With commodity prices down and farm returns expected to significantly decline, USDA’s Farm Service Agency (FSA) has released three major changes to its farm loan programs in an effort to increase the opportunities farmers and ranchers have to be financially viable.
“The analysis of what has gone into these rule changes is nothing short of tremendous,” says Zach Ducheneaux, FSA administrator. “Our team has poured over hundreds of thousands of loans in our portfolio and really identified some things that FSA can, should, and with this rule, will be doing better to support our producers and their economic viability in the countryside.”
The three most notable policy changes, which will go into effect on Sept. 25, include:
1. A new, low-interest installment set-aside program for financially distressed borrowers
According to Ducheneaux, this program was modeled after the Disaster Set-Aside program, but the difference is a borrower doesn’t have to be affected by a declared natural disaster in order to qualify. However, it’s important to note producers must be in FSA’s portfolio by the time these updates go into effect in order to be eligible.
“Oftentimes, what the producer needs is just a little breathing room,” Ducheneaux says. “We have the ability to do that for producers that are in our portfolio as of Sept. 25.”
The program essentially allows eligible, financially distressed borrowers to defer up to one annual loan installment per qualified loan at a reduced rate.
“When we set that payment aside, instead of accruing interest at the already established rate, it’s going to accrue interest at 1/8 of a percent,” Ducheneaux explains. “We’re really setting aside a payment, and it’s not going to balloon on you in a way it jeopardizes your operation as you’re coming to the end of that term.”
2. Access to flexible repayment terms
Some of these more flexible terms include smaller interest-only payments and longer loan terms. The idea behind this change is to allow producers to increase their working capital and give them the ability to save for education and retirement.
“Having a retirement fund built into this can help ease that generational transfer and help enable us to recruit young farmers and ranchers back to the farm,” Ducheneaux says. “Because FSA can make adjustments to our terms, it might help them step out of that job they’ve got in the town 40 miles away for health insurance and pay for that for their family on their own terms.”
He adds that the concern this could add more interest to the loan over time is valid, the point is to increase available cash flow for the operation.
3. Reduced additional loan security requirements
This update reduces the collateral requirements for direct loans from requiring available security equal to 150% of the loan amount down to 125%. One of FSA’s main goals with this change is to reduce the frequency borrowers need to use their personal residence as additional collateral for a farm loan.
“If you think back to 40 years ago, some of the most heart-wrenching stories you hear are when you’re losing the family home,” Ducheneaux says. “With this rule, if we do not need it to get to a one-to-one security position, we will not take the primary residence as additional security.”
In addition, FSA will release liens on collateral the borrower initially provided as additional security after establishing a history of on-time payments.
Additional improvements include streamlining and automating the Farm Loan Program process with a loan assistance tool, online loan application, online repayment feature and a simplified direct loan paper application.
“We think these changes to the terms are really transformative,” Ducheneaux says. “Any of these three provisions on their own would be a great transformation, but taken as a collective, this really signals a new day in ag finance, where FSA is going to position itself as the leader and the example for how our friends in the lending community might consider doing this.”
Ducheneaux explains a robust training process on the changes is underway for FSA employees and asks for patience and grace as the team comes to understand the new tools they have.
