Building Rural America

National Association of Credit Specialists of the

USDA – Farm Service Agency Farm Loan Program Committee

THE FARM LOAN PROGRAM COMMITTEE MET AT THE TOWN & COUNTRY RESORT IN SAN DIEGO, CALIFORNIA ON JUNE 24-26, 2013, TO REVIEW RESOLUTIONS SUBMITTED BY THE MEMBERSHIP.

THE FOLLOWING RESOLUTIONS ARE RECOMMENDED FOR ADOPTION: Resolution 1 CONCERN: There is not currently a section on the security agreement to record the location of rental properties that are not FSA collateral but may be where FSA collateral is stored (i.e. grain bins, machine sheds, pastures, cattle lots, etc.). Since these properties are not FSA collateral, these currently do not meet the description to be placed in any other section of the security agreement but are necessary information for loan servicing actions, such as collateral inspections and foreclosure actions. PROPOSED SOLUTION: Add an additional section to the security agreement to specifically list rental properties that do not meet other collateral descriptions. Resolution 2 CONCERN: FSA can make Direct Farm Ownership loans to make capital Improvements (Handbook 3-FLP Par. 131 C) and for Soil and Water Conservation and Protection (Handbook 3-FLP Par. 131 D). However, when funding for DFOs is not available for long periods of time, Par. 131 F does not allow FSA to refinance a bridge loan for anything other than real estate purchase. Often these authorized purposes are vital to continued farm viability, and if the work cannot be completed until funding is available, this can cause a hardship for the operation. PROPOSED SOLUTION: Amend 3-FLP Handbook Paragraph 131 F to refinance bridge loans made for an authorized FO purpose. Resolution 3 CONCERN: 3 FLP Par. 244 B requires a copy of the APH calculation worksheet be obtained from the crop insurance company and used in the EM loss calculation. However, crop insurance companies are inconsistent in the format of the worksheet and being able to provide the necessary information any in useable and reliable format. If the worksheet is available, it

generally provides the information by unit or farm number and FSA must manually calculate the combined APH or enter each farm separately. PROPOSED SOLUTION: RMA and FSA need to work together to provide this information in a useable and consistent format. RMA is already providing information for SURE and previous crop disaster programs; additionally, this information should already be in the crop insurance provider’s data base as the APH is recalculated each year for the producer.

Resolution 4 CONCERN: Form FSA-2002 duplicates information that is collected on the Schedule F of the tax return. However, if an operation has more than one enterprise, the information on the Schedule F is insufficient to complete enterprise analysis. PROPOSED SOLUTION: Modify Form FSA-2002 to allow for more detailed information by commodity by adding additional lines for individual crop and livestock incomes by commodity. Resolution 5 CONCERN: Form FSA-2002 is used to obtain the 3 year history of income, expense and other financial items. While not required, it becomes the default reporting tool of choice for new applicants. The form does not contain an entry for purchased feeder livestock or costs of goods solds. Without this line entry, the reporting of this number is missed frequently. PROPOSED SOLUTION: Revise the FSA-2002 to include a purchased for resale line. This will enable applicants to report their information correctly and not delay loan processing. Resolution 6 CONCERN: Currently 2-FLP and 3-FLP do not include any reference to AD-3030 with the requirement of who must complete this form based on notice CM-725. PROPOSED SOLUTION: Add the respective information to 2-FLP and 3-FLP to specify who must complete AD-3030.

Resolution 7 CONCERN: Form FSA-2038 can be confusing to many customers and only report their income since the form in part A refers only to Income and "Sales". This happens for both projected and actual for FLP customers and FSFL customers. Because they do not report all their crop or livestock production data it causes difficulties in completing the cash flow as it is not possible to tell whether they need to buy feed, where all the livestock are coming from (purchased or raised) etc. PROPOSED SOLUTION: Revise Form FSA-2038 to amend the label on Part A to indicate that both production and sales should be included. The revision would change "Crop Sales" to read "Crop Production and Sales".

Resolution 8 CONCERN: Responding to lender requests in a timely manner for guaranteed loan restructuring without write-down is diminished when the principal loan amount is above the FLM/FLO’s approval authority as the lender's request has to be reviewed by the State Office according to Paragraph 29G of 1-FLP as Paragraph 313A. PROPOSED SOLUTION: Provide an exception in 1-FLP, paragraph 29G that states all guaranteed loan restructuring can be approved by any authorized agency official, except SED must approve servicing if any debt is forgiven.

Resolution 9 CONCERN: 2-FLP Subpar. 283 does not specifically require a feasible plan to authorize a lender to make an emergency advance. However, National Office stated policy indicates that a feasible plan is required. The requirement specifies stating that "the financial benefit to the lender and the Government from the advance will exceed the amount of the advance". PROPOSED SOLUTION: Add language to paragraph 283 to clarify that a feasible cash flow is not required to approve an emergency advance.

Resolution 10 CONCERN: National office has outlined policy that says if we are making a Microloan to buy a tractor we should take a lien just on that tractor. The FSA-2028 Security Agreement, per consultation with OGC and the U.S. Attorney, provides FSA a blanket security position when executed. The filing of the UCC establishes FSA's lien position on whatever collateral is designated on the UCC. However, it does not change what FSA has a lien on. Therefore, with the FSA-2028 as is, it is impossible to take only a lien on a specific item or items of security. PROPOSED SOLUTION: Create and issue an FSA security agreement form for loans that allows only specific item(s) to be taken as security without the blanket lien aspect.

Resolution 11 CONCERN: 4-FLP Paragraph 117 A allows for subordinations of real estate to be issued for "any authorized FSA loan purpose". It does not specifically tie this requirement to an FO loan, etc. Paragraph 4 C specifies a redelegation of authority for loan refinancing purposes to SEDs. These appear to be in conflict with each other. This is resulting in the interpretation that to issue a real estate subordination for refinancing purposes SED exception authority is required despite the language in paragraph 117 A. PROPOSED SOLUTION: Clarify the procedure to specify that SED exception authority is not needed for RE subordinations for debt refinancing purposes.

Resolution 12 CONCERN: Currently, 2-FLP states at a minimum, the lender will bid the lesser of the net recovery value or the unpaid guaranteed loan balance. If there is a prior lienholder, bidding the lesser of the net recovery value or the unpaid guaranteed loan balance could result in a greater loss to the government. PROPOSED SOLUTION: 2-FLP should be revised to provide guaranteed lenders with instructions for bidding at a foreclosure sale that are similar to those provided in 5-FLP, for direct loans (Exhibit 60).

Resolution 13 CONCERN: It has long been understood and supported by the CFR that the accelertion of accounts is a non-appealable issue within FSA since all servicing rights have previously been extended with appeal rights offered with timeframes expired prior to acceleration. Yet 1-APP does not list acceleration as a non-appealable issue. 7 CFR 780.2 defines adverse decision as a program decision by an employee, officer, or committee of FSA that is adverse to the participant. The term includes any denial of program participation, benefits, written agreements, eligibility, etc. that results in a participant receiving less funds than a participant believes should have been paid or not receiving a program benefit to which the participant believes the participant was entitled. Since acceleration of an account is neither a loan nor benefit for which a participant would believe they are entitled, it does not fall under the adverse decision• definition. 7 CFR 780.5(a) (1) outlines decisions that are not appealable under this part shall include any general program provision or program policy of any statutory or regulatory requirement that is applicable to similarly situated participants. 7 CFR 780.5(a)(3) outlines decision that are not appealable are decisions made pursuant to statutory provisions that expressly make agency decisions final or their implementing regulations. 7 CFR 766.351(b)(1) states if the borrower does not apply, does not accept, or is not eligible for primary loan servicing, conservation contract, market value buyout or homestead protection, and all administrative appeals are concluded, the Agency will accelerate the borrower’s account in accordance with 7 CFR 766.355 and 766.356 as appropriate. Thus FSA issues the acceleration notice in accordance with statutory provisions that apply to all similarly situated delinquent borrowers who did not apply for loan servicing, or did not appeal the denial of loan servicing, and timeframes to do so are exhausted. 7 CFR 766.355(b) provides the borrower 30 days from the date of the acceleration notice to pay the Agency in full. 7 CFR 766.355(c) outlines the borrower options. There is no statutory or Handbook option to appeal the acceleration. 7 CFR 766.355(e) outlines the Agency will liquidate the borrower’s account in accordance with 7 CFR 766.357 if the borrower does not pay the account in full within the time period specified in the acceleration notice. Again, there is no time period for appeal as there is no statutory option for appeal of an acceleration notice.

PROPOSED SOLUTION: Revise 1-APP to include acceleration of account as a nonappealable issue. In addition, 5-FLP Exhibit 51 should be amended to reflect the same language regarding appeal of acceleration as Exhibit 49, 50 and 52. “YOU DO NOT HAVE ANY RIGHT TO APPEAL THIS DECISION TO ACCELERATE YOUR FSA DEBT(S) TO ANY OFFICIAL OF THE FARM SERVICE AGENCY.” should be amended to read “YOU DO NOT HAVE ANY RIGHT TO APPEAL THIS DECISION TO ACCELERATE YOUR FSA DEBT(S).”

Resolution 14 CONCERN: The client has no incentive to pay off a DSA (disaster set-aside) during prosperous times as a second one is not allowed. 5-FLP Part 2 Par. 45 A (3) states “The borrower cannot have more than one installment set aside on each loan.” PROPOSED SOLUTION: Amend 5-FLP to clarify that another set-aside may be approved if the preceding one has been paid in full. Resolution 15 CONCERN: 2-FLP Par 300 G states that the Lender may not initiate foreclosure acton on the loan until 60 days after eligibility of the borrower to participate in the Interest Assistance Programs has been determined by the Agency. Only Guaranteed Operating Loans are eligible for IA, therefore, this determination is not applicable for Guaranteed FO Loans. As the handbook currently reads, this interest assistance determination requires lenders to delay foreclosure action on Guaranteed FO Loans an additional 60 days, which in turn, causes an additional 60 days of interest accrual that FSA will be reimbursing lender for. This increases the loss to the Government. PROPOSED SOLUTION: Revise 2-FLP, Par. 300G to require IA determinations on Guaranteed OL loans only. Resolution 16 CONCERN: At this time, 4-FLP Subpar. 117A will allow FSA to subordinate real estate security when loan proceeds will be used for any authorized Agency purpose. However, 2-FLP (Rev. 1) Subpar. 279A will not allow FSA to subordinate for any authorized Agency loan purpose. 2-FLP limits subordinations to the following circumstances: 1. To permit a guaranteed lender to advance funds and perfect a security interest in crops, feeder livestock, livestock offspring, or livestock products 2. When the lender requesting the guaranteed needs the subordination of the Agency’s lien position to maintain its lien position when servicing or restructuring 3. When the lender requesting the guarantee is requesting the debt of another lender and the Agency’s positions on real estate security will not be adversely affected 4. To permit a Line of Credit to be advanced for annual operating expenses

Based on the current regulations, FSA could subordinate real estate security to a lender for a non-guaranteed loan but cannot subordinate real estate security for a guarantee loan, with the exception of the items 2 and 3 above. The limitations/restrictions in 2-FLP adversely affect the guaranteed lender’s ability to assist their customers that may need a guaranteed loan. PROPOSED SOLUTION: Revise 2-FLP (Rev. 1) Subpar. 279A to be consistent with and reflect the requirement in 4-FLP Subpar. 117A.

Resolution 17 CONCERN: CLP and PLP lenders are required to meet specific requirements for the renewal of their lender status. 2-FLP (Rev. 1) Subpar. 49E states that CLP lenders must make 5 guaranteed loans within the past 2 years and Subpar. 52E states that PLP lenders must make 20 guaranteed loans within the past 5 years. However, with the improving farm economy, the guaranteed loan program usage has declined and lenders are not making as many guaranteed loans as in the past but these lenders continue to be prudent in their guaranteed loan making and loan servicing with decreased numbers. This decrease in guaranteed loans approved will result in possibly many good CLP and PLP lenders losing their current status. PROPOSED SOLUTION: Revise 2-FLP (Rev. 1) Subpar. 49E and 52E to allow a current CLP or PLP lender to request a one-time waiver of the requirement of the number of loans made if all other renewal criteria are met by the lender.

Resolution 18 CONCERN: 1-CM requires the original signature on the “Request for Obligation of Funds” form. Often these forms are signed in the State Office and scanned or faxed to the local County office to provide for loan approval. PROPOSED SOLUTION: Remove from 1-CM the requirement for the for “Request for Obligation of Funds” form from the list of forms that require an original signature – an electronic signature should be acceptable.

Resolution 19 CONCERN: Loan closing by an approved closing agent is currently required for all loans of $10,000 or greater. This becomes costly to the borrower with costs of $1,000 to $1,500. PROPOSED SOLUTION: Increase the requirement for loan closing by an approved closing agent for all loans to $35,000. Resolution 20 CONCERN: Based on recent National Office guidance, a customer who had a Participation FO loan closed at the Participation FO Loan rate (presently 5%) cannot receive the regular FO rate if it is lower than the Participation FO rate at the time of reamortization. 3-FLP has already been revised to allow the customer to obtain the most advantageous rate.

PROPOSED SOLUTION: Revise 5-FLP and make the necessary software changes to eDALR$ to allow FSA to reamortize the borrower’s Participation FO loan at the Regular FO if it is more advantageous to the borrower. Resolution 21 CONCERN: Occasionally, during the processing of an operating loan request the application will be ready for approval except for a chattel appraisal. This is especially true where the application started out with not needing an appraisal but due to changes in use during processing now needs an appraisal. Delaying the approval till the appraisal is actually completed adds time to processing time and potentially could hurt the applicant's chances at funding. PROPOSED SOLUTION: Allow for approval of the loan subject to completion of a chattel appraisal in a way similar to the method used for approval subject to a real estate appraisal.

THE FOLLOWING RESOLUTIONS ARE RECOMMENDED FOR NON-ADOPTION: Resolution 22 CONCERN: Customers who wish to use DFO loan funds to refinance debt will form entities, such as LLCs including the customer already owing the debt, who then apply for loans to purchase farm real estate. This circumvents the intent of the regulation to no allow refinancing of debt. PROPOSED SOLUTION: Require the entity itself to have three years of historical farming experience rather than just one member of the entity. EXPLANATION FOR NON-ADOPTION BY THE COMMITTEE: This is currently not allowed by the regulations as all members of the entity must meet the eligibility criteria for the loan. Resolution 23 CONCERN: It is an accepted fact that at some point we have to get copies of the driver’s license or some form of ID. This is not part of a complete application and thus we are not supposed to include this in the incomplete letter. This can lead to later issues if the name doesn’t match the application or what is entered in SCIMS. PROPOSED SOLUTION: Make proof of name part of a complete application. EXPLANATION FOR NON-ADOPTION BY THE COMMITTEE: The requirement to use the name as listed on the driver’s license has not been adopted in all states. This is a state issue and therefore cannot be addressed in national regulations.

Resolution 24 CONCERN: When taking out bridge loans, we are finding that the customer is experiencing greater cost than we would like. Our regulations say to get the T-38 as one of the cost reducing options. The title company’s underwriters do not allow a T-38 to be used if a new promissory note and deed of trust filed which is what our regulations say must happen along with the transfer from the bridge lender. PROPOSED SOLUTION: Create new transfer and assumption forms especially formatted to use for bridge loans only so that we are not using promissory notes and deed of trust. EXPLANATION FOR NON-ADOPTION BY THE COMMITTEE: FSA does not want to assume the liability for the content of another lender’s promissory note or deed of trust.

Resolution 25 CONCERN: Item B on Page 5 of Form FSA-2040 states “I have listed on this form all collateral I expect to sell, exchange, feed to livestock, consume, or otherwise dispose of. “ If the security to be fed or consumed is listed on the cash flow, the customer has already agreed to the disposition and does not need to be duplicated on Form FSA-2040. PROPOSED SOLUTION: Amend Form FSA-2040 to remove the language “….feed to livestock, consume,…..” EXPLANATION FOR NON-ADOPTION BY THE COMMITTEE: Form FSA-2040 must include the disposition of all collateral.

Resolution 26 CONCERN: Exhibit 5 of 3-FLP must be provided to all applicants. This is a checklist of all items needed for direct loan assistance. The recent amendment changed this checklist to include all application forms (2001, 2301, 2313, 2330) with an area to check the box for whichever loan type is being applied for. However, the checklist is mulitple pages most of which are not applicable to youth loans, the new microloan, and streamline loans. This creates additional paperwork to give to applicants that is not applicable and can be intimidating to applicants who may just look at the long list of items and not the checked boxes. Additionally, microloans require only 1 year of production, income, expense history if available and practical. However, Exhibit 5 only references on the form that 3 years of production history is required. It is confusing. PROPOSED SOLUTION: Keep Exhibit 5 for Direct FO and OL assistance for use with FSA2001. If this type of coverletter is necessary for all applicants, create a separate exhibit for each youth loans, mircoloans, and streamline loans.

EXPLANATION FOR NON-ADOPTION BY THE COMMITTEE: The form can be modified to suit specific loan types and to cover specific items needed for each loan.

Resolution 27 CONCERN: FLOs and FLMs can spend a significant amount of time reviewing guaranteed servicing request for borrowers who are no longer farming. Servicing areas may include but are not limited to partial releases, subordinations, loans outside the guarantee, restructuring, etc. The guaranteed loan program is intended to assist people who are farming. PROPOSED SOLUTION: Amend 2-FLP Handbook to require that when the guaranteed borrower ceases to operate a farm operation, there should be a grace period (approx 5 yrs) in which the guarantee will remain in effect. After the grace period has elapsed, then the lender must return the guarantee paid in full. This would allow the lender and borrower a sufficient amount of time to make the necessary financial arrangements. Lenders could certify the borrower is engaged in farming on the status reports. EXPLANATION FOR NON-ADOPTION BY THE COMMITTEE: This is not significant enough issue to warrant a change in the regulations.

Resolution 28 CONCERN: The sending of FSA-2308 is an additional document and cost that is unnecessary in most circumstances. Procedure no longer requires an eligibility determination within a set amount of time from receipt of the application therefore allowing most eligibility determinations to be made at the same time as loan approval decision. PROPOSED SOLUTION: Incorporate the eligibility language of FSA-2308 into the FSA-2313 and eliminate the sending of FSA-2308 unless the applicant is determined eligible but the loan is otherwise unable to be approved. EXPLANATION FOR NON-ADOPTION BY THE COMMITTEE: The applicant needs to be notified of eligibility since this is a separate action apart from loan approval.

Resolution 29 CONCERN: Current regulations provide that a loan can be approved if the plan is feasible and that feasibility is a positive margin after debt service and/or ending cash on hand. Even if the amount is $1, the plan is feasible but this leaves no room for contingencies. PROPOSED SOLUTION: Require a coverage ratio on term loans that would be sufficient to minimally pay the interest on all scheduled debts before the plan can be considered feasible. EXPLANATION FOR NON-ADOPTION BY THE COMMITTEE: Cannot require a margin of a certain percentage or enough to cover next year’s interest expense.

Resolution 30 CONCERN: 3 FLP, Par. 135B provides that the loan term for DFO loans shall be the minimum period of time that the projected ability to repay will allow, considered in 5-year increments. Current regulations provide that a loan can be approved if the plan is feasible and that feasible is a positive margin after debt service and/or ending cash on hand. Even if the amount is $1 the plan is feasible but this leaves no room for contingences. PROPOSED SOLUTION: Require a coverage ratio on term loans that would be sufficient to at least pay the interest on all scheduled debts before the plan can be considered feasible. EXPLANATION FOR NON-ADOPTION BY THE COMMITTEE: We review every two years for graduation. If you won’t make a loan for anything less than 30 you should be sending them to commercial credit anyway.

Resolution 31 CONCERN: 3 FLP, Par 92B provides that FSA may take a junior lien on real estate only if equity exists in the collateral. Equity exists if there is $1 available. However, this does not take in consideration other factors which would reduce the real equity in a recovery situation, such as cost of disposal and partial ownership. PROPOSED SOLUTION: Allow property to be exempted when an applicant has an undivided interest in the property. Additionally, include the cost of disposal in the determination of equity. EXPLANATION FOR NON-ADOPTION BY THE COMMITTEE: Properties with undivided interests have no value and should not be taken as collateral.

Resolution 32 CONCERN: Handbook 1-FLP Subpar. 131 F (i) does not include using a bridge loan for construction purposes. PROPOSED SOLUTION: Revise 1-FLP Subpar. 131 F (i) to read: "The applicant obtained the loan to be refinanced to purchase a farm for capital improvements after a direct FO was approved. EXPLANATION FOR NON-ADOPTION BY THE COMMITTEE: Covered in Adopted Resolution 2.

Resolution 33 CONCERN: 3-FLP Subpar. 154C, Other Lender Terms [7 CFR 764.204(b)(2)] states that the non-Agency financing must have an amortization period of at least 30 years and cannot have a balloon payment due within the first 20 years of the loan.

PROPOSED SOLUTION: Revise 2-FLP to include the requirement for having a 30 year term and no balloon payment within the first 20 years to be consistent with 3-FLP. EXPLANATION FOR NON-ADOPTION BY THE COMMITTEE: Already covered in 3-FLP and appropriately referenced.

Resolution 34 CONCERN: Form FSA-2313 is being used by county offices to notify applicants of both loan approval and loan closing requirements. PROPOSED SOLUTION: Modify the form to: 1) Change the name to include "Loan Closing Requirements" 2) Add an item that is specifically identified as "Loan Closing Requirements" EXPLANATION FOR NON-ADOPTION BY THE COMMITTEE: A change in the name of the form is not necessary.

Resolution 35 CONCERN: Large guaranteed caseloads mean a significant amount of time is spent by FLP staff entering manual versions of report FSA-2241, Guaranteed Farm Loan Status Report, semiannually. The time spent on this task is increased when PLP lenders submit handwritten reports for input into GLS by FSA staff. PROPOSED SOLUTION: In the CMS and PLP agreement, require that PLP lenders submit their Guaranteed Farm Loan Status Report (FSA-2241) electronically. This will significantly reduce paperwork handled by the field staff, resulting in workload/time savings without putting an undue burden on the PLP lender. EXPLANATION FOR NON-ADOPTION BY THE COMMITTEE: We do not want to take the risk of losing a PLP lender.

Resolution 36 CONCERN: There are 24 different loan types with seperate interest rates listed in 1-FLP Exhibit 17. Many of these loan types are obsolete or not funded. Recommend loan types to reduced to 5 types. Operating, Real Estate, FO Down Payment, Non Program Operating, Non Program Real Estate. PROPOSED SOLUTION: Amend 1-FLP, Exhibit 17, to include interest rates for only the following loan types: Direct Operating, Direct FO, Down Payment FO, Non Program Operating, Non Program Real Estate. All other categories could be addressed in one of five type of loans.

Example. Soil and Water/Conservation would be listed as Direct Operating or Direct Farm Ownership depending on the loan terms and type work being conducted. Joint Financing FO should be same as Direct Farm Ownership. Loan types that are no longer valid or funded should be deleted. EXPLANATION FOR NON-ADOPTION BY THE COMMITTEE: Even those certain loan types are currently not being funded, they are still authorized by the statutes and cannot be removed.

Resolution 37 CONCERN: Often the Agency assists customers in the purchase of land and later the customer wishes to sell a small parcel as a homesite (1-5 acres). 4-FLP, Subpar. 198 regarding partial releases states: “(1) The Agency will obtain an appraisal of the security proposed for disposition." Customers and Loan Officials often want to use the appraisal that valued the entire parcel and utilize the per acre valuation for the small home site. The 4-FLP Handbook is unclear regarding what valuation should be for the intended use of the parcel. Small acreage homesites often are valued more highly on a per acre basis. Example: FSA obtains an appraisial for 100 acres of raw land and the land is valued at $2,500 per acre. 9 months after the loan closes, the customer wants to release 5 acres so his son can build a home. 5 acre homesites in the area typically sell for $3,000 per acre (in this case appraisal is waived