposed to the following proposed provisions: prohibition on processing and packaging fees for guaranteed loans; unenforceable guarantee once a FHLB or FRB assumes a guaranteed loan; and changes to the equity requirements for junior liens. We recommend the FSA revise the proposed rule regarding these provisions to make certain the guaranteed loan program operates more effectively to ensure community banks can continue to provide vital financing to farmers and ranchers in rural America through the program.
We appreciate the opportunity to comment on this proposed rule. If you have any questions regarding this comment letter, please feel free to contact Mark Scanlan, director, Office of Agriculture and Rural Policy or Reece Langley, deputy director, Office of Agriculture and Rural Policy at 202-659-8111.
Camden R. Fine