This fall, California FarmLink shared insights and recommendations on recent changes to USDA farm loan programs at the Farm Service Agency (FSA). In August, the FSA published a new rule intended to improve its lending to beginning farmers and ranchers. As the nation’s most affordable source of farm financing, we appreciate the importance of FSA in supporting equitable access to opportunity in agriculture. Their programs impact FarmLink, too, because the FSA provides vital loan guarantees for many of the loans we make, and some of our guaranteed borrowers also have FSA direct loans. This leads to a shared interest in the success of the borrower.
The core of FarmLink’s mission is investing in the prosperity and well-being of farmers, ranchers, and fishers who have limited access to financial resources. This means our loans are designed to help farmers build financial resilience within their operations and accumulate savings outside of their business as a foundation for personal financial security and inter-generational wealth. The new FSA rule reflects a focus on these same priorities and adopts some of the practices we have used in our lending program for years. It specifically addresses the importance of lowering loan payment amounts in order to allow the farmer to build working capital reserves and personal savings. FarmLink lending has always focused on these needs. Enabling borrowers to manage their cash flow more effectively reduces loan delinquencies and provides clients with the ability to access credit elsewhere when needed.
FarmLink’s support for the new Farm Service Agency Rule
Our detailed written response to the new rule included a discussion of the things we applaud, and also pushed the FSA to make additional changes to further benefit beginning farmers.
The two elements at the center of the new rule are increased flexibility of repayment terms and a decrease in the amount of assets a farmer must pledge as collateral to secure a loan. We applaud both of these changes.
More flexible repayment terms lower the amount of net earnings that have to be spent on loan repayment, this allows farmers to accumulate working capital, thus reducing their future reliance on operating loans. Decreasing collateral requirements increases the amount a farmer can borrow. Since beginning farmers do not yet have many assets, and the amount they can borrow is limited by the assets they can pledge, it takes a long time for them to leverage borrowing and build an asset base. The new FSA rule decreases the amount of collateral required for direct farm loans. Previously a farmer needed to pledge collateral equal to 150% of the amount of the loan. The new rule lowers this amount to 125%. These two changes together are intended to help farmers accumulate working capital and assets more quickly, and we believe they will have this effect. We applaud these changes, though we would like to see the collateral requirement reduced to just 100%, or even lower for beginning farmers and very small loans.
We support the FSA’s new emphasis on goal-setting, business plan development, and building savings to ensure personal financial stability as reflected in the new rule. To support these outcomes, direct borrowers will be offered “repayment flexibilities.” These include: 1) option to choose a maximum loan term (thus lowering the payment amount), 2) opting for the first payment to be interest-only (promotes cash reserves and savings growth), and 3) opting for unequal installments (supports progress towards long-term goals). The ability to save for contingencies, retirement, or college is also fundamental to long-term wealth building strategies.
Acting on what we learn from our clients
Every day our team learns something from the farmers, ranchers, and fishers participating in our work. We apply these lessons in our lending and educational programs, and to inform our policy advocacy. Based on our experience, our comments also reflected additional changes we would like to see in FSA lending programs. The new rule only affects direct loans; we would like to see many provisions of the new rule apply to guaranteed loans, such as those made by FarmLink. We would also like additional protections for FSA direct and guaranteed borrowers, including limiting the circumstances under which FSA and guaranteed lenders can take a personal residence as collateral, and allowing catastrophic personal or family medical expenses to excuse delinquency.
In the coming months we will continue to advocate for:
- Extending some of the changes in the new rule to apply to guaranteed lenders such as FarmLink.
- Establishing a high risk pool that would allow FSA to experiment and innovate loan products for greater impact. Under-collateralized borrowers, for example, would not require any additional collateral beyond 100 percent loan to value for loans less than $100,000.
- Establishing multi-year development loans that feature a longer repayment period and lower collateral requirements for early-stage investments to allow start-up farms to build equity and working capital.
Both the high risk pool and multi-year development loans feature strongly in federal legislation advanced by FarmLink, the Capital for Beginning Farmers and Ranchers Act (H.R.8598, S. 4441), and we urge readers to learn more here.
Continuing the dialogue to shape more equitable financing
Now in our 15th year as a direct lender, with more than 900 loans made to small farmers, we regularly adapt our loan policies and procedures to better serve farmers as we see what works and what needs improvement. The lessons we’ve learned from our clients truly informed our approach to commenting on the rule.
The comments are one step in our ongoing work to help FSA learn from our clients’ experiences. We are in regular communication with FSA officials, virtually and in-person, at the state and federal levels. We also work in tandem with other organizations aiming to improve agricultural credit, including the National Sustainable Agriculture Coalition (NSAC), Rural Advancement Foundation International (RAFI), and Farm Aid.
Throughout the winter we plan to have more conversations with Congressional policymakers to include some of these changes in farm bill legislation. If you have experiences with FSA or other ag lending programs that could inform our approaches, please contact us.
